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Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended March 31, 2020.
 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
001-35342
LUMOS PHARMA, INC.
(Exact name of Registrant as specified in Its Charter)
Delaware
42-1491350
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
4200 Marathon Blvd #200
AustinTexas 78756
(512) 215-2630
(Address, including zip code, and telephone number, including area code, of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common StockLUMOThe Nasdaq Stock Market

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 ý    No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 ý    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer o
Non-accelerated filer 
Smaller reporting company 
Emerging growth company 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes     No ý
As of May 27, 2020, there were 8,292,803 shares of the registrant’s Common Stock, par value $0.01 per share, outstanding.




Table of Contents

https://cdn.kscope.io/cbaf55105d84c297799be9b150bdea86-nlnk-20200331_g1.jpg
Lumos Pharma, Inc.
FORM 10-Q
Table of Contents
Page
Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2020 and 2019
Condensed Consolidated Statement of Changes in Redeemable Convertible Preferred Stock and
Stockholders’ Equity (Deficit) for the Three Months Ended March 31, 2020 and 2019
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019
ITEM 3.


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Table of Contents

PART I

Lumos Pharma, Inc.
Condensed Consolidated Balance Sheets
(unaudited)
(In thousands, except share data)
March 31,December 31,
20202019
Assets
Current assets:
Cash and cash equivalents$85,821  $4,952  
Prepaid expenses and other current assets2,318  82  
Income tax receivable4,665    
Other receivables355  35  
Total current assets93,159  5,069  
Non-current assets:
Property and equipment, net1,064  84  
Right-of-use asset812  373  
Economic interest in Priority Review Voucher ("PRV"), held for sale87,920    
Total non-current assets89,796  457  
Total assets$182,955  $5,526  
Liabilities, Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable$2,362  $365  
Accrued expenses7,732  709  
PRV related liability35,720    
Current portion of lease liability926  189  
Current portion of notes payable27    
Total current liabilities46,767  1,263  
Long-term liabilities:
Royalty obligation payable to Iowa Economic Development Authority6,000    
Lease liability
140  191  
Deferred tax liability8,510    
Total long-term liabilities14,650  191  
Total liabilities61,417  1,454  
Commitments and contingencies
Redeemable convertible preferred stock
Series A redeemable convertible preferred stock, $0.0001 par value: Authorized, issued and outstanding shares - 0 and 978,849 at March 31, 2020 and December 31, 2019, respectively
  21,904  
Series B redeemable convertible preferred stock, $0.0001 par value: Authorized, issued and outstanding shares - 0 and 1,989,616 at March 31, 2020 and December 31, 2019, respectively
  41,631  
Stockholders' equity (deficit)
Undesignated preferred stock, $0.01 par value: Authorized shares - 5,000,000 at March 31, 2020 and December 31, 2019, respectively: issued and outstanding shares - 0 at March 31, 2020 and December 31, 2019
    
Common stock, $0.01 par value: Authorized shares — 75,000,000 and 36,000,000 at March 31, 2020 and December 31, 2019, respectively; issued and outstanding 8,292,803 and 1,177,933 at March 31, 2020 and December 31, 2019, respectively
83  12  
Additional paid-in capital181,443  202  
Accumulated deficit(59,988) (59,677) 
Total stockholders' equity (deficit)121,538  (59,463) 
Total liabilities and stockholders' equity (deficit)$182,955  $5,526  
See accompanying notes to condensed consolidated financial statements.

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Lumos Pharma, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
(In thousands, except share and per share data)

Three Months Ended March 31,
20202019
Operating revenues:
Licensing and collaboration revenue
$21  $  
Total operating revenues
21    
Operating expenses:
 Research and development1,905  1,455  
General and administrative
3,331  683  
Total operating expenses
5,236  2,138  
Loss from operations(5,215) (2,138) 
Other income and expense:
Miscellaneous income, net136  6  
Interest income
4  27  
Interest expense
(48)   
Other income, net
92  33  
Net loss before taxes(5,123) (2,105) 
Income tax benefit5,463    
Net income (loss)$340  $(2,105) 
Accretion of preferred stock to current redemption value(651) (750) 
Net loss attributable to common shareholders$(311) $(2,855) 
Basic and diluted loss per share$(0.14) $(2.13) 
Basic and diluted average shares outstanding2,189,758  1,339,289  
See accompanying notes to condensed consolidated financial statements.






4

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Lumos Pharma, Inc.
Condensed Consolidated Statement of Changes in Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit)
(unaudited)
(In thousands, except share data)

Three Month Period ended March 31, 2020
Series A redeemable convertible preferred stock
Series B redeemable convertible preferred stock
Common Stock
Additional
Paid-in
Capital
Accumulated Deficit
Total
Stockholders' Equity (Deficit)
SharesAmountSharesAmountSharesAmount
Balance at December 31, 2019978,849  $21,904  1,989,616  $41,631  1,177,933  $12  $202  $(59,677) $(59,463) 
Accretion of preferred stock to current redemption value (pre-merger)—  216  —  435  —  —  —  (651) (651) 
Issuance of common stock to former stockholders of NewLink upon merger—  —  —  —  4,146,405  41  116,908  —  116,949  
Conversion of preferred stock into common stock upon merger(978,849) (22,120) (1,989,616) (42,066) 2,968,465  30  64,156  —  64,186  
Share-based compensation—     —  —  —  —  —  177  —  177  
Net income—  —  —  —  —  —  —  340  340  
Balance at March 31, 2020  $    $  8,292,803  $83  $181,443  $(59,988) $121,538  
   
Three Month Period ended March 31, 2019
Series A redeemable convertible preferred stock
Series B redeemable convertible preferred stock
Common Stock
Additional
Paid-in
Capital
Accumulated Deficit
Total
Stockholders' Equity (Deficit)
SharesAmountSharesAmountSharesAmount
Balance at December 31, 2018978,849  $20,903  1,989,616  $39,592  1,345,402  $12  $1  $(46,932) $(46,919) 
Share-based compensation—  —  —  —  —  —  48  —  48  
Accretion of preferred stock to current redemption value (pre-merger)—  247  —  503  —  —  —  (750) (750) 
Net loss—     —  —  —  —  —  —  (2,105) (2,105) 
Balance at March 31, 2019978,849     $21,150  1,989,616  $40,095  1,345,402  $12  $49  $(49,787) $(49,726) 


See accompanying notes to condensed consolidated financial statements.
5


Lumos Pharma, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(In thousands)
Three Months Ended March 31,
20202019
Cash Flows From Operating Activities
Net income (loss)$340  $(2,105) 
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Share-based compensation177  48  
Depreciation and amortization70  8  
Impairment of ROU assets(29)   
Amortization of right-of-use asset and change in operating lease liability(32) 3  
In-process research and development charge426    
Benefit for deferred taxes(990)   
Changes in operating assets and liabilities:
Prepaid expenses and other current assets382  (96) 
Other receivables61    
Accounts payable and accrued expenses758  (42) 
Income taxes receivable(4,473) (2) 
Net cash used in operating activities(3,310) (2,186) 
Cash Flows From Investing Activities
Cash acquired in connection with merger 84,179    
Net cash provided by investing activities84,179    
Net increase (decrease) in cash and cash equivalents80,869  (2,186) 
Cash and cash equivalents at beginning of period4,952  14,022  
Cash and cash equivalents at end of period$85,821  $11,836  


See accompanying notes to condensed consolidated financial statements.
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Table of Contents
Lumos Pharma, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

1.     Organization and Description of Business
Description of Business
Lumos Pharma, Inc. ("Lumos" or the "Company") is a clinical-stage biopharmaceutical company focused on the identification, acquisition, in-license, development, and commercialization of novel products for the treatment of rare diseases. The Company's mission is to develop new therapies for people with rare diseases, prioritizing its focus where the medical need is high, and the pathophysiology is clear. The Company's principal offices are located in Austin, Texas.
Lumos and its subsidiaries have historically devoted substantially all of their efforts toward research and development. The Company has never earned revenue from commercial sales of its drugs.
The Company’s cash and cash equivalents as of March 31, 2020 are expected to be adequate to satisfy the Company’s current liquidity requirements through at least 2022. If available liquidity becomes insufficient to meet the Company’s operating obligations as they come due, the Company’s plans include selling additional shares of common stock, alternative funding arrangements and/or reducing expenditures as necessary to meet the Company’s cash requirements. However, there is no assurance that, if required, the Company will be able to raise additional capital or reduce discretionary spending to provide the required liquidity. Failure by the Company to successfully execute its plans or otherwise address its liquidity needs may have a material adverse effect on its business and financial position and may materially affect the Company’s ability to continue as a going concern.
In March 2020, the World Health Organization declared the outbreak of COVID-19, a novel strain of Coronavirus, a global pandemic. This outbreak is causing major disruptions to businesses and markets worldwide as the virus spreads. The extent of the effect on the Company’s operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic, and governmental, regulatory and private sector responses, all of which are uncertain and difficult to predict. Although the Company is unable to estimate the financial effect of the pandemic at this time, if the pandemic continues to evolve into a severe worldwide crisis, it could have a material adverse effect on the Company’s business, results of operations, financial condition and cash flows. The financial statements do not reflect any adjustments as a result of the pandemic.
Merger with NewLink Genetics Corporation
On March 18, 2020, Lumos, the Company formerly known as NewLink Genetics Corporation ("NewLink"), completed a merger in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated as of September 30, 2019, by and among the Company, Cyclone Merger Sub, Inc. ("Merger Sub"), and what was then known as Lumos Pharma, Inc., which has since been renamed “Lumos Pharma Sub, Inc.” (“Private Lumos”) (as amended, the "Merger Agreement"), pursuant to which Merger Sub merged with and into Private Lumos, with Private Lumos surviving as a wholly-owned subsidiary of NewLink (the "Merger").
On March 18, 2020, and prior to the effective time of the Merger (the “Effective Time”), NewLink effected a 1-for-9 reverse stock split of its common stock (the “Reverse Stock Split”) and, following the Merger, changed its name to “Lumos Pharma, Inc.” Unless otherwise noted herein, all references to share amounts give effect to the Reverse Stock Split. Following the completion of the Merger, the business being conducted by the Company became primarily the business conducted by Private Lumos, which is a biopharmaceutical company focused on the identification, acquisition, in-license, development, and commercialization of novel products for the treatment of rare diseases.
Immediately following the Reverse Stock Split and the completion of the Merger, there were 8,292,803 shares of the Company’s common stock outstanding. Under the terms of the Merger, Private Lumos stockholders received an aggregate of 4,146,398 shares of our common stock, at an exchange rate of (i) 0.1308319305 shares of common stock in exchange for each share of Private Lumos common stock outstanding immediately prior to the Merger, (ii) 0.0873621142 shares of our common stock in exchange for each share of Private Lumos Series A Preferred Stock outstanding immediately prior to the Merger, and (iii) 0.1996348626 shares of our common stock in exchange for each share of Private Lumos Series B Preferred Stock outstanding immediately prior to the Merger. Immediately following the Merger, the former Private Lumos stockholders beneficially owned approximately 50% of the shares of the Company and the former NewLink stockholders beneficially owned approximately 50% of the shares of the Company. For accounting purposes, Private Lumos is considered to have acquired NewLink in the Merger. NewLink's shares of common stock listed on The Nasdaq Capital Market, previously trading through
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Lumos Pharma, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
the close of business on Wednesday, March 18, 2020 (the "Merger Date") under the ticker symbol "NLNK", commenced trading on The Nasdaq Capital Market, under the ticker symbol "LUMO", on Thursday, March 19, 2020. The accompanying condensed consolidated financial statements and notes give retroactive effect to the exchange ratio and change in par value for all periods presented.
The Merger was accounted for as a reverse merger with Private Lumos deemed the accounting acquiror for accounting purposes. Further, the Merger is to be accounted for as an asset acquisition rather than a business combination because the assets acquired and liabilities assumed from NewLink do not meet the definition of a business as defined by ASC 805, Business Combinations as NewLink does not contain the processes in place to generate outputs.

As such, the results of operations and cash flows prior to the Merger Date, relate to Private Lumos. Subsequent to the Merger Date the information in these unaudited quarterly financial statements relates to the Company and its consolidated entities. All share and per share amounts in the financial statements and related notes have been retroactively adjusted, where applicable, for all periods presented to give effect to the exchange ratio applied in connection with the Merger and the Reverse Stock Split.
2. Basis of Presentation
Basis of presentation
The accompanying unaudited interim consolidated financial statements includes the accounts of the Company and its subsidiaries and all intercompany amounts have been eliminated. The unaudited interim consolidated financial statements have been prepared and presented by the Company in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") and the rules and regulations of the U.S. Securities and Exchange Commission (the "SEC"), and, in management’s opinion, reflect all adjustments necessary to present fairly the Company’s interim condensed financial information.
Certain information and footnote disclosures normally included in the Company’s annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2019, included in NewLink's Annual Report on Form 10-K and the Company's Current Report on Form 8-K/A, filed with the SEC on May 29, 2020. The financial results for any interim period are not necessarily indicative of financial results for the full year.
Unaudited interim financial statements
The Company has prepared the accompanying unaudited interim consolidated financial statements based on SEC rules that permit reduced disclosure for interim periods. These unaudited interim consolidated financial statements include, in the Company’s opinion, all adjustments, consisting only of normal recurring adjustments that the Company considers necessary for a fair presentation of its consolidated financial position and results of operations for these periods. The Company’s historical results are not necessarily indicative of the results to be expected in the future and the Company’s operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.
The balance sheet at December 31, 2019 was derived from audited financial statements, but does not include all disclosure required by U.S. GAAP.
3. NewLink Genetics Merger
As described in Note 1, Private Lumos merged with the Company on March 18, 2020. The Merger was accounted for as a reverse merger with Private Lumos as the accounting acquirer based upon the terms of the Merger Agreement and other factors including: (i) Lumos stockholders owned approximately 50% of outstanding common stock of the Company immediately following the closing of the Merger, (ii) the board of directors of the Company (the "Board") consists of three members designated by the NewLink, three members designated by Private Lumos and the Board unanimously appointed a seventh member and (iii) the Company is led by Private Lumos’ then current chief executive officer and chief scientific officer, with other current members of senior management from both Private Lumos and NewLink. The Merger was accounted for as an asset acquisition in accordance with U.S. GAAP as the assets acquired and liabilities assumed from NewLink do not meet the definition of a business as defined by ASC 805, Business Combinations as NewLink does not contain the processes in place to generate outputs. For accounting purposes, Private Lumos is considered to be acquiring the assets and liabilities of NewLink in
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Lumos Pharma, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
this Merger. Management allocated the net assets acquired and liabilities assumed in connection with the transaction based on their estimated acquisition date fair values as described below.

The fair value of the net assets acquired on March 18, 2020 was $116.9 million. As NewLink’s assets were predominately comprised of cash offset by current liabilities, the carrying value of NewLink’s net assets, including the fair value of acquired intangible assets not previously reflected on NewLink’s balance sheet, is considered to be the best indicator of the fair value and the purchase price. The purchase price assigned a value to the assets and liabilities acquired based on the accumulated cost of the acquisition and allocated based on the acquired assets and liabilities relative fair value. Given the cost of the acquisition was computed based on the fair value of the net assets acquired, the relative fair values assigned equate to the computed fair values of the acquired assets and liabilities.
The acquired net assets of NewLink based on their fair values as of March 18, 2020 are as follows (in thousands):
Assets acquired:
Cash and cash equivalents$84,179  
Prepaid and other current assets2,999
Income tax receivable192
Property and equipment1,020
Economic interest in PRV87,920
Other intangible assets426
Other non-current assets517
Total Assets Acquired177,253
Liabilities assumed:
Accounts payable285
Accrued expenses and other current liabilities8,788
PRV-related liability owed to Merck35,720
Royalty obligation payable to Iowa Economics Development Authority6,000
Deferred tax liability9,500
Other long-term liabilities12
Total liabilities assumed60,305
Total net assets acquired$116,948  

On January 3, 2020, Merck Sharp & Dohme Corp. ("Merck") notified NewLink that they had been issued a PRV in connection with the U.S. Food and Drug Administration (the "FDA") approval of EVREBO® (Ebola Zaire Vaccine, Live). Under the terms of the NewLink Merck Agreement (as defined below), on February 4, 2020, Merck assigned all of its rights and interests in connection with the PRV to NewLink. The Company is entitled to 60 percent of the value of the PRV obtained through sale, transfer or other disposition of the PRV, with 40 percent to be payable to Merck upon completion of the sale. The Company intends to sell the PRV in the open market and does not intend to use the PRV for any purpose other than sale in the open market for cash consideration. Management used the precedent transaction method under the market approach to estimate the value of the PRV and relied on purchase prices indicated by actual precedent priority review voucher transactions that were reasonably comparable to the PRV owned by the Company. The Market Approach requires several judgments and assumptions to determine the fair value including discount rates, probability assumption of sale, expected consolidated transaction sales price, and tax rates. The 40 percent ownership owed to Merck is separately reflected as a liability in the condensed consolidated balance sheet. Management used an estimated transaction price of $95.0 million based on the observed median guideline transaction of the range of publicly disclosed transactions of $80.0 million to $111.0 million from 2018 and through 2020. This reflects the most current observable inputs as of March 18, 2020 and trends in the market of PRVs and accounts for the decline in the transaction values since the peak sale of $350.0 million in 2015. The timing of the sale of the PRV may be impacted by the COVID-19 pandemic, however, for the valuation at March 18, 2020, no adjustments to timing were made. The fair values
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Lumos Pharma, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
of the NewLink assets did not attribute any value to future royalties that NewLink might be entitled to receive under the NewLink Merck Agreement or from other assets because management did not believe that any such royalties would be paid in the foreseeable future, if ever.
The fair value assigned to the acquired in-process research and development assets was estimated based on the estimated expected net proceeds from the sales of these assets as intellectual property. These assets are no longer being actively pursued in further clinical development by the Company. The acquired in-process research and development expenses of $426,000 were expensed to research and development expenses in the statement of operations for the three months ended March 31, 2020.
Acquired in-process research and development
Acquired in-process research and development expense consists of the initial up-front payments incurred in connection with the acquisition or licensing of product candidates that do not meet the definition of a business under ASC 805, Business Combinations.
4.     Significant Accounting Policies
Risks and Uncertainties
The Company is monitoring the potential impact of COVID-19, if any, on the carrying value of certain assets and its continued operations. To date, the Company has not experienced material business disruption, nor has it incurred impairment of any assets as a result of COVID-19. The extent to which these events may impact the Company’s business, clinical development and regulatory efforts, and the value of its common stock, will depend on future developments, which are highly uncertain and cannot be predicted at this time. The duration and intensity of these impacts and resulting disruption to the Company’s operations is uncertain and the Company will continue to assess for any future potential financial impact, if any.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The condensed consolidated financial statements include the financial statements of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Financial Instruments and Concentrations of Credit Risk
Cash and cash equivalents, receivables, and accounts payable are recorded at cost, which approximates fair value based on the short-term nature of these financial instruments. The Company is unable to estimate the fair value of the royalty obligation based on future product sales, as the timing of payments, if any, is uncertain.
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. Cash and cash equivalents are held by financial institutions and are federally insured up to certain limits. At times, the Company’s cash and cash equivalents balance exceeds the federally insured limits. To limit the credit risk, the Company invests its excess cash primarily in high quality securities such as money market funds.
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Lumos Pharma, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Share-Based Compensation
The Company is required to estimate the grant-date fair value of share-based payment transactions with employees which include stock options, restricted stock units ("RSUs") and performance shares and recognizes the compensation cost over the requisite service period based on the estimated fair values. The Company estimates the fair value of each award granted using the Black-Scholes option pricing model. The Black-Scholes model requires the input of assumptions, including the expected stock price volatility, the calculation of expected term and the fair value of the underlying common stock on the date of grant, among other inputs. The Company calculates the fair value of the award on the grant date, which is the date the award is authorized by the Board or by the Chief Executive Officer as delegated by the Board.
The Company has issued awards to nonemployee consultants and advisers. All grants to nonemployees are valued using the same fair value method that we use for grants to employees. The compensation cost on these awards is measured each period until vesting and is recognized through the earlier of the vesting of the award or completion of services by the nonemployee.
Following is a description of the inputs for the Black-Scholes model:
Exercise Price
The Company uses the quoted market price as listed on the public exchange on the date of grant. If incentive stock options are granted to a 10% stockholder in the Company, the exercise price shall not be less than 110% of the common stock’s fair market value on the date of grant.
Expected Term (in Years)
The expected term of a stock option is the period of time for which the option is expected to be outstanding. Due to the lack of historical exercise data to provide a reasonable basis upon which to estimate an expected term, we have opted to use the simplified method, which is the use of the midpoint of the vesting term and the contractual term of the award to estimate the expected term.
Risk-Free Interest Rate
The Company uses the average yield on current U.S. Treasury instruments with terms that approximate the expected term of the stock options being valued.
Expected Dividend Yield
The expected dividend yield for all of the Company’s stock option grants is 0%, as the Company has not declared a cash dividend since inception and has no plans to declare a dividend.
Expected Volatility
As the Company does not have sufficient historical stock price information to meet the expected life of the stock option grants, it uses a blended volatility based on the trading history from the common stock of a set of comparable publicly-traded biopharmaceutical companies.
Forfeitures
The Company accounts for forfeitures as they occur.
Property and Equipment
Property and equipment are capitalized as the Company believes they have alternative future uses and are stated at cost, less accumulated depreciation of $161,000 and $154,000 as of March 31, 2020 and December 31, 2019, respectively. Depreciation on all property and equipment is calculated on the straight-line method over the shorter of the lease term or estimated useful life of the asset. Computer equipment has useful lives of three to five years, lab equipment has a useful life of five years, and contract manufacturing organization equipment has a useful life of five years.
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Lumos Pharma, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Acquired In-process Research and Development
Acquired in-process research and development expense consists of the initial up-front payments incurred in connection with the acquisition or licensing of product candidates that do not meet the definition of a business under ASC 805, Business Combinations. During the three months ended March 31, 2020, the Company expensed the in-process research and development asset of $426,000 acquired as part of the Merger as there is no future economic benefit. The expense of $426,000 is recorded within research and development costs within the Consolidated Statement of Operations.
Asset Held for Sale
An asset is considered to be held for sale when all of the following criteria are met: (i) management commits to a plan to sell the asset; (ii) it is unlikely that the disposal plan will be significantly modified or discontinued; (iii) the asset is available for immediate sale in its present condition; (iv) actions required to complete the sale of the asset have been initiated; (v) sale of the asset is probable and the completed sale is expected to occur within one year; and (vi) the asset is actively being marketed for sale at a price that is reasonable given its current market value.
A long-lived asset classified as held for sale is measured at the lower of its carrying amount or fair value less cost to sell. If the long-lived asset is newly acquired, the carrying amount of the long-lived asset is established based on its fair value less cost to sell at the acquisition date. A long-lived asset is not depreciated or amortized while it is classified as held for sale, and an impairment loss would be recognized to the extent the carrying amount exceeds the asset's fair value less cost to sell.
Lumos has classified the PRV as held for sale and is carried at its original fair value less cost to sell on the condensed consolidated balance sheet as of March 31, 2020.
5.   License and Research Collaboration Agreement
Merck Sharp & Dohme Corp.
In November 2014, NewLink entered into a licensing and collaboration agreement (the "NewLink Merck Agreement") with Merck to develop, manufacture and commercialize rVSV-ZEBOV-GP, an Ebola vaccine that NewLink licensed from the Public Health Agency of Canada ("PHAC"). Under the terms of the NewLink Merck Agreement, NewLink granted Merck an exclusive, royalty bearing license to rVSV-ZEBOV-GP and related technology. Under the NewLink Merck Agreement, NewLink received a $30.0 million non-refundable, upfront payment in December 2014, and a one-time $20.0 million non-refundable milestone payment in February 2015 upon the initiation of the pivotal clinical trial using the current rVSV-ZEBOV-GP vaccine product as one arm of the trial.
The NewLink Merck Agreement was amended on December 5, 2017 in connection with our entry into an amended and restated PHAC license on December 5, 2017. The amended NewLink Merck Agreement absolves our subsidiary, BioProtection Systems Corporation ("BPS"), from any future obligation to negotiate or amend the terms of the PHAC license, converts the scope of Merck's sublicense under PHAC’s intellectual property rights to be non-exclusive in the Ebola Sudan field of use, and requires Merck to reimburse us in certain circumstances where we may be obligated to pay royalties to PHAC as a result of Merck’s product sales but Merck would not otherwise be obligated to pay a royalty to us. On April 26, 2018, NewLink entered into an agreement with Merck, the U.S. BioMedical Advanced Research and Development Authority ("BARDA"), and the Defense Threat Reduction Agency ("DTRA") to transfer the government grants from BARDA and DTRA to Merck. The transfer was completed in June 2018 and Merck replaced NewLink as the prime contractor on all such grants.
On December 20, 2019, Merck announced that the FDA approved its application for ERVEBO® (Ebola Zaire Vaccine, Live) for the prevention of disease caused by Zaire Ebola virus in individuals 18 years of age and older. On January 3, 2020, Merck notified NewLink that they had been issued a PRV. Under the terms of the NewLink Merck Agreement, on February 4, 2020, Merck assigned all of its rights and interests in connection with the PRV to NewLink. Upon the Merger, the Company is entitled to 60% of the value of the PRV obtained through sale, transfer or other disposition of the PRV. The Company also has the potential to earn royalties on sales of the vaccine in certain countries, if the vaccine is successfully commercialized by Merck. However, we believe that the market for the vaccine will be limited primarily to areas in the developing world that are excluded from royalty payment or where the vaccine is donated or sold at low or no margin and therefore we do not expect to receive material royalty payments from Merck in the foreseeable future.
For the three months ended March 31, 2020, the Company recognized revenues under the amended NewLink Merck Agreement of $21,000, for work the Company performed as a subcontractor of Merck under the government contracts that were transferred to Merck.
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Lumos Pharma, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
6.   Common Stock Equity Incentive Plans
Contemporaneous with the Merger closing, the Company assumed Private Lumos' 2012 Equity Incentive Plan and 2016 Equity Incentive Plan. Under these plans, the Company assumed 26,248 stock options issued and outstanding under the Private Lumos 2012 Equity Incentive Plan, with a weighted-average exercise price of $1.39 per share and 163,864 stock options issued and outstanding under the Private Lumos 2016 Stock Plan with a weighted-average exercise price of $3.66 per share. From and after the Effective Time, such options may be exercised for shares of our common stock under the terms of the respective plans under which they were granted.
2019 Equity Incentive Plan
In July 2009, the NewLink stockholders approved the 2009 Equity Incentive Plan (the “2009 Plan”), and in May 2019, NewLink's stockholders approved a proposal to amend and extend the 2009 Plan (the "2019 Plan") which remained in effect for the Company upon the Merger. Following the approval of the 2019 Plan, no additional stock awards will be granted under the 2009 Plan. Shares that remained available for issuance pursuant to the exercise of options or issuance or settlement of stock awards under the 2009 Plan became available for issuance pursuant to the 2019 Plan and all shares that would have otherwise returned to the 2009 Plan became available for issuance pursuant to the 2019 Plan. Under the provisions of the 2019 Plan, the Company may grant the following types of common stock awards:
Incentive Stock Options
Nonstatutory Stock Options
Restricted Stock Awards
Stock Appreciation Rights
Awards under the 2019 Plan, as amended, may be made to officers, employees, members of the Board, advisors, and consultants to the Company.
As of March 31, 2020, including the shares from the Private Lumos 2012 and 2016 Equity Incentive Plans that were assumed through the Merger, there were 1,692,379 shares of common stock authorized for issuance under our equity incentive plans, and 957,345 shares remained available for issuance under the 2019 Plan.  
The increases in the authorized shares of common stock under the 2009 Plan in 2010 and 2011 were approved by NewLink's stockholders. The increases in the authorized shares of common stock under the 2009 Plan in 2012 through 2019 were made pursuant to an “evergreen provision,” in accordance with which, on January 1 of each year, from 2013 to (and including) 2019, a number of shares of common stock in an amount equal to 4% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year, or such lesser amount of shares (or no shares) approved by the Board, was added or will be added to the shares reserved under the 2009 Plan.
On May 9, 2019, NewLink's stockholders approved an amendment to the 2009 Plan which, among other modifications, included decreasing the automatic annual “evergreen provision” from 4% to 3%, in accordance with which, on January 1 of each year, from 2020 to (and including) 2029, a number of shares of common stock in an amount equal to 3% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year, or such lesser amount of shares (or no shares) approved by the Board, was added or will be added to the shares reserved under the 2019 Plan.
2010 Non-Employee Directors' Stock Award Plan
Under the terms of the Company’s 2010 Non-Employee Directors’ Stock Award Plan (the "Directors’ Plan") which became effective on November 10, 2011 and remains in effect upon the Merger, 26,455 shares of common stock were reserved for future issuance. On May 9, 2013, an additional 17,989 shares of common stock were added to the shares reserved for future issuance under the Directors' Plan. As of March 31, 2020, 29,650 shares remain available for issuance under the Directors' Plan.
2010 Employee Stock Purchase Plan
Under the terms of the Company’s 2010 Employee Stock Purchase Plan (the "2010 Purchase Plan"), which became effective for NewLink on November 10, 2011 and remains in effect upon the Merger, 23,809 shares of common stock were reserved for future issuance. On May 9, 2013, an additional 20,635 shares of common stock were added to the shares reserved for future issuance under the 2010 Purchase Plan. As of March 31, 2020, 2,628 shares remained available for issuance under the 2010 Purchase Plan.
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Lumos Pharma, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Share-Based Compensation
Share-based compensation expense for the three months ended March 31, 2020 and 2019 was $177,000 and $48,000, respectively. Share-based compensation expense is allocated between research and development and general and administrative expenses within the condensed consolidated statements of operations.
As of March 31, 2020, the total compensation cost related to nonvested option awards not yet recognized was $505,000 and the weighted-average period over which it is expected to be recognized is 3.0 years.
Stock Options and Performance Stock Options
The following table summarizes the stock option activity, including options with market and performance conditions and options granted and forfeited from December 31, 2019 through March 31, 2020:
Number
of options
Weighted
average
exercise
price
Weighted average
remaining contractual
term (years)
Outstanding at beginning of period
596,385  $29.68  5.0
Options granted
    
Options exercised
    
Options forfeited
(1,633) 22.17  
Options expired
(16,488) 0.68  
Outstanding at end of period
578,264  $31.64  7.8
Options exercisable at end of period
401,857  $38.30  8.0
The Company estimates the fair value of each stock option grant on the date of grant using a Black-Scholes option pricing model. In conjunction with the Merger, the Company re-valued the outstanding awards under its equity incentive plans which did not result in a material incremental expense during the three months ended March 31, 2020.
No options were exercised during the three months ended March 31, 2020. The fair value of awards vested during the three months ended March 31, 2020 was $391,000.
During the three months ended March 31, 2020, the Company did not grant any equity awards.
Restricted Stock and Performance Restricted Stock
Restricted stock is common stock that is subject to restrictions, including risks of forfeiture, determined by a committee of the Board in its sole discretion, for as long as such common stock remains subject to any such restrictions. A holder of restricted stock has all rights of a stockholder with respect to such stock, including the right to vote and to receive dividends thereon, except as otherwise provided in the award agreement relating to such award. Restricted stock awards are classified as equity within the consolidated balance sheets. The fair value of each restricted stock grant is estimated on the date of grant using the closing price of the Company's common stock on The Nasdaq Stock Market on the date of grant.
The Company had no restricted stock activity during the three months ended March 31, 2020 as all historical NewLink restricted stock was vested prior to the Merger.
The Company does not have a formal policy regarding the source of shares issued upon exercise of stock options or issuance of restricted stock. The Company expects shares issued to be issued from treasury shares or new shares.
7.  Leases
The Company has certain facility leases with non-cancellable terms ranging between one and two years, with certain renewal options.
The Company records lease liabilities based on the present value of lease payments over the lease term using an incremental borrowing rate to discount its lease liabilities, as the rate implicit in the lease is typically not readily determinable. To compute the present value of the lease liability, the Company used a weighted-average discount rate of 5%. Certain lease
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Lumos Pharma, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
agreements include renewal options that are under the Company's control. The Company includes optional renewal periods in the lease term only when it is reasonably certain that the Company will exercise its option. Prior to the Merger, NewLink had asserted it would renew the lease terms through expiry of the lease renewal option periods. At March 31, 2020, as part of the Company's efforts to reduce costs and conserve resources, the Company concluded it would not be seeking renewal of the leased facilities in Ames, Iowa and upon termination of the lease agreements, it would identify a new space for the Company. As a result of this decision, the Company remeasured the right-of-use assets and lease liabilities using the shorter term. The weighted-average remaining lease term as of March 31, 2020 is less than 1.0 year.
The Company does not separate lease components from non-lease components. Variable lease payments include payments to lessors for taxes, maintenance, insurance and other operating costs as well as payments that are adjusted based on an index or rate. The Company's lease agreements do not contain any residual value guarantees or restrictive covenants.
Future minimum lease payments under the non-cancellable operating leases (with initial or remaining lease terms in excess of one year) as of March 31, 2020 are as follows (in thousands), excluding option renewals:
For the Year Ended December 31:
2020$563  
2021324  
Total future minimum lease payments887  
     Less: Imputed interest(71) 
Unamortized lease incentive250  
Total$1,066  

8.   Income Taxes
For the three months ended March 31, 2020 the Company recorded a benefit of $5.5 million. For the three months ended March 31, 2019 the Company recorded no income tax benefit (expense). The income tax benefit is show below (in thousands):

Three Months Ended March 31,
20202019
Current tax benefit4,473    
Deferred tax benefit990    
Total income tax benefit$5,463  $  
On March 25, 2020, in response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law to provide emergency assistance to affected individuals, families, and businesses. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses. The CARES Act amends the net operating losses ("NOLs") provisions of the Tax Cut and Jobs Act of 2017 (the "Tax Act"), allowing for the carryback of losses arising in tax years beginning before December 31, 2017, specifically to the years ended December 31, 2014 and 2015. An estimated tax benefit of $4.5 million related to pre-tax NOL will be carried back to each of the five taxable years to fully offset taxable income with a full receivable recorded for this amount as of March 31, 2020.
The income tax amount for the three months ended March 31, 2020 differs from the amount that would be expected after applying the statutory U.S. federal income tax rate primarily due to the benefit of $4.5 million recorded as a result of the CARES Act. Additionally, the income tax benefit includes $990,000 for the release of the valuation allowance related to Private Lumos NOLs and a current period benefit for losses the Company anticipates will be offset by future income. The income tax amount for the three months ended March 31, 2019 differs from the amount that would be expected after applying the statutory U.S. federal income tax rate primarily due to the full valuation allowance.
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Lumos Pharma, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected taxable income, and tax planning strategies in making this assessment. As a result of the Merger, a deferred tax liability of $9.5 million was recorded for the step up in book basis over tax basis for the net value of the PRV that the Company anticipates it will realize during the year ending December 31, 2020. A net deferred tax liability of $8.5 million is shown on the condensed consolidated balance sheet as of March 31, 2020. As of March 31, 2020, there is not a valuation allowance recorded.
Based on Section 382 ownership change analyses through March 18, 2020, as a result of the Merger, both historical NewLink and Private Lumos experienced Section 382 ownership changes on March 18, 2020.
The Company has a reserve for uncertain tax positions related to state tax matters of $653,000 as of March 31, 2020 recorded within accrued expenses in the condensed consolidated balance sheet, which includes the accrual of interest and penalties. The Company does not expect the amount to change significantly within the next 12 months.
9.   Net Loss per Share of Common Stock
Basic loss per share is based upon the weighted-average number of shares of common stock outstanding during the period, without consideration of common stock equivalents. Diluted loss per share is based upon the weighted-average number of common shares outstanding during the period plus additional weighted-average potentially dilutive common stock equivalents during the period when the effect is dilutive.

The following table presents the computation of basic and diluted loss per share of common stock (in thousands, except share and per share data):

Three Months Ended March 31,
20202019
Net loss340  (2,105) 
Accretion of preferred stock to current redemption value(651) (750) 
Net loss attributable to common shareholders(311) (2,855) 
Basic and diluted weighted-average shares outstanding2,189,758  1,339,289  
Basic and diluted loss per share$(0.14) $(2.13) 

All common stock equivalents are excluded from the computation of diluted loss per share during periods in which losses are reported since the result would be anti-dilutive. As of March 31, 2020, anti-dilutive stock options and restricted stock awards excluded from our calculation totaled 578,624 and 0, respectively. As of March 31, 2019, anti-dilutive stock options and restricted stock awards excluded from our calculation totaled 269,292 and 0, respectively.
10. Restructuring and Severance Charges
The Company records liabilities for costs associated with exit or disposal activities in the period in which the liability is incurred. Employee severance costs are accrued when the restructuring actions are probable and estimable. Costs for one-time termination benefits in which the employee is required to render service until termination in order to receive the benefits, is recognized ratably over the future service period. The Company also records costs incurred with contract terminations associated with restructuring activities.
On September 30, 2019, prior to the Merger, NewLink adopted a restructuring plan to reduce its headcount by approximately 60%, which consisted primarily of clinical and research and development staff, and made several changes to senior leadership in order to conserve resources.
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Lumos Pharma, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
In addition to the restructuring, Charles J. Link, Jr, M.D. retired from NewLink and the NewLink board of directors, effective August 3, 2019 and Nicholas Vahanian retired from his position as the President and member of the board of directors, effective September 27, 2019, and his employment with the company ended on November 11, 2019.
In conjunction with the restructuring and departure of former NewLink executives, NewLink recorded restructuring and severance charges of $5.6 million during the year ended December 31, 2019. As of March 31, 2020, the Company has $2.7 million accrued relating to remaining payments expected to be paid out over the next twelve months. No expense was recorded during the three months ended March 31, 2020.
11. Commitments and Contingencies
From time to time, claims are asserted against the Company arising in the ordinary course of business. In the opinion of management, liabilities, if any, arising from existing claims are not expected to have a material effect on the Company's earnings, financial position, or liquidity.
On or about May 12, 2016, Trevor Abramson filed a putative securities class action lawsuit in the United States District Court for the Southern District of New York (the “Court for the Southern District of NY”), captioned Abramson v. NewLink Genetics Corp., et al., Case 1:16-cv-3545 (the “Securities Action”). Subsequently, the Court for the Southern District of NY appointed Michael and Kelly Nguyen as lead plaintiffs and approved their selection of Kahn, Swick & Foti, LLC as lead counsel in the Securities Action. On October 31, 2016, the lead plaintiffs filed an amended complaint asserting claims under the federal securities laws against NewLink, NewLink’s former Chief Executive Officer Charles J. Link, Jr., and NewLink’s former Chief Medical Officer and President Nicholas Vahanian, (collectively, the “Defendants”). The amended complaint alleges the Defendants made material false and/or misleading statements that caused losses to NewLink’s investors. The Defendants filed a motion to dismiss the amended complaint on July 14, 2017. On March 29, 2018, the Court for the Southern District of NY dismissed the amended complaint for failure to state a claim, without prejudice, and gave the lead plaintiffs until May 4, 2018 to file any amended complaint attempting to remedy the defects in their claims. On May 4, 2018, the lead plaintiffs filed a second amended complaint asserting claims under the federal securities laws against the Defendants. Like the first amended complaint, the second amended complaint alleges that the Defendants made material false and/or misleading statements or omissions relating to the Phase 2 and 3 trials and efficacy of the product candidate algenpantucel-L that caused losses to NewLink's investors. The lead plaintiffs do not quantify any alleged damages in the second amended complaint but, in addition to attorneys’ fees and costs, they sought to recover damages on behalf of themselves and other persons who purchased or otherwise acquired NewLink’s stock during the putative class period of September 17, 2013 through May 9, 2016, inclusive, at allegedly inflated prices and purportedly suffered financial harm as a result. The Defendants filed a motion to dismiss the second amended complaint on July 31, 2018. On February 13, 2019, the Court for the Southern District of NY dismissed the second amended complaint for failure to state a claim, with prejudice, and closed the case. On March 14, 2019, lead plaintiffs filed a notice of appeal. The briefing on lead plaintiffs' appeal was completed in early July 2019 and oral argument before the Second Circuit Court of Appeals was held on October 21, 2019. The Company intends to continue defending the Securities Action vigorously.
On or about April 26, 2017, Ronald Morrow filed a shareholder derivative lawsuit on behalf of NewLink in the Court for the Southern District of NY, against NewLink’s former Chief Executive Officer Charles J. Link, Jr., NewLink’s former Chief Medical Officer and President Nicholas Vahanian, and NewLink directors Thomas A. Raffin, Joseph Saluri, Ernest J. Talarico, III, Paul R. Edick, Paolo Pucci, and Lota S. Zoth (collectively, the “Morrow Defendants”), captioned Morrow v. Link., et al., Case 1:17-cv-03039 (the “Morrow Action”). The complaint alleges that the Morrow Defendants caused NewLink to issue false statements in its 2016 proxy statement regarding risk management and compensation matters in violation of federal securities law. The complaint also asserts state law claims against the Morrow Defendants for breaches of fiduciary duties, unjust enrichment, abuse of control, insider trading, gross mismanagement, and corporate waste, alleging that the Morrow Defendants made material misstatements or omissions related to the Phase 2 and 3 trials and efficacy of the product candidate algenpantucel-L, awarded themselves excessive compensation, engaged in illegal insider trading, and grossly mismanaged NewLink. The plaintiff does not quantify any alleged damages in the complaint but seeks restitution for damages to NewLink, attorneys’ fees, costs, and expenses, as well as an order directing that proposals for strengthening board oversight be put to a vote of NewLink’s shareholders. The language for such proposals is not specified in the complaint. The plaintiff also contemporaneously filed a statement of relatedness, informing the Court for the Southern District of NY that the Morrow Action is related to Abramson v. NewLink Genetics Corp., et al., Case 1:16-cv-3545. On May 19, 2017, the plaintiff dismissed the Morrow Action without prejudice. Also on May 19, 2017, plaintiffs’ counsel in the Morrow Action filed a new shareholder derivative complaint that is substantively identical to the Morrow Action, except that the plaintiff is Rickey Ely. The latter
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Lumos Pharma, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
action is captioned Ely v. Link, et al., Case 17-cv-3799 (the “Ely Action”). By agreement of the parties and order dated June 26, 2017, the Court for the Southern District of NY temporarily stayed the Ely Action until the Securities Action is dismissed or otherwise finally resolved. Under the terms of the stay, the plaintiff in the Ely Action had until March 15, 2019 (30 days after dismissal of the Securities Action with prejudice) to file an amended derivative complaint or rest upon the current derivative complaint. By further agreement of the parties, dated March 15, 2019, the Ely Action will continue to be stayed pending the outcome of the appeal in the Securities Action. If the Securities Action continues to be dismissed in its entirety following its appeal plaintiff in the Ely Action has agreed to withdraw or dismiss the action, with prejudice. The Company disputes the claims in the Ely Action and intends to defend against them vigorously.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, and such statements are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management’s beliefs and assumptions and on information available to our management as of the date hereof. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements. Examples of these statements include, but are not limited to, statements regarding: the development plan for the Company’s product candidate LUM-201 (ibutamoren) (“LUM-201”); the development plan for our existing pipeline and potential partnership and out-licensing opportunities; the timing of planned preclinical studies and clinical trials; the timing of and our ability to obtain regulatory approvals for our product candidates; the clinical utility of our product candidates; our plans to leverage our existing technologies to discover and develop additional product candidates; our intellectual property position; our ability to enter into strategic collaborations, licensing or other arrangements; our estimates regarding expenses, future revenues, capital requirements and needs for additional financing; plans to develop and commercialize our product candidates; and other risks and uncertainties, including those described in Part II, Item 1A, “Risk Factors” of this Quarterly Report and in our other periodic reports filed from time to time with the Securities and Exchange Commission, or SEC, including our Annual Report on Form 10-K for the year ended December 31, 2019 and Private Lumos’s audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations for the year ended December 31, 2019 included in our Current Report on Form 8-K/A, filed with the SEC on May 29, 2020. Our actual results could differ materially from those discussed in our forward-looking statements for many reasons, including those risks. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. You should read this Quarterly Report on Form 10-Q completely. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. Such factors may be amplified by the COVID-19 pandemic and its potential impact on our business and the global economy.
The following discussion and analysis should be read in conjunction with the unaudited financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Overview
Lumos is a clinical-stage biopharmaceutical company focused on the identification, acquisition and in-license, development, and commercialization of novel products for the treatment of rare diseases. The Company's mission is to develop new therapies for people with rare diseases, prioritizing its focus where the medical need is high and the pathophysiology is clear.
In March 2020, the World Health Organization declared the outbreak of COVID-19, a novel strain of Coronavirus, a global pandemic. This outbreak is causing major disruptions to businesses and markets worldwide as the virus spreads. The extent of the effect on the Company’s operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic, and governmental, regulatory and private sector responses, all of which are uncertain and difficult to predict. Although the Company is unable to estimate the financial effect of the pandemic at this time, if the pandemic continues to evolve into a severe worldwide crisis, it could have a material adverse effect on the Company’s business, results of operations, financial condition and cash flows. The financial statements do not reflect any adjustments as a result of the pandemic.
Recent Events
On March 18, 2020, the Company, formerly known as NewLink, completed a merger in accordance with the terms of the Merger Agreement, pursuant to which Merger Sub merged with and into Private Lumos, with Private Lumos surviving as a wholly-owned subsidiary of NewLink.
Also on March 18, 2020, and prior to the Effective Time, the Company effected a 1-for-9 Reverse Stock Split and, following the Merger, changed its name to “Lumos Pharma, Inc.” Unless otherwise noted herein, all references to share amounts give effect to the Reverse Stock Split. Following the completion of the Merger, the business being conducted by the Company became primarily the business conducted by Private Lumos, which is a biopharmaceutical company focused on the identification, acquisition, in-license, development, and commercialization of novel products for the treatment of rare diseases.
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Lumos’ current pipeline is focused on the future development of an orally administered small molecule, the growth hormone secretagogue ibutamoren, for three rare endocrine disorders.
For accounting purposes, Private Lumos is considered to have acquired NewLink in the Merger. NewLink's shares of common stock listed on The Nasdaq Capital Market, previously trading through the Merger Date under the ticker symbol "NLNK", commenced trading on The Nasdaq Capital Market, under the ticker symbol "LUMO", on Thursday, March 19, 2020. The accompanying results of operations give retroactive effect to the exchange ratio and change in par value for all periods presented.

The Merger was accounted for as a reverse merger with Lumos deemed the accounting acquiror for accounting purposes. Further, the Merger is to be accounted for as an asset acquisition rather than a business combination because the assets acquired and liabilities assumed from NewLink do not meet the definition of a business as defined by ASC 805, Business Combinations as NewLink does not contain the processes in place to generate outputs.

The results of operations and cash flows prior to the Merger Date, relate to Private Lumos. Subsequent to the Merger Date the information in these unaudited quarterly financial statements relates to the Company and its consolidated entities. All share and per share amounts in the financial statements and related notes have been retroactively adjusted, where applicable, for all periods presented to give effect to the exchange ratio applied in connection with the Merger and the Reverse Stock Split.
LUM-201 Growth Hormone Secretagogue
Our pipeline is focused on the development of an orally administered small molecule, the growth hormone secretagogue LUM-201 for rare endocrine disorders where injectable recombinant human growth hormone ("rhGH") is currently approved. A secretagogue is a substance that stimulates the secretion or release of another substance. LUM-201 stimulates the release of growth hormone ("GH") and is referred to as a GH secretagogue. The current targeted indications for LUM-201 are Pediatric Growth Hormone Deficiency ("PGHD"), Turner Syndrome and Children Born Small for Gestational Age (“SGA”), in each case in a certain subset of affected patients. Lumos is planning to initiate a clinical development program to study the effects of LUM-201 in PGHD prior to the end of 2020 with a Phase 2b clinical trial (the "Phase 2b Trial"). The coronavirus pandemic has caused pervasive interruptions to clinical trials industrywide. Facing similar near-term impediments, the Company has experienced some delays related to the pandemic and may experience further delays should significant pandemic related disruptions persist. Depending on the outcome of data developed in the Phase 2b Trial and the timing of such data, Lumos plans to conduct separate Phase 2 clinical trials to study the effects of LUM-201 for Turner Syndrome and SGA in a certain subset of affected patients. The graphic below depicts these indications with their respective development status.

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LUM-201 stimulates GH via the GH secretagogue receptor, also known as the ghrelin receptor, thus providing a differentiated mechanism of action to treat some rare endocrine disorders (involving a deficiency of GH) by increasing the amplitude of endogenous, pulsatile GH secretion. LUM-201’s stimulatory effect is regulated by insulin-like growth factor feedback, hence protecting against hyperstimulation of GH. LUM-201 has been observed to stimulate endogenous GH in patients who have a functional but reduced hypothalamic pituitary GH axis. LUM-201 is a tablet formulation that will be administered orally once daily and provides a new therapeutic approach to the 35-year old standard of care (subcutaneous injectable rhGH) for treating rare endocrine disorders associated with GH deficiencies.
If approved, LUM-201 has the potential to become the first approved oral GH secretagogue to treat rare endocrine disorders associated with GH deficiencies, starting with PGHD, providing an alternative to the current standard regimen of daily injections.
LUM-201 for the Treatment of a Subset of PGHD Patients
Lumos is initially developing LUM-201 for a subset of patients with PGHD. PGHD is a rare endocrine disorder occurring in approximately one in 3,500 persons aged birth to 17 years. Causes of PGHD can be: congenital (children are born with the condition), acquired (brain tumor, head injuries or other causes), iatrogenic (induced by medical treatment) or idiopathic (of unknown cause). Children with untreated PGHD will have significant growth failure (potential adult heights significantly less than five feet and may have abnormal body composition with decreased bone mineralization, decreased lean body mass and increased fat mass).
The main therapeutic goal in PGHD is to restore growth, enabling short children to achieve normal height and prevent complications that could involve metabolic abnormalities, cognitive deficiencies and reduced quality of life. Current treatment of PGHD is limited to daily subcutaneous injections of rhGH with a treatment cycle lasting up to an average of seven years. Poor compliance in daily rhGH injections for an average seven-year treatment regime results in an adverse impact on overall health efficacy.
LUM-201 is intended to provide an oral treatment to stimulate the release of endogenous GH in PGHD patients who have a functional but reduced hypothalamic pituitary GH axis and are expected to respond to LUM-201. Lumos believes this group represents 50% to 60% of PGHD patients. Lumos is planning to initiate a clinical development program to study the effects of LUM-201 in PGHD by the end of 2020 with a Phase 2b study. Lumos has received a Study May Proceed letter from FDA after their review of our study protocol. As trial initiation is currently delayed by the COVID-19 pandemic, Lumos is evaluating whether there is opportunity within the proposed Phase 2b study to address additional FDA comments that could increase Phase 3 registration readiness. The submitted trial is a randomized study testing three doses of LUM-201 in a parallel enrollment approach versus the current standard dose of injectable rhGH with the twin goals of dose selection and refinement of patient selection for a Phase 3 study.
Potential expansion of LUM-201 into additional endocrine indications
Lumos is also in the planning stages for developing LUM-201 for patients with Turner Syndrome. Turner Syndrome is a sex-linked developmental disorder that affects females only (one normal x chromosome, and the other x chromosome is either missing or structurally changed). It causes growth failure that begins before birth and continues into infancy and childhood, where it can be accentuated by the absence of puberty. If left untreated, girls with Turner Syndrome will usually achieve an average adult height that is significantly shorter than their peers.
Lumos is also in the planning stages for developing LUM-201 for the indication of SGA. SGA is a child born with birth weight and/or length under two standard deviations (“SDS”) for the gestational age and sex of the population. Approximately five percent of all newborn children are SGA and a spectrum of factors are found to be causative: maternal, placental, fetal, metabolic, and genetic. In the newborn period, SGA children are at greater risk of life-threatening conditions: hypoglycemia, hypercoagulability, necrotic enterocolitis, direct hyperbilirubinemia, and hypotension. Approximately 10% of SGA children do not achieve catch-up growth and remain short (≥-2 SDS) into adulthood.
Lumos acquired LUM-201 from Ammonett Pharma LLC ("Ammonett") in July 2018. LUM-201 received Orphan Drug Designation ("ODD") in the United States and the European Union for GHD in 2017. The United States patent “Detecting and Treating Growth Hormone Deficiency” has been issued with an expiration in 2036. Other patent applications are pending in multiple jurisdictions.
Since its inception, Private Lumos’ operations have focused on organizing and staffing, business planning, raising capital, acquiring its technology and assets, and conducting preclinical and clinical development of its product candidates. Private Lumos has devoted substantial effort and resources to acquiring its current product candidate, LUM-201, as well as its previous product candidate, LUM-001, which it ceased developing in 2019. Private Lumos acquired LUM-201 through its acquisition of substantially all of the assets related to LUM-201 from Ammonett which had licensed LUM-201 in October 2013 from Merck. Private Lumos has not generated any revenue from product sales. Prior to the Merger, Private Lumos funded its operations
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primarily through the sale and issuance of preferred stock, as well as through in-kind support pursuant to a collaborative research and development agreement with the NIH from 2012 to February 2020.
The following relates to products in development by NewLink prior to the Merger:
IDO Pathway Inhibitors
In cancer, the IDO (indoleamine-2, 3-dioxygenase) pathway regulates immune response by suppressing T-cell activation, which enables cancer to avoid immune response. IDO is overexpressed in many cancers, both within tumor cells as a direct defense against T-cell attack, and also within antigen presenting cells in tumor-draining lymph nodes, thereby promoting peripheral tolerance to tumor associated antigens ("TAAs"). When hijacked by developing cancers in this manner, the IDO pathway may facilitate the survival, growth, invasion and metastasis of malignant cells whose expression of TAAs might otherwise be recognized and attacked by the immune system.
Currently, we have a small molecule portfolio primarily focused on the IDO pathway. Our small-molecule IDO pathway inhibitor product candidates that have previously been advanced into the clinic include indoximod and NLG802. Our product candidates are designed to counteract the above described immunosuppressive effects of the IDO pathway in cancer. Preclinical evidence supports the premise that indoximod stimulates the activation of antitumor T-cells through activation of mammalian target of rapamycin and modulation of signaling through the aryl hydrocarbon receptor.
To date, our IDO focused small molecules have been well tolerated in clinical trials. They are orally bioavailable and we believe they offer the potential to be synergistic with other cancer therapies such as radiation, chemotherapy, vaccination and immunotherapies involving other checkpoint inhibitors such as anti-PD-1, anti-programmed cell death ligand-1, or anti-cytotoxic T-lymphocyte antigen 4. Clinical data suggest an increase in clinical activity without adding significant toxicity.
More than 900 patients have been treated with indoximod to date and it has generally been well-tolerated, including in combination with PD-1 checkpoint inhibitors, various chemotherapy agents, radiation, and a cancer vaccine. A tablet formulation of indoximod hydrochloride for adult patients and a sprinkle formulation for pediatric indications have been developed. Both of these formulations of indoximod could be used in future clinical trials.
NLG802 is a prodrug of indoximod. NLG802 is intended to increase bioavailability and exposure to indoximod above levels currently achievable by direct oral administration of indoximod. Based on data from a Phase 1 dose escalation trial, presented in May 2019 at the Immuno-Oncology 2019 World Congress, the treatment regimen was well tolerated with no NLG802-related serious adverse events reported. The recommended Phase 2 dose was established at 1452 mg BID based on achieving preclinical exposure levels required for pharmacodynamic effects of indoximod.
Two U.S. patents covering both the salt and prodrug formulations of indoximod were issued in the United States on August 15, 2017 and February 19, 2019, respectively, providing exclusivity until at least 2036. We are continuing to pursue international patent coverage for these formulations in some countries, and we are exploring the potential for further development and licensing opportunities but do not have an active program for the drug product candidate as of March 31, 2020.
Ebola Vaccine
In November 2014, NewLink entered into the NewLink Merck Agreement to develop and potentially commercialize our rVSV∆G-ZEBOV GP vaccine product candidate and other aspects of the vaccine technology. The rVSV∆G-ZEBOV GP vaccine product candidate was originally developed by the PHAC and is designed to utilize the rVSV vector to induce immunity against Ebola virus when replacing the VSV glycoprotein with corresponding glycoproteins from filoviruses. Under the NewLink Merck Agreement, NewLink received an upfront payment of $30.0 million in October 2014, and in February 2015, NewLink received a milestone payment of $20.0 million.
In addition to milestone payments from Merck, NewLink was awarded contracts for development of the rVSV∆G-ZEBOV GP from the BARDA and the DTRA totaling $52.1 million during 2016 and $67.0 million during 2014 and 2015. Funds of $2.1 million were de-obligated from the DTRA grant awards in 2017. NewLink received total awards of $118.8 million. On April 26, 2018 NewLink entered into an agreement with Merck, DTRA and BARDA to transfer the government grants from BARDA and DTRA to Merck. The transfer was completed in June 2018 and Merck replaced NewLink as the prime contractor on all such grants.
On December 20, 2019, Merck announced that the FDA approved its application for ERVEBO® (Ebola Zaire Vaccine, Live) for the prevention of disease caused by Zaire Ebola virus in individuals 18 years of age and older. On January 3, 2020, Merck notified NewLink that they had been issued a PRV. Under the terms of the NewLink Merck Agreement, on February 4, 2020, Merck assigned all of its rights and interests in connection with the PRV to NewLink, and upon the Merger, the Company
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is entitled to 60% of the value of the PRV obtained through sale, transfer or other disposition of the PRV. We also have the potential to earn royalties on sales of the vaccine in certain countries, if the vaccine is successfully commercialized by Merck. However, we believe that the market for the vaccine will be limited primarily to areas in the developing world that are excluded from royalty payment or where the vaccine is donated or sold at low or no margin and therefore we do not expect to receive material royalty payments from Merck in the foreseeable future.
Restructuring Charges
On September 30, 2019, prior to the Merger, NewLink adopted a restructuring plan to reduce its headcount by approximately 60%, which consisted primarily of clinical and research and development staff and made several changes to senior leadership in order to conserve resources.
In addition to the restructuring, effective August 3, 2019, Charles J. Link, Jr, M.D. retired from his position as the Chairman, Chief Executive Officer and Chief Scientific Officer and a member of the board of directors of NewLink, and Nicholas Vahanian retired from his position as the President and member of the board of NewLink, effective September 27, 2019, and his employment with NewLink ended on November 11, 2019.
As of March 31, 2020, the Company has $2.7 million accrued relating to remaining payments expected to be paid out over the next twelve months. No expense was recorded during the three months ended March 31, 2020.
Corporate Information
Our executive offices are located at 4200 Marathon Blvd., Suite 200, Austin Texas. We have additional executive and administrative space in Ames, Iowa, with the lease ending in March 2021.
We incurred a net loss of $340,000 for the three months ended March 31, 2020. We expect to continue to incur losses over the next several years as we incur expenses to complete our clinical trial programs, expand our pipeline and pursue regulatory approval of our product candidates.
Critical Accounting Policies and Significant Judgments and Estimates
We have prepared our financial statements in accordance with U.S. GAAP which requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, expenses and related disclosures at the date of the financial statements, as well as revenues and expenses during the reporting periods. As such, to understand our financial statements, it is important to understand our critical accounting policies. A critical accounting policy is one that is both important to the portrayal of our financial condition and results of operation and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Actual results could, therefore, differ materially from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more detail in Note 4 to our condensed consolidated financial statements, we believe the following accounting policies to be critical in the preparation of our financial statements.
Asset acquisitions
Accounting for transactions as asset acquisitions is significantly different than business combinations. For example, acquired in-process research and development is expensed for asset acquisitions and capitalized for business combinations. Goodwill is only recognized in business combination transactions. As a result, it is important to determine whether a business or an asset or a group of assets is acquired. A business is defined in ASC 805, Business Combinations, as an integrated set of inputs and processes that are capable of generating outputs that have the ability to provide a return to its investors or owners. Typical inputs include long-lived assets (including intangible assets or rights to use long-lived assets), intellectual property and the ability to obtain access to required resources. Typical processes include strategic, operational and resource management processes that are typically documented or evident through an organized workforce.
We considered all of the above factors when determining whether a business was acquired. In evaluating the Merger, we concluded that NewLink did not meet the definition of a business as it does not have the processes in place to generate outputs.
There are several methods that can be used to determine the fair value of acquired intangibles. We used the precedent transaction method under the market approach to estimate the value of the PRV. We relied on purchase prices indicated by actual precedent priority review voucher transactions that were reasonably comparable to the PRV owned by NewLink. The Market Approach requires several judgments and assumptions to determine the fair value including discount rates, probability assumption of sale, expected transaction sales price, and tax rates. A change in these assumptions would impact the
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consideration received and capitalized as part of the Merger. The change could be material. For example, a 3% change in the discount rate used would increase (decrease) the fair value of the equity issued by approximately 2 to 4%.
The fair value assigned to the acquired in-process research and development assets was estimated based on the estimated expected net proceeds from the sales of these assets as intellectual property. These assets are no longer being actively pursued in further clinical development by the Company.
Acquired in-process research and development
Acquired in-process research and development expense consists of the initial up-front payments incurred in connection with the acquisition or licensing of product candidates that do not meet the definition of a business under ASC 805, Business Combinations.
Recent Accounting Pronouncements
We do not believe that any recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the accompanying financial statements.
Results of Operations
Comparison of the Three Months Ended March 31, 2020 and 2019
Revenues. Revenues for the three months ended March 31, 2020 were $21,000, an increase of $21,000 from zero for the same period in 2019. The increase in revenue is attributable to $21,000 in licensing billings to Merck. We recognized licensing revenue during the three months ended March 31, 2020 for work we performed as a subcontractor of Merck.
Research and Development Expenses. Research and development expenses for the three months ended March 31, 2020 were $1.9 million, an increase of $450,000 from $1.5 million for the same period in 2019. The increase is primarily due to additional expenses incurred as a result of the Merger including the write-off of the acquired NewLink in-process research and development of $426,000, increase of $84,000 in personnel-related and stock compensation expense, and an increase of $68,000 in equipment and supplies expense, offset by a decrease in research and development consulting of $128,000.
General and Administrative Expenses. General and administrative expenses for the three months ended March 31, 2020 were $3.3 million, an increase of $2.6 million from $683,000 for the same period in 2019. The increase was due primarily to increases of $1.6 million in legal and professional fees incurred primarily due to the Merger, $663,000 in personnel-related expense, $295,000 due to increased operating expenses for rent, supplies, and depreciation and $91,000 due to insurance.
Income Tax Benefit. We recorded an income tax benefit of $5.5 million for the three months ended March 31, 2020. We recorded no income tax benefit for the three months ended March 31, 2019. The income tax benefit as of March 31, 2020 differs from the three months ended March 31, 2019 primarily due to the benefit recorded as a result of our ability to carryback NOLs to the tax years beginning before December 31, 2017, specifically to the years ended December 31, 2014 and 2015, the release of the valuation allowance relating to Private Lumos NOL carryforwards, and current tax benefit that management anticipates will be utilized in the current year.
Net Loss. Net income for the three months ended March 31, 2020 was $340,000 compared to a net loss of $2.1 million for the same period in 2019. The net loss available to common shareholders for the three months ended March 31, 2020 was $311,000 compared to a net loss available to common shareholders of $2.9 million for the same period in 2019. The increase in net loss attributable to common shareholders compared to net loss is due to the accretion of preferred stock dividends of $651,000 and $750,000 for the three months ended March 31, 2020 and 2019, respectively. The basic and diluted weighted-average shares of common stock outstanding for the three months ended March 31, 2020 were 2,189,758, resulting in a basic and diluted loss per share available to common shareholders of $0.14. For the three months ended March 31, 2019, the basic and diluted weighted-average shares of common stock outstanding were 1,339,289, resulting in basic and diluted loss per share of $2.13.

Liquidity and Capital Resources
As of March 31, 2020, we had cash and cash equivalents of $85.8 million. We have historically funded our operations principally through the private placement of equity securities, public offerings of common stock, and license and milestone payments received under our collaboration agreements. We believe that our cash and cash equivalents on hand will be sufficient to fund our current operations through at least 2022.
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We anticipate that we will continue to generate operating losses to the extent that we incur expenses to complete our clinical trial programs for our product candidates, develop our pipeline and pursue regulatory approval of our product candidates.
We may seek to sell additional equity or debt securities or obtain a credit facility if our available cash and cash equivalents are insufficient to satisfy our liquidity requirements or if we develop additional opportunities to do so. The sale of additional equity and debt securities may result in additional dilution to our stockholders. If we raise additional funds through the issuance of debt securities or preferred stock, these securities could have rights senior to those of our common stock and could contain covenants that would restrict our operations. We may require additional capital beyond our currently forecasted amounts. Any such required additional capital may not be available on reasonable terms, if at all. If we were unable to obtain additional financing, we may be required to reduce the scope of, delay or eliminate some or all of our planned research and development activities, which could harm our business.
Because of the numerous risks and uncertainties associated with the research and development of our product candidates, we are unable to estimate the exact amounts of our working capital requirements. Our future funding requirements will depend on many factors, including, but not limited to:
the scope, progress, results, and costs of clinical trials for our product candidates, and discovery and development activities related to new product candidates;
the timing of, and the costs involved in, obtaining regulatory approvals for our product candidates;
the cost of commercialization activities if any of our product candidates are approved for sale, including marketing, sales, facilities, and distribution costs;
the cost of manufacturing our product candidates and any products we commercialize;
our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of such agreements;
whether, and to what extent, we are required to repay our outstanding government provided loans;
the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including litigation costs and the outcome of such litigation;
the impact of public health crises such as the current COVID-19 pandemic or similar outbreaks, and
the timing, receipt and amount of sales of, or royalties on, our future products, if any.
Cash Flows
The following table sets forth the primary sources and uses of cash for each of the periods set forth below:
Three Months Ended March 31,
20202019
Net cash used in operating activities
$(3,310) $(2,186) 
Net cash provided by investing activities
84,179  —  
Net cash used in financing activities—  —  
Net increase (decrease) in cash and equivalents$80,869  $(2,186) 

For the three months ended March 31, 2020 and 2019, we used cash of $3.3 million and $2.2 million, respectively, for our operating activities. The increase in cash used in operating activities was primarily due to the Merger activity and changes in working capital for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019.
For the three months ended March 31, 2020 our investing activities provided cash of $84.2 million and none for the three months ended March 31, 2019. The cash provided by investing activities during the three months ended March 31, 2020 was due to $84.2 million in cash acquired in connection with the Merger.


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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk related to changes in interest rates. As of March 31, 2020 and December 31, 2019, we had cash and cash equivalents of $85.8 million and $5.0 million, respectively, consisting primarily of money market funds. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of United States interest rates. Due to the short-term duration of our investment portfolio and the low-risk profile of our investments, an immediate 10% change in interest rates would not have a material effect on the fair market value of our portfolio.

ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s principal executive officer and principal financial officer have concluded, based on an evaluation of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934, as amended (Exchange Act), Rules 13a-15(e) or 15d-15(e)) as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15 that, as of March 31, 2020, the Company’s disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
In connection with the evaluation of the Company's internal control over financial reporting that occurred during the quarter ended March 31, 2020, which is required under the Exchange Act by paragraph (d) of Exchange Rules 13a-15 or 15d-15 (as defined in paragraph (f) of Rule 13a-15), management determined that there was no change that materially affected or is reasonably likely to materially affect internal control over financial reporting.
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.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
On or about May 12, 2016, Trevor Abramson filed the Securities Action in the Court for the Southern District of NY. Subsequently, the Court for the Southern District of NY appointed Michael and Kelly Nguyen as lead plaintiffs and approved their selection of Kahn, Swick & Foti, LLC as lead counsel in the Securities Action. On October 31, 2016, the lead plaintiffs filed an amended complaint asserting claims under the federal securities laws against the Defendants. The amended complaint alleges the Defendants made material false and/or misleading statements that caused losses to the Company’s investors. The Defendants filed a motion to dismiss the amended complaint on July 14, 2017. On March 29, 2018, the Court for the Southern District of NY dismissed the amended complaint for failure to state a claim, without prejudice, and gave the lead plaintiffs until May 4, 2018 to file any amended complaint attempting to remedy the defects in their claims. On May 4, 2018, the lead plaintiffs filed a second amended complaint asserting claims under the federal securities laws against the Defendants. Like the first amended complaint, the second amended complaint alleges that the Defendants made material false and/or misleading statements or omissions relating to the Phase 2 and 3 trials and efficacy of the product candidate algenpantucel-L that caused losses to the Company’s investors. The lead plaintiffs do not quantify any alleged damages in the second amended complaint but, in addition to attorneys’ fees and costs, they sought to recover damages on behalf of themselves and other persons who purchased or otherwise acquired the Company’s stock during the putative class period of September 17, 2013 through May 9, 2016, inclusive, at allegedly inflated prices and purportedly suffered financial harm as a result. The Defendants filed a motion to dismiss the second amended complaint on July 31, 2018. On February 13, 2019, the Court for the Southern District of NY dismissed the second amended complaint for failure to state a claim, with prejudice, and closed the case. On March 14, 2019, lead plaintiffs filed a notice of appeal. The briefing on lead plaintiffs' appeal was completed in early July 2019 and oral argument before the Second Circuit Court of Appeals was held on October 21, 2019. The Company intends to continue defending the Securities Action vigorously.
On or about April 26, 2017, Ronald Morrow filed the Morrow Action in the Court for the Southern District of NY, against the Morrow Defendants. The complaint alleges that the Morrow Defendants caused the Company to issue false statements in its 2016 proxy statement regarding risk management and compensation matters in violation of federal securities law. The complaint also asserts state law claims against the Morrow Defendants for breaches of fiduciary duties, unjust enrichment, abuse of control, insider trading, gross mismanagement, and corporate waste, alleging that the Morrow Defendants made material misstatements or omissions related to the Phase 2 and 3 trials and efficacy of the product candidate algenpantucel-L, awarded themselves excessive compensation, engaged in illegal insider trading, and grossly mismanaged the Company. The plaintiff does not quantify any alleged damages in the complaint but seeks restitution for damages to the Company, attorneys’ fees, costs, and expenses, as well as an order directing that proposals for strengthening board oversight be put to a vote of the Company’s shareholders. The language for such proposals is not specified in the complaint. The plaintiff also contemporaneously filed a statement of relatedness, informing the Court for the Southern District of NY that the Morrow Action is related to Abramson v. NewLink Genetics Corp., et al., Case 1:16-cv-3545. On May 19, 2017, the plaintiff dismissed the Morrow Action without prejudice. Also on May 19, 2017, plaintiffs’ counsel in the Morrow Action filed a new shareholder derivative complaint that is substantively identical to the Morrow Action, except that the plaintiff is Rickey Ely. The latter action is captioned Ely v. Link, et al., Case 17-cv-3799, or the Ely Action. By agreement of the parties and order dated June 26, 2017, the Court for the Southern District of NY temporarily stayed the Ely Action until the Securities Action is dismissed or otherwise finally resolved. Under the terms of the stay, the plaintiff in the Ely Action had until March 15, 2019 (30 days after dismissal of the Securities Action with prejudice) to file an amended derivative complaint or rest upon the current derivative complaint. By further agreement of the parties, dated March 15, 2019, the Ely Action will continue to be stayed pending the outcome of the appeal in the Securities Action. If the Securities Action continues to be dismissed in its entirety following its appeal plaintiff in the Ely Action has agreed to withdraw or dismiss the action, with prejudice. The Company disputes the claims in the Ely Action and intends to defend against them vigorously.
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Item 1A.  RISK FACTORS
RISK FACTORS
Investing in our common stock involves significant risks, some of which are described below. In evaluating our business, investors should carefully consider the following risk factors. These risk factors contain, in addition to historical information, forward-looking statements that involve substantial risks and uncertainties. Our actual results could differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below. The order in which the following risks are presented is not intended to reflect the magnitude of the risks described. The occurrence of any of the following risks could have a material adverse effect on our business, financial condition, results of operations and prospects. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.
Risks Related to our Financial Condition and Capital Requirements
We have a limited operating history and have incurred significant losses since our inception, and we anticipate that we will continue to incur substantial and increasing losses for the foreseeable future. We have only one product candidate and no commercial sales, which, together with our limited operating history, makes it difficult to evaluate our business and assess our future viability.
We are a clinical-stage biopharmaceutical company with a limited operating history. We do not have any products approved for sale, and we are currently focused on developing our only product candidate, LUM-201. Evaluating our performance, viability or future success will be more difficult than if we had a longer operating history or approved products on the market. We continue to incur significant research and development and general and administrative expenses related to our operations. Investment in biopharmaceutical product development is highly speculative because it entails substantial upfront capital expenditures and significant risk that any potential product candidate will fail to demonstrate adequate effect or an acceptable safety profile, gain regulatory approval or become commercially viable. We have incurred significant operating losses in each year since our inception and expect to incur substantial and increasing losses for the foreseeable future. As of March 31, 2020, we had an accumulated deficit of $60.0 million. In the event we are able to monetize the PRV issued as a result of the approval by the FDA of the Ebola vaccine developed under the NewLink Merck Agreement by partner Merck in 2020, we may have taxable net income during the year ended December 31, 2020, however, due to the step up to fair value of the PRV asset recorded in conjunction with the Merger, we do not expect to achieve operating income for 2020 or for the foreseeable future.
To date, we have financed our operations primarily through private placements of our convertible preferred stock. We have devoted substantially all of our efforts to research and development, including clinical trials, but have not completed development of any product candidate. We anticipate that our expenses will increase substantially as we:
continue the research and development of our only product candidate, LUM-201, and any future product candidates;
pursue clinical trials of LUM-201, including the Phase 2b Trial of LUM-201 that we expect to initiate in by the end of 2020;
seek to in-license additional product candidates and incur any future costs to develop these product candidates;
seek regulatory approvals for LUM-201 and any future product candidates that successfully complete clinical trials;
establish a sales, marketing and distribution infrastructure and scale-up manufacturing capabilities to commercialize LUM-201 or other future product candidates if they obtain regulatory approval, including process improvements in order to manufacture LUM-201 or other future product candidates at commercial scale; and
enhance operational, financial and information management systems and hire more personnel, including personnel to support development of LUM-201 and any future product candidates and, if a product candidate is approved, its commercialization efforts.
To be profitable in the future, we must succeed in developing and eventually commercializing LUM-201 as well as other products with significant market potential. This will require us to be successful in a range of activities, including advancing LUM-201 and any future product candidates, completing clinical trials of these product candidates, obtaining regulatory approval for these product candidates and manufacturing, marketing and selling those products for which we may obtain regulatory approval. We are only in the preliminary stages of some of these activities. We may not succeed in these activities and may never generate revenue that is sufficient to be profitable in the future. Even if we are profitable, we may not be able to
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sustain or increase profitability on a quarterly or annual basis. Our failure to achieve sustained profitability would depress our value and could impair our ability to raise capital, expand our business, diversify our product candidates, market our product candidates, if approved, or continue our operations.
We currently have no source of product revenue and may never become profitable.
To date, we have not generated any revenues from commercial product sales, or otherwise. Even if we are able to successfully achieve regulatory approval for LUM-201 or any future product candidates, we do not know when any of these products will generate revenue from product sales. Our ability to generate revenue from product sales and achieve profitability will depend upon our ability, alone or with any future collaborators, to successfully commercialize products, including LUM-201 or any product candidates that we may develop, in-license or acquire in the future. Our ability to generate revenue from product sales from LUM-201 or any future product candidates also depends on a number of additional factors, including our or any future collaborators’ ability to:
complete development activities, including our planned Phase 2b and Phase 3 clinical trials of LUM-201, successfully and on a timely basis;
demonstrate the safety and efficacy of LUM-201 to the satisfaction of the FDA and obtain regulatory approval for LUM-201 and future product candidates, if any, for which there is a commercial market;
complete and submit applications to, and obtain regulatory approval from, foreign regulatory authorities;
set a commercially viable price for our products;
establish and maintain supply and manufacturing relationships with reliable third parties, and ensure adequate and legally compliant manufacturing of bulk drug substances and drug products to maintain that supply;
develop a commercial organization capable of sales, marketing and distribution of any products for which we obtain marketing approval in markets where we intend to commercialize independently;
find suitable distribution partners to help us market, sell and distribute our approved products in other markets;
obtain coverage and adequate reimbursement from third-party payors, including government and private payors;
achieve market acceptance of our approved products, if any;
establish, maintain and protect our intellectual property rights and avoid third-party patent interference or patent infringement claims; and
attract, hire and retain qualified personnel.
In addition, because of the numerous risks and uncertainties associated with pharmaceutical product development, including that LUM-201 or any future product candidates may not advance through development or achieve the endpoints of applicable clinical trials, 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 decide to or are required by the FDA or foreign regulatory authorities to perform studies or trials in addition to those that we currently anticipate. Even if we are able to complete the development and regulatory process for LUM-201 or any future product candidates, we anticipate incurring significant costs associated with commercializing these products.
Even if we are able to generate revenues from the sale of LUM-201 or any future product candidates that may be approved, 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 or shut down our operations.
We will need additional funds to support our operations, and such funding may not be available to us on acceptable terms, or at all, which would force us to delay, reduce or suspend our research and development programs and other operations or commercialization efforts. Raising additional capital may subject us to unfavorable terms, cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our product candidates and technologies.
The completion of the development and the potential commercialization of LUM-201 and any future product candidates, should they receive approval, will require substantial funds. Our future financing requirements will depend on many factors, some of which are beyond our control, including the following:
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the rate of progress and cost of our clinical trials;
the timing of, and costs involved in, seeking and obtaining approvals from the FDA and other regulatory authorities;
the extent of any required post-marketing approval commitments to applicable regulatory authorities;
developing an efficient, cost-effective, and scalable manufacturing process for LUM-201 and any future product candidates, including establishing and maintaining commercially viable supply and manufacturing relationships with third parties to obtain finished products that are appropriately packaged for sale;
the costs of commercialization activities if LUM-201 or any future product candidate is approved, including product sales, marketing, manufacturing and distribution;
the degree and rate of market acceptance of any products launched by us or future partners;
a continued acceptable safety profile following any marketing approval;
the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;
our ability to enter into additional collaboration, licensing, commercialization or other arrangements and the terms and timing of such arrangements;
the emergence of competing technologies or other adverse market developments; and
the costs of attracting, hiring and retaining qualified personnel.
We do not have any material committed external source of funds or other support for our planned development efforts. Until we can generate a sufficient amount of product revenue to finance our cash requirements, which we may never do, we expect to finance future cash needs through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances, monetization of the PRV, licensing arrangements and other marketing and distribution arrangements. Additional financing may not be available to us when we need it or such additional financing may not be available on favorable terms. If we raise additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish certain valuable rights to LUM-201 or potential future product candidates, technologies, future revenue streams or research programs, or grant licenses on terms that may not be favorable to us. If we raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect its stockholders’ rights. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we are unable to obtain adequate financing when needed, we may have to delay, reduce the scope of, or suspend one or more of our clinical trials or research and development programs or our commercialization efforts.
Our operating results may fluctuate significantly, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations or our guidance.
Our quarterly and annual operating results may fluctuate significantly in the future, which makes it difficult for us to predict our future operating results. From time to time, we may enter into collaboration agreements with other companies that include development funding and significant upfront and milestone payments and/or royalties. Accordingly, our revenue may depend on development funding and the achievement of development and clinical milestones under any potential future collaboration and license agreements and sales of its product candidates, if approved. These upfront and milestone payments may vary significantly from period to period and any such variance could cause a significant fluctuation in our operating results from one period to the next. In addition, we measure compensation cost for stock-based awards made to employees at the grant date of the award, based on the fair value of the award as determined by our Board, and recognize the cost as an expense over the employee’s requisite service period. As the variables that we use as a basis for valuing these awards change over time, the magnitude of the expense that we must recognize may vary significantly. Furthermore, our operating results may fluctuate due to a variety of other factors, many of which are outside of our control and may be difficult to predict, including the following:
the timing and cost of, and level of investment in, research and development activities relating to LUM-201 and any future product candidates, which will change from time to time;
our ability to enroll patients in clinical trials and the timing of enrollment;
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the cost of manufacturing LUM-201 and any future product candidates, which may vary depending on FDA guidelines and requirements, the quantity of production and the terms of our agreements with manufacturers;
expenditures that we will or may incur to acquire or develop additional product candidates and technologies;
the timing and outcomes of clinical trials for LUM-201 and any future product candidates or competing product candidates;
changes in the competitive landscape of its industry, including consolidation among our competitors or partners;
any delays in regulatory review or approval of LUM-201 or any of our future product candidates;
the level of demand for LUM-201 and any future product candidates, should they receive approval, which may fluctuate significantly and be difficult to predict;
the risk/benefit profile, cost and reimbursement policies with respect to our products candidates, if approved, and existing and potential future drugs that compete with our product candidates;
competition from existing and potential future drugs that compete with LUM-201 or any of our future product candidates;
our ability to commercialize LUM-201 or any future product candidate inside and outside of the United States, either independently or working with third parties;
our ability to establish and maintain collaborations, licensing or other arrangements;
our ability to obtain any economic benefit from the monetization of the PRV;
our ability to adequately support future growth;
potential unforeseen business disruptions that increase our costs or expenses;
future accounting pronouncements or changes in our accounting policies; and
the changing and volatile global economic environment.
The cumulative effects of these factors could result in large fluctuations and unpredictability in our quarterly and annual operating results. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Investors should not rely on our past results as an indication of its future performance.
Our ability to use our net operating loss carryforwards and certain other tax attributes is limited by Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the "Code").
Sections 382 and 383 of the Code limit a corporation’s ability to utilize its net operating loss carryforwards and certain other tax attributes (including research credits) to offset any future taxable income or tax if the corporation experiences a cumulative ownership change of more than 50% over any rolling three-year period. State net operating loss carryforwards (and certain other tax attributes) may be similarly limited. A Section 382 ownership change can, therefore, result in significantly greater tax liabilities than a corporation would incur in the absence of such a change, and any increased liabilities could adversely affect the corporation’s business, results of operations, financial condition and cash flow.
Based on Section 382 ownership change analyses, we believe that from our inception through June 30, 2019, we experienced Section 382 ownership changes in September 2001 and March 2003, and BPS experienced Section 382 ownership changes in January 2006 and January 2011.
Additionally, based on Section 382 ownership change analyses through March 18, 2020, as a result of the Merger, both historical NewLink and Private Lumos experienced Section 382 ownership changes on March 18, 2020.
These ownership changes limited our ability to utilize federal net operating loss carryforwards and certain other tax attributes that accrued prior to the respective ownership changes of us and our subsidiaries and may continue to limit our ability to utilize such attributes in the future.
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Additional ownership changes may occur in the future as a result of events over which we will have little or no control, including purchases and sales of our equity by our 5% stockholders, the emergence of new 5% stockholders, additional equity offerings or redemptions of our stock or certain changes in the ownership of any of our 5% stockholders.
Accounting pronouncements may impact our reported results of operations and financial position.
U.S. GAAP and related implementation guidelines and interpretations can be highly complex and involve subjective judgments. Changes in these rules or their interpretation, the adoption of new pronouncements or the application of existing pronouncements to changes in our business could significantly alter our reported financial statements and results of operations.
We incur significant costs as a result of operating as a public company, and our management is required to devote substantial time to meet compliance obligations.
As a public company, we incur significant legal, accounting and other expenses to comply with reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), as well as rules subsequently implemented by the SEC and The Nasdaq Global Market. Meeting the requirements of these rules and regulations entails significant legal and financial compliance costs, makes some activities more difficult, time-consuming or costly and may also place undue strain on our personnel, systems and resources. Our management and other personnel devote a substantial amount of time to these compliance requirements. In addition, these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified people to serve on our Board of Directors, our board committees or as executive officers.
Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our ability to produce accurate financial statements and on our stock price.
Pursuant to Section 404 of the Sarbanes-Oxley Act, we are required to publish a report by our management on our internal control over financial reporting. To achieve compliance with Section 404, we have engaged in a process to document and evaluate our internal control over financial reporting, which has been both costly and challenging. To maintain compliance on an ongoing basis, we will need to dedicate internal resources, engage outside consultants and adopt a detailed work plan. Despite our effort, there is a risk that neither we nor our independent registered public accounting firm will be able to conclude that our internal control over financial reporting is effective as required by Section 404. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.
The comprehensive tax reform bill of 2017 could adversely affect our business and financial condition.
On December 22, 2017 the Tax Act was signed into law. The Tax Act significantly revised the Code and included, among other things, significant changes to corporate taxation, including a reduction of the corporate income tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income for net operating losses arising in taxable years beginning after December 31, 2017 and elimination of net operating loss carrybacks for net operating losses arising in taxable years beginning after December 31, 2017, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the Tax Act did not have a material impact on our business. In addition, it is uncertain if and to what extent various states will conform to the Tax Act. The impact of the Tax Act on holders of our common stock is also uncertain and could be adverse. We urge our stockholders to consult with their legal and tax advisors with respect to the Tax Act and the potential tax consequences of investing in or holding our common stock.
Changes in our effective income tax rate could adversely affect our results of operations in the future.
For the three months ended March 31, 2020 we recorded an income tax benefit of $5.5 million. Our income tax rate differs from the amount that would be expected after applying the statutory U.S. federal income tax rate primarily due to the benefit of $4.5 million recorded as a result of the CARES Act. Additionally, the income tax benefit includes $990,000 for the release of the valuation allowance related to Private Lumos NOLs and a current period benefit for losses the Company anticipates will be offset by future income. Our effective income tax rate, as well as our relative domestic and international tax liabilities, will depend in part on the allocation of any future income among different jurisdictions. In addition, various factors may have favorable or unfavorable effects on our effective income tax rate in individual jurisdictions or in the aggregate. These factors include whether tax authorities agree with our interpretations of existing tax laws, any required accounting for stock options and other share-based compensation, changes in tax laws and rates (including the recently enacted U.S. federal income tax law
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changes), our future levels of research and development spending, changes in accounting standards, changes in the mix of any future earnings in the various tax jurisdictions in which we may operate, the outcome of any examinations by the U.S. Internal Revenue Service or other tax authorities, the accuracy of our estimates for unrecognized tax benefits and realization of deferred tax assets and changes in overall levels of pre-tax earnings. The effect on our income tax liabilities resulting from the above-mentioned factors or other factors could have a material adverse effect on our results of operations.
Risks Related to the Development and Commercialization of our Product Candidate
Our success depends heavily on the successful development, regulatory approval and commercialization of our only product candidate, LUM-201.
We do not have any products that have gained regulatory approval. Our current clinical-stage product candidate, LUM-201, is an orally-formulated GH stimulating therapeutic for a subset of PGHD patients and potentially other endocrine disorders. As a result, our near-term prospects, including our ability to finance our operations and generate revenue, are substantially dependent on our ability to obtain regulatory approval for and, if approved, to successfully commercialize LUM-201 in a timely manner.
We cannot commercialize LUM-201 or any future product candidates in the United States without first obtaining regulatory approval for the product from the FDA, nor can we commercialize LUM-201 or any future product candidates outside of the United States without obtaining regulatory approval from comparable foreign regulatory authorities. The FDA review process typically takes years to complete and approval is never guaranteed. Before obtaining regulatory approvals for the commercial sale of LUM-201 for a target PGHD indication or our future product candidates, we generally must demonstrate with substantial evidence gathered in preclinical and well-controlled clinical trials that the product candidate is safe and effective for use for that target indication and that the manufacturing facilities, processes and controls are adequate. We are pursuing the same regulatory pathway for LUM-201 followed by most of the approved rhGH products and long-acting GH products under development for a subset of PGHD patients. We intend to study treatment naïve and previously-treated patients by conducting trials including a six-month Phase 2b dose-finding trial and a Phase 3 clinical trial with a primary endpoint of 12 month mean height velocity that is intended to support regulatory approval. If we must conduct additional or different trials than prior rhGH products were required to complete, this could increase the amount of time and expense required for regulatory approval of LUM-201, if any. In addition, while the available growth data from published studies of approved rhGH therapy products suggest that six and 12 months mean height velocities are well correlated, it is possible that LUM-201, due to its unique properties, will produce different results. If the six months mean height velocities that we observe for LUM-201 in the planned Phase 2b Trial do not correlate to 12 month mean height velocities that we ultimately observe in any Phase 3 clinical trial that we may conduct, LUM-201 may not achieve the required primary endpoint in the Phase 3 clinical trial, and LUM-201 may not receive regulatory approval. Moreover, obtaining regulatory approval for marketing of LUM-201 in one country does not ensure we will be able to obtain regulatory approval in other countries, while a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in other countries.
Even if LUM-201 or any of our future product candidates were to successfully obtain approval from the FDA and comparable foreign regulatory authorities, any approval might contain significant limitations related to use restrictions for specified age groups, warnings, precautions or contraindications, or may be subject to burdensome post-approval study or risk management requirements. If we are unable to obtain regulatory approval for LUM-201 in one or more jurisdictions, or any approval contains significant limitations, we may not be able to obtain sufficient funding or generate sufficient revenue to continue to fund its operations. Also, any regulatory approval of LUM-201 or our future product candidates, once obtained, may be withdrawn. Furthermore, even if we obtain regulatory approval for LUM-201, the commercial success of LUM-201 will depend on a number of factors, including the following:
development of our own commercial organization or establishment of a commercial collaboration with a commercial infrastructure;
establishment of commercially viable pricing and obtaining approval for adequate reimbursement from third-party and government payors;
the ability of our third-party manufacturers to manufacture quantities of LUM-201 using commercially viable processes at a scale sufficient to meet anticipated demand and reduce our cost of manufacturing, and that are compliant with the FDA’s cGMP;
our success in educating physicians and patients about the benefits, administration and use of LUM-201;
the availability, perceived advantages, relative cost, relative safety and relative efficacy of alternative and competing treatments;
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the effectiveness of our own or our potential strategic collaborators’ marketing, sales and distribution strategy and operations;
acceptance of LUM-201 as safe and effective by patients, caregivers and the medical community;
a continued acceptable safety profile of LUM-201 following approval; and
continued compliance with our obligations in our intellectual property licenses with third parties upon favorable terms.
Many of these factors are beyond our control. If we or our commercialization collaborators are unable to successfully commercialize LUM-201, we may not be able to earn sufficient revenues to continue our business.
The analysis that supports our basis for pursuing development of LUM-201 for PGHD is derived from data from three clinical trials conducted by Merck in the 1990s, and a post-hoc analysis of one of the trials. Various issues relating to such trials and analysis could materially adversely impact our LUM-201 clinical trial design and our future development plans.
The probability of the Phase 2b Trial succeeding is highly dependent on the adequacy of the Phase 2b Trial design. In designing such trial, we reviewed data and analysis from three studies on LUM-201 completed by Merck in the 1990s (the “Merck Trials”) and we incorporated the results our analysis of Merck’s clinical data into the design of the Phase 2b Trial. However, we could have misinterpreted or performed a flawed analysis of such data. Factors that could have affected our interpretation and analysis of the Merck Trials include:
clinical trial procedures and statistical analysis methods may have changed since the 1990s when the Merck Trials were conducted, which limits our ability to effectively predict how changes to trial design might affect the Phase 2b Trial results;
two of the Merck Trials were discontinued prior to completion due to lack of efficacy;
one of the Merck Trials changed the formulation of the drug part way through the treatment naïve patient trial and for the other previously-treated patient trial the formulation change was for the entire trial, and the changed formulation was subsequently determined to have 30% to 40% less bioavailability;
certain relevant information from the Merck Trials, including the source documentation for the Merck Trials, is not available and so could not be referenced for our analysis and Phase 2b Trial design; and
bias in small sample size and other limitations inherent in the post-hoc analysis of the Merck Trials upon which we have relied for our Phase 2b Trial design could have caused such post-hoc analysis to be unreliable.
As a result of such factors, among others, there could be flaws in the design of the Phase 2b clinical trial that could cause it to fail, which would materially adversely impact our business, future development plans, and prospects.
Because the results of preclinical testing or earlier clinical trials are not necessarily predictive of future results, LUM-201 may not have favorable results in later clinical trials or receive regulatory approval.
Success in preclinical testing and early clinical trials does not ensure that later clinical trials will generate adequate data to demonstrate the efficacy and safety of an investigational drug. A number of companies in the pharmaceutical and biotechnology industries, including those with greater resources and experience, have suffered significant setbacks in clinical trials, even after seeing promising results in earlier clinical trials. We do not know whether the clinical trials we are conducting, or may conduct, will demonstrate adequate efficacy and safety to result in regulatory approval to market LUM-201. Even if we believe that we have adequate data to support an application for regulatory approval to market our product candidates, the FDA, the EMA, or other applicable foreign regulatory authorities may not agree and may require that we conduct additional clinical trials. If later-stage clinical trials do not produce favorable results, our ability to achieve regulatory approval for LUM-201 may be adversely impacted.
There can be no assurance that LUM-201 will not exhibit new or increased safety risks in the Phase 2b Trial compared to the previously conducted Merck Trials, or, if we complete the Phase 2b Trial, in the planned Phase 3 clinical trial. In addition, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many other companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain regulatory approval for the marketing of their products.
In addition, we have not yet established the optimal dose for LUM-201. There can be no guarantee that the three dose levels currently being planned in the Phase 2b Trial will be efficacious or, if they are, whether any one will be the optimal dose.
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The Phase 2b Trial may not be successful in determining a dose or dose regimen of LUM-201 suitable for future development and potential marketing approval.
If we make changes to any of our product candidates, additional clinical trials may be required resulting in additional costs and delays.
We have an ongoing research program to investigate potential opportunities to improve the potency, efficacy and/or safety profile of some of our product candidates through modifications to their formulations or chemical compositions. These efforts may not be successful. If a new formulation or composition appears promising, we may decide to undertake clinical development of such formulation or composition even if an existing product candidate has shown acceptable safety and efficacy in clinical trials. The nature and extent of additional clinical trials that might be required for a new formulation or composition would depend on many factors. If we were to decide to pursue clinical development of a new formulation or composition, we would incur additional costs and the timeline for potential commercialization would be delayed. There can be no assurance that any new formulation or composition would prove to be safe or effective or superior to an existing product candidate. Any delay in commercialization of a new formulation or composition may adversely affect our competitive position.
We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates or indications that may be more profitable or for which there is a greater likelihood of success.
Because we have limited financial and managerial resources, we must focus on research programs and product candidates for the specific indications that we believe are the most scientifically and commercially promising. As a result, we have in the past determined to let certain of our development projects remain idle, including by allowing IND applications to lapse into inactive status, and we may in the future decide to forego or delay pursuit of opportunities with other product candidates or other indications that later prove to have greater scientific or commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable scientific or commercial products or profitable market opportunities. In addition, we may spend valuable time and managerial and financial resources on research programs and product candidates for specific indications that ultimately do not yield any scientifically or commercially viable products. Furthermore, our resource allocation decisions and our decisions about whether and how to develop or commercialize any particular product candidate may be based on evaluations of the scientific and commercial potential or target market for the product candidate that later prove to be materially inaccurate. If we enter into collaborations, licensing or other royalty arrangements to develop or commercialize a particular product candidate, we may relinquish valuable rights to that product candidate in situations where it would have been more advantageous for us to retain sole rights to development and commercialization.
The outbreak of the novel strain of coronavirus, SARS-CoV-2, which causes COVID-19, have, and could continue to adversely impact our business, including our planned clinical trials.
Public health crises such as pandemics or similar outbreaks could adversely impact our business. In December 2019, a novel strain of coronavirus, SARS-CoV-2, which causes coronavirus disease 2019, or COVID-19, surfaced in Wuhan, China. Since then, COVID-19 has spread to multiple countries, including the United States. In response to the spread of COVID-19, we have closed our executive offices with our employees continuing their work outside of our offices.
As a result of the COVID-19 outbreak, or similar pandemics, we have experienced, and may continue to experience disruptions that could severely impact our business, manufacturing, preclinical development activities, preclinical studies and planned clinical trials, including:
interruption or delays in the operations of the U.S. Food and Drug Administration and comparable foreign regulatory agencies, which may impact timelines for regulatory submission, trial initiation and regulatory approval;
interruption or delays in our contract research organizations ("CROs") and collaborators meeting expected deadlines or complying with regulatory requirements related to preclinical development activities, preclinical studies and planned clinical trials;
interruptions of, or delays in receiving, supplies of our product candidates from our contract manufacturing organizations ("CMOs") due to staffing shortages, productions slowdowns or stoppages and disruptions in delivery systems;
delays or difficulties in any planned clinical site initiation, including difficulties in obtaining IRB approvals, recruiting clinical site investigators and clinical site staff;
delays or difficulties in enrolling patients in clinical trials;
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increased rates of patients withdrawing from any planned clinical trials following enrollment as a result of contracting COVID-19 or being forced to quarantine;
diversion of healthcare resources away from the conduct of our preclinical development activities, preclinical studies and planned clinical trials, including the diversion of hospitals serving as any potential clinical trial sites and hospital staff supporting the conduct of our planned clinical trials;
interruption of planned key clinical trial activities, such as clinical trial site data monitoring, due to limitations on travel imposed or recommended by federal or state governments, employers and others or interruption of clinical trial subject visits and study procedures (particularly any procedures that may be deemed non-essential), which may impact the integrity of subject data and planned clinical study endpoints;
limitations on employee or collaborator resources that would otherwise be focused on the conduct of our preclinical development activities, preclinical studies and planned clinical trials, including because of sickness of employees or their families, the desire of employees to avoid contact with large groups of people, an increased reliance on working from home or mass transit disruptions; and
reduced ability to engage with the medical and investor communities due to the cancellation of conferences scheduled throughout the year.
These and other factors arising from the COVID-19 pandemic could worsen in countries that are already afflicted with COVID-19, could continue to spread to additional countries, or could return to countries where the pandemic has been partially contained, each of which could further adversely impact our ability to conduct preclinical development activities, preclinical studies and planned clinical trials and our business generally, and could have a material adverse impact on our operations and financial condition and results.
In addition, the trading prices for our common stock and other biopharmaceutical companies have been highly volatile as a result of the COVID-19 epidemic. As a result, our ability to raise capital through any future sales of our common stock or such sales may be on unfavorable terms. The COVID-19 outbreak continues to rapidly evolve. The extent to which the outbreak may impact our business, preclinical studies and clinical trials will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions and actions to contain the outbreak or treat its impact, such as social distancing and quarantines or lock-downs in the United States and other countries, business closures or business disruptions and the effectiveness of actions taken in the United States and other countries to contain and treat the disease.
As an organization, we have never conducted a Phase 2b or a Phase 3 clinical trial or submitted a New Drug Application (an “NDA”) before, and may be unsuccessful in doing so for LUM-201.
We are currently planning to conduct the Phase 2b clinical trial and we may need to conduct additional clinical trials before initiating our planned Phase 3 clinical trial. If the Phase 2b clinical trial is successful, we intend to independently conduct a Phase 3 clinical trial of LUM-201. To conduct a Phase 3 clinical trial and submit a successful NDA is a complicated process. As an organization, we have never conducted a Phase 3 clinical trial, have limited experience in preparing, submitting and prosecuting regulatory filings, and have not submitted an NDA before. We also have had limited interactions with the FDA and have not discussed any proposed clinical trial designs or implementations with the FDA. Consequently, even if the Phase 2b Trial is successful, we may be unable to successfully and efficiently execute and complete necessary clinical trials in a way that leads to an NDA submission and approval of LUM-201. Failure to commence or complete, or delays in, our planned clinical trials would prevent us from or delay us in commercializing LUM-201.
Delays in the enrollment of patients in any of our clinical trials could increase our development costs and delay completion of the trial.
We may not be able to initiate or continue clinical trials for LUM-201 or any future product candidates if we are unable to locate and enroll a sufficient number of eligible patients to participate in these trials. Even if we are able to enroll a sufficient number of patients in our clinical trials, if the pace of enrollment is slower than we expect, the development costs for our product candidates may increase and the completion of our trials may be delayed or our trials could become too expensive to complete.
There may be concurrent competing PGHD clinical trials that will inhibit or slow our enrollment in the planned Phase 2b and Phase 3 clinical trials. If we experience delays in enrollment, our ability to complete our planned clinical trials could be impaired and the costs of conducting such trials could increase, either of which could have a material adverse effect on our business.
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If clinical trials of LUM-201 and any future product candidates fail to demonstrate safety and efficacy to the satisfaction of the FDA or similar regulatory authorities outside the United States or do not otherwise produce positive results, we may incur additional costs, experience delays in completing or ultimately fail in completing the development and commercialization of LUM-201 or our future product candidates.
Before obtaining regulatory approval for the sale of any product candidate, we must conduct extensive clinical trials to demonstrate the safety and efficacy of our product candidates in humans. Clinical trials are expensive, difficult to design and implement, can take many years to complete and are uncertain as to outcome. A failure of one or more of our clinical trials could occur at any stage of testing.
We have identified several aspects of the Phase 2b Trial protocols that could potentially delay or prevent our ability to receive regulatory approval or commercialize LUM-201. For example, we may be administering LUM-201 at dose levels that are not as efficacious and/or safe as other rhGH therapies. The Phase 2b Trial will test doses of LUM-201 that are equal to, and two and four times higher than, the highest doses tested in the multiple dose Merck Trials. These higher doses were never tested in adults or children in a multiple dose trial in the Merck Trials and, even if the trials are able to show that such higher doses increase efficacy, such higher doses may not be as safe as the doses tested in the Merck Trials. As a result, frequent safety assessments may be required during the trial.
In addition to trial design factors, we may experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent our ability to receive regulatory approval or commercialize LUM-201 or any future product candidates, including the following:
clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon product development programs;
the number of patients required for clinical trials may be larger than we anticipate, enrollment of subjects who meet our inclusion criteria in these clinical trials may be insufficient or slower than we anticipate, or patients may drop out of these clinical trials at a higher rate than we anticipate;
our existing supply of the LUM-201 Active Pharmaceutical Ingredient (the “API”) was manufactured more than 20 years ago and, while we have conducted testing and believe this supply is suitable for clinical use, it may unexpectedly become unusable or documentation concerning this supply may be in the possession of third parties and become unavailable over time;
the cost of clinical trials or the manufacturing of our product candidates may be greater 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 product candidates for various reasons, including a finding that our product candidates have unanticipated serious adverse events or other unexpected characteristics or that the patients are being exposed to unacceptable health risks;
regulators may not approve our proposed clinical development plans;
regulators or institutional review boards may not authorize us or our investigators to commence a clinical trial or conduct a clinical trial at a prospective trial site;
regulators or institutional review boards may require that we or our investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements; and
the supply or quality of our product candidates or other materials necessary to conduct clinical trials of our product candidates may be insufficient or inadequate.
If we are required to conduct additional clinical trials or other testing of LUM-201 or any future product candidates beyond those that we contemplate, if we are unable to successfully complete clinical trials or other testing, or if the results of these trials or tests are not positive or are only modestly positive or if there are safety concerns, we may:
be materially delayed in obtaining marketing approval for LUM-201 or other product candidates;
not obtain marketing approval at all;
obtain approval for indications that are not as broad as intended or targeted;
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have the product removed from the market after obtaining marketing approval;
be subject to additional post-marketing testing requirements; or
be subject to restrictions on how the product is distributed or used.
Our product development costs will also increase if it experiences delays in testing or approvals. 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 may have the exclusive right to commercialize our product candidates or allow its competitors to bring products to market before it does, which would impair our ability to commercialize our product candidates and harm our business and results of operations.
Even if we obtain marketing approval for LUM-201, certain factors may limit the market for LUM-201, which could materially impair our ability to generate revenue from such product.
Even if we receive regulatory approval for LUM-201, certain factors may limit the market for LUM-201 or put the product at a competitive disadvantage relative to alternative therapies. For instance, we believe that the treatment will only be effective for approximately 50% to 60% of PGHD patients, and approximately 50% for patients with either SGA or Turner Syndrome, and the actual percentages could be substantially lower. Certain jurisdictions such as Australia and the European Union have different diagnostic criteria for diagnosing PGHD and as a result, the market for LUM-201 in those jurisdictions is smaller. In addition, there are a number of challenges that LUM-201 would face to obtain acceptance and use by physicians. Physicians will need to conduct additional testing to identify their patients who would be eligible for LUM-201 treatment. Approved products that would compete with LUM-201 have been used for many years or decades with an excellent safety profile. It will take a number of years of results of LUM-201 to provide the comfort level that may be necessary to satisfy some physicians and patient families. Some physicians may feel the benefits of an oral product do not outweigh limitations. For example, the mean annual growth velocity for LUM-201 treated patients included in the trial (Predictive Enrichment Marker ("PEM")-Positive) may be substantially lower, despite meeting non-inferiority study requirements, than such mean for all rhGH treated PGHD patients. These factors could limit the size of the market LUM-201 intends to address and the rate of market acceptance, which could materially impair our ability to generate revenue.
LUM-201 or our future product candidates may cause serious 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 marketing approval.
Our product candidate, LUM-201, has not completed clinical development. The risk of failure of clinical development is high. It is impossible to predict when or if this or any future product candidates will prove safe enough to receive regulatory approval. Undesirable adverse events caused by LUM-201 or any future product 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 or other comparable foreign regulatory authority.
At the doses tested previously in the Merck Trials, LUM-201 was generally well-tolerated in children with the most commonly reported adverse events being digestive systems events, including appetite increase. Mild elevations in liver enzymes without accompanying changes in bilirubin were also reported. To our knowledge, no serious drug-related adverse events have been reported in children treated with LUM-201 to date. However, we cannot assure you that adverse events from LUM-201 in current or future clinical trials will not prompt the discontinuation of the development of LUM-201. Similarly, our future product candidates may cause serious adverse events or have other properties that could delay or prevent their regulatory approval. As a result of these adverse events or further safety or toxicity issues that we may experience in its clinical trials in the future, we may not receive approval to market LUM-201 or any future product candidates, which could prevent us from ever generating revenue or achieving profitability. Results of our trials could reveal an unacceptably high severity or prevalence of adverse events. In such an event, our trials could be suspended or terminated and the FDA or comparable foreign regulatory authorities could order it to cease further development of or deny approval of its product candidates for any or all targeted indications. Any drug-related adverse events could affect patient recruitment or the ability of enrolled subjects to complete the trial or result in potential product liability claims. Any of these occurrences may have a material adverse effect on our business, results of operations, financial condition, cash flows and future prospects.
Additionally, if LUM-201 or any of our future product candidates receive marketing approval, and we or others later identify undesirable adverse events caused by such product, a number of potentially significant negative consequences could result, including:
we may be forced to suspend the marketing of such product;
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regulatory authorities may withdraw our approvals of such product;
regulatory authorities may require additional warnings on the label that could diminish the usage or otherwise limit the commercial success of such products;
the FDA or other regulatory bodies may issue safety alerts, Dear Healthcare Provider letters, press releases or other communications containing warnings about such product;
the FDA may require the establishment or modification of REMS, or a comparable foreign regulatory authority may require the establishment or modification of a similar strategy that may, for instance, restrict distribution of our products and impose burdensome implementation requirements on us;
we may be required to change the way the product is administered or conduct additional clinical trials;
we could be sued and held liable for harm caused to subjects or patients;
we may be subject to litigation or product liability claims; and
our reputation may suffer.
Any of these events could prevent us from achieving or maintaining market acceptance of the particular product candidate, if approved.
Even if our clinical trials demonstrate acceptable safety and efficacy of LUM-201 for growth in PGHD patients based on a once daily oral dosing regimen, the FDA or similar regulatory authorities outside the United States may not approve LUM-201 for marketing or may approve it with restrictions on the label, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
Assuming the success of our clinical trials, we anticipate seeking regulatory approval for LUM-201 initially in the United States and the European Union for treatment of a subset of PGHD patients based on a once daily weight-based dosing regimen. We may subsequently seek regulatory approval in other jurisdictions including China and Japan. It is possible that the FDA, the EMA, or regulatory agencies in other countries may not consider the results of our clinical trials to be sufficient for approval of LUM-201 for this indication. In general, the FDA suggests that sponsors complete two adequate and well-controlled clinical trials to demonstrate effectiveness because a conclusion based on two persuasive trials will be more compelling than a conclusion based on a single trial. Even if we achieve favorable results in the Phase 2b Trial and its planned Phase 3 clinical trial and considering that LUM-201 is a new chemical entity, the FDA may nonetheless require that we conduct additional clinical trials, possibly using a different clinical trial design.
Moreover, even if the FDA or other regulatory authorities approve LUM-201 for treatment of a subset of PGHD patients based on a once daily weight-based dosing regimen, the approval may include additional restrictions on the label that could make LUM-201 less attractive to physicians and patients compared to other products that may be approved for broader indications, which could limit potential sales of LUM-201.
If we fail to obtain FDA or other regulatory approval of LUM-201 or if the approval is narrower than what we seek, it could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
Even if LUM-201 or any future product candidates receive regulatory approval, they may fail to achieve the degree of market acceptance by physicians, patients, caregivers, healthcare payors and others in the medical community necessary for commercial success.
If LUM-201 or any future product candidates receive regulatory approval, they may nonetheless fail to gain sufficient market acceptance by physicians, hospital administrators, patients, healthcare payors and others in the medical community. The degree of market acceptance of our product candidates, if approved for commercial sale, will depend on a number of factors, including the following:
the prevalence and severity of any adverse events;
their efficacy and potential advantages compared to alternative treatments;
the price Lumos charges for its product candidates;
the willingness of physicians to change their current treatment practices;
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convenience and ease of administration compared to alternative treatments;
the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;
the strength of marketing and distribution support; and
the availability of third-party coverage or adequate reimbursement.
For example, a number of companies offer therapies for treatment of PGHD patients based on a daily injection based regimen, and physicians, patients or their families may not be willing to change their current treatment practices in favor of LUM-201 even if it is able to eliminate daily injection dosing. If LUM-201 or any future product candidates, if approved, do not achieve an adequate level of acceptance, we may not generate significant product revenue and we may not become profitable on a sustained basis or at all.
In addition, several companies, including large worldwide pharmaceutical companies are developing products that provide weekly injection-based treatment for PGHD. If one or more of such products are approved, physicians, patients and their families may prefer a once weekly treatment option over LUM-201’s daily treatment.
LUM-201 has never been manufactured on a commercial scale, and there are risks associated with scaling up manufacturing to commercial scale. We are in the process of arranging for production of LUM-201 by a third-party manufacturer, which may not be successful, and this could delay regulatory approval and commercialization of LUM-201.
We have an existing supply of the LUM-201 API obtained in connection with the Asset Purchase Agreement by and between Lumos and Ammonett (the “APA”) and the exclusive, worldwide license and collaboration agreement entered into in November 2014 with Merck (the “Lumos Merck Agreement”) that we believe will be sufficient for our Phase 2b Trial, subject to FDA review. The LUM-201 API has never been manufactured on a commercial scale, and there are risks associated with scaling up manufacturing to commercial scale including, among others, cost overruns, potential problems with process scale-up, process reproducibility, stability issues, lot consistency, and timely availability of raw materials. Even if we could otherwise obtain regulatory approval for LUM-201, there is no assurance that any manufacturer we arrange will be able to manufacture the approved product to specifications acceptable to the FDA or other regulatory authorities, to produce it in sufficient quantities to meet the requirements for the potential launch of the product or to meet potential future demand. If any manufacturer is unable to begin production in a timely and efficient manner or produce sufficient quantities of the approved product for commercialization, our commercialization efforts would be impaired, which would have an adverse effect on our business, financial condition, results of operations and growth prospects.
Our failure to successfully identify, acquire, develop and commercialize additional products or product candidates could impair our ability to grow.
Although a substantial amount of our efforts will focus on the continued clinical testing and potential approval of our product candidate, LUM-201, a key element of its long-term growth strategy is to acquire, develop, and/or market additional products and product candidates. Research programs to identify product candidates require substantial technical, financial and human resources, whether or not any product candidates are ultimately identified. Because our internal research capabilities are limited, we may be dependent upon pharmaceutical and biotechnology companies, academic scientists and other researchers to sell or license products or technology to us. The success of this strategy depends partly upon our ability to identify, select and acquire promising pharmaceutical product candidates and products. The process of proposing, negotiating and implementing a license or acquisition of a product candidate or approved product is lengthy and complex. Other companies, including some with substantially greater financial, marketing and sales resources, may compete with us for the license or acquisition of product candidates and approved products. We have limited resources to identify and execute the acquisition or in-licensing of third-party products, businesses and technologies and integrate them into its current infrastructure. Moreover, we may devote resources to potential acquisitions or in-licensing opportunities that are never completed, or we may fail to realize the anticipated benefits of such efforts. Any product candidate that we acquire may require additional development efforts prior to commercial sale, including extensive clinical testing and approval by the FDA and applicable foreign regulatory authorities. All product candidates are prone to risks of failure typical of pharmaceutical product development, including the possibility that a product candidate will not be shown to be sufficiently safe and effective for approval by regulatory authorities. In addition, we cannot provide assurance that any products that we develop or approved products that we acquire will be manufactured profitably or achieve market acceptance.
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We currently have no sales or distribution personnel and only limited marketing capabilities. If we are unable to develop a sales and marketing and distribution capability on our own or through collaborations or other marketing partners, we will not be successful in commercializing LUM-201 or other future products.
We do not have sales or marketing infrastru