Genocea Biosciences
GENOCEA BIOSCIENCES, INC. (Form: 10-K, Received: 02/17/2017 16:06:01)


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________________________________
FORM 10-K
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                to                
Commission file number 001-36289
Genocea Biosciences, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
51-0596811
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
100 Acorn Park Drive
 
 
Cambridge, Massachusetts
 
02140
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (617) 876-8191
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which
  registered
Common Stock, $0.001 par value
 
NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act: None
_______________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   o  Yes   x  No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   o  Yes   x  No
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.   x  Yes   o  No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   x  Yes   o  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer   o
 
Accelerated filer   x
Non-accelerated filer  o
 
Smaller reporting company   o
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   o  Yes   x  No
EXPLANATORY NOTE : Under the Jumpstart Our Business Startups Act, the registrant qualifies as an “emerging growth company.” We therefore incorporate the scaled disclosures required of an emerging growth company in this Annual Report on Form 10-K.
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the closing price for such stock as reported on the NASDAQ Global Market on June 30, 2016 , the last business day of the registrant’s most recently completed second quarter, was: $85,898,985 .
The number of shares outstanding of the registrant’s common stock as of February 15, 2017 was 28,498,694 .
 




TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements that involve substantial risks and uncertainties. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, our clinical results and other future conditions. The words “anticipate”, “believe”, “contemplate”, “continue”, “could”, “estimate”, “expect”, “forecast”, “goal”, “intend”, “may”, “plan”, “potential”, “predict”, “project”, “should”, “target”, “will”, “would”, or the negative of these terms or other similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.
The forward-looking statements in this Annual Report on Form 10-K include, among other things, statements about:
the timing of results of our ongoing and planned clinical trials;
our planned clinical trials for GEN-003;
our estimates regarding the amount of funds we require to complete our clinical trials for GEN-003 and to continue our investments in our immuno-oncology;
our estimate for when we will require additional funding;
our plans to commercialize GEN-003 and our other product candidates;
the timing of, and our ability to, obtain and maintain regulatory approvals for our product candidates;
the rate and degree of market acceptance and clinical utility of any approved product candidate;
  the potential benefits of strategic partnership agreements and our ability to enter into strategic partnership arrangements;
our ability to quickly and efficiently identify and develop product candidates;
our commercialization, marketing and manufacturing capabilities and strategy;
our intellectual property position; and
our estimates regarding expenses, future revenues, capital requirements, the sufficiency of our current and expected cash resources and our need for additional financing.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Annual Report on Form 10-K, particularly in the “Risk Factors” section, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make or collaborations or strategic partnerships we may enter into.
You should read this Annual Report on Form 10-K and the documents that we have filed as exhibits to the Annual Report on Form 10-K completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

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PART I

Item 1.        Business

Unless the context requires otherwise, references in this Annual Report on Form 10-K to “Genocea”, “we”, “us” and “our” refer to Genocea Biosciences, Inc.

Overview

We are a biopharmaceutical company that discovers and develops novel vaccines and immunotherapies to address diseases with significant unmet needs. We use our proprietary discovery platform, ATLAS TM , to rapidly design vaccines and immunotherapies that act, in part, through T cell (or cellular) immune responses, in contrast to approved vaccines and immunotherapies, which are designed to act primarily through B cell (or antibody) immune responses. We believe that by harnessing T cells we can develop first-in-class vaccines and immunotherapies to address diseases where T cells are central to the control of the disease.

We have one product candidate in active Phase 2 clinical development, GEN-003, an immunotherapy for the treatment of genital herpes. We also have a pre-clinical immuno-oncology program focused on personalized cancer vaccines ("GEN-009"). The GEN-009 program leverages ATLAS to identify patient neoantigens, or newly formed antigens unique to each patient, that are associated with that individual's tumor. We have other infectious disease programs, including GEN-004, a Phase 2-ready universal vaccine for the prevention of pneumococcal infections, and early stage programs focused on genital herpes prophylaxis, chlamydia, and malaria.
 
ATLAS Platform

Vaccines represent a major healthcare success story, having eradicated or significantly reduced the global prevalence of many infectious diseases. To date, all approved vaccines have been developed primarily to elicit B cell responses. However, there remain many diseases for which no effective vaccines or only partially effective vaccines exist. A major reason, for infectious diseases, is that the organisms that cause these diseases largely evade the antibody immune response generated by B cells, which can generally only address pathogens in the bloodstream. Such organisms may reside in host cells or mucosal surfaces of the nose and throat. To address these pathogens, vaccines targeting responses from the T cell arm of the immune system may present the solution. In the case of cancers, the success of checkpoint blockade therapies, in which essentially the brakes are taken off of T cells, it is clear that the cellular arm of the immune system needs to be engaged.

We believe T cell target discovery has been particularly challenging for two reasons. First, the diversity of human T cell responses contrasts with the generally uniform B cell responses in humans. Second, the number of candidate targets for T cell responses can be exponentially greater than for B cell responses. These complexities represent fundamental barriers that traditional vaccine discovery tools, which rely either on computer predictions, or on empirically selecting the potential targets by iteratively testing them in animal models, have not been able to address.

We have designed the ATLAS platform to overcome these T cell target discovery challenges. We believe ATLAS represents the most comprehensive high-throughput system for T cell vaccine and immunotherapy discovery in the biopharmaceutical industry. ATLAS is designed to mimic the T cell arm of the human immune system in a laboratory setting. Using ATLAS, we are able to measure T cell responses to the entire set of protein targets for a specific pathogen or cancer from patients' blood samples, allowing us to identify vaccine and immunotherapy targets associated with protective T cell responses to disease. By comparing antigens identified in individuals who naturally control their disease with those who do not, we can select the antigens that may have the best likelihood of inducing protective T cell immune responses.

We believe we are a leader in the field of T cell vaccine and immunotherapy discovery and development. Our management and scientific teams possess considerable experience in vaccine, immunotherapy, cancer and anti-infective research, manufacturing, clinical development and regulatory matters.

GEN-003 — Phase 2 immunotherapy for genital herpes
 
Our lead program is GEN-003, a Phase 2 candidate therapeutic vaccine, or immunotherapy, that we are developing to treat genital herpes infections. Data from our double-blind, placebo-controlled, dose-escalating Phase 1/2a trial for GEN-003 represented the first reported instance of a therapeutic vaccine working against an infectious disease. Our second trial was a Phase 2 dose optimization study, which confirmed the Phase 1/2a trial results and tested six combinations of proteins and adjuvant to determine the optimal dose for future trials. Our third trial utilized the top two performing doses identified from our

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Phase 2 dose optimization study and is intended to test potential Phase 3 endpoints with an improved formulation of GEN-003, manufactured with commercially-scalable processes, which will be used in future Phase 3 trials. Key data from those trials is described below.

Phase 1/2a Trial - Completed
 
Final analysis of the data from the Phase 1/2a trial showed that, for the best performing 30µg per protein dose group, there was a sustained reduction in the viral shedding rate. After completion of dosing for this group, the viral shedding rate was reduced by 52% versus baseline and, at six months after the final dose, the shedding rate remained at 40% below baseline. The reduction in the genital lesion rate after completion of the third dose was greatest for the 30µg dose group at 48%. After six months, the reduction from baseline in genital lesion rate for this dose group was 65% and, after 12 months, the genital lesion rate was 42% lower than baseline. GEN-003 was safe and well tolerated over the 12 months of this trial.
 
Phase 2 Dose Optimization Trial - Completed

A 310-subject Phase 2 dose optimization trial was completed in March 2016. Subjects were randomized to one of six dosing groups of either 30μg or 60μg per protein paired with one of three adjuvant doses (25μg, 50μg, or 75μg). A seventh group received placebo. Subjects received three doses of GEN-003 or placebo at 21-day intervals. Baseline viral shedding and genital lesion rates were established for each subject in a 28-day observation period prior to the commencement of dosing by collecting 56 genital swab samples (two per day), which were analyzed for the presence of HSV-2 DNA, and by recording the days on which genital lesions were present. This 28-day observation period was repeated immediately after the completion of dosing, and at six and twelve months following dosing. No maintenance doses were given. After the 28-day observation period immediately after dosing, patients in the placebo arm were rolled over across the six active combinations of GEN-003 and Matrix-M2 under a separate protocol. The primary endpoint of the trial was the reduction in viral shedding rate versus baseline, a measure of anti-viral activity. A number of exploratory secondary endpoints were also studied, including the reduction in genital lesion rates, the percent of patients who were lesion recurrence free up to six and 12 months after dosing and time to first lesion recurrence after dosing.

The two most promising doses from this dose optimization study were 60 µg per protein combined with either 50 or 75 µg of Matrix-M2 adjuvant ("60/50 Dose" and "60/75 Dose" respectively). In October 2015, we announced positive results from the planned interim analysis of data collected six months after dosing demonstrating that patients dosed with GEN-003 showed a statistically significant 47% (p=0.0004) and 58% (p < 0.0001) reduction from baseline in the viral shedding rate for both the 60/50 Dose and 60/75 Dose, respectively. In a planned secondary analysis, the proportion of patients receiving any one of the six GEN-003 doses who were lesion-free at six months after dosing ranged from approximately 30% to 50%, similar to results reported in clinical trials with oral antiviral therapies. In addition, the time to first recurrence after completion of dosing showed a range of 152 days to greater than 180 days among dose groups. In a further secondary analysis measuring the impact on genital lesion rates, GEN-003 demonstrated sustained and statistically significant reductions from baseline in five of six dose groups ranging from 43% to 69%.

In March 2016, we announced positive results from data collected twelve months after dosing. The 60/50 Dose and 60/75 Dose continued to demonstrate statistically significant reductions of 66% (p < 0.0001) and 55% (p=0.01), respectively, from baseline in the viral shedding rate. These two doses were advanced to our Phase 2b trial evaluating a new Phase 3-ready formulation of GEN-003.
 
The Phase 2 dose optimization trial continued to show that GEN-003 is safe and well tolerated by patients, with no serious adverse events ("AEs") related to the vaccine.

Phase 2b Trial - Ongoing

In December 2015, we initiated a Phase 2b trial which was our first study testing potential Phase 3 endpoints with a Phase 3-ready formulation of GEN-003, manufactured with commercially-scalable processes. The trial enrolled 131 subjects that were randomized to one of three dose groups - placebo, 60/50 Dose, and 60/75 Dose. All subjects received three injections at 21-day intervals.

In September 2016, we announced positive viral shedding rate reductions from the ongoing Phase 2b study. The study achieved its primary endpoint, with GEN-003 demonstrating a statistically significant (versus placebo and baseline) 40% reduction in the viral shedding rate compared to baseline immediately after dosing in the 60/50 Dose group. This result was consistent with a statistically significant (versus placebo and baseline) viral shedding rate reduction of 41% at this same dose and time point in the previous Phase 2 dose optimization trial. In addition, the reactogenicity profile of this dose, an indication

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of the strength of the immune response to GEN-003, was consistent between the trials. This same dose in the prior Phase 2 trial subsequently demonstrated virologic and clinical efficacy durable through at least one year after dosing.

The 60/75 Dose group reduced the viral shedding rate by 27%, lower than that observed in the prior trial, and also showed a less acceptable reactogenicity profile than the prior trial. We believe that the increase in reactogenicity of this dose indicates an overstimulation of the T cell immune system leading to the reduced efficacy with this dose in this trial, as would be expected with the well-known bell-shaped T cell dose response curve. The likely driver of this effect is a more potent adjuvant formulation following customary manufacturing process changes to prepare for Phase 3 trials and commercialization.

In January 2017, we announced positive clinical results from this ongoing trial. At six months after dosing, GEN-003 demonstrated statistically significant improvements versus placebo across multiple clinical endpoints. The 60/50 Dose significantly reduced the rate of genital lesions during the six months following dosing compared to placebo (41% reduction versus placebo). The genital lesion rate is an important overall measure of disease that captures both the frequency and duration of recurrences, both of which are important to both patients and their caregivers. GEN-003 also consistently demonstrated significant benefits versus placebo across several other clinical endpoints including median duration of recurrences in days (2.8 compared to 4.2 for placebo), median duration of recurrences over six months (1.0 compared to 2.0 for placebo), and estimates of percent recurrence free after first and last dose (29% and 22%, respectively, for the 60/50 Dose versus 10% and 13%, respectively, for placebo). In addition, mean duration of recurrences in days (3.3 compared to 4.8 for placebo) and mean duration of recurrences over six months (2.1 compared to 2.7 for placebo) demonstrated significant benefit versus placebo.

The clinical efficacy data versus placebo at twelve-months post dosing is expected in the middle of 2017. The viral shedding rate reduction data at six-months post dosing is expected in the first half of 2017.

GEN-003 also continues to demonstrate a safety profile appropriate for its therapeutic setting in the judgment of the trial’s independent Drug Monitoring Committee. There was no grade 4 reactogenicity or related serious AEs and discontinuations due to AEs were low and similarly distributed across active dose groups and placebo.
    
We intend to conduct an end-of-Phase 2 meeting with the FDA in early 2017. We also expect to commence Phase 3 trials in the fourth quarter of 2017. We plan to commence a clinical trial exploring the potential additive effects of GEN-003 on top of daily administration of valacyclovir in parallel with the Phase 3 program. We retain all rights to GEN-003 and our strategy is to execute a partnership to maximize the potential of GEN-003 and to help fund the costs of the GEN-003 Phase 3 program.

If GEN-003 successfully completes clinical development and is approved, we believe it would represent an important new treatment option for patients with genital herpes.

Our Immuno-Oncology Program
 
Guided by our positive clinical results on GEN-003 and our belief in the ATLAS platform, we are focused on combining our antigen selection and vaccine development expertise with that of leading cancer innovators to unlock new targets in immuno-oncology. Our potential cancer vaccines will be designed to educate T cells to recognize and attack specific targets and thereby kill cancers. We are developing personalized cancer vaccines by leveraging ATLAS to identify patient neoantigens, or newly formed antigens unique to each patient, that are associated with that individual's tumor. We anticipate filing a personalized cancer vaccine Investigational New Drug ("IND") application with the FDA in 2017. We are also applying the results from ATLAS, and its utility a prognostic tool, to identify patients that could benefit from checkpoint inhibitor therapy. Our strategy in immuno-oncology combines our own internal development programs with a focus on partnering ATLAS for other immuno-oncology applications.

Refer to "Our Immuno-Oncology Program" below for additional details on this program, including our current collaborations.
In November 2015, we also commenced a new program focused on Epstein-Barr Virus (“EBV”) ("GEN-007"). EBV infection has been linked to cancers with high unmet needs such as non-Hodgkin’s lymphoma, nasopharyngeal carcinoma and gastric carcinoma. We believe the ATLAS platform is highly suited to the creation of a new immunotherapy for EBV given that T cell responses are understood to be crucial for protection against EBV. Furthermore, EBV is part of the herpesvirus family, in which we have deep experience through our development of GEN-003. We are currently conducting ATLAS screens for EBV and plan to select antigen candidates for further study in 2017.

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Other infectious disease programs

Our other infectious disease programs include GEN-004, a potential universal  Streptococcus pneumoniae , or pneumococcus, vaccine to protect against a leading cause of infectious disease mortality worldwide and early stage programs focused on genital herpes prophylaxis, chlamydia, and malaria. In October 2015, we announced that top-line results from the Phase 2a clinical trial for GEN-004 showed consistent reductions versus placebo in the pre-specified endpoints of the rate and density of upper airway colonization in a human challenge model, but that neither of the endpoints achieved statistical significance. GEN-004 was safe and well tolerated by subjects. Although we did not achieve statistical significance in this study, the consistent apparent effect gives us confidence in the vaccine concept and in the potential for GEN-004. In November 2016, we paused activities on our other early stage programs focused on genital herpes prophylaxis, chlamydia, and malaria in order to focus all of our internal research and pre-clinical resources on our immuno-oncology investments. Progress made and data generated to date in these infectious disease clinical and research programs remains valuable to Genocea for the future.

Our Product Candidate Pipeline

The following table describes our active programs in development:
Vaccine
Candidate
 
Program
 
Stage of Development
 
Next Milestone
 
Anticipated Timeline
GEN-003
 
Genital herpes Therapeutic
 
Phase 2
 
12-month clinical data from Phase 2b trial
 
Third quarter of 2017
GEN-009
 
Immuno-oncology - Neoantigen
 
Pre-clinical
 
File IND
 
Fourth quarter of 2017
GEN-007
 
Epstein-Barr Virus
 
Research
 
Select antigen candidates
 
Second half of 2017

GEN-003 Market Opportunity

Genital Herpes

We are developing our lead product candidate, GEN-003, to treat patients with genital herpes infections. GEN-003 consists of two protein antigens. The first antigen is ICP4.2, a large fragment of the protein ICP4 that we discovered in ATLAS screens to be a T cell antigen associated with protection from infection or with less severe infection. The second antigen is glycoprotein D2, or gD2, a B cell antigen that is the target of antibodies that provide anti-viral activity during the time in the life cycle of the herpes virus where the pathogen is susceptible to inactivation by antibodies. gD2 was also a target of T cells in our ATLAS screens and was selected based on such ATLAS screens as ATLAS prioritized gD2 as the B cell antigen most associated with T cell responses. We pair the antigens with Matrix-M2, a novel adjuvant that we have licensed exclusively for this indication from Novavax, Inc. ("Novavax"). See “—Other Collaborations—Novavax”.

Genital herpes is a sexually transmitted disease. Genital herpes infections have become an epidemic, spreading to approximately 16% of the United States population between the ages of 14 and 49, and more than 500 million people worldwide, according to the World Health Organization.

For infected individuals, the disease can manifest in a number of ways, with so-called viral shedding as the common element. For some of the virus’ life cycle, it lies dormant within nerve cells near the spine. Although there may be no visible sign of infection, the virus lives within these nerve cells. Periodically, the virus reactivates and virus travels to skin cells of the genitalia where they are released. The release of the virus is called viral shedding and can be detected by swabbing the genital area and testing the swab for the presence of viral DNA. For reasons not completely understood, reactivation of the virus within the nerve cells may occur, resulting in a large amount of virus shedding from skin and mucus membranes. If the replication is maintained for a long enough period of time and at a high enough level, the virus destroys the cells it inhabits and causes ulcers to form on the skin. Patients experiencing such visible ulcers are considered symptomatic patients. It is generally believed that the immune system responds to episodes of genital herpes outbreaks by activating T cells that reduce viral replication and destroy infected cells, allowing healing and resolution of genital ulcers, usually after a few days, although for many patients, ulcers return at variable intervals. Patients may also experience periodic, low-frequency viral shedding. Because the shedding at these times does not lead to the development of ulcers, these episodes are called asymptomatic shedding. These asymptomatic patients continue to pose a disease transmission risk through sexual contact while shedding virus.


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Some people, approximately 60% of those infected, are asymptomatic or fail to recognize or seek medical attention for an initial mild outbreak of ulcers. According to the New England Journal of Medicine, roughly 40% of persons infected with HSV-2 experience visible symptoms. It has been reported in the Annals of Internal Medicine that approximately 70% of the people with visible symptoms experience three or more outbreaks per year, which we consider to be moderate-to-severe disease. Patients with genital herpes experience significant distress because of the potential negative impact on their ability to form and maintain sexual relationships. Infection with genital herpes can involve substantial risks in addition to the infection itself. For example, persons with genital herpes infection have a threefold increased risk for human immunodeficiency virus, or HIV, acquisition. Additionally, pregnant women can transmit genital herpes to infants in childbirth, which can result in severe brain damage or death.

BARCHART.JPG
_________________________
*
Note: Each bar represents 1 swab; 2 swabs collected per day; the absence of a bar means no shedding was detected on the swab on a particular day.

The total number of days during a month that the herpes virus can be detected in the genital area with or without visible ulcers is called the shedding frequency. A pattern of shedding and outbreak for one person is illustrated in the graph above. Viral shedding is measured by collecting swabs of the genital area, following a protocol that has been used in decades of studies of HSV-2 viral shedding. In the example shown above, the subject collected swabs twice daily for 28 days. HSV-2 DNA was detectable in approximately 66% of the collected swabs, meaning the patient’s shedding frequency is 66% for the period measured. Some swabs had no detectable viral DNA, meaning the subject did not shed virus at the time of sample collection (exemplified by the blank areas of the above graph). The magnitude of viral shedding varied widely from day to day and only sometimes resulted in clinical symptoms such as visible genital ulcers (represented by the dark bars of the above graph).  Ulcers generally appear after several days of asymptomatic shedding and at times when the magnitude of shedding is highest. The extent, frequency, and duration of shedding vary from person to person, but the pattern is relatively consistent for each person.

Limitations of Current Genital Herpes Treatment Options

There is no known cure for genital herpes. For patients infected with genital herpes, oral antiviral drugs are the only treatment option. The most commonly prescribed treatment is valacyclovir including Valtrex, marketed by GlaxoSmithKline. Other medications available are acyclovir (Zovirax, marketed by GlaxoSmithKline) and famciclovir (Famvir, marketed by Novartis). These drugs all work by limiting the ability of the virus to replicate when it emerges from latency. Sales for these oral antivirals totaled $1.6 billion globally in 2008, including nearly $700 million in the United States, according to IMS Health.

Based on market surveys conducted on our behalf, most patients who use oral antivirals treat their disease episodically. At the onset of outbreaks, or in the case of some patients, at the onset of prodrome, a tingling sensation that may precede an outbreak, patients take antiviral medication to reduce the duration and severity of the outbreak. According to the approved Valtrex prescribing information, episodic treatment only reduces the duration of outbreaks by up to 50% when compared to placebo. Patients treating their symptoms episodically are not protected against asymptomatic viral shedding and, therefore, have no reduced risk of transmission of infection to an uninfected sexual partner while asymptomatic.

Some patients treat their infection with daily antiviral medication. This approach is called chronic suppressive therapy, and has been shown to reduce—but not eliminate—viral shedding, the frequency of symptomatic outbreaks of genital ulcers, and the risk of transmission of the infection to an uninfected sexual partner. Even on chronic suppressive therapy, based on the valacyclovir prescribing information, 35% of patients taking chronic suppressive therapy suffer outbreaks within six months

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after initiation of treatment and 46% of patients suffer outbreaks within 12 months. Patients taking chronic suppressive therapy reduce their disease transmission risk only by as much as 52%.

A market research survey conducted on our behalf, in 2014, which included primary research with more than 300 physicians in the United States, United Kingdom, Germany, France and Brazil, and a review of secondary sources, indicated that approximately 11 million people in the U.S. are diagnosed with genital herpes. Of those diagnosed, approximately 7 million are treated with oral anti-viral medicines. This research also indicated that approximately 2.5 million patients treat their disease chronically with daily anti-viral pills, and approximately 4.5 million patients treat episodically to reduce the severity of outbreaks when they occur. Of those patients treated chronically, approximately 30% continue to suffer three or more outbreaks of genital herpes per year and of those treated episodically, approximately 50% continue to suffer three or more outbreaks per year. This market research also indicated that the prevalence of genital herpes outside the United States is similar to the United States.

Due to the limited effectiveness of oral antiviral therapy, there remains a significant unmet medical need, against both the symptoms of genital herpes and disease transmission risk from viral shedding.

GEN-003: An Immunotherapy Candidate for Genital Herpes

In our three clinical studies we have shown that GEN-003 is the first immunotherapy known to have demonstrated a statistically significant reduction in viral shedding rate and the signs of clinical genital herpes disease as measured by genital lesion rates (see "Clinical Development" below). We believe that these clinical results continue to demonstrate that GEN-003 has the potential to be a first-in-class immunotherapy to treat genital herpes.

We believe that, if approved for the treatment of genital herpes infections, GEN-003 could address the unmet needs of patients in several ways. For patients taking episodic therapy, GEN-003 could offer reduced symptomatic and asymptomatic viral shedding, potentially reducing disease transmission risk. Since episodic therapy offers no protection against disease transmission during asymptomatic shedding, these patients and their sexual partners are unprotected when the infected partner is not taking anti-viral medication.

For patients on chronic suppressive therapy, we believe GEN-003 may provide both improved outcomes and increased convenience. In a 2016 market research survey conducted on our behalf in the United States of almost 300 currently treated patients, more than 80% stated a preference for GEN-003 over their current therapy. For some patients, we anticipate that physicians will prescribe GEN-003 as baseline therapy. Such patients may still take oral antivirals in case of an outbreak to further control symptoms. Replacing daily therapy may offer convenience to these patients. For other patients, we anticipate that physicians may prescribe GEN-003 alongside chronic suppressive therapy. This combination therapy approach mirrors the treatment practice of other chronic viral infections such as HIV and hepatitis C virus. We anticipate that, since the mechanisms of action for GEN-003 and oral antiviral medication should complement each other, the control against symptoms and disease transmission risk offered by the combination would exceed that of either therapy alone.

In a second market research survey conducted on our behalf with more than 400 patients with HSV-2 infections in the United States, the United Kingdom, France and Germany, and more than 300 physicians who treat patients with HSV-2 infections, 56% of patients on chronic suppressive therapy indicated an intent to use GEN-003 in combination with other therapies and 37% of such patients indicated an intent to use GEN-003 on its own, if it were approved; 30% of patients on episodic therapy indicated an intent to use GEN-003 in combination with other therapies and 60% of such patients indicated an intent to use GEN-003 on its own, if it were approved; and 15% of patients not taking any HSV-2 therapy indicated an intent to use GEN-003 in combination with other therapies and 65% of such patients indicated an intent to use GEN-003 on its own, if it were approved.

Taking together the results of the two market research surveys conducted on our behalf, we forecast a potential market share for GEN-003 in the US of approximately 3 million of the 12 million diagnosed patients. We believe that this translates into a global revenue opportunity of over $2 billion annually. These were limited surveys and may or may not be representative of how patients might ultimately use GEN-003, if at all, or how GEN-003 may be reimbursed if GEN-003 successfully completes clinical development and is approved by regulatory authorities.

Clinical Development

Our Phase 1/2a Clinical Trial


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We completed a Phase 1/2a trial, testing the safety, T and B cell immunogenicity, and impact on viral shedding of GEN-003 in subjects with documented recurrent HSV-2 infection. We also measured, as an exploratory endpoint, the effect of GEN-003 on the genital lesion rate. The trial was conducted at seven sites in the United States, including some of the leading institutions for scientific and clinical research of genital herpes. The trial was double-blind, placebo-controlled and dose-escalating. We enrolled subjects between 18 and 50 years of age. An independent Data Monitoring Committee monitored the safety of subjects enrolled in the clinical trial.

This trial enrolled 143 otherwise healthy subjects with a history of three to nine genital herpes outbreaks per year when not on suppressive therapy. Subjects were randomized into one of three dose cohorts. Within each cohort, subjects were randomized in a 3:1:1 ratio, whereby for every three subjects receiving GEN-003, one would receive placebo and one would receive the ICP4.2 and gD2 proteins without the Matrix-M2 adjuvant. We included this last cohort to demonstrate that Matrix-M2 was necessary to achieve the desired biological responses. There were three vaccine dose groups, based on the amount of protein. The lowest dose group subjects received 10µg of each protein; in the middle dose group, the protein doses increased to 30µg, and in the high dose group the protein dose was 100µg. For all subjects receiving GEN-003 (proteins plus adjuvant), the Matrix-M2 dose was 50µg. Subjects received three vaccinations, on days zero, 21 and 42.

The primary objective of this trial was to monitor the safety profile of the proposed vaccine. Overall, GEN-003 was well-tolerated. During the seven days following each injection, side-effects were generally those considered typically associated with vaccines, such as fatigue, site injection pain, tenderness and swelling. Among all vaccine dose groups, the frequency of AEs appeared greater among those subjects given the 10µg dose. In the 30µg and 100µg dose cohorts, the AE rate was lower than that of the 10µg cohort. In addition, the frequency of AEs appeared to diminish with subsequent doses. Beyond the week following vaccination with the GEN-003 immunotherapy, the AE types and frequencies appeared similar to those following vaccination with placebo. The AEs have been transient, resolved over a few days and resulted in only two subjects discontinuing further vaccinations: one for a combination of symptoms (myalgia and fatigue; and pain and tenderness at the injection site) and one for injection site pain.

Additionally, we measured the immunotherapy-induced T cell and B cell immune responses. We structured and statistically powered the trial to measure the proposed immunotherapy’s impact on the viral shedding rate, an important marker of virus activity. We selected this endpoint because of the connection between shedding, symptomatic outbreaks, and risk of transmission of virus by sexual contact. Every subject in the study swabbed their genitalia twice per day for 28 days before receiving the first assigned treatment injection, and after treatment, using the standard protocol that has been used for many clinical trials of HSV-2 shedding.

We measured immunotherapy activity in two ways: the impact on viral shedding and the impact on signs of clinical genital herpes disease as measured by genital lesion rates, defined as the total days in which a patient reported the presence of a visible genital lesion during swabbing days, divided by the total number of swabbing days. The impact on viral shedding was determined by viral DNA present in swabs from subjects over the 28-day measurement period before receiving the assigned treatment and immediately after completing the three-dose regimen and again at six months and 12 months after the final dose. The genital lesion rate was measured at the same time points.

Final analysis of the data showed that for the best performing 30µg dose group, there was a sustained and statistically significant reduction in the viral shedding and genital lesion rates. After completion of dosing for this dose group, the viral shedding rate fell by 52% versus baseline (p<0.001) and, at six months after the final dose, the shedding rate remained at 40% below baseline (p<0.001). At 12 months, the viral shedding rate returned to baseline for this dose group. The reduction in the genital lesion rate after completion of the third dose was greatest for the 30µg dose group, at 48% (p<0.001). After six months, the reduction from baseline in genital lesion rate for this dose group was 65% (p<0.001) and after 12 months the genital lesion rate was 42% lower than baseline.

Our data have also demonstrated that GEN-003 induced a broad immune response in vaccinated subjects at all dose levels. T cell responses increased from baseline 21-fold to ICP4.2 and 10-fold to gD2. Subjects also experienced strong increases in antibody response to ICP4.2 and gD2, as measured by immunoglobulin G, or IgG, a standard measure of antibody response. The antibodies generated in response to the vaccine are able to prevent the virus from infecting new cells, as measured by a standard assay for evaluating the ability of the virus to infect cells  in vitro .

Phase 2 Dose Optimization Trial

The objective of our Phase 2 dose optimization trial was to confirm the results of the best performing dose in the Phase 1/2a trial, and to test other combinations of protein and adjuvant to determine the optimal dose for future trials and potentially improve on the current profile of GEN-003. The Phase 2 study enrolled 310 subjects from 17 institutions in the

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United States. Subjects were randomized to one of six dosing groups of either 30 µg or 60 µg per protein paired with one of three Matrix-M2 adjuvant doses (25 µg, 50 µg, or 75 µg). A seventh group received placebo. Subjects received three doses of GEN-003 or placebo at 21-day intervals. Baseline viral shedding and genital lesion rates were established for each subject in a 28-day observation period prior to the commencement of dosing by collecting 56 genital swab samples (two per day), which were analyzed for the presence of HSV-2 DNA, and by recording the days on which genital lesions were present. This 28-day observation period was repeated immediately after the completion of dosing, was repeated at six months following dosing and will be repeated at twelve months following dosing. No maintenance doses were given.

In May 2015, we announced that, at the 28-day observation period immediately after completion of dosing, both the 60/50 Dose and 60/75 Dose demonstrated a highly statistically significant 41% (p=0.01) and 55% (p=0.006) reductions, respectively, from baseline in the viral shedding rate, the primary endpoint of the trial and a measure of anti-viral activity. All dose combinations tested, including the successful 30 µg per protein / 50 µg of adjuvant dose from the prior Phase 1/2a trial, demonstrated a statistically significant viral shedding rate reduction versus baseline and only the lowest dose combination did not demonstrate a statistically significant reduction versus placebo. In a planned secondary analysis to assess impact on patient reported genital lesion rates, all dose groups, including the placebo group, demonstrated a statistically significant reduction from baseline. Furthermore, there was no difference in discontinuations in patient dosing due to AEs across the different treatment arms.

In October 2015, we announced positive results from the interim analysis of data collected six months after dosing. At its best performing dose, the 60/75 Dose, GEN-003 demonstrated a statistically significant 58% reduction from baseline in the viral shedding rate (p < 0.0001), the primary endpoint of the study. In a planned secondary analysis, the proportion of patients receiving GEN-003 who were lesion-free at six months after dosing ranged from approximately 30% to 50%, similar to results reported in clinical trials with oral antiviral therapies. In addition, the time to first recurrence after completion of dosing showed a range of 152 days to greater than 180 days among dose groups. In a further secondary analysis measuring the impact on genital lesion rates, GEN-003 demonstrated sustained and statistically significant reductions from baseline in five of six dose groups ranging from 43% to 69%. The Phase 2 trial continued to show that GEN-003 was safe and well tolerated by patients, with no serious AEs related to the vaccine. The two most promising doses from this dose optimization study were the 60/50 Dose and the 60/75 Dose. In October 2015, we announced positive results from the planned interim analysis of data collected six months after dosing demonstrating GEN-003 usage resulted in a statistically significant 47% (p=0.004) and 58% (p < 0.0001) reduction from baseline in the viral shedding rates for both the 60/50 Dose and 60/75 Dose, respectively.

In March 2016, we announced positive results from data collected twelve months after dosing. The 60/50 Dose and 60/75 Dose continued to demonstrated statistically significant reductions of 66% (p < 0.0001) and 55% (p=0.01), respectively, from baseline in the viral shedding rate. These two doses were advanced to our Phase 2b trial evaluating a new Phase 3-ready formulation of GEN-003.
 
The Phase 2 dose optimization trial continued to show that GEN-003 is safe and well tolerated by patients, with no serious AEs related to the vaccine.

Phase 2b Trial

In December 2015, we initiated a Phase 2b trial which was our first study testing potential Phase 3 endpoints with a Phase 3-ready formulation of GEN-003, manufactured with commercially-scalable processes. The trial enrolled 131 subjects that were randomized to one of three dose groups - placebo, 60/50 Dose, and 60/75 Dose. All subjects received three injections at 21-day intervals.

In September 2016, we announced positive viral shedding rate reductions from this study. The trial achieved its primary endpoint, with GEN-003 demonstrating a statistically significant (versus placebo and baseline) 40% reduction in the viral shedding rate compared to baseline immediately after dosing in the 60/50 Dose group. This result was consistent with a statistically significant (versus placebo and baseline) viral shedding rate reduction of 41% at this same dose and time point in the previous Phase 2 dose optimization trial. In addition, the reactogenicity profile of this dose, an indication of the strength of the immune response to GEN-003, was consistent between the trials. This same dose in the prior Phase 2 trial subsequently demonstrated virologic and clinical efficacy durable through at least one year after dosing.

The 60/75 Dose group reduced the viral shedding rate by 27%, lower than that observed in the prior trial, and also showed a less acceptable reactogenicity profile than the prior trial. We believe that the increase in reactogenicity of this dose indicates an overstimulation of the T cell immune system leading to the reduced efficacy with this dose in this trial, as would be expected with the known bell-shaped T cell dose response curve. The likely driver of this effect is a more potent adjuvant formulation following customary manufacturing process changes to prepare for Phase 3 trials and commercialization.

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In January 2017, we announced positive clinical results from this ongoing trial. At six months after dosing, GEN-003 demonstrated statistically significant improvements versus placebo across multiple clinical endpoints. The 60/50 Dose significantly reduced the rate of genital lesions during the six months following dosing compared to placebo (41% reduction versus placebo). The genital lesion rate is an important overall measure of disease that captures both the frequency and duration of recurrences, both of which are important to both patients and their caregivers. GEN-003 also consistently demonstrated significant benefits versus placebo across several other clinical endpoints including median duration of recurrences in days (2.8 compared to 4.2 for placebo), median duration of recurrences over six months (1.0 compared to 2.0 for placebo), and estimates of percent recurrence free after first and last dose (29% and 22%, respectively, for the 60/50 Dose versus 10% and 13%, respectively, for placebo). In addition, mean duration of recurrences in days (3.3 compared to 4.8 for placebo) and mean duration of recurrences over six months (2.1 compared to 2.7 for placebo) demonstrated significant benefit versus placebo.

Next Steps: Phase 2b twelve-month results; End-of-Phase 2 Meeting; Antiviral Combination GEN-003 Study; Initiation of Phase 3 Pivotal Study

The clinical efficacy data versus placebo at twelve-months post dosing is expected in the middle of 2017 for the ongoing Phase 2b trial. The viral shedding rate reduction data at six-months post dosing is expected in the first half of 2017. In the second half of 2017, we also anticipate the 24-month data from a Phase 2 trial to inform the timing of maintenance dosing. We intend to conduct an end-of-Phase 2 meeting with the FDA in early 2017. We also expect to commence Phase 3 trials in the fourth quarter of 2017. We plan to commence a clinical trial exploring the potential additive effects of GEN-003 on top of daily administration of valacyclovir in parallel with the Phase 3 program. We retain all rights to GEN-003 and our strategy is to execute a partnership to maximize the potential of GEN-003 and to help fund the costs of the GEN-003 Phase 3 program.

Potential for GEN-003 to Treat HSV-1 Infection

We anticipate that GEN-003 may also help a patient’s immune system fight herpes simplex virus type-1, or HSV-1. HSV-1 is most commonly identified with cold sores and has infected approximately 60% of Americans, according to the Center for Disease Control and Prevention ("CDC"). Increasingly, HSV-1 has been associated with outbreaks of genital ulcers, though the frequency and severity of such outbreaks generally is less than those associated with HSV-2. HSV-1 and HSV-2 are related viruses and the proteins in GEN-003 are present in, and nearly identical to, those found in HSV-1. Consequently, we believe that GEN- 003 may be active against HSV-1 and thus intend to study the potential for GEN-003 to combat HSV-1 genital disease in the Phase 3 program.

The Opportunity to Prevent HSV-2 Infections

In addition to treating HSV-2 infection with GEN-003, we believe that ATLAS may help to develop a vaccine that can prevent HSV-2 from infecting healthy persons. We believe that a vaccine that has therapeutic effect may be the foundation for a preventative vaccine. A prophylactic vaccine may be an important step in halting the epidemic, and could be used to treat uninfected partners of HSV-2 infected subjects to prevent them from acquiring the disease. The vaccine could also be used more broadly as a preventative measure. Although we have made important progress in the development of a prophylactic vaccine and we believe this is a valuable asset for us, we have paused our research and development of this product candidate in order to focus on GEN-003 and our immuno-oncology program.

Our Immuno-Oncology Program
Cancer is among the leading causes of death worldwide, with the incidence estimated to grow to 22 million over the next two decades. In 2015 in the U.S., an estimated 1.6 million new cases of cancer will be diagnosed, and approximately 600,000 people will die from the disease.

Cancer starts in the human body when the otherwise orderly process of cell growth, division and death breaks down. As a result, abnormal or damaged cells that should die instead survive, grow and spread, forming solid tumors or cancers of the blood like leukemia. Although the body’s immune system is designed to remove abnormal or damaged cells, cancerous cells are sometimes able to evade the immune system.
    
A recent breakthrough in treating cancer is the development of Checkpoint Blockade ("CPB") therapies. Immune CPBs function by blocking the activity of checkpoint proteins, which inhibit normal immune responses to cancers. Several CPBs have recently been approved by the FDA, including ipilimumab (Yervoy®), nivolumab (Opdivo®) and pembrolizumab (Keytruda®). Although these therapies unleash a robust T cell response, they don’t work well for all patients - demonstrating limited efficacy and toxic effects in some populations.

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Guided by our positive clinical results on GEN-003 and belief in the ATLAS platform, we are focused on combining our antigen selection and vaccine development expertise with that of leading cancer innovators to unlock new targets in immuno-oncology. Our potential cancer vaccines will be designed to educate T cells to recognize and attack specific targets and thereby kill cancers. We are developing personalized cancer vaccines by leveraging ATLAS to identify patient neoantigens, or newly formed antigens unique to each patient, that are associated with that individual's tumor. We anticipate filing a personalized cancer vaccine IND application with the FDA in 2017. We are also applying the results from ATLAS, and its utility a prognostic tool, to identify patients that could benefit from checkpoint inhibitor therapy. Our strategy in immuno-oncology combines our own internal development programs with a focus on partnering ATLAS for other immuno-oncology applications.

Our current collaborations in immuno-oncology are as follows:

Dana-Farber Cancer Institute ("DFCI") - Starting in 2014, we entered into a collaboration with F. Stephen Hodi, Jr., M.D., director of the Melanoma Center at DFCI to utilize ATLAS to potentially identify patterns of T cell response in melanoma patients receiving CBP therapy. By analyzing the immune responses of both responders and non-responders to CBP therapy, ATLAS successfully identified the cancer antigens to which either (or both) CD4+ or CD8+ T cells became activated. Although this research was not powered to draw firm conclusions, the analysis of T cell responses in patients receiving CBP therapy revealed a pattern indicating a greater breadth of T cell activation for responders than non-responders. The study also revealed preliminary evidence that different characteristics of T cell responses emerge when comparing patients who respond and those who do not. Some T cell responses did not correspond with improved patient outcomes, and may be classified as “decoys,” further validating the ability of ATLAS to distinguish clinically relevant targets of T cell response. The collaboration with Dana-Farber is ongoing as we continue to analyze more tumor samples to characterize T cell response profiles that may be prognostic of CBP efficacy, and to identify T cell antigens that may be included in novel immunotherapies.

Memorial Sloan Kettering Cancer Center ("MSKCC") - In November 2015, we announced a collaboration with Timothy A. Chan, M.D., Ph.D., Vice Chair, Department of Radiation Oncology, and Jedd D. Wolchok, M.D., Ph.D., Chief of Melanoma and Immunotherapeutics Service at the MSKCC to screen the T cell responses of melanoma and non-small cell lung cancer patients treated with CBPs against the complete repertoire of patient-specific putative cancer neoantigens. The goals of the collaboration are to identify signatures of T cell response in cancer patients associated with response or non-response to CBP therapy and to discover new T cell cancer vaccine antigens. ATLAS is being used in conjunction with MSKCC’s patient-specific cancer neoantigen sequences and blood samples from the same cancer patients.

Through this collaboration, ATLAS has discovered several neoantigens as biologically relevant T cell targets associated with significant cytotoxic T cell responses. Importantly, many of these neoantigens were not identified by commonly used predictive computer algorithms, and the majority of neoantigens that were identified by those algorithms were not associated with meaningful T cell responses in ATLAS.

Checkmate Pharmaceuticals ("Checkmate") - In December 2016, we entered into a collaboration agreement with Checkmate. Checkmate is a clinical-phase company developing a product that seeks to activate the innate immune system to attack a tumor. Checkmate’s lead therapeutic candidate is currently in a Phase 1 clinical trial in metastatic melanoma in combination with an immune CBP. We are employing ATLAS to profile the T cell responses of approximately 20 patients enrolled in Checkmate’s ongoing Phase 1b clinical trial to a library of tumor-associated antigens common to patients with advanced melanoma. The T cell response signatures of those patients who respond to CMP-001/pembrolizumab combination therapy will be compared to the signatures of those who do not respond, thereby potentially identifying antigens associated with positive or negative patient outcomes.

US Oncology Research ("US Oncology") - In December 2016, we also announced our entry into a collaboration agreement with US Oncology, one of the largest network of community oncologists in the US. Through collaboration and shared purpose, US Oncology provides the clinical, research, technology and business resources to ensure the growth and vitality of their independent, community-based oncology practices. Pursuant to our agreement, we will screen the T cell responses of cancer patients with solid tumors who will be treated with checkpoint inhibitors against the complete repertoire of patient-specific putative cancer neoantigens. The objective of the collaboration is to use ATLAS to further Genocea's expertise in identifying signatures of T cell responses in cancer patients and to discover new T cell cancer vaccine antigens to support personalized cancer vaccine clinical trials.

Our Epstein Barr Virus Program
    

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EBV is associated with a number of cancers, such as post-transplant lymphoproliferative disease, non-Hodgkin's lymphoma, nasopharyngeal carcinoma and gastric carcinoma. EBV is also the cause of infectious mononucleosis in adolescence and is associated with higher risk of a number of other serious diseases.
    
We believe that an effective immunotherapy against EBV needs to direct T cells and may have therapeutic potential against some or all of these diseases with large unmet needs. Furthermore, we believe that ATLAS is well-suited to identify the clinically important antigens which drive protective T cell responses to the virus.
    
Discovery research using ATLAS is ongoing to identify candidate T cell antigens to form the core of an immunotherapy that could potentially be advanced into clinical development.
 
Other Infectious Disease Programs

Pneumococcal Disease

The Gates Foundation has noted that pneumococcus kills more children under age five globally than any other organism. There are more than 90 serotypes, or strains, of pneumococcus known to exist. Pneumococcus is a bacterium that often resides harmlessly in the nose and throat but can cause otitis media, or middle ear infection, as well as pneumonia, an infection in the lungs. Such consequences of infection are considered non-invasive pneumococcal disease. Invasive pneumococcal disease ("IPD") arises when pneumococcus enters the bloodstream and potentially spreads to other organs. The consequences of IPD can be severe and, according to the CDC, 10% of patients with IPD die.

We believe there are significant limitations with current pneumococcal vaccines given they cover only 13 serotypes of the disease compared to the more than 90 known serotypes of pneumococcus. Incidence of invasive disease caused by the 75+ serotypes not included in that vaccine is rapidly increasing and to our knowledge, other companies’ product candidates are being developed to elicit a B cell response. Our GEN-004 program was designed to prevent infections caused by all serotypes of pneumococcus. GEN-004 consists of three whole Pneumococcal T cell protein antigens, SP0148, SP1912 and SP2108, combined with the adjuvant Alhydrogel, a form of alum that is contained in several approved vaccines.

We demonstrated proof-of-concept of GEN-004 in a mouse model of nasal colonization. We subsequently launched a Phase 1 clinical trial that was a randomized, double-blind, dose-escalation, and placebo-controlled clinical trial enrolling 90 healthy adult volunteers. In June 2014, we announced positive top-line data from a Phase 1 clinical trial in the United States to evaluate the safety of, and immune response to, GEN-004. The Phase 1 clinical trial met its safety, tolerability and immunogenicity goals.

Based on these data, a Phase 2a trial was initiated in the third quarter of 2014. Subjects in the clinical trial received either 100µg dose of GEN-004 with 350µg of adjuvant or placebo, and then was “challenged” intranasally with live pneumococcus in the nasal cavity. We enrolled approximately 90 healthy adults in this trial and it was designed to monitor AEs, antibody and T-cell immune responses as determined by IgG and IL-17A, and incidence of post-challenge nasopharyngeal colonization. In October 2015, we announced that top-line results from the Phase 2a clinical trial for GEN-004 showed consistent reductions versus placebo in the pre-specified endpoints of the rate and density of colonization, but that neither of the endpoints achieved statistical significance. GEN-004 was safe and well tolerated by subjects.

Although we did not achieve statistical significance in this study, we believe the consistent apparent effect of the Phase 2a trial supports the vaccine concept and the potential for GEN-004. We believe it is possible that future trials would require a change in some combination of dose, adjuvant or trial population to confirm any effect. GEN-004 is currently not part of any active clinical trials or development as we focus our efforts on GEN-003 and our immuno-oncology program.

Our Chlamydia Program

Chlamydia is the most commonly reported bacterial sexually transmitted disease in the United States. According to the CDC, an estimated 2.9 million infections occur annually in the United States. Despite the widespread availability of antibiotics that are effective against  Chlamydia trachomatis , the pathogen that causes chlamydia infections, incidence has increased at greater than 5% per year over the past decade, according to the CDC. A key reason for this is that chlamydia is often an asymptomatic infection, so infected individuals do not seek treatment, which can result in severe consequences, particularly in women, such as pelvic inflammatory disease, infertility and serious neonatal infections. Antibodies appear to be unlikely to protect against infection as the pathogen is intracellular for much of its life cycle. Additionally, as a large genome pathogen,  Chlamydia trachomatis  represents a large T cell antigen discovery challenge and, we believe, a pathogen for use of ATLAS to identify a vaccine candidate.

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We have achieved promising preclinical results using chlamydia antigens identified using ATLAS. The ATLAS screening, comprising 144 subjects, identified chlamydia antigen targets that elicit T cell responses preferentially in patients with positive clinical outcomes (spontaneous clearance) versus patients with infertility or pelvic inflammatory disease. Based on our screening analysis, we prioritized 25  Chlamydia trachomatis  antigens for pre-clinical testing.  All antigens have been cloned and expressed and twelve have been successfully purified. These proteins were paired with Matrix-M2 adjuvant and evaluated as potential vaccine candidates in an animal efficacy model of chlamydia infection. From these studies we have identified three antigen targets that confer protection against chlamydia challenge based on bacterial burden analysis in the genital tract measured over time. Immunogenicity studies done coincident with the challenge model suggest that these antigens may be protecting mice by different mechanisms of action. Research under this program was paused in the fourth quarter of 2016 to focus on GEN-003 and our immuno-oncology program.

Our Malaria Program

Malaria is one of the deadliest infectious diseases in the world. Approximately 400 thousand to 800 thousand people died in 2013 due to malaria, primarily in the developing world. There is no vaccine to prevent malaria, an infection caused by the plasmodium parasites transmitted by mosquitoes. We previously collaborated with the Naval Medical Research Center "NMRC") and initiated a second collaboration with the Gates Foundation for which malaria is a priority infectious disease. When the parasite is injected into the blood through the bite of an infected mosquito, it rapidly travels to the liver where it replicates exponentially, is released into the bloodstream, and causes sickness. T cells in the liver could potentially be used to kill the cells in which the parasite is hiding, before the parasite is able to replicate itself, and could therefore protect against blood infection. Both the Gates Foundation and NMRC have sponsored several studies investigating killed or attenuated whole organism vaccines, which induce immunity, but are impractical to manufacture because the vaccines are based on irradiated parasites grown within the salivary glands of mosquitoes.

In September 2014, we announced the receipt of a $1.2 million grant from the Gates Foundation for the identification of protective T cell antigens for malaria vaccines, which extended our collaboration through 2016 and supports comprehensive screening of the malaria proteome to identify targets of protective T cell responses. We completed this grant work early in 2016 and presented our results to the Gates Foundation.

Competition

The biotechnology and pharmaceutical industries are characterized by intense and rapidly changing competition to develop new technologies and proprietary products. Although we believe that our proprietary patent portfolio and T cell vaccine expertise provide us with competitive advantages, we face potential competition from many different sources, including larger and better-funded pharmaceutical companies. Not only must we compete with other vaccine companies but any products that we may commercialize will have to compete with existing therapies and new therapies that may become available in the future.

There are other organizations working to improve existing therapies or to develop new vaccines or therapies for our initially selected indications. Depending on how successful these efforts are, it is possible they may increase the barriers to adoption and success of our GEN-003 product candidate, if approved.

The current standard of care for the treatment of HSV-2 is valacyclovir, an oral antiviral medicine. Other currently approved oral antiviral medications include acyclovir and famciclovir. AiCuris, a private company based in Germany, is developing a new oral antiviral, pritelivir, for which an existing clinical hold has been partially lifted for certain patient populations. We believe that GEN-003 may offer advantages in terms of improved symptom control, reduced disease transmission risk and improved compliance when compared to oral antivirals.

There are also several companies attempting to develop new therapeutic vaccines against genital herpes, including Agenus Inc., Admedus Ltd, Sanofi Pasteur and Vical Incorporated. GEN-003 is in more advanced clinical development than these product candidates being developed by these companies. Furthermore, we believe that GEN-003 has advantages against each of these product candidates based on the screens of human protection that we have conducted using ATLAS that include these competitors’ antigens, published reports of non-clinical vaccine efficacy, announced clinical results in the case of Agenus, Inc. and Vical, Inc. and our own clinical results to date. However, there can be no assurance that one or more of these companies or other companies will not achieve similar or superior clinical results in the future as compared to GEN-003 or that our future clinical trials will be successful.

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Many of our competitors, either alone or with their strategic partners, have substantially greater financial, technical and human resources than we do and significantly greater experience in the discovery and development of product candidates, obtaining FDA and other regulatory approvals of vaccines and the commercialization of those vaccines. Accordingly, our competitors may be more successful than us in obtaining approval for vaccines and achieving widespread market acceptance. Our competitors’ vaccines may be more effective, or more effectively marketed and sold, than any vaccine we may commercialize and may render our vaccines obsolete or non-competitive.

Mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated among a smaller number of our competitors. These competitors also compete with us in recruiting and retaining qualified scientific and management personnel and establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies.

We anticipate that we will face intense and increasing competition as new drugs enter the market and advanced technologies become available. We expect any vaccines that we develop and commercialize to compete on the basis of, among other things, efficacy, safety, convenience of administration and delivery, price, the level of generic competition and the availability of reimbursement from government and other third-party payors.

Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any products that we may develop. Our competitors also may obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for our products, which could result in our competitors establishing a strong market position before we are able to enter the market. In addition, our ability to compete may be affected in many cases by insurers or other third-party payors seeking to encourage the use of generic products.
Intellectual Property

We strive to protect and enhance the proprietary technology, inventions and improvements that are commercially important to our business, including seeking, maintaining, and defending patent rights, whether developed internally or licensed from third parties. We also rely on trade secrets relating to our proprietary technology platform and on know-how, continuing technological innovation and in-licensing opportunities to develop, strengthen and maintain our proprietary position in the vaccine field. We additionally rely on regulatory protection afforded through data exclusivity, market exclusivity and patent term extensions where available. Still further, we utilize trademark protection for our company name, and expect to do so for products and/or services as they are marketed.

Our commercial success may depend in part on our ability to obtain and maintain patent and other proprietary protection for commercially important technology, inventions and know-how related to our business; defend and enforce our patents; preserve the confidentiality of our trade secrets; and operate without infringing the valid enforceable patents and proprietary rights of third parties. Our ability to stop third parties from making, using, selling, offering to sell or importing our products may depend on the extent to which we have rights under valid and enforceable patents or trade secrets that cover these activities. With respect to both licensed and company-owned intellectual property, we cannot be sure that patents will be granted with respect to any of our pending patent applications or with respect to any patent applications filed by us in the future, nor can we be sure that any of our existing patents or any patents that may be granted to us in the future will be commercially useful in protecting our commercial products and methods of manufacturing the same.

We have developed or in-licensed numerous patents and patent applications and possess substantial know-how and trade secrets relating to the development and commercialization of vaccine products. The term of individual patents depends upon the legal term of the patents in the countries in which they are obtained. In most countries in which we file, the patent term is 20 years from the date of filing the non-provisional application. In the United States, a patent’s term may be lengthened by patent term adjustment, which compensates a patentee for administrative delays by the United States Patent and Trademark Office ("U.S. PTO") in granting a patent, or may be shortened if a patent is terminally disclaimed over an earlier-filed patent.

The term of a patent that covers an FDA-approved drug may also be eligible for patent term extension, which permits patent term restoration of a United States patent as compensation for the patent term lost during the FDA regulatory review process. The Hatch-Waxman Act permits a patent term extension of up to five years beyond the expiration of the patent. The length of the patent term extension is related to the length of time the drug is under regulatory review. A patent term extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval and only one patent applicable to an approved drug may be extended. Moreover, a patent can only be extended once, and thus, if a single patent is applicable to multiple products, it can only be extended based on one product. Similar provisions are available in Europe and

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other foreign jurisdictions to extend the term of a patent that covers an approved drug. When possible, depending upon the length of clinical trials and other factors involved in the filing of a biologics license application ("BLA") we expect to apply for patent term extensions for patents covering our product candidates and their methods of use.

As of the date of this Annual Report on Form 10-K, our patent portfolio includes the following:

ATLAS

Our discovery platform patent portfolio includes three patent families, currently comprising six issued U.S. patents. We hold an exclusive license from The Regents of the University of California ("UC") to the first patent family, including U.S. Patent 6,004,815 and the related U.S. Patents 6,287,556 and 6,599,502. This first family includes claims to fundamental aspects of the ATLAS platform, developed by our scientific founder, Darren Higgins, Ph.D. while he was employed at the University of California, Berkeley. Patents in this family have a patent term until August 2018. We hold a further exclusive license from President and Fellows of Harvard College ("Harvard") to the second patent family, which covers methods related to the ATLAS discovery platform. This second patent family includes U.S. Patent 9,051,564, issued patents in Europe and Australia, a pending U.S. application, and pending applications in Europe and Canada. Patents issuing from these applications are expected to expire in 2027 with the exception of U.S. Patent 9,051,564 which includes a Patent Term Adjustment and extends until December 2031. We wholly own the third patent family, which is specifically directed to the ATLAS platform as utilized by us. This third patent family includes U.S. Patents 8,313,894 and 9,045,791, a pending U.S. patent application, an issued patent in Australia, and pending applications in Europe, Canada and Australia. Patents issuing from applications in this family are expected to have a patent term until at least July 2029. U.S. Patents 8,313,894 and 9,045,791 have terms that include Patent Term Adjustments and extend until August 2030 and August 2029, respectively.

GEN-003 (Genital Herpes)

We wholly own a portfolio of patent applications directed to HSV-2 vaccines, including GEN-003. This portfolio includes two patent families covering HSV-2 vaccine compositions and methods for inhibiting or treating HSV-2 infections. The first patent family includes U.S. Patent 8,617,564, and patents granted in Australia, China, Indonesia, Israel, Japan, Mexico, New Zealand, Russia, and Singapore. A U.S. application and applications in Europe, Canada, Japan, Brazil, India, China and four additional foreign jurisdictions are pending in the first patent family. The second family includes a pending U.S. application, a patent granted in Japan, and pending applications in Europe, Canada, and Australia. Patents that issue from applications in these families are expected to expire in 2030 and 2031. The term for the issued U.S. Patent 8,617,564 includes Patent Term Adjustment and extends until at least January 2031. We own a further patent family covering follow-on HSV-2 vaccine compositions, with applications pending in the U.S., Europe, Canada, Australia and Japan. Patents issuing from this family are expected to expire in 2032.

We hold a license from Isconova AB (now Novavax, Inc.) to two patent families covering Matrix-M2, the adjuvant used in GEN-003. Both patent families include a pending U.S. application and issued patents in Europe, Canada, Australia, Japan, Brazil, New Zealand and South Africa. These issued patents have patent terms until at least July 2023 and July 2024. The second patent family also includes issued U.S. Patent 8,821,881, which has a term that extends until August 2026 inclusive of a Patent Term Adjustment.

GEN-004 (Pneumococcus)

We co-own with Children’s Medical Center Corporation ("Children's"), a portfolio of patent applications directed to pneumococcus vaccines, including GEN-004. This portfolio includes two patent families covering pneumococcal vaccine compositions and methods for inhibiting or treating pneumococcal infections. A U.S. application and applications in Europe, Canada, Brazil, India, China and eight additional foreign jurisdictions are pending in the first patent family. The first family also includes granted patents in Australia, Japan, New Zealand and Russia. The second patent family includes U.S. Patent 9,393,294, a pending U.S. application, granted patents in Australia, Indonesia, Mexico and New Zealand, and pending applications in Europe, Canada, Japan, Brazil, Russia, India, China and six additional foreign jurisdictions. Patents that issue from applications in these patent families are expected to have patent terms until at least 2030 and 2032, respectively. We hold an exclusive license to Children's interest in these patent rights. We co-own with Children's one further patent family covering follow-on pneumococcal vaccine compositions, with pending applications in the U.S., Europe, Canada, Australia, and Japan. Children's interest in these patent rights is also exclusively licensed to us.

GEN-001 (Chlamydia)


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Our chlamydia patent portfolio previously included four patent families (one of which overlaps with the ATLAS portfolio). We held an exclusive license from Harvard to the first three patent families. We notified Harvard of our partial termination of the license agreement with regard to chlamydia antigens covered by these patent families on December 8th 2014. Effective March 8th 2015, the license agreement with Harvard with regard to chlamydia antigens covered by these patent families was terminated and we no longer hold an exclusive license to two of the three patent families, or to a chlamydia antigen covered by the remaining family. The remaining family covers certain aspects of the ATLAS platform, as well as one chlamydia antigen, and we maintain exclusive rights to aspects of the ATLAS platform covered by this family. We determined that the chlamydia antigens covered by these patent families were not relevant to the continued development of GEN-001. We wholly own the fourth patent family, which covers chlamydia vaccine and immunogenic compositions and methods for inhibiting or treating chlamydia infections. A U.S. application and applications in Europe, Canada, Australia and Japan are pending in this patent family. Patents issuing therefrom are expected to expire in 2031.

In addition to the above, we have established expertise and development capabilities focused in the areas of preclinical research and development, manufacturing and manufacturing process scale-up, quality control, quality assurance, regulatory affairs and clinical trial design and implementation. We believe that our focus and expertise will help us develop products based on our proprietary intellectual property.

In-License Agreements

University of California

In August 2006, we entered into an exclusive license agreement with UC granting us an exclusive, royalty-bearing sublicensable license to a patent family that includes claims to fundamental aspects of the ATLAS platform, to make, use, offer for sale, import and sell licensed products and services, and to practice licensed methods in all fields of use in the United States. This patent family consists entirely of issued United States patents with a patent term until August 2018. UC retains the right to practice and to allow other educational and non-profit institutions to practice, the licensed intellectual property licensed under the agreement for educational and research purposes.

Until first commercial sale of a licensed product or service, we are obligated to pay UC an annual license maintenance fee in the low five figures. Upon commercialization of our products and services covered by the licensed patents, we are obligated to pay UC royalties in the low single digits, subject to a minimum annual royalty in the low five figures, on the net sales of such products and services sold by us or our affiliates for the life of any licensed patents covering the products or services. The royalties payable to UC are subject to reduction for any third party payments required to be made, with a minimum floor in the low single digits. In addition, we agreed to pay UC a flat royalty in the low single digits on net sales of products sold by us or our affiliates which include a polypeptide, nucleotide sequence, biological organism or chemical entity identified in the practice of a licensed method or service, but not otherwise covered, by the licensed patent for the life of the licensed patents. If we receive any revenue (cash or non-cash) from any sublicensees, we must pay UC a percentage of such revenue, excluding certain categories of payments but including royalties on net sales by sublicensees, varying in the low-double digits for any sublicense depending on the scope of the license. Under the terms of the agreement, we are obligated to pay UC a specified development milestone payment and a specified commercial milestone payment up to $500 thousand in the aggregate for the first licensed product covered by the licensed patents, plus up to an additional $250 thousand if specified development and commercial milestones are met for each subsequent licensed product covered by the licensed patents. As of December 31, 2016, we have not made any milestone payments.

We are required to diligently develop and market licensed products, services and methods. If we are unable to meet our diligence obligations, even after any extension thereof, UC has the right, depending on the number of years the agreement has been effective, to either terminate the agreement or convert our exclusive license to a non-exclusive license.

Unless earlier terminated, the agreement with UC will remain in effect until the expiration of the last-to-expire patent under the licensed patent rights. We may terminate the agreement at any time by giving UC advance written notice. The agreement may also be terminated by UC in the event of a material breach by us that remains uncured after a specified period of time.

Harvard University

In November 2007, we entered into an exclusive license agreement with Harvard, granting us an exclusive, worldwide, royalty-bearing, sublicensable license to three patent families, to develop, make, have made, use, market, offer for sale, sell, have sold and import licensed products and to perform licensed services. This agreement was amended and restated in November 2012. The Harvard intellectual property covers methods related to the ATLAS discovery platform, as well as certain

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chlamydia immunogenic compositions and methods for inhibiting or treating chlamydia infections. Any patents within this portfolio that have issued or may be issued will expire normally in 2027 and 2028. Harvard retains the right to make and use, and to grant licenses to other not-for-profit research organizations to make and use, the licensed intellectual property for internal research, teaching and other educational purposes. We notified Harvard of our partial termination of the license agreement with regard to intellectual property covering chlamydia antigens on December 8, 2014. Effective March 8, 2015, the license agreement with Harvard with regard to intellectual property covering chlamydia antigens was terminated and we no longer hold a license to two of the three in-licensed Harvard patent families, or to a chlamydia antigen covered by the remaining family. The remaining family covers certain aspects of the ATLAS platform, as well as one chlamydia antigen, and we continue to maintain exclusive rights to aspects of the ATLAS platform covered by this family.

We are obligated to pay Harvard an annual license maintenance fee ranging from the low five figures to the mid-five figures depending on the type of product and the number of years after the effective date of the agreement.  For products covered by the licensed patent rights, we are obligated to pay Harvard milestone payments up to $1.8 million in the aggregate upon the achievement of certain development and regulatory milestones. For products discovered using the licensed methods, we are obligated to pay Harvard milestone payments up to $600 thousand in the aggregate for each of the first three products and up to $300 thousand in the aggregate for each additional product under the agreement upon the achievement of certain development and regulatory milestones. As of December 31, 2016, we paid $198 thousand in aggregate milestone payments. Upon commercialization of our products covered by the licensed patent rights or discovered using the licensed methods, we are obligated to pay Harvard royalties on the net sales of such products and services sold by us, our affiliates and our sublicensees. This royalty varies depending on the type of product or service but is in the low single digits. The royalty based on sales by our sublicensees is the greater of the applicable royalty rate or a percentage in the high single digits or the low double digits of the royalties we receive from such sublicensee depending on the type of product. Depending on the type of commercialized product or service, royalties are payable until the expiration of the last-to-expire valid claim under the licensed patent rights or for a period of 10 years from first commercial sale of such product or service. The royalties payable to Harvard are subject to reduction, capped at a specified percentage, for any third party payments required to be made. In addition to the royalty payments, if we receive any additional revenue (cash or non-cash) under any sublicense, we must pay Harvard a percentage of such revenue, excluding certain categories of payments, varying from the low single digits to up to the low double digits depending on the scope of the license that includes the sublicense.

We are required to use commercially reasonable efforts to develop licensed products, introduce them into the commercial market and market them, in compliance with an agreed upon development plan. We are also obligated to achieve specified development milestones. If we are unable to meet our development milestones for any type of product or service, absent any reasonable proposed extension or amendment thereof, Harvard has the right, depending on the type of product or service, to terminate this agreement with respect to such products or to convert the license to a non-exclusive, non-sublicensable license with respect to such products and services.

Our agreement with Harvard will expire on a product-by-product or service-by-service and country-by-country basis until the expiration of the last-to-expire valid claim under the licensed patent rights. We may terminate the agreement at any time by giving Harvard advance written notice. Harvard may also terminate the agreement in the event of a material breach by us that remains uncured; in the event of our insolvency, bankruptcy, or similar circumstances; or if we challenge the validity of any patents licensed to us.
Other Collaborations

Children’s Medical Center Corporation

In September 2008, we entered into a collaborative research agreement with Children’s, that was funded by PATH Vaccine Solutions ("PATH"). The collaborative research project led to the identification of certain highly conserved pneumococcal antigens that are able to protect against colonization. The intellectual property covering these antigens is co-owned by us and Children's and covers pneumococcal vaccine compositions and methods for inhibiting or treating pneumococcus infections. In February 2010, we entered into an exclusive license agreement with Children's, which was amended and restated in March 2012. This agreement grants us an exclusive, worldwide, sublicensable license under Children's rights to the jointly-owned intellectual property to make, have made, use, sell, offer for sale, import and export licensed products and to practice licensed processes for the prevention and treatment of Streptococcus pneumoniae. Children's retains the right to practice and use, and to allow academic non-profit research organizations to practice and use, the licensed intellectual property for research, educational, clinical and charitable purposes. Under the terms of the agreement, our license from Children's is subject to PATH’s separate non-exclusive, royalty-free license from Children's to develop pneumococcal T cell-based protein vaccines worldwide and to market and sell such vaccines in developing countries.


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For products covered by the licensed patent rights, we are obligated to pay Children's milestone payments up to $390 thousand in the aggregate upon the achievement of certain development and commercial milestones. As of December 31, 2016, we paid $140 thousand in aggregate milestone payments. Upon commercialization of our products, we are obligated to pay Children's royalties in the low single digits on the net sales of licensed products sold by us, our affiliates and our sublicensees. The royalties payable to Children's are subject to reduction for any third-party payments required to be made, with a minimum floor in the low single digits. Royalties are payable for the term of the license agreement, which is 15 years from the effective date of the amended and restated agreement or until expiration of the last-to-expire patent under the licensed patent rights, whichever period is longer. If we receive any additional revenue (cash or non-cash) under any sublicense, we must pay Children's a percentage of such income varying from the mid-single digits to low double digits depending on the clinical stage of development of the product, provided that such percentage may increase to match our financial obligations to third parties.

We are required to use commercially reasonable efforts to bring at least one licensed product to market as soon as reasonably practical, consistent with sound and legal business practices and judgment and to accomplish the objectives set forth in an agreed upon development plan. If we are unable to meet our diligence obligations, even after any extensions thereof, Children's has the right to terminate in this agreement in whole or in part.
Unless earlier terminated, the agreement with Children's will remain in effect until the later of 15 years from the effective date of the amended and restated agreement or the expiration of the last to expire patent under the licensed patent rights. We may terminate the agreement in its entirety or on a country-by-country and licensed product-by-licensed product basis. Children's may terminate the agreement in the event of our bankruptcy, insolvency or similar circumstances; if we use confidential information to formally challenge Children's joint ownership of the licensed patent rights; or if we materially breach the agreement and do not cure such breach within a specified time period.

Novavax

In August 2009, we entered into an exclusive license and collaboration agreement with Isconova AB, a Swedish company which has subsequently been acquired by Novavax. The agreement grants us a worldwide, sublicensable, exclusive license to two patent families, to import, make, have made, use, sell, offer for sale and otherwise exploit licensed vaccine products containing an adjuvant which incorporates or is developed from Matrix-A, Matrix-C and/or Matrix-M technology, in the fields of HSV and chlamydia, and the time-limited exclusive fields of Neisseria gonorrhoeae , cytomegalovirus and Mycobacterium tuberculosis . In July 2015, upon expiration of the five-year exclusivity term included in the agreement, the license granted to us converted to a non-exclusive license with respect to all licensed intellectual property rights that were not jointly invented by us and Novavax under the collaboration. Under the terms of this agreement, Novavax also grants us a worldwide, sublicensable, non-exclusive license under such licensed intellectual property rights to import, make, have made, use, sell, offer for sale and otherwise exploit licensed products in the field of Streptococcus pneumoniae . Our rights in the field of Streptococcus pneumoniae are exclusive with respect to all intellectual property rights jointly invented by us and Novavax under the collaboration. The agreement further grants us certain limited rights to use Novavax trademarks.

For licensed products in each unique disease field under the agreement, we are obligated to pay Novavax milestone payments up to approximately $3.0 million in the aggregate upon the achievement of certain development and commercial milestones. As of December 31, 2016, we paid $275 thousand in aggregate milestone payments. Upon commercialization of our products, we are obligated to pay Novavax royalties on the net sales of licensed products sold by us, our affiliates and our sublicensees. The royalties payable to Novavax are in the low single digits and vary on a country-by-country and licensed product-by-licensed product basis based on the amount of net sales and the nature and timing of the licensed product’s development. The royalties payable to Novavax are subject to reduction if the licensed product is not covered by one or more valid claims of the licensed patent rights, or if we are required to make any third-party payments. Royalties are payable for 10 years from first commercial sale in any particular country or until the date on which offer for sale of a licensed product is no longer covered by a valid claim of the licensed patent rights in such country, whichever period is longer. In addition to the royalty payments, if we receive any additional revenue (cash or non-cash) under any sublicenses, we must pay Novavax a percentage of such revenue, up to the low double digits.

We are required to use commercially reasonable efforts to perform specified research activities in accordance with an agreed-upon research plan. We are also obligated to use commercially reasonable efforts consistent with prudent business judgment and business and market conditions to research, develop and carry out the commercialization of licensed products in HSV and chlamydia.

Our agreement with Novavax will expire on a country-by-country and licensed product-by-licensed product basis on the date of the expiration of the royalty term with respect to such licensed product in such country. We may terminate the

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agreement on a country-by-country and licensed product-by-licensed product basis or in its entirety at any time by giving Novavax advance written notice. Both parties may also terminate the agreement in the event of a material breach by the other party that remains uncured or for bankruptcy, insolvency or similar circumstances. Novavax may terminate this agreement if we challenge the validity of any patents licensed to us.

The agreement also contained a research funding clause for which we made monthly payments to Novavax between August 2009 and March 2012 of approximately $1.6 million. All amounts of research funding provided were to be refunded by Novavax. After December 31, 2015, any amounts remaining due from Novavax, including accrued interest, could be received in cash upon 30-day written notice provided by us. We provided this notice in January 2016 and received the $1.6 million refund in February 2016.

Manufacture Contracts

Fujifilm

In February 2014, we entered into a supply agreement with FUJIFILM Diosynth Biotechnologies U.S.A., Inc. ("Fujifilm") for the manufacture and supply of antigens for future GEN-003 clinical trials. In June and September 2016, the Company entered into new statements of work under the agreement with Fujifilm for the manufacture and supply of antigens for the Company's Phase 3 clinical trials. Under these agreement, we are obligated to pay Fujifilm milestone payments up to the low-eight figures upon the achievement of certain manufacturing milestones. As of December 31, 2016, we paid approximately $7.0 million in aggregate manufacturing milestone payments. Additionally, raw materials, resins and consumables purchased for the vaccine production are invoiced separately as such costs are incurred by Fujifilm. We pay Fujifilm’s actual costs plus a percentage fee in the mid-single digits for these raw materials, resins and consumables. We also are required to pay reservation fees, which equal a percentage of production fees in the low-double digits, to reserve manufacturing slots in the production timeframe as agreed upon under the agreement. We are required to use commercially reasonable efforts to timely provide Fujifilm with the technology, materials and resources needed to produce and supply the recombinant protein antigen.
Our agreement with Fujifilm will expire on February 25, 2024. Subject to termination fees under applicable circumstances, we may terminate the agreement at any time by giving Fujifilm advance written notice. The agreement may also be terminated by either party due to a material uncured breach by the other party.

Baxter

In October 2014, we entered a product development and clinical supply agreement with Baxter Pharmaceutical Solutions LLC ("Baxter"). The product development and clinical supply agreement provides the terms and conditions under which Baxter will formulate, fill, inspect, package, label and test our lead product, GEN-003 for clinical supply. Under this agreement, we are obligated to pay Baxter amounts up to the low six digits for each batch of GEN-003 manufactured. Additionally, certain set-up fees and equipment purchased for the purposes of batch production will be invoiced separately by Baxter. We will pay set-up fees and equipment costs in the low six digits upon commencement of batch production. We also pay a monthly service fee in the low five digits for project management services for the duration of the arrangement. As of December 31, 2016, we paid approximately $657 thousand under this agreement.

Our agreement with Baxter expires on October 23, 2021. Subject to termination fees under applicable circumstances, we may terminate the agreement at any time by giving Baxter advance written notice. The agreement may also be terminated by either party due to a material uncured breach by the other party.

Trade Secrets

We may rely, in some circumstances, on trade secrets to protect our technology. However, trade secrets can be difficult to protect. We seek to protect our proprietary technology and processes, in part, by entering into confidentiality agreements with our employees, consultants, scientific advisors and contractors. We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in these individuals, organizations and systems, agreements or security measures may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our consultants, contractors or collaborators use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.


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United States Government Regulation

Biological products such as vaccines are subject to regulation under the Federal Food, Drug, and Cosmetic Act ("FD&C Act") and the Public Health Service Act ("PHS Act"), and other federal, state, local and foreign statutes and regulations. Both the FD&C and PHS Acts and their corresponding regulations govern, among other things, the testing, manufacturing, safety, efficacy, labeling, packaging, storage, record keeping, distribution, reporting, advertising and other promotional practices involving biological products. Clinical testing of biological products is subject to FDA review before initiation. In addition, FDA approval must be obtained before marketing of biological products. The process of obtaining regulatory review and approval and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources and we may not be able to obtain the required regulatory approvals.

United States Biological Products Development Process

The process required by the FDA before a biological product may be marketed in the United States generally involves the following:

completion of nonclinical laboratory tests and animal studies according to good laboratory practices ("GLP") and applicable requirements for the humane use of laboratory animals or other applicable regulations;
submission to the FDA of an application for an IND which must become effective before human clinical trials may begin;
performance of adequate and well-controlled human clinical trials according to the FDA’s regulations commonly referred to as good clinical practices ("GCP") and any additional requirements for the protection of human research subjects and their health information, to establish the safety and efficacy of the proposed biological product for its intended use, including approval by an independent Institutional Review Board (“IRB”), representing each clinical site before each clinical trial may be initiated;
submission to the FDA of a BLA for marketing approval that includes substantive evidence of safety, purity, and potency from results of nonclinical testing and clinical trials;
satisfactory completion of an FDA inspection of the manufacturing facility or facilities where the biological product is produced to assess compliance with good manufacturing practices ("GMPs") to assure that the facilities, methods and controls are adequate to preserve the biological product’s identity, strength, quality and purity and, if applicable, the FDA’s current good tissue practices ("GTP") for the use of human cellular and tissue products;
potential FDA audit of the nonclinical and clinical trial sites that generated the data in support of the BLA; and
FDA review and approval, or licensure, of the BLA.
Before testing any biological product candidate in humans, the product candidate enters the preclinical study stage. Preclinical studies, also referred to as nonclinical studies, include laboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies to assess the potential safety and activity of the product candidate. The conduct of the preclinical studies must comply with federal regulations and requirements including GLPs.

The clinical trial sponsor must submit the results of the preclinical tests, together with manufacturing information, analytical data, any available clinical data or literature and a proposed clinical protocol, to the FDA as part of the IND. Some preclinical studies may continue even after the IND is submitted. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA places the clinical trial on a clinical hold within that 30-day time period. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. The FDA also may impose clinical holds on a biological product candidate at any time before or during clinical trials due to safety concerns or non-compliance. If the FDA imposes a clinical hold, studies may not recommence without FDA authorization and then only under terms authorized by the FDA. Accordingly, we cannot be sure that submission of an IND will result in the FDA allowing clinical trials to begin, or that, once begun, issues will not arise that suspend or terminate such studies.

Clinical trials involve the administration of the biological product candidate to healthy volunteers or patients under the supervision of qualified investigators, generally physicians not employed by or under the trial sponsor’s control. Clinical trials

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are conducted under protocols detailing, among other things, the objectives of the clinical trial, dosing procedures, subject selection and exclusion criteria, and the parameters to be used to monitor subject safety, including stopping rules that assure a clinical trial will be stopped if certain AEs should occur. Each protocol and any amendments to the protocol must be submitted to the FDA as part of the IND. Clinical trials must be conducted and monitored in accordance with the FDA’s regulations comprising the GCP requirements, including the requirement that all research subjects provide informed consent. Further, each clinical trial must be reviewed and approved by an IRB, at or servicing each institution at which the clinical trial will be conducted. An IRB is charged with protecting the welfare and rights of trial participants and considers such items as whether the risks to individuals participating in the clinical studies are minimized and are reasonable in relation to anticipated benefits. The IRB also approves the form and content of the informed consent that must be signed by each clinical trial subject or his or her legal representative and must monitor the clinical trial until completed.

Human clinical trials are typically conducted in three sequential phases that may overlap or be combined:

Phase 1.  The biological product is initially introduced into healthy human subjects and tested for safety, dosage tolerance, absorption, metabolism, distribution and excretion. In the case of some products for severe or life-threatening diseases, especially when the product may be too inherently toxic to ethically administer to healthy volunteers, the initial human testing is often conducted in patients.
Phase 2.  The biological product is evaluated in a limited patient population to identify possible AEs and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance, optimal dosage and dosing schedule.
Phase 3.  Clinical studies are undertaken to further evaluate safety, purity, and potential of biological product in an expanded patient population at geographically dispersed clinical trial sites. These clinical studies are intended to establish the overall risk/benefit ratio of the product and provide an adequate basis for product approval and product labeling.
Post-approval clinical studies, sometimes referred to as Phase 4 clinical studies, may be conducted after initial marketing approval. These clinical studies are used to gain additional experience from the treatment of patients in the intended therapeutic indication, particularly for long-term safety follow-up.

During all phases of clinical development, regulatory agencies require extensive monitoring and auditing of all clinical activities, clinical data and clinical trial investigators. Annual progress reports detailing the results of the clinical studies must be submitted to the FDA. Written IND safety reports must be promptly submitted to the FDA and the investigators for serious and unexpected AEs, any findings from other studies, tests in laboratory animals or in vitro testing that suggest a significant risk for human subjects, or any clinically important increase in the rate of a serious suspected adverse reaction over that listed in the protocol or investigator brochure. The sponsor must submit an IND safety report within 15 calendar days after the sponsor determines that the information qualifies for reporting. The sponsor also must notify the FDA of any unexpected fatal or life-threatening suspected adverse reaction within seven calendar days after the sponsor’s initial receipt of the information. Phase 1, Phase 2 and Phase 3 clinical studies may not be completed successfully within any specified period, if at all. The FDA or the sponsor or its data safety monitoring board may suspend or terminate a clinical trial at any time on various grounds, including a finding that the research subjects or patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the biological product has been associated with unexpected serious harm to patients. Sponsors of all controlled clinical trials, except for Phase 1 trials, are required to submit certain clinical trial information for inclusion in the public clinical trial registry and results data bank maintained by the National Institutes of Health, which are publicly available at http://clinicaltrials.gov .

Concurrent with clinical studies, companies usually complete additional animal studies and must also develop additional information about the physical characteristics of the biological product as well as finalize a process for manufacturing the product in commercial quantities in accordance with GMP requirements. To help reduce the risk of the introduction of adventitious agents with use of biological products, the PHS Act emphasizes the importance of manufacturing control for products whose attributes cannot be precisely defined. The manufacturing process must be capable of consistently producing quality batches of the product candidate and, among other things, the sponsor must develop methods for testing the identity, strength, quality, potency and purity of the final biological product. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the biological product candidate does not undergo unacceptable deterioration over its shelf life.

United States Review and Approval Processes

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After the completion of clinical trials of a biological product, FDA approval of a BLA must be obtained before commercial marketing of the biological product. The BLA must include results of product development, laboratory and animal studies, human studies, information on the manufacture and composition of the product, proposed labeling and other relevant information. In addition, under the Pediatric Research Equity Act, a BLA or supplement to a BLA must contain data to assess the safety and effectiveness of the biological product for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective. The FDA may grant deferrals for submission of data or full or partial waivers. The testing and approval processes require substantial time and effort and there can be no assurance that the FDA will accept the BLA for filing and, even if filed, that any approval will be granted on a timely basis, if at all, and for what indications will be approved, if any.

Under the Prescription Drug User Fee Act ("PDUFA"), as amended, each BLA must be accompanied by a significant user fee. PDFUA also imposes an annual product fee for biologics and an annual establishment fee on facilities used to manufacture prescription biologics. Fee waivers or reductions are available in certain circumstances, including a waiver of the application fee for the first application filed by a small business.

Within 60 days following submission of the application, the FDA reviews the BLA to determine if it is substantially complete before the agency accepts it for filing. The FDA may refuse to file any BLA that it deems incomplete or not properly reviewable at the time of submission and may request additional information. In this event, the BLA must be resubmitted with the additional information. The resubmitted application also is subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth substantive review of the BLA. The FDA reviews the BLA to determine, among other things, whether the proposed product is safe and potent, or effective, for its intended use, and has an acceptable purity profile, and whether the product is being manufactured in accordance with GMP regulations to assure and preserve the product’s identity, safety, strength, quality, potency and purity. The FDA may refer applications for novel biological products or biological products that present difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions. During the biological product approval process, the FDA also will determine whether a Risk Evaluation and Mitigation Strategy ("REMS"), is necessary to assure the safe use of the biological product. If the FDA concludes a REMS is needed, the sponsor of the BLA must submit a proposed REMS; the FDA will not approve the BLA without a REMS, if required.

Before approving a BLA, the FDA will inspect the facilities at which the product is manufactured. The FDA will not approve the product unless it determines that the manufacturing processes and facilities are in compliance with GMP requirements and adequate to assure consistent production of the product within required specifications. Additionally, before approving a BLA, the FDA will typically inspect one or more clinical sites to assure that the clinical trials were conducted in compliance with IND study requirements and GCP requirements. To assure GMP, GTP and GCP compliance, an applicant must incur significant expenditure of time, money and effort in the areas of training, record keeping, production, and quality control.

Notwithstanding the submission of relevant data and information, the FDA may ultimately decide that the BLA does not satisfy its regulatory criteria for approval and deny approval. Data obtained from clinical trials are not always conclusive and the FDA may interpret data differently than we interpret the same data. If the agency decides not to approve the BLA in its present form, the FDA will issue a complete response letter that usually describes all of the specific deficiencies in the BLA identified by the FDA. The deficiencies identified may be minor, for example, requiring labeling changes, or major, for example, requiring additional clinical trials. Additionally, the complete response letter may include recommended actions that the applicant might take to place the application in a condition for approval. If a complete response letter is issued, the applicant may either resubmit the BLA, addressing all of the deficiencies identified in the letter, or withdraw the application.

If a product receives regulatory approval, the approval may be significantly limited to specific diseases and dosages or the indications for use may otherwise be limited, which could restrict the commercial value of the product. Further, the FDA may require that certain contraindications, warnings or precautions be included in the product labeling. The FDA may impose restrictions and conditions on product distribution, prescribing, or dispensing in the form of a risk management plan, or otherwise limit the scope of any approval. In addition, the FDA may require post marketing clinical trials, sometimes referred to as Phase 4 clinical trials, designed to further assess a biological product’s safety and effectiveness, and testing and surveillance programs to monitor the safety of approved products that have been commercialized.

One of the performance goals agreed to by the FDA under the PDUFA is to review 90% of standard BLAs in 10 months from filing and 90% of priority BLAs in six months from filing, whereupon a review decision is to be made. The FDA does not always meet its PDUFA goal dates for standard and priority BLAs and its review goals are subject to change

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from time to time. The review process and the PDUFA goal date may be extended by three months if the FDA requests or the BLA sponsor otherwise provides additional information or clarification regarding information already provided in the submission within the last three months before the PDUFA goal date.

Federal and State Fraud and Abuse, Transparency and Privacy Laws

In the United States, our business activities are subject to numerous other laws by federal and state authorities, in addition to the FDA, including but not limited to, the United States Department of Health and Human Services ("HHS"), and its various divisions, including but not limited to, the Centers for Medicare & Medicaid Services ("CMS"). These laws are enforced by various federal and state enforcement authorities, including but not limited to, the United States Department of Justice, and individual United States Attorney offices within the Department of Justice, HHS’ various enforcement divisions, including but not limited to, the Office of Inspector General, the Office for Human Research Protections, and the Office of Research Integrity, and other state and local government agencies.

The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting, or receiving any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce, or in return for, purchasing, leasing, ordering, or arranging for or recommending, the purchase lease, or order of any good, facility, service or item for which payment is made, in whole or in part, under a federal health care program, such as Medicare. The federal Anti-Kickback Statute has been interpreted to apply to arrangements between manufacturers on one hand and prescribers, purchasers and formulary managers on the other. There are a number of statutory exceptions and regulatory safe harbors protecting certain common activities from prosecution. Failure to meet all of the requirements of a particular applicable statutory exception or regulatory safe harbor does not make the conduct per se illegal under the federal Anti-Kickback Statute. Instead, the legality of the arrangement will be evaluated on a case-by-case basis based on a cumulative review of all of its facts and circumstances.

The federal civil False Claims Act prohibits, among other things, any person or entity from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment to, or approval by, the federal government, or knowingly making, using, or causing to be made or used, a false record or statement material to a false or fraudulent claim to the federal government. Recently, the civil False Claims Act has been used to assert liability on the basis of kickbacks and improper referrals, improperly reported government pricing metrics such as Medicaid Best Price or Average Manufacturer Price, improper use of supplier or provider Medicare numbers when detailing a provider of services, improper promotion of drugs or off-label uses not expressly approved by the FDA in a drug’s label, and misrepresentations with respect to the services rendered or items provided.

Additionally, the civil monetary penalties statute, among other things, imposes fines against any person who is determined to have presented, or caused to be presented, claims to a federal health care program that the person knows, or should know, is for an item or service that was not provided as claimed or is false or fraudulent.

The federal Health Insurance Portability and Accountability Act of 1996 created new federal criminal statutes that prohibit knowingly and willfully executing, or attempting to execute, a scheme to defraud or to obtain, by means of false or fraudulent pretenses, representations or promises, any of the money or property owned by, or under the custody or control of, any health care benefit program and knowingly and willfully falsifying, concealing or covering up by trick, scheme or device a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of, or payment for, health care benefits, items or services relating to health care matters.

Many states have similar fraud and abuse statutes and regulations that apply to items and services reimbursed under Medicaid and other state programs, or, in several states, private payors.

Additionally, the federal Physician Payments Sunshine Act within the Health Care and Education Reconciliation Act, or Health Care Reform Law, and its implementing regulations, require that certain manufacturers of drugs, devices, biological and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report to CMS, information related to certain payments or other transfers of value made or distributed to physicians and teaching hospitals, or to entities or individuals at the request of, or designated on behalf of, the physicians and teaching hospitals and to report annually to CMS certain ownership and investment interests held by physicians and their immediate family members.

In addition, we may be subject to, or our marketing activities may be limited by, data privacy and security regulation by both the federal government and the states in which we conduct our business.


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If our operations are found to be in violation of any of the health regulatory laws described above, or any other laws that apply to us, we may be subject to penalties, including, without limitation, civil, criminal, and administrative penalties, damages, monetary fines, disgorgement, possible exclusion from participation in Medicare, Medicaid and other federal health care programs, contractual damages, reputational harm, diminished profits and future earnings, and curtailment or restructuring of our operations.

Reimbursement

In both domestic and foreign markets, the commercial success of any approved products will depend, in part, on the availability of coverage and adequate reimbursement of such products from third-party payors, such as government health care programs, commercial insurance and managed care organizations. Patients who are provided vaccinations, and providers providing vaccinations, generally rely on third-party payors to reimburse all or part of the associated health care costs. Sales of any approved vaccines will therefore depend substantially, both domestically and abroad, on the extent to which the costs of our approved vaccines will be paid by third-party payors. These third-party payors are increasingly challenging the prices charged for medical products and services and imposing controls to manage costs. The containment of health care costs has become a priority of federal and state governments and the prices of drugs have been a focus in this effort. Governments have shown significant interest in implementing cost-containment programs, including price controls, restrictions on reimbursement and requirements for substitution of generic products. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could further limit our net revenue and results. Third-party payors may limit coverage to specific products on an approved list, or formulary, which might not include all of the FDA-approved products for a particular indication. In addition, there is significant uncertainty regarding the reimbursement status of newly approved health care products. Third-party payors are increasingly examining the medical necessity and cost-effectiveness of medical products and services, in addition to their safety and efficacy. We may need to conduct expensive pharmacoeconomic studies in order to demonstrate the cost-effectiveness of our products. If third-party payors do not consider our products to be cost-effective compared to other therapies, the payors may not cover our products after approved as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our products on a profitable basis.

Within the United States, if we obtain appropriate approval in the future to market any of our current product candidates, we may seek approval and coverage for those products under Medicaid, Medicare and the PHS Act, pharmaceutical pricing program and also seek to sell the products to federal agencies. These programs are administered by various federal and state agencies to allow for individuals age 65 and over, low income, and disabled beneficiaries access to approved medicines and treatments. Under these programs, manufacturers are required to pay rebates, and the pricing of an approved treatment may be subject to various forms of price modifications.

Recent legislation, including the American Recovery and Reinvestment Act of 2009 (the "2009 Act"), the Affordable Care Act enacted in March 2010 (the "2010 Act"), as well as the pending proposals to eliminate or significantly modify the 2010 Act may impact health care financing by both governmental and private payors. The 2009 Act provides funding for the federal government to compare the effectiveness of different treatments for the same illness. Although the results of the comparative effectiveness studies are not intended to mandate coverage policies for public or private payors, it is not clear what effect, if any, the research will have on the sales of any product, if any such product or the condition that it is intended to treat is the subject of a trial. It is also possible that comparative effectiveness research demonstrating benefits in a competitor’s product could adversely affect the sales of any of our approved products. The 2010 Act was designed to reduce the cost of health care which could limit the prices we are able to charge or the amounts of reimbursement available for our vaccine candidates once they are approved.

Modifications to or repeal of all or certain provisions of the 2010 Act are expected as a result of the outcome of the recent presidential elections and Republications maintaining control of Congress, consistent with statements made by Donald Trump and members of Congress during the presidential campaign and following the election. We cannot predict the ultimate content, timing or effect of any changes to the 2010 Act or other federal and state reform efforts. There is no assurance that federal or state health care reform will not adversely affect our business and financial results, and we cannot predict how future federal or state legislative, judicial or administrative changes relating to healthcare reform will affect our business.

Outside the United States, ensuring adequate coverage and payment for our products will face challenges. In international markets, reimbursement and health care payment systems vary significantly by country, and many countries have instituted price ceilings on specific products and therapies. Pricing of prescription pharmaceuticals is subject to governmental control in many countries. Pricing negotiations with governmental authorities can extend well beyond the receipt of regulatory marketing approval for a product and may require us to conduct a clinical trial that compares the cost effectiveness of our product candidates or products to other available therapies. The conduct of such a clinical trial could be expensive and result in delays in our commercialization efforts. Third-party payors are challenging the prices charged for medical products and

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services, and many third-party payors limit reimbursement for newly-approved health care products. Recent budgetary pressures in many European Union countries are also causing governments to consider or implement various cost-containment measures, such as price freezes, increased price cuts and rebates. If budget pressures continue, governments may implement additional cost-containment measures. Cost-control initiatives could decrease the price we might establish for products that we may develop or sell, which would result in lower product revenues or royalties payable to us. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our products.

Foreign Regulation

In addition to regulations in the United States, we will be subject to a variety of foreign regulations governing clinical trials and commercial sales and distribution of our product candidates. Whether or not we obtain FDA approval for a product candidate, we must obtain approval from the comparable regulatory authorities of foreign countries or economic areas, such as the European Union, before we may commence clinical trials or market products in those countries or areas. The approval process and requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from place to place, and the time may be longer or shorter than that required for FDA approval.

Certain countries outside of the United States have a process that requires the submission of a clinical trial application ("CTA") much like an IND prior to the commencement of human clinical trials. In Europe, for example, a CTA must be submitted to the competent national health authority and to independent ethics committees in each country in which a company intends to conduct clinical trials. Once the CTA is approved in accordance with a country’s requirements, clinical trial development may proceed in that country. In all cases, the clinical trials must be conducted in accordance with GCPs and other applicable regulatory requirements.

Under European Union regulatory systems, a company may submit marketing authorization applications either under a centralized or decentralized procedure. The centralized procedure is compulsory for medicinal products produced by biotechnology or those medicinal products containing new active substances for specific indications such as the treatment of AIDS, cancer, neurodegenerative disorders, diabetes, viral diseases and designated orphan medicines, and optional for other medicines which are highly innovative. Under the centralized procedure, a marketing application is submitted to the European Medicines Agency where it will be evaluated by the Committee for Medicinal Products for Human Use and a favorable opinion typically results in the grant by the European Commission of a single marketing authorization that is valid for all European Union member states within 67 days of receipt of the opinion. The initial marketing authorization is valid for five years, but once renewed is usually valid for an unlimited period. The decentralized procedure provides for approval by one or more “concerned” member states based on an assessment of an application performed by one member state, known as the “reference” member state. Under the decentralized approval procedure, an applicant submits an application, or dossier, and related materials to the reference member state and concerned member states. The reference member state prepares a draft assessment and drafts of the related materials within 120 days after receipt of a valid application. Within 90 days of receiving the reference member state’s assessment report, each concerned member state must decide whether to approve the assessment report and related materials. If a member state does not recognize the marketing authorization, the disputed points are eventually referred to the European Commission, whose decision is binding on all member states. In light of the United Kingdom’s vote in 2016 to leave the European Union, the so-called Brexit vote, there may be changes forthcoming in the scope of the centralized approval procedure as the terms of that exit are negotiated between the United Kingdom and the European Union.

Manufacturing

We do not have any manufacturing facilities. We currently rely, and expect to continue to rely, on third parties for the manufacture of our product candidates for non-clinical studies and clinical trials, as well as for commercial manufacture if our product candidates receive marketing approval. To date, we have obtained materials for GEN-003 from third-party manufacturers who are sole source suppliers to us. We intend to identify and qualify contract manufacturers to provide the protein process development, protein production, adjuvant production, and fill-and-finish services prior to submission of a BLA to the FDA.


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Executive Officers of the Registrant

The following table sets forth the name, age and position of each of our executive officers as of February 17, 2017.
Name
 
Age
 
Position
William Clark
 
48
 
President and Chief Executive Officer
Seth Hetherington, M.D.
 
64
 
Chief Medical Officer
Jonathan Poole
 
42
 
Chief Financial Officer
Eric Hoffman, Ph.D.
 
47
 
Chief Business Officer
Jessica Baker Flechtner, Ph.D.
 
45
 
Chief Scientific Officer

William Clark  has served as our President and Chief Executive Officer since February 2011. Previously he served as our Chief Business Officer from August 2010 to February 2011. Mr. Clark has served on our board of directors since February 2011. Prior to joining our Company, he served as Chief Business Officer at Vanda Pharmaceuticals, Inc. ("Vanda"), a biopharmaceutical company he co-founded in 2004. While at Vanda, he lead the company’s strategic and business development activities, and played a central role in raising more than $220 million in multiple public and private financings. Prior to Vanda, Mr. Clark was a principal at Care Capital, LLC, a venture capital firm investing in biopharmaceutical companies, after serving in a variety of commercial and strategic roles at SmithKline Beecham (now GlaxoSmithKline). Mr. Clark holds a B.A. from Harvard University and an M.B.A. from The Wharton School at the University of Pennsylvania.

Seth Hetherington, M.D.   has served as our Chief Medical Officer since joining our Company in January 2011. Prior to joining our Company, Dr. Hetherington served as Senior Vice President of Clinical and Regulatory Affairs at Icagen, Inc. ("Icagen"), from May 2006 through December 2010. Prior to Icagen, Dr. Hetherington served as Vice President, Clinical Development and Chief Medical Officer at Inhibitex Inc. from June 2002 through April 2005 and held various positions of increasing responsibility in clinical drug development at GlaxoSmithKline from 1995 through June 2002. Dr. Hetherington has also served as a faculty member at the University of North Carolina School of Medicine and held appointments at several leading academic medical centers, including the University of Tennessee, St. Jude Children’s Research Hospital in Memphis and Albany Medical College. Dr. Hetherington earned his B.S. at Yale University and his M.D. at the University of North Carolina, Chapel Hill and he completed his postgraduate training in pediatrics and pediatric infectious diseases at the University of North Carolina and the University of Minnesota, respectively. Dr. Hetherington has published extensively in medical and scientific literature, and is board certified in both pediatrics and pediatric infectious diseases. He has served as the industry representative to the Vaccines and Related Blood Products Advisory Committee of the FDA and the National Vaccine Advisory Committee of the U.S. Department of Health and Human Services.

Jonathan Poole  has served as our Chief Financial Officer since joining our Company in April 2014. Prior to joining our Company, Mr. Poole served as Senior Vice President of Finance for Pipeline and Technical Operation at Shire plc (“Shire”) from June 2013 through March 2014, leading finance support for Shire’s global business development, research and development and technical operations activities. Mr. Poole previously served as divisional Chief Financial Officer of Shire HGT, Shire’s rare disease division, from May 2010 through June 2013 and held various positions of increasing responsibility in finance at Shire from 2006 through May 2010. He began his career in the United Kingdom in investment banking at UBS Warburg and ING Barings and also worked as an investment manager for Avanti Capital plc, a United Kingdom private equity investment firm. Mr. Poole holds an M.B.A. from London Business School and a BSc in biological sciences from Durham University in the United Kingdom.

Eric Hoffman, Ph.D.   has served as our Chief Business Officer since joining our Company in December 2014. Prior to joining our Company, Dr. Hoffman served as Vice President of Corporate and Business Development, and also oversaw Program Management and Commercial Operations, at Idenix Pharmaceuticals, Inc. ("Idenix") from January 2012 until its acquisition by Merck & Co. in August 2014. Dr. Hoffman also held a role overseeing Investor Relations and Corporate Communications while at Idenix from January 2011 to December 2011. Prior to Idenix, Dr. Hoffman spent nearly five years, from 2006 to 2011, at Biogen Idec in investor relations and business development roles and spent more than five years from 2001 to 2006 on Wall Street as an equity research analyst at J.P. Morgan, Schwab Soundview Capital Markets and Bear Stearns. Before starting on Wall Street in 2001, he was a post-doctoral research scientist in the Department of Immunobiology at King's College London School of Medicine at Guy’s Hospital, studying T-cell development from 1999 to 2000. He has authored several book chapters and peer-reviewed articles, including in Cell, Immunity , and Genes & Development . Dr. Hoffman holds a Ph.D. in Immunobiology from Yale University and a B.S. in Biology from Trinity University.


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Jessica Baker Flechtner, Ph.D.  has held multiple scientific roles since joining our Company in March 2007 and has served as our Chief Scientific Officer since February 2016, Senior Vice President of Research from February 2014 to January 2016, Vice President of Research from January 2010 to February 2014, and Senior Director, Research and Development from 2007 to 2010. Prior to joining our Company, Dr. Flechtner was an Immunology Consultant at BioVest International, Inc. from June 2006 to March 2007, where she guided the development of assays to evaluate the success of the company’s autologous Follicular (Non-Hodgkin’s) Lymphoma vaccine in patients. As a researcher at Mojave Therapeutics, Inc., or Mojave, and Antigenics Inc. (now Agenus), which acquired Mojave’s intellectual property, from 2001 to 2005, Dr. Flechtner developed protein and peptide-based vaccines and immunotherapies for cancer, infectious disease, autoimmunity and allergy. She is an inventor on various pending or issued patents and has multiple peer-reviewed scientific publications. Dr. Flechtner performed her post-doctoral work in the laboratory of Dr. Harvey Cantor at the Dana Farber Cancer Institute and Harvard Medical School and holds a Ph.D. in Cellular Immunology and B.S. in Animal Science from Cornell University. She is a member of the American Association of Immunologists, American Association for Cancer Research, Society for the Immunotherapy of Cancer, the American Society for Microbiology, and Women in Bio.

Employees

As of December 31, 2016, we had 98 full-time employees. Of these 98 employees, 80 employees are engaged in research and development and 18 employees are engaged in finance, human resources, facilities and business and general management. We have no collective bargaining agreements with our employees and we have not experienced any work stoppages. We consider our relations with our employees to be good.

Our Corporate Information

We were incorporated under the laws of the State of Delaware in August 2006. Our principal executive offices are located at 100 Acorn Park Drive, 5th Floor, Cambridge, Massachusetts 02140 and our telephone number is (617) 876-8191. Genocea ®  and the Genocea logo are registered trademarks.

Available Information

We maintain an Internet website at http://www.genocea.com where our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other documents and all amendments to those reports and documents are available without charge, as soon as reasonably practicable following the time they are filed with, or furnished to, the Securities and Exchange Commission ("SEC"). References to our website address do not constitute incorporation by reference of the information contained on the website, and the information contained on the website is not part of this document.

The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at http://www.sec.gov .

Item 1A.    Risk Factors

Risks Related to Our Financial Position and Need for Additional Capital

We have incurred significant losses since our founding in 2006 and anticipate that we will continue to incur significant losses for the foreseeable future and may never achieve or maintain profitability.

We are a clinical-stage biotechnology company, and we have not yet generated significant revenues. We have incurred net losses each year since our inception, including net losses of $ 49.6 million , $ 42.5 million , and $ 35.3 million for the years ended December 31, 2016 , 2015, and 2014, respectively. As of December 31, 2016 and 2015, we had accumulated deficits of approximately $ 207.5 million and $ 157.9 million , respectively. To date, we have not commercialized any products or generated any revenues from the sale of products and have financed our operations primarily through private placements of our preferred stock, debt financing, our initial public offering ("IPO") completed in February 2014, and follow-on public offerings in March 2015 and August 2015 and we do not expect to generate any product revenues in the foreseeable future. We do not know whether or when we will generate product revenues or become profitable.
 
We have devoted most of our financial resources to research and development, including our clinical and non-clinical technology development and development activities. The amount of our future net losses will depend, in part, on the rate of our future expenditures and our ability to obtain funding through equity or debt financings, strategic collaborations or additional

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grants. We have not completed pivotal clinical studies for any product candidate and it will be several years, if ever, before we have a product candidate ready for commercialization. Even if we obtain regulatory approval to market a product candidate, our future revenues will depend upon the size of any markets in which our product candidates have received approval, our ability to achieve sufficient market acceptance, reimbursement from third-party payors and other factors.
 
We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. We anticipate that our expenses will increase significantly if and as we:

continue our Phase 2 and commence our Phase 3 programs for GEN-003, our most advanced product candidate that we are developing for the treatment of genital herpes infections;
 
initiate additional non-clinical, clinical or other studies for GEN-009, our neoantigen cancer vaccine product candidate;
 
manufacture material for clinical trials and for commercial sale;
 
seek regulatory approvals for any product candidates that successfully complete clinical trials;
 
establish a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain marketing approval;
 
seek to discover and develop additional product candidates;
 
acquire or in-license other product candidates and technologies;
 
make royalty milestone or other payments under any in-license agreements;
 
maintain, protect and expand our intellectual property portfolio;
 
attract and retain skilled personnel; and
 
create additional infrastructure to support our operations as a public company and our product development and planned future commercialization efforts.
 
The net losses we incur may fluctuate significantly from quarter to quarter and year to year, such that a period-to-period comparison of our results of operations may not be a good indication of our future performance. In any particular quarter or quarters, our operating results could be below the expectations of securities analysts or investors, which could cause our stock price to decline.
 
To become and remain profitable, we must succeed in developing and eventually commercializing products that generate significant revenue. This will require us to be successful in a range of challenging activities, including completing non-clinical studies and clinical trials of our product candidates, discovering additional product candidates, obtaining regulatory approval for these product candidates and manufacturing, marketing and selling any products for which we may obtain regulatory approval. We are only in the preliminary stages of most of these activities. We may never succeed in these activities and, even if we do, may never generate revenues that are significant enough to achieve profitability.
 
Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve profitability. If we are required by the FDA or the European Medicines Agency to perform studies in addition to those currently expected, or if there are any delays in completing our clinical trials or the development of any of our product candidates, our expenses could increase.
 
Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would depress the value of our company and could impair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our product offerings or even continue our operations. A decline in the value of our company could also cause you to lose all or part of your investment.

We will require substantial additional financing to achieve our goals, and a failure to obtain this necessary capital when needed would force us to delay, limit, reduce or terminate our product development or commercialization efforts.

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As of December 31, 2016 , our cash, cash equivalents and investments were $ 63.4 million . We believe that we will continue to expend substantial resources for the foreseeable future developing GEN-003 and GEN-009, our neoantigen cancer vaccine product candidate. These expenditures will include costs associated with research and development, potentially acquiring new technologies, potentially obtaining regulatory approvals and manufacturing products, as well as marketing and selling products approved for sale, if any. In addition, other unanticipated costs may arise. Because the outcome of our planned and anticipated clinical trials is highly uncertain, we cannot reasonably estimate the actual amounts necessary to successfully complete the development and commercialization of our product candidates.
 
Our future capital requirements depend on many factors, including:
 
the progress, results and costs of our ongoing Phase 2 program for GEN-003;

the costs associated with initiating our planned Phase 3 program for GEN-003;

the number and development requirements of other product candidates that we pursue;

the timing of, and the costs involved in, obtaining regulatory approvals for our product candidates if clinical trials are successful and the outcome of regulatory review of our product candidates;
 
the cost and timing of future commercialization activities for our products, if any of our product candidates are approved for marketing, including product manufacturing, marketing, sales and distribution costs;
 
the cost of our general and administrative functions;

the revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval;
 
the cost of manufacturing our product candidates for clinical trials in preparation for regulatory approval and in preparation for commercialization;
 
our ability to establish and maintain strategic partnerships, licensing or other arrangements and the financial terms of such agreements;
 
the costs involved in preparing, filing, prosecuting patent applications, maintaining, defending and enforcing our intellectual property rights, including litigation costs and the outcome of such litigation;

the timing, receipt, and amount of sales of, or royalties or milestone payments on, our future products, if any; and
 
the extent to which we acquire or in-license other products or technologies.
 
Based on our current operating plan, we believe that our existing cash, cash equivalents and investments are sufficient to support our operating expenses and capital expenditure requirements into the first quarter of 2018, without assuming any receipt of proceeds from potential business development partnerships, equity financings or debt drawdowns. This guidance assumes commencing Phase 3 trials for GEN-003 for genital herpes in the fourth quarter of 2017 and filing an IND for GEN-009 for cancer by the end of the year, however it is our strategy to secure additional sources of financing in advance of starting GEN-003 Phase 3 clinical trials.

Our operating plan may change as a result of many factors currently unknown to us, and we may need additional funds sooner than planned. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. Additional funds may not be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available to us when needed, we would be required to delay, limit, reduce or terminate non-clinical studies, clinical trials or other development activities for one or more of our product candidates or delay, limit, reduce or terminate our establishment of sales and marketing capabilities or other activities that may be necessary to commercialize our product candidates.

Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our technologies or product candidates on unfavorable terms to us.


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Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings and license and development agreements with strategic partnerships with third parties. In 2015, we raised additional net capital of approximately $95.2 million through follow-on public offerings in March and August along with $4.7 million of net debt financing in December. No significant capital activities occurred in 2016. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take certain actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through strategic partnerships with third parties, we may have to relinquish valuable rights to our technologies or product candidates, future revenue streams, research programs or product candidates or grant licenses on terms that are not favorable to us. If we are unable to raise additional capital when needed, we would be required to delay, limit, reduce or terminate our product development or commercialization efforts for GEN-003, our immuno-oncology program, or our other product candidates, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Risks Related to Clinical Development, Regulatory Review and Approval of Our Product Candidates

We are substantially dependent on the success of the clinical development of GEN-003, our only product candidate currently in an active clinical trial. Any failure to successfully develop or commercialize the GEN-003 vaccine, or any significant delays in doing so, will have a material adverse effect on our business, result of operations and financial condition.
    
We have invested a significant portion of our efforts and financial resources in the development of the GEN-003 vaccine for genital herpes, the only product candidate we have that is currently in an active clinical development. Our ability to generate product revenue depends heavily on the successful development and commercialization of GEN-003. The successful development and commercialization of GEN-003 will depend on several factors, including the following:

Successful completion of our ongoing and additional clinical studies of GEN-003;

Obtaining marketing approvals from regulatory authorities for GEN-003;

Establishing manufacturing and commercialization arrangements between ourselves and third parties;

A continued acceptable safety and efficacy profile of GEN-003; and

The availability of reimbursement to patients from healthcare payors for GEN-003.

Any failure to successfully develop or commercialize GEN-003 or any significant delays in doing so will have a material adverse effect on our business, results of operations and financial condition.

Because our active product candidate is in an early stage of development, there is a high risk of failure, and we may never succeed in developing marketable products or generating product revenue.

Our existing encouraging non-clinical and clinical results for GEN-003 are not necessarily predictive of the final results of our ongoing or future clinical trials. Success in non-clinical studies may not be predictive of similar results in humans during clinical trials, and successful results from early or small clinical trials of a vaccine candidate may not be replicated in later and larger clinical trials. Among other reasons for the potential failure of earlier, smaller clinical trials to be replicated in later, larger clinical trials is the fact that manufacturing scale up is necessary to prepare for Phase 3 development and commercialization. While our Phase 2b trial utilizes a formulation of GEN-003 manufactured using commercially-scalable processes, GEN-003 requires complex manufacturing processes, and scaling up these processes can cause changes in the product that may not be apparent until the product is further tested as part of our planned Phase 3 trials.

If the results of our ongoing or future clinical trials are inconclusive with respect to the efficacy of our product candidates or if we do not meet our clinical endpoints with statistical significance or if there are safety concerns or AEs associated with our product candidates, we may be prevented or delayed in obtaining marketing approval for our product candidates. Alternatively, even if we obtain regulatory approval, that approval may be for indications or patient populations that are not as broad as intended or desired or may require labeling that includes significant use or distribution restrictions or safety warnings. We may also be required to perform additional or unanticipated clinical trials to obtain approval or be subject to additional post-marketing testing requirements to maintain regulatory approval. In addition, regulatory authorities may

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withdraw their approval of the product or impose restrictions on its distribution in the form of a modified risk evaluation and mitigation strategy.

In addition to product candidates being developed in our non-clinical and clinical programs, we are expending resources in our immuno-oncology program. Our first program established is GEN-009, a neoantigen cancer vaccine product candidate. GEN-009 is at an early stage and our research efforts to move this candidate to clinical testing, or to identify and develop other product candidates, may not be successful. Furthermore, we need to develop the supply chain for any product candidates we identify.

If we do not obtain regulatory approval for our current and future product candidates, our business will be adversely affected.

Our product candidates are subject to extensive governmental regulations relating to, among other things, research, clinical trials, manufacturing, import, export and commercialization. In order to obtain regulatory approval for the commercial sale of any product candidate, we must demonstrate through extensive non-clinical studies and clinical trials that the product candidate is safe and effective for use in each target indication. Clinical trials are expensive, time-consuming and uncertain as to outcome. We may gain regulatory approval for GEN-003 or our other current or potential future clinical and non-clinical product candidates in some but not all of the territories available or some but not all of the target indications, resulting in limited commercial opportunity for the approved vaccine or immunotherapy, or we may never obtain regulatory approval for these product candidates for any indication in any jurisdiction.

We may find it difficult to enroll patients in our clinical trials, which could delay or prevent clinical trials of our product candidates.

Identifying and qualifying patients to participate in clinical trials of our product candidates is critical to our success. The timing of our clinical trials depends on the speed at which we can recruit patients to participate in testing our product candidates. If patients are unwilling to participate in our studies because of negative publicity from AEs in the biotechnology industries or for other reasons, including competitive clinical trials for similar patient populations, the timeline for recruiting patients, conducting studies and obtaining regulatory approval of potential products may be delayed or prevented. These delays could result in increased costs, delays in advancing our product development, delays in testing the effectiveness of our technology or termination of the clinical trials altogether.

We may not be able to identify, recruit and enroll a sufficient number of patients, or those with required or desired characteristics to achieve diversity in a study, to complete our clinical trials in a timely manner. Patient enrollment is affected by factors including:

severity of the disease under investigation;
design of the study protocol;
size of the patient population;
eligibility criteria for the trial in question;
perceived risks and benefits of the product candidate under study;
proximity and availability of clinical trial sites for prospective patients;
availability of competing therapies and clinical trials;
efforts to facilitate timely enrollment in clinical trials;
patient referral practices of physicians; and
ability to monitor patients adequately during and after treatment.
We may not be able to initiate or continue clinical trials if we cannot enroll a sufficient number of eligible patients to participate in the clinical trials required by regulatory agencies. If we have difficulty enrolling a sufficient number of patients to conduct our clinical trials as planned, we may need to delay, limit or terminate ongoing or planned clinical trials, any of which would have an adverse effect on our business.


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We may not be able to comply with requirements of foreign jurisdictions in conducting trials outside of the United States.

To date, we have not conducted any clinical trials for GEN-003 outside of the United States. Our ability to successfully initiate, enroll and complete a clinical trial in any foreign country, should we attempt to do so, is subject to numerous risks unique to conducting business in foreign countries, including:
difficulty in establishing or managing relationships with contract research organizations ("CROs") and physicians;
different standards for the conduct of clinical trials;
our inability to locate qualified local consultants, physicians and partners;
the potential burden of complying with a variety of foreign laws, medical standards and regulatory requirements, including the regulation of pharmaceutical and biotechnology products and treatment; and
the acceptability of data obtained from studies conducted outside the United States to the FDA in support of a BLA.
If we fail to successfully meet requirements for the conduct of clinical trials outside of the United States, we may be delayed in obtaining, or be unable to obtain, regulatory approval for our product candidates.

We may encounter substantial delays in our clinical trials or we may fail to demonstrate safety and efficacy to the satisfaction of applicable regulatory authorities.

Before obtaining marketing approval from regulatory authorities for the sale of our product candidates, we must conduct extensive clinical trials to demonstrate the safety and efficacy of the product candidates for the intended indications. Clinical testing is expensive, time-consuming and uncertain as to outcome. We cannot guarantee that clinical trials will be conducted as planned or completed on schedule, if at all. A failure of one or more clinical trials can occur at any stage of testing. Events that may prevent successful or timely completion of clinical development include:
delays by us in reaching a consensus with regulatory agencies on trial design, including our end of Phase 2 meeting for GEN-003 expected to occur in the first quarter of 2017;
delays in reaching agreement on acceptable terms with prospective CROs and clinical trial sites;
delays in obtaining required IRB approval at each clinical trial site;
imposition of a clinical hold by regulatory agencies or an IRB for any reason, including safety concerns raised by other clinical trials of similar vaccines that may reflect an unacceptable risk with GEN-003 or after an inspection of clinical operations or trial sites;
failure to perform in accordance with the FDA’s GCPs or applicable regulatory guidelines in other countries;
delays in the testing, validation, manufacturing and delivery of the product candidates to the clinical sites;
delays caused by patients not completing participation in a trial or not returning for post-treatment follow-up;
clinical trial sites or patients dropping out of a trial or failing to complete dosing;
occurrence of serious AEs in clinical trials that are associated with the product candidates that are viewed to outweigh its potential benefits; or
changes in regulatory requirements and guidance that require amending or submitting new clinical protocols.
Delays, including delays caused by the above factors, can be costly and could negatively affect our ability to complete a clinical trial. We intend to file an IND for a product candidate in our immuno-oncology program before the end of 2017, but we have experienced clinical holds on IND submissions in the past. Our IND for GEN-003 was subject to a clinical hold from January 2012 to July 2012. In our original IND submission, we described a finding of osteonecrosis (microscopic evidence of bone and bone marrow death) in a toxicity study of GEN-003 conducted in mice. Because this finding was not present in toxicity studies conducted in other species, we reasoned that this was a mouse-specific finding and did not indicate a risk to humans in clinical trials. As the FDA provided us with several options that would resolve this issue to their satisfaction, we conducted an additional toxicity study in a highly relevant species (non-human primate) that would be more representative of a risk to humans. Since no bone or bone marrow toxicity was observed in this additional study, the FDA subsequently lifted the clinical hold, allowing us to proceed with the first study in humans of GEN-003.

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We cannot give any assurance that we will be able to resolve any future clinical holds imposed by the FDA or other regulatory authorities outside of the United States, or any delay caused by other factors described above or any other factors, on a timely basis or at all. If we are not able to successfully initiate and complete subsequent clinical trials, we will not be able to obtain regulatory approval and will not be able to commercialize our product candidates.

Our active product candidate, GEN-003, and our current and future potential product candidates, including any arising out of our immuno-oncology program, are or will be based on T cell activation, which is a novel approach for vaccines, immunotherapies and medical treatments. Consequently, it may be difficult for us to predict the time and cost of product development. Unforeseen problems with the T cell approach to vaccines and immunotherapies may prevent further development or approval of our current and future product candidates. Because of the novelty of this approach, there may be unknown safety risks associated with the vaccines and immunotherapies that we develop. Regulatory agencies such as the FDA may require us to conduct extensive safety testing prior to approval to demonstrate a low risk of rare and severe AEs caused by the vaccines and immunotherapies. If approved, the novel mechanism of action of the vaccines may adversely affect physician and patient perception and uptake of our products.

We have concentrated our research and development efforts on T cell vaccine and immunotherapy technology, and our future success is highly dependent on the successful development of T cell vaccines and immunotherapies in general, and our active development product and current and future product candidates in particular. There can be no assurance that any development problems we or others researching T cell vaccines and immunotherapies may experience in the future will not cause significant delays or unanticipated costs, or that such development problems can be solved.

Public perception of vaccine safety issues, including adoption of novel vaccine mechanisms of action, may adversely influence willingness of subjects to participate in clinical trials, or if approved, of physicians to prescribe and of patients to receive novel vaccines.

Our active development product, GEN-003 includes a novel vaccine adjuvant and our other current and potential future product candidates may include one or more novel adjuvants, which may make it difficult for us to predict the time and cost of product development as well as the requirements the FDA or other regulatory agencies may impose to demonstrate the safety of such product candidates.

Novel vaccine adjuvants, included in some of our product candidates, may pose an increased safety risk to patients. Adjuvants are compounds that are added to vaccine antigens to enhance the activation and improve immune response and efficacy of vaccines. Development of vaccines with novel adjuvants requires evaluation in larger numbers of patients prior to approval than would be typical for therapeutic drugs. Guidelines for evaluation of vaccines with novel adjuvants have been established by the FDA and other regulatory bodies and expert committees. Our product candidates, including GEN-003, may include one or more novel vaccine adjuvants. Any vaccine, because of the presence of an adjuvant, may have side effects considered to pose too great a risk to patients to warrant approval of the vaccine. Traditionally, regulatory authorities have required extensive study of novel adjuvants because vaccines typically get administered to healthy populations, in particular infants, children and the elderly, rather than in people with disease. Such extensive study has often included long-term monitoring of safety in large general populations that has at times exceeded 10,000 subjects. This contrasts with the few thousand subjects typically necessary for approval of novel therapeutics. Although GEN-003 is being developed as a treatment, and therefore is not expected to be administered to uninfected subjects, regulators nonetheless may require us to amass a prophylactic vaccine-like safety database. To date, the FDA and other major regulatory agencies have only approved vaccines containing five adjuvants, which makes it difficult to determine how long it will take or how much it will cost to obtain regulatory approvals for our product candidates in the United States or elsewhere.

If we fail to obtain regulatory approval in jurisdictions outside the United States, we will not be able to market our products in those jurisdictions.

We intend to market our product candidates, if approved, in international markets. Such marketing will require separate regulatory approvals in each market and compliance with numerous and varying regulatory requirements. The approval procedures vary among countries and may involve requirements for additional testing, and the time required to obtain approval may differ from that required to obtain FDA approval. In addition, in many countries outside the United States, a vaccine must be approved for reimbursement before it can be approved for sale in that country. In some cases, the price that we intend to charge for our vaccine is also subject to approval. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval. We may not obtain foreign regulatory approvals on a timely basis, if at all. We

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may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our vaccines in any market.

Even if we receive regulatory approval for our product candidates, such vaccines and immunotherapies will be subject to ongoing regulatory review, which may result in significant additional expense. Additionally, our product candidates, including our active development product, GEN-003, and any other current or potential future vaccine or immunotherapy product candidates, if approved, could be subject to labeling and other restrictions, and we may be subject to penalties if we fail to comply with regulatory requirements or experience unanticipated problems with our products.

Any regulatory approvals that we receive for our product candidates may also be subject to limitations on the approved indications for which the product may be marketed or to conditions of approval, or contain requirements for potentially costly post-marketing testing, including Phase 4 clinical trials, and surveillance to monitor the safety and efficacy of the vaccine or immunotherapy potentially over many years. In addition, if the FDA approves any of our product candidates, the manufacturing processes, labeling, packaging, distribution, AE reporting, storage, advertising, promotion and recordkeeping for the product will be subject to extensive and ongoing regulatory requirements. These requirements include submissions of safety and other post-marketing information and reports, registration, as well as continued compliance with current good manufacturing practice ("cGMP"), and GCP, for any clinical trials that we conduct post-approval.

Later discovery of previously unknown problems with an approved product, including AEs of unanticipated severity or frequency, or with manufacturing operations or processes, or failure to comply with regulatory requirements, may result in, among other things:
restrictions on the marketing or manufacturing of the product, withdrawal of the product from the market, or voluntary or mandatory product recalls;
fines, warning letters, or holds on clinical trials;
refusal by the FDA to approve pending applications or supplements to approved applications filed by us, or suspension or revocation of product license approvals;
product seizure or detention, or refusal to permit the import or export of products; and
injunctions or the imposition of civil, criminal and/or administrative penalties, damages, monetary fines, disgorgement, exclusion from participation in Medicare, Medicaid and other federal health care programs, and curtailment or restructuring of our operations.
The FDA’s policies may change and additional government regulations may be enacted that could affect regulatory approval that we have received for our product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or not able to maintain regulatory compliance, we may lose any marketing approval that may have been obtained and we may not achieve or sustain profitability, which would adversely affect our business.

Risks Related to Our Reliance on Third Parties

We rely on third parties to conduct non-clinical studies and clinical trials for our product candidates, including our active development product, GEN-003, and any other current or future product candidates, and if they do not properly and successfully perform their obligations to us, we may not be able to obtain regulatory approvals for our product candidates.

We rely on third party CROs and other third parties to assist in managing, monitoring and otherwise carrying out our GEN-003 clinical trials. We expect to continue to rely on third parties, such as CROs, clinical data management organizations, medical institutions and clinical investigators, to conduct our clinical trials. We compete with many other companies for the resources of these third parties. The third parties on whom we rely generally may terminate their engagements at any time, and having to enter into alternative arrangements would delay development and commercialization of our product candidates.

Our reliance on these third parties for research and development activities will reduce our control over these activities but will not relieve us of our responsibilities. For example, the FDA and foreign regulatory authorities require compliance with regulations and standards, including GCP, for designing, conducting, monitoring, recording, analyzing, and reporting the results of clinical trials to assure that the data and results are credible and accurate and that the rights, integrity and confidentiality of

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trial participants are protected. Although we rely on third parties to conduct our clinical trials, we are responsible for ensuring that each of these clinical trials is conducted in accordance with its general investigational plan and protocol.

Furthermore, these third parties may also have relationships with other entities, some of which may be our competitors. If these third parties do not successfully carry out their duties under their agreements, if the quality or accuracy of the data they obtain is compromised due to their failure to adhere to clinical trial protocols or to regulatory requirements, or if they otherwise fail to comply with clinical trial protocols or meet expected deadlines, the clinical trials of our product candidates may not meet regulatory requirements. If clinical trials do not meet regulatory requirements or if these third parties need to be replaced, non-clinical development activities or clinical trials may be extended, delayed, suspended or terminated. If any of these events occur, we may not be able to obtain regulatory approval of our product candidates on a timely basis or at all.

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

We rely on third parties to conduct some or all aspects of our product manufacturing, and these third parties may not perform satisfactorily.

We do not have any manufacturing facilities or personnel. We do not expect to independently conduct all aspects of our product manufacturing. We currently rely, and expect to rely, on third parties with respect to manufacturing, including under our agreements with Fujifilm and Novavax. For example, we rely on third party suppliers and manufacturers to manufacture and supply vaccines for our GEN-003 clinical trials. This reliance on third parties increases the risk that we will not have sufficient quantities of our product candidates or products or such quantities at an acceptable cost or quality, which could delay, prevent or impair our development or commercialization efforts.

Any of these third parties may terminate their engagement with us at any time. If we need to enter into alternative arrangements, it could delay our product development activities. Our reliance on these third parties for manufacturing activities will reduce our control over these activities but will not relieve us of our responsibility to ensure compliance with all required regulations regarding manufacturing.

Reliance on third party manufacturers entails risks to which we would not be subject if we manufactured the product candidates ourselves, including:
the inability to negotiate manufacturing agreements with third parties under commercially reasonable terms;
reduced control as a result of using third party manufacturers for all aspects of manufacturing activities, including regulatory compliance and quality assurance;
termination or nonrenewal of manufacturing agreements with third parties in a manner or at a time that is costly or damaging to us;
the unavailability of a manufacturer that is capable of, or that has the capacity to, manufacture our clinical supply that results in delays or additional manufacturing costs;
the possible misappropriation of our proprietary information, including our trade secrets and know-how or infringement of third party intellectual property rights by our contract manufacturers; and
disruptions to the operations of our third party manufacturers or suppliers caused by conditions unrelated to our business or operations, including the bankruptcy of the manufacturer or supplier.
Any of these events could lead to clinical trial delays or failure to obtain regulatory approval, or affect our ability to successfully commercialize future products. Some of these events could be the basis for FDA action, including injunction, recall, seizure or total or partial suspension of production.

Third party manufacturers may not be able to comply with cGMP regulations or similar regulatory requirements outside the United States. Our failure, or the failure of our third party manufacturers, to comply with applicable regulations could result in sanctions being imposed on us, including clinical holds, fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates or products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of our products.


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Our product candidates and any products that we may develop may compete with other product candidates and products for access to manufacturing facilities. There are a limited number of manufacturers that operate under cGMP regulations and that might be capable of manufacturing for us.

Any performance failure on the part of our existing or future manufacturers could delay clinical development or marketing approval. We do not currently have arrangements in place for redundant supply or a second source for bulk drug substance. If our current contract manufacturers cannot perform as agreed, we may be required to replace such manufacturers. Although we believe that there are several potential alternative manufacturers who could manufacture our product candidates, we may incur added costs and delays in identifying and qualifying any such replacement.

Our current and anticipated future dependence upon others for the manufacture of our product candidates or products may adversely affect our future profit margins and our ability to commercialize any products that receive marketing approval on a timely and competitive basis.

If we are unable to manufacture our products in sufficient quantities, or at sufficient yields, or are unable to obtain regulatory approvals for a manufacturing facility for our products, we may experience delays in product development, clinical trials, regulatory approval and commercial distribution.

Completion of our clinical trials and commercialization of our product candidates require access to, or development of, facilities to manufacture our product candidates at sufficient yields and at commercial-scale. We have no experience manufacturing, or managing third parties in manufacturing, any of our product candidates in the volumes that will be necessary to support large-scale clinical trials or commercial sales. Efforts to establish these capabilities may not meet initial expectations as to scheduling, scale-up, reproducibility, yield, purity, cost, potency or quality.

We expect to rely on third-parties for the manufacture of clinical and, if necessary, commercial quantities of our product candidates. These third-party manufacturers must also receive FDA approval before they can produce clinical material or commercial products. Our products may be in competition with other products for access to these facilities and may be subject to delays in manufacture if third-parties give other products greater priority. We may not be able to enter into any necessary third-party manufacturing arrangements on acceptable terms, or on a timely basis. In addition, we may have to enter into technical transfer agreements and share our know-how with the third-party manufacturers, which can be time-consuming and may result in delays.

Our reliance on contract manufacturers may adversely affect our operations or result in unforeseen delays or other problems beyond our control. Because of contractual restraints and the limited number of third-party manufacturers with the expertise, required regulatory approvals and facilities to manufacture our bulk vaccines on a commercial-scale, replacement of a manufacturer may be expensive and time-consuming and may cause interruptions in the production of our vaccine. A third-party manufacturer may also encounter difficulties in production. These problems may include:
difficulties with production costs, scale-up and yields;
unavailability of raw materials and supplies;
insufficient quality control and assurance;
shortages of qualified personnel;
failure to comply with strictly enforced federal, state and foreign regulations that vary in each country where product might be sold; and
lack of capital funding.
As a result, any delay or interruption could have a material adverse effect on our business, financial condition, results of operations and cash flows.


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We may not be successful in establishing and maintaining strategic partnerships, which could adversely affect our ability to develop and commercialize products.

A part of our strategy is to evaluate and, as deemed appropriate, enter into partnerships in the future when strategically attractive, including potentially with major biotechnology or pharmaceutical companies. We face significant competition in seeking appropriate partners for our product candidates, and the negotiation process is time-consuming and complex. In order for us to successfully partner our product candidates, potential partners must view these product candidates as economically valuable in markets they determine to be attractive in light of the terms that we are seeking and other available products for licensing by other companies. Even if we are successful in our efforts to establish strategic partnerships, the terms that we agree upon may not be favorable to us, and we may not be able to maintain such strategic partnerships if, for example, development or approval of a product is delayed or sales of an approved product are disappointing. Any delay in entering into strategic partnership agreements related to our product candidates could delay the development and commercialization of our product candidates and reduce their competitiveness even if they reach the market.

In addition, our strategic partners may breach their agreements with us, and we may not be able to adequately protect our rights under these agreements. Furthermore, our strategic partners will likely negotiate for certain rights to control decisions regarding the development and commercialization of our product candidates, if approved, and may not conduct those activities in the same manner as we would do so.

If we fail to establish and maintain strategic partnerships related to our product candidates, we will bear all of the risk and costs related to the development of any such product candidate, and we may need to seek additional financing, hire additional employees and otherwise develop expertise which we do not have and for which we have not budgeted. This could negatively affect the development of any unpartnered product candidate.

Risks Related to Our Intellectual Property

If we are unable to obtain or protect intellectual property rights related to our product candidates, we may not be able to compete effectively in our markets.

We rely upon a combination of patents, patent applications, know-how and confidentiality agreements to protect the intellectual property related to our platform technology and product candidates. The patent position of biotechnology companies is generally uncertain because it involves complex legal and factual considerations. The standards applied by the U.S. PTO and foreign patent offices in granting patents are not always applied uniformly or predictably. For example, there is no uniform worldwide policy regarding patentable subject matter or the scope of claims allowable in biotechnology patents. The patent applications that we own or in-license may fail to result in issued patents with claims that cover our discovery platform or product candidates in the United States or in other countries. There is no assurance that all potentially relevant prior art relating to our patents and patent applications or those of our licensors has been found, and prior art that we have not disclosed could be used by a third party to invalidate a patent or prevent a patent from issuing from a pending patent application. Even if patents do successfully issue and even if such patents cover our discovery platform or product candidates, third parties may challenge their validity, enforceability or scope, which may result in such patents being narrowed or invalidated. Furthermore, even if they are unchallenged, our patents and patent applications, or those of our licensors, may not adequately protect our platform technology, provide exclusivity for our product candidates, prevent others from designing around our patents with similar products, or prevent others from operating in jurisdictions in which we did not pursue patent protection. Any of these outcomes could impair our ability to prevent competition from third parties, which may have an adverse impact on our business.

If patent applications we hold or have in-licensed with respect to our platform or product candidates fail to issue, if their breadth or strength of protection is threatened, or if they fail to provide meaningful exclusivity for our product candidates or ATLAS discovery platform, it could dissuade companies from collaborating with us. We or our licensors have filed several patent applications covering aspects of our product candidates. We cannot offer any assurances about which, if any, patents will be issued, the breadth of any such patents or whether any issued patents will be found invalid and unenforceable or will be challenged by third parties. Any successful opposition to these patent applications, or patents that may issue from them, or to any other patent applications or patents owned by or licensed to us, could deprive us of rights necessary for the successful commercialization of any product candidate that we may develop. Since patent applications in the United States and most other countries are confidential for a period of time after filing, and some remain so until issued, we cannot be certain that we or our licensors were the first to file a patent application relating to any particular aspect of a product candidate. Furthermore, if third parties have filed such patent applications, an interference proceeding in the United States can be initiated by such third party, or by the U.S. PTO itself, to determine who was the first to invent any of the subject matter covered by the patent claims of our applications.

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In the United States, for patent applications filed prior to March 16, 2013, assuming the other requirements for patentability are met, the first to invent is entitled to the patent, while outside the United States, the first to file a patent application is entitled to the patent. On March 16, 2013, the United States transitioned to a ‘first to file’ system more like that in the rest of the world in that the first inventor to file a patent application is entitled to the patent. Under either the prior system or current one, third parties are allowed to submit prior art prior to the issuance of a patent by the U.S. PTO, and may become involved in opposition, derivation, reexamination,  inter partes  review or interference proceedings challenging our patent rights or the patent rights of others. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, our patent rights, which could adversely affect our competitive position with respect to third parties.

In addition, patents have a limited lifespan. In most countries, including the United States, the natural expiration of a patent is 20 years from the date it is filed. Various extensions of patent term may be available in particular countries, however in all circumstances the life of a patent, and the protection it affords, has a limited term. If we encounter delays in obtaining regulatory approvals, the period of time during which we could market a product under patent protection could be reduced. We expect to seek extensions of patent terms where these are available in any countries where we are prosecuting patents. Such possible extensions include those permitted under the Drug Price Competition and Patent Term Restoration Act of 1984 in the United States, which permits a patent term extension of up to five years to cover an FDA-approved product. However, the applicable authorities, including the FDA in the United States, and any equivalent regulatory authority in other countries, may not agree with our assessment of whether such extensions are available, and may refuse to grant extensions to our patents, or may grant more limited extensions than we request. If this occurs, our competitors may be able to take advantage of our investment in development and clinical trials by referencing our clinical and non-clinical data, and then may be able to launch their product earlier than might otherwise be the case.

Any loss of, or failure to obtain, patent protection could have a material adverse impact on our business. We may be unable to prevent competitors from entering the market with a product that is similar to or the same as our products.

We may become involved in lawsuits to protect or enforce our intellectual property, which could be expensive, time consuming and unsuccessful.

Competitors may infringe our patents or misappropriate or otherwise violate our intellectual property rights. To counter infringement or unauthorized use, litigation may be necessary to enforce or defend our intellectual property rights, to protect our trade secrets and/or to determine the validity and scope of our own intellectual property rights or the proprietary rights of others. Such litigation can be expensive and time consuming. Many of our current and potential competitors have the ability to dedicate substantially greater resources to litigate intellectual property rights than we can. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property. Litigation could result in substantial costs and diversion of management resources, which could harm our business and financial results. In addition, in an infringement proceeding, a court may decide that a patent owned by or licensed to us is invalid or unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation proceeding could put one or more of our patents at risk of being invalidated, held unenforceable or interpreted narrowly. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation.

Third-party claims of intellectual property infringement or misappropriation may prevent or delay our development and commercialization efforts.

Our commercial success depends in part on our ability to develop, manufacture, market and sell our product candidates, and to use our or our licensors’ proprietary technologies without infringing the patents and proprietary rights of third parties. There is a substantial amount of litigation, both within and outside the United States, involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries, including patent infringement lawsuits, interferences, oppositions, reexamination, and  inter partes  review proceedings before the U.S. PTO and corresponding foreign patent offices. Numerous U.S. and foreign issued patents and pending patent applications owned by third parties exist in the fields in which we are developing and may develop our product candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that our product candidates may be subject to claims of infringement of the patent rights of third parties.

Third parties may assert that we are employing their proprietary technology without authorization. There may be third-party patents or patent applications with claims for example to materials, formulations, methods of manufacture, methods of analysis, and/or methods for treatment related to the use or manufacture of our products or product candidates. In some cases,

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we may have failed to identify such relevant third-party patents or patent applications. For example, applications filed before November 29, 2000 and certain applications filed after that date that will not be filed outside the United States remain confidential until patents issue. Except for the preceding exceptions, patent applications in the United States and elsewhere are generally published only after a waiting period of approximately 18 months after the earliest filing. Therefore, patent applications covering our platform technology or our products or product candidates could have been filed by others without our knowledge. Additionally, pending patent applications which have been published can, subject to certain limitations, be later amended in a manner that could cover our platform technologies, our products or product candidates and/or the use, analysis, and/or manufacture of our product candidates.

If any third-party patents were held by a court of competent jurisdiction to cover aspects of our materials, formulations, methods of manufacture, methods of analysis, and/or methods for treatment, the holders of any such patents would be able to block our ability to develop and commercialize the applicable product candidate until such patent expired or unless we obtain a license. Such licenses may not be available on acceptable terms, if at all. Even if we were able to obtain a license, the rights may be nonexclusive, which could result in our competitors gaining access to the same intellectual property. Ultimately, we could be prevented from commercializing a product, or be forced to cease some aspect of our business operations, if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses on acceptable terms.

Parties making claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize one or more of our product candidates. Defending against claims of patent infringement or misappropriation of trade secrets could be costly and time consuming, regardless of the outcome. Thus, even if we were to ultimately prevail, or to settle at an early stage, such litigation could burden us with substantial unanticipated costs. In addition, litigation or threatened litigation could result in significant demands on the time and attention of our management team, distracting them from the pursuit of other company business. In the event of a successful claim of infringement against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, pay royalties, redesign our infringing products or obtain one or more licenses from third parties, which may be impossible or require substantial time and monetary expenditure.

We may face a claim of misappropriation if a third party believes that we inappropriately obtained and used trade secrets of such third party. If we are found to have misappropriated a third party’s trade secrets, we may be prevented from further using such trade secrets, limiting our ability to develop our product candidates, and we may be required to pay damages. During the course of any patent or other intellectual property litigation, there could be public announcements of the results of hearings, rulings on motions, and other interim proceedings in the litigation. If securities analysts or investors regard these announcements as negative, the perceived value of our products, programs, or intellectual property could be diminished. Accordingly, the market price of our common stock may decline.

We have in-licensed a portion of our intellectual property, and, if we fail to comply with our obligations under these arrangements, we could lose such intellectual property rights or owe damages to the licensor of such intellectual property.

We are a party to a number of license and collaboration agreements that are important to our business, and we may enter into additional license or collaboration agreements in the future. Our discovery platform is built, in part, around patents exclusively in-licensed from academic or research institutions. Certain of our in-licensed intellectual property also covers, or may cover GEN-003 and other current or future product candidates. See “Business — In-License Agreements” and “Business — Other Collaborations” for a description of our outstanding license and collaboration agreements with UC, Harvard, Children’s, Novavax, and the DFCI.

Our existing license agreements impose, and we expect that future license agreements will impose, various diligence, milestone payment, royalty and other obligations on us. If there is any conflict, dispute, disagreement or issue of non-performance between us and our licensing partners regarding our rights or obligations under the license agreements, including any such conflict, dispute or disagreement arising from our failure to satisfy payment obligations under any such agreement, we may owe damages, our licensor may have a right to terminate the affected license, and our ability to utilize the affected intellectual property in our drug discovery and development efforts, and our ability to enter into collaboration or marketing agreements for an affected product candidate, may be adversely affected.


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Confidentiality agreements with employees and third parties may not prevent unauthorized disclosure of proprietary information.

In addition to the protection afforded by patents, we rely on confidentiality agreements to protect proprietary know-how that may not be patentable or that we may elect not to patent, processes for which patents are difficult to enforce and any other elements of our platform technology and discovery and development processes that involve proprietary know-how, information or technology that is not covered by patents. We seek to protect our proprietary technology and processes, in part, by entering into confidentiality agreements with our employees, consultants, and outside scientific advisors, contractors and collaborators. Although we use reasonable efforts to protect our know-how, our employees, consultants, contractors, or outside scientific advisors might intentionally or inadvertently disclose our know-how information to competitors. In addition, competitors may otherwise gain access to our know-how or independently develop substantially equivalent information and techniques.

Enforcing a claim that a third party illegally obtained and is using any of our know-how is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States sometimes are less willing than U.S. courts to protect know-how. Misappropriation or unauthorized disclosure of our know-how could impair our competitive position and may have a material adverse effect on our business.

Risks Related to Commercialization of Our Product Candidates

Our future commercial success depends upon attaining significant market acceptance of our product candidates, if approved, among physicians, patients, third-party payors and others in the medical community.

Even if we obtain marketing approval for GEN-003 or any other products that we may develop or acquire in the future, the product may not gain market acceptance among physicians, third-party payors, patients and others in the medical community. For example, we currently expect that the initial administration of GEN-003 will be though three injections and future maintenance doses may be required. Physicians or patients may not accept this product as a result of this anticipated dosing requirement. In addition, market acceptance of any approved products depends on a number of other factors, including:
the efficacy and safety of the product, as demonstrated in clinical trials;
the clinical indications for which the product is approved and the label approved by regulatory authorities for use with the product, including any warnings that may be required on the label;
acceptance by physicians and patients of the product as a safe and effective treatment and the willingness of the target patient population to try new therapies and of physicians to prescribe new therapies;
the cost, safety and efficacy of treatment in relation to alternative treatments;
the availability of adequate course and reimbursement by third-party payors and government authorities;
relative convenience and ease of administration;
the prevalence and severity of adverse side effects;
the effectiveness of our sales and marketing efforts; and
the restrictions on the use of our products together with other medications, if any.
Market acceptance is critical to our ability to generate significant revenue. Any product candidate, if approved and commercialized, may be accepted in only limited capacities or not at all. If any approved products are not accepted by the market to the extent that we expect, we may not be able to generate significant revenue and our business would suffer.

If we are unable to establish sales, marketing and distribution capabilities, we may not be successful in commercializing our product candidates if and when they are approved.

We do not have a sales or marketing infrastructure and have no experience in the sale, marketing or distribution of pharmaceutical products. To achieve commercial success for any product for which we have obtained marketing approval, we will need to establish a sales and marketing organization.


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In the future, we expect to build a focused sales and marketing infrastructure to market or co-promote some of our product candidates in the United States, if and when they are approved. There are risks involved with establishing our own sales, marketing and distribution capabilities. For example, recruiting and training a sales force is expensive and time consuming and could delay any product launch. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel.

Factors that may inhibit our efforts to commercialize our products on our own include:
our inability to recruit, train and retain adequate numbers of effective sales and marketing personnel;
the inability of sales personnel to obtain access to physicians;
the lack of adequate numbers of physicians to prescribe any future products;
the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and
unforeseen costs and expenses associated with creating an independent sales and marketing organization.
If we are unable to establish our own sales, marketing and distribution capabilities, and instead enter into arrangements with third parties to perform these services, our product revenues and our profitability, if any, are likely to be lower than if we were to market, sell and distribute any products that we develop ourselves. In addition, we may not be successful in entering into arrangements with third parties to sell, market and distribute our product candidates or may be unable to do so on terms that are favorable to us. We likely will have little control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our products effectively. If we do not establish sales, marketing and distribution capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in commercializing our product candidates.

Coverage and reimbursement may be limited or unavailable in certain market segments for our product candidates, which could make it difficult for us to sell our products profitably.

Market acceptance and sales of any approved products will depend significantly on the availability of adequate coverage and reimbursement from third-party payors and may be affected by existing and future health care reform measures. Third-party payors, such as government health care programs, private health insurers and health maintenance organizations, decide which drugs they will provide coverage for and establish reimbursement levels. Coverage and reimbursement decisions by a third-party payor may depend upon a number of factors, including the third-party payor’s determination that use of a product is:
a covered benefit under its health plan;
safe, effective and medically necessary;
appropriate for the specific patient;
cost-effective; and
neither experimental nor investigational.
Third-party payors, whether foreign or domestic, or governmental or commercial, are developing increasingly sophisticated methods of controlling health care costs. Coverage and reimbursement can vary significantly from payor to payor. As a result, obtaining coverage and reimbursement approval for a product from each government and other third-party payor will require us to provide supporting scientific, clinical and cost-effectiveness data for the use of our products to each payor separately, with no assurance that we will be able to provide data sufficient to gain acceptance with respect to coverage and reimbursement. We cannot be sure that coverage or adequate reimbursement will be available for any of our product candidates. Also, we cannot be sure that coverage determinations or reimbursement amounts will not reduce the demand for, or the price of, our products. If reimbursement is not available or is available only to limited levels, we may not be able to commercialize certain of our products. In addition, in the United States third-party payors are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement of new drugs. As a result, significant uncertainty exists as to whether and how much third-party payors will reimburse patients for their use of newly approved drugs, which in turn will put pressure on the pricing of drugs.

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Price controls may be imposed, which may adversely affect our future profitability.

In international markets, reimbursement and health care payment systems vary significantly by country, and many countries have instituted price ceilings on specific products and therapies. In some countries, particularly member states of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after receipt of marketing approval for a product. In addition, there can be considerable pressure by governments and other stakeholders on coverage, prices and reimbursement levels, including as part of cost containment measures. Political, economic and regulatory developments may further complicate pricing negotiations, and pricing negotiations may continue after coverage and reimbursement has been obtained. Reference pricing used by various European Union member states and parallel distribution, or arbitrage between low-priced and high-priced member states, can further reduce prices. In some countries, we may be required to conduct a clinical trial or other studies that compare the cost-effectiveness of our product candidates to other available vaccines in order to obtain or maintain coverage, reimbursement or pricing approval. Publication of discounts by third-party payors or authorities may lead to further pressure on the prices or reimbursement levels within the country of publication and other countries. There can be no assurance that our vaccine candidates will be considered cost-effective by third-party payors, that an adequate level of reimbursement will be available or that the third-party payors’ reimbursement policies will not adversely affect our ability to sell our products profitably. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be adversely affected.

The impact of recent health care reform legislation and other changes in the health care industry and in health care spending on us is currently unknown, and may adversely affect our business model.

In the United States, and in some foreign jurisdictions, the legislative landscape continues to evolve. Our revenue prospects could be affected by changes in health care spending and policy in the United States and abroad. We operate in a highly regulated industry and new laws or judicial decisions, or new interpretations of existing laws or decisions, related to health care availability, the method of delivery or payment for health care products and services could negatively impact our business, operations and financial condition. There is significant interest in promoting health care reform, as evidenced by the enactment in the United States of the Patient Protection and Affordable Care Act (the "ACA"), as amended by the Health Care and Education Reconciliation Act in 2010, as well as the pending proposals to eliminate or significantly modify the ACA. It is likely that federal and state legislatures within the United States and foreign governments will continue to consider changes to existing health care legislation.
Modifications to or repeal of all or certain provisions of the ACA are expected as a result of the outcome of the recent presidential elections and Republications maintaining control of Congress, consistent with statements made by Donald Trump and members of Congress during the presidential campaign and following the election. We cannot predict the ultimate content, timing or effect of any changes to the ACA or other federal and state reform efforts. There is no assurance that federal or state health care reform will not adversely affect our business and financial results, and we cannot predict how future federal or state legislative, judicial or administrative changes relating to healthcare reform will affect our business.
The continuing efforts of the government, insurance companies, managed care organizations and other payors of health care services to contain or reduce costs of health care may adversely affect:
the demand for any drug products for which we may obtain regulatory approval;
our ability to set a price that we believe is fair for our products;
our ability to obtain coverage and reimbursement approval for a product;
our ability to generate revenues and achieve or maintain profitability; and
the level of taxes that we are required to pay.
We face substantial competition, which may result in others discovering, developing or commercializing products before, or more successfully, than we do.

The development and commercialization of new drug products is highly competitive. Our future success depends on our ability to demonstrate and maintain a competitive advantage with respect to the design, development and commercialization of our product candidates. Our objective is to design, develop and commercialize new products with superior efficacy, convenience, tolerability and safety. In many cases, the products that we commercialize will compete with existing, market-leading products.

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Oral antivirals, such as valacyclovir and famciclovir, are products currently approved to treat patients with genital herpes. GEN-003, our active development product and lead product candidate, will compete with these products, if approved. In addition, one or more products not currently approved for the treatment of genital herpes, including pritelivir (AiCuris) and HerpV (Agenus) and other vaccines in development by Admedus, Ltd and Vical Incorporated may in the future be granted marketing approval for the treatment of genital herpes or other conditions for which GEN-003 might be approved.

Other companies that are seeking to identify antigens for the development of vaccines and T cell receptor therapies using predictive tools include Foundation Medicine, Neon Therapeutics, Gritstone Oncology, Immatics Biotechnologies GmbH, Immunocore Limited, and Adaptive Biotechnologies.

Many of our potential competitors have significantly greater financial, manufacturing, marketing, drug development, technical and human resources than we do. Large pharmaceutical companies, in particular, have extensive experience in clinical testing, including recruiting patients, obtaining regulatory approvals, recruiting patients and in manufacturing pharmaceutical products. Large and established companies such as Merck & Co., Inc., GlaxoSmithKline plc, Novartis, Inc., Sanofi Pasteur, SA, Pfizer Inc. and MedImmune, LLC (a subsidiary of AstraZeneca PLC), among others, compete in the vaccine market. In particular, these companies have greater experience and expertise in securing government contracts and grants to support their research and development efforts, conducting testing and clinical trials, obtaining regulatory approvals to market products, manufacturing such products on a broad scale and marketing approved products. These companies also have significantly greater research and marketing capabilities than we do and may also have products that have been approved or are in late stages of development, and have collaborative arrangements in our target markets with leading companies and research institutions. Established pharmaceutical companies may also invest heavily to accelerate discovery and development of novel compounds or to in-license novel compounds that could make the product that we develop obsolete. As a result of all of these factors, our competitors may succeed in obtaining patent protection and/or FDA approval or discovering, developing and commercializing products before we do. In addition, any new product that competes with an approved product must demonstrate compelling advantages in efficacy, convenience, tolerability and safety in order to overcome price competition and to be commercially successful. If we are not able to compete effectively against potential competitors, our business will not grow and our financial condition and operations will suffer.

Our products may cause undesirable side effects or have other properties that delay or prevent their regulatory approval or limit their commercial potential.

Undesirable side effects caused by our products or even competing products in development that utilize a common mechanism of action could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in the denial of regulatory approval by the FDA or other regulatory authorities and potential product liability claims. We are currently conducting Phase 2 clinical trials for GEN-003. Serious AEs deemed to be caused by our product candidates could have a material AE on the development of our product candidates and our business as a whole. The most common AEs to date in the clinical trial evaluating the safety and tolerability of GEN-003 have been fatigue, myalgia (muscle pain), pain tenderness and induration (inflammatory hardening of the skin). Our understanding of the relationship between GEN-003 and these events, as well as our understanding of AEs in future clinical trials of other product candidates, may change as we gather more information, and additional unexpected AEs may be observed.

If we or others identify undesirable side effects caused by any of our product candidates either before or after receipt of marketing approval, a number of potentially significant negative consequences could result, including:
our clinical trials may be put on hold;
we may be unable to obtain regulatory approval for our vaccine candidates;
regulatory authorities may withdraw approvals of our vaccines;
regulatory authorities may require additional warnings on the label;
a medication guide outlining the risks of such side effects for distribution to patients may be required;
we could be sued and held liable for harm caused to patients; and
our reputation may suffer.
Any of these events could prevent us from achieving or maintaining market acceptance of our products and could substantially increase commercialization costs.

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Risks Related to Our Indebtedness

Our level of indebtedness and debt service obligations could adversely affect our financial condition, and may make it more difficult for us to fund our operations.

In December 2015, we entered into an amendment (the "First Amendment") to our Loan Agreement (the "2014 Term Loan") with Hercules Technology Growth Capital, Inc. (“Hercules”). The First Amendment required us to draw an additional $5.0 million and permitted us to draw two additional $5.0 million tranches, which expired unused at December 15, 2016. At December 31, 2016 , $17.0 million was outstanding under the amended 2014 Term Loan. Principal payments are currently scheduled to begin July 1, 2017.

All obligations under our 2014 Term Loan are secured by substantially all of our existing property and assets, excluding our intellectual property and in-licensed technology. This indebtedness may create additional financing risk for us, particularly if our business or prevailing financial market conditions are not conducive to paying off or refinancing our outstanding debt obligations at maturity. This indebtedness could also have important negative consequences, including:

we will need to repay our indebtedness by making payments of interest and principal, which will reduce the amount of money available to finance our operations, our research and development efforts and other general corporate activities; and
 
our failure to comply with the restrictive covenants in our 2014 Term Loan could result in an event of default that, if not cured or waived, would accelerate our obligation to repay this indebtedness, and Hercules could seek to enforce its security interest in the assets securing such indebtedness.
 
To the extent additional debt is added to our current debt levels, the risks described above could increase.

We may not have cash available to us in an amount sufficient to enable us to make interest or principal payments on our indebtedness when due.

Failure to satisfy our current and future debt obligations under our 2014 Term Loan could result in an event of default and, as a result, Hercules could accelerate all of the amounts due. In the event of an acceleration of amounts due under our 2014 Term Loan as a result of an event of default, we may not have sufficient funds or may be unable to arrange for additional financing to repay our indebtedness. In addition, Hercules could seek to enforce its security interests in the assets securing such indebtedness.

We are subject to certain restrictive covenants which, if breached, could have a material adverse effect on our business and prospects.

Our 2014 Term Loan imposes operating and other restrictions on us. Such restrictions will affect, and in many respects limit or prohibit, our ability and the ability of any future subsidiary to, among other things:
dispose of certain assets;
change our lines of business;
engage in mergers or consolidations;
incur additional indebtedness;
create liens on assets;
pay dividends and make distributions or repurchase our capital stock; and
engage in certain transactions with affiliates.
Risks Related to Our Business and Industry

If we fail to attract and keep senior management and key scientific personnel, we may be unable to successfully develop our products, conduct our clinical trials and commercialize our product candidates.


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We are highly dependent on members of our senior management, including William Clark, our President and Chief Executive Officer, Seth Hetherington, M.D., our Chief Medical Officer, Jonathan Poole, our Chief Financial Officer, and Jessica Flechtner, Ph.D., our Chief Scientific Officer. The loss of the services of any of these persons could impede the achievement of our research, development and commercialization objectives. We have employment agreements with each of these members of senior management.

Recruiting and retaining qualified scientific, clinical, manufacturing, sales and marketing personnel will also be critical to our success. The loss of the services of our executive officers or other key employees could impede the achievement of our research, development and commercialization objectives and seriously harm our ability to successfully implement our business strategy. Furthermore, replacing executive officers and key employees may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to successfully develop, gain regulatory approval of and commercialize products. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate these key personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us. If we are unable to continue to attract and retain high quality personnel, our ability to pursue our growth strategy will be limited.

Our employees, independent contractors, principal investigators, consultants, commercial partners, and vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements and insider trading.

We are exposed to the risk of fraudulent or other illegal activity by our employees, independent contractors, principal investigators, consultants, commercial partners, and vendors. Misconduct by these parties could include intentional, reckless and/or negligent conduct that fails: to comply with the laws of the FDA and similar foreign regulatory bodies; provide true, complete and accurate information to the FDA and similar foreign regulatory bodies; to comply with manufacturing standards we have established; to comply with federal, state and foreign health care fraud and abuse laws and regulations; to report financial information or data accurately; or to disclose unauthorized activities to us. In particular, the promotion, sale and marketing of health care items and services, as well as certain business arrangements in the health care industry are subject to extensive laws and regulations intended to prevent misconduct, including fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and, structuring and commission(s), certain customer incentive programs and other business arrangements. Activities subject to these laws also involve the improper use of information obtained in the course of patient recruitment for clinical trials. It is not always possible to identify and deter such misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, disgorgement, possible exclusion from participation in Medicare, Medicaid and other federal health care programs, contractual damages, reputational harm, diminished profits and future earnings, and curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations.

We may encounter difficulties in managing our growth and expanding our operations successfully.

As we seek to advance our product candidates through clinical trials and commercialization, we will need to expand our development, regulatory, manufacturing, marketing and sales capabilities or contract with third parties to provide these capabilities for us. As our operations expand, we expect that we will need to manage additional relationships with various strategic partners, suppliers and other third parties. Future growth will impose significant added responsibilities on members of management. Our future financial performance and our ability to commercialize our product candidates and to compete effectively will depend, in part, on our ability to manage any future growth effectively. To that end, we must be able to manage our development efforts and clinical trials effectively and hire, train and integrate additional management, administrative and, if necessary, sales and marketing personnel. We may not be able to accomplish these tasks, and our failure to accomplish any of them could prevent us from successfully growing our company.

If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of our product candidates.


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We face an inherent risk of product liability as a result of the clinical testing of our product candidates and will face an even greater risk if we commercialize any products. For example, we may be sued if any product we develop allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability and a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates. Even a successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:
decreased demand for any product candidates or products that we may develop;
injury to our reputation and significant negative media attention;
withdrawal of clinical trial participants;
significant costs to defend the related litigations;
a diversion of management’s time and our resources;
substantial monetary awards to trial participants or patients;
product recalls, withdrawals, or labeling, marketing or promotional restrictions;
loss of revenue;
the inability to commercialize any product candidates that we may develop; and
a decline in our stock price.
Failure to obtain and retain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of products we develop. We currently carry product liability insurance covering our clinical trials in the amount of $5.0 million in the aggregate. Although we maintain product liability insurance, any claim that may be brought against us could result in a court judgment or settlement in an amount that is not covered, in whole or in part, by our insurance or that is in excess of the limits of our insurance coverage. Our insurance policies also have various exclusions, and we may be subject to a product liability claim for which we have no coverage. We will have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts.

We must comply with environmental laws and regulations, and failure to comply with these laws and regulations could expose us to significant liabilities.

We use hazardous chemicals and radioactive and biological materials in certain aspects of our business and are subject to a variety of federal, state and local laws and regulations governing the use, generation, manufacture, distribution, storage, handling, treatment and disposal of these materials. We cannot eliminate the risk of accidental injury or contamination from the use, manufacture, distribution, storage, handling, treatment or disposal of hazardous materials. In the event of contamination or injury, or failure to comply with environmental, occupational health and safety and export control laws and regulations, we could be held liable for any resulting damages and any such liability could exceed our assets and resources. We are uninsured for third-party contamination injury.

We may not be able to win government, academic institution or non-profit contracts or grants.

From time to time, we may apply for contracts or grants from government agencies, non-profit entities and academic institutions. Such grants have been our only source of revenue to date. Such contracts or grants can be highly attractive because they provide capital to fund the ongoing development of our technologies and product candidates without diluting our stockholders. However, there is often significant competition for these contracts or grants. Entities offering contracts or grants may have requirements to apply for or to otherwise be eligible to receive certain contracts or grants that our competitors may be able to satisfy that we cannot. In addition, such entities may make arbitrary decisions as to whether to offer contracts or make grants, to whom the contracts or grants will be awarded and the size of the contracts or grants to each awardee. Even if we are able to satisfy the award requirements, there is no guarantee that we will be a successful awardee. Therefore, we may not be able to win any contracts or grants in a timely manner, if at all.


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Risks Related to Our Common Stock

We are eligible to be treated as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 ("JOBS Act"), and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company”, as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include:
not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting;
not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board providing for supplemental auditor’s reports for additional information about the audit and the financial statements;
reduced disclosure obligations regarding executive compensation; and
exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.
We have taken advantage of reduced reporting burdens in this prospectus. For example, we have not included all of the executive compensation related information that would be required if we were not an emerging growth company. We cannot predict whether investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of these accounting standards until they would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

We could be an emerging growth company for up to five years, until December 31, 2019, although circumstances could cause us to lose that status earlier, including if the market value of our common stock held by non-affiliates exceeds $700.0 million as of any June 30 before that time or if we have total annual gross revenue of $1.0 billion or more during any fiscal year before that time, in which cases we would no longer be an emerging growth company as of the following December 31 or, if we issue more than $1.0 billion in non-convertible debt during any three-year period before that time, we would cease to be an emerging growth company immediately. Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company” if the market value of our common stock held by non-affiliates is below $75.0 million as of June 30 in any given year, which would allow us to take advantage of many of the same exemptions from disclosure requirements, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements.

We cannot predict what the market price of our common stock will be and, as a result, it may be difficult for you to sell your shares of our common stock.

An inactive market may impair our ability to raise capital by selling shares of our common stock and may impair our ability to enter into strategic partnerships or acquire companies or products by using our shares of common stock as consideration. We cannot predict the prices at which our common stock will trade. It is possible that in one or more future periods our results of operations may be below the expectations of public market analysts and investors and, as a result of these and other factors, the price of our common stock may fall.

If our stock price is volatile, our stockholders could incur substantial losses.

Our stock price is likely to be volatile. The stock market in general and the market for biopharmaceutical companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, our stockholders could incur substantial losses. The market price for our common stock may be influenced by many factors, including:

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the success of competitive products or technologies;
results of clinical trials of our product candidates;
the timing of the release of results of our clinical trials;
results of clinical trials of our competitors’ products;
regulatory actions or legal developments with respect to our products or our competitors’ products;
developments or disputes concerning patent applications, issued patents or other proprietary rights;
the results of our efforts to discover, develop, acquire or in-license additional product candidates or products;
actual or anticipated fluctuations in our financial condition and operating results;
publication of research reports by securities analysts about us or our competitors or our industry;
our failure or the failure of our competitors to meet analysts’ projections or guidance that we or our competitors may give to the market;
additions and departures of key personnel;
strategic decisions by us or our competitors, such as acquisitions, divestitures, spin-offs, joint ventures, strategic investments or changes in business strategy;
the passage of legislation or other regulatory developments affecting us or our industry;
fluctuations in the valuation of companies perceived by investors to be comparable to us;
sales of our common stock by us, our insiders or our other stockholders;
speculation in the press or investment community;
announcement or expectation of additional financing efforts;
changes in accounting principles;
terrorist acts, acts of war or periods of widespread civil unrest;
natural disasters and other calamities;
changes in market conditions for biopharmaceutical stocks; and
changes in general market and economic conditions.
In addition, the stock market has recently experienced significant volatility, particularly with respect to pharmaceutical, biotechnology and other life sciences company stocks. The volatility of pharmaceutical, biotechnology and other life sciences company stocks often does not relate to the operating performance of the companies represented by the stock. As we operate in a single industry, we are especially vulnerable to these factors to the extent that they affect our industry or our products, or to a lesser extent our markets. In the past, securities class action litigation has often been initiated against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our management’s attention and resources, and could also require us to make substantial payments to satisfy judgments or to settle litigation.

Our failure to implement and maintain effective internal control over financial reporting could result in material misstatements in our financial statements which could require us to restate financial statements, cause investors to lose confidence in our reported financial information and have a negative effect on our stock price.

As reported in our Quarterly Report on Form 10-Q filed with the SEC on May 9, 2014, during the quarter ended March 31, 2014, management and our independent registered public accounting firm identified a material weakness in our internal control over financial reporting (as defined in the Public Company Accounting Oversight Board’s Auditing Standard No. 5) related to the accounting for a non-cash stock compensation expense for a milestone-based stock option award. We

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remediated this material weakness by implementing corrective measures as described in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014.

We cannot assure you that additional material weaknesses or significant deficiencies in our internal control over financial reporting will not be identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in additional material weaknesses or significant deficiencies, cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of periodic management evaluations regarding the effectiveness of our internal control over financial reporting. The existence of a material weakness or significant deficiency could result in errors in our financial statements that could result in a restatement of financial statements, cause us to fail to meet our reporting obligations and cause investors to lose confidence in our reported financial information, leading to a decline in our stock price.

We incur significant costs as a result of being a public company and our management expects to devote substantial time to public company compliance programs.

As a public company, we incur significant legal, insurance, accounting and other expenses that we did not incur as a private company. In addition, our administrative staff are required to perform additional tasks. We invest resources to comply with evolving laws, regulations and standards, and this investment could result in increased general and administrative expenses and may divert management’s time and attention from product development activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed. In the future, it may be more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal control over financial reporting. Any failure to develop or maintain effective controls could adversely affect the results of periodic management evaluations. In the event that we are not able to demonstrate compliance with the Sarbanes-Oxley Act, that our internal control over financial reporting is perceived as inadequate, or that we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results and the price of our ordinary shares could decline. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the NASDAQ Global Market.

We are required to comply with certain of the SEC’s rules that implement Section 404 of the Sarbanes-Oxley Act, which require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting commencing with our second annual report. This assessment must include the disclosure of any material weaknesses in our internal control over financial reporting identified by our management or our independent registered public accounting firm. To achieve compliance with Section 404 within the prescribed period, we engage in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that we will not be able to conclude, within the prescribed timeframe or at all, that our internal control over financial reporting is effective as required by Section 404. If we identify one or more material weaknesses, it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statement.

Our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting until the later of our second annual report or the first annual report required to be filed with the SEC following the date we are no longer an “emerging growth company” as defined in the JOBS Act. We cannot assure you that there will not be material weaknesses or significant deficiencies in our internal controls in the future.

Provisions in our charter documents and under Delaware law have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our stockholders, and prevent attempts by our stockholders to replace or remove our current management.


51



Provisions in our amended and restated certificate of incorporation and amended and restated by-laws contain provisions that may have the effect of discouraging, delaying or preventing a change in control of us or changes in our management. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, because our board of directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Among other things, these provisions:
authorize “blank check” preferred stock, which could be issued by our board of directors without stockholder approval and may contain voting, liquidation, dividend and other rights superior to our common stock;
create a classified board of directors whose members serve staggered three-year terms;
specify that special meetings of our stockholders can be called only by our board of directors, the chairperson of our board of directors, our chief executive officer or our president;
prohibit stockholder action by written consent;
establish an advance notice procedure for stockholder approvals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to our board of directors;
provide that our directors may be removed only for cause;
provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum
specify that no stockholder is permitted to cumulate votes at any election of directors;
expressly authorize our board of directors to modify, alter or repeal our by-laws; and
require supermajority votes of the holders of our common stock to amend specified provisions of our by-laws.
These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.

Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.

Any provision of our amended and restated certificate of incorporation, our amended and restated by-laws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

Our ability to use net operating losses to offset future taxable income may be subject to certain limitations.

In general, under Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"), a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating losses ("NOLs"), to offset future taxable income. Our existing NOLs are subject to limitations arising from previous ownership changes, and if we undergo an ownership change in connection any follow-on offerings of our common or preferred stock, our ability to utilize NOLs could be further limited by Section 382 of the Code. Our NOLs may also be impaired under state law. Accordingly, we may not be able to utilize a material portion of our NOLs. Furthermore, our ability to utilize our NOLs is conditioned upon our attaining profitability and generating U.S. federal taxable income. We have incurred net losses since our inception and anticipate that we will continue to incur significant losses for the foreseeable future; thus, we do not know whether or when we will generate the U.S. federal taxable income necessary to utilize our NOLs.


52



Our amended and restated certificate of incorporation designates the state or federal courts located in the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our amended and restated certificate of incorporation provides that, subject to limited exceptions, the state and federal courts located in the State of Delaware will be the sole and exclusive forum for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (3) any action asserting a claim against us arising pursuant to any provision of the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated by-laws or (4) any other action asserting a claim against us that is governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to the provisions of our amended and restated certificate of incorporation described above. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find these provisions of our amended and restated certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.

Because we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be the source of gain for our stockholders.

You should not rely on an investment in our common stock to provide dividend income. We do not anticipate that we will pay any cash dividends to holders of our common stock in the foreseeable future. Instead, we plan to retain any earnings to maintain and expand our operations. In addition, our ability to pay cash dividends is currently prohibited by the terms of our debt financing arrangement, and any future debt financing arrangement may contain terms prohibiting or limiting the amount of dividends that may be declared or paid on our common stock. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any return on their investment. As a result, investors seeking cash dividends should not purchase our common stock.

Item 1B.       Unresolved Staff Comments

None.

Item 2.          Properties

Our principal executive offices are located at 100 Acorn Park Drive, 5th floor, Cambridge, Massachusetts 02140. We have two leases at this address, and in aggregate, we occupy approximately 34,200 square feet of laboratory and office space. Both leases were extended in 2016 and have terms that expire in February 2020. We believe that our existing facilities are sufficient for our present operations, but that over time, our existing facility space will need to be expanded to meet the demands of our future lab operations.

Item 3.          Legal Proceedings

From time to time we are subject to various legal proceedings and claims that arise in the ordinary course of our business activities. Although the results of litigation and claims cannot be predicted with certainty, as of the date of this Annual Report on Form 10-K, we do not believe we are party to any claim or litigation, the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our business. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

Item 4.           Mine Safety Disclosures

Not applicable.


53



PART II

Item 5.           Market for Registrant’s Common Equity, Related Stockholder Matters and Issuers Purchases of Equity Securities

Market Information

Our common stock has been publicly traded on the NASDAQ Global Market under the symbol “GNCA” since February 5, 2014. Prior to that time, there was no public market for our common stock. The following table sets forth, for the periods indicated, the high and low sales prices for our common stock as reported on the NASDAQ Global Market.

 
 
Year ended December 31, 2016
 
Year ended December 31, 2015
 
 
High
Low
 
High
Low
First quarter
 
$
8.07

$
2.56

 
$
12.50

$
6.15

Second quarter
 
$
7.74

$
3.35

 
$
14.29

$
9.00

Third quarter
 
$
6.39

$
3.86

 
$
16.18

$
6.63

Fourth quarter
 
$
5.22

$
3.28

 
$
8.20

$
4.27


Holders

As of February 14, 2017, there were approximately 24 holders of record of our common stock. This number does not include beneficial owners whose shares are held by nominees in street name.

Dividends

We have never declared or paid cash dividends on our common stock, and we do not expect to pay any cash dividends on our common stock in the foreseeable future.

Performance Graph

The following performance graph and related information shall not be deemed to be “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act, except to the extent that we specifically incorporate it by reference into such filing.

The following graph compares the performance of our common stock to the NASDAQ Composite Index and to the NASDAQ Biotechnology Index from February 5, 2014 (the first date that shares of our common stock were publicly traded) through December 31, 2016 . The comparison assumes $100 was invested after the market closed on February 5, 2014 in our common stock and in each of the foregoing indices, and it assumes reinvestment of dividends, if any.


54



GNCA-201512_CHARTX32683A01.JPG
_________________________
*
$100 invested on 2/5/2014 in stock or index, including reinvestment of dividends. Fiscal year ending December 31, 2016 .

Cumulative Total Return Comparison
 
2/5/2014
 
Mar-14
 
Jun-14
 
Sep-14
 
Dec-14
 
Mar-15
 
Jun-15
 
Sep-15
 
Dec-15
 
Mar-16
 
Jun-16
 
Sep-16
 
Dec-16
Genocea Biosciences, Inc.
100.00

 
165.36

 
170.45

 
82.27

 
63.64

 
107.82

 
124.82

 
62.27

 
47.91

 
70.36

 
37.27

 
46.55

 
37.45

NASDAQ Composite
100.00

 
104.67

 
109.89

 
112.01

 
118.06

 
122.17

 
124.31

 
115.17

 
124.82

 
121.40

 
120.72

 
132.42

 
134.19

NASDAQ Biotechnology
100.00

 
99.66

 
108.44

 
115.41

 
128.26

 
145.21

 
156.00

 
127.93

 
142.91

 
110.08

 
108.73

 
122.20

 
111.93


Recent Sales of Unregistered Securities

None.

Purchase of Equity Securities

We did not purchase any of our registered equity securities during the period covered by this Annual Report on Form 10-K.

Securities Authorized for Issuance under Equity Compensation Plans

The following table contains information about our equity compensation plans as of December 31, 2016.
Plan category
    
Number of securities to be issued upon exercise of outstanding stock options and warrants
    
Weighted-average exercise price of outstanding options and warrants
    
Number of securities remaining available for future issuance under equity compensation plans
 
Equity compensation plans approved by security holders  (1)
 
3,807,061

 
$
5.94

 
485,483

(2)

55




(1) Includes information regarding our 2014 Equity Incentive Plan
(2) Does not include 1,137,781 shares added to the 2014 Equity Incentive Plan under the evergreen provision on January 1, 2017.






Item 6.          Selected Financial Data

The selected statements of operations data for each of the three years in the period ended December 31, 2016 and the balance sheet data at December 31, 2016 and 2015 have been derived from our audited financial statements included elsewhere in this Annual Report on Form 10-K. The selected statements of operations data for the period ended December 31, 2013 and 2012 and the balance sheet data at December 31, 2013 and 2012 have been derived from our audited financial statements not included in this Annual Report on Form 10-K. Our historical results for any prior period are not necessarily indicative of results to be expected in any future period.

The information set forth below should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this Annual Report on Form 10-K and with our consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. The selected financial data in this section are not intended to replace the consolidated financial statements and are qualified in their entirety by the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
 
 
Years Ended December 31
(In thousands, except per share data)
 
2016
 
2015
 
2014
 
2013
 
2012
Grant revenue
 
$
235

 
$
670

 
$
308

 
$
731

 
$
1,977

 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
Research and development
 
34,645

 
28,049

 
23,727

 
15,695

 
11,240

General and administrative
 
15,427

 
13,987

 
9,747

 
4,961

 
3,690

Refund of research and development expense
 
(1,592
)
 

 

 


 


Total operating expenses
 
48,480

 
42,036

 
33,474

 
20,656

 
14,930

Loss from operations
 
(48,245
)
 
(41,366
)
 
(33,166
)
 
(19,925
)
 
(12,953
)
Other expense, net:
 
 
 
 
 
 
 
 
 
 
Interest income
 
410

 
163

 
55

 
6

 
13

Interest expense
 
(1,738
)
 
(1,280
)
 
(1,025
)
 
(465
)
 
(520
)
Change in fair value of warrants
 

 

 
(725
)
 
(222
)
 
93

Loss on debt extinguishment
 

 

 
(435
)
 
(200
)
 

Total other expense, net
 
(1,328
)
 
(1,117
)
 
(2,130
)
 
(881
)
 
(414
)
Net loss
 
$
(49,573
)
 
$
(42,483
)
 
$
(35,296
)
 
$
(20,806
)
 
$
(13,367
)
Comprehensive loss
 
$
(49,573
)
 
$
(42,490
)
 
$
(35,303
)
 
$
(20,806
)
 
$
(13,367
)
 
 
 
 
 
 
 
 
 
 
 
Reconciliation of net loss to net loss attributable to common stockholders
 
 
 
 
 
 
 
 
 
 
Net loss
 
$
(49,573
)
 
$
(42,483
)
 
$
(35,296
)
 
$
(20,806
)
 
$
(13,367
)
Accretion of redeemable convertible preferred stock to redemption value
 

 

 
(180
)
 
(1,605
)
 
(1,781
)
Net loss attributable to common stockholders
 
$
(49,573
)
 
$
(42,483
)
 
$
(35,476
)
 
$
(22,411
)
 
$
(15,148
)
Net loss per share attributable to common stockholders - basic and diluted (1)
 
$
(1.75
)
 
$
(1.74
)
 
$
(2.27
)
 
$
(75.46
)
 
$
(51.35
)
Weighted-average number of common shares used in net loss per share attributable to common stockholders - basic and diluted
 
28,299

 
24,460

 
15,618

 
297

 
295



56



 
 
As of December 31,
(in thousands)
 
2016
 
2015
 
2014
 
2013
 
2012
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Cash, cash equivalents and investments
 
$
63,362

 
$
106,432

 
$
47,079

 
$
12,208

 
$
11,516

Working capital
 
53,918

 
89,226

 
42,173

 
8,382

 
7,932

Total assets
 
69,896

 
112,142

 
50,332

 
15,761

 
13,531

Preferred stock warrant liability
 

 

 

 
656

 
246

Preferred stock
 

 

 

 
81,562

 
64,707

Common stock and additional paid-in capital
 
253,024

 
247,578

 
147,941

 

 

Total stockholders’ equity (deficit)
 
45,541

 
89,661

 
32,507

 
(80,131
)
 
(58,402
)
_________________________
(1)
See Note 2 within the notes to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K for a description of the method used to calculate basic and diluted net loss per common share.

Item 7.           Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with the section entitled “Selected Financial Data” and our financial statements and related notes appearing in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Annual Report on Form 10-K, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.


Overview

We are a biopharmaceutical company that discovers and develops novel vaccines and immunotherapies to address diseases with significant unmet needs. We use our proprietary discovery platform, ATLAS TM , to rapidly design vaccines and immunotherapies that act, in part, through T cell (or cellular) immune responses, in contrast to approved vaccines and immunotherapies, which are designed to act primarily through B cell (or antibody) immune responses. We believe that by harnessing T cells we can develop first-in-class vaccines and immunotherapies to address diseases where T cells are central to the control of the disease.
 
We have one product candidate in active Phase 2 clinical development, GEN-003, an immunotherapy for the treatment of genital herpes. We also had a pre-clinical immuno-oncology program focused on personalized cancer vaccines ("GEN-009"). The GEN-009 program leverages ATLAS to identify patient neoantigens, or newly formed antigens unique to each patient, that are associated with that individual's tumor. We have other non-active infectious disease programs, including GEN-004, a Phase 2-ready universal vaccine for the prevention of pneumococcal infections, and early stage programs focused on genital herpes prophylaxis, chlamydia, and malaria.
 
GEN-003 — Phase 2 immunotherapy for genital herpes
 
Our lead program is GEN-003, a Phase 2 candidate therapeutic vaccine, or immunotherapy, that we are developing to treat genital herpes infections. We have completed two positive clinical trials and have a third trial currently underway which has also demonstrated positive interim efficacy results. Key data from those trials is described below.

Phase 1/2 Trial
 
Final analysis of the data from the Phase 1/2a trial showed that, for the best performing 30µg dose group, there was a sustained reduction in the viral shedding rate. After completion of dosing for this group, the viral shedding rate was reduced by 52% versus baseline and, at six months after the final dose, the shedding rate remained at 40% below baseline. The reduction in the genital lesion rate after completion of the third dose was greatest for the 30 µg dose group at 48%. After six months, the reduction from baseline in genital lesion rate for this dose group was 65% and, after 12 months, the genital lesion rate was 42% lower than baseline. GEN-003 was safe and well tolerated over the 12 months of this trial.
 
Phase 2 Dose Optimization Trial

57




A 310-subject Phase 2 dose optimization trial was completed in March 2016. The objective of this trial was to confirm the results of the Phase 1/2a trial and to test six combinations of proteins and adjuvant to determine the optimal dose for future trials and potentially improve on the profile of GEN-003. Subjects were randomized to one of six dosing groups of either 30μg or 60μg per protein paired with one of three adjuvant doses (25 μg, 50 μg, or 75 μg). A seventh group received placebo. Subjects received three doses of GEN-003 or placebo at 21-day intervals. Baseline viral shedding and genital lesion rates were established for each subject in a 28-day observation period prior to the commencement of dosing by collecting 56 genital swab samples (two per day), which were analyzed for the presence of HSV-2 DNA, and by recording the days on which genital lesions were present. This 28-day observation period was repeated immediately after the completion of dosing, and at six and twelve months following dosing. No maintenance doses were given. After the 28-day observation period immediately after dosing, patients in the placebo arm were rolled over across the 6 active combinations of GEN-003 and Matrix-M2 under a separate protocol.
    
The primary endpoint of the trial was the reduction in viral shedding rate versus baseline, a measure of anti-viral activity. A number of exploratory secondary endpoints were also studied, including the percent of patients who were recurrence free from lesions up to six and 12 months after dosing, the time to first recurrence of lesions after dosing and the reduction in genital lesion rates. The two most promising doses from this dose optimization study were 60 µg per protein combined with either 50 or 75 µg of Matrix-M2 adjuvant ("60/50 Dose" and "60/75 Dose" respectively). The efficacy of GEN-003 at these two dose levels over the course of the Phase 2 dose optimization trial is as follows:
    
 
Placebo
60/50 Dose
60/75 Dose
Endpoint
Post dose 3
Post dose 3
6 months
12 months
Post dose 3
6 months
12 months
Viral shedding rate reduction (1)
-4%
41%
47%
66%
55%
58%
55%
Poisson mixed effect model (Old Model) (2)
 
 
 
 
 
 
 
   p-value vs baseline
0.48
<0.0001
<0.0001
<0.0001
<0.0001
<0.0001
<0.0001
   p-value vs placebo
NA
<0.0001
NA
NA
<0.0001
NA
NA
Poisson mixed effect model with Empirical Variance
(New Model) (3)
 
 
 
 
 
 
 
   p-value vs baseline
0.88
0.01
0.0004
<0.0001
0.006
<0.0001
0.01
   p-value vs placebo
NA
0.04
NA
NA
0.01
NA
NA
% patients lesion free
NA
68%
36%
30%
68%
30%
21%
Genital lesion rate reduction (1)
60%
69%
50%
65%
60%
43%
47%
Poisson mixed effect model (Old Model) (2)
 
 
 
 
 
 
 
   p-value vs baseline
<0.0001
<0.0001
<0.0001
<0.0001
<0.0001
<0.0001
<0.0001
   p-value vs placebo
NA
0.3
NA
NA
0.79
NA
NA
Poisson mixed effect model with Empirical Variance
(New Model)
(3)
 
 
 
 
 
 
 
   p-value vs baseline
0.0002
0.0005
0.01
0.003
0.02
0.03
0.02
   p-value vs placebo
NA
0.59
NA
NA
0.85
NA
NA
(1) Rate reduction vs. pre-dosing levels.
(2) Generalized Linear Model with “Standard” Poisson distribution as pre-specified in the Phase 2 trial statistical analysis plan, formerly a widely adopted model developed by the University of Washington (“UW”) and which was used in both the GEN-003 Phase 1/2 and Phase 2 trials (the “Old Model”).
(3) Statistical analysis performed using a modified Poisson model (the “New Model”) reflecting advances in the field since the start of the Phase 2 dose optimization trial: Magaret, Amalia, "Models for HSV shedding must account for two levels of overdispersion" ((January 2016). UW Biostatistics Working Paper Series. Working Paper 410). UW developed the New Model as clinical trial data which accumulated over the years indicated that the Old Model assumptions around the distribution of data did not fit this actual genital herpes clinical trial data. The New Model corrects the assumption of data distribution by an empiric variance method which better reflects this clinical trial experience.

58



Critically, the results of the GEN-003 clinical trials analyzed with the New Model remain statistically significant and the estimated magnitude of the effect, confidence intervals around that effect and durability of effect are unchanged.
Genocea considers it important to reflect advances in the field of genital herpes research in its approach to the conduct of clinical trials and the analysis of clinical trial data and adopted the New Model as the primary statistical model for the viral shedding rate and genital lesion rate data in its ongoing Phase 2b trial. Results shown above from the Phase 2 trial using the New Model are provided for comparative purposes, but were not part of the original pre-specified statistical analysis plan for this trial.

Phase 2b Trial

In December 2015, a Phase 2b trial was initiated as our first study testing potential Phase 3 endpoints with a Phase 3-ready formulation of GEN-003, manufactured with commercially-scalable processes. The trial enrolled 131 subjects that were randomized to one of three dose groups - placebo, 60/50 Dose, and 60/75 Dose. All subjects received three injections at 21-day intervals.

In September 2016, we announced positive viral shedding rate reductions from the ongoing Phase 2b study. The study achieved its primary endpoint, with GEN-003 demonstrating a statistically significant (versus placebo and baseline) 40% reduction in the viral shedding rate compared to baseline immediately after dosing in the 60/50 Dose group, using a new Phase 3-ready formulation. This result was consistent with a statistically significant (versus placebo and baseline) viral shedding rate reduction of 41% at this same dose and time point in a prior Phase 2 trial. In addition, the reactogenicity profile of this dose, an indication of the strength of the immune response to GEN-003, was consistent between the trials. This same dose in the prior Phase 2 trial subsequently demonstrated virologic and clinical efficacy durable through at least one year after dosing.

The 60/75 Dose group reduced the viral shedding rate by 27%, lower than that observed in the prior trial, and also showed a less acceptable reactogenicity profile than the prior trial. We believe that the increase in reactogenicity of this dose indicates an overstimulation of the T cell immune system leading to the reduced efficacy with this dose in this trial, as would be expected with the known bell-shaped T cell dose response curve. The likely driver of this effect is a more potent adjuvant formulation following customary manufacturing process changes to prepare for Phase 3 trials and commercialization.

The top-line viral shedding rate reductions for all of the dose groups in the trial are summarized in the following table:

 
Placebo
60/50 Dose
60/75 Dose
Viral shedding rate reduction (1)
6%
-40%
-27%
Poisson mixed effect model with Empirical Variance
(New Model)
(2)(3)
 
 
 
   p-value vs. baseline
0.76
0.03
0.16
   p-value vs. placebo
NA
0.05
0.20
(1) Rate reduction vs. pre-dosing levels.
(2) The New Model (see note above under “Phase 2 Dose Optimization Trial”), as pre-specified in the Phase 2b statistical analysis plan.
(3) Under the Old Model (see note above under “Phase 2 Dose Optimization Trial”), p-values for the 60/50 Dose were <0.0001 vs. both baseline and placebo and for the 60/75 Dose were 0.001 vs. baseline and 0.004 vs. placebo.

In January 2017, we announced positive clinical results from this ongoing trial. At six months after dosing, GEN-003 demonstrated statistically significant improvements versus placebo across multiple clinical endpoints. The 60/50 Dose significantly reduced the rate of genital lesions during the six months following dosing compared to placebo (41% reduction versus placebo). The genital lesion rate is an important overall measure of disease that captures both the frequency and duration of recurrences, both of which are important to both patients and their caregivers. GEN-003 also consistently demonstrated significant benefits versus placebo across several other clinical endpoints across the dose groups as summarized in the following table:


59



Secondary clinical endpoint
Placebo
(n=44)
60/50
(n=43)
60/75
(n=44)
Mean genital lesion rate (percent of days with lesions over six months)
7.9%
4.5%
4.6%
Median genital lesion rate
5.6%
2.7%
1.9%
  p-value versus placebo (1)
NA
0.03
0.03
Mean duration of recurrences (days)
4.8
3.3
4.3
Median duration of recurrences
4.2
2.8
4.0
  p-value versus placebo (1)
NA
0.01
0.64
Mean number of recurrences over six months
2.7
2.1
1.9
Median number of recurrences over six months
2.0
1.0
1.5
  p-value versus placebo (1)
NA
0.08
0.02
Kaplan-Meier estimate of percent recurrence free after first dose
10%
29%
31%
  p-value versus placebo (2)
NA
0.03
0.03
Kaplan-Meier estimate of percent recurrence free after last dose
13%
22%
36%
  p-value versus placebo (2)
NA
0.17
0.02

Statistical tests pre-specified in Phase 2b trial protocol as follows:
(1) Wilcoxon Rank Sum test
(2) Log rank test

The clinical efficacy data versus placebo at twelve-months post dosing is expected in the middle of 2017. The viral shedding rate reduction data at six-months post dosing is expected in the first half of 2017.

GEN-003 also continues to demonstrate a safety profile appropriate for its therapeutic setting in the judgment of the trial’s independent Drug Monitoring Committee. There was no grade 4 reactogenicity or related serious adverse events and discontinuations due to adverse events were low and similarly distributed across active dose groups and placebo.

We intend to conduct an end-of-Phase 2 meeting with the FDA in early 2017. We also expect to commence Phase 3 trials in the fourth quarter of 2017. We plan to commence a clinical trial exploring the potential additive effects of GEN-003 on top of daily administration of valacyclovir in parallel with the Phase 3 program. We retain all rights to GEN-003 and our strategy is to execute a partnership to maximize the potential of GEN-003 and to help fund the costs of the GEN-003 Phase 3 program.

If GEN-003 successfully completes clinical development and is approved, we believe it would represent an important new treatment option for patients with genital herpes.

Our Immuno-Oncology Program
 
Guided by our positive clinical results on GEN-003 and belief in the ATLAS platform, we are focused on combining our antigen selection and vaccine development expertise with that of leading cancer innovators to unlock new targets in immuno-oncology. Our potential cancer vaccines will be designed to educate T cells to recognize and attack specific targets and thereby kill cancers. We are developing personalized cancer vaccines by leveraging ATLAS to identify patient neoantigens, or newly formed antigens unique to each patient, that are associated with that individual's tumor. We anticipate filing a personalized cancer vaccine IND application with the FDA in 2017. We are also applying the results from ATLAS, and its utility a prognostic tool, to identify patients that could benefit from checkpoint inhibitor therapy. Our strategy in immuno-oncology combines our own internal development programs with a focus on partnering ATLAS for other immuno-oncology applications.

Refer to Part I of this report under the heading "Business - Our Immuno-Oncology Program" for additional details on this program, including our current collaborations.
In November 2015, we also commenced a new program focused on Epstein-Barr Virus (“EBV”), ("GEN-009"). EBV infection has been linked to cancers with high unmet needs such as non-Hodgkin’s lymphoma, nasopharyngeal carcinoma and gastric carcinoma. We believe the ATLAS platform is highly suited to the creation of a new immunotherapy for EBV given that T cell responses are understood to be crucial for protection against EBV. Furthermore, EBV is part of the herpesvirus family, in

60



which we have deep experience through our development of GEN-003. We are currently conducting ATLAS screens for EBV and plan to select antigen candidates for further study in 2017.

Other infectious disease programs

Our other infectious disease programs include GEN-004, a potential universal  Streptococcus pneumoniae , or pneumococcus, vaccine to protect against a leading cause of infectious disease mortality worldwide and early stage programs focused on genital herpes prophylaxis, chlamydia, and malaria. In October 2015, we announced that top-line results from the Phase 2a clinical trial for GEN-004 showed consistent reductions versus placebo in the pre-specified endpoints of the rate and density of upper airway colonization in a human challenge model, but that neither of the endpoints achieved statistical significance. GEN-004 was safe and well tolerated by subjects. Although we did not achieve statistical significance in this study, the consistent apparent effect gives us confidence in the vaccine concept and in the potential for GEN-004. In November 2016, we paused activities on our other early stage programs focused on genital herpes prophylaxis, chlamydia, and malaria in order to focus all of our internal research and pre-clinical resources on our immuno-oncology investments. Progress made and data generated to date in these infectious disease clinical and research programs remains valuable to Genocea for the future.

Financing and business operations

We commenced business operations in August 2006. To date, our operations have been limited to organizing and staffing our company, acquiring and developing our proprietary ATLAS technology, identifying potential product candidates and undertaking preclinical studies and clinical trials for our product candidates. All of our revenue to date has been grant revenue. We have not generated any product revenue and do not expect to do so for the foreseeable future. We have primarily financed our operations through the issuance of our equity securities, debt financings and amounts received through grants. As of December 31, 2016 , we had received an aggregate of $279.6 million in gross proceeds from the issuance of equity securities and gross proceeds from debt facilities and an aggregate of $7.9 million from grants. At December 31, 2016 , our cash and cash equivalents and investments were $ 63.4 million .
 
Since inception, we have incurred significant operating losses. Our net losses were $ 49.6 million and $ 42.5 million for the years ended December 31, 2016 and 2015 , respectively, and our accumulated deficit was $ 207.5 million as of December 31, 2016 . We expect to incur significant expenses and increasing operating losses for the foreseeable future. Our net losses may fluctuate significantly from quarter to quarter and year to year. We will need to generate significant revenue to achieve profitability, and we may never do so.
 
In March 2015, we completed an underwritten public offering of 6.3 million shares of our common stock at a public offering price of $8.25 per share for an aggregate offering price of $51.7 million. In August 2015, we completed another underwritten public offering of 3.9 million shares of our common stock at a public offering price of $13.00 per share for an aggregate offering price of $50.1 million. We received net proceeds from these offerings of approximately $95.7 million, after deducting approximately $6.1 million in underwriting discounts and commissions, excluding offering costs payable by us.
 
We believe that our cash, cash equivalents and investments at December 31, 2016 are sufficient to support our operating expenses and capital expenditure requirements into the first quarter of 2018, without assuming any receipt of proceeds from potential business development partnerships, equity financings or debt drawdowns. This guidance assumes commencing Phase 3 trials for GEN-003 for genital herpes in the fourth quarter of 2017 and filing an IND for GEN-009 for cancer by the end of the year, however it is our strategy to secure additional sources of financing in advance of starting GEN-003 Phase 3 clinical trials.

Costs related to clinical trials can be unpredictable and therefore there can be no guarantee that our current balances of cash, cash equivalents and investments, and any proceeds received from other sources, will be sufficient to fund our studies or operations through this period. These funds will not be sufficient to enable us to conduct pivotal clinical trials for, seek marketing approval for or commercially launch GEN-003 or any other product candidate. Accordingly, to obtain marketing approval for and to commercialize these or any other product candidates, we will be required to obtain further funding through public or private equity offerings, debt financings, collaboration and licensing arrangements or other sources. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital when needed would have a negative effect on our financial condition and our ability to pursue our business strategy.

Financial Overview

Grant revenue
 

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Grant revenue consists of revenue earned to conduct vaccine development research. We have received grants from private not-for-profit organizations and federal agencies. These grants have related to the discovery and development of several of our product candidates, including product candidates for the prevention of pneumococcus, chlamydia, and malaria. Revenue under these grants is recognized as research services are performed. Funds received in advance of research services being performed are recorded as deferred revenue. We plan to continue to pursue grant funding, but there can be no assurance we will be successful in obtaining such grants in the future.
 
We have no products approved for sale. We will not receive any revenue from any product candidates that we develop until we obtain regulatory approval and commercialize such products or until we potentially enter into agreements with third parties for the development and commercialization of product candidates. If our development efforts for any of our product candidates result in regulatory approval or we enter into collaboration agreements with third parties, we may generate revenue from product sales or from such third parties.
 
We expect that our revenue will be less than our expenses for the foreseeable future and that we will experience increasing losses as we continue our development of, and seek regulatory approvals for, our product candidates and begin to commercialize any approved products. Our ability to generate revenue for each product candidate for which we receive regulatory approval will depend on numerous factors, including competition, commercial manufacturing capability and market acceptance of our products.

Research and development expenses
 
Research and development expenses consist primarily of costs incurred to advance our preclinical and clinical candidates, which include:

personnel-related expenses, including salaries, benefits, stock-based compensation expense and travel;
expenses incurred under agreements with contract research organizations ("CROs"), contract manufacturing organizations ("CMOs"), consultants and other vendors that conduct our clinical trials and preclinical activities;
costs of acquiring, developing and manufacturing clinical trial materials and lab supplies; and
facility costs, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies.
 
We expense internal research and development costs to operations as incurred. We expense third party costs for research and development activities, such as conducting clinical trials, based on an evaluation of the progress to completion of specific performance or tasks such as patient enrollment, clinical site activations or information, which is provided to us by our vendors.
 
The following table identifies research and development expenses on a program-specific basis for our product candidates (in thousands):
 
 
Years ended December 31,
 
 
2016
 
2015
 
2014
Genital herpes (GEN-003) (1)
 
$
19,641

 
$
15,555

 
$
15,147

Other research and development (2)
 
15,004

 
12,494

 
8,580

Total research and development
 
$
34,645

 
$
28,049

 
$
23,727

_________________________
(1) Includes direct and indirect internal costs and external costs such as CMO and CRO costs.
(2) Includes costs related to all other product candidates and certain technology platform development costs related to ATLAS. Additionally, costs that are not specifically allocated by project including facilities costs, depreciation expense, and non-project specific costs incurred by R&D personnel, are included in this line item.
We expect our research and development expenses will increase as we continue the manufacture of pre-clinical and clinical materials and manage the clinical trials of, and seek regulatory approval for, GEN-003.
 
General and administrative expenses
 

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General and administrative expenses consist principally of salaries and related costs for personnel, including stock-based compensation and travel expenses, in executive and other administrative functions. Other general and administrative expenses include facility-related costs, communication expenses and professional fees associated with corporate and intellectual property legal expenses, consulting and accounting services.
 
We anticipate that our general and administrative expenses will increase in the future to support the continued research and development of our product candidates and to operate as a public company. These increases will likely include higher costs for insurance, hiring activities, and professional services, such as outside consultants, lawyers and accountants, among other expenses. Additionally, if and when we believe a regulatory approval of our first product candidate appears likely, we anticipate that we will increase our salary and personnel costs and other expenses as a result of our preparation for commercial operations.
 
Refund of research and development expenses
 
The refund of research and development expenses recorded in year ended December 31, 2016 related to a one-time payment received from Novavax pursuant to contractual obligations under the Novavax Agreement that existed to refund research and development expenses paid to Novavax between 2009 and 2011.

Other expense, net

Other expense consists of fair value adjustments on warrants to purchase preferred stock, loss on debt extinguishment, interest income and interest expense. Upon completion of our IPO on February 10, 2014, warrants to purchase preferred stock were converted to warrants to purchase common stock and as a result, the Company no longer recorded fair value adjustments for its warrants. Losses on debt extinguishment were recorded on the retirement of outstanding borrowings due to the refinancing of existing debt with a new lender.

Interest income
    
Interest income consists of interest earned on our cash, cash equivalent and investment portfolio.

Interest expense

Interest expense consists of interest expense on our long-term debt facilities and non-cash interest related to the amortization of debt discount and issuance costs

Accretion of redeemable convertible preferred stock
 
Certain classes of our preferred stock were redeemable beginning in 2017 at the original issuance price plus any declared or accrued but unpaid dividends upon written election of the preferred stockholders in accordance with the terms of our articles of incorporation. Accretion of preferred stock reflects the accretion of issuance costs and, for Series B preferred stock, cumulative dividends based on their respective redemption values. On February 10, 2014, we completed our IPO and all shares of preferred stock were converted into 11,466,479 shares of our Common Stock. No accretion of preferred stock is recorded after this date as no shares of preferred stock are outstanding.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial position and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, we evaluate estimates, which include, but are not limited to, estimates related to clinical trial accruals, prepaid and accrued research and development expenses, stock-based compensation expense, common stock warrants, warrants to purchase redeemable securities, and reported amounts of revenues and expenses during the reported period. We base our estimates on historical experience and other market-specific or other relevant assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from those estimates or assumptions.

While our significant accounting policies are described in more detail in the notes to our financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our financial statements.


63



Prepaid and Accrued Research and Development Expenses

As part of the process of preparing our financial statements, we are required to estimate our prepaid and accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed for us and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our prepaid and accrued research and development expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments, if necessary. Examples of estimated prepaid and accrued research and development expenses include fees paid to CROs in connection with clinical trials, CMOs with respect to pre-clinical and clinical materials and intermediaries and vendors in connection with preclinical development activities.

We base our expenses related to clinical trials on our estimates of the services performed pursuant to contracts with clinical sites that conduct clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of subjects and the completion of required data submission. In recording service fees, we make estimates based upon the time period over which services will be performed or other observable and measureable progress points as defined in the contracts, such as number of subjects enrolled, number of sites, or quantity of services performed in each period. The calculated amount of service fee expense is compared to the actual payments made pursuant to the contract's billing schedule to determine the resulting prepaid or accrual position. Additionally, for each clinical site, we accrue 10% of the earned amounts which is payable upon completion of the required data submission for the clinical trial. If our estimates of the status and timing of services performed differs from the actual status and timing of services performed, we may report amounts that are too high or too low in any particular period. To date, there has been no material differences from our estimates to the amount actually incurred.

Stock-Based Compensation

We have applied the fair value recognition provisions of Financial Accounting Standards Board Accounting Standards Codification ("FASB ASC"), Topic 718, Compensation — Stock Compensation ( " ASC 718"), to account for stock-based compensation for employees and ASC 718 and FASB ASC Topic 505, Equity ( " ASC 505"), for non-employees. We recognize compensation costs related to stock options granted to employees based on the estimated fair value of the awards on the date of grant. Stock compensation related to non-employee awards is re-measured at each reporting period until the awards are vested.

Determining the amount of stock-based compensation to be recorded requires us to develop estimates of the fair value of stock-based awards as of their measurement date. We recognize stock-based compensation expense over the requisite service period, which is the vesting period of the award. Calculating the fair value of stock-based awards requires that we make highly subjective assumptions. We use the Black-Scholes option pricing model to value our stock option awards. Use of this valuation methodology requires that we make assumptions as to the volatility of our common stock, the fair value of our common stock on the measurement date, the expected term of our stock options, the risk free interest rate for a period that approximates the expected term of our stock options and our expected dividend yield. Because of our limited operating history as a publicly traded entity, we utilize data from a representative group of publicly traded companies to estimate expected stock price volatility. We selected representative companies from the biopharmaceutical industry with characteristics similar to us. We use the simplified method as prescribed by the SEC Staff Accounting Bulletin No. 107, Share-Based Payment as we do not have sufficient historical stock option activity data to provide a reasonable basis upon which to estimate the expected term of stock options granted to employees. For non-employee grants, we use an expected term equal to the remaining contractual term of the award. We utilize a dividend yield of zero based on the fact that we have never paid cash dividends and have no current intention of paying cash dividends. The risk-free interest rate used for each grant is based on the U.S. Treasury yield curve in effect at the time of grant for instruments with a similar expected life.

Under ASC 718, we are also required to estimate forfeitures at the time of grant, and revise those estimates in subsequent periods if actual forfeitures differ from our estimates. In March 2016, the FASB issued ASU 2016-09, Compensation — Stock Compensation (Topic 718), which provides for improvements to employee share-based payment accounting.  The Company early adopted ASU 2016-09 as of June 30, 2016. In connection with the early adoption, the Company elected an accounting policy to record forfeitures as they occur. There was no financial statement impact upon adoption as the Company had estimated a forfeiture rate of zero given that most options awards vest on a monthly basis. Stock-based compensation expense recognized in the financial statements is based on awards that ultimately vest.


64



Stock-based compensation expense includes options granted to employees and non-employees and has been reported in our statements of operations and comprehensive loss as follows (in thousands):
 
 
Years ended December 31,
 
 
2016
 
2015
 
2014
Research and development
 
$
1,568

 
$
1,690

 
$
1,511

General and administrative
 
2,579

 
2,158

 
1,394

Total
 
$
4,147

 
$
3,848

 
$
2,905


We estimated the fair value of stock options of each employee stock award at the grant date using the following assumptions:
 
 
Years ended December 31,
 
 
2016
 
2015
 
2014
Expected Volatility
 
67.4% - 77.9%
 
68.5% - 85.3%
 
86.2% - 103.6%
Risk-free interest rate
 
1.14% - 2.09%
 
1.56% - 1.94%
 
1.75% - 2.00%
Expected term (in years)
 
5.50 - 6.08
 
5.50 - 6.08
 
6.25
Expected dividend yield
 
0%
 
0%
 
0%

At December 31, 2016 , we had approximately $ 6.6 million of total unrecognized compensation expense, which we expect to recognize over a weighted-average remaining vesting period of approximately three years. Our stock-based compensation expense for stock options has increased primarily based upon headcount growth and the related number of stock option awards granted to new and existing employees.

Results of Operations

Comparison of the Years Ended December 31, 2016 and December 31, 2015

 
 
Years Ended
December 31,
 
Increase
(in thousands)
 
2016
 
2015
 
(Decrease)
Grant revenue
 
$
235

 
$
670

 
$
(435
)
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
Research and development
 
34,645

 
28,049

 
6,596

General and administrative
 
15,427

 
13,987

 
1,440

Refund of research and development expense
 
(1,592
)
 

 
1,592

Total operating expenses
 
48,480

 
42,036

 
6,444

Loss from operations
 
(48,245
)
 
(41,366
)
 
6,879

Other income and expenses:
 
 
 
 
 
 
Interest income
 
410

 
163

 
247

Interest expense
 
(1,738
)
 
(1,280
)
 
458

Total other income and expense
 
(1,328
)
 
(1,117
)
 
211

Net loss
 
$
(49,573
)
 
$
(42,483
)
 
7,090


Grant revenue
 
Grant revenue decreased by $ 0.4 million for the year ended December 31, 2016 to $ 0.2 million from $ 0.7 million for the year ended December 31, 2015 . We entered into a $1.2 million grant with the Bill & Melinda Gates Foundation (the "Gates Foundation") in September 2014. Grant revenue was earned on activities that occurred throughout the twelve-month period in 2015 and were largely completed in the first quarter of 2016.
 
Research and development expenses
 

65



Research and development ("R&D") expenses increased approximately $ 6.6 million to $ 34.6 million for the year ended December 31, 2016 from $ 28.0 million for the same period ended December 31, 2015 .  Increases in compensation, consulting and professional services (approximately $5.0 million), lab-related costs (approximately $1.4 million), facility costs (approximately $0.9 million), and depreciation expense (approximately $0.4 million), were offset by decreases in manufacturing costs (approximately $0.8 million) and clinical costs (approximately $0.4 million). The remaining increases, all insignificant by spending category, are attributable to the overall growth of the research and development function.

On a program basis, GEN-003 costs increased $4.1 million in the year ended December 31, 2016 , driven by increased headcount related costs of $2.1 million and higher clinical, consulting and professional service costs of $2.0 million due to the timing of activities in support of our clinical trials. GEN-004 clinical costs decreased by $2.6 million following the completion of a clinical trial in November 2015 and the decision to pause further development of this product candidate. Costs to advance our pre-clinical product candidates and develop our ATLAS platform for immuno-oncology increased by $5.1 million, driven by higher headcount and lab-related costs. Development on infectious disease research programs, all of which were paused in November 2016, increased by $2.0 million, and an increase of $3.1 million in spending in our immuno-oncology program.

General and administrative expenses
 
General and administrative expense increased $ 1.4 million to $ 15.4 million for the year ended December 31, 2016 from $ 14.0 million for the year ended December 31, 2015 . The increase was due largely to market research costs of $0.9 million and higher depreciation costs from facility expansion of $0.5 million.

Refund of research and development costs

In February 2016, we recorded a gain upon receipt of $1.6 million , including accrued interest, pursuant to contractual obligations under the Novavax Agreement to refund research and development expenses paid to Novavax between 2009 and 2011.

Interest Income 

Interest income increased $0.2 million for the year ended December 31, 2016 due to both higher levels of investing activity (full year of investing excess cash compared to beginning to invest in September 2015 in the prior year) and a higher interest rate environment.

Interest Expense

Interest expense increased $0.5 million for the year ended December 31, 2016 . The increase was due primarily to the $5.0 million increase in principal borrowings under our 2014 Term Loan as a result of the First Amendment entered into in the fourth quarter of 2015.

Comparison of the Years Ended December 31, 2015 and December 31, 2014


66



 
 
Years Ended December 31,
 
Increase
(in thousands)
 
2015
 
2014
 
(Decrease)
Grant revenue
 
$
670

 
$
308

 
$
362

 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
Research and development
 
28,049

 
23,727

 
4,322

General and administrative
 
13,987

 
9,747

 
4,240

Total operating expenses
 
42,036

 
33,474

 
8,562

Loss from operations
 
(41,366
)
 
(33,166
)
 
8,200

Other expense, net:
 
 
 
 
 
 
Change in fair value of warrants
 

 
(725
)
 
(725
)
Loss on debt extinguishment
 

 
(435
)
 
(435
)
Interest income
 
163

 
55

 
108

Interest expense
 
(1,280
)
 
(1,025
)
 
255

Total other expense, net
 
(1,117
)
 
(2,130
)
 
(1,013
)
Net loss
 
$
(42,483
)
 
$
(35,296
)
 
7,187


Grant revenue

Grant revenue increased $ 0.4 million to $ 0.7 million for the year ended December 31, 2015 from $ 0.3 million for the year ended December 31, 2014 . The increase was due to a full year of activities performed related to a $1.2 million grant entered into with the Gates Foundation in September 2014.

Research and development expenses

R&D expense increased $ 4.3 million to $ 28.0 million for the year ended December 31, 2015 from $ 23.7 million for the year ended December 31, 2014 .  This net increase was attributable to increases of $2.1 million in R&D personnel costs, approximately $1.8 million in lab-related and facilities costs and other general increases to support research activities offset by a $1.0 million decrease in clinical costs and licensing payments. R&D headcount increased by more than 55% to support the clinical and manufacturing activities related to our Phase 2 trials, along with hiring to support our oncology and other research programs. The decline in both clinical costs and licensing payments related to the relative timing of major clinical activities and milestones in 2015 versus 2014.
 
On a program basis, GEN-003 costs increased by $0.4 million largely due to (i) the ongoing Phase 2 dose optimization that began in the second half of 2014 (ii) costs incurred to drive improvements in the manufacturing process for GEN-003 to enable production at commercial scale, and (iii) costs related to the initiation of patient screening for our 131-subject Phase 2b study in the fourth quarter of 2015. Pre-clinical R&D increased by $5.4 million as we accelerated our investment in immuno-oncology research and collaborations and increased spending on our other product candidates and the development of the ATLAS technology platform. These increases were offset by a $1.5 million cost decrease in GEN-004 due to our fourth quarter decision to suspend investment in this program.

General and administrative expenses

G&A expense increased $ 4.2 million to $ 14.0 million for the year ended December 31, 2015 from $ 9.7 million for the year ended December 31, 2014 . The increase was due largely to additional personnel costs of $2.3 million attributable to higher headcount, increases in depreciation costs of approximately $0.4 million due to capital additions and expansion of our of