UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
20-F
(Mark One)
|
|
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
|
||||
OR
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the fiscal year ended
December 31
, 2023
OR
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from to
OR
|
|
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
Date of event requiring this shell company report
For the transition period from to
Commission file number
001-39670
(Exact name of registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
(Jurisdiction of incorporation or organization)
(Address of principal executive offices)
Chief Executive Officer Tel: (
617
)
482-2333
E-mail: ir@puretechhealth.com
c/o PureTech Health LLC
6 Tide Street, Suite 400
Boston, Massachusetts 02210
United States
(Name, telephone, e-mail and/or facsimile number and address of company contact person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
|
Title of each class:
|
Trading Symbol(s) |
Name of each exchange
on which registered:
|
||||||
|
|
|
The
|
||||||
|
|
*
|
The
|
||||||
|
*
|
Listed not for trading, but only in connection with the registration of the American Depositary Shares on The Nasdaq Global Market.
|
||||
Securities registered or to be registered pursuant to Section 12(g) of the Act: None.
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None.
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: Ordinary Shares:
271,853,731
outstanding as of December 31, 2023.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
No
☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ☐
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:
Yes
☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files):
Yes
☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer
|
☐ |
|
☒ |
Non-accelerated filer
|
☐ |
Emerging growth company
|
|
||||||||||||||||||||||||||||
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
| † | The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012. | ||||
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.
☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).
☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
|
U.S. GAAP ☐
|
|
Other ☐
|
||||||||||||||||||||||||
|
by the International Accounting Standards Board
|
☒
|
|||||||||||||||||||||||||
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
☒
TABLE OF CONTENTS
| Page | ||||||||
| ITEM 1. | ||||||||
| ITEM 2. | ||||||||
| ITEM 3. | ||||||||
| ITEM 4. | ||||||||
| ITEM 4A. | ||||||||
| ITEM 5. | ||||||||
| ITEM 6. | ||||||||
| ITEM 7. | ||||||||
| ITEM 8. | ||||||||
| ITEM 9. | ||||||||
| ITEM 10. | ||||||||
| ITEM 11. | ||||||||
| ITEM 12. | ||||||||
| ITEM 13. | ||||||||
| ITEM 14. | ||||||||
| ITEM 15. | ||||||||
| ITEM 16. | ||||||||
| ITEM 16A. | ||||||||
| ITEM 16B. | ||||||||
| ITEM 16C. | ||||||||
| ITEM 16D. | ||||||||
| ITEM 16E. | ||||||||
| ITEM 16F. | ||||||||
| ITEM 16G. | ||||||||
| ITEM 16H. | ||||||||
| ITEM 16I. | ||||||||
|
ITEM 16J
|
||||||||
|
ITEM 16K
|
||||||||
| ITEM 17. | ||||||||
| ITEM 18. | ||||||||
| ITEM 19. | ||||||||
i
Special Note Regarding Forward-Looking Statements
This annual report on Form 20-F contains forward-looking statements that involve substantial risks and uncertainties. All statements contained in this report, other than statements of historical fact, including statements regarding our and our Founded Entities' strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management, are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “would,” “could,” “should,” “continue” and 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 20-F include, among other things, statements about:
•
our ability to realize value from our Founded Entities, which may be impacted if we reduce our ownership to a minority interest or otherwise cede control to other investors through contractual agreements or otherwise;
•
the success, cost and timing of our clinical development within our Internal Programs and Founded Entities, including the progress of, and results from, our Internal Programs' and Founded Entities' preclinical and clinical trials of LYT-100, LYT-200, SPT-300 (formerly known as LYT-300) SPT-310 (formerly known as LYT-310) and SPT-320 (formerly known as LYT-320), our technology platforms and other potential therapeutic candidates within our Internal Programs and therapeutic candidates being developed by our Founded Entities;
•
our ability to obtain and maintain regulatory clearance, certification, authorization or approval of the therapeutic candidates within our Internal Programs or our Founded Entities, and any related restrictions, limitations or warnings in the label of any of the therapeutic candidates if cleared, certified, authorized or approved;
•
our ability to compete with companies currently marketing or engaged in the development of treatments for indications within our Internal Programs or our Founded Entities are designed to target;
•
our plans to pursue research and development of other future therapeutic candidates;
•
the potential advantages of the therapeutic candidates within our Internal Programs and the therapeutic candidates being developed by our Founded Entities;
•
the rate and degree of market acceptance and clinical utility of our therapeutic candidates;
•
the success of our collaborations and partnerships with third parties;
•
our estimates regarding the potential market opportunity for the therapeutic candidates within our Internal Programs and the therapeutic candidates being developed by our Founded Entities;
•
our sales, marketing and distribution capabilities and strategy;
•
our ability to establish and maintain arrangements for manufacture of the therapeutic candidates within our Internal Programs and therapeutic candidates being developed by our Founded Entities;
•
our intellectual property position;
•
our expectations related to the use of capital;
•
the effect of any pandemic or other public health crises, including mitigation efforts and economic effects, on any of the foregoing or other aspects of our business operations;
•
our estimates regarding expenses, future revenues, capital requirements and needs for additional financing;
•
the impact of government laws and regulations; and
•
our competitive position.
ii
SUMMARY OF RISK FACTORS
The risk factors described below are a summary of the principal risk factors associated with our business. These are not the only risks we face. You should carefully consider these risk factors, together with the risk factors incorporated by reference into Item 3D. of this annual report on Form 20-F and the other reports and documents filed by us with the SEC.
•
As of December 31, 2023, we had never generated revenue from the therapeutic candidates within our Internal Programs, and we may never be operationally profitable.
•
We may require substantial additional funding to achieve our business goals. If we are unable to obtain this funding when needed and on acceptable terms, we could be forced to delay, limit or terminate certain of our therapeutic development efforts. Certain of our Founded Entities will similarly require substantial additional funding to achieve their business goals.
•
Our ability to realize value from our Founded Entities may be impacted if we reduce our ownership or otherwise cede control to other investors through contractual agreements or otherwise.
•
We have limited information about and limited control or influence over our Non-Controlled Founded Entities.
•
The therapeutic candidates within our Internal Programs and most of our Founded Entities’ therapeutic candidates are in preclinical or clinical development, which is a lengthy and expensive process with uncertain outcomes and the potential for substantial delays. We cannot give any assurance that any of our and our Founded Entities’ therapeutic candidates will receive regulatory clearance, authorization or approval, which is necessary before they can be commercialized.
•
Preclinical development is uncertain. Our preclinical programs may experience delays or may never advance to clinical trials, which would adversely affect our ability to obtain regulatory clearance, authorization or approvals or commercialize these programs on a timely basis or at all, which would have an adverse effect on our business.
•
Clinical trials of our or our Founded Entities’ therapeutic candidates may be delayed, and certain programs may never advance in the clinic or may be more costly to conduct than we anticipate, any of which can affect our ability to fund our company and would have a material adverse impact on our platform or our business.
•
If we encounter difficulties enrolling patients in clinical trials, our clinical development activities could be delayed or otherwise adversely affected.
•
Use of the therapeutic candidates within our Internal Programs or the therapeutic candidates being developed by our Founded Entities could be associated with side effects, AEs or other properties or safety risks, which could delay or halt their clinical development, prevent their regulatory clearance, authorization or approval, cause us to suspend or discontinue clinical trials, abandon a therapeutic candidate, limit their commercial potential, if cleared, authorized or approved, or result in other significant negative consequences that could severely harm our business, prospects, operating results and financial condition.
•
Our clinical trials may fail to demonstrate substantial evidence of the safety and effectiveness of therapeutic candidates that we may identify and pursue for their intended uses, which would prevent, delay or limit the scope of regulatory clearance, certification, authorization or approval and potential commercialization.
•
Even if we complete the necessary preclinical studies and clinical trials, the marketing approval and certification process is expensive, time-consuming and uncertain and may prevent us from obtaining clearance, certification, authorization or approvals for the potential commercialization of therapeutic candidates.
•
If we are unable to obtain regulatory clearance, certification, authorization or approval in one or more jurisdictions for any therapeutic candidates that we may identify and develop, our business could be substantially harmed.
•
Certain of the therapeutic candidates being developed by us or our Founded Entities are novel, complex and difficult to manufacture. We could experience manufacturing problems that result in delays in our development or commercialization programs or otherwise harm our business.
•
If, in the future, we are unable to establish sales and marketing capabilities or enter into agreements with third parties to sell and market any therapeutic candidates we may develop, we may not be successful in commercializing those therapeutic candidates if and when they are approved.
•
If we fail to comply with healthcare laws, we could face substantial penalties and our business, operations and financial conditions could be adversely affected.
•
We face significant competition in an environment of rapid technological and scientific change, and there is a possibility that our competitors may achieve regulatory approval before us or develop therapies that are safer, more advanced or more effective than ours, which may negatively impact our ability to successfully market or commercialize any therapeutic candidates we may develop and ultimately harm our financial condition.
•
We are currently party to and may seek to enter into additional collaborations, licenses and other similar arrangements and may not be successful in maintaining existing arrangements or entering into new ones, and even if we are, we may not realize the benefits of such relationships, which could cause us to expend significant resources and give rise to substantial business risk with no assurance of financial return.
•
We rely on third parties to assist in conducting our clinical trials and some aspects of our research and preclinical testing, and those third parties may not perform satisfactorily, including failing to meet deadlines for the completion of such trials, research, or testing.
•
If we or our Founded Entities are unable to obtain and maintain sufficient intellectual property protection for our or our Founded Entities’ existing therapeutic candidates or any other therapeutic candidates that we or they may identify, or if the scope of the intellectual property protection we or they currently have or obtain in the future is not sufficiently broad, our competitors could develop and commercialize therapeutic candidates similar or identical to ours, and our ability to successfully commercialize our existing therapeutic candidates and any other therapeutic candidates that we or they may pursue may be impaired.
•
We may not be able to protect our intellectual property rights throughout the world.
•
Our or our Founded Entities’ proprietary rights may not adequately protect our technologies and therapeutic candidates, and do not necessarily address all potential threats to our competitive advantage.
•
The failure to maintain our licenses and realize their benefits may harm our business.
•
If we or our Founded Entities fail to comply with our obligations in the agreements under which we license intellectual property rights from third parties or these agreements are terminated or we or our Founded Entities otherwise experience disruptions to our business relationships with our licensors, we could lose intellectual property rights that are important to our business.
iii
•
Patent terms may be inadequate to protect our competitive position on therapeutic candidates for an adequate amount of time.
•
Issued patents covering our Internal Programs or our Founded Entities' therapeutics candidates could be found invalid or unenforceable if challenged in courts or patent offices.
•
If we are unable to protect the confidentiality of our trade secrets, the value of our technology could be materially adversely affected and our business would be harmed.
•
We and our Founded Entities may be subject to claims challenging the inventorship of our patents and other intellectual property.
•
The COVID-19 pandemic has impacted, and any future global health crises may in the future impact, our business, including our clinical trials and preclinical studies, and may materially and adversely affect our business in the future.
•
Failures in one or more of our programs could adversely impact other programs and have a material adverse impact on our business, results of operations and ability to fund our business.
•
Our business is highly dependent on the clinical advancement of our programs and our success in identifying potential therapeutic candidates. Delay or failure to advance our programs could adversely impact our business.
•
Our future success depends on our ability to retain key employees, directors, consultants and advisors and to attract, retain and motivate qualified personnel.
•
The market price of our ADSs has been and will likely continue to be highly volatile, and you could lose all or part of your investment.
•
Holders of ADSs are not treated as holders of our ordinary shares.
•
As a foreign private issuer, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from Nasdaq corporate governance listing standards. These practices may afford less protection to shareholders than they would enjoy if we complied fully with corporate governance listing standards.
•
If we are unable to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, shareholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our ADSs.
iv
EXPLANATORY NOTE
Pursuant to Rule 12b-23(a) of the Securities Exchange Act of 1934, as amended, the information required in this annual report on Form 20-F for the fiscal year ended December 31, 2023 (this "annual report on Form 20-F") of PureTech Health plc (the “Company”) set out below is being incorporated by reference from PureTech’s “Annual Report and Accounts 2023”, portions of which are included as exhibit 15.1 to this annual report on Form 20-F. Only the information set out below with specific reference to items and pages of PureTech's "Annual Report and Accounts 2023" is deemed to be filed as part of this annual report on Form 20-F. Other information contained within PureTech's "Annual Report and Accounts 2023" that is not specified, including graphs and tabular data, is not included in this annual report on Form 20-F and is not deemed to be filed as part of this annual report on Form 20-F. Photographs are also not included. References herein to PureTech's websites are textual references only and information on or accessible through such websites does not form part of and is not incorporated into this annual report on Form 20-F.
References below to major headings include all information under such major headings, including subheadings, unless such reference is a reference to a subheading, in which case such reference includes only the information contained under such subheading. Unless the context otherwise requires, “PureTech” and “PureTech Health” refer to the Company, which is comprised of PureTech and its subsidiaries (together, the “Group”).
v
PART I
| ITEM 1. | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS. | ||||
A.
IDENTITY OF DIRECTORS
Not applicable.
B.
IDENTITY OF SENIOR MANAGEMENT
Not applicable.
C.
IDENTITY OF ADVISERS.
Not applicable.
1
| ITEM 2. | OFFER STATISTICS AND EXPECTED TIMETABLE | ||||
Not applicable.
2
| ITEM 3. | KEY INFORMATION | ||||
A.
[Reserved]
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
D. RISK FACTORS
The information (including tabular data) set forth or referenced under the heading “Risk Factor Annex" on pages 186 to 223 of PureTech’s “Annual Report and Accounts 2023” included as exhibit 15.1 to this annual report on Form 20-F is incorporated by reference.
3
| ITEM 4. | INFORMATION ON THE COMPANY | ||||
A. HISTORY AND DEVELOPMENT OF THE COMPANY
The information set forth under the heading "History and Development of the Company" on page 185 of PureTech’s “Annual Report and Accounts 2023” included as exhibit 15.1 to this annual report on Form 20-F is incorporated by reference.
For a description of our principal capital expenditures and divestitures for the three years ended December 31, 2023 and for those currently in progress, see Item 5. “Operating and Financial Review and Prospects—A. Operating Results”.
The United States Securities and Exchange Commission (the “SEC”) maintains an internet website that contains reports, proxy and information statements, and other information regarding issuers, like us, that file electronically with the SEC. The address of that website is www.sec.gov. We also maintain an Internet website at www.puretechhealth.com. The information contained on, or that may be accessed through, our website is not part of, and is not incorporated into, annual report on Form 20-F.
B. BUSINESS OVERVIEW
The information (including graphs and tabular data) set forth under the following headings is incorporated by reference herein: “Highlights of the Year—2023” (for the years of 2021, 2022 and 2023) on page 1, “PureTech's Hub-and-Spoke Model” on page 10, "Internal Program" on page 11, “ESG Report— Patients-Ensuring Drug Efficacy and Safety” on page 33, “Risk Management—Risks related to regulatory approval" on page 61 and "Risk Management—Risks related to intellectual property protection" on page 63, “Financial Review—Revenue” on page 71, in each case of PureTech's "Annual Report and Accounts 2023" included as exhibit 15.1 to this annual report on Form 20-F, “Consolidated Statement of Comprehensive Income/(Loss),” “Notes to the Consolidated Financial Statements—Note 3. Revenue” and “Notes to the Consolidated Financial Statements—Note 4. Segment Information,” in each case of our audited consolidated financial statements included elsewhere in this annual report on Form 20-F. Seasonality does not materially impact the Company's main business.
Competition
The biotechnology and pharmaceutical industries utilize rapidly advancing technologies and are characterized by intense competition. There is also a strong emphasis on intellectual property and proprietary products. Our pipeline builds on validated biology of known therapeutics while applying unique inventive steps that improve the clinical pharmacology. We further de-risk programs with key experiments at an early stage to validate the underlying value proposition. We believe that our technology, drug discovery and development expertise and capabilities enable such strong pipeline creation and provide us with a competitive advantage. However, we will continue to face competition from different sources including major pharmaceutical companies, biotechnology companies, academic institutions, government agencies, and public and private research institutions. In addition, there are many companies that have approved therapeutics for some of our target indications. For any products that we eventually commercialize, we will not only compete with existing therapies but also compete with new therapies that may become available in the future.
In addition to the competition we will face from the parties described above, we face competition for certain of the product candidates we are developing internally as well as the products we are advancing through our Founded Entities.
LYT-100
In the field of idiopathic pulmonary fibrosis (IPF), there are two approved drugs, pirfenidone (Esbriet), marketed by Roche, and nintedanib (Ofev), marketed by Boehringer Ingelheim. These drugs have unfavorable tolerability profiles, leading to sustained unmet need for novel therapies. In May 2022, a generic version of pirfenidone was approved in the US. Generic pirfenidone is also starting to be prescribed in some EU countries. Other potential competitive product candidates in various stages of development include, but are not limited to: United Therapeutics’ treprostinil in Phase 3 clinical trials, Boehringer Ingelheim’s BI1015550 in Phase 3 development, BMS’ BMS-986278 in Phase 3 clinical development, Avalyn’s AP01 which is expected to enter a Phase 2 or 3 trial , Pliant Therapeutics’ PLN-74809 in Phase 2 clinical development, and Horizon Therapeutics’ HZN-825 in Phase 2 clinical development.
LYT-200
We are aware of one current drug product candidate targeting galectin-9, FibroGen’s FG-3165, which FibroGen has disclosed that they are anticipating submitting an Investigational New Drug Application, or IND, for in the first quarter of 2024. Additionally, if we are successful in developing LYT-200 as an immuno-oncology (IO) treatment we would expect to compete with currently approved IO therapies and those that may be developed in the future. Current marketed IO products include CTLA-4, such as BMS’ Yervoy, and PD-1/PD-L1, such as BMS’ Opdivo, Merck’s Keytruda and Genentech’s Tecentriq, and T cell engager immunotherapies, such as Amgen’s Blincyto. In addition, there are other academic groups and/or companies that may be involved in pre-clinical research centered around galectin-9 as a therapeutic target.
SPT-300 (formerly known as LYT-300)
In the field of GABAA positive allosteric modulators, there are four approved drugs, allopregnanolone (Zulresso) and zuranolone (Zurzuvae), marketed by Sage Therapeutics, ganaxolone (Ztalmy), marketed by Marinus Pharmaceuticals, and cenobamate (Xcopri), marketed by SK Life Science. Other potential competitive product candidates in various stages of development include, Abbvie/Cerevel’s darigabat , Roche’s alogabat and Sage’s SAGE-324, all in Phase 2 clinical development.
SPT-310 (formerly known as LYT-310)
In the field of cannabidiol agents, there is one FDA approved drug, Epidiolex, marketed by Jazz Pharmaceuticals (originally GW Pharmaceuticals). Other potential competitive product candidates in various stages of development include Horizon/Zynerba Pharmaceuticals’ ZyGel in Phase 3 clinical development, Cardiol Therapeutics’ Cardiol Rx in Phase 2 clinical development.
SPT-320 (formerly known as LYT-320)
We are aware of only one other agomelatine agent in development, Alto Neuroscience’s ALTO-300. ALTO-300 successfully completed a Phase 2a open-label trial to evaluate predictive biomarkers for efficacy and safety. ALTO-300 is now in a placebo-
4
controlled Phase 2b trial and topline data is estimated to be in the second half of 2024. In addition, there are other academic groups that may be involved in research centered around agomelatine as a therapeutic target.
Glyph Technology Platform
We are not aware of any direct competitors to our Glyph technology platform, but it may compete with new therapies that become available in the future to target the indications we are focused on.
Government Regulation
Government authorities in the United States, at the federal, state and local level, and in other countries and jurisdictions, including the European Union, or EU, extensively regulate, among other things, the research, development, testing, manufacture, quality control, approval, packaging, storage, recordkeeping, labeling, advertising, promotion, distribution, marketing, post-approval monitoring and reporting, and import and export of drugs, biological products and medical devices. The processes for obtaining regulatory approvals in the United States and in foreign countries and jurisdictions, along with subsequent compliance with applicable statutes and regulations, require the expenditure of substantial time and financial resources.
U.S. Regulation of Drugs and Biologics
In the United States, the FDA regulates drugs under the FDCA, and its implementing regulations, and biologics under the FDCA and the Public Health Service Act and its implementing regulations. FDA approval is required before any new unapproved drug or dosage form, including a new use of a previously approved drug, can be marketed in the United States. Drugs and biologics are also subject to other federal, state, and local statutes and regulations. The process required by the FDA before such product candidates may be marketed in the United States generally involves the following:
•
completion of extensive preclinical laboratory tests and preclinical animal studies, certain of which must be performed in accordance with Good Laboratory Practice, or GLP, regulations and other applicable regulations;
•
submission to the FDA of an IND, which must become effective before human clinical studies may begin;
•
approval by an independent institutional review board, or IRB, or ethics committee representing each clinical site before each clinical study may be initiated;
•
performance of adequate and well-controlled human clinical studies in accordance with Good Clinical Practice, or GCP, requirements to establish the safety and efficacy, or with respect to biologics, the safety, purity and potency of the product candidate for each proposed indication;
•
preparation of and submission to the FDA of a new drug application, or NDA, or biologics license application, or BLA, after completion of all pivotal clinical studies;
•
potential review of the product application by an FDA advisory committee, where appropriate and if applicable;
•
a determination by the FDA within 60 days of its receipt of an NDA or BLA to file the application for review;
•
satisfactory completion of an FDA pre-approval inspection of the manufacturing facilities where the proposed product drug substance is produced to assess compliance with current Good Manufacturing Practices, or cGMP, and potential audits of selected clinical trial sites to ensure compliance with GCP; and
•
FDA review and approval of an NDA or BLA prior to any commercial marketing or sale of the drug in the United States.
An IND is a request for authorization from the FDA to administer an investigational drug product to humans. The central focus of an IND submission is on the general investigational plan and the protocol or protocols for preclinical studies and clinical trials. The IND also includes results of animal and in vitro studies assessing the toxicology, pharmacokinetics, pharmacology and pharmacodynamics of the product, chemistry, manufacturing and controls, or CMC, information, and any available human data or literature to support the use of the investigational product. An IND must become effective before human clinical trials may begin. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day period, raises safety concerns or questions about the proposed clinical trial. In such a case, the IND may be placed on clinical hold and the IND sponsor and the FDA must resolve any outstanding concerns or questions before the clinical trial can begin. Submission of an IND therefore may or may not result in FDA authorization to begin a clinical trial.
Clinical trials involve the administration of the investigational product to human subjects under the supervision of qualified investigators in accordance with GCP, which includes, among other things, the requirement that all research subjects provide their informed consent for their participation in any clinical study. Clinical trials are conducted under protocols detailing, among other things, the objectives of the study, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. A separate submission to the existing IND must be made for each successive clinical trial conducted during product development and for any subsequent protocol amendments. While the IND is active, progress reports summarizing the results of the clinical trials and nonclinical studies performed since the last progress report, among other information, must be submitted at least annually to the FDA, and written IND safety reports must be submitted to the FDA and investigators for serious and unexpected suspected adverse events, findings from other studies suggesting a significant risk to humans exposed to the drug, findings from animal or in vitro testing suggesting a significant risk to humans exposed to the drug, and any clinically important increased rate of a serious suspected adverse reaction compared to that listed in the protocol or investigator brochure.
Furthermore, an independent IRB for each site proposing to conduct the clinical trial must review and approve the plan for any clinical trial and its informed consent form before the clinical trial begins at that site, and must monitor the study until completed. Regulatory authorities, the IRB or the sponsor may suspend a clinical trial at any time on various grounds, including a finding that the subjects are being exposed to an unacceptable health risk or that the trial is unlikely to meet its stated objectives. Some studies also include oversight by an independent group of qualified experts organized by the clinical study sponsor, known as a data safety monitoring board, which provides authorization for whether or not a study may move forward at designated check points based on access to certain data from the study and may halt the clinical trial if it determines that there is an unacceptable safety risk for subjects or other grounds, such as no demonstration of efficacy. There are also requirements governing the reporting of ongoing preclinical studies and clinical trials and clinical study results to public registries.
The clinical investigation of a drug is generally divided into three phases. Although the phases are usually conducted sequentially, they may overlap or be combined.
•
Phase 1. The investigational product is initially introduced into healthy human subjects or patients with the target disease or condition. These studies are generally designed to test the safety, dosage tolerance, absorption, metabolism and distribution
5
of the investigational product in humans, the side effects associated with increasing doses, and, if possible, to gain early evidence on effectiveness.
•
Phase 2. The investigational product is administered to a limited patient population with a specified disease or condition to evaluate the preliminary efficacy, optimal dosages and dosing schedule and to identify possible adverse side effects and safety risks.
•
Phase 3. The investigational product is administered to an expanded patient population to further evaluate dosage, to provide statistically significant evidence of clinical efficacy and to further test for safety, generally at multiple geographically dispersed clinical trial sites. These clinical trials are intended to establish the overall risk/benefit ratio of the investigational product and to provide an adequate basis for product approval.
In some cases, the FDA may condition approval of an NDA or BLA for a product candidate on the sponsor’s agreement to conduct additional clinical studies after approval. In other cases, a sponsor may voluntarily conduct additional clinical studies after approval to gain more information about the drug within the approved indication. Such post-approval studies are often referred to as Phase 4 clinical studies. Concurrent with clinical trials, companies may complete additional animal studies and develop additional information about the biological characteristics of the product candidate, and must finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the product candidate and, among other things, must develop methods for testing the identity, strength, quality and purity of the final product, or for biologics, the safety, purity and potency.
Special Protocol Assessment
The special protocol assessment, or SPA, process is designed to facilitate the FDA’s review and approval of certain drugs and biologics by allowing the FDA to evaluate the proposed design of certain preclinical studies and clinical trials, including among others, trials that are intended to form the primary basis for determining a product candidate’s efficacy. Upon specific request by a clinical trial sponsor, the FDA aims to evaluate the protocol and respond to a sponsor’s questions regarding, among other things, entry, criteria, dose selection, endpoints, trial conduct and data analyses, within 45 days of receipt of the request. The FDA ultimately assesses whether the protocol design and planned analysis of the trial are acceptable to support regulatory approval of the product candidate with respect to effectiveness of the indication studied. All agreements and disagreements between the FDA and the sponsor regarding an SPA must be clearly documented in an SPA letter or the minutes of a meeting between the sponsor and the FDA.
Even if the FDA agrees to the design, execution and analyses proposed in protocols reviewed under the SPA process, the FDA may rescind or alter its agreement where the FDA determines that a substantial scientific issue essential to determining the safety or efficacy of the product candidate has been identified after the trial has begun, which can include, but is not limited to, the following circumstances:
•
identification of data that would call into question the clinical relevance of previously agreed-upon efficacy endpoints;
•
identification of safety concerns related to the product or its pharmacological class;
•
paradigm shifts in disease diagnosis or management recognized by the scientific community and the FDA; or
•
the relevant data, assumptions, or information provided by the sponsor in the SPA submission are found to be false statements or misstatements, or are found to omit relevant facts, such that the clinical relevance of critical components of trial design is called into question, or appropriate safety monitoring and human subject protection are affected.
A documented SPA may be modified, and such modification will be deemed binding on the FDA review division, except under the circumstances described above, if the FDA and the sponsor agree in writing to modify the protocol and such modification is intended to improve the study. If the sponsor fails to follow the protocol that was agreed upon with FDA consistent with the SPA agreement, or makes substantive changes in the protocol without the FDA’s agreement, then FDA will consider the results from the study as a BLA or NDA review issue. The FDA will not be bound by an SPA agreement where the sponsor fails to conduct the trial in accordance with the agreed SPA.
NDA and BLA Review Process
Assuming successful completion of all required testing in accordance with all applicable regulatory requirements, the results of product development, including, among other things, the results from nonclinical studies and clinical trials are submitted to the FDA as part of an NDA or BLA requesting approval to market the product for one or more indications. The NDA or BLA must include all relevant data available from pertinent preclinical studies and clinical trials, including negative or ambiguous results as well as positive findings, together with detailed information relating to the product’s CMC and proposed labeling, among other things. Data can come from company-sponsored clinical studies intended to test the safety and effectiveness of the product, or from a number of alternative sources, including studies initiated and sponsored by investigators. The submission of an NDA or BLA requires payment of a substantial application user fee to the FDA, unless a waiver or exemption applies.
In addition, under the Pediatric Research Equity Act, or PREA, an NDA or BLA or supplement to an NDA or BLA must contain data to assess the safety and effectiveness of the biological product candidate 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 requires that a sponsor who is planning to submit a marketing application for a drug or biological product that includes a new active ingredient, new indication, new dosage form, new dosing regimen or new route of administration submit an initial pediatric study plan within sixty days after an end-of-Phase 2 meeting or as may be agreed between the sponsor and FDA. Unless otherwise required by regulation, PREA does not apply to any product candidate for an indication for which orphan designation has been granted.
Within 60 days following submission of the application, the FDA reviews the submitted BLA or NDA to determine if the application is substantially complete before the FDA accepts it for filing. The FDA may refuse to file any NDA or BLA that it deems incomplete or not properly reviewable at the time of submission and may request additional information. In this event, the NDA or BLA must be resubmitted with the additional information. Once an NDA or BLA has been accepted for filing, the FDA’s goal is to review applications for original biologics or new-molecular-entity drugs within ten months after the filing date, or, if the application qualifies for priority review, six months after the filing date. In both standard and priority reviews, the review process may also be extended for a three-month period for the FDA to review additional information that is deemed a major amendment to an application.
6
The FDA reviews an NDA to determine, among other things, whether a product is safe and effective for its intended use and whether its manufacturing is sufficient to assure and preserve the product’s identity, strength, quality and purity. The FDA reviews a BLA to determine, among other things, whether a product is safe, pure and potent and the facility in which it is manufactured, processed, packed or held meets standards designed to assure the product’s continued safety, purity and potency. When reviewing an NDA or BLA, the FDA may convene an advisory committee to provide clinical insight on application review questions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions.
Before approving an NDA or BLA, the FDA will typically inspect the facility or facilities where the product is manufactured. The FDA will not approve an application unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. Additionally, before approving an NDA or BLA, the FDA will typically inspect one or more clinical sites to assure compliance with GCP.
After the FDA evaluates the NDA or BLA and conducts inspections of manufacturing facilities where the investigational product and/or its drug substance will be produced, the FDA may issue an approval letter or a Complete Response letter. An approval letter authorizes commercial marketing of the product with specific prescribing information for specific indications. A Complete Response letter will describe all of the deficiencies that the FDA has identified in the NDA or BLA, except that where the FDA determines that the data supporting the application are inadequate to support approval, the FDA may issue the Complete Response letter without first conducting required inspections, testing submitted product lots and/or reviewing proposed labeling. In issuing the Complete Response letter, the FDA may recommend actions that the applicant might take to place a resubmittedNDA or BLA in condition for approval, including requests for additional clinical studies, or other information supporting the application. Notwithstanding the submission of any additional information or data, the FDA may delay or refuse approval of an NDA or BLA if applicable regulatory criteria are not satisfied.
If the FDA approves a BLA or NDA, such approval will be granted for particular indications and may entail limitations on the indicated uses for which such product may be marketed. For example, the FDA may approve the NDA or BLA with a Risk Evaluation and Mitigation Strategy, or REMS, to ensure the benefits of the product outweigh its risks. A REMS is a safety strategy to manage a known or potential serious risk associated with a product and to enable patients to have continued access to such medicines by managing their safe use, and could include medication guides, physician communication plans, or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. The FDA also may condition approval on, among other things, changes to proposed labeling or the development of adequate controls and specifications. Once approved, the FDA may withdraw the product approval if compliance with pre- and post-marketing requirements is not maintained or if problems occur after the product reaches the marketplace. The FDA may require one or more post-market studies and surveillance to further assess and monitor the product’s safety and effectiveness after commercialization, and may limit further marketing of the product based on the results of these post-marketing studies.
Regulation of Combination Products in the United States
Certain therapeutic products are comprised of multiple components, such as drug or biologic components and device components, that would normally be subject to different regulatory frameworks by the FDA and frequently regulated by different centers at the FDA. These products are known as combination products. Under the FDCA, the FDA is charged with assigning a center with primary jurisdiction, or a lead center, for review of a combination product. The determination of which center will be the lead center is based on the “primary mode of action” of the combination product. Thus, if the primary mode of action of a drug-device combination product is attributable to the drug product, the FDA center responsible for premarket review of the drug product would have primary jurisdiction for the combination product. The FDA has also established the Office of Combination Products to address issues surrounding combination products and provide more certainty to the regulatory review process. That office serves as a focal point for combination product issues for agency reviewers and industry. It is also responsible for developing guidance and regulations to clarify the regulation of combination products, and for assignment of the FDA center that has primary jurisdiction for review of combination products where the jurisdiction is unclear or in dispute. A combination product with a primary mode of action attributable to the drug or biologic component generally would be reviewed and approved pursuant to the drug approval processes set forth in the FDCA. In reviewing the NDA or BLA for such a product, however, FDA reviewers would consult with their counterparts in the FDA’s Center for Devices and Radiological Health to ensure that the device component of the combination product met applicable requirements regarding safety, effectiveness, durability and performance. In addition, under FDA regulations, combination products are subject to cGMP requirements applicable to both drugs and devices, including the Quality System Regulation, or QSR, currently applicable to medical devices.
Expedited Development and Review Programs for Drugs and Biologics
The FDA offers a number of expedited development and review programs for qualifying product candidates. The fast track program is intended to expedite or facilitate the process for reviewing product candidates that meet certain criteria. Specifically, product candidates are eligible for fast track designation if they are intended to treat a serious or life-threatening disease or condition and demonstrate the potential to address unmet medical needs for the disease or condition. Fast track designation applies to the combination of the product candidate and the specific indication for which it is being studied. The sponsor of a fast track product candidate has opportunities for more frequent interactions with the review team during product development and, once an NDA or BLA is submitted, the application may be eligible for priority review. A fast track product candidate may also be eligible for rolling review, where the FDA may consider for review sections of the NDA or BLA on a rolling basis before the complete application is submitted, if the sponsor provides a schedule for the submission of the sections of the NDA or BLA, the FDA agrees to accept sections of the NDA or BLA and determines that the schedule is acceptable, and the sponsor pays any required user fees upon submission of the first section of the NDA or BLA.
A product candidate intended to treat a serious or life-threatening disease or condition may also be eligible for breakthrough therapy designation to expedite its development and review. A product candidate can receive breakthrough therapy designation if preliminary clinical evidence indicates that the product candidate, alone or in combination with one or more other drugs or biologics, may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. The designation includes all of the fast track program
7
features, as well as more intensive FDA interaction and guidance beginning as early as Phase 1 and an organizational commitment to expedite the development and review of the product candidate, including involvement of senior managers.
Any marketing application for a drug or biologic submitted to the FDA for approval, including a product candidate with a fast track designation and/or breakthrough therapy designation, may be eligible for other types of FDA programs intended to expedite the FDA review and approval process, such as priority review . An NDA or BLA is eligible for priority review if the product candidate has the potential to provide a significant improvement in the treatment, diagnosis or prevention of a serious disease or condition. For new-molecular-entity NDAs and original BLAs, priority review designation means the FDA’s goal is to take action on the marketing application within six months of the 60-day filing date (as compared to ten months under standard review).
Additionally, depending on the designs of the applicable clinical trials, product candidates studied for their safety and effectiveness in treating serious or life-threatening diseases or conditions may receive accelerated approval upon a determination that the product candidate has an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity, or prevalence of the condition and the availability or lack of alternative treatments. As a condition of accelerated approval, the FDA will generally require the sponsor to perform adequate and well-controlled confirmatory clinical studies to verify and describe the anticipated effect on irreversible morbidity or mortality or other clinical benefit and may require such confirmatory studies be underway prior to granting accelerated approval. Products receiving accelerated approval may be subject to expedited withdrawal procedures if the sponsor fails to conduct the required confirmatory studies in a timely manner or if such studies fail to verify the predicted clinical benefit. In addition, the FDA currently requires as a condition for accelerated approval pre-approval of promotional materials, which could adversely impact the timing of the commercial launch of the product.
Fast track designation, breakthrough therapy designation, priority review, and accelerated approval do not change the standards for approval but may expedite the development or approval process. Even if a product qualifies for one or more of these programs, the FDA may later decide that the product no longer meets the conditions for qualification or decide that the time period for FDA review or approval will not be shortened. We may explore some of these opportunities for our product candidates as appropriate.
Rare Pediatric Disease Priority Review Voucher Program
In 2012, the U.S. Congress authorized the FDA to award priority review vouchers to Sponsors of certain rare pediatric disease product applications. This program is designed to encourage development of new drug and biological products for prevention and treatment of certain rare pediatric diseases. Specifically, under this program, a sponsor who receives an approval for a drug or biologic for a “rare pediatric disease” may qualify for a voucher that can be redeemed to receive priority review of a subsequent marketing application for a different product. The Sponsor of a rare pediatric disease drug product receiving a priority review voucher may transfer (including by sale) the voucher to another sponsor. The voucher may be further transferred any number of times before the voucher is used, as long as the Sponsor making the transfer has not yet submitted the application. The FDA may also revoke any priority review voucher if the rare pediatric disease drug for which the voucher was awarded is not marketed in the U.S. within one year following the date of approval.
For purposes of this program, a “rare pediatric disease” is a (a) serious or life-threatening disease in which the serious or life-threatening manifestations primarily affect individuals aged from birth to 18 years, including age groups often called neonates, infants, children, and adolescents; and (b) rare diseases or conditions within the meaning of the Orphan Drug Act. On December 27, 2020, the Rare Pediatric Disease Priority Review Voucher Program was extended. Under the current statutory sunset provisions, after September 30, 2024, FDA may only award a voucher for an approved rare pediatric disease product application if the Sponsor has rare pediatric disease designation for the drug, and that designation was granted by September 30, 2024. After September 30, 2026, FDA may not award any Rare Pediatric Disease Priority Review Voucher.
Orphan Drug Designation
Under the Orphan Drug Act, the FDA may grant orphan designation to a drug or biologic intended to treat a rare disease or condition, which is a disease or condition that affects fewer than 200,000 individuals in the United States, or more than 200,000 individuals in the United States for which there is no reasonable expectation that the cost of developing and making available in the United States a drug or biologic for this type of disease or condition will be recovered from sales in the United States for that drug or biologic. Orphan drug designation must be requested before submitting an NDA or BLA. After the FDA grants orphan drug designation, the generic identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. The orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review or approval process.
If a product that has orphan drug designation subsequently receives the first FDA approval for the disease or condition for which it has such designation, the product is entitled to orphan drug exclusive approval (or exclusivity), which means that the FDA may not approve any other applications, including a full NDA or BLA, to market the same drug or biologic for the same disease or condition for seven years, except in limited circumstances, such as a showing of clinical superiority to the product with orphan drug exclusivity or if the FDA finds that the holder of the orphan drug exclusivity has not shown that it can assure the availability of sufficient quantities of the orphan drug to meet the needs of patients with the disease or condition for which the drug or biologic was designated. Orphan drug exclusivity does not prevent the FDA from approving a different drug or biologic for the same disease or condition, or the same drug or biologic for a different disease or condition. Among the other benefits of orphan drug designation are tax credits for certain research and a waiver of the NDA or BLA application user fee.
A designated orphan drug may not receive orphan drug exclusivity if it is approved for a use that is broader than the disease or condition for which it received orphan designation. In addition, exclusive marketing rights in the United States may be lost if the FDA later determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantities of the product to meet the needs of patients with the rare disease or condition.
Post-Approval Requirements for Drugs and Biologics
Any products manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including, among other things, requirements relating to record-keeping, reporting of adverse experiences, periodic reporting, product sampling and distribution, and advertising and promotion of the product. After approval, most changes to the
8
approved product, such as adding new indications or other labeling claims, are subject to prior FDA review and approval. There also are continuing user fee requirements, under which the FDA assesses an annual program fee for each product identified in an approved NDA or BLA. Drug and biologic manufacturers and their subcontractors are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMPs, which impose certain procedural and documentation requirements upon NDA or BLA holders and any third-party manufacturers. Changes to the manufacturing process are strictly regulated, and, depending on the significance of the change, may require prior FDA approval before being implemented. FDA regulations also require investigation and correction of any deviations from cGMPs and impose reporting requirements upon us and any third-party manufacturers that we may decide to use. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain compliance with cGMPs and other aspects of regulatory compliance.
The FDA may withdraw approval if compliance with regulatory requirements and standards is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in revisions to the approved labeling to add new safety information; imposition of post-market studies or clinical studies to assess new safety risks; or imposition of distribution restrictions or other restrictions under a REMS program. Other potential consequences include, among other things:
•
restrictions on the marketing or manufacturing of a product, complete withdrawal of the product from the market or product recalls;
•
fines, warning letters or holds on post-approval clinical studies;
•
refusal of the FDA to approve pending applications or supplements to approved applications, or suspension or revocation of existing product approvals;
•
product seizure or detention, or refusal of the FDA to permit the import or export of products;
•
consent decrees, corporate integrity agreements, debarment or exclusion from federal healthcare programs;
•
mandated modification of promotional materials and labeling and the issuance of corrective information;
•
the issuance of safety alerts, Dear Healthcare Provider letters, press releases and other communications containing warnings or other safety information about the product; or
•
injunctions or the imposition of civil or criminal penalties.
The FDA closely regulates the marketing, labeling, advertising and promotion of biologics. A company can make only those claims relating to safety and efficacy, purity and potency that are approved by the FDA and in accordance with the provisions of the approved label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses. Failure to comply with these requirements can result in, among other things, adverse publicity, warning letters, corrective advertising and potential civil and criminal penalties. Physicians may prescribe legally available products for uses that are not described in the product’s labeling and that differ from those tested by us and approved by the FDA. Such off-label uses are common across medical specialties. Physicians may believe that such off-label uses are the best treatment for many patients in varied circumstances. The FDA does not regulate the behavior of physicians in their choice of treatments. The FDA does, however, restrict manufacturer’s communications on the subject of off-label use of their products.
Hatch-Waxman Act and Drug Product Exclusivity
Section 505 of the FDCA describes three types of marketing applications that may be submitted to the FDA to request marketing authorization for a new drug. A Section 505(b)(1) NDA is an application that contains full reports of investigations of safety and efficacy. A 505(b)(2) NDA is an application that contains full reports of investigations of safety and efficacy but where at least some of the information required for approval comes from investigations that were not conducted by or for the applicant and for which the applicant has not obtained a right of reference or use from the person by or for whom the investigations were conducted. This regulatory pathway enables the applicant to rely, in part, on the FDA's prior findings of safety and efficacy for an existing product, or published literature, in support of its application. Section 505(j) of the FDCA establishes an abbreviated approval process for a generic version of approved drug products through the submission of an Abbreviated New Drug Application, or ANDA. An ANDA provides for marketing of a generic drug product that has the same active ingredients, dosage form, strength, route of administration, labeling, performance characteristics and intended use, among other things, to a previously approved product. ANDAs are termed "abbreviated" because they are generally not required to include preclinical (animal) and clinical (human) data to establish safety and efficacy. Instead, generic applicants must scientifically demonstrate that their product is bioequivalent to, or performs in the same manner as, the innovator drug through in vitro, in vivo, or other testing. The generic version must deliver the same amount of active ingredients into a subject's bloodstream in the same amount of time as the innovator drug and can often be substituted by pharmacists under prescriptions written for the reference listed drug. In seeking approval for a drug through an NDA, applicants are required to list with the FDA each patent with claims that cover the applicant's drug or a method of using the drug. Upon approval of a drug, each of the patents listed in the application for the drug is then published in the FDA's Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book. Drugs listed in the Orange Book can, in turn, be cited by potential competitors in support of approval of an ANDA or 505(b)(2) NDA.
Upon submission of an ANDA or a 505(b)(2) NDA, an applicant must certify to the FDA that: (1) no patent information on the drug product that is the subject of the application has been submitted to the FDA; (2) such patent has expired; (3) the date on which such patent expires; or (4) such patent is invalid or will not be infringed upon by the manufacture, use or sale of the drug product for which the application is submitted. Generally, the ANDA or 505(b)(2) NDA cannot be approved until all listed patents have expired, except where the ANDA or 505(b)(2) NDA applicant challenges a listed patent through the last type of certification, also known as a paragraph IV certification. If the applicant does not challenge the listed patents or indicates that it is not seeking approval of a patented method of use, the ANDA or 505(b)(2) NDA application will not be approved until all of the listed patents claiming the referenced product have expired. If the ANDA or 505(b)(2) NDA applicant has provided a Paragraph IV certification to the FDA, the applicant must send notice of the Paragraph IV certification to the NDA and patent holders once the application has been accepted for filing by the FDA. The NDA and patent holders may then initiate a patent infringement lawsuit in response to the notice of the paragraph IV certification. If the paragraph IV certification is challenged by an NDA holder or the patent owner(s) asserts a patent challenge to the paragraph IV certification, the FDA may not approve that application until the earlier of 30 months from the receipt of the notice of the paragraph IV certification, the expiration of the patent, when the infringement case
9
concerning each such patent was favorably decided in the applicant's favor or settled, or such shorter or longer period as may be ordered by a court. This prohibition is generally referred to as the 30-month stay. In instances where an ANDA or 505(b)(2) NDA applicant files a paragraph IV certification, the NDA holder or patent owner(s) regularly take action to trigger the 30-month stay, recognizing that the related patent litigation may take many months or years to resolve. Thus, approval of an ANDA or 505(b)(2) NDA could be delayed for a significant period of time depending on the patent certification the applicant makes and the reference drug sponsor's decision to initiate patent litigation.
The Hatch-Waxman Act also establishes periods of regulatory exclusivity for certain approved drug products, during which the FDA cannot approve (or in some cases accept) an ANDA or 505(b)(2) application that relies on the branded reference drug. For example, the holder of an NDA, including a 505(b)(2) NDA, may obtain five years of non-patent data exclusivity upon approval of a new drug containing new chemical entities that have not been previously approved by the FDA. A drug is a new chemical entity if the FDA has not previously approved any other new drug containing the same active moiety, which is the molecule or ion responsible for the therapeutic activity of the drug substance. During the exclusivity period, the FDA may not accept for review an ANDA or a 505(b)(2) NDA submitted by another company that contains the previously approved active moiety. However, an ANDA or 505(b)(2) NDA may be submitted after four years if it contains a certification of patent invalidity or non-infringement. The Hatch-Waxman Act also provides three years of non-patent exclusivity to the holder of an NDA (including a 505(b)(2) NDA) for a particular condition of approval, or change to a marketed product, such as a new formulation for a previously approved product, if one or more new clinical studies (other than bioavailability or bioequivalence studies) was essential to the approval of the application and was conducted/sponsored by the applicant. This three-year exclusivity period protects against FDA approval of ANDAs and 505(b)(2) NDAs for the condition of the new drug's approval. As a general matter, the three year exclusivity does not prohibit the FDA from approving ANDAs or 505(b)(2) NDAs for generic versions of the original, unmodified drug product. Five-year and three-year exclusivity will not delay the submission or approval of a full NDA; however, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the preclinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and efficacy.
Biosimilars and Reference Product Exclusivity
The Biologics Price Competition and Innovation Act of 2009, or BPCIA, created an abbreviated approval pathway for biological products that are highly similar, or “biosimilar,” to or interchangeable with an FDA-approved reference biological product. Biosimilarity, which requires that there be no clinically meaningful differences between the biological product and the reference product in terms of safety, purity, and potency, is generally shown through analytical studies, animal studies, and a clinical study or studies. Interchangeability requires that a product is biosimilar to the reference product and the product must demonstrate that it can be expected to produce the same clinical results as the reference product in any given patient and, for products that are administered multiple times to an individual, the biologic and the reference biologic may be alternated or switched after one has been previously administered without increasing safety risks or risks of diminished efficacy relative to exclusive use of the reference biologic. A product shown to be biosimilar or interchangeable with an FDA-approved reference biological product may rely in part on the FDA’s previous determination of safety and effectiveness for the reference product for approval, which can potentially reduce the cost and time required to obtain approval to market the product.
Under the BPCIA, an application for a biosimilar product may not be submitted to the FDA until four years following the date that the reference product was first licensed by the FDA. In addition, the approval of a biosimilar product may not be made effective by the FDA until 12 years from the date on which the reference product was first licensed. During this 12-year period of exclusivity, another company may still market a competing version of the reference product if the FDA approves a full BLA for the competing product containing that applicant’s own preclinical data and data from adequate and well-controlled clinical trials to demonstrate the safety, purity and potency of its product. The BPCIA also created certain exclusivity periods for biosimilars approved as interchangeable products. At this juncture, it is unclear whether products deemed “interchangeable” by the FDA will, in fact, be readily substituted by pharmacies, which are governed by state pharmacy law.
A biological product can also obtain pediatric market exclusivity in the United States. Pediatric exclusivity, if granted, adds six months to existing exclusivity periods and patent terms. This six-month exclusivity, which runs from the end of any existing periods of regulatory exclusivity or patent terms, may be granted based on the voluntary completion of a pediatric study in accordance with an FDA-issued “Written Request” for such a study.
U.S. Drug Enforcement Administration Regulation
We are developing certain product candidates that utilize, or may utilize controlled substances regulated by the U.S. Drug Enforcement Administration, DEA. The Controlled Substances Act of 1970, or CSA, establishes registration, security, recordkeeping, reporting, storage, distribution and other requirements administered by the DEA. The DEA is concerned with the control of handlers of controlled substances, and with the equipment and raw materials used in their manufacture and packaging, in order to prevent loss and diversion into illicit channels of commerce. The DEA regulates controlled substances as Schedule I, II, III, IV or V substances. Schedule I substances by definition have no established medicinal use, and may not be marketed or sold in the United States. A pharmaceutical product may be listed as Schedule II, III, IV or V, with Schedule II substances considered to present the highest risk of abuse and Schedule V substances the lowest relative risk of abuse among such substances.
Annual registration is required for any facility that manufactures, distributes, dispenses, imports or exports any controlled substance. The registration is specific to the particular location, activity and controlled substance schedule. For example, separate registrations are needed for import and manufacturing, and each registration will specify which schedules of controlled substances are authorized. The DEA typically inspects a facility to review its security measures prior to issuing a registration. Security requirements vary by controlled substance schedule, with the most stringent requirements applying to Schedule I and Schedule II substances. Required security measures include background checks on employees and physical control of inventory through measures such as cages, surveillance cameras and inventory reconciliations. Records must be maintained for the handling of all controlled substances, and periodic reports made to the DEA. Reports must also be made for thefts or losses of any controlled substance, and authorization must be obtained to destroy any controlled substance. In addition, special authorization and notification requirements apply to imports and exports.
To meet its responsibilities, the DEA conducts periodic inspections of registered establishments that handle controlled substances. Failure to maintain compliance with applicable requirements, particularly as manifested in loss or diversion, can result in
10
enforcement action. The DEA may seek civil penalties, refuse to renew necessary registrations, or initiate proceedings to revoke those registrations. In certain circumstances, violations could eventuate in criminal proceedings. Individual states also regulate controlled substances, and we and our contract manufacturers are also subject to state regulation on distribution of these products.
U.S. Regulation of Medical Devices
The FDA regulates the development, design, non-clinical and clinical research, manufacturing, safety, efficacy, labeling, packaging, storage, installation, servicing, recordkeeping, premarket clearance or approval, adverse event reporting, advertising, promotion, marketing and distribution, and import and export of medical devices to ensure that medical devices distributed domestically are safe and effective for their intended uses and otherwise meet the requirements of the FDCA.
U.S. Medical Device Classification:
Unless an exemption applies, each medical device commercially distributed in the United States requires either FDA clearance of a 510(k) premarket notification, or approval of a premarket approval, or PMA, application. Under the FDCA, medical devices are classified into one of three classes—Class I, Class II or Class III—depending on the degree of risk associated with each medical device and the extent of manufacturer and regulatory control needed to ensure its safety and effectiveness. Class I includes devices with the lowest risk to the patient and are those for which safety and effectiveness can be assured by adherence to the FDA’s General Controls for medical devices, which include compliance with the applicable portions of the QSR, facility registration and product listing, reporting of adverse medical events, and truthful and non-misleading labeling, advertising, and promotional materials. Class II devices are subject to the FDA’s General Controls, and special controls as deemed necessary by the FDA to ensure the safety and effectiveness of the device. These special controls can include performance standards, post-market surveillance, patient registries and FDA guidance documents.
While most Class I devices are exempt from the 510(k) premarket notification requirement, manufacturers of most Class II devices are required to submit to the FDA a premarket notification under Section 510(k) of the FDCA requesting permission to commercially distribute the device. The FDA’s permission to commercially distribute a device subject to a 510(k) premarket notification is generally known as 510(k) clearance. Devices deemed by the FDA to pose the greatest risks, such as life-sustaining, life-supporting or some implantable devices, or devices that have a new intended use, or use advanced technology that is not substantially equivalent to that of a legally marketed device, are placed in Class III, requiring approval of a PMA. Some pre-amendment devices are unclassified, but are subject to FDA’s premarket notification and clearance process in order to be commercially distributed.
510(k) Clearance Marketing Pathway
To obtain 510(k) clearance, a manufacturer must submit to the FDA a premarket notification demonstrating that the proposed device is “substantially equivalent” to a predicate device already on the market. A predicate device is a legally marketed device that is not subject to premarket approval, i.e., a device that was legally marketed prior to May 28, 1976 (pre-amendments device) and for which a PMA is not required, a device that has been reclassified from Class III to Class II or I, or a device that was found substantially equivalent through the 510(k) process. The FDA’s 510(k) clearance process usually takes from three to twelve months, but may take longer. The FDA may require additional information, including clinical data, to make a determination regarding substantial equivalence.
If the FDA agrees that the device is substantially equivalent to a predicate device currently on the market, it will grant 510(k) clearance to commercially market the device. If the FDA determines that the device is “not substantially equivalent” to a previously cleared device, the device is automatically designated as a Class III device. The device sponsor must then fulfill more rigorous PMA requirements, or can request a risk-based classification determination for the device in accordance with the “de novo” process, which is a route to market for novel medical devices that are low to moderate risk and are not substantially equivalent to a predicate device.
After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change or modification in its intended use, will require a new 510(k) clearance or, depending on the modification, PMA approval or de novo reclassification. The FDA requires each manufacturer to determine whether the proposed change requires submission of a 510(k), de novo request or a PMA in the first instance, but the FDA can review any such decision and disagree with a manufacturer’s determination. If the FDA disagrees with a manufacturer’s determination, the FDA can require the manufacturer to cease marketing and/or request the recall of the modified device until 510(k) marketing clearance or PMA approval is obtained or a de novo request is granted. Also, in these circumstances, the manufacturer may be subject to significant regulatory fines or penalties.
11
PMA Approval Pathway
Class III devices require PMA approval before they can be marketed, although some pre-amendment Class III devices for which FDA has not yet required a PMA are cleared through the 510(k) process. The PMA process is more demanding than the 510(k) premarket notification process. In a PMA, the manufacturer must demonstrate that the device is safe and effective, and the PMA must be supported by extensive data, including data from pre-clinical studies and human clinical trials. The PMA must also contain a full description of the device and its components, a full description of the methods, facilities, and controls used for manufacturing, and proposed labeling. Following receipt of a PMA, the FDA determines whether the application is sufficiently complete to permit a substantive review. If FDA accepts the application for review, it has 180 days under the FDCA to complete its review of a PMA, although in practice, the FDA’s review often takes significantly longer, and can take up to several years. An advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. The FDA may or may not accept the panel’s recommendation. In addition, the FDA will generally conduct a pre-approval inspection of the applicant or its third-party manufacturers’ or suppliers’ manufacturing facility or facilities to ensure compliance with the QSR.
The FDA will approve the new device for commercial distribution if it determines that the data and information in the PMA constitute valid scientific evidence and that there is reasonable assurance that the device is safe and effective for its intended use(s). The FDA may approve a PMA with post-approval conditions intended to ensure the safety and effectiveness of the device, or on some form of post-market surveillance when deemed necessary to protect the public health. or to provide additional safety and efficacy data for the device in a larger population or for a longer period of use. In such cases, the manufacturer might be required to follow certain patient groups for a number of years and to make periodic reports to the FDA on the clinical status of those patients. Failure to comply with the conditions of approval can result in material adverse enforcement action, including withdrawal of the approval.
Certain changes to an approved device, such as changes in manufacturing facilities, methods, or quality control procedures, or changes in the design performance specifications, which affect the safety or effectiveness of the device, require submission of a PMA supplement. PMA supplements often require submission of the same type of information as a PMA, except that the supplement is limited to information needed to support any changes from the device covered by the original PMA and may not require as extensive clinical data or the convening of an advisory panel.
De novo classification process
Medical device types that the FDA has not previously classified as Class I, II, or III are automatically classified into Class III regardless of the level of risk they pose. The Food and Drug Administration Modernization Act of 1997 established a route to market for low-to-moderate risk medical devices that are automatically placed into Class III due to the absence of a predicate device, called the “Request for Evaluation of Automatic Class III Designation,” or the de novo classification procedure. This procedure allows a manufacturer whose novel device is automatically classified into Class III to request down-classification of its medical device into Class I or Class II on the basis that the device presents low or moderate risk, rather than requiring the submission and approval of a PMA application. Manufacturers may request de novo classification directly without first submitting a 510(k) pre-market notification to the FDA and receiving a not-substantially-equivalent determination.
The FDA is required to classify a medical device within 120 days following receipt of a de novo request, although, in practice, the process may take significantly longer. If the manufacturer seeks reclassification into Class II, the manufacturer must include a draft proposal for special controls that are necessary to provide a reasonable assurance of the safety and effectiveness of the medical device. If FDA grants the de novo request, the device may be legally marketed in the United States. However, the FDA may reject the request if the FDA identifies a legally marketed predicate device that would be appropriate for a 510(k) notification, determines that the device is not low-to-moderate risk, or determines that general controls would be inadequate to control the risks and/or special controls cannot be developed. After a device receives de novo classification, any modification that could significantly affect its safety or efficacy, or that would constitute a major change or modification in its intended use, will require a new 510(k) clearance or, depending on the modification, another de novo request or even PMA approval.
Clinical Trials for Medical Devices
Clinical trials are almost always required to support a PMA or a de novo request, and are sometimes required to support 510(k) submissions. All clinical investigations of devices to determine safety and effectiveness must be conducted in accordance with the FDA’s investigational device exemption, or IDE, regulations which govern investigational device labeling, prohibit promotion of the investigational device, and specify an array of recordkeeping, reporting and monitoring responsibilities of study sponsors and study investigators. If the device presents a “significant risk” to human health, as defined by the FDA, the FDA requires the device sponsor to submit an IDE application to the FDA, which must become effective prior to commencing human clinical trials. If the device under evaluation does not present a significant risk to human health, then the device sponsor is not required to submit an IDE application to the FDA before initiating human clinical trials, but must still comply with abbreviated IDE requirements when conducting such trials. A significant risk device is one that presents a potential for serious risk to the health, safety or welfare of a patient and either is implanted, used in supporting or sustaining human life, substantially important in diagnosing, curing, mitigating or treating disease or otherwise preventing impairment of human health, or otherwise presents a potential for serious risk to a subject. An IDE application must be supported by appropriate data, such as animal and laboratory test results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. The IDE will automatically become effective 30 days after receipt by the FDA unless the FDA notifies the company that the investigation may not begin. If the FDA determines that there are deficiencies or other concerns with an IDE for which it requires modification, the FDA may permit a clinical trial to proceed under a conditional approval.
Regardless of the degree of risk presented by the medical device, clinical studies must be approved by, and conducted under the oversight of, an IRB for each clinical site. The IRB is responsible for the initial and continuing review of the IDE, and may pose additional requirements for the conduct of the study. If an IDE application is approved by the FDA and one or more IRBs, human clinical trials may begin at a specific number of investigational sites with a specific number of patients, as approved by the FDA. An IDE supplement must be submitted to, and approved by, the FDA before a sponsor or investigator may make a change to the investigational plan that may affect its scientific soundness, study plan or the rights, safety or welfare of human subjects.
12
During a study, the sponsor is required to comply with the applicable FDA requirements, including, for example, trial monitoring, selecting clinical investigators and providing them with the investigational plan, ensuring IRB review, adverse event reporting, record keeping and prohibitions on the promotion of investigational devices or on making safety or effectiveness claims for them. The clinical investigators in the clinical study are also subject to FDA’s regulations and must obtain patient informed consent, rigorously follow the investigational plan and study protocol, control the disposition of the investigational device, and comply with all reporting and recordkeeping requirements. Additionally, after a trial begins, we, the FDA or the IRB could suspend or terminate a clinical trial at any time for various reasons, including a belief that the risks to study subjects outweigh the anticipated benefits.
Post-market Regulation
After a device is cleared or approved for marketing, numerous and pervasive regulatory requirements continue to apply. These include:
•
establishment registration and device listing with the FDA;
•
QSR requirements, which require manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the design and manufacturing process;
•
labeling regulations and FDA prohibitions against the promotion of investigational products, or the promotion of “off-label” uses of cleared or approved products;
•
requirements related to promotional activities;
•
clearance or approval of product modifications to cleared devices or devices authorized through the de novo classification process that could significantly affect safety or effectiveness, or that would constitute a major change in intended use of such devices, or approval of certain modifications to PMA-approved devices;
•
medical device reporting regulations, which require that a manufacturer report to the FDA if a device it markets may have caused or contributed to a death or serious injury, or has malfunctioned and the device or a similar device that it markets would be likely to cause or contribute to a death or serious injury, if the malfunction were to recur;
•
correction, removal and recall reporting regulations, which require that manufacturers report to the FDA field corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FDCA that may present a risk to health;
•
the FDA’s recall authority, whereby the agency can order device manufacturers to recall from the market a product that is in violation of governing laws and regulations; and
•
post-market surveillance activities and regulations, which apply when deemed by the FDA to be necessary to protect the public health or to provide additional safety and effectiveness data for the device.
Manufacturing processes for medical devices are currently required to comply with the applicable portions of the QSR, which cover the methods and the facilities and controls for the design, manufacture, testing, production, processes, controls, quality assurance, labeling, packaging, distribution, installation and servicing of finished devices intended for human use. The QSR also requires, among other things, maintenance of a device master file, device history file, and complaint files. As a manufacturer, we are subject to periodic scheduled or unscheduled inspections by the FDA. Failure to maintain compliance with the QSR requirements could result in the shutdown of, or restrictions on, manufacturing operations and the recall or seizure of marketed products. The discovery of previously unknown problems with marketed medical devices, including unanticipated adverse events or adverse events of increasing severity or frequency, whether resulting from the use of the device within the scope of its clearance or off-label by a physician in the practice of medicine, could result in restrictions on the device, including the removal of the product from the market or voluntary or mandatory device recalls.
In addition, in February 2024, the FDA issued a final rule to amend and replace the QSR, which sets forth the FDA’s current good manufacturing practice requirements for medical devices, to align more closely with the International Organization for Standardization standards. Specifically, this final rule, which the FDA expects to go into effect on February 2, 2026, establishes the Quality Management System Regulation, or QMSR, which, among other things, incorporates by reference the quality management system requirements of ISO 13485:2016. Until such time as the QMSR becomes effective, manufacturers of medical devices are still required to comply with the current QSR.
The FDA has broad regulatory compliance and enforcement powers. If the FDA determines that a manufacturer has failed to comply with applicable regulatory requirements, it can take a variety of compliance or enforcement actions, which may result in a variety of sanctions, including: warning letters, untitled letters, fines, injunctions, consent decrees and civil penalties; recalls, withdrawals, or administrative detention or product seizures; operating restrictions or partial suspension or total shutdown of production; refusing or delaying requests for 510(k) marketing clearance or PMA approvals of new products or modified products; withdrawing 510(k) clearances or PMA approvals that have already been granted; refusal to grant export approvals for; or criminal prosecution.
FDA Regulation of Companion Diagnostics
If safe and effective use of a drug or biologic depends on an in vitro diagnostic test, then the FDA generally will require approval or clearance of that diagnostic, known as a companion diagnostic, at the same time that the FDA approves the therapeutic product. In August 2014, the FDA issued final guidance clarifying the requirements that will apply to approval of therapeutic products and in vitro companion diagnostics. According to the guidance, if the FDA determines that a companion diagnostic device is essential to the safe and effective use of a novel therapeutic product or indication, FDA generally will not approve the therapeutic product or new therapeutic product indication if the companion diagnostic device is not approved or cleared for that indication. Approval or clearance of the companion diagnostic device will ensure that the device has been adequately evaluated and has adequate performance characteristics in the intended population.
Foreign Regulation
To market any product outside of the United States, we would need to comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy and governing, among other things, clinical trials, marketing authorization, commercial sales and distribution of our products. The foreign regulatory approval process includes all of the risks associated with FDA approval set forth above, as well as additional country-specific regulation. Because biologically sourced raw materials are subject to unique contamination risks, their use may be restricted in some countries.
13
Whether or not we obtain FDA approval for a product, we must obtain approval of a product by the comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of the product in those countries. Approval by one regulatory authority does not ensure approval by regulatory authorities in other jurisdictions. The approval process varies from country to country, can involve additional testing beyond that required by FDA, and may be longer or shorter than that required for FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing, promotion, and reimbursement vary greatly from country to country.
Regulation of medicinal products in the European Union
Non-clinical Studies and Clinical Trials
Similar to the United States, the various phases of preclinical and clinical research in the EU are subject to significant regulatory controls.
Non-clinical studies are performed to demonstrate the health or environmental safety of new chemical or biological substances. Non-clinical studies (pharmaco-toxicological) must be conducted in compliance with the GLP principles, as set forth in EU Directive 2004/10/EC (unless otherwise justified for certain particular medicinal products – e.g., radio-pharmaceutical precursors for radio-labelling purposes). In particular, non-clinical studies, both in vitro and in vivo, must be planned, performed, monitored, recorded, reported and archived in accordance with the GLP principles, which define a set of rules and criteria for a quality system for the organizational process and the conditions for non-clinical studies. These GLP standards reflect the Organization for Economic Co-operation and Development requirements.
Clinical trials of medicinal products in the EU must be conducted in accordance with EU and national regulations and the International Council for Harmonization of Technical Requirements for Pharmaceuticals for Human Use, or ICH, guidelines on Good Clinical Practices, or GCP, as well as the applicable regulatory requirements and the ethical principles that have their origin in the Declaration of Helsinki. If the sponsor of the clinical trial is not established within the EU, it must appoint an EU entity to act as its legal representative. The sponsor must take out a clinical trial insurance policy, and in most EU member states, the sponsor is liable to provide ‘no fault’ compensation to any study subject injured in the clinical trial.
The regulatory landscape related to clinical trials in the EU has been subject to recent changes. The EU Clinical Trials Regulation, or CTR, which was adopted in April 2014 and repeals the EU Clinical Trials Directive, became applicable on January 31, 2022. Unlike directives, the CTR is directly applicable in all EU member states without the need for member states to further implement it into national law. The CTR notably harmonizes the assessment and supervision processes for clinical trials throughout the EU via a Clinical Trials Information System, which contains a centralized EU portal and database.
While the EU Clinical Trials Directive required a separate clinical trial application, or CTA, to be submitted in each member state in which the clinical trial takes place, to both the competent national health authority and an independent ethics committee, much like the FDA and IRB respectively, the CTR introduces a centralized process and only requires the submission of a single application for multi-center trials. The CTR allows sponsors to make a single submission to both the competent authority and an ethics committee in each member state, leading to a single decision per member state. The CTA must include, among other things, a copy of the trial protocol and an investigational medicinal product dossier containing information about the manufacture and quality of the medicinal product under investigation. The assessment procedure of the CTA has been harmonized as well, including a joint assessment by all member states concerned, and a separate assessment by each member state with respect to specific requirements related to its own territory, including ethics rules. Each member state’s decision is communicated to the sponsor via the centralized EU portal. Once the CTA is approved, clinical study development may proceed.
The CTR foresees a three-year transition period. The extent to which ongoing and new clinical trials will be governed by the CTR varies. Clinical trials for which an application was submitted (i) prior to January 31, 2022 under the EU Clinical Trials Directive, or (ii) between January 31, 2022 and January 31, 2023 and for which the sponsor has opted for the application of the EU Clinical Trials Directive remain governed by said Directive until January 31, 2025. After this date, all clinical trials (including those which are ongoing) will become subject to the provisions of the CTR.
Medicines used in clinical trials must be manufactured in accordance with Good Manufacturing Practice, or GMP. Other national and EU-wide regulatory requirements may also apply.
Marketing Authorization
In order to market our product candidates in the EU and many other foreign jurisdictions, we must obtain separate regulatory approvals. More concretely, in the EU, medicinal products can only be commercialized after obtaining a marketing authorization, or MA. To obtain regulatory approval of a product candidate under EU regulatory systems, we must submit a MA application, or MAA. The process for doing this depends, among other things, on the nature of the medicinal product. There are two main types of MA.
•
“Centralized MAs” are issued by the European Commission through the centralized procedure, based on the opinion of the Committee for Medicinal Products for Human Use, or CHMP, of the European Medicines Agency, or EMA, and are valid throughout the entire territory of the EU. The centralized procedure is mandatory for certain types of products, such as (i) medicinal products derived from biotechnological processes, (ii) designated orphan medicinal products, (iii) advanced-therapy medicinal products, or ATMPs (i.e. gene-therapy, somatic cell-therapy or tissue-engineered medicines) and (iv) medicinal products containing a new active substance indicated for the treatment of HIV/AIDS, cancer, neurodegenerative diseases, diabetes, or autoimmune diseases and other immune dysfunctions and viral diseases. The centralized procedure is optional for products containing a new active substance not yet authorized in the EU, or for products that constitute a significant therapeutic, scientific or technical innovation or which are in the interest of public health in the EU. Under the centralized procedure the maximum timeframe for the evaluation of a MAA by the EMA is 210 days, excluding clock stops. In exceptional cases, the CHMP might perform an accelerated review of a MAA in no more than 150 days (not including clock stops).“National MAs” are issued by the competent authorities of the EU member states, only cover their respective territory, and are available for products not falling within the mandatory scope of the centralized procedure. Where a product has already been authorized for marketing in an EU member state, this national MA can be recognized in other member states through the mutual recognition procedure. If the product has not received a national MA in any member state at the time of application, it can be approved simultaneously in various member states through the decentralized procedure. Under the decentralized procedure an
14
identical dossier is submitted to the competent authorities of each of the member states in which the MA is sought, one of which is selected by the applicant as the reference member state, or RMS. The competent authority of the RMS prepares a draft assessment report, a draft summary of the product characteristics, or SmPC, and a draft of the labeling and package leaflet, which are sent to the other Member States (referred to as the concerned member states, or CMSs) for their approval. If the CMSs raise no objections, based on a potential serious risk to public health, to the assessment, SmPC, labeling, or packaging proposed by the RMS, the product is subsequently granted a national MA in all the member states (i.e., in the RMS and the CMSs).
Under the above described procedures, before granting the MA, the EMA or the competent authorities of the EU member states make an assessment of the risk-benefit balance of the product on the basis of scientific criteria concerning its quality, safety and efficacy. MAs have an initial duration of five years. After these five years, the authorization may be renewed on the basis of a reevaluation of the risk-benefit balance.
Furthermore, MA may also be granted “under exceptional circumstances” when the applicant can show that it is unable to provide comprehensive data on the efficacy and safety under normal conditions of use even after the product has been authorized and subject to specific procedures being introduced. This may arise in particular when the intended indications are very rare and, in the present state of scientific knowledge, it is not possible to provide comprehensive information, or when generating data may be contrary to generally accepted ethical principles. This MA is reserved to medicinal products to be approved for severe diseases or unmet medical needs and the applicant does not hold the complete data set legally required for the grant of a MA. The applicant does not have to provide the missing data and will never have to. Although the MA “under exceptional circumstances” is granted definitively, the risk-benefit balance of the medicinal product is reviewed annually and the MA is withdrawn in case the risk-benefit ratio is no longer favorable.
Data and Marketing Exclusivity
In the EU, innovative medicinal products (including both small molecules and biological medicinal products) generally receive eight years of data exclusivity and an additional two years of market exclusivity upon MA. The data exclusivity period, if granted, prevents generic or biosimilar applicants from referencing the innovator’s pre-clinical and clinical trial data contained in the dossier of the reference product when applying for a generic or biosimilar MA, for a period of eight years from the date on which the reference product was first authorized in the EU. During the additional two-year period of market exclusivity, a generic or biosimilar MA can be submitted, and the innovator’s data may be referenced, but no generic or biosimilar product can be marketed until the expiration of the market exclusivity period. The overall ten-year period can be extended to a maximum of 11 years if, during the first eight years of those ten years, the MA holder obtains an authorization for one or more new therapeutic indications which, during the scientific evaluation prior to their authorization, are determined to bring a significant clinical benefit in comparison with currently approved therapies. However, there is no guarantee that a product will be considered by the EU’s regulatory authorities to be a new chemical or biological entity, and products may not qualify for data exclusivity.
In the EU, there is a special regime for biosimilars, or biological medicinal products that are similar to a reference medicinal product but that do not meet the definition of a generic medicinal product, for example, because of differences in raw materials or manufacturing processes. For such products, the results of appropriate preclinical or clinical trials must be provided, and guidelines from the EMA detail the type of quantity of supplementary data to be provided for different types of biological product. There are no such guidelines for complex biological products, such as gene or cell therapy medicinal products, and so it is unlikely that biosimilars of those products will currently be approved in the EU. However, guidance from the EMA states that they will be considered in the future in light of the scientific knowledge and regulatory experience gained at the time.
Orphan Medicinal Products
The criteria for designating an “orphan medicinal product” in the EU are similar in principle to those in the United States. A medicinal product can be designated as an orphan if its sponsor can establish that: (1) the product is intended for the diagnosis, prevention or treatment of life-threatening or chronically debilitating conditions, (2) either (a) such condition affects no more than 5 in 10,000 persons in the EU when the application is made, or (b) where it is unlikely that the marketing of the medicine would generate sufficient return in the EU to justify the necessary investment in its development, and (3) there exists no satisfactory method of diagnosis, prevention or treatment of the condition that have been authorized in the EU or, if such a method exists, the product in question would be of significant benefit to those affected by the condition.
Orphan designation must be requested before submitting an MAA. In the EU, orphan designation entitles a party to incentives such as reduction of fees or fee waivers, protocol assistance and access to the centralized procedure. Upon grant of a MA, orphan medicinal products are entitled to ten years of market exclusivity for the approved indication, which means that the competent authorities cannot accept another MAA, or grant a MA, or accept an application to extend a MA for a similar medicinal product for the same indication for a period of ten years. The period of market exclusivity is extended by two years for orphan medicinal products that have also complied with an agreed Pediatric Investigation Plan, or PIP. No extension to any supplementary protection certificate can be granted on the basis of pediatric studies for orphan indications.
This period may be reduced to six years if, at the end of the fifth year, it is established that the orphan designation criteria are no longer met, including where it is shown that the product is sufficiently profitable not to justify maintenance of market exclusivity or where the prevalence of the condition has increased above the threshold. Additionally, MA may only be granted to a “similar medicinal product” for the same indication at any time, if (i) the holder of the MA for the original orphan medicinal product consents to a second orphan medicinal product application, (ii) the holder of the MA for the original orphan medicinal product cannot supply sufficient quantities of the orphan medicinal product, or (iii) the second applicant can establish that its medicinal product, although similar, is safer, more effective or otherwise clinically superior to the authorized orphan medicinal product. A “similar medicinal product” is defined as a medicinal product containing a similar active substance or substances as contained in an authorized orphan medicinal product, and which is intended for the same therapeutic indication. Orphan designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process.
European Pediatric Development
In the EU, MAAs for new medicinal products have to include the results of studies conducted in the pediatric population, in compliance with a PIP, with the EMA’s Pediatric Committee, or PDCO. The PIP sets out the timing and measures proposed to
15
generate data to support a pediatric indication of the product candidate for which MA is being sought. The PDCO can grant a deferral of the obligation to implement some or all of the measures of the PIP until there are sufficient data to demonstrate the efficacy and safety of the product in adults. Further, the obligation to provide pediatric clinical trial data can be waived by the PDCO when this data is not needed or appropriate because the product is likely to be ineffective or unsafe in children, the disease or condition for which the product is intended occurs only in adult populations, or when the product does not represent a significant therapeutic benefit over existing treatments for pediatric patients. Once the MA is obtained in all the EU member states and study results are included in the product information, even where such results are negative, the product is eligible for six months’ supplementary protection certificate extension (if any is in effect at the time of approval).
Controlled Substances
Controlled substances are not regulated at EU level and the EU legislation does not establish different classes of narcotic or psychotropic substances. However, the United Nations, or UN, Single Convention on Narcotic Drugs of 1961 and the UN Convention on Psychotropic Substances of 1971, or the UN Conventions, codify internationally applicable control measures to ensure the availability of narcotic drugs and psychotropic substances for medical and scientific purposes. The individual EU member states are all signatories to these UN Conventions. All signatories have a dual obligation to ensure that these substances are available for medical purposes and to protect populations against abuse and dependence.
The UN Conventions regulate narcotic drugs and psychotropic substances as Schedule I, II, III, IV substances with Schedule II substances presenting the lowest relative risk of abuse among such substances and Schedule I and IV substances considered to present the highest risk of abuse.
The UN Conventions require signatories to require all persons manufacturing, trading (including exporting and importing) or distributing controlled substances to obtain a license from the relevant authority. Each individual export or import of a controlled substance must also be subject to an authorization. Before the relevant authority can issue an export authorization for a particular shipment, the exporter must provide the authority with a copy of the import authorization issued by the relevant authority of the importing country. Implementation of the obligations provided in the UN Conventions and additional requirements are regulated at national level and requirements may vary from one member state to another.
Post-Approval requirements
Similar to the United States, both MA holders and manufacturers of medicinal products are subject to comprehensive regulatory oversight by the EMA, the European Commission and/or the competent regulatory authorities of the member states. The holder of a MA must establish and maintain a pharmacovigilance system and appoint an individual qualified person for pharmacovigilance, or QPPV, who is responsible for the establishment and maintenance oversight of that system, and oversees the safety profiles of medicinal products and any emerging safety concerns. Key obligations include expedited reporting of suspected serious adverse reactions and submission of periodic safety update reports, or PSURs.
All new MAA must include a risk management plan, or RMP, describing the risk management system that the company will put in place and documenting measures to prevent or minimize the risks associated with the product. The regulatory authorities may also impose specific obligations as a condition of the MA. Such risk-minimization measures or post-authorization obligations may include additional safety monitoring, more frequent submission of PSURs, or the conduct of additional clinical trials or post-authorization safety studies.
The advertising and promotion of medicinal products is also subject to laws concerning promotion of medicinal products, interactions with physicians, misleading and comparative advertising and unfair commercial practices. All advertising and promotional activities for the product must be consistent with the approved summary of product characteristics, and therefore all off-label promotion is prohibited. Direct-to-consumer advertising of prescription medicines is also prohibited in the EU. Although general requirements for advertising and promotion of medicinal products are established under EU directives, the details are governed by regulations in each member state and can differ from one country to another.
Much like the Anti-Kickback Statue prohibition in the United States, the provision of benefits or advantages to physicians to induce or encourage the prescription, recommendation, endorsement, purchase, supply, order or use of medicinal products is also prohibited in the EU. The provision of benefits or advantages to induce or reward improper performance generally is usually governed by national EU member states anti-bribery laws. Infringement of these laws could result in substantial fines and imprisonment.
Payments made to physicians in certain EU member states must be publicly disclosed. Moreover, agreements with physicians often must be the subject of prior notification and/or approval by the physician’s employer, his or her competent professional organization and/or the regulatory authorities of the individual EU member states. These requirements are provided in national laws, industry codes or professional codes of conduct, applicable in the EU member states.
Failure to comply with EU and member state laws that apply to the conduct of clinical trials, manufacturing approval, MA of medicinal products and marketing of such products, both before and after grant of the MA, manufacturing of pharmaceutical products, statutory health insurance, bribery and anti-corruption or with other applicable regulatory requirements may result in administrative, civil or criminal penalties. These penalties could include delays or refusal to authorize the conduct of clinical trials, or to grant MA, product withdrawals and recalls, product seizures, suspension, withdrawal or variation of the MA, total or partial suspension of production, distribution, manufacturing or clinical trials, operating restrictions, injunctions, suspension of licenses, fines and criminal penalties.
The aforementioned EU rules are generally applicable in the European Economic Area, or EEA, which consists of the 27 EU member states plus Norway, Liechtenstein and Iceland.
16
Regulation of Combination Products in the European Union
The EU regulates medical devices and medicinal products separately, through different legislative instruments, and the applicable requirements will vary depending on the type of drug-device combination product. EU guidance has been published to help manufacturers select the right regulatory framework.
Drug-delivery products intended to administer a medicinal product where the medicinal product and the device form a single integral product are regulated as medicinal products in the EU. The EMA is responsible for evaluating the quality, safety and efficacy of MAAs submitted through the centralized procedure, including the safety and performance of the medical device in relation to its use with the medicinal product. The EMA or the EU member state national competent authority will assess the product in accordance with the rules for medicinal products described above but the device part must comply with Regulation (EU) No 2017/745, or the EU Medical Devices Regulation (including the general safety and performance requirements provided in Annex I). MAA must include—where available—the results of the assessment of the conformity of the device part with the EU Medical Devices Regulation contained in the manufacturer’s EU declaration of conformity of the device or the relevant certificate issued by a notified body. If the MAA does not include the results of the conformity assessment and where for the conformity assessment of the device, if used separately, the involvement of a notified body is required, the competent authority must require the applicant to provide a notified body opinion on the conformity of the device.
By contrast, in case of drug-delivery products intended to administer a medicinal product where the device and the medicinal product do not form a single integral product (but are e.g. co-packaged), the medicinal product is regulated in accordance with the rules for medicinal products described above while the device part is regulated as a medical device and will have to comply with all the requirements set forth by the EU Medical Devices Regulation.
The characteristics of non-integral devices used for the administration of medicinal products may impact the quality, safety and efficacy profile of the medicinal products. To the extent that administration devices are co-packaged with the medicinal product or, in exceptional cases, where the use of a specific type of administration device is specifically provided for in the product information of the medicinal product, additional information may need to be provided in the MAA for the medicinal product on the characteristics of the medical device(s) that may impact on the quality, safety and/or efficacy of the medicinal product.
The requirements regarding quality documentation for medicinal products when used with a medical device, including single integral products, co-packaged and referenced products, are outlined in the EMA guideline of July 22, 2021, which became applicable as of January 1, 2022.
The aforementioned EU rules are generally applicable in the EEA
Regulation of Medical Devices in the European Union
In the EU, until May 25, 2021, medical devices were regulated by the Council Directive 93/42/EEC, or the EU Medical Devices Directive which has been repealed and replaced by the EU Medical Devices Regulation. Our Founded Entities' medical devices current certificates have been granted under the EU Medical Devices Directive whose regime is described below. However, as of May 26, 2021, some of the EU Medical Devices Regulation requirements apply in place of the corresponding requirements of the EU Medical Devices Directive with regard to registration of economic operators and of devices, post-market surveillance and vigilance requirements. Pursuing marketing of medical devices in the EU will notably require that our devices be certified under the new regime set forth in the EU Medical Devices Regulation .
Medical Devices Directive
Under the EU Medical Devices Directive, all medical devices placed on the market in the EU must meet the relevant essential requirements laid down in Annex I to the EU Medical Devices Directive, including the requirement that a medical device must be designed and manufactured in such a way that it will not compromise the clinical condition or safety of patients, or the safety and health of users and others. In addition, the device must achieve the performance intended by the manufacturer and be designed, manufactured, and packaged in a suitable manner. The European Commission has adopted various standards applicable to medical devices. These include standards governing common requirements, such as sterilization and safety of medical electrical equipment and product standards for certain types of medical devices. There are also harmonized standards relating to design and manufacture. While not mandatory, compliance with these standards is viewed as the easiest way to satisfy the essential requirements as a practical matter as it creates a rebuttable presumption that the device satisfies that essential requirement.
To demonstrate compliance with the essential requirements laid down in Annex I to the EU Medical Devices Directive, medical device manufacturers must undergo a conformity assessment procedure, which varies according to the type of medical device and its (risk) classification. As a general rule, demonstration of conformity of medical devices and their manufacturers with the essential requirements must be based, among other things, on the evaluation of clinical data supporting the safety and performance of the products during normal conditions of use. Specifically, a manufacturer must demonstrate that the device achieves its intended performance during normal conditions of use, that the known and foreseeable risks, and any adverse events, are minimized and acceptable when weighed against the benefits of its intended performance, and that any claims made about the performance and safety of the device are supported by suitable evidence. Except for low-risk medical devices (Class I non-sterile, non-measuring devices), where the manufacturer can self-assess the conformity of its products with the essential requirements (except for any parts which relate to sterility or metrology), a conformity assessment procedure requires the intervention of a notified body. Notified bodies are independent organizations designated by EU member states to assess the conformity of devices before being placed on the market. A notified body would typically audit and examine a product’s technical dossiers and the manufacturer’s quality system (the notified body must presume that quality systems which implement the relevant harmonized standards – which is ISO 13485:2016 for Medical Devices Quality Management Systems – conform to these requirements). If satisfied that the relevant product conforms to the relevant essential requirements, the notified body issues a certificate of conformity, which the manufacturer uses as a basis for its own declaration of conformity. The manufacturer may then apply the European Conformity, or CE mark, to the device, which allows the device to be placed on the market throughout the EU.
Throughout the term of the certificate of conformity, the manufacturer will be subject to periodic surveillance audits to verify continued compliance with the applicable requirements. In particular, there will be a new audit by the notified body before it will renew the relevant certificate(s).
17
Medical Devices Regulation
The regulatory landscape related to medical devices in the EU recently evolved. On April 5, 2017, the EU Medical Devices Regulation was adopted with the aim of ensuring better protection of public health and patient safety. The EU Medical Devices Regulation establishes a uniform, transparent, predictable and sustainable regulatory framework across the EU for medical devices and ensure a high level of safety and health while supporting innovation. Unlike the EU Medical Devices Directive, the EU Medical Devices Regulation is directly applicable in EU member states without the need for member states to implement into national law. This aims at increasing harmonization across the EU.
The EU Medical Devices Regulation became effective on May 26, 2021. In accordance with its recently extended transitional provisions, both (i) devices lawfully placed on the market pursuant to the EU Medical Devices Directive prior to May 26, 2021 and (ii) legacy devices lawfully placed on the EU market after May 26, 2021 in accordance with the transitional provisions of the EU Medical Devices Regulation may generally continue to be made available on the market or put into service, provided that the requirements of the transitional provisions are fulfilled. However, even in this case, manufacturers must comply with a number of new or reinforced requirements set forth in the EU Medical Devices Regulation, in particular the obligations described below.
The EU Medical Devices Regulation requires that before placing a device, other than a custom-made device, on the market, manufacturers (as well as other economic operators such as authorized representatives and importers) must register by submitting identification information to the electronic system (Eudamed), unless they have already registered. The information to be submitted by manufacturers (and authorized representatives) also includes the name, address and contact details of the person or persons responsible for regulatory compliance. The new Regulation also requires that before placing a device, other than a custom-made device, on the market, manufacturers must assign a unique identifier to the device and provide it along with other core data to the unique device identifier, or UDI, database. These new requirements aim at ensuring better identification and traceability of the devices. Each device – and as applicable, each package – will have a UDI composed of two parts: a device identifier, or UDI-DI, specific to a device, and a production identifier, or UDI-PI, to identify the unit producing the device. Manufacturers are also notably responsible for entering the necessary data on Eudamed, which includes the UDI database, and for keeping it up to date. The obligations for registration in Eudamed will become applicable at a later date (as Eudamed is not yet fully functional). Until Eudamed is fully functional, the corresponding provisions of the EU Medical Devices Directive continue to apply for the purpose of meeting the obligations laid down in the provisions regarding exchange of information, including, and in particular, information regarding registration of devices and economic operators.
All manufacturers placing medical devices on the market in the EU must comply with the EU medical device vigilance system which has been reinforced by the EU Medical Devices Regulation. Under this system, serious incidents and Field Safety Corrective Actions, or FSCAs, must be reported to the relevant authorities of the EU member states. These reports will have to be submitted through Eudamed – once functional – and aim to ensure that, in addition to reporting to the relevant authorities of the EU member states, other actors such as the economic operators in the supply chain will also be informed. Until Eudamed is fully functional, the corresponding provisions of the EU Medical Devices Directive continue to apply. Manufacturers are required to take FSCAs, which are defined as any corrective action for technical or medical reasons to prevent or reduce a risk of a serious incident associated with the use of a medical device that is made available on the market. A serious incident is any malfunction or deterioration in the characteristics or performance of a device on the market (e.g., inadequacy in the information supplied by the manufacturer, undesirable side-effect), which, directly or indirectly, might lead to either the death or serious deterioration of the health of a patient, user, or other persons, or to a serious public health threat. An FSCA may include the recall, modification, exchange, destruction or retrofitting of the device. FSCAs must be communicated by the manufacturer or its legal representative to its customers and/or to the end users of the device through Field Safety Notices. For similar serious incidents that occur with the same device or device type and for which the root cause has been identified or a FSCA implemented or where the incidents are common and well documented, manufacturers may provide periodic summary reports instead of individual serious incident reports.
The advertising and promotion of medical devices are subject to some general principles set forth in EU legislation. According to the EU Medical Devices Regulation, only devices that are CE marked may be marketed and advertised in the EU in accordance with their intended purpose. Directive 2006/114/EC concerning misleading and comparative advertising and Directive 2005/29/EC on unfair commercial practices, while not specific to the advertising of medical devices, also apply to the advertising thereof and contain general rules (for example, requiring that advertisements are evidenced, balanced and not misleading). Specific requirements are defined at a national level. EU member states’ laws related to the advertising and promotion of medical devices, which vary between jurisdictions, may limit or restrict the advertising and promotion of products to the general public and may impose limitations on promotional activities with healthcare professionals.
In the EU, regulatory authorities have the power to carry out announced and, if necessary, unannounced inspections of companies, suppliers and/or sub-contractors and, where necessary, the facilities of professional users. Failure to comply with regulatory requirements (as applicable) could require time and resources to respond to the regulatory authorities’ observations and to implement corrective and preventive actions, as appropriate. Regulatory authorities have broad compliance and enforcement powers and, if such issues cannot be resolved to their satisfaction, can take a variety of actions, including untitled or warning letters, fines, consent decrees, injunctions or civil or criminal penalties.
The aforementioned EU rules are generally applicable in the EEA.
Regulation of In Vitro Diagnostic Medical Devices in the European Union
The EU regulatory landscape concerning in vitro diagnostic medical devices, or IVD MDs, recently evolved. On April 5, 2017 Regulation (EU) 2017/746 of the European Parliament and of the Council on IVD MDs and repealing Directive 98/79/EC and Commission Decision 2010/227/EU, or the IVDR, was adopted to establish a modernized and more robust EU legislative framework, with the aim of ensuring better protection of public health and patient safety. This aims at reducing the risk of discrepancies in interpretation across the different European markets.
The IVDR fully applies since May 26, 2022. The IVDR fully applies since May 26, 2022. IVD MDs lawfully placed on the market pursuant to the Directive 98/79/EC, or EU IVDD, prior to May 26, 2022 may generally continue to be made available on the market or put into service until May 26, 2027, provided that the requirements of the transitional provisions are fulfilled. However, even in
18
this case, manufacturers must comply with a number of new or reinforced requirements set forth in the EU IVDR. The IVDR among other things:
•
strengthens the rules on placing devices on the market and reinforce surveillance once they are available;
•
establishes explicit provisions on manufacturers’ responsibilities for the follow-up of the quality, performance and safety of devices placed on the market;
•
establishes explicit provisions on importers’ and distributors’ obligations and responsibilities;
•
imposes an obligation to identify a responsible person who is ultimately responsible for all aspects of compliance with the requirements of the new regulation;
•
improves the traceability of medical devices throughout the supply chain to the end-user or patient through the introduction of a unique identification number, to increase the ability of manufacturers and regulatory authorities to trace specific devices through the supply chain and to facilitate the prompt and efficient recall of medical devices that have been found to present a safety risk;
•
sets up a central database (Eudamed) to provide patients, healthcare professionals and the public with comprehensive information on products available in the EU; and
•
strengthens rules for the assessment of certain high-risk devices that may have to undergo an additional check by experts before they are placed on the market.
The aforementioned EU rules are generally applicable in the EEA.
Regulation of Companion Diagnostics in the European Union
In the EU, IVD MDs were regulated by the EU IVDD, which regulated the placing on the market, the CE marking, the essential requirements, the conformity assessment procedures, the registration obligations for manufactures and devices as well as the vigilance procedure. IVD MDs had to comply with the requirements provided for in the EU IVDD, and with further requirements implemented at national level (as the case may be).
The regulation of companion diagnostics is subject to further requirements since the IVDR became applicable on May 26, 2022. The IVDR introduced a new classification system for companion diagnostics which are now specifically defined as diagnostic tests that support the safe and effective use of a specific medicinal product, by identifying patients that are suitable or unsuitable for treatment. Companion diagnostics will have to undergo a conformity assessment by a notified body. Before it can issue an EU certificate, the notified body must seek a scientific opinion from the EMA on the suitability of the companion diagnostic to the medicinal product concerned if the medicinal product falls exclusively within the scope of the centralized procedure for the authorization of medicines, or the medicinal product is already authorized through the centralized procedure, or a MAA for the medicinal product has been submitted through the centralized procedure. For other substances, the notified body can seek the opinion from a national competent authorities or the EMA.
Brexit and the Regulatory Framework in the United Kingdom
Since the end of the Brexit transition period on January 1, 2021, Great Britain, or GB (England, Scotland and Wales) has not been directly subject to EU laws, however under the terms of the Ireland/Northern Ireland Protocol, EU laws generally apply to Northern Ireland. On February 27, 2023, the United Kingdom, or UK, Government and the European Commission reached a political agreement on the “Windsor Agreement” which will revise the Protocol on Ireland/Northern Ireland in order to address some of the perceived shortcomings in its operation. Under the changes, Northern Ireland will be reintegrated under the regulatory authority of the Medicines and Healthcare products Regulatory Agency, or MHRA, with respect to medicinal products. The UK Government has confirmed that the Windsor Agreement will come into effect on January 1, 2025, at which point the MHRA will be solely responsible for authorizing medicines for the Northern Ireland market. There could be additional uncertainty and risk around what these changes will mean to our business.
It remains unclear as to what extent the UK Government will seek to align its regulations with the EU. The EU laws that have been transposed into UK law through secondary legislation remain applicable in Great Britain;however, new legislation such as the (EU) CTR is not applicable in GB. Whilst the EU-UK Trade and Cooperation Agreement, or TCA, includes the mutual recognition of GMP inspections of manufacturing facilities for medicinal products and GMP documents issued, it does not contain wholesale mutual recognition of UK and EU pharmaceutical regulations and product standards. There may be divergent local requirements in Great Britain from the EU in the future, which may impact clinical and development activities that occur in the UK in the future. Similarly, clinical trial submissions in the UK will not be able to be bundled with those of EU countries within the EMA Clinical Trial Information System, or CTIS, adding further complexity, cost and potential risk to future clinical and development activity in the UK. Significant political and economic uncertainty remains about how much the relationship between the UK and EU will differ as a result of the UK’s withdrawal.
The UK regulatory framework in relation to clinical trials is derived from existing EU legislation (as implemented into UK law, through secondary legislation). On January 17, 2022, the MHRA launched an eight-week consultation on reframing the UK legislation for clinical trials, with the aim to streamline clinical trials approvals, enable innovation, enhance clinical trials transparency, enable greater risk proportionality, and promote patient and public involvement in clinical trials. The resulting new legislation will determine how aligned the UK clinical trials regime is compared to the (EU) CTR.
The MHRA has introduced changes to national licensing procedures, including procedures to prioritize access to new medicines that will benefit patients, including a 150-day assessment and a rolling review procedure. All existing EU MAs for centrally authorized products were automatically converted or grandfathered into UK MAs, effective in GB (only), free of charge on January 1, 2021, unless the MA holder opted out. In order to use the centralized procedure to obtain a MA that will be valid throughout the EEA, companies must be established in the EEA. Therefore, since Brexit, companies established in the UK can no longer use the EU centralized procedure and instead an EEA entity must hold any centralized MAs. In order to obtain a UK MA to commercialize products in the UK, an applicant must be established in the UK and must follow one of the UK national authorization procedures or one of the remaining post-Brexit international cooperation procedures to obtain an MA to commercialize products in the UK. A new international recognition framework has applied since January 1, 2024, whereby the MHRA will have regard to decisions on the approval of MAs made by the EMA and certain other regulators when determining an application for a new GB MA.
19
With respect to medical devices (including IVD MDs), the TCA does not specifically refer to them but does provide for cooperation and exchange of information in the area of product safety and compliance, including market surveillance, enforcement activities and measures, standardization related activities, exchanges of officials, and coordinated product recalls (or other similar actions). For medical devices that are locally manufactured but use components from other countries, the “rules of origin” criteria will need to be reviewed. The rules for placing medical devices on the Northern Ireland market will differ from those in GB.
All medical devices must be registered with the MHRA, and since January 1, 2022, manufacturers based outside the UK have been required to appoint a UK responsible person that has a registered place of business in the UK to register devices with the MHRA.
On June 26, 2022, the MHRA published its response to a 10-week consultation on the post-Brexit regulatory framework for medical devices and diagnostics. The MHRA seeks to amend the UK Medical Devices Regulations 2002, or the “UK MDR” (which continues to be based on the EU legislation which preceded the EU Medical Devices Regulation, EUIVDD, in particular to create a new access pathway to support innovation, create an innovative framework for regulating software and artificial intelligence as medical devices, reform in vitro diagnostic medical device regulation and foster sustainability through the reuse and remanufacture of medical devices. Regulations implementing the new regime were originally scheduled to come into force in July 2023, but the Government has confirmed that core elements of the new regime are likely to apply from July 2025. Devices which have valid certification issued by EU notified bodies under the EU Medical Devices Regulation or EU Medical Devices Directive are subject to transitional arrangements. The UK Government has introduced legislation which provides that CE marked medical devices may be placed on the Great Britain market to the following transitional timelines:
•
General medical devices compliant with the EU Medical Devices Directive or EU active implantable medical devices directive, or EU AIMDD, with a valid declaration and CE marking can be placed on the GB market up until the sooner of expiry of certificate or June 30, 2028;
•
IVD MDs compliant with the EU IVDD can be placed on the GB market up until the sooner of certificate expiration or June 30, 2030; and
•
General medical devices, including custom-made devices, compliant with the EU Medical Devices Regulation and IVD MDs compliant with the (EU) IVDR can be placed on the GB market up until June 30, 2030.
Following these transitional periods, it is expected that all medical devices will require a UK Conformity Assessment, or UKCA, mark. Manufacturers may choose to use the UKCA mark on a voluntary basis prior to the regulations coming into force. However, from July 2025, products which do not have existing and valid CE certification under the EU Medical Devices Directive or EU Medical Devices Regulation and are therefore not subject to the transitional arrangements will be required to carry the UKCA mark if they are to be sold into the market in Great Britain. UKCA marking will not be recognized in the EU. The rules for placing medical devices on the market in Northern Ireland, which is part of the UK, differ from those in Great Britain (England, Scotland and Wales) and continues to be based on EU law.
Under the terms of the Northern Ireland Protocol, Northern Ireland follows EU rules on medical devices and devices marketed in Northern Ireland require assessment according to the EU regulatory regime. Such assessment may be conducted by an EU notified body, in which case a CE mark is required before placing the device on the market in the EU or Northern Ireland. Alternatively, if a UK notified body conducts such assessment, a ‘UKNI’ mark applied and the device may only be placed on the market in Northern Ireland and not the EU.
Rest of the World Regulation
For other countries outside of the EU, the UK and the United States, such as countries in Eastern Europe, Latin America or Asia, the requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary from country to country. Additionally, the clinical trials must be conducted in accordance with GCP requirements and the applicable regulatory requirements and the ethical principles that have their origin in the Declaration of Helsinki.
If we fail to comply with applicable foreign regulatory requirements, we may be subject to, among other things, fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.
Additional Laws and Regulations Governing International Operations
Our operations are subject to global anti-corruption laws, including the UK Bribery Act 2020 (“Bribery Act”), the . US Foreign Corrupt Practices Act ("FCPA"), and other applicable laws which generally prohibit us, our employees, and intermediaries acting on our behalf from corruptly authorizing, promising, offering, or providing, directly or indirectly, anything else of value, to government officials or other persons to obtain or retain business or gain some other business advantage. The Bribery Act also prohibits: (i) “commercial” bribery of private parties, in addition to bribery involving domestic or foreign officials; (ii) the acceptance of bribes, as well as the giving of bribes; and (iii) “facilitation payments”, meaning generally low-level payments designed to secure or expedite routine governmental actions or other conduct that persons are already under obligations to perform. The Bribery Act also creates an offense applicable to corporate entities for failure to prevent bribery by our employees, officers, directors, and other third parties acting on our behalf, to which the only defense is to maintain “adequate procedures” designed to prevent such acts of bribery.
Compliance with global anti-corruption laws presents particular challenges in the pharmaceutical industry, because, in many countries, hospitals are operated by the government, and doctors and other hospital employees are considered foreign officials. We have policies and procedures designed to promote compliance with anti-corruption laws and may need to dedicate additional resources as our operations expand around the world.
Various laws, regulations and executive orders also restrict the use and dissemination outside of the United States, or the sharing with certain non-U.S. nationals, of information classified for national security purposes, as well as certain products and technical data relating to those products. If we expand our presence outside of the United States, it will require us to dedicate additional resources to comply with these laws, and these laws may preclude us from developing, manufacturing, or selling certain products and product candidates outside of the United States, which could limit our growth potential and increase our development costs.
The failure to comply with laws governing international business practices may result in substantial civil and criminal penalties and suspension or debarment from government contracting. The SEC also may suspend or bar issuers from trading securities on U.S. exchanges for violations of the FCPA’s accounting provisions.
20
Healthcare Laws and Regulation
Manufacturing, sales, promotion and other activities following product approval are also subject to regulation by numerous regulatory authorities in the United States in addition to the FDA, including the Centers for Medicare Medicaid Services, or CMS, the Office of Inspector General and Office for Civil Rights, other divisions of the Department of Health and Human Services, or HHS, the Department of Justice, the Drug Enforcement Administration, the Consumer Product Safety Commission, the Federal Trade Commission, the Occupational Safety Health Administration, the Environmental Protection Agency and state and local governments.
Healthcare providers and third-party payors play a primary role in the recommendation and prescription of drug products and other medical items and services. Arrangements with providers, consultants, third-party payors and customers are subject to broadly applicable fraud and abuse, anti-kickback, false claims laws, reporting of payments to physicians and teaching hospitals and patient privacy laws and regulations and other healthcare laws and regulations that may constrain our business and/or financial arrangements. Restrictions under applicable federal and state healthcare laws and regulations, include the following:
•
the federal Anti-Kickback Statute, which makes it illegal for any person, including a prescription drug manufacturer (or a party acting on its behalf), to knowingly and willfully solicit, receive, offer or pay any remuneration (including any kickback, bribe or certain rebate), directly or indirectly, overtly or covertly, in cash or in kind, or in return for, that is intended to induce or reward referrals, including the purchase, recommendation, order or prescription of a particular drug, for which payment may be made under a federal healthcare program, such as Medicare or Medicaid. A person or entity need not have actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it in order to have committed a violation;
•
the federal civil and criminal false claims laws, including the civil False Claims Act, or FCA, which prohibit individuals or entities from, among other things, knowingly presenting, or causing to be presented, to the federal government, claims for payment or approval that are false, fictitious or fraudulent; knowingly making, using or causing to be made or used, a false statement or record material to a false or fraudulent claim or obligation to pay or transmit money or property to the federal government; or knowingly concealing or knowingly and improperly avoiding or decreasing an obligation to pay money to the federal government. Manufacturers can be held liable under the FCA even when they do not submit claims directly to government payors if they are deemed to “cause” the submission of false or fraudulent claims. The government may assert that a claim including items and services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the FCA. The FCA also permits a private individual acting as a “whistleblower” to bring actions on behalf of the federal government alleging violations of the FCA and to share in any monetary recovery.
•
the federal civil monetary penalties laws, which impose civil fines for, among other things, the offering or transfer or remuneration to a Medicare or state healthcare program beneficiary if the person knows or should know it is likely to influence the beneficiary’s selection of a particular provider, practitioner, or supplier of services reimbursable by Medicare or a state health care program, unless an exception applies;
•
the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which imposes civil and criminal liability for, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or knowingly and willfully falsifying, concealing or covering up by any trick or device a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services; similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;
•
the federal transparency requirements known as the federal Physician Payments Sunshine Act, which requires certain manufacturers of drugs, devices, biologics and medical supplies to report annually to CMS information related to payments and other transfers of value made by that entity to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors), certain non-physician practitioners such as physician assistants and nurse practitioners, and teaching hospitals, as well as ownership and investment interests held by the physicians described above and their immediate family members;
•
federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm consumers;
•
federal price reporting laws, which require manufacturers to calculate and report complex pricing metrics to government programs, where such reported prices may be used in the calculation of reimbursement and/or discounts on approved products;
•
analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, which may apply to healthcare items or services that are reimbursed by non-governmental third-party payors, including private insurers; and
•
some state laws require pharmaceutical companies to comply with the industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government in addition to requiring manufacturers to report information related to payments to physicians and other healthcare providers, marketing expenditures, and pricing information. Certain state and local laws require the registration of pharmaceutical sales and medical representatives.
Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, in the event we obtain regulatory approval for any one of our products, it is possible that some of our business activities could be subject to challenge and may not comply under one or more of such laws, regulations, and guidance. Law enforcement authorities are increasingly focused on enforcing fraud and abuse laws, and it is possible that some of our practices may be challenged under these laws. Violations of these laws can subject us to administrative, civil and criminal penalties, damages, fines, disgorgement, the exclusion from participation in federal and state healthcare programs, individual imprisonment, reputational harm, and the curtailment or restructuring of our operations, as well as additional reporting obligations and oversight if we become subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with these laws. Efforts to ensure that our current and future business arrangements with third parties, and our business generally, will comply with applicable healthcare laws and regulations will involve substantial costs.
Moreover, analogous state and foreign laws and regulations may be broader in scope than the provisions described above and may apply regardless of payor. These laws and regulations may differ from one another in significant ways, thus further complicating compliance efforts. For instance, in the EU, many EU member states have adopted specific anti-gift statutes that further limit commercial practices for medicinal products and MDs, in particular vis-à-vis healthcare professionals and organizations. Additionally, there has been a recent trend of increased regulation of payments and transfers of value provided to
21
healthcare professionals or entities and many EU member states have adopted national “Sunshine Acts” which impose reporting and transparency requirements (often on an annual basis), similar to the requirements in the United States, on pharmaceutical companies. Certain countries also mandate implementation of commercial compliance programs, or require disclosure of marketing expenditures and pricing information.
Coverage and Reimbursement
In the United States and markets in other countries, patients who are prescribed treatments for their conditions and providers performing the prescribed services generally rely on third-party payors to reimburse all or part of the associated healthcare costs. Thus, even if a product candidate is approved, sales of the product will depend, in part, on the extent to which third-party payors, including government health programs in the United States such as Medicare and Medicaid, commercial health insurers and managed care organizations, provide coverage, and establish adequate reimbursement levels for, the product. In the United States, no uniform policy of coverage and reimbursement for drug and other medical products exists among third-party payors. Although CMS determines whether and to what extent a new medicine will be covered and reimbursed under Medicare and private payors tend to follow CMS to a substantial degree, coverage and reimbursement for drug and other medical products can differ significantly from payor to payor. The process for determining whether a third-party payor will provide coverage for a product may be separate from the process for setting the price or reimbursement rate that the payor will pay for the product once coverage is approved. Third-party payors are increasingly challenging the prices charged, examining the medical necessity, and reviewing the cost-effectiveness of medical products and services and imposing controls to manage costs. Third-party payors may limit coverage to specific products on an approved list, also known as a formulary, which might not include all of the approved products for a particular indication.
In order to secure coverage and reimbursement for any product that might be approved for sale, a company may need to conduct expensive pharmacoeconomic or other studies in order to demonstrate the medical necessity and cost-effectiveness of the product, in addition to the costs required to obtain FDA or other comparable regulatory approvals. Additionally, companies may also need to provide discounts to purchasers, private health plans or government healthcare programs. Nonetheless, product candidates may not be considered medically necessary or cost effective. A decision by a third-party payor not to cover a product could reduce physician utilization once the product is approved and have a material adverse effect on sales, our operations and financial condition. Additionally, a third-party payor’s decision to provide coverage for a product does not imply that an adequate reimbursement rate will be approved. Further, one payor’s determination to provide coverage for a product does not assure that other payors will also provide coverage and reimbursement for the product, and the level of coverage and reimbursement can differ significantly from payor to payor. Factors payors consider in determining reimbursement are based on whether the 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.
Net prices for drugs may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors and by any future relaxation of laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in the United States. Increasingly, third-party payors are requiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices charged for medical products. We cannot be sure that reimbursement will be available for any product candidate that we commercialize and, if reimbursement is available, the level of reimbursement. In addition, many pharmaceutical manufacturers must calculate and report certain price reporting metrics to the government, such as average sales price, or ASP, and best price. Penalties may apply in some cases when such metrics are not submitted accurately and timely. Further, these prices for drugs may be reduced by mandatory discounts or rebates required by government healthcare programs.
In addition, in many foreign countries, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing and reimbursement vary widely from country to country. In the EU, governments influence the price of pharmaceutical products through their pricing and reimbursement rules and control of national health care systems that fund a large part of the cost of those products to consumers. Member states are free to restrict the range of pharmaceutical products for which their national health insurance systems provide reimbursement, and to control the prices and reimbursement levels of pharmaceutical products for human use. Some jurisdictions operate positive and negative list systems under which products may only be marketed once a reimbursement price has been agreed to by the government. Member states may approve a specific price or level of reimbursement for the pharmaceutical product, or alternatively adopt a system of direct or indirect controls on the profitability of the company responsible for placing the pharmaceutical product on the market, including volume-based arrangements, caps and reference pricing mechanisms. To obtain reimbursement or pricing approval, some of these countries may require the completion of clinical trials that compare the cost-effectiveness of a particular product candidate to currently available therapies. Other member states allow companies to fix their own prices for medicines, but monitor and control company profits. 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. The downward pressure on health care costs has become very intense. As a result, increasingly high barriers are being erected to the entry of new products. In addition, in some countries, cross-border imports from low-priced markets exert a commercial pressure on pricing within a country.
The containment of healthcare costs has become a priority of federal, state and foreign governments, and the prices of products 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 a company’s revenue generated from the sale of any approved products. Coverage policies and third-party payor reimbursement rates may change at any time. Even if favorable coverage and reimbursement status is attained
22
for one or more products for which a company or its collaborators receive regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future.
Healthcare Reform
In the United States and some foreign jurisdictions, there have been, and likely will continue to be, a number of legislative and regulatory changes and proposed changes regarding the healthcare system directed at broadening the availability of healthcare, improving the quality of healthcare, and containing or lowering the cost of healthcare. For example, in March 2010, the U.S. Congress enacted the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively the ACA which, among other things, included changes to the coverage and payment for products under government health care programs. The ACA included provisions of importance to our potential product candidates that:
•
created an annual, nondeductible fee on any entity that manufactures or imports specified branded prescription drugs and biologic products, apportioned among these entities according to their market share in certain government healthcare programs;
•
expanded eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to certain individuals with income at or below 133 percent of the federal poverty level, thereby potentially increasing a manufacturer’s Medicaid rebate liability;
•
expanded manufacturers’ rebate liability under the Medicaid Drug Rebate Program by increasing the minimum rebate for both branded and generic drugs and revising the definition of “average manufacturer price,” or AMP, for calculating and reporting Medicaid drug rebates on outpatient prescription drug prices;
•
addressed a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected;
•
expanded the types of entities eligible for the 340B drug discount program;
•
established the Medicare Part D coverage gap discount program by requiring manufacturers to provide a 50 percent point-of-sale-discount (increased to 70% as of January 1, 2019 pursuant to subsequent legislation) off the negotiated price of applicable brand drugs to eligible beneficiaries during their coverage gap period as a condition for the manufacturers’ outpatient drugs to be covered under Medicare Part D; and
•
created a Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research.
Since its enactment, there have been numerous judicial, administrative, executive, and legislative challenges to certain aspects of the ACA.
On June 17, 2021, the U.S. Supreme Court dismissed the most recent judicial challenge to the ACA brought by several states without specifically ruling on the constitutionality of the ACA.
Other legislative changes have been proposed and adopted in the United States since the ACA was enacted. In August 2011, the Budget Control Act of 2011, among other things, included aggregate reductions of Medicare payments to providers, which went into effect in April 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2032 unless additional Congressional action is taken. In January 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, further reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. More recently, on March 11, 2021, President Biden signed the American Rescue Plan Act of 2021 into law, which eliminated the statutory Medicaid drug rebate cap,, beginning January 1, 2024. The rebate was previously capped at 100% of a drug’s average manufacturer price.
Moreover, payment methodologies may be subject to changes in healthcare legislation and regulatory initiatives. For example, CMS may develop new payment and delivery models, such as bundled payment models. In addition, recently there has been heightened governmental scrutiny over the manner in which manufacturers set prices for their commercial products, which has resulted in several Congressional inquiries and proposed and enacted state and federal legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for pharmaceutical products. On August 16, 2022, the Inflation Reduction Act of 2022, or IRA, was into law. Among other things, the IRA requires manufacturers of certain drugs to engage in price negotiations with Medicare (beginning in 2026), imposes rebates under Medicare Part B and Medicare Part D to penalize price increases that outpace inflation (first due in 2023), and replaces the Part D coverage gap discount program with a new discounting program (beginning in 2025). The IRA permits the Secretary of the Department of Health and Human Services to implement many of these provisions through guidance, as opposed to regulation, for the initial years. On August 29, 2023, HHS announced the list of the first ten drugs that will be subject to price negotiations, although the Medicare drug price negotiation program is currently subject to legal challenges. For that and other reasons, it is currently unclear how the IRA will be effectuated.
Individual states in the United States have also become increasingly active in passing legislation and implementing regulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. In addition, regional healthcare authorities and individual hospitals are increasingly using bidding procedures to determine what pharmaceutical products and which suppliers will be included in their prescription drug and other healthcare programs. Furthermore, there has been increased interest by third-party payors and governmental authorities in reference pricing systems and publication of discounts and list prices. It is difficult to predict the future legislative landscape in healthcare and the effect on our business, results of operations, financial condition and prospects. However, we expect that additional state and federal healthcare reform measures will be adopted in the future.
On May 30, 2018, the Right to Try Act was signed into law. The law, among other things, provides a federal framework for certain patients to access certain investigational new drug products that have completed a Phase 1 clinical trial and that are undergoing investigation for FDA approval. Under certain circumstances, eligible patients can seek treatment without enrolling in clinical trials and without obtaining FDA permission under the FDA expanded access program. There is no obligation for a drug manufacturer
23
to make its drug products available to eligible patients as a result of the Right to Try Act. Drug manufacturers who provide their investigational product under the Right to Try Act are required to submit to FDA an annual summary of the use of their drug.
Outside the United States, ensuring coverage and adequate payment for a product also involves challenges. Pricing of prescription pharmaceuticals is subject to government control in many countries. In the EU, pricing negotiations with government authorities can extend well beyond the receipt of regulatory approval for a product and may require a clinical trial that compares the cost-effectiveness of a product to other available therapies. The conduct of such a clinical trial could be expensive and result in delays in commercialization.
Health Technology Assessment, or HTA, of medicinal products in the EU is an essential element of the pricing and reimbursement decision-making process in a number of EU member states. The outcome of HTA has a direct impact on the pricing and reimbursement status granted to the medicinal product. A negative HTA by a leading and recognized HTA body concerning a medicinal product could undermine the prospects to obtain reimbursement for such product not only in the EU member state in which the negative assessment was issued, but also in other EU member states
In 2011, Directive 2011/24/EU was adopted at the EU level. This Directive establishes a voluntary network of national authorities or bodies responsible for HTA in the individual EU member states. The network facilitates and supports the exchange of scientific information concerning HTAs. Further to this, on December 13, 2021, Regulation No 2021/2282 on HTA, amending Directive 2011/24/EU, was adopted. While the Regulation entered into force in January 2022, it will only begin to apply from January 2025 onwards, with preparatory and implementation-related steps to take place in the interim. Once applicable, it will have a phased implementation depending on the concerned products. The Regulation intends to boost cooperation among EU member states in assessing health technologies, including new medicinal products as well as certain high-risk medical devices, and provide the basis for cooperation at the EU level for joint clinical assessments in these areas. It will permit EU member states to use common HTA tools, methodologies, and procedures across the EU, working together in four main areas, including joint clinical assessment of the innovative health technologies with the highestpotential impact for patients, joint scientific consultations whereby developers can seek advice from HTA authorities, identification of emerging health technologies to identify promising technologies early, and continuing voluntary cooperation in other areas. Individual EU member states will continue to be responsible for assessing non-clinical (e.g., economic, social, ethical) aspects of health technologies, and making decisions on pricing and reimbursement.
Data Privacy and Security Laws
Numerous state, federal and foreign laws, regulations and standards govern the collection, use, access to, confidentiality and security of health-related and other personal information, and could apply now or in the future to our operations or the operations of our partners. In the United States, numerous federal and state laws and regulations, including data breach notification laws, health information privacy and security laws and consumer protection laws and regulations govern the collection, use, disclosure, and protection of health-related and other personal information. In addition, certain foreign laws govern the privacy and security of personal data, including health-related data. Privacy and security laws, regulations, and other obligations are constantly evolving, may conflict with each other to complicate compliance efforts, and can result in investigations, proceedings, or actions that lead to significant civil and/or criminal penalties and restrictions on data processing.
Foreign Private Issuer Status
We report under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as a non-U.S. company with foreign private issuer status. As long as we qualify as a foreign private issuer under the Exchange Act, we will be exempt from certain provisions of the Exchange Act that are applicable to U.S. domestic public companies, including:
•
the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act;
•
sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time;
•
the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing unaudited financial and other specified information, or current reports on Form 8-K, upon the occurrence of specified significant events; and
•
Regulation FD, which regulates selective disclosures of material information by issuers.
24
C. ORGANIZATIONAL STRUCTURE
The information (including tabular data) set forth or referenced under the heading“Highlights of the Year—2023" on page 1 and- "PureTech's Hub-and-Spoke Model” on page 10 of PureTech’s “Annual Report and Accounts 2023” included as exhibit 15.1 to this annual report on Form 20-F is incorporated by reference and "Notes to the Consolidated Financial Statements—Note 1. Material Accounting Policies" in each case of our audited consolidated financial statements included elsewhere in this annual report on Form 20-F .
D. PROPERTY, PLANTS AND EQUIPMENT
The information (including tabular data) set forth or referenced under the headings “Notes to the Consolidated Financial Statements—Note 12. Property and Equipment” and “Notes to the Consolidated Financial Statements—Note 23. Leases and subleases” in each case of our audited consolidated financial statements included elsewhere in this annual report on Form 20-F.
25
| ITEM 4A. | UNRESOLVED STAFF COMMENTS | ||||
Not applicable.
26
| ITEM 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS | ||||
You should read the following discussion and analysis, including those portions incorporated herein by reference, together with our consolidated financial statements, including the notes thereto, included elsewhere in this annual report on Form 20-F. Some of the information contained in this discussion and analysis or incorporated herein, 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 incorporated herein by reference, our actual results could differ materially from the results described in or implied by these forward-looking statements.
Our audited consolidated financial statements as of and for the years ended December 31, 2023, 2022 and 2021 have been prepared in accordance with IFRSs as issued by the International Accounting Standards Board ("IASB").
The following discussion contains references to the consolidated financial statements of PureTech Health plc and its consolidated subsidiaries, or the Company. These financial statements consolidate the Company’s subsidiaries and include the Company’s interest in associates and investments held at fair value. Subsidiaries are those entities over which the Company maintains control. Associates are those entities in which the Company does not have control for financial accounting purposes but maintains significant influence over the financial and operating policies. Where we have neither control nor significant influence for financial accounting purposes, we recognize our holding in such entity as an investment at fair value. For purposes of our consolidated financial statements, each of our Founded Entities are considered to be either a “subsidiary” or an “associate” depending on whether PureTech Health plc controls or maintains significant influence over the financial and operating policies of the respective entity at the respective period end date. For additional information regarding the accounting treatment of these entities, see Note 1. Material Accounting Policies of our consolidated financial statements included elsewhere in this annual report on Form 20-F.
A. OPERATING RESULTS
The information (including tabular data) set forth or referenced under the heading “Key Performance Indicators—2023” on page 67 of PureTech’s “Annual Report and Accounts 2023” included as exhibit 15.1 to this annual report on Form 20-F is incorporated by reference.
2023 Compared with 2022
The information (including tabular data) set forth or referenced under the heading “Financial Review” on pages 68 to 80 of PureTech’s “Annual Report and Accounts 2023” included as exhibit 15.1 to this annual report on Form 20-F is incorporated by reference.
2022 Compared with 2021 is set forth under Item 5. A. Operating Results of PureTech's 2022 Form 20-F.
The information (including tabular data) set forth or referenced under the heading “Risk Management” on pages 60 to 64 of PureTech’s “Annual Report and Accounts 2023” included as exhibit 15.1 to this annual report on Form 20-F is incorporated by reference.
B. LIQUIDITY AND CAPITAL RESOURCES
The information (including tabular data) set forth or referenced under the following headings is incorporated by reference herein: "Viability" on pages 65 to 66 and "Financial Review—Cash Flow and Liquidity" on page 69 of PureTech's "Annual Report and Accounts 2023" included as exhibit 15.1 to this annual report on Form 20-F and “Notes to the Consolidated Financial Statements—Note 22. Long-term loan”, “Notes to the Consolidated Financial Statements—Note 23. Leases and subleases”, “Notes to the Consolidated Financial Statements—Note 24. Capital and Financial Risk Management ” and “Notes to the Consolidated Financial Statements—Note 25. Commitments and Contingencies”, in each case of our consolidated financial statements included elsewhere in this annual report on Form 20-F.
Under various license and collaboration agreements we are required to make milestone payments upon successful completion and achievement of certain intellectual property, clinical, regulatory and sales milestones. We will also be required to make royalty payments in connection with the sale of products developed under these agreements, if and when such sales occur. As of December 31, 2023, these milestone events have not yet occurred and therefore the Company does not have a present obligation to make the related payments in respect of the licenses. We believe that the occurrence of many of these milestones is remote at this time. As of December 31, 2023 payments in respect of developmental milestones that are dependent on events that are outside the control of the Company but are reasonably possible to occur amounted to approximately $7.4 million. These milestone amounts represent an aggregate of multiple milestone payments depending on different milestone events in multiple agreements. The probability that all such milestone events will occur in the aggregate is remote. We are not able to predict when and if such milestone events will occur. Payments made to license IP represent the acquisition cost of intangible assets. For more information, see "Note 13. Intangible Assets" to our audited consolidated financial statements included elsewhere in this annual report on Form 20-F.
We present the preferred shares issued by our subsidiaries to third parties as liabilities in our Consolidated Statement of Financial Position. Such preferred shares are redeemable only upon liquidation or deemed liquidation (as defined in the subsidiaries' incorporation documents) of the respective subsidiaries. We are unable to predict when and if such liquidation or deemed liquidation events will occur, and therefore when and if such shares will be redeemed, if at all.
27
As of December 31, 2023, our off-balance sheet arrangements consist of outstanding standby letters of credit. We have no other off-balance sheet arrangements that have had, or are reasonably likely to have, a material current or future effect on our consolidated financial statements or changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. See “Notes to the Consolidated Financial Statements—Note 14. Other Financial Assets” included in our audited consolidated financial statements included elsewhere in this annual report on Form 20-F.
We consider the Group's working capital to be sufficient for its present requirements.
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
The information (including tabular data) set forth or referenced under the following headings is incorporated by reference herein: "Overview - Giving Life To Science" on page 1 and “ESG Report- Patients—Bioethics: RD” on page 32 of PureTech’s “Annual Report and Accounts 2023” included as exhibit 15.1 to this annual report on Form 20-F and "Notes to the Consolidated Financial Statements - Note 4. Segment Information" of our consolidated financial statements included elsewhere in this annual report on Form 20-F.
D. TREND INFORMATION
Other than as disclosed elsewhere in this annual report on Form 20-F, we are not aware of any trends, uncertainties, demands, commitments or events for the period from January 1, 2023 to the present time that are reasonably likely to have a material adverse effect on our net revenue, income, profitability, liquidity or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future operating results or financial condition.
E. CRITICAL ACCOUNTING ESTIMATES
The information (including tabular data) set forth or referenced under the following headings is incorporated by reference herein "Notes to the Consolidated Financial Statements – Note 1. – Material Accounting Policies" of our consolidated financial statements included elsewhere in this annual report on Form 20-F.
28
| ITEM 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES | ||||
A. DIRECTORS AND SENIOR MANAGEMENT
The information (including tabular data) set forth under the heading “Board of Directors” on pages 82 to 84, “Management team” on page 85 and "Directors’ Report for the year ended December 31, 2023” on pages 93 to 97 in each case of PureTech’s “Annual Report and Accounts 2023" included as exhibit 15.1 to this annual report on Form 20-F is incorporated by reference.
Board Diversity
The table below provides certain information regarding the diversity of our Board and Directors as of the date of this annual report.
|
Board Diversity Matrix as of April 25, 2024
|
|||||
| Country of Principal Executive Offices | United States | ||||
| Foreign Private Issuer | Yes | ||||
| Disclosure Prohibited Under Home Country Law | No | ||||
| Total Number of Directors | 6 | ||||
| Female | Male | Non-Binary | Did Not Disclose Gender | |||||||||||
| Part I: Gender Identity | ||||||||||||||
| Directors | 2 | 4 | 0 | 0 | ||||||||||
| Part II: Demographic Background | ||||||||||||||
| Underrepresented Individual in Home Country Jurisdiction | 0 | |||||||||||||
| LGBTQ+ | 0 | |||||||||||||
| Did Not Disclose Demographic Background | 0 | |||||||||||||
B. COMPENSATION
The information (including graphs and tabular data) set forth under the following headings is incorporated by reference herein: “Directors’ Report for the year ended December 31, 2023” on pages 93 to 97, “Directors’ Remuneration Report for the year ended December 31, 2023” on pages 102 to 112, “Directors’ Remuneration Policy” on pages 106 to 112, “Annual Report on Remuneration” on pages 113 to 122, in each case of PureTech’s “Annual Report and Accounts 2023” included as exhibit 15.1 to this annual report on Form 20-F and “Notes to the Consolidated Financial Statements—Note 9. Share-based Payments” of our audited consolidated financial statements included elsewhere in this annual report. References to the term audited within the "Annual Report on Remuneration" are not incorporated by reference within this Form 20-F.
C. BOARD PRACTICES
The information (including graphs and tabular data) set forth under the headings "Board of Directors" on pages 82 to 84 “The Board” on pages 86 to 90, “Report of the Nomination Committee” on page 98, “Report of the Audit Committee” on pages 99 to 101, and "Directors' Remuneration Report for the year ended December 31, 2023" on pages 102 to 112 in each case of PureTech’s “Annual Report and Accounts 2023” included as exhibit 15.1 to this annual report on Form 20-F is incorporated by reference.
D. EMPLOYEES
The information (including tabular data) set forth under the heading “ESG Report— People” on pages 34 to 39 of PureTech’s “Annual Report and Accounts 2023” included as exhibit 15.1 to this annual report on Form 20-F is incorporated by reference.
E. SHARE OWNERSHIP
The information (including graphs and tabular data) set forth under the headings “Directors’ Report for the year ended December 31, 2023” on pages 93 to 97 and “Annual Report on Remuneration” on pages 113 to 122, in each case of PureTech’s “Annual Report and Accounts 2023” included as exhibit 15.1 to this annual report on Form 20-F is incorporated by reference. For information regarding the share ownership of our directors and executive officers, see Item 7.A - "Major Shareholders". References to the term audited within the "Annual Report on Remuneration" are not incorporated by reference within this Form 20-F.
F. DISCLOSURE OF REGISTRANT'S ACTION TO RECOVER ERRONEOUSLY AWARDED COMPENSATION
None.
29
| ITEM 7. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS | ||||
A. MAJOR SHAREHOLDERS
The following table sets forth information with respect to the beneficial ownership of our ordinary shares as of by:
•
each of our directors;
•
each of our executive officers; and
•
each person, or group of affiliated persons, who is known by us to beneficially own more than 3 percent of our outstanding ordinary shares.
The column entitled “Percentage of Shares Beneficially Owned” is based on a total of 270,209,101 ordinary shares outstanding as of March 31, 2024.
Beneficial ownership is determined in accordance with the rules and regulations of the SEC and includes voting or investment power with respect to our ordinary shares. Ordinary shares subject to options that are currently exercisable or exercisable within 60 days after March 31, 2024 are considered outstanding and beneficially owned by the person holding the options for the purpose of calculating the percentage ownership of that person but not for the purpose of calculating the percentage ownership of any other person. Except as otherwise noted, the persons and entities in this table have sole voting and investment power with respect to all of the ordinary shares beneficially owned by them, subject to community property laws, where applicable. Except as otherwise set forth below, the address of the beneficial owner is c/o PureTech Health, 6 Tide Street, Suite 400, Boston, Massachusetts 02210. The information in the table below is based on information known to us or ascertained by us from public filings made by the shareholders. We have also set forth below information known to us regarding any significant change in the percentage ownership of our ordinary shares by any major shareholders during the past three years. The major shareholders listed below do not have voting rights with respect to their ordinary shares that are different from the voting rights of other holders of our ordinary shares.
| NAME OF BENEFICIAL OWNER |
PERCENTAGE OF SHARES
BENEFICIALLY OWNED |
||||
| 3 Percent Shareholders | |||||
|
Invesco Ltd.
1
|
23.8 | % | |||
| Lansdowne Partners Limited 2 | 8.1 | % | |||
| Baillie Gifford Co 3 | 7.7 | % | |||
|
Vanguard Group, Inc.
4
|
4.2 | % | |||
|
Patient Capital Management,
5
|
3.9 | % | |||
|
Recordati S.p.A
6
|
3.5 | % | |||
|
MG Investment Management, LTD
7
|
3.4 | % | |||
| Executive Officers and Directors | |||||
| Daphne Zohar 8 | 4.7 | % | |||
|
Bharatt Chowrira, Ph.D., J.D
.9
|
1 | % | |||
| Sharon Barber-Lui | * | ||||
| Raju Kucherlapati, Ph.D. | * | ||||
| John LaMattina, Ph.D. | * | ||||
|
Robert Langer, Sc.D.
10
|
1.1 | % | |||
| Kiran Mazumdar-Shaw | * | ||||
|
|
|
||||
* Represents beneficial ownership of less than 1 percent of our outstanding ordinary shares.
We are not aware that the Company is directly owned or controlled by another corporation, any foreign government or any other natural or legal person(s) severally or jointly. We are not aware of any arrangement, the operation of which may result in a change of control of the Company.
The number of record holders in the United States is not representative of the number of beneficial holders nor is it representative of where such beneficial holders are resident since many of these ordinary shares were held by brokers or other nominees. As of March 31, 2024, assuming that all of our ordinary shares represented by ADSs are held by residents of the United States, we estimate that approximately 30% of our outstanding ordinary shares were held in the United States by approximately 78 holders of record.
1
Consists of 64,188,623 shares beneficially held. The address for Invesco Ltd. is c/o Invesco Ltd.,1331 Spring Street NW, Suite 2500, Atlanta, GA 30309
2
Consists of 21,876,774 shares beneficially held. The address for Lansdowne Partners Limited is c/o 15 Davies Street, London W1K 3AG, United Kingdom.
3
Consists of 20,662,288 shares beneficially held. The address for Baillie Gifford Co. is c/o Calton Square, 1 Greenside Row, Edinburgh EH1 3AN, United Kingdom.
4
Consists of 11,469,994 shares beneficially held. The address for Vanguard Group, Inc. is 455 Devon Park Dr Valley Forge, PA, 19482. .
5
Consists of 10,533,234 shares beneficially held. .The address for Patient Capital Management, Inc. is 100 Simcoe St., Suite 100, Toronto, ON M5H 3G2, Canada.
6
Consists of 9,554,140 shares beneficially held. The address for Recordati S.p.A. is c/o Via Civitali, 1, 20148 Milano, Italy.
7
Consists of 9,153,518 shares beneficially held. The address for MG Investment Management, LTD is c/o 10 Fenchurch Avenue London EC3M 5BM, United Kingdom
8
Consists of an aggregate of 12,778,029 shares held by (i) the Zohar Family Trust I, a U.S. established trust of which Ms. Zohar is a beneficiary and trustee (ii) the Zohar Family Trust II, a U.S. established trust of which Ms. Zohar is a beneficiary (in the event of her spouse’s death) and trustee; (iii) Zohar LLC, a U.S. established limited liability company and (iv) Ms. Zohar owns or has a beneficial interest in 100 percent of the share capital of Zohar LLC. Effective April 8, 2024, Ms. Zohar resigned from her role as the Company’s Chief Executive Officer and as a member of the board of directors.
9
Consists of an aggregate of 1,00,001 shares beneficially held by Bharatt Chowrira, Ph.D., J.D., and 1,762,500 vested but unexercised options.
10
Consists of an aggregate of 2,976,831 shares held by (i) Langer Family 2020 Trust and (ii) Dr. Langer direct
30
The information (including graphs and tabular data) set forth under the headings “Directors’ Report for the year ended December 31, 2023—Substantial Shareholders” on page 93 and “Annual Report on Remuneration” on pages 113 to 122, in each case of PureTech’s “Annual Report and Accounts 2023” included as exhibit 15.1 to this annual report on Form 20-F is incorporated by reference.
Change in Ownership of Major Shareholders
To our knowledge, other than as disclosed in the table above, our other filings with the SEC, public disclosure, including without limitation Schedule 13 filings, and this annual report, there has been no significant change in the percentage ownership held by any major shareholder since January 1, 2021.
B. RELATED PARTY TRANSACTIONS
The information (including graphs and tabular data) set forth under the following headings is incorporated by reference herein: headings “Directors’ Report for the year ended December 31, 2023—Related party transactions” on page 95, “Highlights of the Year – 2023” on page 1, "PureTech's Hub-and-Spoke Model" on page 10"and Founded Entities" on pages 13 to 21, in each case of PureTech’s “Annual Report and Accounts 2023” included as exhibit 15.1 to this annual report on Form 20-F and “Notes to the Consolidated Financial Statements—Note 26. Related Parties Transactions” of our audited consolidated financial statements included elsewhere in this annual report. For information regarding transactions with our Founded Entities, see Item 10.C - "Material Contracts."
C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
31
| ITEM 8. | FINANCIAL INFORMATION | ||||
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
Consolidated Financial Statements
Please see the information below under the heading Item 18—“Financial Statements.”
Dividend Distribution Policy
We have never declared or paid any dividends on our ordinary shares, though we may consider doing so in the future depending on the progression of our business. Under English law, we may only pay dividends if our accumulated realized profits, which have not been previously distributed or capitalized, exceed our accumulated realized losses, so far as such losses have not been previously written off in a reduction or reorganization of capital. Therefore, we must have sufficient distributable profits before issuing a dividend. Distributable profits are determined at the holding company level and not on a consolidated basis. Subject to such restrictions and to any restrictions set out in the Articles of Association, declaration and payment of cash dividends in the future, if any, will be at the discretion of our Board of Directors (the "Board") (and in the case of final dividends, must be approved by our shareholders), and will depend upon such factors as results of operations, capital requirements, contractual restrictions, our overall financial condition or applicable laws and any other factors deemed relevant by the Board.
Legal Proceedings
As of December 31, 2023, we were not party to any material legal matters or claims, except as noted below. In the future, we may become party to legal matters and claims arising in the ordinary course of business, the resolution of which we do not anticipate would have a material adverse impact on our financial position, results of operations or cash flows. In March 2024, a complaint was filed against the Company alleging breach of contract with respect to certain payments alleged to be owed to a previous employee of a Company subsidiary based on purported terms of a contract between such individual and the Company. The Company intends to defend itself vigorously though the ultimate outcome of this matter and the timing for resolution remains uncertain. No determination has been made that a loss, if any, arising from this matter is probable or that the amount of any such loss, or range of loss, is reasonably estimable.
B. SIGNIFICANT CHANGES
Except as otherwise disclosed in this annual report on Form 20-F and in the “Notes to the Consolidated Financial Statements—Note 28. Subsequent Events”, no significant change has occurred since the date of the most recent financial statements included elsewhere in this annual report on Form 20-F.
32
| ITEM 9. | THE OFFER AND LISTING | ||||
A. OFFER AND LISTING DETAILS
Our American Depositary Shares ("ADSs") have been listed on The Nasdaq Global Market under the symbol “PRTC” since November 16, 2020. Prior to that date, there was no public trading market for our ADSs. Our ordinary shares have been trading on the main market of the London Stock Exchange since June 2015 under the ticker code “PRTC.” Prior to that date, there was no public trading market for our ordinary shares.
B. PLAN OF DISTRIBUTION
Not applicable.
C. MARKETS
Our ADSs have been listed on the Nasdaq Global Market under the symbol “PRTC” since November 16, 2020 and our ordinary shares have been listed on the main market of the London Stock Exchange since June 2015.
D. SELLING SHAREHOLDERS
Not applicable.
E. DILUTION
Not applicable.
F. EXPENSES OF THE ISSUE
Not applicable.
33
| ITEM 10. | ADDITIONAL INFORMATION | ||||
A. SHARE CAPITAL
Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
Objects
Section 31 of the Companies Act 2006 provides that the objects of a company are unrestricted unless any restrictions are set out in the articles. There are no such restrictions in our Articles of Association ("Articles") and our objects are therefore unrestricted.
A copy of our Articles is attached as Exhibit 1.1 to this annual report on Form 20-F. The information called for by this Item is set forth in Exhibit 2.3 to this annual report on Form 20-F for the year ended December 31, 2023.
C. MATERIAL CONTRACTS
Except as otherwise set forth below or as otherwise disclosed in this report, we are not currently, and have not been in the last two years, party to any material contract, other than contracts entered into in the ordinary course of business.
The Company asked shareholders to approve a resolution to adopt a new PureTech Health plc Performance Share Plan, or PSP, at the Company’s Annual General Meeting (“AGM”) on June 13, 2023, to help better manage the potential dilution from equity incentives, a critically important part of our overall compensation program. The new PSP proposal passed with support from 96.8% of the shares voted at the AGM. Following the AGM, a new forward-looking limit of 10% of the issued share capital over the next 5 years was instituted for all new awards. Any forfeitures, cancellations, or withholdings from shares granted under the prior extinguished limit of the prior PSP are not eligible to be re-granted at any time under the new limit contained in the new PSP. As part of the change and the implementation of the new PSP, the Company removed the separate “5% in 10 years” dilution limit applicable to awards granted to senior employees such as Executive Directors, to ensure we have full flexibility in operating the new PSP going forward.
On August 10, 2018, we entered into a Lease Agreement with RBK I Tenant, LLC for certain premises of approximately 50,858 rentable square feet of space at 6 Tide Street, Boston, MA 02210. The lease commenced on April 26, 2019 for an initial term consisting of ten years and three months and there is an option to extend for two consecutive periods of five years each.
We have executed agreements with the members of the Board substantially in the form of our Form of Deed of Indemnity.
We entered into an Asset Purchase Agreement by and between Auspex Pharmaceuticals, Inc. and PureTech Health LLC, dated July 15, 2019, pursuant to which Auspex assigned and transferred all patent claims, inventory, technology, contracts and related rights relating to LYT-100 to us. As consideration, we paid an upfront payment, which we do not deem material. In addition, Auspex is eligible to receive milestone payments of approximately $84 million in the aggregate depending upon specified developmental, regulatory and commercial achievements. In addition, for ten years following the first commercial sale of any commercialized product containing LYT-100, Auspex is eligible to receive low to middle single-digit royalties on the worldwide net sales of such product.
We entered into a Royalty Agreement with Follica, Incorporated, dated July 23, 2013, pursuant to which Follica agreed to pay us a two percent royalty on net sales by Follica or its sublicensees of (i) products involving skin disruption using any mechanical, energy or chemical based approaches, applying compounds to the skin, or any other approaches to the treatment of hair follicles or other dermatological disorders commercialized by Follica, (ii) processes involving such products, or (iii) services which use or incorporate any such product or process. In the event that Follica sublicenses the rights to any of these products, processes or services, Follica will be obligated to pay us low teen royalties on any income received from the sublicensee. Either party may terminate this agreement upon an uncured material breach by the other party. To date, we have not received any royalty payments pursuant to this agreement. We do not direct or control the development and commercialization of the intellectual property licensed pursuant to this agreement.
We entered into a Royalty and Sublicense Income Agreement with Gelesis, dated December 18, 2009, pursuant to which we are required to provide certain funding, management services and services relating to intellectual property. In exchange, Gelesis is required to pay us a royalty equal to 2 percent of all net product sales and 10 percent of gross sublicense income received on certain food products as a result of developing hydrogel-based products that are covered by a licensed patent that has issued and has not been revoked or abandoned. The royalty rate is subject to customary downward adjustments in the event Gelesis is required to pay third parties to obtain a license to intellectual property rights that are necessary for Gelesis to develop or commercialize our products. There are no milestone payment obligations under this agreement. Management services provided by us include advisory services on corporate strategy, general and administrative support including office space, supplies and administrative support, payroll services and website development and support. Gelesis’ obligation to pay royalties to us will terminate on a country-by-country basis upon termination or expiration of the underlying patents. To date, we have not received any royalty payments pursuant to this agreement. We do not direct or control the development and commercialization of the intellectual property sublicensed pursuant to this agreement.
We entered into an Exclusive Patent License Agreement with Karuna, dated March 4, 2011, pursuant to which we granted Karuna an exclusive license to patent rights relating to combinations of a muscarinic activator with a muscarinic inhibitor for the treatment of central nervous system disorders. Karuna agreed to make milestone payments to us of up to an aggregate of $10 million upon the achievement of specified development and regulatory milestones. In addition, for the term of this agreement Karuna is obligated to pay us low single-digit running royalties on the worldwide net sales of any commercialized product covered by the licenses granted under this agreement. In the event that Karuna sublicenses any of the patent rights granted under this agreement, Karuna will be obligated to pay us royalties within the range of 15 percent to 25 percent on any income received from the sublicensee, excluding royalties. Karuna may terminate this agreement for any reason with proper prior notice to us, provided that it would lose its rights to the underlying patents as a result. Either party may terminate this agreement upon an uncured material breach by the other party. To date, we have not received any royalty payments pursuant
34
to this agreement. We do not direct or control the development and commercialization of the intellectual property licensed pursuant to this agreement. The acquisition of Karuna by Bristol Meyers Squibb (NYSE: BMY), which closed on March 18, 2024 (the “Karuna Acquisition”), had no impact on our rights or obligations under the Exclusive Patent License Agreement with Karuna, which remains in full force and effect.
We entered into a Research and License Agreement with New York University, or NYU, on March 6, 2017, pursuant to which NYU granted to us an exclusive worldwide license to patents relating to certain therapeutic candidates, including LYT-200. In connection with this agreement, we are required to pay an annual license fee in addition to milestone payments upon the achievement of certain clinical and commercial milestones, both of which we deem immaterial. Additionally, for the term of this agreement, we are obligated to make low single digit royalty payments on the net sales of any commercialized product covered by the license granted under the agreement. In the event that we sublicense any of the patent rights granted under the Research and License Agreement, we will be obligated to pay NYU a low teen percentage of any royalties received by such sublicensee, provided that such payments are capped at a low single digit of net sales of any commercialized product by such sublicensee.
Gelesis Business Combination and Other Transactions
On January 13, 2022, Gelesis, Capstar Special Acquisition Corp., a Delaware corporation (“CPSR”), and CPSR Gelesis Merger Sub, Inc., a Delaware corporation, and wholly-owned subsidiary of CPSR (“Merger Sub”), consummated a business combination ("Gelesis Merger") pursuant to the business combination agreement, dated July 19, 2021, as amended on November 8, 2021 (the “Gelesis Business Combination Agreement”). Pursuant to the terms of the Gelesis Business Combination Agreement, Merger Sub merged with and into Gelesis, with Gelesis surviving the merger as a wholly-owned subsidiary of CPSR. In connection with the consummation of the Merger on the Closing Date, CPSR changed its name to Gelesis Holdings, Inc ("GLS"). As a result of the Gelesis Merger, among other things, each common share of Gelesis that was issued and outstanding immediately prior to the effective time of the Merger, after giving effect to the conversion of all preferred shares of Gelesis into common shares of Gelesis immediately prior to the effective time, was canceled and converted into the right to receive a number of shares of GLS Common Stock equal to an exchange ratio of approximately 2.59 multiplied by the number of common shares of Gelesis held by such holder immediately prior to the effective time. In addition, (a) all vested and unvested stock options of Gelesis were assumed by GLS and (b) each warrant of Old Gelesis was cancelled in exchange for a warrant to purchase shares of GLS, in each case based on an implied equity value of $675,000,000 as of the Closing.
Concurrently with the execution of the Gelesis Business Combination Agreement, on July 19, 2021, CPSR entered into subscription agreements (the “Subscription Agreements”) with certain investors, including us, pursuant to which we purchased 1.5 million shares of GLS common stock at a price of $10.00 per share, for an aggregate purchase price of $15.0 million (the “PIPE Financing”). The PIPE Financing was consummated concurrently with the closing of the Gelesis Merger.
On December 30, 2021, CPSR entered into a Backstop Agreement (the “Backstop Agreement”) with us and SSD2, LLC (“SSD2” and together with us, the “Backstop Purchasers”), pursuant to which the Backstop Purchasers agreed to purchase an aggregate of up to 1,500,000 shares of GLS common stock immediately prior to the closing at a cash purchase price of $10.00 per share (the “Backstop Purchase Shares”), resulting in aggregate proceeds of up to $15.0 million, which amount, when added to the proceeds from the PIPE Financing, would ensure that the minimum cash condition would be satisfied. Based on the number of redemptions at closing, we purchased 496,145 shares for an aggregate price of $5.0 million. In addition, at the closing of the sale of the Backstop Purchase Shares, GLS issued an additional 1,322,500 shares of common stock to us.
On the closing on January 13, 2022, Gelesis, CPSR, certain former directors of CPSR (the “Director Holders”) and certain former stockholders of Gelesis (collectively with Sponsor and the Director Holders, the “Holders”), including us, entered into an Amended and Restated Registration and Stockholder Rights Agreement, pursuant to which, among other things, the Holders agreed not to effect any sale or distribution of any equity securities of GLS held by any of them during a lock-up period (180 days after closing of the Gelesis Merger in the case of PureTech Health LLC), and GLS agreed to register for resale, pursuant to Rule 415 of the Securities Act of 1933, as amended, certain shares of common stock and other equity securities of GLS that are held by the parties thereto from time to time.
Gelesis Promissory Note and Convertible Notes
On July 25, 2022, GLS issued a short term promissory note in the aggregate principal amount of $15.0 million (the “Promissory Note”) to us for a cash purchase price of $15.0 million as part of a series of promissory notes issued by GLS. On July 27, 2022, the Promissory Note was amended and restated to revise certain provisions contained therein.
Upon a Payment Default under the Promissory Note that has not been cured by GLS after five days, (x) GLS will be required to issue a warrant to us (a “Promissory Note Warrant”) to purchase, at an exercise price of $0.01 per share, subject to adjustment, an aggregate of number of shares of GLS common stock equal to: (i) (A) 0.2 multiplied by (B) the amount of outstanding principal and accrued interest under the Promissory Note as of the date of conversion, divided by (ii) the volume weighted average price of the GLS common stock, as reported by the New York Stock Exchange (the “NYSE”), for the five trading days (the “Common Stock VWAP”) occurring immediately prior to the date of exercise and (y) we may elect, at our option, to convert the outstanding principal and accrued interest under the Promissory Note into a number of shares of GLS common stock equal to (i) the amount of outstanding principal and accrued interest under the Promissory Note as of the date of conversion, divided by (ii) the lesser of the price per share of (A) the GLS common stock, as reported by the NYSE or (B) the Common Stock VWAP as of the day prior to the date of our conversion notice. The Promissory Note Warrant will be exercisable from the date of issuance and will expire on the date that is ten years from the date of issuance.
On February 21, 2023, we entered into a Note and Warrant Purchase Agreement (the “NPA”) with GLS, Gelesis (together with GLS, the “Notes Issuers”), Gelesis 2012, Inc. and Gelesis, LLC, as guarantors of the Convertible Notes, pursuant to which, for a cash purchase price of $5.0 million, (i) the Notes Issuers issued a short term secured convertible note in the aggregate principal amount of $5.0 million (the “Convertible Notes” and such initial issuance, the “Initial Notes”) to us and (ii) GLS issued warrants to purchase 23,688,047 shares of common stock of GLS (the “Warrants”) to us. The Convertible Notes are guaranteed by the domestic subsidiaries of Gelesis and are secured by a first-priority lien on any and all assets of GLS, including without limitation, intellectual property, regulatory filings and product approvals, clearances and marks worldwide (other than the
35
equity interests in Gelesis S.r.l. and assets held by Gelesis S.r.l.) and a pledge of the 100% of the equity interests of Gelesis and the domestic subsidiaries of the Notes Issuers. The Convertible Notes bear interest at a rate of 12% per annum, and were originally scheduled to mature on July 31, 2023, unless earlier converted or extended as described below. The Convertible Notes are not convertible, and the Warrants are not exercisable, until GLS receives stockholder approval of the issuance of the shares of common stock underlying the Convertible Note and the Warrants (the “Stockholder Approval”) in accordance with the terms thereof. Upon receipt of Stockholder Approval, (i) the Convertible Notes shall be convertible at our option into a number of shares of common stock equal to (x) the outstanding principal amount of such Note plus accrued and unpaid interest divided by (y) the Conversion Price (as defined in the Convertible Note) and (ii) the Warrants will become exercisable for a purchase price of $0.2744 per share.
In addition, pursuant to the NPA, we have agreed, upon the request of the Notes Issuers, to purchase from the Notes Issuers an additional $5.0 million principal amount of the Convertible Notes (the “Additional Notes”), and to purchase from GLS additional Warrants, representing warrant coverage of 170% of the principal amount of the Additional Notes, if (i) GLS and we, in our sole discretion, shall have agreed upon a satisfactory over-the-counter operating plan for GLS; (ii) GLS shall have successfully completed and submitted the usability study with respect to the OTC reclassification of its Plenity product; (iii) GLS shall have received Stockholder Approval on or prior to July 31, 2023; and (iv) other commercially reasonable customary conditions are satisfied.
On May 1, 2023, (i) the Notes Issuers issued to us, for a cash purchase price of $2.0 million, an Additional Note in the aggregate principal amount of $2.0 million (the “$2.0 million Additional Note”), and (ii) GLS issued to us a warrant to purchase 192,307,692 shares of Common Stock of GLS (the “Second Closing Warrant”) at an exercise price of $0.0182 expiring on May 1, 2028. The $2.0 million Additional Note is convertible into a number of shares of Common Stock of GLS equal to (i) the principal amount plus accrued and unpaid interest, divided by (ii) the initial conversion price of $0.0182. The terms of the $2.0 million Additional Note are generally the same as the terms of Initial Notes issued on February 21, 2023, including interest rate, maturity, covenants, events of default, and collateral.
On May 26, 2023, (i) the Notes Issuers issued to us, for a cash purchase price of $0.35 million, an Additional Note in the aggregate principal amount of $0.35 million (the “$0.35 million Additional Note"), and (ii) GLS used to us a warrant to purchase 43,133,803 shares of Common Stock of GLS(the “Third Closing Warrant”) at an exercise price of $0.0142 expiring on May 1, 2028. The $0.35 million Additional Note is convertible into a number of shares of Common Stock of GL:S equal to (i) the principal amount plus accrued and unpaid interest, divided by (ii) the initial conversion price of $0.0142. The terms of the Additional Note are generally the same as the terms of the Initial Note issued on February 21, 2023, and the $2.0 million Additional Note.
On June 12, 2023, the Notes Issuers issued to us, for a cash purchase price of $3.0 million, an Additional Note in the aggregate principal amount of $3.0 million (the “$3.0 million Additional Note”). The $3.0 million Additional Note is convertible into a number of shares of Common Stock of GLS equal to (i) the principal amount plus accrued and unpaid interest, divided by (ii) the initial conversion price of 0.0134. The $3.0 million Additional Note is issued on substantially the same terms (other than conversion price and warrant coverage) as the $2.0 million Additional Note issued on May 1, 2023 and the $0.35 million Additional Note issued on May 26, 2023.
On June 28, 2023, we entered into Amendment No. 3 to the NPA with the Notes Issuers and certain of its subsidiaries, which extended the maturity date of the Convertible Notes issued pursuant to the NPA to March 31, 2024, unless earlier converted or redeemed.
On September 20, 2023, the Notes Issuers issued to us, for a cash purchase price of $1.5 million, an Additional Note in the aggregate principal amount of $1.5 million (the “$1.5 million Additional Note”). The $1.5 Million Additional Note is convertible into a number of shares of Common Stock of GLS equal to (i) the principal amount plus accrued and unpaid interest, divided by (ii) the initial conversion price of $0.0494. The $1.5 Million Additional Note is issued on the same terms (other than conversion price) and in the same form as the $3.0 Million Additional Note issued on June 12, 2023. In addition, the parties amended the NPA to increase the aggregate principal amount of Additional Notes issuable to us pursuant to the NPA was increased to $6.85 million.
The aggregate principal amount of Convertible Notes issued under the NPA was $11.85 million.
During the terms of the Initial Notes and the Additional Notes, any term of any indebtedness, debt or equity-linked debt security incurred or issued by the Notes Issuers after the issuance of the Initial Notes that is more favorable than the terms of the Initial Notes or the Additional Notes (including warrant coverage), shall, at our option, automatically be incorporated into the Initial Notes, the Additional Notes and/or the Warrants (including warrant coverage).
The NPA provides that all shares of common stock issuable upon conversion of the Convertible Notes and upon exercise of the Warrants shall be entitled to registration rights which require GLS to file a shelf registration statement to register such shares for resale.
Gelesis Merger Agreement
On June 12, 2023, PureTech Health LLC and Caviar Merger Sub LLC, a Delaware limited liability company and a wholly-owned subsidiary of PureTech Health LLC (“Merger Sub”), entered into an agreement (hereinafter the "Merger Agreement"), with GLS pursuant to which GLS was to merge with and into Merger Sub, with Merger Sub continuing as the surviving company (the “Surviving Company”, and such merger, the “Merger”). If the Merger had been completed, we would have acquired all issued and outstanding shares of common stock of GLS not otherwise held by us, and GLS would have become our indirect wholly-owned subsidiary. In connection with the execution and delivery of the Merger Agreement, PureTech Health LLC entered into a Voting and Support Agreement (the “Voting and Support Agreement”) with GLS.
Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of common stock of GLS issued and outstanding immediately prior to the Effective Time would have been cancelled and converted into the right to receive $0.05664 per share in cash, without interest.
36
On October 12, 2023, we delivered a notice of termination to GLS in accordance with the Merger Agreement, terminating the Merger Agreement pursuant to Section 8.2(a) of the Merger Agreement. As a result of the termination of the Merger Agreement, the Voting and Support Agreement was terminated in accordance with its terms.
Gelesis Bankruptcy Filing
On October 30, 2023, GLS, together with its U. S. subsidiaries, Gelesis, Inc., and Gelesis, LLC, ceased operations and filed a voluntary petition for relief under the provisions of Chapter 7 of Title 11 of the United States Code in the United States Bankruptcy Court for the District of Delaware Case No. 23-11787.
Akili Business Combination Transaction
On January 26, 2022, Akili entered into an Agreement and Plan of Merger (the “Akili Merger Agreement”), by and among Akili, Social Capital Suvretta Holdings Corp. I (“SCS”), and Karibu Merger Sub, Inc., a Delaware corporation and a direct wholly-owned subsidiary of SCS (“Merger Sub”). Pursuant to the Akili Merger Agreement, among other things: (i) prior to the closing of the transactions contemplated by the Akili Merger Agreement, SCS will domesticate as a Delaware corporation in accordance with the DGCL, and the Cayman Islands Companies Act (As Revised), (ii) at the closing, upon the terms and subject to the conditions of the Merger Agreement, in accordance with the DGCL, Merger Sub will merge with and into Akili, with Akili continuing as the surviving corporation and a wholly-owned subsidiary of SCS (the “Merger”), (iii) at the closing, all of the outstanding capital stock of Akili and all options and warrants to acquire capital stock of Akili will be converted into the right to receive shares of common stock, par value $0.0001 per share, of SCS (after its domestication) (“SCS Common Stock”) or comparable equity awards that are settled or are exercisable for shares of SCS Common Stock, representing an aggregate of 60 million shares of SCS Common Stock, (iv) at the closing, SCS will be renamed “Akili, Inc.” and (v) at the closing, SCS will deposit into an escrow account for the benefit of the pre-Closing Akili stockholders, optionholders and warrantholders an aggregate number of shares of SCS Common Stock equal to 7.5% of the fully diluted shares of SCS Common Stock (including shares reserved under the equity incentive plan to be adopted by the combined company in connection with the Closing), determined as of immediately following the Closing (collectively, the “Earnout Shares”), which Earnout Shares will be subject to release from escrow to the pre-Closing Akili stockholders, optionholders and warrantholders in three equal tranches upon the daily volume weighted average price of a share of SCS Common Stock reaching $15.00/share, $20.00/share and $30.00/share, respectively, over any 20 trading days within any 30 consecutive trading day period following the closing and prior to the fifth anniversary of the closing, in each case, on the terms set forth in the Akili Merger Agreement. The Closing is subject to the satisfaction or waiver of certain closing conditions contained in the Merger Agreement, including the approval of SCS’s shareholders.
Sonde Stock Purchase Agreement
On May 25, 2022, we entered into a Series B Preferred Stock Purchase Agreement (the “Sonde Series B Agreement”) with Sonde and other investors pursuant to which certain other investors purchased shares of Sonde’s Series B Preferred Stock, and the $2.8 million principal amount and accrued interest outstanding under the convertible promissory notes previously issued to us by Sonde shall be converted into 1.1 million shares of Series B Preferred Stock of Sonde.
Royalty Pharma Royalty Purchase Agreement
On March 22, 2023, we entered into a Royalty Purchase Agreement (the “Royalty Pharma Agreement”) with Royalty Pharma Investments 2019 ICAV (“Royalty Pharma”), pursuant to which Royalty Pharma acquired an interest in our royalty in Karuna’s KarXT for aggregate payments to us of up to $500.0 million. Pursuant to the Royalty Pharma Agreement, Royalty Pharma will receive 100% of the royalty payments that we had a right to receive from Karuna until Royalty Pharma receives $60.0 million in such royalty payments during a calendar year, after which Royalty Pharma will receive 33% and we will receive 67% of such royalty payments for such calendar year. We received an upfront payment of $100.0 million from Royalty Pharma upon closing and are eligible to receive up to $400.0 million in additional payments upon the achievement of certain regulatory and commercial milestones related to KarXT. The Karuna Acquisition had no impact on our rights or obligations under the Royalty Pharma Agreement with Karuna, which remains in full force and effect.
Vedanta Note Purchase Agreement
On April 24, 2023, we entered into a Secured Convertible Promissory Note Purchase Agreement with Vedanta and other investors pursuant to which we purchased a secured convertible promissory note (the “Vedanta Note”) from Vedanta in the principal amount of $5.0 million. The Vedanta Note bears interest at an annual rate of 9.0% and matures on the later of (i) November 1, 2025 and (ii) the date which is 60 days after all amounts owed under or in connection with Vedanta’s loan and security agreement with K2 HealthVentures LLC (if then in effect and outstanding) have been paid in full. The Vedanta Note is mandatorily convertible in a qualified equity financing and a qualified public offering into shares of Vedanta’s preferred stock or common stock, respectively. In addition, the Vedanta Note allows for optional conversion immediately prior to a non-qualified equity financing and for a pay-out in the case of a change of control transaction.
Seaport Therapeutics Asset Transfer Agreement and Transition Services Agreement
On April 8, 2024, in connection with the launch of our Founded Entity, Seaport Therapeutics, Inc. (“Seaport”), which we founded on April 1, 2024, we entered into an Asset Transfer Agreement, by and among Seaport, PureTech Health LLC (“PureTech Health”) and PureTech LYT, Inc. (“PureTech LYT”) pursuant to which PureTech Health and PureTech LYT agreed to transfer and assign to Seaport all assets, rights and properties existing as of the closing date (the “Seaport Closing Date”) related to the Glyph Technology or Products (as defined in the Asset Transfer Agreement) (together, the “Transferred Assets”) subject to the conditions set forth therein. In consideration of the asset transfer, Seaport issued to PureTech LYT shares of Seaport Series A-1 Preferred Stock and shares of Seaport common stock on the Seaport Closing Date. Following the Seaport Closing Date, PureTech is entitled to receive certain tiered royalty payments in respect of annual net sales of Glyph Products at specified rates ranging from 3% to 5% during the Royalty Term (as defined in the Asset Transfer Agreement). In addition, PureTech is entitled to receive from Seaport certain milestone payments upon achievement of certain specified milestones, certain sublicense income, and certain other amounts as set forth in the Asset Transfer Agreement. Seaport has the exclusive right to develop products utilizing the Glyph technology for CNS applications and may also develop products for non-CNS applications. PureTech retains certain rights to develop products utilizing the Glyph technology for non-CNS applications to the extent Seaport is not developing products in such applications.
37
In connection with entry into the Asset Transfer Agreement, we entered into a Transition Services Agreement with Seaport pursuant to which we will provide to Seaport certain services relating to the orderly transition and continued operation of the Transferred Assets on a transitional basis for one year following the Seaport Closing Date (unless extended by mutual agreement of the parties or the earlier termination of all services provided under the Transition Services Agreement) in consideration of Seaport’s payment of all fees associated with the transitioned services.
Seaport Stock Purchase Agreement
On April 8, 2024, in connection with the launch of Seaport, we entered into a Series A-2 Preferred Stock Purchase Agreement with Seaport and other investors party thereto pursuant to which we agreed to purchase an aggregate of 8,421,052 shares of Seaport’s Series A-2 Preferred Stock at a purchase price of $3.80 per share and agreed to purchase, if requested by Seaport, up to a specified amount of Series B Preferred Stock in Seaport’s next qualified preferred stock financing.
38
Voting and Investors’ Rights Agreements
We are party to voting and investors’ rights agreements with certain of our Founded Entities as described below:
•
Pursuant to an Amended and Restated Investors’ Rights Agreement, as amended, between Vedanta and certain of its investors, dated March 1, 2023, we are entitled to designate a total of four directors to Vedanta’s board of directors, including (i) two directors for so long as PureTech Health LLC continues to hold a majority of Vedanta’s Series A-1 preferred stock, and (ii) two directors for so long as PureTech Health LLC continues to hold a majority of Vedanta’s Series B preferred stock. The execution of this agreement replaced and terminated the previous Amended and Restated Investors' Rights Agreement dated July 15, 2021, which had provided us with equivalent rights.
•
Pursuant to an Amended and Restated Voting Agreement between Sonde and certain of its investors, dated May 25, 2022, we are entitled to designate one director to Sonde’s board of directors for so long as PureTech Health LLC and its affiliates continue to hold at least 1,000,000 shares of Sonde’s Series A-2 preferred stock. The execution of this agreement replaced and terminated the previous Voting Agreement dated April 9, 2019, which had provided us with equivalent rights.
•
Pursuant to a Voting Agreement between Entrega and certain of its investors, dated December 18, 2017, we are entitled to designate four directors to Entrega’s board of directors.
•
Pursuant to a Voting Agreement between Seaport and certain investors, dated April 8, 2024, we are entitled to designate three directors to Seaport’s board of directors so long as we and our affiliates beneficially own an aggregate of at least 10,000,000 shares of the Series A-1 Preferred Stock of Seaport.
Agreements with Founded Entities Restricting Sale of Shares in Connection with an Underwritten Offering
We are party to agreements containing market stand-off provisions with certain of our Founded Entities that restrict our ability to sell shares of such Founded Entities for 180 days (or for a period of time as specified below) after their initial public offerings or initial public listing through a business combination, or an underwritten offering, as follows:
•
Amended and Restated Registration Rights Agreement, by and among Akili and the holders listed therein, dated as of August 19, 2022, which provides for a 90-day market stand-off period;
•
Lock-Up Agreement, by and among Akili and the holders listed therein, dated as of August 19, 2022;
•
Third Amended and Restated Investors’ Rights Agreement between Akili and the investor parties named therein, dated May 25, 2021, the execution of which replaced and terminated the Second Amended and Restated Investors' Rights Agreement dated May 8, 2018, which had contained an equivalent restriction;
•
Amended and Restated Investors’ Rights Agreement between Vedanta, as amended, and the investor parties named therein, dated March 1, 2023, the execution of which replaced and terminated the previous Amended and Restated Investors' Rights Agreement dated July 15, 2021, which had contained an equivalent restriction;
•
Investors’ Rights Agreement between Entrega and the investor parties named therein, dated December 18, 2017;
•
Amended and Restated Investors’ Rights Agreement between Sonde and the investor parties named therein, dated May 25, 2022, the execution of which replaced and terminated the previous Investors' Rights Agreement dated April 9, 2019, which had contained an equivalent restriction;
•
Amended and Restated Investors’ Rights Agreement between Vor and the investor parties named therein, dated June 30, 2020, which terminated as of Vor’s initial public offering, except for the registration rights granted thereunder;
•
Amended and Restated Registration and Stockholders Rights Agreement dated January 13, 2022 between CPSR and the stockholder parties named therein, the execution of which terminated the Ninth Amended and Restated Stockholders Agreement between Gelesis and the stockholder parties named therein, dated December 5, 2019, which had contained an equivalent restriction; and
•
The Backstop Agreement between CPSR and us, among others, dated December 30, 2021, which provides that certain shares acquired thereunder are subject to a 180-day market stand off provision.
Other Shareholder Rights Agreements
We have certain registration rights provisions in agreements with our Founded Entities as follows:
•
Third Amended and Restated Investors’ Rights Agreement between Akili and the investor parties named therein, dated May 25, 2021, the execution of which replaced and terminated the Second Amended and Restated Investors' Rights Agreement dated May 8, 2018, which had provided us with similar rights;
•
Amended and Restated Registration Rights Agreement, by and among Akili and the holders listed therein, dated as of August 19, 2022;
•
Amended and Restated Investors’ Rights Agreement between Vedanta, as amended, and the investor parties named therein, dated March 1, 2023, the execution of which replaced and terminated the previous Amended and Restated Investors' Rights Agreement dated July 15, 2021, which had provided us with similar rights;
•
Investors’ Rights Agreement between Entrega and the investor parties named therein, dated December 18, 2017;
•
Amended and Restated Investors’ Rights Agreement between Sonde and the investor parties named therein, dated May 25, 2022, the execution of which replaced and terminated the previous Investors' Rights Agreement dated April 9, 2019, which had provided us with similar rights ;
•
Amended and Restated Registration and Stockholders Rights Agreement dated January 13, 2022 between CPSR and the stockholder parties named therein, the execution of which terminated the Ninth Amended and Restated Stockholders Agreement between Gelesis and the stockholder parties named therein, dated December 5, 2019,which had provided us with similar rights;
•
The Backstop Agreement between CPSR and us, among others, dated December 30, 2021;
•
Subscription Agreement between CPSR and the investor parties thereto dated July 19, 2021; and
•
Amended and Restated Investors’ Rights Agreement between Vor and the investor parties named therein, dated June 30, 2020.
•
Investors’ Rights Agreement between Seaport and the investor parties thereto, dated April 8, 2024.
39
We have certain preemptive rights of first refusal with respect to transfers of shares by other holders pursuant to the following agreements:
•
Fifth Amended and Restated Right of First Refusal and Co-Sale Agreement, dated July 19, 2019, by and among Follica, Incorporated and the investors and key holders party thereto;
•
Amended and Restated Right of First Refusal and Co-Sale Agreement, dated May 25, 2022, by and between Sonde Health, Inc. and the investors and key holders party thereto, the execution of which replaced and terminated the previous Right of First Refusal and Co-Sale Agreement dated April 9, 2019, which had provided us with similar rights; and
•
Right of First Refusal and Co-Sale Agreement, dated December 18, 2017, by and between Entrega, Inc. and the investors and key holders party thereto.
•
Right of First Refusal and Co-Sale Agreement, dated April 8, 2024, by and between Seaport Therapeutics, Inc. and the investors and key holders party thereto.
D. EXCHANGE CONTROLS
Other than certain economic sanctions which may be in place from time to time, there are currently no UK laws, decrees or other regulations restricting the import or export of capital or affecting the remittance of dividends or other payment to holders of ordinary shares who are non-residents of the United Kingdom. Similarly, other than certain economic sanctions which may be in force from time to time, there are no limitations relating only to nonresidents of the United Kingdom under English law or the Company's articles of association on the right to be a holder of, and to vote in respect of, the ordinary shares.
E. TAXATION
Certain United Kingdom Tax Considerations
The following is a general summary of certain U.K. tax considerations relating to the ownership and disposal of an ordinary share or ADS and does not address all possible tax consequences relating to an investment in an ordinary share or ADS. It is based on U.K. tax law and generally published HM Revenue Customs, or HMRC, practice (which may not be binding on HMRC) as of the date of this annual report on Form 20-F, both of which are subject to change, possibly with retrospective effect.
Save as provided otherwise, this summary applies only to a person who is the absolute beneficial owner of an ordinary share or ADS and who is resident (and, in the case of an individual, domiciled) in the United Kingdom for tax purposes and who is not resident for tax purposes in any other jurisdiction and does not have a permanent establishment or fixed base in any other jurisdiction with which the holding of an ordinary share or ADS is connected (“U.K. Holders”). A person (a) who is not resident (or, if resident, is not domiciled) in the United Kingdom for tax purposes, including an individual and company who trades in the United Kingdom through a branch, agency or permanent establishment in the United Kingdom to which an ordinary share or ADS is attributable, or (b) who is resident or otherwise subject to tax in a jurisdiction outside the United Kingdom, is recommended to seek the advice of professional advisors in relation to their taxation obligations.
This summary is for general information only and is not intended to be, nor should it be considered to be, legal or tax advice to any particular investor. It does not address all of the tax considerations that may be relevant to specific investors in light of their particular circumstances or to investors subject to special treatment under U.K. tax law. In particular:
•
this summary only applies to an absolute beneficial owner of an ordinary share or ADS and any dividend paid in respect of the ordinary share where the dividend is regarded for U.K. tax purposes as that person’s own income (and not the income of some other person);
•
this summary: (a) only addresses the principal U.K. tax consequences for an investor who holds an ordinary share or ADS as a capital asset, (b) does not address the tax consequences that may be relevant to certain special classes of investor such as a dealer, broker or trader in shares or securities and any other person who holds an ordinary share or ADS otherwise than as an investment, (c) does not address the tax consequences for a holder that is a financial institution, insurance company, collective investment scheme, pension scheme, charity or tax-exempt organization, (d) assumes that a holder is not an officer or employee of the company (nor of any related company) and has not (and is not deemed to have) acquired the an ordinary share or ADS by virtue of an office or employment, and (e) assumes that a holder does not control or hold (and is not deemed to control or hold), either alone or together with one or more associated or connected persons, directly or indirectly (including through the holding of an ordinary share or ADS), an interest of 10 percent or more in the issued share capital (or in any class thereof), voting power, rights to profits or capital of the company, and is not otherwise connected with the company.
This summary further assumes that a holder of an ordinary share or ADS is the beneficial owner of the underlying ordinary share for U.K. direct tax purposes.
POTENTIAL INVESTORS IN THE ORDINARY SHARES OR ADSs SHOULD SATISFY THEMSELVES PRIOR TO INVESTING AS TO THE OVERALL TAX CONSEQUENCES, INCLUDING, SPECIFICALLY, THE CONSEQUENCES UNDER U.K. TAX LAW AND HMRC PRACTICE OF THE ACQUISITION, OWNERSHIP AND DISPOSAL OF THE ORDINARY SHARES OR ADSs, IN THEIR OWN PARTICULAR CIRCUMSTANCES BY CONSULTING THEIR TAX ADVISERS.
Taxation of Dividends
Withholding Tax
A dividend payment in respect of an ordinary share may be made without withholding or deduction for or on account of U.K. tax.
Income Tax
A dividend received by individual U.K. Holders may, depending on his or her particular circumstances, be subject to U.K. income tax on the gross amount of the dividend paid.
An individual holder of an ordinary share or ADS who is not a U.K. Holder will not be chargeable to U.K. income tax on a dividend paid by the company, unless such holder carries on (whether solely or in partnership) a trade, profession or vocation
40
in the United Kingdom through a permanent establishment in the United Kingdom to which the ordinary share or ADS is attributable. In these circumstances, such holder may, depending on his or her individual circumstances, be chargeable to U.K. income tax on a dividend received from the company.
All dividends received by a UK Holder from the Company or from other sources will form part of the UK Holder’s total income for UK income tax purposes and will constitute the top slice of that income. The rate of U.K. income tax that is chargeable on dividends received in the tax year 2022/2023 by (i) an additional rate taxpayer is 39.35 percent, (ii) a higher rate taxpayer is 33.75 percent, and (iii) a basic rate taxpayer is 8.75 percent. A nil rate of income tax will apply to the first £2,000 of taxable dividend income received by an individual U.K. Holder in a tax year. Note that from April 6, 2023 the dividend allowance will be reduced to £1,000, and that from April 6, 2024 the dividend allowance is expected to be reduced again to £500.
Corporation Tax
A U.K. Holder within the charge to U.K. corporation tax may be entitled to exemption from U.K. corporation tax in respect of dividend payments, provided the dividends qualify for exemption (which is likely) and certain conditions are met (including anti-avoidance conditions). If the conditions for the exemption are not satisfied, or such U.K. Holder elects for an otherwise exempt dividend to be taxable, U.K. corporation tax will be chargeable on the gross amount of a dividend. If potential investors are in any doubt as to their position, they should consult their own professional advisers.
A corporate holder of an ordinary share or ADS that is not a U.K. Holder will not be subject to U.K. corporation tax on a dividend received from the company, unless it carries on a trade in the United Kingdom through a permanent establishment to which the ordinary share or ADS is attributable. In these circumstances, such holder may, depending on its individual circumstances and if the exemption from U.K. corporation tax discussed above does not apply, be chargeable to U.K. corporation tax on dividends received from the company.
Taxation of Disposals
U.K. Holders
A disposal or deemed disposal of an ordinary share or ADS by an individual U.K. Holder may, depending on his or her individual circumstances, give rise to a chargeable gain or to an allowable loss for the purpose of U.K. capital gains tax. The principal factors that will determine the capital gains tax position on a disposal of an ordinary share or ADS are the extent to which the holder realizes any other capital gains in the tax year in which the disposal is made, the extent to which the holder has incurred capital losses in that or any earlier tax year and the level of the annual exemption for tax-free gains in that tax year (the “annual exemption”). The annual exemption for the 2023/2024 tax year is £12,300. Note that from April 6, 2023 the annual exemption will be reduced to £6,000, and that from April 6, 2024 the annual exemption is expected to be reduced again to £3,000. If, after all allowable deductions, an individual U.K. Holder’s total taxable income for the year exceeds the basic rate income tax limit, a taxable capital gain accruing on a disposal of an ordinary share or an ADS is taxed at the rate of 20 percent. In other cases, a taxable capital gain accruing on a disposal of an ordinary share or ADS may be taxed at the rate of 10 percent save to the extent that any capital gains exceed the unused basic rate tax band. In that case, the rate currently applicable to the excess would be 20 percent.
An individual U.K. Holder who ceases to be resident in the United Kingdom (or who fails to be regarded as resident in a territory outside the United Kingdom for the purposes of double taxation relief) for a period of five tax years or less than five years and who disposes of an ordinary share or ADS during that period of temporary non-residence may be liable to U.K. capital gains tax on a chargeable gain accruing on such disposal on his or her return to the United Kingdom (or upon ceasing to be regarded as resident outside the United Kingdom for the purposes of double taxation relief) (subject to available exemptions or reliefs).
A disposal (or deemed disposal) of an ordinary share or ADS by a corporate U.K. Holder may give rise to a chargeable gain or an allowable loss for the purpose of U.K. corporation tax. Any gain or loss in respect of currency fluctuations over the period of holding an ordinary share or an ADS are also brought into account on a disposal.
Non-U.K. Holders
An individual holder who is not a U.K. Holder should not normally be liable to U.K. capital gains tax on capital gains realized on the disposal of an ordinary share or ADS unless such holder carries on (whether solely or in partnership) a trade, profession or vocation in the United Kingdom through a permanent establishment in the United Kingdom to which the ordinary share or ADS is attributable. In these circumstances, such holder may, depending on his or her individual circumstances, be chargeable to U.K. capital gains tax on chargeable gains arising from a disposal of his or her ordinary share or ADS.
A corporate holder of an ordinary share or ADS that is not a U.K. Holder will not be liable for U.K. corporation tax on chargeable gains realized on the disposal of an ordinary share or ADS unless: (i) it carries on a trade in the United Kingdom through a permanent establishment to which the ordinary share or ADS is attributable; or (ii) the corporate holder is disposing of an interest in a company and that disposal is of an asset that derives 75 percent or more of its gross asset value from UK land and that holder has a substantial indirect interest in UK land (broadly at least 25 percent at any time during the previous two years). In these circumstances, a disposal (or deemed disposal) of an ordinary share or ADS by such holder may give rise to a chargeable gain or an allowable loss for the purposes of U.K. corporation tax.
Inheritance Tax
If, for the purposes of the Double Taxation Relief (Taxes on Estates of Deceased Persons and on Gifts) Treaty United States of America Order 1979 (S1 1979/1454) between the United States and the United Kingdom, an individual holder is domiciled at the time of their death or at the time of a transfer made during their lifetime in the United States and is not a national of the United Kingdom, any ordinary share or ADS beneficially owned by that holder should not generally be subject to U.K. inheritance tax, provided that any applicable U.S. federal gift or estate tax liability is paid, except where (i) the ordinary share or ADS is part of the business property of a U.K. permanent establishment or pertain to a U.K. fixed base used for the performance of independent personal services; or (ii) the ordinary share or ADS is comprised in a settlement unless, at the time the settlement was made, the settlor was domiciled in the United States and not a national of the U.K. (in which case no charge to U.K. inheritance tax should apply).
41
Stamp Duty and Stamp Duty Reserve Tax
The stamp duty and stamp duty reserve tax, or SDRT, treatment of the issue, transfer and agreement to transfer an ordinary share outside a depositary receipt system or a clearance service are discussed in the paragraphs under “General” below. The stamp duty and SDRT treatment of such transactions in relation to such systems are discussed in the paragraphs under “Depositary Receipt Systems and Clearance Services” below. The discussion below relates to the holders of our ordinary shares or ADSs wherever resident, however it should be noted that special rules may apply to certain persons such as market makers, brokers, dealers or intermediaries.
General
Issue of Ordinary Shares or ADSs
The issue of an ordinary share or ADS does not give rise to a SDRT liability, according to the HM Revenue Customs practice and recent case law and is not subject to stamp duty.
Transfer of Ordinary Shares
A transfer of an ordinary share will generally be subject to stamp duty at the rate of 0.5 percent of the consideration given for the transfer (rounded up to the next £5). An exemption from stamp duty is available on an instrument transferring an ordinary share where the amount or value of the consideration is £1,000 or less, and it is certified on the instrument that the transaction effected does not form part of a larger transaction or series of transactions in respect of which the aggregate amount or value of the consideration exceeds £1,000. The purchaser normally pays the stamp duty.
An unconditional agreement to transfer an ordinary share will normally give rise to a charge to SDRT at the rate of 0.5 percent of the amount or value of the consideration payable for the transfer. SDRT is, in general, payable by the purchaser. If a duly stamped transfer completing an agreement to transfer is produced within six years of the date on which the agreement is made (or, if the agreement is conditional, the date on which the agreement becomes unconditional) any SDRT already paid is generally repayable, normally with interest, and any SDRT charge yet to be paid is cancelled.
Transfer of ADSs
No stamp duty will, in practice, be payable on a written instrument transferring an ADS or on an unconditional agreement to transfer an ADS provided the instrument of transfer or the unconditional agreement to transfer is executed and remains at all times outside the UK. Where these conditions are not met, the transfer of, or agreement to transfer, an ADS could, depending on the circumstances, attract a charge to U.K. stamp duty at the rate of 0.5 percent of the value of the consideration. No SDRT will be payable in respect of an agreement to transfer an ADS.
Depositary Receipt Systems and Clearance Services
Based on current HM Revenue Customs practice and recent case law in respect of the European Council Directives 69/335/EC and 2009/7/EC, or the Capital Duties Directives, no SDRT is generally payable when shares are issued or transferred to a clearance service or depositary receipt system as an integral part of a raising of capital. HM Revenue Customs has confirmed that it will continue not to apply the 1.5 percent stamp duty and SDRT charge on the issue of shares (and transfers integral to the raising of capital) into overseas clearance systems and depository receipt issuers once the U.K. leaves the EU. In addition, a recent Court of Justice of the European Union judgment (Air Berlin plc v HM Revenue Customs (2017)) held on the relevant facts that the Capital Duties Directives preclude the taxation of a transfer of legal title to shares for the sole purpose of listing those shares on a stock exchange which does not impact the beneficial ownership of the shares, but, as yet, the U.K. domestic law and HM Revenue Customs’ published practice remain unchanged and, accordingly, we anticipate that amounts on account of SDRT will continue to be collected by the depositary receipt issuer or clearance service. Holders of ordinary shares should consult their own independent professional advisers before incurring or reimbursing the costs of such a 1.5 percent SDRT charge.
Where an ordinary share or ADS is otherwise transferred (i) to, or to a nominee or an agent for, a person whose business is or includes the provision of clearance services or (ii) to, or to a nominee or an agent for a person whose business is or includes issuing depositary receipts, stamp duty or SDRT will generally be payable at the higher rate of 1.5 percent of the amount or value of the consideration given or, in certain circumstances, the value of the shares.
There is an exception from the 1.5 percent charge on the transfer to, or to a nominee or agent for, a clearance service where the clearance service has made and maintained an election under section 97A(1) of the Finance Act 1986, which has been approved by HM Revenue Customs. It is understood that HM Revenue Customs regards the facilities of DTC as a clearance service for these purposes and we are not aware of any section 97A election having been made by the DTC.
Any liability for stamp duty or SDRT in respect of a transfer into a clearance service or depositary receipt system, or in respect of a transfer within such a service, which does arise will strictly be accountable by the clearance service or depositary receipt system operator or their nominee, as the case may be, but will, in practice, be borne by the participants in the clearance service or depositary receipt system.
Repurchase of Ordinary Shares
U.K. stamp duty will generally be due at a rate of 0.5% of the consideration paid (rounded up to the next £5.00) on a repurchase by the company of its ordinary shares.
42
Taxation in the United States
The following discussion is a summary of the material U.S. federal income tax consequences to U.S. Holders and Non-U.S. Holders, each as defined below, of the acquisition, ownership and disposition of our ordinary shares or ADSs, but does not purport to be a comprehensive discussion of all the tax considerations that may be relevant to a decision to purchase our ordinary shares or ADSs. The effects of other U.S. federal tax laws, such as estate and gift tax laws, and any applicable state, local or non-U.S. tax laws, are not discussed. This discussion is based on current provisions of the U.S. Internal Revenue Code of 1986, as amended, or the Code, U.S. Treasury Regulations promulgated thereunder, published rulings and administrative pronouncements of the U.S. Internal Revenue Service, or the IRS, and judicial decisions, in each case as available on the date of this annual report on Form 20-F. All of the foregoing are subject to change, which change could apply retroactively and could affect the tax consequences described below. We have not, and will not, seek a ruling from the IRS with regard to the U.S. federal income tax treatment of an investment in our ordinary shares or ADSs, and there can be no assurance the IRS or a court will agree with the discussion below. This discussion is limited to U.S. Holders and Non-U.S. Holders of our ordinary shares or ADSs. This discussion addresses only the U.S. federal income tax considerations for holders that our ordinary shares or ADSs as capital assets within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion does not address all U.S. federal income tax matters that may be relevant to a particular holder, including the impact of the Medicare contribution tax on net investment income and the alternative minimum tax. Each prospective investor should consult a professional tax advisor with respect to the tax consequences of the acquisition, ownership or disposition of our ordinary shares or ADSs. In addition, this discussion does not address tax considerations applicable to a holder of our ordinary shares or ADSs that may be subject to special tax rules including, without limitation, the following:
•
U.S. expatriates and former citizens or long-term residents of the United States;
•
banks or other financial institutions;
•
insurance companies;
•
dealers or traders in securities, currencies, or notional principal contracts;
•
tax-exempt entities, including an “individual retirement account” or “Roth IRA” retirement plan;
•
regulated investment companies or real estate investment trusts;
•
“qualified foreign pension funds,” or entities wholly owned by a “qualified foreign pension fund”;
•
persons who have elected to mark securities to market;
•
tax-exempt organizations or governmental organizations;
•
persons that hold our ordinary shares as part of a hedge, straddle, conversion, constructive sale or similar transaction involving more than one position;
•
partnerships or other entities or arrangements treated as partnerships for U.S. federal income tax purposes (and investors therein);
•
"controlled foreign corporations," "passive foreign investment companies," and corporations that accumulate earnings to avoid U.S. federal income tax;
•
persons who acquired our ordinary shares or ADSs as compensation for the performance of services;
•
“qualified foreign pension funds” as defined in Section 897(l)(2) of the Code and entities all of the interests of which are held by qualified foreign pension funds;
•
holders that own (or are deemed to own) 10 percent or more of our ordinary shares or ADSs, by vote or value; and
•
U.S. Holders that have a “functional currency” other than the U.S. dollar.
If an entity treated as a partnership or other pass-through entity for U.S. federal income tax purposes holds our ordinary shares or ADSs, the tax treatment of a partner in the partnership will generally depend upon the status of the partner, the activities of the partnership and certain determinations made at the partner level. A partner in a partnership or other pass-through entity that hold our ordinary shares or ADSs should consult his, her or its tax advisor regarding the tax consequences of acquiring, holding and disposing of our ordinary shares or ADSs through a partnership or other pass-through entity, as applicable.
For the purposes of this discussion, a “U.S. Holder” is a beneficial owner of our ordinary shares or ADSs that is (or is treated as), for U.S. federal income tax purposes:
•
an individual who is either a citizen or resident of the United States;
•
a corporation created or organized in or under the laws of the United States, any state of the United States or the District of Columbia;
•
an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or
•
a trust, if (1) a court within the United States is able to exercise primary supervision over its administration and one or more "United States persons" (within the meaning of Section 7701(a)(3) of the Code) have the authority to control all of the substantial decisions of such trust or (2) such trust has a valid election in effect under applicable U.S. Treasury Regulations to be treated as a United States person for U.S. federal income tax purposes.
For purposes of this discussion, a "Non-U.S. Holder" is a beneficial owner of our ordinary shares or ADSs that is not a U.S. Holder.
THIS DISCUSSION IS NOT TAX ADVICE. PERSONS CONSIDERING AN INVESTMENT IN ORDINARY SHARES OR ADSs SHOULD CONSULT THEIR TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES APPLICABLE TO THEM RELATING TO THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES OR ADSs, INCLUDING THE APPLICABILITY OF U.S. FEDERAL, STATE AND LOCAL TAX LAWS, ANY NON-U.S. TAX LAWS AND ANY INCOME TAX TREATY.
43
Ownership of ADSs
For U.S. federal income tax purposes, a holder of ADSs generally will be treated as the owner of the ordinary shares represented by such ADSs. Gain or loss will generally not be recognized on account of exchanges of ordinary shares for ADSs, or of ADSs for ordinary shares. References to ordinary shares in the discussion below are deemed to include ADSs, unless context otherwise requires.
Treatment of the Company as a Domestic Corporation for U.S. Federal Income Tax Purposes
Even though we are incorporated under the laws of England and Wales, due to the circumstances of its formation and the application of Section 7874 of the Code, the Company is treated as a U.S. domestic corporation for U.S. federal income tax purposes. This has implications for all shareholders; we are subject to U.S. federal income tax as if we were a U.S. corporation, and distributions made by us are generally treated as U.S.-source dividends as described below and generally subject to U.S. dividend withholding tax.
U.S. Holders
Distributions
As described in the section entitled “Dividend Distribution Policy,” we have never declared or paid any dividends on our ordinary shares, though we may consider doing so in the future depending on the progression of our business. If we do make distributions of cash or property on our ordinary shares or ADSs, such distributions will be treated as U.S.-source dividends includible in the gross income of a U.S. Holder as ordinary income to the extent of the our current and accumulated earnings and profits, as determined under U.S. federal income tax principles. To the extent the amount of a distribution exceeds tour current and accumulated earnings and profits, the distribution will be treated first as a non-taxable return of capital to the extent of a U.S. Holder’s adjusted tax basis in the ordinary shares or ADSs and thereafter as gain from the sale of such ordinary shares or ADSs. Subject to applicable limitations and requirements, dividends received on the ordinary shares or ADSs generally should be eligible for the “dividends received deduction” available to corporate shareholders. A dividend paid by us to a non-corporate U.S. Holder generally will be eligible for preferential rates if certain holding period requirements are met.
The U.S. dollar value of any distribution made by us in foreign currency will be calculated by reference to the exchange rate in effect on the date of the U.S. Holder’s actual or constructive receipt of such distribution, regardless of whether the foreign currency is in fact converted into U.S. dollars. If the foreign currency is converted into U.S. dollars on such date of receipt, the U.S. Holder generally will not recognize foreign currency gain or loss on such conversion. If the foreign currency is not converted into U.S. dollars on the date of receipt, such U.S. Holder will have a basis in the foreign currency equal to its U.S. dollar value on the date of receipt. Any gain or loss on a subsequent conversion or other taxable disposition of the foreign currency generally will be U.S.-source ordinary income or loss to such U.S. Holder.
Sale or Other Taxable Disposition
A U.S. Holder will recognize gain or loss for U.S. federal income tax purposes upon a sale or other taxable disposition of its ordinary shares or ADSs in an amount equal to the difference between the amount realized from such sale or disposition and the U.S. Holder’s adjusted tax basis in the ordinary shares or ADSs. A U.S. Holder’s adjusted tax basis in the ordinary shares or ADSs generally will be the U.S. Holder’s cost for such ordinary shares or ADSs. Any such gain or loss generally will be U.S.-source capital gain or loss and will be long-term capital gain or loss if, on the date of sale or disposition, such U.S. Holder held the ordinary shares or ADSs for more than one year. Long-term capital gains derived by non-corporate U.S. Holders are eligible for taxation at reduced rates. The deductibility of capital losses is subject to significant limitations.
Information Reporting And Backup Withholding
Payments of distributions on or proceeds arising from the sale or other taxable disposition of ordinary shares or ADSs generally will be subject to information reporting, and they may be subject to backup withholding if a U.S. Holder (i) fails to furnish such U.S. Holder’s correct U.S. taxpayer identification number (generally on IRS Form W-9), (ii) furnishes an incorrect U.S. taxpayer identification number, (iii) is notified by the IRS that such U.S. Holder has previously failed to properly report items subject to backup withholding, or (iv) fails to certify under penalty of perjury that such U.S. Holder has furnished its correct U.S. taxpayer identification number and that the IRS has not notified such U.S. Holder that it is subject to backup withholding.
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a U.S. Holder’s U.S. federal income tax liability, provided the required information is timely furnished to the IRS.
Non-U.S. Holders
Distributions
As described in the section entitled “Dividend Distribution Policy,” we have never declared or paid any dividends on our ordinary shares, though we may consider doing so in the future depending on the progression of our business. If we do make distributions of cash or property on our ordinary shares or ADSs, such distributions will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Amounts not treated as dividends for U.S. federal income tax purposes will constitute a return of capital and first be applied against and reduce a Non-U.S. Holder’s adjusted tax basis in its ordinary shares or ADSs, but not below zero. Any excess will be treated as capital gain and will be treated as described below under “—Sale or Other Taxable Disposition.”
Subject to the discussion below on effectively connected income, dividends paid to a Non-U.S. Holder will be subject to U.S. federal withholding tax at a rate of 30% of the gross amount of the dividends (or such lower rate specified by an applicable income tax treaty, provided the Non-U.S. Holder furnishes a valid IRS Form W-8BEN or W-8BEN-E (or other applicable documentation) certifying qualification for the lower treaty rate). A Non-U.S. Holder that does not timely furnish the required documentation, but that qualifies for a reduced treaty rate, may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS. Non-U.S. Holders should consult their tax advisors regarding their entitlement to benefits under any applicable income tax treaty.
If dividends paid to a Non-U.S. Holder are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, the Non-U.S. Holder maintains a permanent
44
establishment in the United States to which such dividends are attributable), the Non-U.S. Holder will be exempt from the U.S. federal withholding tax described above. To claim the exemption, the Non-U.S. Holder must furnish to the applicable withholding agent a valid IRS Form W-8ECI, certifying that the dividends are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States.
Any such effectively connected dividends will be subject to U.S. federal income tax on a net income basis at the regular rates. A Non-U.S. Holder that is a corporation also may be subject to a branch profits tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty) on such effectively connected dividends, as adjusted for certain items. Non-U.S. Holders should consult their tax advisors regarding any applicable tax treaties that may provide for different rules.
Sale or Other Taxable Disposition
A Non-U.S. Holder will not be subject to U.S. federal income tax on any gain realized upon the sale or other taxable disposition of our ordinary shares or ADSs unless:
•
the gain is effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, the Non-U.S. Holder maintains a permanent establishment in the United States to which such gain is attributable);
•
the Non-U.S. Holder is a nonresident alien individual present in the United States for 183 days or more during the taxable year of the disposition and certain other requirements are met; or
•
our ordinary shares or ADSs constitutes U.S. real property interests (“USRPI”) by reason of our status as a U.S. real property holding corporation (“USRPHC”) for U.S. federal income tax purposes.
Gain described in the first bullet point above generally will be subject to U.S. federal income tax on a net income basis at the regular rates. A Non-U.S. Holder that is a corporation also may be subject to a branch profits tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty) on such effectively connected gain, as adjusted for certain items.
A Non-U.S. Holder described in the second bullet point above will be subject to U.S. federal income tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty) on gain realized upon the sale or other taxable disposition of our ordinary shares or ADSs, which may be offset by U.S. source capital losses of the Non-U.S. Holder (even though the individual is not considered a resident of the United States), provided the Non-U.S. Holder has timely filed U.S. federal income tax returns with respect to such losses.
With respect to the third bullet point above, we believe we currently are not, and do not anticipate becoming, a USRPHC. Because the determination of whether we are a USRPHC depends, however, on the fair market value of our USRPIs relative to the fair market value of our non-U.S. real property interests and our other business assets, there can be no assurance we currently are not a USRPHC or will not become one in the future. Even if we are or were to become a USRPHC, gain arising from the sale or other taxable disposition of our ordinary shares or ADSs by a Non-U.S. Holder will not be subject to U.S. federal income tax if our ordinary shares or ADSs is “regularly traded,” as defined by applicable U.S. Treasury Regulations, on an established securities market and such Non-U.S. Holder owned, actually and constructively, 5% or less of our ordinary shares or ADSs throughout the shorter of the five-year period ending on the date of the sale or other taxable disposition or the Non-U.S. Holder’s holding period.
Non-U.S. Holders should consult their tax advisors regarding potentially applicable income tax treaties that may provide for different rules.
Information Reporting and Backup Withholding
Payments of dividends on our ordinary shares or ADSs will not be subject to backup withholding, provided the applicable withholding agent does not have actual knowledge or reason to know the holder is a United States person and the holder either certifies its non-U.S. status, such as by furnishing a valid IRS Form W-8BEN, W-8BEN-E, or W-8ECI, or otherwise establishes an exemption. However, information returns are required to be filed with the IRS in connection with any distributions on our ordinary shares or ADSs paid to the Non-U.S. Holder, regardless of whether such distributions constitute dividends or whether any tax was actually withheld. In addition, proceeds of the sale or other taxable disposition of our ordinary shares or ADSs within the United States or conducted through certain U.S.-related brokers generally will not be subject to backup withholding or information reporting if the applicable withholding agent receives the certification described above and does not have actual knowledge or reason to know that such holder is a United States person or the holder otherwise establishes an exemption. Proceeds of a disposition of our ordinary shares or ADSs conducted through a non-U.S. office of a non-U.S. broker generally will not be subject to backup withholding or information reporting.
Copies of information returns that are filed with the IRS may also be made available under the provisions of an applicable treaty or agreement to the tax authorities of the country in which the Non-U.S. Holder resides or is established.
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a Non-U.S. Holder’s U.S. federal income tax liability, provided the required information is timely furnished to the IRS.
Additional Withholding Tax on Payments Made to Foreign Accounts
Withholding taxes may be imposed under Sections 1471 to 1474 of the Code (such Sections commonly referred to as the Foreign Account Tax Compliance Act, or FATCA) on certain types of payments made to non-U.S. financial institutions and certain other non-U.S. entities. Specifically, a 30% withholding tax may be imposed on dividends on, or (subject to the proposed U.S. Treasury Regulations discussed below) gross proceeds from the sale or other disposition of, our ordinary shares or ADSs paid to a “foreign financial institution” or a “non-financial foreign entity” (each as defined in the Code), unless (1) the foreign financial institution undertakes certain diligence and reporting obligations, (2) the non-financial foreign entity either certifies it does not have any “substantial United States owners” (as defined in the Code) or furnishes identifying information regarding each substantial United States owner, or (3) the foreign financial institution or non-financial foreign entity otherwise qualifies for an exemption from these rules. If the payee is a foreign financial institution and is subject to the diligence and reporting requirements in (1) above, it must enter into an agreement with the U.S. Department of the Treasury requiring, among other things, that it undertake to identify accounts held by certain “specified United States persons” or “United States
45
owned foreign entities” (each as defined in the Code), annually report certain information about such accounts, and withhold 30% on certain payments to non-compliant foreign financial institutions and certain other account holders. Foreign financial institutions located in jurisdictions that have an intergovernmental agreement with the United States governing FATCA may be subject to different rules.
Under the applicable U.S. Treasury Regulations and administrative guidance, withholding under FATCA generally applies to payments of dividends on our ordinary shares or ADSs. While withholding under FATCA would have applied also to payments of gross proceeds from the sale or other disposition of stock on or after January 1, 2019, proposed U.S. Treasury Regulations eliminate FATCA withholding on payments of gross proceeds entirely. Taxpayers generally may rely on these proposed U.S.Treasury Regulations until final U.S. Treasury Regulations are issued.
F. DIVIDENDS AND PAYING AGENTS
Not applicable.
G. STATEMENT BY EXPERTS
Not applicable.
H. DOCUMENTS ON DISPLAY
We are subject to the informational requirements of the Exchange Act. Accordingly, we are required to make certain filings with the SEC, including annual reports on Form 20-F and reports on Form 6-K. The SEC maintains a website at http://www.sec.gov from which filings may be accessed.
We also make available on our website, free of charge, our annual reports on Form 20-F and the text of our reports on Form 6-K, including any amendments to these reports, as well as certain other SEC filings, as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Our website address is www.puretechhealth.com. The information contained on our website is not incorporated by reference into this annual report on Form 20-F.
I. SUBSIDIARY INFORMATION
Not applicable.
J. ANNUAL REPORT TO SECURITY HOLDERS
[Not applicable.]
46
| ITEM 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | ||||
The information (including graphs and tabular data) set forth under the following headings is incorporated by reference herein: “Quantitative and Qualitative Disclosures about Financial Risks” on page 79 of PureTech’s “Annual Report and Accounts 2023” included as exhibit 15.1 to this annual report on Form 20-F and in “Financial Statements—Notes to the Consolidated Financial Statements—Note 24. Capital and Financial Risk Management ” in the audited consolidated financial statements included elsewhere in this annual report on Form 20-F.
47
| ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES | ||||
A. DEBT SECURITIES
Not applicable.
B. WARRANTS AND RIGHTS
Not applicable.
C. OTHER SECURITIES
Not applicable.
D. AMERICAN DEPOSITARY SHARES
Our ADSs are registered with Citibank, N.A., as depositary . Each ADS represents ten ordinary shares (or a right to receive ten ordinary shares) deposited with Citibank, N.A. (London), as custodian for the depositary in the United Kingdom. Citibank’s depositary offices are located at 388 Greenwich Street, New York, New York, 10013. ADSs represent ownership interests in securities that are on deposit with the depositary bank. ADSs may be represented by certificates that are commonly known as “American Depositary Receipts” or “ADRs.” The depositary bank typically appoints a custodian to safekeep the securities on deposit. In this case, the custodian is Citibank, N.A.—London Branch, located at Citigroup Centre Canary Wharf, London E14 5LB D.
A deposit agreement among us, the depositary, ADS holders and beneficial owners of ADSs issued thereunder sets out ADS holder rights as well as the rights and obligations of the depositary. New York law governs the deposit agreement and the ADSs. A copy of the deposit agreement is incorporated by reference as exhibit 2.1 to this annual report on Form 20-F.
Fees and Charges
As an ADS holder, you will be required to pay the following fees under the terms of the deposit agreement:
| SERVICE | FEES | |||||||
|
•
Issuance of ADSs (e.g., an issuance of ADS upon a deposit of ordinary shares, upon a change in the ADS(s)-to-ordinary share(s) ratio, or for any other reason), excluding ADS issuances as a result of distributions of ordinary shares)
|
Up to U.S.$0.05 per ADS issued | |||||||
|
•
Cancellation of ADSs (e.g., a cancellation of ADSs for delivery of deposited property, upon a change in the ADS(s)-to-ordinary share(s) ratio, or for any other reason)
|
Up to U.S.$0.05 per ADS cancelled | |||||||
|
•
Distribution of cash dividends or other cash distributions (e.g., upon a sale of rights and other entitlements)
|
Up to U.S.$0.05 per ADS held | |||||||
|
•
Distribution of ADSs pursuant to (i) share dividends or other free share distributions, or (ii) exercise of rights to purchase additional ADSs
|
Up to U.S.$0.05 per ADS held | |||||||
|
•
Distribution of securities other than ADSs or rights to purchase additional ADSs (e.g., upon a spin-off)
|
Up to U.S.$0.05 per ADS held | |||||||
|
•
ADS Services
|
Up to U.S.$0.05 per ADS held on the applicable record date(s) established by the depositary bank | |||||||
|
•
Registration of ADS transfers (e.g., upon a registration of the transfer of registered ownership of ADSs, upon a transfer of ADSs into DTC and vice versa, or for any other reason)
|
Up to U.S.$0.05 per ADS (or fraction thereof) transferred | |||||||
|
•
Conversion of ADSs of one series for ADSs of another series (e.g., upon conversion of partial entitlement ADSs for full entitlement ADSs, or upon conversion of restricted ADSs (each as defined in the deposit agreement) into freely transferable ADSs, and vice versa).
|
Up to U.S.$0.05 per ADS (or fraction thereof) converted | |||||||
48
As an ADS holder you will also be responsible to pay certain charges such as:
•
taxes (including applicable interest and penalties) and other governmental charges;
•
the registration fees as may from time to time be in effect for the registration of ordinary shares on the share register and applicable to transfers of ordinary shares to or from the name of the custodian, the depositary bank or any nominees upon the making of deposits and withdrawals, respectively;
•
certain cable, telex and facsimile transmission and delivery expenses;
•
the fees, expenses, spreads, taxes and other charges of the depositary bank and/or service providers (which may be a division, branch or affiliate of the depositary bank) in the conversion of foreign currency;
•
the reasonable and customary out-of-pocket expenses incurred by the depositary bank in connection with compliance with exchange control regulations and other regulatory requirements applicable to ordinary shares, ADSs and ADRs; and
•
the fees, charges, costs and expenses incurred by the depositary bank, the custodian, or any nominee in connection with the ADR program.
ADS fees and charges for (i) the issuance of ADSs, and (ii) the cancellation of ADSs are charged to the person for whom the ADSs are issued (in the case of ADS issuances) and to the person for whom ADSs are cancelled (in the case of ADS cancellations). In the case of ADSs issued by the depositary bank into DTC, the ADS issuance and cancellation fees and charges may be deducted from distributions made through DTC, and may be charged to the DTC participant(s) receiving the ADSs being issued or the DTC participant(s) holding the ADSs being cancelled, as the case may be, on behalf of the beneficial owner(s) and will be charged by the DTC participant(s) to the account of the applicable beneficial owner(s) in accordance with the procedures and practices of the DTC participants as in effect at the time. ADS fees and charges in respect of distributions and the ADS service fee are charged to the holders as of the applicable ADS record date. In the case of distributions of cash, the amount of the applicable ADS fees and charges is deducted from the funds being distributed. In the case of (i) distributions other than cash and (ii) the ADS service fee, holders as of the ADS record date will be invoiced for the amount of the ADS fees and charges and such ADS fees and charges may be deducted from distributions made to holders of ADSs. For ADSs held through DTC, the ADS fees and charges for distributions other than cash and the ADS service fee may be deducted from distributions made through DTC, and may be charged to the DTC participants in accordance with the procedures and practices prescribed by DTC and the DTC participants in turn charge the amount of such ADS fees and charges to the beneficial owners for whom they hold ADSs. In the case of (i) registration of ADS transfers, the ADS transfer fee will be payable by the ADS Holder whose ADSs are being transferred or by the person to whom the ADSs are transferred, and (ii) conversion of ADSs of one series for ADSs of another series, the ADS conversion fee will be payable by the Holder whose ADSs are converted or by the person to whom the converted ADSs are delivered.
In the event of refusal to pay the depositary bank fees, the depositary bank may, under the terms of the deposit agreement, refuse the requested service until payment is received or may set off the amount of the depositary bank fees from any distribution to be made to the ADS holder. Certain depositary fees and charges (such as the ADS services fee) may become payable shortly after the purchase of ADSs. Note that the fees and charges you may be required to pay may vary over time and may be changed by us and by the depositary bank. You will receive prior notice of such changes. The depositary bank may reimburse us for certain expenses incurred by us in respect of the ADR program, by making available a portion of the ADS fees charged in respect of the ADR program or otherwise, upon such terms and conditions as we and the depositary bank agree from time to time.
49
PART II
| ITEM 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES | ||||
None.
50
| ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | ||||
None.
51
| ITEM 15. | CONTROLS AND PROCEDURES | ||||
A. Disclosure Controls and Procedures
Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act, are designed to ensure that information required to be disclosed by us in the reports that are filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the management of the Group, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure
.
Because of its inherent limitations, disclosure controls and procedures can provide only reasonable assurance of achieving their control objectives. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of December 31, 2023. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2023, our disclosure controls and procedures were effective at the reasonable assurance level.
B. Management’s Annual Report on Internal Control Over Financial Reporting
In accordance with the requirements of section 404 of Sarbanes-Oxley, the following report is provided by management in respect of the Group’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)):
•
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Group. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
•
Management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of Group's internal control over financial reporting based on criteria established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO);
•
Based on their assessment under these criteria, our management has concluded that as of December 31, 2023, the Group's internal control over financial reporting was effective.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The effectiveness of the Group's internal control over financial reporting as of December 31, 2023 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears under Item 18 - "Financial Statements".
C. Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) that occurred during the period covered by this annual report on Form 20-F that have materially affected, or are reasonably likely to materially affect, the Group's internal control over financial reporting.
52
| ITEM 16. | RESERVED | ||||
| ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT | ||||
Our Board of Directors has determined that Sharon Barber-Lui, independent director (under the standards set forth in Nasdaq Stock Market Rule 5605(a)(2) and Rule 10A-3 under the Exchange Act) and member of our audit committee, is an audit committee financial expert as defined in Item 16A of Form 20-F under the Exchange Act.
| ITEM 16B. | CODE OF ETHICS | ||||
Our Board of Directors has adopted a written Code of Business Conduct and Ethics. The Code of Business Conduct and Ethics applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A current copy of the code is posted on the investor relations section of our website, which is located at www.puretechhealth.com.The information contained on, or that can be accessed through, our website is not and shall not be deemed to be part of this annual report on Form 20-F. Our Code of Business Conduct and Ethics is intended to meet the definition of “code of ethics” under Item 16B of Form 20-F under the Exchange Act. We will disclose on our website any amendment to, or waiver from, a provision of our Code of Business Conduct and Ethics that applies to our directors or executive officers to the extent required under the rules of the SEC or Nasdaq. We granted no waivers under our Code of Business Conduct and Ethics in 2023.
| ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES | ||||
The following table sets forth the aggregate fees billed to us for professional services rendered by PwC in 2023 and KPMG LLP in 2022 and the subsequent interim period through May 31, 2023.
PwC:
| For the years ending December 31, |
2023
$000s
|
||||
| Audit fees | $ | 2,686 | |||
| Audit-related fees | $ | — | |||
| Tax fees | $ | — | |||
|
All other fees*
|
$ | 9 | |||
| Total | $ | 2,695 | |||
*"All other fees” represents non-audit fees in connection with access to the PricewaterhouseCoopers LLP on-line accounting research and disclosure database.
KPMG:
| For the years ending December 31, |
2023
$000s
|
2022
$000s
|
||||||
| Audit fees | — | 3,099 | ||||||
| Audit-related fees | — | — | ||||||
| Tax fees | — | — | ||||||
| All other fees | — | — | ||||||
| Total | — | 3,099 | ||||||
The information set forth or referenced under the heading “Report of the Audit Committee” on pages 99 to 101 of PureTech’s “Annual Report and Accounts 2023” included as exhibit 15.1 to this annual report on Form 20-F is incorporated by reference.
The Audit Committee evaluates the qualifications, independence and performance of the independent auditor as well as pre-approves and reviews the audit and non-audit services to be performed by the independent auditor. In accordance with this policy, all services performed by and fees paid to KPMG LLP and PwC were approved by the Audit Committee.
| ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES | ||||
Not applicable.
53
| ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS | ||||
| Period |
Total Number of
Shares (or Units) Purchased |
Average Price Paid per Share (or Unit) |
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs
1
|
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | ||||||||||
|
January 1, 2023 through January 31, 2023
|
42,994 | 3.16 | 42,994 | 23,504 | ||||||||||
|
February 1, 2023 through February 28, 2023
|
204,868 | 2.90 | 204,868 | 22,910,768.05 | ||||||||||
|
March 1, 2023 through March 31, 2023
|
234,714 | 2.63 | 234,714 | 22,294,150.13 | ||||||||||
|
April 1, 2023 through April 30, 2023
|
165,143 | 2.73 | 165,143 | 21,843,534.07 | ||||||||||
|
May 1, 2023 through May 31, 2023
|
790,639 | $2.74 | 790,639 | $19,677,236 | ||||||||||
|
June 1, 2023 through June 30, 2023
|
1,072,529 | $2.96 | 1,072,529 | $16,506,598 | ||||||||||
|
July 1, 2023 through July 31, 2023
|
906,369 | $2.90 | 906,369 | $13,879,886 | ||||||||||
|
August 1, 2023 through August 31, 2023
|
770,163 | $2.56 | 770,163 | $11,907,992 | ||||||||||
|
September 1, 2023 through September 30, 2023
|
810,833 | $2.57 | 810,833 | $9,822,077 | ||||||||||
|
October 1, 2023 through October 31, 2023
|
1,034,123 | $2.12 | 1,034,123 | $7,631,621 | ||||||||||
|
November 1, 2023 through November 30, 2023
|
788,347 | $2.06 | 788,347 | $6,004,615 | ||||||||||
|
December 1, 2023 through December 31, 2023
|
862,804 | $1.89 | 862,804 | $4,374,617 | ||||||||||
| Total | 7,683,526 | $2.60 | 7,683,526 | 4,374,617 | ||||||||||
1.
On May 9, 2022, the Company announced the commencement of a $50 million share repurchase program (the “Program”) of its ordinary shares. The Company executed the Program in two equal tranches, the first of which was completed on October 26, 2022, and the second which was completed on February 7, 2024. In respect of each of the two tranches, the Company entered into an irrevocable non-discretionary instruction with Jefferies International Limited (“Jefferies”) in relation to the purchase by Jefferies of the Company’s ordinary shares for an aggregate consideration (excluding expenses) of no greater than $25 million and the simultaneous on-sale of such ordinary shares by Jefferies to the Company. Jefferies makes its trading decisions in relation to the ordinary shares independently of, and uninfluenced by, the Company. Between May 9, 2022, and February 7, 2024, the Company repurchased an aggregate of 20,182,863 ordinary shares under the Share Buyback Program, which represents approximately 7% of the Company’s issued share capital at the time the program commenced. In light of the closing of the merger between its Founded Entity, Karuna Therapeutics, Inc. (Nasdaq: KRTX), and Bristol Meyers Squibb (NYSE: BMY) which occurred on March 18, 2024, the Company announced a proposed capital return of up to $100 million to its shareholders by way of a tender offer (the “Tender Offer”). The Tender Offer is expected to be launched in early May, subject to market conditions and shareholder approval. A circular setting out the full terms of the Tender Offer and a timetable is expected to be published after the Company’s Annual Report and Accounts. . Any purchase of ordinary shares under the Program was carried out on the London Stock Exchange and any other UK recognized investment exchange which may have been agreed, in accordance with pre-set parameters and in accordance with, and subject to limits, including those limits related to daily volume and price, prescribed by the Company’s general authority to repurchase ordinary shares granted by its shareholders at its most recent annual general meeting on June 13, 2023, Chapter 12 of the Financial Conduct Authority’s UK Listing Rules, Article 5(1) of Regulation (EU) No. 596/2014 (as incorporated into UK domestic law by the European Union (Withdrawal) Act 2018) and Commission Delegated Regulation (EU) 2016/1052 (as incorporated into UK domestic law by the European Union (Withdrawal) Act 2018). All ordinary shares repurchased under the Program were held in treasury.
No ordinary shares were repurchased during 2023 other than through the Program.
| ITEM 16F. | CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT | ||||
Not applicable.
| ITEM 16G. | CORPORATE GOVERNANCE | ||||
We qualify as a foreign private issuer (as such term is defined in Rule 3b-4 under the Exchange Act). The Listing Rules of the Nasdaq Stock Market include certain accommodations in the corporate governance requirements that allow foreign private issuers to follow “home country” corporate governance practices in lieu of the otherwise applicable corporate governance standards of the Nasdaq Stock Market. We rely on the certain exemptions for foreign private issuers and follow United Kingdom corporate governance practices in lieu of the Nasdaq corporate governance rules.
A summary of the significant ways in which the Company’s corporate governance practices differ from those followed by U.S. domestic companies under the Nasdaq corporate governance rules is set forth below.
The information (including tabular data) set forth or referenced under the headings “Directors’ Report for the year ended 31 December 2023—Compliance with the UK Corporate Governance Code” (first paragraph only) on page 94 of PureTech’s “Annual Report and Accounts 2023” included as exhibit 15.1 to this annual report on Form 20-F is incorporated by reference.
The Sarbanes-Oxley Act of 2002, as well as related rules subsequently implemented by the SEC, requires foreign private issuers, including our company, to comply with various corporate governance practices. In addition, Nasdaq rules provide that foreign private issuers may follow home country practice in lieu of the Nasdaq corporate governance standards, subject to certain exceptions and except to the extent that such exemptions would be contrary to U.S. federal securities laws. The home country practices followed by our company in lieu of Nasdaq rules are described below:
•
We do not follow Nasdaq’s quorum requirements applicable to meetings of shareholders. Such quorum requirements are not required under U.K. law. In accordance with generally accepted business practice, our articles of association provide alternative quorum requirements that are generally applicable to meetings of shareholders.
•
We do not follow Nasdaq’s requirements that independent directors have regularly scheduled meetings at which only independent directors are present. Under U.K. law the independent directors may choose to meet in executive session at their discretion.
•
We do not follow Nasdaq’s requirements to seek shareholder approval for the implementation of certain equity compensation plans, the issuances of ordinary shares under such plans, or in connection with certain private placements of equity securities. In
54
accordance with U.K. law, we are not required to seek shareholder approval to allot ordinary shares in connection with applicable employee equity compensation plans. We will follow U.K. law with respect to any requirement to obtain shareholder approval prior to any private placements of equity securities.
•
We do not follow Nasdaq’s requirements with respect to review and approval of related party transactions. We will follow U.K. law with respect to any requirements regarding review and approval of related party transactions.
Other than as discussed above, we intend to comply with the rules generally applicable to U.S. domestic companies listed on Nasdaq. We may in the future, however, decide to use other foreign private issuer exemptions with respect to some or all of the other Nasdaq rules. Following our home country governance practices may provide less protection than is accorded to investors under Nasdaq rules applicable to domestic issuers.
We intend to take all actions necessary for us to maintain compliance as a foreign private issuer under the applicable corporate governance requirements of the Sarbanes-Oxley Act of 2002, the rules adopted by the SEC and Nasdaq’s listing standards.
Because we are a foreign private issuer, our directors and senior management are not subject to short-swing profit and insider trading reporting obligations under Section 16 of the Exchange Act . They are, however, subject to the obligations to report changes in share ownership under Section 13 of the Exchange Act and related SEC rules.
| ITEM 16H. | MINE SAFETY DISCLOSURE | ||||
Not applicable.
ITEM 16I. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
ITEM 16J. INSIDER TRADING POLICIES
Not applicable.
55
ITEM 16K. CYBERSECURITY DISCLOSURE
We have developed and implemented a cybersecurity risk management program intended to protect the confidentiality, integrity, and availability of our critical systems and information. Our cybersecurity risk management program includes a cybersecurity incident response plan.
We design and assess our program based on the National Institute of Standards and Technology Cybersecurity Framework (NIST CSF). This does not imply that we meet any particular technical standards, specifications, or requirements, only that we use the NIST CSF as a guide to help us identify, assess, and manage cybersecurity risks relevant to our business.
Our cybersecurity risk management program is integrated into our overall enterprise risk management program, and shares common methodologies, reporting channels and governance processes that apply across the enterprise risk management program to other legal, compliance, strategic, operational, and financial risk areas.
Our cybersecurity risk management program includes:
•
risk assessments designed to help identify material cybersecurity risks to our critical systems, information, products, services, and our broader enterprise IT environment;
•
a security team principally responsible for managing (1) our cybersecurity risk assessment processes, (2) our security controls, and (3) our response to cybersecurity incidents;
•
the use of external service providers, where appropriate, to assess, test or otherwise assist with aspects of our security controls;
•
cybersecurity awareness training of our employees, incident response personnel, and senior management, including phishing training courses designed to educate users on detecting malicious emails;
•
a cybersecurity incident response plan that includes procedures for responding to cybersecurity incidents;
•
use of a Digital Forensics and Incident Response team provided by our external IT service provider as needed.
We have not identified risks from known cybersecurity threats. We have not experienced any prior cybersecurity incidents, that have materially affected us, including our operations, business strategy, results of operations, or financial condition. For more information, see the section titled “Risk Factor— Cyberattacks or other failures in our telecommunications or information technology systems, or those of our collaborators, contract research organizations, third-party logistics providers, distributors or other contractors or consultants, could result in information theft, data corruption and significant disruption of our business operations.”
Cybersecurity Governance
Our Board considers cybersecurity risk as part of its risk oversight function and has delegated to the Audit Committee (Committee) oversight of cybersecurity and other information technology risks. The Committee oversees management’s implementation of our cybersecurity risk management program.
The Committee receives reports at least annually from management on our cybersecurity risks. In addition, management updates the Committee, as necessary, regarding any material cybersecurity incidents, as well as any incidents with lesser impact potential.
Our management team, including our Vice President of IT and Information Security Officer, has a combined 30+ years of risk management experience and is responsible for assessing and managing our material risks from cybersecurity threats. The team has primary responsibility for our overall cybersecurity risk management program and supervises both our internal cybersecurity personnel and our retained external cybersecurity consultants. Our management team’s experience includes experience managing IT programs as well as various certifications, such as the Information Systems Security Professional certification, and Certified Cloud Security Professionalism certification.
Our management team supervises efforts to prevent, detect, mitigate, and remediate cybersecurity risks and incidents through various means, which may include briefings from internal security personnel; threat intelligence and other information obtained from governmental, public or private sources, including external consultants engaged by us; and alerts and reports produced by security tools deployed in the information technology environment.
56
PART III
| ITEM 17. | FINANCIAL STATEMENTS | ||||
Not applicable
57
| ITEM 18. | FINANCIAL STATEMENTS | ||||
See pages F-1 through F-55 of this annual report.
58
| ITEM 19. | EXHIBITS | ||||
The Exhibits listed in the Exhibit Index at the end of this annual report are filed as Exhibits to this annual report.
59
| EXHIBIT NUMBER | DESCRIPTION OF EXHIBIT | INCORPORATION BY REFERENCE | |||||||||||||||
| Schedule/Form | File Number | Exhibit | File Date | ||||||||||||||
| 1.1 | 20FR12B | 001-39670 | 3.1 | 10/27/2020 | |||||||||||||
| 2.1 | 20-F | 001-39670 | 2.1 | 4/15/2021 | |||||||||||||
| 2.2 | Form of American Depository Receipt (included in Exhibit 2.1) | ||||||||||||||||
| 2.3 | 20-F | 001-39670 | 2.3 | 4/26/2022 | |||||||||||||
| 4.1# | 20FR12B | 001-39670 | 10.1 | 10/27/2020 | |||||||||||||
|
4.2#
|
|||||||||||||||||
|
4.3#
|
20FR12B | 001-39670 | 10.2 | 10/27/2020 | |||||||||||||
|
4.4#
|
20FR12B | 001-39670 | 10.3 | 10/27/2020 | |||||||||||||
|
4.5#
|
20FR12B | 001-39670 | 10.4 | 10/27/2020 | |||||||||||||
| 4.6 | 20FR12B | 001-39670 | 10.5 | 10/27/2020 | |||||||||||||
|
4.7#
|
20FR12B | 001-39670 | 10.6 | 10/27/2020 | |||||||||||||
|
4.8†
|
20FR12B | 001-39670 | 10.7 | 10/27/2020 | |||||||||||||
|
4.9†
|
20FR12B | 001-39670 | 10.8 | 10/27/2020 | |||||||||||||
| 4.10 | 20FR12B | 001-39670 | 10.9 | 10/27/2020 | |||||||||||||
|
4.11†
|
20FR12B | 001-39670 | 10.10 | 10/27/2020 | |||||||||||||
|
4.12†
|
20FR12B | 001-39670 | 10.12 | 10/27/2020 | |||||||||||||
| 4.13† | 20FR12B | 001-39670 | 10.18 | 10/27/2020 | |||||||||||||
|
4.14†
|
20FR12B | 001-39670 | 10.21 | 10/27/2020 | |||||||||||||
|
4.15*†
|
|||||||||||||||||
|
4.16*†
|
|||||||||||||||||
|
4.17*†
|
|||||||||||||||||
|
4.18†
|
20FR12B | 001-39670 | 10.26 | 10/27/2020 | |||||||||||||
60
| EXHIBIT NUMBER | DESCRIPTION OF EXHIBIT | INCORPORATION BY REFERENCE | |||||||||||||||
| Schedule/Form | File Number | Exhibit | File Date | ||||||||||||||
|
4.19†
|
20FR12B | 001-39670 | 10.27 | 10/27/2020 | |||||||||||||
|
4.20†
|
20FR12B | 001-39670 | 10.28 | 10/27/2020 | |||||||||||||
|
4.21†
|
20FR12B | 001-39670 | 10.29 | 10/27/2020 | |||||||||||||
|
4.22+
|
8-K | 001-39362 | 10.2 | 1/20//2022 | |||||||||||||
|
4.23*†
|
|||||||||||||||||
|
4.24*†
|
|||||||||||||||||
|
4.25*†
|
|||||||||||||||||
|
4.26+
|
S-4/A | 333-258693 | 2.1 | 12/23/2021 | |||||||||||||
| 4.27 | S-4/A | 333-258693 | 2.2 | 12/23/2021 | |||||||||||||
| 4.28 | 8-K | 001-39362 | 2.1 | 1/3/2022 | |||||||||||||
| 4.29 | S-4 | 333-258693 | 10.2 | 8/10/2021 | |||||||||||||
| 4.30 | 8-K | 001-39362 | 10.1 | 1/3/2022 | |||||||||||||
|
4.31+
|
8-K/A | 001-40558 | 2.1 | 1/27/2022 | |||||||||||||
| 4.32 | 8-K | 001-39362 | 10.1 | 7/29/2022 | |||||||||||||
|
4.33+
|
8-K | 001-39362 | 10.1 | 2/23/2023 | |||||||||||||
61
| EXHIBIT NUMBER | DESCRIPTION OF EXHIBIT | INCORPORATION BY REFERENCE | |||||||||||||||
| Schedule/Form | File Number | Exhibit | File Date | ||||||||||||||
|
4.34+
|
8-K | 001-40558 | 10.6 | 8/23/2022 | |||||||||||||
|
4.35+
|
8-K | 001-40558 | 10.7 | 8/23/2022 | |||||||||||||
|
4.36*†+
|
|||||||||||||||||
|
4.37*
|
|||||||||||||||||
|
4.38+
|
|||||||||||||||||
| 8.1 | 20FR12B | 001-39670 | 21.1 | 10/27/2020 | |||||||||||||
| 12.1* | |||||||||||||||||
| 12.2* | |||||||||||||||||
| 13.1*** | |||||||||||||||||
| 13.2*** | |||||||||||||||||
| 15.1** | |||||||||||||||||
|
97.1*
|
|||||||||||||||||
| 101.INS* | XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | ||||||||||||||||
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | ||||||||||||||||
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||||||||||||||||
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | ||||||||||||||||
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | ||||||||||||||||
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||||||||||||||||
| 104* | Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | ||||||||||||||||
* Filed herewith.
** Certain of the information included within Exhibit 15.1, which is provided pursuant to Rule 12b-23(a) of the Securities Exchange Act of 1934, as amended, is incorporated by reference in this annual report on Form 20-F, as specified elsewhere in this annual report on Form 20-F. With the exception of the items and pages so specified, the "Annual Report and Accounts 2022" is not deemed to be filed as part of this annual report on Form 20-F.
*** Furnished herewith.
# Indicates a management contract or any compensatory plan, contract or arrangement.
62
† Portions of this exhibit (indicated by asterisks) have been omitted because either (A) they are both (i) not material and (ii) would likely cause competitive harm if publicly disclosed., or (B) they are both (i) not material and (ii) the type of information that the Registrant customarily and actually treats as private or confidential, as applicable. The Registrant agrees to furnish an unredacted copy of this exhibit to the Securities and Exchange Commission upon request.
+ Schedules and exhibits to this exhibit omitted. The Registrant agrees to furnish supplementally a copy of any omitted schedule or exhibit to the SEC upon request.
63
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
Date: April 25, 2024
| PURETECH HEALTH PLC | ||||||||
| By: |
/s/ Bharatt Chowrira
|
|||||||
|
Name: Bharatt Chowrira
|
||||||||
| Title: Chief Executive Officer | ||||||||
64
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
|||||
|
Consolidated Financial Statements as of and for the Years Ended December 31, 2023, 2022, and 2021
|
|||||
|
F-
2
|
|||||
|
Report of KPMG LLP, Independent Registered Public Accounting Firm
(PCAOB ID
|
F-
4
|
||||
|
F-
5
|
|||||
|
F-
6
|
|||||
|
F-
7
|
|||||
|
F-
9
|
|||||
|
F-
11
|
|||||
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of PureTech Health plc
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statement of financial position of PureTech Health Plc and its subsidiaries (the “Company”) as of December 31, 2023, and the related consolidated statements of comprehensive income/(loss), of changes in equity and of cash flows for the year then ended, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023, and the results of its operations and its cash flows for the year then ended in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting appearing under Item 15B. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audit of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
F-2
Determination of the Accounting Treatment for the Sale of Future Royalties Liability
As described in Notes 1 and 17 to the consolidated financial statements, on March 4, 2011, the Company entered into a license agreement with Karuna Therapeutics, Inc. (“Karuna”) according to which the Company granted Karuna an exclusive license to research, develop and sell KarXT in exchange for a royalty on annual net sales, development and regulatory milestones and a fixed portion of sublicensing income, if any (hereinafter “License Agreement”). On March 22, 2023, the Company signed an agreement with Royalty Pharma (hereinafter "Royalty Purchase Agreement"), according to which the Company sold Royalty Pharma a partial right to receive royalty payments made by Karuna in respect of net sales of KarXT, if and when received. According to the Royalty Purchase Agreement, all royalties due to the Company under the License Agreement will be paid to Royalty Pharma up until an annual threshold of $60 million, while all royalties above such annual threshold in a given year will be split 33% to Royalty Pharma and 67% to the Company. Under the terms of the Royalty Purchase Agreement, the Company received a non-refundable initial payment of $100 million at the execution of the Royalty Purchase Agreement and is eligible to receive additional payments in the aggregate of up to an additional $400 million based on the achievement of certain regulatory and commercial milestones. The Company continues to hold the rights under the License Agreement and has a contractual obligation to deliver cash to Royalty Pharma for a portion of the royalties it receives. Therefore, the Company will continue to account for any royalties and regulatory milestones due to the Company under the License Agreement as revenue in its Consolidated Statement of Comprehensive Income/(Loss) and record the proceeds from the Royalty Purchase Agreement as a financial liability on its Consolidated Statement of Financial Position. In determining the appropriate accounting treatment for the Royalty Purchase Agreement, management applied significant judgment. In order to determine the amortized cost of the sale of future royalties liability, management is required to estimate the total amount of future receipts from and payments to Royalty Pharma under the Royalty Purchase Agreement over the life of the agreement. The $100 million liability, recorded at execution of the Royalty Purchase Agreement, will be accreted to the total of these receipts and payments as interest expense over the life of the Royalty Purchase Agreement. The sale of future royalties liability amounted to $110.2 million as of December 31, 2023.
The principal considerations for our determination that performing procedures relating to the determination of the accounting treatment for the sale of future royalties liability is a critical audit matter are (i) the significant judgment by management when determining the accounting treatment for the sale of future royalties liability and (ii) a high degree of auditor judgment and effort in performing procedures and evaluating audit evidence related to the accounting for the sale of future royalties liability.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s determination of the accounting treatment for the sale of future royalties liability. These procedures also included, among others, (i) obtaining and reviewing the key terms of the License Agreement and Royalty Purchase Agreement; (ii) evaluating the reasonableness of management’s determined accounting treatment for the sale of future royalties liability; (iii) testing the liability related to the sale of future royalties, including considering the contractual terms of the agreements and the impact on the accounting determination; and (iv) evaluating the sufficiency of the disclosures within the consolidated financial statements.
/s/
PricewaterhouseCoopers LLP
25 April, 2024
We have served as the Company’s auditor since 2023.
F-3
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
PureTech Health PLC
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of financial position of PureTech Health PLC and subsidiaries (the Group) as of December 31, 2022, the related consolidated statements of comprehensive income / (loss), changes in equity, and cash flows for each of the years in the two-year period ended December 31, 2022 and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as of December 31, 2022, and the results of its operations and its cash flows for each of the years in the two‑year period ended December 31, 2022, in conformity with International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board and international accounting standards in conformity with the requirements of the UK-adopted IFRSs.
Basis for Opinion
These consolidated financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Group in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We served as the Group’s auditor from 2015 to 2022
.
London, United Kingdom
27 April 2023 except for Note 4 and Note 20, as to which the date is 25 April 2024
F-4
Consolidated Statement of Comprehensive Income/(Loss)
For the years ended December 31
| Note |
2023
$000s
|
2022
$000s
|
2021
$000s
|
|||||||||||
| Contract revenue | 3 |
|
|
|
||||||||||
| Grant revenue | 3 |
|
|
|
||||||||||
|
Total revenue
|
|
|
|
|||||||||||
| Operating expenses: | ||||||||||||||
| General and administrative expenses | 8 |
(
|
(
|
(
|
||||||||||
| Research and development expenses |
8
|
(
|
(
|
(
|
||||||||||
|
Operating income/(loss)
|
(
|
(
|
(
|
|||||||||||
| Other income/(expense): | ||||||||||||||
|
Gain/(loss) on deconsolidation of subsidiary
|
5 |
|
|
|
||||||||||
| Gain/(loss) on investments held at fair value | 5 |
|
(
|
|
||||||||||
|
Realized gain/(loss) on sale of investments
|
5 |
(
|
(
|
(
|
||||||||||
| Gain/(loss) on investments in notes from associates | 7 |
(
|
|
|
||||||||||
| Other income/(expense) |
(
|
|
|
|||||||||||
|
Other income/(expense)
|
|
(
|
|
|||||||||||
| Finance income/(costs): | ||||||||||||||
| Finance income | 10 |
|
|
|
||||||||||
| Finance costs – contractual | 10 |
(
|
(
|
(
|
||||||||||
| Finance income/(costs) – fair value accounting | 10 |
|
|
|
||||||||||
| Finance costs – non cash interest expense related to sale of future royalties | 17 |
(
|
|
|
||||||||||
|
Net finance income/(costs)
|
|
|
|
|||||||||||
|
Share of net income/(loss) of associates accounted for using the equity method
|
6 |
(
|
(
|
(
|
||||||||||
|
Gain/(loss) on dilution of ownership interest in associates
|
6 |
|
|
|
||||||||||
|
Impairment of investment in associates
|
6 |
|
(
|
|
||||||||||
|
Income/(loss) before taxes
|
(
|
(
|
(
|
|||||||||||
| Taxation | 27 |
(
|
|
(
|
||||||||||
|
Income/(loss) for the year
|
(
|
(
|
(
|
|||||||||||
| Other comprehensive income/(loss): | ||||||||||||||
| Items that are or may be reclassified as profit or loss | ||||||||||||||
| Equity-accounted associate – share of other comprehensive income (loss) | 6 |
|
(
|
|
||||||||||
| Reclassification of foreign currency differences on dilution of interest |
|
(
|
|
|||||||||||
|
Total other comprehensive income/(loss)
|
|
(
|
|
|||||||||||
|
Total comprehensive income/(loss) for the year
|
(
|
(
|
(
|
|||||||||||
| Income/(loss) attributable to: | ||||||||||||||
| Owners of the Group |
(
|
(
|
(
|
|||||||||||
| Non-controlling interests |
(
|
|
(
|
|||||||||||
|
(
|
(
|
(
|
||||||||||||
| Comprehensive income/(loss) attributable to: | ||||||||||||||
| Owners of the Group |
(
|
(
|
(
|
|||||||||||
| Non-controlling interests |
(
|
|
(
|
|||||||||||
|
(
|
(
|
(
|
||||||||||||
| $ | $ | $ | ||||||||||||
| Earnings/(loss) per share: | ||||||||||||||
| Basic earnings/(loss) per share | 11 |
(
|
(
|
(
|
||||||||||
| Diluted earnings/(loss) per share | 11 |
(
|
(
|
(
|
||||||||||
The accompanying notes are an integral part of these financial statements.
F-5
Consolidated Statement of Financial Position
As of December 31,
| Note |
2023
$000s
|
2022
$000s
|
|||||||||
| Assets | |||||||||||
| Non-current assets | |||||||||||
| Property and equipment, net | 12 |
|
|
||||||||
| Right of use asset, net | 23 |
|
|
||||||||
| Intangible assets, net | 13 |
|
|
||||||||
| Investments held at fair value | 5 |
|
|
||||||||
|
Investment in associates – equity method
|
6 |
|
|
||||||||
| Investments in notes from associates | 7 |
|
|
||||||||
| Lease receivable – long-term | 23 |
|
|
||||||||
| Other non-current assets |
|
|
|||||||||
| Total non-current assets |
|
|
|||||||||
| Current assets | |||||||||||
| Trade and other receivables | 24 |
|
|
||||||||
| Income tax receivable | 27 |
|
|
||||||||
| Prepaid expenses |
|
|
|||||||||
| Lease receivable – short-term | 23 |
|
|
||||||||
| Other financial assets | 14 |
|
|
||||||||
| Short-term investments | 24 |
|
|
||||||||
| Cash and cash equivalents | 24 |
|
|
||||||||
| Total current assets |
|
|
|||||||||
|
Total assets
|
|
|
|||||||||
| Equity and liabilities | |||||||||||
| Equity | |||||||||||
| Share capital |
|
|
|||||||||
| Share premium |
|
|
|||||||||
| Treasury stock |
(
|
(
|
|||||||||
| Merger reserve |
|
|
|||||||||
| Translation reserve |
|
|
|||||||||
| Other reserve |
(
|
(
|
|||||||||
| Retained earnings |
|
|
|||||||||
|
Equity attributable to the owners of the Group
|
15 |
|
|
||||||||
| Non-controlling interests | 20 |
(
|
|
||||||||
|
Total equity
|
|
|
|||||||||
| Non-current liabilities | |||||||||||
| Sale of future royalties liability | 17 |
|
|
||||||||
| Deferred tax liability | 27 |
|
|
||||||||
| Lease liability, non-current | 23 |
|
|
||||||||
| Long-term loan | 22 |
|
|
||||||||
| Liability for share-based awards | 9 |
|
|
||||||||
| Total non-current liabilities |
|
|
|||||||||
| Current liabilities | |||||||||||
| Deferred revenue | 3 |
|
|
||||||||
| Lease liability, current | 23 |
|
|
||||||||
| Trade and other payables | 21 |
|
|
||||||||
| Notes payable | 19 |
|
|
||||||||
| Warrant liability | 18 |
|
|
||||||||
| Preferred shares |
16, 18
|
|
|
||||||||
| Current portion of long-term loan | 22 |
|
|
||||||||
| Total current liabilities |
|
|
|||||||||
|
Total liabilities
|
|
|
|||||||||
|
Total equity and liabilities
|
|
|
|||||||||
Please refer to the accompanying Notes to the consolidated financial information. Registered number: 09582467.
The Consolidated Financial Statements were approved by the Board of Directors and authorized for issuance on April 25, 2024 and signed on its behalf by:
The Consolidated Financial Statements were approved by the Board of Directors and authorized for issuance on April 25, 2024 and signed on its behalf by:
Bharatt Chowrira
Chief Executive Officer
April 25, 2024
April 25, 2024
The accompanying notes are an integral part of these financial statements.
F-6
Consolidated Statement of Changes in Equity
For the years ended December 31
|
|
Share Capital |
|
Treasury Shares |
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
|
|
Note
|
Shares |
Amount
$000s |
Share premium
$000s |
Shares |
Amount
$000s |
Merger reserve $000s |
Translation reserve
$000s |
Other reserve
$000s |
Retained earnings/ (accumulated deficit)
$000s |
Total Parent equity
$000s |
Non-controlling interests
$000s |
Total
Equity $000s |
||||||||||||||||||||||||||||
|
Balance January 1, 2021
|
|
|
|
|
|
|
|
(
|
|
|
(
|
|
|||||||||||||||||||||||||||||
| Net income/(loss) | — | — | — | — | — | — | — | — |
(
|
(
|
(
|
(
|
|||||||||||||||||||||||||||||
| Total comprehensive income/(loss) for the year | — | — | — | — | — | — | — | — |
(
|
(
|
(
|
(
|
|||||||||||||||||||||||||||||
|
Exercise of stock options
|
9 |
|
|
|
— | — | — | — | — | — |
|
— |
|
||||||||||||||||||||||||||||
| Revaluation of deferred tax assets related to share-based awards | — | — | — | — | — | — | — |
|
— |
|
— |
|
|||||||||||||||||||||||||||||
|
Equity-settled share-based awards
|
9 | — | — | — | — | — | — | — |
|
— |
|
|
|
||||||||||||||||||||||||||||
| Settlement of restricted stock units | 9 | — | — | — | — | — | — | — |
(
|
— |
(
|
— |
(
|
||||||||||||||||||||||||||||
| Reclassification of equity settled awards to liability awards | — | — | — | — | — | — | — |
(
|
— |
(
|
— |
(
|
|||||||||||||||||||||||||||||
| Vesting of share-based awards and net share exercise | 9 | — | — | — | — | — | — | — |
(
|
— |
(
|
— |
(
|
||||||||||||||||||||||||||||
| Acquisition of subsidiary non-controlling interest | — | — | — | — | — | — | — |
(
|
— |
(
|
|
(
|
|||||||||||||||||||||||||||||
| NCI exercise of share options in subsidiaries | 9 | — | — | — | — | — | — | — |
|
— |
|
(
|
|
||||||||||||||||||||||||||||
| Other | — | — | — | — | — | — | — | — | — | — |
(
|
(
|
|||||||||||||||||||||||||||||
|
Balance December 31, 2021
|
|
|
|
|
|
|
|
(
|
|
|
(
|
|
|||||||||||||||||||||||||||||
| Net income/(loss) | — | — | — | — | — | — | — | — |
(
|
(
|
|
(
|
|||||||||||||||||||||||||||||
|
Other comprehensive income/(loss), net
|
— | — | — | — |
(
|
— | — |
(
|
— |
(
|
|||||||||||||||||||||||||||||||
|
Total comprehensive income/(loss) for the year
|
— | — | — | — | — | — |
(
|
— |
(
|
(
|
|
(
|
|||||||||||||||||||||||||||||
| Deconsolidation of Subsidiary | 5 | — | — | — | — | — | — | — | — | — | — |
|
|
||||||||||||||||||||||||||||
|
Exercise of stock options
|
9 |
|
|
|
— | — | — | — |
|
— |
|
||||||||||||||||||||||||||||||
| Purchase of Treasury stock | 15 | — | — | — |
(
|
(
|
— | — | — | — |
(
|
— |
(
|
||||||||||||||||||||||||||||
| Revaluation of deferred tax assets related to share-based awards | — | — | — | — | — | — | — |
|
— |
|
— |
|
|||||||||||||||||||||||||||||
|
Equity-settled share-based awards
|
9 | — | — | — | — | — | — | — |
|
— |
|
|
|
||||||||||||||||||||||||||||
| Settlement of restricted stock units | 9 |
|
— | — | — | — | — | — |
|
— |
|
— |
|
||||||||||||||||||||||||||||
| NCI exercise of share options in subsidiaries | 9 | — | — | — | — | — | — | — |
|
— |
|
(
|
|
||||||||||||||||||||||||||||
| Other | — | — | — | — | — | — | — | — | — | — |
(
|
(
|
|||||||||||||||||||||||||||||
|
Balance December 31, 2022
|
|
|
|
(
|
(
|
|
|
(
|
|
|
|
|
|||||||||||||||||||||||||||||
F-7
|
|
Share Capital |
|
Treasury Shares |
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
|
|
Note
|
Shares |
Amount
$000s |
Share premium
$000s |
Shares |
Amount
$000s |
Merger reserve $000s |
Translation reserve
$000s |
Other reserve
$000s |
Retained earnings/ (accumulated deficit)
$000s |
Total Parent equity
$000s |
Non-controlling interests
$000s |
Total
Equity $000s |
||||||||||||||||||||||||||||
|
Balance January 1, 2023
|
|
|
|
(
|
(
|
|
|
(
|
|
|
|
|
|||||||||||||||||||||||||||||
| Net income/(loss) | — | — | — | — | — | — | — | — |
(
|
(
|
(
|
(
|
|||||||||||||||||||||||||||||
| Other comprehensive income/(loss) for the period | — | — | — | — | — | — |
|
— | — |
|
— |
|
|||||||||||||||||||||||||||||
| Total comprehensive income/(loss) for the period | — | — | — | — | — | — |
|
— |
(
|
(
|
(
|
(
|
|||||||||||||||||||||||||||||
| Deconsolidation of Subsidiary | 5 | — | — | — | — | — | — | — | — | — | — |
(
|
(
|
||||||||||||||||||||||||||||
|
Exercise of stock options
|
9 |
|
|
|
|
|
— | — |
(
|
— |
|
— |
|
||||||||||||||||||||||||||||
| Purchase of Treasury stock | 15 | — | — | — |
(
|
(
|
— | — | — | — |
(
|
— |
(
|
||||||||||||||||||||||||||||
|
Equity-settled share-based awards
|
9 | — | — | — | — | — | — | — |
|
— |
|
|
|
||||||||||||||||||||||||||||
| Settlement of restricted stock units | 9 | — | — | — |
|
|
— | — |
|
— |
|
— |
|
||||||||||||||||||||||||||||
| Expiration of share options in subsidiary | — | — | — | — | — | — | — |
|
— |
|
(
|
|
|||||||||||||||||||||||||||||
| Other | — | — | — | — | — | — | — | — | — | — |
(
|
(
|
|||||||||||||||||||||||||||||
|
Balance December 31, 2023
|
|
|
|
(
|
(
|
|
|
(
|
|
|
(
|
|
|||||||||||||||||||||||||||||
The accompanying notes are an integral part of these financial statements.
F-8
Consolidated Statement of Cash Flows
For the years ended December 31
|
|
Note |
2023
$000s
|
2022
$000s
|
2021
$000s
|
||||||||||
| Cash flows from operating activities | ||||||||||||||
|
Income/(loss) for the year
|
(
|
(
|
(
|
|||||||||||
| Adjustments to reconcile income/(loss) for the period to net cash used in operating activities: | ||||||||||||||
| Non-cash items: | ||||||||||||||
| Depreciation and amortization |
12, 23
|
|
|
|
||||||||||
| Share-based compensation expense | 9 |
|
|
|
||||||||||
| (Gain)/loss on investment held at fair value | 5 |
(
|
|
(
|
||||||||||
| Realized loss on sale of investments | 5 |
|
|
|
||||||||||
| Gain on dilution of ownership interest in associate | 6 |
|
(
|
|
||||||||||
| Impairment of investment in associates | 6 |
|
|
|
||||||||||
| Gain on deconsolidation of subsidiary | 5 |
(
|
(
|
|
||||||||||
| Share of net loss of associates accounted for using the equity method | 6 |
|
|
|
||||||||||
| Loss on investments in notes from associates | 7 |
|
|
|
||||||||||
| Fair value gain on other financial instruments |
6, 18
|
|
(
|
(
|
||||||||||
| Loss on disposal of assets |
|
|
|
|||||||||||
| Impairment of fixed assets |
|
|
|
|||||||||||
| Income taxes, net | 27 |
|
(
|
|
||||||||||
| Finance (income)/costs, net | 10 |
(
|
(
|
(
|
||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||
| Trade and other receivables |
|
(
|
(
|
|||||||||||
| Prepaid expenses |
|
(
|
(
|
|||||||||||
| Deferred revenue |
(
|
|
(
|
|||||||||||
| Trade and other payables | 21 |
|
|
|
||||||||||
| Other |
|
|
(
|
|||||||||||
| Income taxes paid |
(
|
(
|
(
|
|||||||||||
| Interest received |
|
|
|
|||||||||||
| Interest paid |
(
|
(
|
(
|
|||||||||||
| Net cash used in operating activities |
(
|
(
|
(
|
|||||||||||
| Cash flows from investing activities: | ||||||||||||||
| Purchase of property and equipment | 12 |
(
|
(
|
(
|
||||||||||
| Proceeds from sale of property and equipment |
|
|
|
|||||||||||
| Purchases of intangible assets | 13 |
(
|
|
(
|
||||||||||
| Investment in associates | 6 |
|
(
|
|
||||||||||
| Purchase of investments held at fair value | 5 |
|
(
|
(
|
||||||||||
| Sale of investments held at fair value | 5 |
|
|
|
||||||||||
| Purchase of short-term note from associate |
|
|
(
|
|||||||||||
| Repayment of short-term note from associate |
|
|
|
|||||||||||
| Purchase of Convertible Note from associate | 7 |
(
|
(
|
|
||||||||||
| Cash derecognized upon loss of control over subsidiary (see table below) | 5 |
(
|
(
|
|
||||||||||
| Purchases of short-term investments |
(
|
(
|
|
|||||||||||
| Proceeds from maturity of short-term investments |
|
|
|
|||||||||||
| Receipt of payment of sublease |
|
|
|
|||||||||||
| Net cash provided by (used in) investing activities |
|
(
|
|
|||||||||||
| Cash flows from financing activities: | ||||||||||||||
| Receipt of cash from sale of future royalties | 17 |
|
|
|
||||||||||
| Issuance of subsidiary preferred Shares | 16 |
|
|
|
||||||||||
| Issuance of Subsidiary Convertible Note |
|
|
|
|||||||||||
| Payment of lease liability | 23 |
(
|
(
|
(
|
||||||||||
| Exercise of stock options |
|
|
|
|||||||||||
| Settlement of restricted stock unit equity awards |
|
|
(
|
|||||||||||
| Vesting of restricted stock units and net share exercise |
|
|
(
|
|||||||||||
| NCI exercise of stock options in subsidiary |
|
|
|
|||||||||||
| Purchase of treasury stock | 15 |
(
|
(
|
|
||||||||||
| Acquisition of a non-controlling Interest of a subsidiary |
|
|
(
|
|||||||||||
| Other |
(
|
(
|
(
|
|||||||||||
| Net cash provided by (used in) financing activities |
|
(
|
|
|||||||||||
| Net increase (decrease) in cash and cash equivalents |
|
(
|
|
|||||||||||
| Cash and cash equivalents at beginning of year |
|
|
|
|||||||||||
|
Cash and cash equivalents at end of year
|
|
|
|
|||||||||||
| Supplemental disclosure of non-cash investment and financing activities: | ||||||||||||||
| Purchase of intangible assets not yet paid in cash |
|
|
|
|||||||||||
|
Settlement of restricted stock units through issuance of equity
|
|
|
|
|||||||||||
| Purchase of property, plant and equipment against trade and other payables |
|
|
|
|||||||||||
| Leasehold improvements purchased through lease incentives (deducted from Right of Use Asset) |
|
|
|
|||||||||||
| Conversion of subsidiary convertible note into preferred share liabilities |
|
|
|
|||||||||||
F-9
Supplemental disclosure of non-cash investment and financing activities (continued):
Assets, Liabilities and non-controlling interests in deconsolidated subsidiary
|
2023
$000s |
2022
$000s |
|||||||
| Trade and other receivables |
(
|
|
||||||
| Prepaid assets |
(
|
|
||||||
| Property, plant and equipment, net |
(
|
|
||||||
| Right of use asset, net |
(
|
|
||||||
| Trade and other Payables |
|
|
||||||
| Deferred revenue |
|
|
||||||
| Lease liabilities (including current potion) |
|
|
||||||
| Long-term loan (including current portion) |
|
|
||||||
| Subsidiary notes payable |
|
|
||||||
| Subsidiary preferred shares and warrants |
|
|
||||||
| Other assets and liabilities, net |
(
|
|
||||||
| Non-controlling interest |
|
(
|
||||||
|
|
|
|||||||
| Investment retained in deconsolidated subsidiary |
|
|
||||||
| Gain on deconsolidation |
(
|
(
|
||||||
| Cash in deconsolidated subsidiary |
|
|
||||||
The accompanying notes are an integral part of these financial statements.
F-10
Notes to the Consolidated Financial Statements
(Amounts in thousands, except share and per share data, or exercise price and conversion price)
1.
Material Accounting Policies
Description of Business
PureTech Health plc (the “Parent”) is a public company incorporated, domiciled and registered in the United Kingdom (“UK”). The registered number is 09582467 and the registered address is 13th Floor, One Angel Court, London, EC2R 7HJ, United Kingdom.
The Parent and its subsidiaries are together referred to as the “Group”.
The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these group financial statements.
Basis of Presentation
The consolidated financial statements of the Group (the "Consolidated Financial Statements") are presented as of December 31, 2023 and 2022, and for the years ended December 31, 2023, 2022 and 2021. The Consolidated Financial Statements have been approved by the Directors on April 25, 2024, and are prepared in accordance with International Financial Reporting Standards ("IFRSs") as issued by the International Accounting Standards Board ("IASB").
For presentation of the Consolidated Statement of Comprehensive Income/(Loss), the Group uses a classification based on the function of expenses, rather than based on their nature, as it is more representative of the format used for internal reporting and management purposes and is consistent with international practice.
Certain amounts in the Consolidated Financial Statements and accompanying notes may not add due to rounding. All percentages have been calculated using unrounded amounts.
Basis of Measurement
Use of Judgments and Estimates
In preparing the Consolidated Financial Statements, management has made judgements, estimates and assumptions that affect the application of the Group’s accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an on-going basis.
Significant estimation is applied in determining the following:
•
Financial instruments valuations (see Note 18. Financial Instruments): In accordance with IFRS 9, the Group carries certain financial assets and financial liabilities at fair value, with changes in fair value through profit and loss ("FVTPL"). Valuation of the aforementioned financial instruments (assets and liabilities) includes making significant estimates, specifically determining the appropriate valuation methodology and making certain estimates such as the future expected returns on the financial instrument in different scenarios, appropriate discount rate, volatility, and term to exit.
Significant judgement is also applied in determining the following:
•
Whether financial instruments should be classified as liability or equity (see Note 16. Subsidiary Preferred Shares.). The judgement includes an assessment of whether the financial instruments include contractual obligations of the Group to deliver cash or other financial assets or to exchange financial assets or financial liabilities with another party, and whether those obligations could be settled by the Group exchanging a fixed amount of cash or other financial assets for a fixed number of its own equity instruments. Further information about these critical judgements and estimates is included below under Financial Instruments.
•
Whether the power to control investees exists (see Note 5. Investments Held at Fair Value and Note 6. Investments in Associates and accounting policy with regard to Subsidiaries below). The judgement includes an assessment of whether the Group has (i) power over the investee; (ii) exposure, or rights, to variable returns from its involvement with the investee; and (iii) the ability to use its power over the investee to affect the amount of its own returns. The Group considers among others its voting shares, shareholder agreements, ability to appoint board members, representation on the board, rights to appoint management, de facto control, investee dependence on the Group, etc. If the power to control the investee exists, it consolidates the financial statements of such investee in the Consolidated Financial Statements of the Group. Upon issuance of new shares in an investee and/or a change in any shareholders or governance agreements, the Group reassesses its ability to control the investee based on the revised voting interest, revised board composition and revised subsidiary governance and management structure. When such new circumstances result in the Group losing its power to control the investee, the investee is deconsolidated. On March 1 2023 Vedanta was deconsolidated. Although the Group holds
47
% of the voting rights and the other shareholders are widely dispersed, the Group does not have de facto control because the investor rights agreement stipulates that the relevant activities of Vedanta are directed by Vedanta's Board and the Group does not control Vedanta's Board decision making. Voting rights are not the dominant factor for directing Vedanta's relevant activities.
•
Whether the Group has significant influence over financial and operating policies of investees in order to determine if the Group should account for its investment as an associate based on IAS 28 or a financial instrument based on IFRS 9. (refer to Note 5. Investments Held at Fair Value and Note 6. Investments in Associates ). This judgement includes, among others, an assessment whether the Group has representation on the board of directors of the investee, whether the Group participates in the policy making processes of the investee, whether there is any interchange of managerial personnel, whether there is any essential technical information provided to the investee and if there are any transactions between the Group and the investee.
•
Upon determining that the Group does have significant influence over the financial and operating policies of an investee, if the Group holds more than a single instrument issued by its equity-accounted investee, judgement is required to determine whether the additional instrument forms part of the investment in the associate, which is accounted for under IAS 28 and
F-11
scoped out of IFRS 9, or it is a separate financial instrument that falls in the scope of IFRS 9. This judgement includes an assessment of the characteristics of the financial instrument of the investee held by the Group and whether such financial instrument provides access to returns underlying an ownership interest.
•
When the Group has other investments in an equity accounted investee that are not accounted for under IAS 28, judgement is required in determining if such investments constitute long-term interests ("LTI") for the purposes of IAS 28. This determination is based on the individual facts and circumstances and characteristics of each investment, but is driven, among other factors, by the intention and likelihood to settle the instrument through redemption or repayment in the foreseeable future, and whether or not the investment is likely to be converted to common stock or other equity instruments. After considering the individual facts and circumstances of the Group’s investment in its associate's preferred stock in the manner described above, including the long-term nature of such investment, the ability of the Group to convert its preferred stock investment to an investment in common shares and the likelihood of such conversion, the Group concluded that such investment was considered a long term interest.
•
In determining the appropriate accounting treatment for the Royalty Purchase Agreement, management applied significant judgement (refer to Note 17. Sale of Future Royalties Liability).
As of December 31, 2023, the Group had cash and cash equivalents of $
191,081
and short-term investments of $
136,062
.
Considering the Group’s financial position as of December 31, 2023, and its principal risks and opportunities, the Group prepared a going concern analysis covering a period of at least the twelve-month period from the date of signing the Consolidated Financial Statements ("the going concern period") utilizing realistic scenarios and applying a severe but plausible downside scenario. Even under the downside scenario, the analysis demonstrates the Group continues to maintain sufficient liquidity headroom and continues to comply with all financial obligations. The Board of Directors believe the Group and the Parent is adequately resourced to continue in operational existence for at least the twelve-month period from the date of signing the Consolidated Financial Statements. Accordingly, the Board of Directors considered it appropriate to adopt the going concern basis of accounting in preparing the Consolidated Financial Statements and the PureTech Health plc Financial Statements.
Basis of consolidation
The Consolidated Financial Statements as of December 31, 2023 and 2022, and for each of the years ended December 31, 2023, 2022 and 2021, comprises PureTech Health plc and its consolidated subsidiaries. Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated.
Subsidiaries
As used in these financial statements, the term subsidiaries refers to entities that are controlled by the Group. Under applicable accounting rules, the Group controls an entity when it is exposed to, or has the rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. In assessing control, the Group takes into consideration potential voting rights, board representation, shareholders' agreements, ability to appoint board of directors and management, de facto control and other related factors. The financial statements of subsidiaries are included in the Consolidated Financial Statements from the date that control commences until the date that control ceases. Losses applicable to the non-controlling interests in a subsidiary are allocated to the non-controlling interests even if doing so causes the non-controlling interests to have a deficit balance.
F-12
A list of all current and former subsidiaries organized with respect to classification as of December 31, 2023, and the Group’s total voting percentage, based on outstanding voting common and preferred shares as of December 31, 2023, 2022 and 2021, is outlined below.
All current subsidiaries are domiciled within the United States and conduct business activities solely within the United States.
|
Voting percentage at December 31, through the holdings in
|
||||||||||||||||||||||||||
| 2023 | 2022 | 2021 | ||||||||||||||||||||||||
| Subsidiary | Common | Preferred | Common | Preferred | Common | Preferred | ||||||||||||||||||||
| Subsidiary operating companies | ||||||||||||||||||||||||||
|
Alivio Therapeutics, Inc.
2
|
|
|
|
|
|
|
||||||||||||||||||||
|
Entrega, Inc. (indirectly held through Enlight)
2
|
|
|
|
|
|
|
||||||||||||||||||||
|
PureTech LYT, Inc. (formerly Ariya Therapeutics, Inc.)
2
|
|
|
|
|
|
|
||||||||||||||||||||
|
PureTech LYT 100, Inc.
2
|
|
|
|
|
|
|
||||||||||||||||||||
|
PureTech Management, Inc.
3
|
|
|
|
|
|
|
||||||||||||||||||||
|
PureTech Health LLC
3
|
|
|
|
|
|
|
||||||||||||||||||||
| Deconsolidated former subsidiary operating companies | ||||||||||||||||||||||||||
|
Sonde Health, Inc.
2,5
|
|
|
|
|
|
|
||||||||||||||||||||
|
Akili Interactive Labs, Inc.
2,6
|
|
|
|
|
|
|
||||||||||||||||||||
|
Gelesis, Inc.
1,2
|
|
|
|
|
|
|
||||||||||||||||||||
|
Karuna Therapeutics, Inc.
2,6
|
|
|
|
|
|
|
||||||||||||||||||||
|
Vedanta Biosciences, Inc.
2, 4
|
|
|
|
|
|
|
||||||||||||||||||||
|
Vedanta Biosciences Securities Corp. (indirectly held through Vedanta)
2, 4
|
|
|
|
|
|
|
||||||||||||||||||||
|
Vor Biopharma Inc
.2,6
|
|
|
|
|
|
|
||||||||||||||||||||
| Nontrading holding companies | ||||||||||||||||||||||||||
|
Endra Holdings, LLC (held indirectly through Enlight)
2
|
|
|
|
|
|
|
||||||||||||||||||||
|
Ensof Holdings, LLC (held indirectly through Enlight)
2
|
|
|
|
|
|
|
||||||||||||||||||||
|
PureTech Securities Corp.
2
|
|
|
|
|
|
|
||||||||||||||||||||
|
PureTech Securities II Corp.
2
|
|
|
|
|
|
|
||||||||||||||||||||
| Inactive subsidiaries | ||||||||||||||||||||||||||
|
Appeering, Inc.
2
|
|
|
|
|
|
|
||||||||||||||||||||
|
Commense Inc.
2
|
|
|
|
|
|
|
||||||||||||||||||||
|
Enlight Biosciences, LLC
2
|
|
|
|
|
|
|
||||||||||||||||||||
|
Ensof Biosystems, Inc. (held indirectly through Enlight)
2
|
|
|
|
|
|
|
||||||||||||||||||||
|
Follica, LLC
2
|
|
|
|
|
|
|
||||||||||||||||||||
|
Knode Inc. (indirectly held through Enlight)
2
|
|
|
|
|
|
|
||||||||||||||||||||
|
Libra Biosciences, Inc.
2
|
|
|
|
|
|
|
||||||||||||||||||||
|
Mandara Sciences, LLC
2
|
|
|
|
|
|
|
||||||||||||||||||||
|
Tal Medical, Inc.
2
|
|
|
|
|
|
|
||||||||||||||||||||
1 On October 30, 2023, Gelesis ceased operations and filed a voluntary petition for relief under the United States bankruptcy code. See Note 6. Investments in Associates for details.
2 Registered address is Corporation Trust Center, 1209 Orange St., Wilmington, DE 19801, USA.
3 Registered address is 2711 Centerville Rd., Suite 400, Wilmington, DE 19808, USA.
4 On March 1, 2023, the Group lost control over Vedanta and Vedanta was deconsolidated from the Group’s financial statements, resulting in only the profits and losses generated by Vedanta through the deconsolidation date being included in the Group’s Consolidated Statement of Comprehensive Income/(Loss). See Notes 5. Investments Held at Fair Value for further details about the accounting for the investments in Vedanta subsequent to deconsolidation.
5 On May 25, 2022, the Group lost control over Sonde and Sonde was deconsolidated from the Group’s financial statements, resulting in only the profits and losses generated by Sonde through the deconsolidation date being included in the Group’s Consolidated Statement of Comprehensive Income/(Loss). See Notes 5. Investments Held at Fair Value and 6. Investments in Associates for further details about the accounting for the investments in Sonde subsequent to deconsolidation.
6 See Notes 5. Investments Held at Fair Value and 6. Investments in Associates for additional discussion on the Group's investment held in Akili, Karuna and Vor.
7 Follica became inactive during 2023.
Change in Subsidiary Ownership and Loss of Control
Changes in the Group’s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions.
Where the Group loses control of a subsidiary, the assets and liabilities are derecognized along with any related non-controlling interest (“NCI”). Any interest retained in the former subsidiary is measured at fair value when control is lost. Any resulting gain or loss is recognized as profit or loss in the Consolidated Statement of Comprehensive Income/(Loss).
Associates
As used in these financial statements, the term associates are those entities in which the Group has no control but maintains significant influence over the financial and operating policies. Significant influence is presumed to exist when the Group holds between 20 and 50 percent of the voting power of an entity, unless it can be clearly demonstrated that this is not the case. The Group evaluates if it maintains significant influence over associates by assessing if the Group has the power to participate in the financial and operating policy decisions of the associate.
Application of the Equity Method to Associates
Associates are accounted for using the equity method (equity accounted investees) and are initially recognized at cost, or if recognized upon deconsolidation, they are initially recorded at fair value at the date of deconsolidation. The Consolidated
F-13
Financial Statements include the Group’s share of the total comprehensive income or loss of equity accounted investees, from the date that significant influence commences until the date that significant influence ceases.
To the extent the Group holds interests in associates that are not providing access to returns underlying ownership interests, the instrument is accounted for in accordance with IFRS 9 as investments held at fair value.
When the Group’s share of losses exceeds its equity method investment in the investee, losses are applied against long-term interests, which are investments accounted for under IFRS 9. Investments are determined to be long-term interests when they are long-term in nature and in substance they form part of the Group's net investment in that associate. This determination is impacted by many factors, among others, whether settlement by the investee through redemption or repayment is planned or likely in the foreseeable future, whether the investment can be converted and/or is likely to be converted to common stock or other equity instrument and other factors regarding the nature of the investment. Whilst this assessment is dependent on many specific facts and circumstances of each investment, typically conversion features whereby the investment is likely to convert to common stock or other equity instruments would point to the investment being a long-term interest. Similarly, where the investment is not planned or likely to be settled through redemption or repayment in the foreseeable future, this would indicate that the investment is a long-term interest. When the net investment in the associate, which includes the Group’s investments in other long-term interests, is reduced to nil, recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of an investee.
The Group has adopted the amendments to IAS 28 Investments in Associates that addresses the dual application of IAS 28 and IFRS 9 when equity method losses are applied against long-term interests. The amendments provide the annual sequence in which both standards are to be applied in such a case. The Group has applied the equity method losses to the long-term interests presented as part of Investments held at fair value subsequent to remeasuring such investments to their fair value at balance sheet date.
Sale of Future Royalties Liability
The Group accounts for the sale of future royalties liability as a financial liability, as it continues to hold the rights under the royalty bearing licensing agreement and has a contractual obligation to deliver cash to an investor for a portion of the royalty it receives. Interest on the sale of future royalties liability is recognized using the effective interest rate over the life of the related royalty stream.
The sale of future royalties liability and the related interest expense are based on the Group’s current estimates of future royalties expected to be paid over the life of the arrangement. Forecasts are updated periodically as new data is obtained. Any increases, decreases or a shift in timing of estimated cash flows require the Group to re-calculate the amortized cost of the sale of future royalties liability as the present value of the estimated future contractual cash flows that are discounted at the liability’s original effective interest rate. The adjustment is recognized immediately in profit or loss as income or expense.
Financial Instruments
Classification
The Group classifies its financial assets in the following measurement categories:
•
Those to be measured subsequently at fair value either through other comprehensive income "FVOCI", or through profit or loss "FVTPL", and
•
Those to be measured at amortized cost.
The classification depends on the Group’s business model for managing the financial assets and the contractual terms of the cash flows.
For assets measured at fair value, gains and losses are recorded in profit or loss.
Measurement
At initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at FVTPL, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets that are carried at FVTPL are expensed.
Impairment
The Group assesses on a forward-looking basis the expected credit losses associated with its debt instruments carried at amortized cost. For trade receivables, the Group applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognized from initial recognition of the receivables.
Financial Assets
The Group’s financial assets consist of cash and cash equivalents, investments in debt securities, trade and other receivables, notes, restricted cash deposits and investments in equity securities. The Group’s financial assets are virtually all classified into the following categories: investments held at fair value, notes, trade and other receivables, short-term investments and cash and cash equivalents. The Group determines the classification of financial assets at initial recognition depending on the purpose for which the financial assets were acquired.
Investments held at fair value are investments in equity instruments. Such investments consist of the Group's minority interest holdings where the Group has no significant influence or preferred share investments that are not providing access to returns underlying ownership interests and are categorized as debt instruments that are presented at fair value through profit and loss because the amounts receivable do not represent solely payments of principal and interest. These financial assets are initially measured at fair value and subsequently re-measured at fair value at each reporting date. The Group has elected to record the changes in fair values for the financial assets falling under this category through profit and loss. Please refer to Note 5. Investments Held at Fair Value.
Changes in the fair value of financial assets at FVTPL are recognized in other income/(expense) in the Consolidated Statement of Comprehensive Income/(Loss) as applicable.
F-14
The notes from an associate, since their contractual terms do not consist solely of cash flow payments of principal and interest on the principal amount outstanding, are initially and subsequently measured at fair value, with changes in fair value recognized through profit and loss.
Cash and cash equivalents consist of demand deposits with banks and other financial institutions and highly liquid instruments with original maturities of three months or less at the date of purchase. Cash and cash equivalents are carried at cost, which approximates their fair value.
Short-term investments consist of short-term US treasury bills that are held to maturity. The contractual terms consist solely of payment of the principal and interest and the Group's business model is to hold the treasury bills to maturity. As such, such short-term investments are recorded at amortized cost. As of balance sheet date, amortized cost approximated the fair value of such short-term investments.
Trade and other receivables are non-derivative financial assets with fixed and determinable payments that are not quoted on active markets. These financial assets are carried at the amounts expected to be received less any expected lifetime losses. Such losses are determined taking into account previous experience, credit rating and economic stability of counterparty and economic conditions. When a trade receivable is determined to be uncollectible, it is written off against the available provision. As of balance sheet date, the Group did not record any such expected lifetime losses related to the outstanding trade and other receivable balances. Trade and other receivables are included in current assets, unless maturities are greater than 12 months after the end of the reporting period.
Financial Liabilities
The Group’s financial liabilities primarily consist of trade and other payables, and preferred shares.
The majority of the Group’s subsidiaries have preferred shares and certain notes payable with embedded derivatives, which are classified as current liabilities. When the Group has preferred shares and notes with embedded derivatives that qualify for bifurcation, the Group has elected to account for the entire instrument as FVTPL after determining under IFRS 9 that the instrument qualifies to be accounted for under such FVTPL method.
The Group derecognizes a financial liability when its contractual obligations are discharged, cancelled or expire.
Equity Instruments Issued by the Group
Financial instruments issued by the Group are treated as equity only to the extent that they meet the following two conditions, in accordance with IAS 32:
1.
They include no contractual obligations upon the Group to deliver cash or other financial assets or to exchange financial assets or financial liabilities with another party under conditions that are potentially unfavorable to the Group; and
2.
Where the instrument will or may be settled in the Group’s own equity instruments, it is either a non-derivative that includes no obligation to deliver a variable number of the Group’s own equity instruments or is a derivative that will be settled by the Group exchanging a fixed amount of cash or other financial assets for a fixed number of its own equity instruments.
To the extent that this definition is not met, the financial instrument is classified as a financial liability. Where the instrument so classified takes the legal form of the Group’s own shares, the amounts presented in the Group's shareholders' equity exclude amounts in relation to those shares.
IFRS 15, Revenue from Contracts with Customers
The standard establishes a five-step principle-based approach for revenue recognition and is based on the concept of recognizing an amount that reflects the consideration for performance obligations only when they are satisfied and the control of goods or services is transferred.
The majority of the Group’s contract revenue is generated from licenses and services, some of which are part of collaboration arrangements.
Management reviewed contracts where the Group received consideration in order to determine whether or not they should be accounted for in accordance with IFRS 15. To date, the Group has entered into transactions that generate revenue and meet the scope of either IFRS 15 or IAS 20 Accounting for Government Grants. Contract revenue is recognized at either a point-in-time or over time, depending on the nature of the performance obligations.
The Group accounts for agreements that meet the definition of IFRS 15 by applying the following five step model:
•
Identify the contract(s) with a customer – A contract with a customer exists when (i) the Group enters into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment terms related to those goods or services, (ii) the contract has commercial substance and, (iii) the Group determines that collection of substantially all consideration for goods or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration.
•
Identify the performance obligations in the contract – Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the good or service either on its own or together with other resources that are readily available from third parties or from the Group, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract.
•
Determine the transaction price – The transaction price is determined based on the consideration to which the Group will be entitled in exchange for transferring goods or services to the customer. To the extent the transaction price includes variable consideration, the Group estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in the Group’s judgement, it is probable that a significant future reversal of cumulative revenue under the contract will not occur.
F-15
•
Allocate the transaction price to the performance obligations in the contract – If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis.
•
Recognize revenue when (or as) the Group satisfies a performance obligation – The Group satisfies performance obligations either over time or at a point in time as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised good or service to a customer.
Revenue generated from services agreements (typically where licenses and related services were combined into one performance obligation) is determined to be recognized over time when it can be determined that the services meet one of the following: (a) the customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs; (b) the entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced; or (c) the entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date.
It was determined that the Group has contracts that meet criteria (a), since the customer simultaneously receives and consumes the benefits provided by the Group’s performance as the Group performs. Therefore revenue is recognized over time using the input method based on costs incurred to date as compared to total contract costs. The Group believes that in research and development service type agreements using costs incurred to date represents the most faithful depiction of the entity’s performance towards complete satisfaction of a performance obligation.
Revenue from licenses that are not part of a combined performance obligation are recognized at a point in time due to the licenses relating to intellectual property that has significant stand-alone functionality and as such represent a right to use the entity's intellectual property as it exists at the point in time at which the license is granted.
Royalty income received in respect of licensing agreements when the license of intellectual property is the predominant item in the arrangement is recognized as the related third-party sales in the licensee occur.
Amounts that are receivable or have been received per contractual terms but have not been recognized as revenue since performance has not yet occurred or has not yet been completed are recorded as deferred revenue. The Group classifies as non-current deferred revenue amounts received for which performance is expected to occur beyond one year or one operating cycle.
Grant Revenue
The Group recognizes grants from governmental agencies as grant revenue in the Consolidated Statement of Comprehensive Income/(Loss), gross of the expenditures that were related to obtaining the grant, when there is reasonable assurance that the Group will comply with the conditions within the grant agreement and there is reasonable assurance that payments under the grants will be received. The Group evaluates the conditions of each grant as of each reporting date to ensure that the Group has reasonable assurance of meeting the conditions of each grant arrangement and that it is expected that the grant payment will be received as a result of meeting the necessary conditions.
The Group submits qualifying expenses for reimbursement after the Group has incurred the research and development expense. The Group records an unbilled receivable upon incurring such expenses. In cases in which the grant revenue is received prior to the expenses being incurred or recognized, the amounts received are deferred until the related expense is incurred and/or recognized. Grant revenue is recognized in the Consolidated Statement of Comprehensive Income/(Loss) at the time in which the Group recognizes the related reimbursable expense for which the grant is intended to compensate.
Functional and Presentation Currency
The Consolidated Financial Statements are presented in United States dollars (“US dollars”). The functional currency of all members of the Group is the U.S. dollar. The Group's share in foreign exchange differences in associates were reported in other comprehensive income/(loss).
Foreign Currency
Share Capital
Ordinary shares are classified as equity. The Group's equity is comprised of share capital, share premium, merger reserve, other reserve, translation reserve, and retained earnings/accumulated deficit.
Treasury Shares
Treasury shares are recognized at cost and are deducted from shareholders' equity. No gain or loss is recognized in profit and loss for the purchase, sale, re-issue or cancellation of the Group's own equity shares.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and any accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. Assets under construction represent leasehold improvements and machinery and equipment to be used in operations or research and development activities. When parts of an item of property and equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment.
Depreciation is calculated using the straight-line method over the estimated useful life of the related asset:
F-16
| Laboratory and manufacturing equipment |
|
||||
| Furniture and fixtures |
|
||||
| Computer equipment and software |
|
||||
| Leasehold improvements |
|
||||
Depreciation methods, useful lives and residual values are reviewed at each balance sheet date.
Intangible Assets
Intangible assets, which include purchased patents and licenses with finite useful lives, are carried at historical cost less accumulated amortization, if amortization has commenced. Intangible assets with finite lives are amortized from the time they are available for their intended use. Amortization is calculated using the straight-line method to allocate the costs of patents and licenses over their estimated useful lives.
Research and development intangible assets, which are still under development and have accordingly not yet obtained marketing approval, are presented as In-Process Research and Development (IPRD). The cost of IPRD represents upfront payments as well as additional contingent payments based on development, regulatory and sales milestones related to certain license agreement where the Group licenses IP from a third party. These milestones are capitalized as the milestone is triggered. See Note 25. Commitments and Contingencies. IPRD is not amortized since it is not yet available for its intended use, but it is evaluated for potential impairment on an annual basis or more frequently when facts and circumstances warrant.
Impairment of Non-Financial Assets
The Group reviews the carrying amounts of its property and equipment and intangible assets at each reporting date to determine whether there are indicators of impairment. If any such indicators of impairment exist, then an asset’s recoverable amount is estimated. The recoverable amount is the higher of an asset’s fair value less cost of disposal and value in use.
The Group’s IPRD intangible assets are not yet available for their intended use. As such, they are tested for impairment at least annually.
An impairment loss is recognized when an asset’s carrying amount exceeds its recoverable amount. For the purposes of impairment testing, assets are grouped at the lowest levels for which there are largely independent cash flows. If a non- financial asset instrument is impaired, an impairment loss is recognized in the Consolidated Statement of Comprehensive Income/(Loss).
Employee Benefits
Short-Term Employee Benefits
Short-term employee benefit obligations are measured on an undiscounted basis and expensed as the related service is provided. A liability is recognized for the amount expected to be paid if the Group has a present legal or constructive obligation due to past service provided by the employee, and the obligation can be estimated reliably.
Defined Contribution Plans
Share-based Payments
Share-based payment arrangements, in which the Group receives goods or services as consideration for its own equity instruments, are accounted for as equity-settled share-based payment transactions (except certain restricted stock units - see below) in accordance with IFRS 2, regardless of how the equity instruments are obtained by the Group. The grant date fair value of employee share-based payment awards is recognized as an expense with a corresponding increase in equity over the requisite service period related to the awards. The amount recognized as an expense is adjusted to reflect the actual number of awards for which the related service and non-market performance conditions are expected to be met, such that the amount ultimately recognized as an expense is based on the number of awards that do meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with market conditions, the grant date fair value is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes.
Certain restricted stock units are treated as liability settled awards starting in 2021. Such awards are remeasured at every reporting date until settlement date and are recognized as compensation expense over the requisite service period. Differences in remeasurement are recognized in profit and loss. The cumulative cost that will ultimately be recognized in respect of these awards will equal to the amount at settlement.
Development Costs
Expenditures on research activities are recognized as incurred in the Consolidated Statement of Comprehensive Income/(Loss). In accordance with IAS 38, development costs are capitalized only if the expenditure can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, the Group can demonstrate its ability to use or sell the intangible asset, the Group intends to and has sufficient resources to complete development and to use or sell the asset, and it is able to measure reliably the expenditure attributable to the intangible asset during its development. The point at which technical feasibility is determined to have been reached is, generally, when regulatory approval has been received where applicable. Management determines that commercial viability has been reached when a clear market and pricing point have been identified, which may coincide with achieving meaningful recurring sales. Otherwise, the development expenditure is recognized
F-17
as incurred in the Consolidated Statement of Comprehensive Income/(Loss). As of balance sheet date, the Group has not capitalized any development costs.
Provisions
A provision is recognized in the Consolidated Statement of Financial Position when the Group has a present legal or constructive obligation due to a past event that can be reliably measured, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects risks specific to the liability.
Leases
The Group leases real estate for use in operations. These leases have lease terms of approximately
10
years. The Group includes options that are reasonably certain to be exercised as part of the determination of the lease term. The group determines if an arrangement is a lease at inception of the contract in accordance with guidance detailed in IFRS 16. Right-of-use (ROU) assets represent the Group’s right to use an underlying asset for the lease term and lease liabilities represent the Group's obligation to make lease payments arising from the lease. Operating lease ROU assets and lease liabilities are recognized at commencement date based on the present value of the lease payments over the lease term. As most of the Group's leases do not provide an implicit rate, the Group used its estimated incremental borrowing rate, based on information available at commencement date, in determining the present value of future payments.
The Group’s leases are virtually all leases of real estate.
The Group has elected to account for lease payments as an expense on a straight-line basis over the life of the lease for:
•
Leases with a term of 12 months or less and containing no purchase options; and
•
Leases where the underlying asset has a value of less than $5,000.
Finance Income and Finance Costs
Finance income consists of interest income on funds invested in money market funds and U.S. treasuries. Finance income is recognized as it is earned. Finance costs consist mainly of loan, notes and lease liability interest expenses, interest expense due to accretion of and adjustment to sale of future royalties liability as well as the changes in the fair value of financial liabilities carried at FVTPL (such changes can consist of finance income when the fair value of such financial liabilities decreases).
Taxation
Tax on the profit or loss for the year comprises current and deferred income tax. In accordance with IAS 12, tax is recognized in the Consolidated Statement of Comprehensive Income/(Loss) except to the extent that it relates to items recognized directly in equity.
Current income tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantially enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
Deferred tax is recognized due to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax assets are recognized for unused tax losses, unused tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be used. Deferred tax assets with respect to investments in associates are recognized only to the extent that it is probable the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.
Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date.
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.
Fair Value Measurements
The Group’s accounting policies require that certain financial assets and certain financial liabilities be measured at their fair value.
The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs. Fair values are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows:
•
Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.
•
Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
•
Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
The Group recognizes transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred.
Operating Segments
Operating segments are reported in a manner that is consistent with the internal reporting provided to the chief operating decision maker (“CODM”). The CODM reviews discrete financial information for the operating segments in order to assess their
F-18
performance and is responsible for making decisions about resources allocated to the segments. The CODM has been identified as the Group’s Board of Directors.
2.
New Standards and Interpretations
The Group has applied the following amendments for the first time for its annual reporting period commencing January 1, 2023:
•
IFRS 17
Insurance Contracts
•
Definition of Accounting Estimates
(Amendments to IAS 8)
•
Deferred Tax related to Assets and Liabilities Arising from a Single Transaction
(Amendments to IAS 12)
The amendments listed above did not have any impact on the amounts recognized in prior and current periods and are not expected to significantly affect the future periods.
Certain new accounting standards, amendments to accounting standards and interpretations have been published that are not mandatory for December 31, 2023 reporting periods and have not been early adopted by the Group. These standards, amendments or interpretations are not expected to have a material impact on the Group in the current or future reporting periods and on foreseeable future transactions.
3.
Revenue
Revenue recorded in the Consolidated Statement of Comprehensive Income/(Loss) consists of the following:
|
For the years ended December 31,
|
2023
$
|
2022
$
|
2021
$
|
||||||||
| Contract revenue |
|
|
|
||||||||
|
Grant revenue
|
|
|
|
||||||||
| Total revenue |
|
|
|
||||||||
All amounts recorded in contract revenue were generated in the United States.
For the years ended December 31, 2023, 2022 and 2021, contract revenue includes royalties received from an associate in the amounts of
zero
, $
509
and $
231
, respectively.
Substantially all of the Group’s contracts related to contract revenue for the years ended December 31, 2023, 2022 and 2021 were determined to have a single performance obligation which consists of a combined deliverable of license of intellectual property and research and development services. Therefore, for such contracts, revenue is recognized over time based on the input method which the Group believes is a faithful depiction of the transfer of goods and services. Progress is measured based on costs incurred to date as compared to total projected costs. Payments for such contracts are primarily made up-front on a periodic basis.
During the year ended December 31, 2021, the Group received a $
6,500
payment from Imbrium Therapeutics, Inc. following the exercise of the option to acquire an exclusive license for the Initial Product Candidate, as defined in the agreement. Since the license transferred was a right to use license, revenue from the option exercise was recognized at a point in time upon transfer of the license, which occurred during the year ended December 31, 2021.
Disaggregated Revenue
The Group disaggregates contract revenue in a manner that depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. The Group disaggregates revenue based on contract revenue or grant revenue, and further disaggregates contract revenue based on the transfer of control of the underlying performance obligations.
|
Timing of contract revenue recognition
For the years ended December 31,
|
2023
$
|
2022
$
|
2021
$
|
||||||||
|
Transferred at a point in time – Licensing Income
|
|
|
|
||||||||
|
Transferred over time
|
|
|
|
||||||||
|
|
|
|
|
||||||||
| Customers over 10% of revenue |
2023
$
|
2022
$
|
2021
$
|
||||||||
| Customer A |
|
|
|
||||||||
| Customer B |
|
|
|
||||||||
| Customer C |
|
|
|
||||||||
|
|
|
|
|||||||||
F-19
4.
Segment Information
Basis for Segmentation
The Directors are the Group’s chief operating decision-makers. The Group’s operating segments are determined based on the financial information provided to the Board of Directors periodically for the purposes of allocating resources and assessing performance. During the second half of 2023, the Group changed the financial information that was regularly reviewed by the Board of Directors to allocate resources and assess performance. The Group has determined each of its Wholly-Owned Programs represents an operating segment and the Group has aggregated each of these operating segments into
one
reportable segment, the Wholly-Owned Programs segment, given the high level of operational and financial similarities across its Wholly-Owned Programs. Each of the Group’s Controlled Founded Entities represents an operating segment. The Group aggregates each Controlled Founded Entity operating segment into
one
reportable segment, the Controlled Founded Entities segment. For the Group’s entities that do not meet the definition of an operating segment, the Group presents this information in the Parent Other column in its segment footnote to reconcile the information in this footnote to the Consolidated Financial Statements. Substantially all of the Group’s revenue and profit generating activities are generated within the United States and, accordingly, no geographical disclosures are provided.
The Group has retroactively recast its fiscal year 2022 and 2021 results on the new basis for comparability.
Following is the description of the Group's reportable segments:
Wholly-Owned Programs
The Wholly-Owned Programs segment is advancing Wholly-Owned Programs which are focused on treatments for patients with devastating diseases. The Wholly-Owned Programs segment is comprised of the technologies that are wholly-owned and will be advanced through with either the Group's funding or non-dilutive sources of financing. The operational management of the Wholly-Owned Programs segment is conducted by the PureTech Health team, which is responsible for the strategy, business development, and research and development.
Controlled Founded Entities
The Controlled Founded Entities segment is comprised of the Group’s consolidated operational subsidiaries as of December 31, 2023 that either have, or have plans to hire, independent management teams and currently have already raised third-party dilutive capital. These subsidiaries have active research and development programs and either have entered into or plan to seek an equity or debt investment partner, who will provide additional industry knowledge and access to networks, as well as additional funding to continue the pursued growth of the entity.
The Group’s entities that were determined not to meet the definition of an operating segment are included in the Parent Company and Other column to reconcile the information in this footnote to the financial statements. This column captures activities not directly attributable to the Group's operating segments and includes the activities of the Parent, corporate support functions and certain research and development support functions that are not directly attributable to a strategic business segment as well as the elimination of intercompany transactions. This column also captures the operating results for the deconsolidated entities through the date of deconsolidation (e.g. Vedanta in 2023 and Sonde in 2022) and accounting for the Group's holdings in Founded Entities for which control has been lost, which primarily represents: the activity associated with deconsolidating an entity when the Group no longer controls the entity (e.g. Vedanta in 2023 and Sonde in 2022), the gain or loss on the Group's investments accounted for at fair value (e.g. the Group's ownership stakes in Karuna, Vor and Akili) and the Group's net income or loss of associates accounted for using the equity method.
(The term "Founded Entities" refers to entities which the Company incorporated and announced the incorporation as a Founded Entity externally. It includes certain of the Company’s wholly-owned subsidiaries which have been announced by the Company as Founded Entities, Controlled Founded Entities and deconsolidated Founded Entities.)
In January 2024, the Group launched
two
new Founded Entities to advance certain programs from the Wholly-Owned Programs segment. Refer to Note 28. Subsequent Events for detail. The financial results of these programs were included in the Wholly-Owned Programs segment as of December 31, 2023 and 2022 and for the three years ended December 31, 2023, 2022 and 2021, respectively. Upon raising dilutive third-party financing, the financial results of these
two
entities will be included in the Controlled Founded Entities segment to the extent that the Group maintains control over these entities.
F-20
The Group’s Board of Directors reviews segment performance and allocates resources based upon revenue and operating loss as well as the funds available for each segment. The Board of Directors do not review any other information for purposes of assessing segment performance or allocating resources.
|
For the year ended December 31, 2023
|
||||||||||||||
|
Wholly-Owned Programs
$
|
Controlled Founded Entities
$
|
Parent Company
Other
$
|
Consolidated
$
|
|||||||||||
| Contract revenue |
|
|
|
|
||||||||||
| Grant revenue |
|
|
|
|
||||||||||
| Total revenue |
|
|
|
|
||||||||||
| General and administrative expenses |
(
|
(
|
(
|
(
|
||||||||||
| Research and development expenses |
(
|
(
|
(
|
(
|
||||||||||
| Total operating expense |
(
|
(
|
(
|
(
|
||||||||||
| Operating income/(loss) |
(
|
(
|
(
|
(
|
||||||||||
|
Income/expenses not allocated to segments
|
||||||||||||||
| Other income/(expense): | ||||||||||||||
| Gain on deconsolidation of subsidiary |
|
|||||||||||||
| Gain/(loss) on investment held at fair value |
|
|||||||||||||
| Realized loss on sale of investments |
(
|
|||||||||||||
| Gain/(loss) on investment in notes from associates |
(
|
|||||||||||||
| Other income/(expense) |
(
|
|||||||||||||
| Total other income/(expense) |
|
|||||||||||||
| Net finance income/(costs) |
|
|||||||||||||
| Share of net income/(loss) of associates accounted for using the equity method |
(
|
|||||||||||||
| Income/(loss) before taxes |
(
|
|||||||||||||
|
As of December 31, 2023
|
||||||||||||||
|
Available Funds
|
||||||||||||||
| Cash and cash equivalents |
|
|
|
|
||||||||||
| Short-term Investments |
|
|
|
|
||||||||||
| Consolidated cash, cash equivalents and short-term investments |
|
|
|
|
||||||||||
|
For the year ended December 31, 2022
|
||||||||||||||
|
Wholly-Owned Programs
$ |
Controlled Founded Entities
$
|
Parent
Company
Other
$
|
Consolidated
$
|
|||||||||||
| Contract revenue |
|
|
|
|
||||||||||
| Grant revenue |
|
|
|
|
||||||||||
| Total revenue |
|
|
|
|
||||||||||
| General and administrative expenses |
(
|
(
|
(
|
(
|
||||||||||
| Research and development expenses |
(
|
(
|
(
|
(
|
||||||||||
| Total Operating expenses |
(
|
(
|
(
|
(
|
||||||||||
|
Operating income/(loss)
|
(
|
|
(
|
(
|
||||||||||
|
Income/expenses not allocated to segments
|
||||||||||||||
| Other income/(expense): | ||||||||||||||
| Gain on deconsolidation |
|
|||||||||||||
| Gain/(loss) on investment held at fair value |
(
|
|||||||||||||
| Realized loss on sale of investments |
(
|
|||||||||||||
| Other income/(expense) |
|
|||||||||||||
| Total other income/(expense) |
(
|
|||||||||||||
| Net finance income/(costs) |
|
|||||||||||||
| Share of net income/(loss) of associate accounted for using the equity method |
(
|
|||||||||||||
| Gain on dilution of ownership interest in associate |
|
|||||||||||||
|
Impairment of investment in associates
|
(
|
|||||||||||||
| Income/(loss) before taxes |
(
|
|||||||||||||
|
As of December 31, 2022
|
||||||||||||||
| Available Funds | ||||||||||||||
| Cash and cash equivalents |
|
|
|
|
||||||||||
| Short-term Investments |
|
|
|
|
||||||||||
| Consolidated cash, cash equivalents and short-term investments |
|
|
|
|
||||||||||
F-21
|
For the year ended December 31, 2021
|
||||||||||||||
|
Wholly-Owned Programs
$ |
Controlled Founded Entities
$
|
Parent
Company
Other
$
|
Consolidated
$
|
|||||||||||
| Contract revenue |
|
|
|
|
||||||||||
| Grant revenue |
|
|
|
|
||||||||||
| Total revenue |
|
|
|
|
||||||||||
| General and administrative expenses |
(
|
(
|
(
|
(
|
||||||||||
| Research and development expenses |
(
|
(
|
(
|
(
|
||||||||||
| Total operating expense |
(
|
(
|
(
|
(
|
||||||||||
|
Operating income/(loss)
|
(
|
|
(
|
(
|
||||||||||
|
Income/expenses not allocated to segments
|
||||||||||||||
| Other income/(expense): | ||||||||||||||
| Gain/(loss) on investment held at fair value |
|
|||||||||||||
| Realized loss on sale of investments |
(
|
|||||||||||||
| Other income/(expense) |
|
|||||||||||||
| Other income/(expense) |
|
|||||||||||||
| Net finance income/(costs) |
|
|||||||||||||
| Share of net income/(loss) of associate accounted for using the equity method |
(
|
|||||||||||||
| Income/(loss) before taxes |
(
|
|||||||||||||
5.
Investments Held at Fair Value
Investments held at fair value include both unlisted and listed securities held by the Group. These investments, which include interests in Akili, Vor, Karuna, Sonde, Vedanta, Gelesis and other insignificant investments, are initially measured at fair value and are subsequently re-measured at fair value at each reporting date with changes in the fair value recorded through profit and loss.
Activities related to such investments during the periods are shown below:
| Investments held at fair value |
$
|
||||
|
Balance as of January 1, 2022
|
|
||||
| Investment in Sonde preferred shares - Sonde deconsolidation |
|
||||
| Sale of Karuna and Vor shares |
(
|
||||
| Loss realised on sale of investments as a result of written call option |
(
|
||||
| Investment in Akili common shares |
|
||||
| Gelesis Earn-out Shares received in the SPAC exchange |
|
||||
| Exchange of Gelesis preferred shares to Gelesis common shares |
(
|
||||
| Loss – change in fair value through profit and loss |
(
|
||||
|
Balance as of December 31, 2022 and January 1, 2023
|
|
||||
| Investment in Vedanta preferred shares – Vedanta deconsolidation |
|
||||
|
Investment in Gelesis 2023 Warrants
|
|
||||
| Sale of Karuna shares |
(
|
||||
| Loss realised on sale of investments |
(
|
||||
| Gain – change in fair value through profit and loss |
|
||||
|
Balance as of December 31, 2023
|
|
||||
Vedanta
On March 1, 2023, Vedanta issued convertible debt to a syndicate of investors. The Group did not participate in this round of financing. As part of the issuance of the debt, the convertible debt holders were granted representation on Vedanta's Board of Directors and the Group lost control over the Vedanta Board of Directors and the power to direct the relevant Vedanta activities. Consequently, Vedanta was deconsolidated on March 1, 2023 and its results of operations are included in the Consolidated Financial Statements through the date of deconsolidation.
Following deconsolidation, the Group has significant influence over Vedanta through its voting interest in Vedanta and its remaining representation on Vedanta's Board of Directors. However, the Group only holds convertible preferred shares in Vedanta that do not provide their holders with access to returns associated with a residual equity interest, and as such are accounted for under IFRS 9, as investments held at fair value with changes in fair value recorded in profit and loss. Under IFRS 9, the preferred share investments are categorized as debt instruments that are presented at fair value through profit and loss because the amounts receivable do not represent solely payments of principal and interest.
Upon deconsolidation, the Group derecognized its assets, liabilities and non-controlling interest in respect of Vedanta and recorded its aforementioned investment in Vedanta at fair value. The deconsolidation resulted in a gain of $
61,787
. As of the date of deconsolidation, the investment in Vedanta convertible preferred shares held at fair value amounted to $
20,456
.
During the year ended December 31, 2023, the Group recognized a loss of $
6,303
for the changes in the fair value of the investment in Vedanta that was included in gain/(loss) on investments held at fair value within the Consolidated Statement of Comprehensive Income/(Loss). The fair value of the Group’s investment in Vedanta is $
14,153
as of December 31, 2023.
Karuna
F-22
Karuna was deconsolidated in March 2019. During 2019, Karuna completed its IPO and the Group lost its significant influence in Karuna. The shares held in Karuna are accounted for as an investment held at fair value under IFRS 9.
2021
On February 9, 2021, the Group sold
1,000,000
common shares of Karuna for $
118,000
. On November 9, 2021, the Group sold an additional
750,000
common shares of Karuna for $
100,125
. As a result of the aforementioned sales, the Group recorded a loss of $
20,925
, attributable to blockage discount included in the sales price, in realized gain/(loss) on sale of investments within the Consolidated Statement of Comprehensive Income/(Loss).
2022
On August 8, 2022, the Group sold
125,000
shares of Karuna common stock. In addition, the Group wrote a series of call options entitling the holders thereof to purchase up to
477,100
Karuna common stock at a set price, which were exercised in full in August and September 2022. Aggregate proceeds to the Group from all aforementioned transactions amounted to $
115,457
, net of transaction fees. As a result of the aforementioned sales, the Group recorded a loss of $
29,303
, attributable to the exercise of the aforementioned call options, in realized gain/(loss) on sale of investment within the Consolidated Statement of Comprehensive Income/(Loss).
2023
During the three months ended December 31, 2023, the Group sold
167,579
shares of Karuna common stock with aggregate proceeds of $
33,309
, net of transaction fees.
During the years ended December 31, 2023, 2022, and 2021 the Group recorded gains of $
107,079
, $
134,952
, $
109,987
, respectively for the changes in the fair value of the Karuna investment that were included in gain/(loss) on investments held at fair value within the Consolidated Statement of Comprehensive Income/(Loss). As of December 31, 2023, the Group held
886,885
shares or
2.3
percent of total outstanding Karuna common stock. In December 2023, Karuna entered into a definitive merger agreement with Bristol Myers Squibb ("BMS") under which Karuna common shares were acquired by Bristol Myers Squibb for $
330
per share in March 2024. See Note 28. Subsequent Events. The fair value of the Group’s investment in Karuna is $
280,708
as of December 31, 2023.
Vor
Vor was deconsolidated in February 2019. As the Group did not hold common shares in Vor upon deconsolidation and the preferred shares it held did not have equity-like features. Therefore, the preferred shares held by the Group fell under the guidance of IFRS 9 and were treated as a financial asset held at fair value with changes in fair value recorded in the Consolidated Statement of Comprehensive Income/(Loss).
2021
On January 8, 2021, the Group participated in the second closing of Vor’s Series B preferred share financing. For consideration of $
500
, the Group received an additional
961,538
Series B preferred shares.
On February 9, 2021, Vor closed its initial public offering (the "IPO") of
9,828,017
shares of its common stock at a price of $
18.00
per share. Subsequent to the closing, the Group held
3,207,200
shares of Vor common stock, representing
8.6
percent of Vor common stock.
2022
In August and December 2022, the Group sold an aggregate of
535,400
shares of Vor common stock for aggregate proceeds of $
3,253
.
During the years ended December 31, 2023, 2022 and 2021, the Group recognized a loss of $
11,756
, a loss of $
16,247
, and a gain of $
3,903
, respectively, for the changes in the fair value of the investment that were included in gain/(loss) on investments held at fair value within the Consolidated Statement of Comprehensive Income/(Loss). The fair value of the Group’s investment in Vor is $
6,012
as of December 31, 2023.
Gelesis
Gelesis was deconsolidated in July 2019. The common stock held in Gelesis was accounted for under the equity method, while the preferred shares and warrants held by the Group fell under the guidance of IFRS 9 and were treated as financial assets held at fair value, with changes to the fair value of the instruments recorded through the Consolidated Statement of Comprehensive Income/(Loss). Please refer to Note 6. Investments in Associates for information regarding the Group's investment in Gelesis as an associate.
2021
During the year ended December 31, 2021, as the equity method based investment in Gelesis was reduced to
zero
previously, the Group allocated a portion of its share in the net loss in Gelesis of $
73,703
, to its preferred share and warrant investments in Gelesis, which were considered to be long-term interests in Gelesis.
2022
On January 13, 2022, Gelesis completed its business combination with Capstar Special Purpose Acquisition Corp ("Capstar"). As part of the business combination, all shares in Gelesis, common and preferred, including the shares held by the Group, were exchanged for common shares of the merged entity and unvested common shares that will vest upon the stock price of the new combined entity reaching certain target prices (hereinafter "Gelesis Earn-out Shares"). In addition, the Group invested $
15,000
in the class A common shares of Capstar as part of the Private Investment in Public Equity ("PIPE") transaction that took place immediately prior to the closing of the business combination and an additional approximately $
4,961
, as part of the Backstop agreement signed with Capstar on December 30, 2021 (See Note 6. Investments in Associates). Pursuant to the business combination, Gelesis became a wholly-owned subsidiary of Capstar and Capstar changed its name to Gelesis Holdings, Inc., which began trading on the New York Stock Exchange under the ticker symbol "GLS" on January 14, 2022. The exchange of the preferred stock (including warrants) for common stock (including common stock warrants) represents an additional investment in Gelesis equity investment. The Group recorded the changes in fair value of the preferred stock and warrants through the date of the exchange upon which the preferred shares and warrants were derecognized and recorded as an additional investment in
F-23
Gelesis equity interest. All equity method losses allocated in prior periods against the investment in Gelesis held at fair value were reclassified to include within the equity method investment in Gelesis and were offset against the gain on dilution of interest.
As part of the aforementioned exchange, the Group received
4,526,622
Gelesis Earn-out Shares, which were valued on the date of the exchange at $
14,214
. The Group accounted for such Gelesis Earn-out Shares under IFRS 9 as investments held at fair value with changes in fair value recorded through profit and loss.
2023
In February and May 2023, as part of Gelesis' issuance of senior secured promissory notes to the Group, Gelesis also issued to the Group (i) warrants to purchase
23,688,047
shares of Gelesis common stock with an exercise price of $
0.2744
per share (ii) warrants to purchase
192,307,692
shares of Gelesis common stock at an exercise price of $
0.0182
per share and (iii) warrants to purchase
43,133,803
shares of Gelesis common stock at an exercise price of $
0.0142
per share. These warrants expire
five years
after issuance and are collectively referred to as the Gelesis 2023 Warrants.
The Gelesis 2023 Warrants were recorded at their initial fair value of $
1,121
and then subsequently re-measured to fair value through the profit and loss. As of December 31, 2023, the fair value of the Gelesis 2023 Warrants was $
0
as Gelesis ceased operations in October 2023
.
During the years ended December 31, 2023, 2022 and 2021, the Group recognized a loss of $
1,264
, a loss of $
18,476
and a gain of $
34,566
, respectively, related to the change in the fair value of these instruments that was included in gain/(loss) on investments held at fair value within the Consolidated Statement of Comprehensive Income/(Loss).
Sonde
On May 25, 2022, Sonde completed a Series B preferred share financing, which resulted in the Group losing control over Sonde and the deconsolidation of Sonde. Therefore, the results of operations of Sonde are included in the Consolidated Financial Statements through the date of deconsolidation.
Upon deconsolidation, the Group derecognized its assets and liabilities and non-controlling interest in respect of Sonde and recorded its aforementioned investments in Sonde at fair value. The deconsolidation resulted in a gain of $
27,251
. As of the date of deconsolidation, the investment in Sonde preferred shares held at fair value amounted to $
11,168
.
Following deconsolidation, the Group had significant influence in Sonde through its
48.2
% voting interest in Sonde and its remaining representation on Sonde's Board of Directors. The Group holds Preferred A-1, A-2 and B shares. The Preferred A-1 shares have the same terms as common stock and provide their shareholders with access to returns associated with a residual equity ownership in Sonde. Consequently, the investment in Preferred A-1 shares is accounted for under the equity method. The convertible Preferred A-2 and B shares do not provide their shareholders with access to returns associated with a residual equity interest and as such are accounted for under IFRS 9, as investments held at fair value with changes in fair value recorded in profit and loss. Under IFRS 9, the A-2 and B preferred share investments are categorized as debt instruments that are presented at fair value through profit and loss because the amounts receivable do not represent solely payments of principal and interest.
During the years ended December 31, 2023 and 2022, the Group recognized a loss of $
994
, and a gain of $
235
, respectively, for the changes in the fair value of the investment in Sonde that were included in gain/(loss) on investments held at fair value within the Consolidated Statement of Comprehensive Income/(Loss). The fair value of the Group’s investment in Sonde is $
10,408
as of December 31, 2023.
Akili
Akili was deconsolidated in 2018. At time of deconsolidation, as the Group did not hold common shares in Akili and the preferred shares it held did not have equity-like features. Therefore, the preferred shares held by the Group fell under the guidance of IFRS 9 and were treated as a financial asset held at fair value and changes to the fair value of the preferred shares were recorded through the Consolidated Statement of Comprehensive Income/(Loss), in accordance with IFRS 9.
On May 25, 2021, Akili completed its Series D financing for gross proceeds of $
110,000
in which Akili issued
13,053,508
Series D preferred shares. The Group did not participate in this round of financing and as a result, the Group's interest in Akili was reduced from
41.9
percent to
27.5
percent.
On August 19, 2022, Akili Interactive merged with Social Capital Suvretta Holdings Corp. I, a special purpose acquisition company. The combined company's securities began trading on August 22, 2022 on the Nasdaq Stock Market under the ticker symbol "AKLI". As part of this transaction, the Akili Interactive shares held by the Group were exchanged for the common stock of the combined company's securities as well as unvested common stock ("Akili Earnout Shares") that will vest when the share price exceeds certain thresholds. In addition, as part of a PIPE transaction that took place concurrently with the closing of the transaction, the Group purchased
500,000
shares for a total consideration of $
5,000
. Following the closing of the aforementioned transactions, the Group holds
12,527,477
shares of the combined entity and
1,433,914
Akili Earn-out Shares, with fair value amounted to $
6,422
as of December 31, 2023.
During the years ended December 31, 2023, 2022 and 2021, the Group recognized a loss of $
8,681
, a loss of $
131,419
, and a gain of $
32,151
, respectively, for the changes in the fair value of the investment in Akili that were included in gain/(loss) on investments held at fair value within the Consolidated Statement of Comprehensive Income/(Loss).
6.
Investments in Associates
Gelesis
Gelesis was founded by the Group and raised funding through preferred shares financings as well as issuances of warrants and loans. As of July 1, 2019, Gelesis was deconsolidated from the Group’s financial statements. Upon deconsolidation, the preferred shares and warrants held by the Group fell under the guidance of IFRS 9
Financial Instruments
and were treated as financial assets held at fair value and the investment in common shares of Gelesis was subject to IAS 28
Investment in Associates
as the Group had significant influence over Gelesis.
F-24
2021
Due to the Group's share in the losses of Gelesis, in 2020, the Group's investment in Gelesis accounted for under the equity method was reduced to
zero
. Since the Group had investments in Gelesis warrants and preferred shares that were deemed to be long-term interests, the Group continued recognizing its share in Gelesis losses while applying such losses to its preferred share and warrant investment in Gelesis accounted for as an investment held at fair value. In 2021, total investment in Gelesis, including the long-term interests, was reduced to
zero
. Since the Group did not incur legal or constructive obligations or made payments on behalf of Gelesis, the Group discontinued recognizing equity method losses in 2021. As of December 31, 2021, unrecognized equity method losses amounted to $
38,101
, which included $
709
of unrecognized other comprehensive loss.
During 2021, due to exercise of stock options into common shares in Gelesis, the Group's equity interest in Gelesis was reduced from
47.9
percent at December 31, 2020 to
42.0
percent as of December 31, 2021. The gain resulting from the issuance of shares to third parties and the resulting reduction in the Group's share in the accumulated deficit of Gelesis under the equity method was fully offset by the unrecognized equity method losses.
Backstop agreement – 2022 and 2021
On December 30, 2021, the Group signed a Backstop agreement with Capstar and had committed to acquire Capstar class A common shares at $
10
per share immediately prior to the closing of the business combination between Gelesis and Capstar, in case, the Available Funds, as defined in the agreement, were less than $
15,000
. According to the Backstop agreement, if the Group had to acquire any shares under the agreement, the Group would receive an additional
1,322,500
class A common shares of Capstar at
no
additional consideration.
The Group determined that such agreement meets the definition of a derivative under IFRS 9 and as such should be recorded at fair value with changes in fair value recorded through profit and loss. The derivative was initially recorded at fair value adjusted to defer the day 1 gain equal to the difference between the fair value of $
11,200
and transaction price of
zero
on the effective date of the Backstop agreement and as such was initially recorded at
zero
. The deferred gain was amortized over the period from the effective date until settlement date, January 13, 2022. During the years ended December 31, 2022 and 2021, the Group recognized income of $
10,400
and $
800
, respectively, for the amortization of the deferred gain. During the year ended December 31, 2022, the Group recognized a loss of $
2,776
in respect of the decrease in the fair value of the derivative until the settlement date, resulting in a net gain of $
7,624
recorded during the year ended December 31, 2022 in respect of the Backstop agreement. The gain was included in other Income/(expense) in the Consolidated Statement of Comprehensive Income/(Loss). The fair value of the derivative on the settlement date in the amount of $
8,424
represents an additional investment in Gelesis as part of the SPAC transaction described below.
On January 13, 2022, as part of the conclusion of the aforementioned Backstop agreement, the Group acquired
496,145
class A common shares of Capstar for $
4,961
and received an additional
1,322,500
class A common shares of Capstar for
no
additional consideration.
2022
Share exchange – Capstar
On January 13, 2022, Gelesis completed its business combination with Capstar. As part of the business combination, all shares in Gelesis, common and preferred, including the shares held by the Group, were exchanged for common shares of the merged entity and unvested common shares that will vest upon the stock price of the new combined entity reaching certain target prices (the "Gelesis Earn-out Shares"). In addition, the Group invested $
15,000
in the class A common shares of Capstar as part of the PIPE transaction that took place immediately prior to the closing of the business combination and an additional $
4,961
, as part of the Backstop agreement described above. Pursuant to the business combination, Gelesis became a wholly-owned subsidiary of Capstar and Capstar changed its name to Gelesis Holdings, Inc., which began trading on the New York Stock Exchange under the ticker symbol "GLS" on January 14, 2022. Following the closing of the business combination, the PIPE transaction, the settlement of the aforementioned Backstop agreement with Capstar, and the exchange of all preferred shares in Gelesis to common shares in the new combined entity, the Group holds
16,727,582
common shares of Gelesis Holdings Inc., which was equal to approximately
23.2
% of Gelesis Holdings Inc's outstanding common shares at the time of the exchange. Due to the Group's significant equity holding and voting interest in Gelesis, the Group continued to maintain significant influence in Gelesis and as such continued to account for its Gelesis equity investment under the equity method.
Gelesis was deemed to be the acquirer in Gelesis Holdings Inc. and the financial assets and financial liabilities in Capstar were deemed to be acquired by Gelesis in consideration for the shares held by Capstar legacy shareholders. As such, the Group did not revalue the retained investment in Gelesis but rather treated the exchange as a dilution of its equity interest in Gelesis from
42.0
percent as of December 31, 2021 to
22.8
percent as of January 13, 2022 (including warrants that provide its holders access to returns associated with equity holders). After considering the aforementioned additional investments, the exchange of the preferred stock, previously accounted for as an investment held at fair value, to common stock (and representing an additional equity investment in Gelesis), the earn-out shares received in Gelesis (see Note 5. Investments Held at Fair Value) and the offset of previously unrecognized equity method losses, the net gain recorded on the dilution of interest amounted to $
28,255
.
Impairment
Following Gelesis’ decline in its market price in 2022 and its lack of liquidity, the Group recorded an impairment loss of $
8,390
as of December 31, 2022 in respect of its investment in Gelesis. The recoverable amount of the investment in Gelesis was $
4,910
as of December 31, 2022, which was determined based on fair value less costs to sell (which were estimated to be insignificant). Fair value was determined based on level 1 of the fair value hierarchy as Gelesis shares were traded on an active market as of December 31, 2022.
The impairment loss was presented separately in the Consolidated Statement of Comprehensive Income/(loss) for the year ended December 31, 2022 in the line item impairment of investment in associates.
2023
During the year ended December 31, 2023, the Group entered into agreements with Gelesis to purchase senior secured convertible promissory notes and warrants for shares of Gelesis common stock (see Note 7. Investment in Notes from Associates). The warrants to purchase shares of Gelesis common stock represented potential voting rights to the Group and it is therefore
F-25
necessary to consider whether they were substantive. If these potential voting rights were substantive and the Group had the practical ability to exercise the rights and take control of greater than 50% of Gelesis common stock, the Group would be required to consolidate Gelesis under the accounting standards.
In February 2023, the Group obtained warrants to purchase
23,688,047
shares of Gelesis common stock (the “February Warrants”) at an exercise price of $
0.2744
per share. The exercise of the February Warrants was subject to the approval of the Gelesis stockholders until May 1, 2023. On May 1, 2023, stockholder approval was no longer required for the Group to exercise the February Warrants. The potential voting rights associated with the February Warrants were not substantive as the exercise price of the February Warrants was at a significant premium to the fair value of the Gelesis common stock.
In May 2023, the Group obtained warrants to purchase
235,441,495
shares of Gelesis common stock (the “May Warrants”). The May Warrants were exercisable at the option of the Group and had an exercise price of either $
0.0182
or $
0.0142
. The May Warrants were substantive as the Group would have benefited from exercising such warrants since their exercise price was at the money or at an insignificant premium over the fair value of the Gelesis common stock. However, that benefit from exercising the May Warrants only existed for a short period of time because in June 2023, the potential voting rights associated with the May Warrants were impacted by the terms and conditions of the Merger Agreement as described below and were no longer substantive.
In October 2023, the Group terminated the Merger Agreement with Gelesis and the potential voting rights associated with the May Warrants were not substantive. Also, in October 2023, Gelesis ceased operations and filed a voluntary petition for relief under the provisions of Chapter 7 of Title 11 of the United States Bankruptcy Code. A Chapter 7 trustee has been appointed by the Bankruptcy Court who has control over the assets and liabilities of Gelesis, effectively eliminating the authority and powers of the Board of Directors of Gelesis and its executive officers to act on behalf of Gelesis. The assets of Gelesis will be liquidated and Gelesis no longer has any officers or employees. The Group ceased accounting for Gelesis as an equity method investment as it no longer had significant influence in Gelesis. During the year ended December 31, 2023, the Group recorded $
4,910
as its share in the losses of Gelesis and the Group’s balance in this equity method investment was
zero
as of December 31, 2023.
Merger Agreement
On June 12, 2023, PureTech Health LLC and Caviar Merger Sub LLC, a Delaware limited liability company and a wholly-owned subsidiary of PureTech (“Merger Sub”), entered into an agreement (the "Merger Agreement"), pursuant to which Gelesis would merge with and into Merger Sub, with Merger Sub continuing as the surviving company ( the “Merger”). If the Merger had been completed, PureTech would have acquired all issued and outstanding shares of common stock of Gelesis not otherwise held by PureTech, and Gelesis would have become an indirect wholly-owned subsidiary of PureTech. On October 12, 2023, the Group terminated the Merger Agreement.
Sonde
On May 25, 2022, Sonde completed a Series B preferred share financing. As a result of the aforementioned financing, the Group's voting interest was reduced below 50% and the Group lost its control over Sonde and as such ceased to consolidate Sonde on the date the round of financing was completed.
Following deconsolidation, the Group has significant influence in Sonde through its voting interest in Sonde and its remaining representation on Sonde's Board of Directors. The Group's voting interest at date of deconsolidation and as of December 31, 2022 was
48.2
% and
40.17
%, respectively. The Group holds Preferred A-1, A-2 and B shares. The Preferred A-1 shares, in substance, have the same terms as common stock and as such provide their shareholders with access to returns associated with a residual equity ownership in Sonde. Consequently, the investment in Preferred A-1 shares is accounted for under the equity method. The Preferred A-2 and B shares, however, do not provide their shareholders with access to returns associated with a residual equity interest and as such are accounted for under IFRS 9, as investments held at fair value.
The fair value of the Preferred A-1 shares on the date of deconsolidation amounted to $
7,716
, which is the initial value of the equity method investment in Sonde.
During the years ended December 31, 2023 and 2022, the Group recorded losses of $
1,052
and $
3,443
, respectively, related to Sonde's equity method of accounting. As of December 31, 2023, the Sonde equity method investment has a balance of $
3,185
.
The following table summarizes the activity related to the investment in associates balance for the years ended December 31, 2023 and 2022.
| Investment in Associates |
$
|
||||
|
As of January 1, 2022
|
|
||||
| Cash investment in associates |
|
||||
| Additional investment as a result of settling the Backstop agreement (see above) |
|
||||
| Gain on dilution of interest in associate (*) |
|
||||
| Investment in Sonde - deconsolidation |
|
||||
| Share in net loss of associates |
(
|
||||
| Reversal of equity method losses recorded against LTI (due to decrease in the fair value of such LTI): |
(
|
||||
| Share in other comprehensive loss of associates |
(
|
||||
| Impairment |
(
|
||||
|
As of December 31, 2022 and January 1, 2023
|
|
||||
| Share in net loss of associates |
(
|
||||
| Share in other comprehensive income of associates |
|
||||
| As of December 31, 2023 |
|
||||
* Gain on dilution of interest was further increased due to the receipt of Gelesis Earn-out Shares accounted for as investments held at fair value (see above).
F-26
Summarized financial information
The following table summarizes the financial information of Gelesis as of December 31, 2022 and for the years ended December 31, 2022 and 2021, as included in its own financial statements, adjusted for fair value adjustments at deconsolidation and differences in accounting policies. The table also reconciles the summarized financial information to the carrying amount of the Group’s interest in Gelesis. As of December 31, 2023, the Group’s investment in Gelesis is $
0
and Gelesis does not represent a significant equity method investment. As a result, such a disclosure for Gelesis is not presented for the year ended December 31, 2023.
|
2022
$
|
||||||||
| As of and for the year ended December 31, | ||||||||
| Percentage ownership interest |
|
% | ||||||
| Non-current assets |
|
|||||||
| Current assets |
|
|||||||
| Non-current liabilities |
(
|
|||||||
| Current liabilities |
(
|
|||||||
| Non-controlling interests and options issued to third parties |
(
|
|||||||
| Net assets (deficit) attributable to shareholders of Gelesis Inc. |
|
|||||||
| Group's share of net assets (net deficit) |
|
|||||||
| Goodwill |
|
|||||||
| Impairment |
(
|
|||||||
| Investment in associates |
|
|||||||
|
2022
$
|
2021
$
|
|||||||
| Revenue |
|
|
||||||
| Loss from continuing operations (100%) |
(
|
(
|
||||||
| Total comprehensive loss (100%) |
(
|
(
|
||||||
| Group's share in net losses - limited to net investment amount (*) |
(
|
(
|
||||||
| Group's share of total comprehensive loss - limited to net investment amount |
(
|
(
|
||||||
* For the year ended December 31, 2022, the amount includes $
4,406
reversal of equity method losses recorded against long-term Interests ("LTI") due to the decrease in fair value of such LTI.
F-27
7.
Investment in Notes from Associates
Gelesis
Unsecured Promissory Note
On July 27, 2022, the Group, as a lender, entered into an unsecured promissory note (the "Junior Note") with Gelesis, as a borrower, in the amount of $
15,000
. The Junior Note bears an annual interest rate of
15
% per annum. The maturity date of the Junior Note is the earlier of December 31, 2023 or
five
business days following the consummation of a qualified financing by Gelesis. Based on the terms of the Junior Note, due to the option to convert to a variable amount of shares at the time of default, the Junior Note is required to be measured at fair value with changes in fair value recorded through profit and loss.
As of December 31, 2023 and December 31, 2022 the fair value of the Junior Note was $
0
and $
16,501
, respectively. In the year ended December 31, 2023, the Group recorded a loss of $
16,501
for the change in the fair value of the Junior Note which was included in gain/(loss) on investments in notes from associates within the Consolidated Statement of Comprehensive Income/(Loss). The fair value of the Junior Note was determined to be $
0
as of December 31, 2023 as Gelesis has ceased operations and filed for bankruptcy. In the year ended December 31, 2022, the Group recorded interest income of $
963
and a gain of $
539
for the change in the fair value of the Junior Note which was included in other income/(expense) in the Consolidated Statement of Comprehensive Income/(Loss).
Senior Secured Convertible Promissory Notes
During the year ended December 31, 2023, the Group entered into multiple agreements with Gelesis to purchase for $
11,850
senior secured convertible promissory notes (the "Senior Notes") and warrants for share of Gelesis common stock. The initial fair value of the Senior Notes was determined to be $
10,729
while $
1,121
was determined to be the initial fair value of the warrants. The Senior Notes represent debt instruments that are presented at fair value through profit and loss as the amounts receivable do not solely represent payments of principal and interest as the Senior Notes are convertible into Gelesis common stock.
The Senior Notes are secured by a first-priority lien on substantially all assets of Gelesis and the guarantors (other than the equity interests in, and assets held by Gelesis s.r.l., a subsidiary of Gelesis, and certain other exceptions).
In October 2023, Gelesis ceased operations and filed a voluntary petition for relief under the provisions of Chapter 7 of Title 11 of the United States Bankruptcy Code. Therefore, the Group determined that the fair value of the Senior Notes was $
0
as of December 31, 2023 and the Group recorded a loss of $
10,729
for the changes in the fair value of the Senior Notes. The loss was included in gain/(loss) on investments in notes from associates in the Consolidated Statement of Comprehensive Income/(Loss).
Vedanta
On April 24, 2023, Vedanta closed the second tranche of its convertible debt for additional proceeds of $
18,000
, of which $
5,000
were invested by the Group. The convertible debt carries an interest rate of
9
percent per annum. The debt has various conversion triggers and the conversion price is established at the lower of
80
% of the equity price of the last financing round, or a certain pre-money valuation cap established in the agreement. If the convertible debt is not earlier converted or repaid, the entire outstanding amount of the convertible debt shall be due and payable upon the earliest to occur of (a) the later of (x) November 1, 2025 and (y) the date which is sixty (
60
) days after all amounts owed under, or in connection with, the loan Vedanta received from a certain investor have been paid in full, or (b) the consummation of a Deemed Liquidation Event (as defined in Vedanta’s Amended and Restated Certificate of Incorporation).
Due to the terms of the convertible debt, the investment in such convertible debt is measured at fair value with changes in the fair value recorded through profit and loss. During the years ended December 31, 2023, the Group recorded a loss of $
400
for the changes in the fair value of the Vedanta convertible debt which was included in gain/(loss) on investments in notes from associates in the Consolidated Statement of Comprehensive Income/(Loss).
Following is the activity in respect of investments in notes from associates during the periods
.
The fair value of the $
4,600
note from associate as of December 31, 2023 is determined using unobservable Level 3 inputs. See Note 18. Financial Instruments for additional information.
| Investment in notes from associates |
$
|
||||
| Balance as of January 1, 2022 |
|
||||
|
Investment In Gelesis notes
|
|
||||
|
Changes in the fair value of the notes
|
|
||||
|
Balance as of December 31, 2022 and January 1, 2023
|
|
||||
|
Investment In Gelesis notes
|
|
||||
| Investment in Vedanta convertible debt |
|
||||
|
Changes in the fair value of the notes and convertible debt
|
(
|
||||
|
Balance as of December 31, 2023
|
|
||||
F-28
8.
Operating Expenses
Total operating expenses were as follows:
| For the years ending December 31, |
2023
$
|
2022
$
|
2021
$
|
||||||||
| General and administrative |
|
|
|
||||||||
| Research and development |
|
|
|
||||||||
| Total operating expenses |
|
|
|
||||||||
The average number of persons employed by the Group during the year, analyzed by category, was as follows:
| For the years ending December 31, |
2023
|
2022
|
2021
|
||||||||
| General and administrative |
|
|
|
||||||||
| Research and development |
|
|
|
||||||||
| Total |
|
|
|
||||||||
The aggregate payroll costs of these persons were as follows:
|
2023
$
|
2022
$
|
2021
$
|
|||||||||
| For the years ending December 31, | |||||||||||
| General and administrative |
|
|
|
||||||||
| Research and development |
|
|
|
||||||||
| Total |
|
|
|
||||||||
Detailed operating expenses were as follows:
|
2023
$
|
2022
$
|
2021
$
|
|||||||||
| For the years ending December 31, | |||||||||||
| Salaries and wages |
|
|
|
||||||||
|
Healthcare and other benefits
|
|
|
|
||||||||
| Payroll taxes |
|
|
|
||||||||
| Share-based payments |
|
|
|
||||||||
| Total payroll costs |
|
|
|
||||||||
|
Amortization
|
|
|
|
||||||||
|
Depreciation
|
|
|
|
||||||||
|
Total amortization and depreciation expenses
|
|
|
|
||||||||
| Other general and administrative expenses |
|
|
|
||||||||
| Other research and development expenses |
|
|
|
||||||||
| Total other operating expenses |
|
|
|
||||||||
| Total operating expenses |
|
|
|
||||||||
Please refer to Note 9. Share-based Payments for further disclosures related to share-based payments and Note 26. Related Parties Transactions for management’s remuneration disclosures.
F-29
9.
Share-based Payments
Share-based payments includes stock options, time-based restricted stock units (“RSUs”) and performance-based RSUs in which the expense is recognized based on the grant date fair value of these awards, except for performance-based RSUs to executives that are treated as liability awards where expense is recognized based on reporting date fair value up until settlement date.
Share-based Payment Expense
The Group's share-based payment expense for the years ended December 31, 2023, 2022 and 2021, was $
4,415
, $
14,699
, and $
13,950
respectively.
The following table provides the classification of the Group’s consolidated share-based payment expense as reflected in the Consolidated Statement of Income/(Loss):
|
Year ended December 31,
|
2023
$
|
2022
$
|
2021
$
|
||||||||
| General and administrative |
|
|
|
||||||||
| Research and development |
|
|
|
||||||||
| Total |
|
|
|
||||||||
The Performance Share Plan
In June 2015, the Group adopted the Performance Stock Plan (the “2015 PSP”). Under the 2015 PSP and subsequent amendments, awards of ordinary shares may be made to the Directors, senior managers and employees, and other individuals providing services to the Group up to a maximum authorized amount of
10.0
percent of the total ordinary shares outstanding. The shares have various vesting terms over a period of service between
and
four years
, provided the recipient remains continuously engaged as a service provider. The options awards expire
10
years from the grant date.
In June 2023 the Group adopted a new Performance Stock Plan (the "2023 PSP") that has the same terms as the 2015 PSP but instituted for all new awards a limit of
10.0
percent of the total ordinary shares outstanding over a
five-year
period.
The share-based awards granted under the PSPs are generally equity-settled (see cash settlements below). As of December 31, 2023, the Group had issued
27,384,777
units of share-based awards under these plans.
RSUs
RSU activity for the years ended December 31, 2023, 2022 and 2021 is detailed as follows:
| Number of Shares/Units |
Weighted Average Grant Date Fair Value (GBP) (*)
|
|||||||
| Outstanding (Non-vested) at January 1, 2021 |
|
|
||||||
| RSUs Granted in Period |
|
|
||||||
| Vested |
(
|
|
||||||
| Forfeited |
(
|
|
||||||
| Outstanding (Non-vested) at December 31, 2021 and January 1, 2022 |
|
|
||||||
| RSUs Granted in Period |
|
|
||||||
| Vested |
(
|
|
||||||
| Forfeited |
(
|
|
||||||
| Outstanding (Non-vested) at December 31, 2022 and January 1, 2023 |
|
|
||||||
| RSUs Granted in Period |
|
|
||||||
| Vested |
(
|
|
||||||
| Forfeited |
(
|
|
||||||
| Outstanding (Non-vested) at December 31, 2023 |
|
|
||||||
* For liability awards - based on fair value at reporting date.
Each RSU entitles the holder to
one
ordinary share on vesting and the RSU awards are generally based on a vesting schedule over a
to
three-year
requisite service period in which the Group recognizes compensation expense for the RSUs. Following vesting, each recipient will be required to make a payment of
one
pence per ordinary share on settlement of the RSUs.
RSUs granted to the non-executive directors are time-based and equity-settled. The grant date fair value on such RSUs is recognized over the vesting term.
RSUs granted to executives are performance-based and vesting of such RSUs is subject to the satisfaction of both performance and market conditions. The performance condition is based on the achievement of the Group's strategic targets. The market conditions are based on the achievement of the absolute total shareholder return (“TSR”), TSR as compared to the FTSE 250 Index, and TSR as compared to the MSCI Europe Health Care Index. The RSU award performance criteria have changed over time as the criteria are continually evaluated by the Group’s Remuneration Committee.
The Group recognizes the estimated fair value of performance-based awards with non-market conditions as share-based compensation expense over the performance period based upon its determination of whether it is probable that the performance targets will be achieved. The Group assesses the probability of achieving the performance targets at each reporting period. Cumulative adjustments, if any, are recorded to reflect subsequent changes in the estimated outcome of performance-related conditions.
The fair value of the performance-based awards with market conditions is based on the Monte Carlo simulation analysis utilizing a Geometric Brownian Motion process with
100,000
simulations to value those shares. The model considers share price volatility, risk-free rate and other covariance of comparable public companies and other market data to predict distribution of relative share performance.
F-30
Liability settled RSUs classification
The RSUs to executives are treated as liability awards as the Group has a historical practice of settling these awards in cash, and as such adjusted to fair value at every reporting date until settlement with changes in fair value recorded in earnings as stock based compensation expense.
The Group incurred share-based payment expenses for RSUs of $
827
(including $
402
expense in respect of RSU liability awards), $
1,637
(including $
1,131
expense in respect of RSU liability awards), and $
1,540
(including $
589
expense in respect of RSU liability awards) for the years ended December 31, 2023, 2022 and 2021, respectively. The decrease in the share-based compensation expense in respect of the RSUs for the year ended December 31, 2023, as compared to the year ended December 31, 2022 is due to reduction in the fair value of the liability awards.
As of December 31, 2023, the carrying amount of the RSU liability awards was $
4,782
, $
1,281
current; $
3,501
non current, out of which $
1,283
related to awards that have met all their performance and market conditions.
Stock Options
Stock option activity for the years ended December 31, 2023, 2022 and 2021, is detailed as follows:
| Number of Options | Wtd Average Exercise Price (GBP) |
Wtd Average of
remaining contractual term (in years) |
Wtd Average Stock Price at Exercise (GBP) | |||||||||||
| Outstanding at January 1, 2021 |
|
|
|
|||||||||||
| Granted |
|
|
||||||||||||
| Exercised |
(
|
|
|
|||||||||||
| Forfeited and expired |
(
|
|
||||||||||||
| Options Exercisable at December 31, 2021 and January 1, 2022 |
|
|
|
|||||||||||
| Outstanding at December 31, 2021 and January 1, 2022 |
|
|
|
|||||||||||
| Granted |
|
|
||||||||||||
| Exercised |
(
|
|
|
|||||||||||
| Forfeited and expired |
(
|
|
||||||||||||
| Options Exercisable at December 31, 2022 and January 1, 2023 |
|
|
|
|||||||||||
| Outstanding at December 31, 2022 and January 1, 2023 |
|
|
|
|||||||||||
| Granted |
|
|
||||||||||||
| Exercised |
(
|
|
|
|||||||||||
| Forfeited and expired |
(
|
|
||||||||||||
| Options Exercisable at December 31, 2023 |
|
|
|
|||||||||||
| Outstanding at December 31, 2023 |
|
|
|
|||||||||||
The fair value of the stock options awarded by the Group was estimated at the grant date using the Black-Scholes option valuation model, considering the terms and conditions upon which options were granted, with the following weighted-average assumptions:
|
At December 31,
|
2023
|
2022
|
2021
|
||||||||
| Expected volatility |
|
% |
|
% |
|
% | |||||
| Expected terms (in years) |
|
|
|
||||||||
| Risk-free interest rate |
|
% |
|
% |
|
% | |||||
| Expected dividend yield |
|
|
|
||||||||
| Exercise price (GBP) |
|
|
|
||||||||
| Underlying stock price (GBP) |
|
|
|
||||||||
These assumptions resulted in an estimated weighted-average grant-date fair value per share of stock options granted during the years ended December 31, 2023, 2022 and 2021 of $
1.37
,$
1.15
and $
1.87
, respectively.
The Group incurred share-based payment expense for the stock options of $
3,310
, $
8,351
and $
6,158
for the years ended December 31, 2023, 2022 and 2021, respectively.
For shares outstanding as of December 31, 2023, the range of exercise prices is detailed as follows:
| Range of Exercise Prices (GBP) |
Options
Outstanding |
Wtd
Average Exercise Price (GBP) |
Wtd Average of
remaining contractual term (in years) |
||||||||
|
|
|
|
|
||||||||
|
|
|
|
|
||||||||
|
|
|
|
|
||||||||
|
|
|
|
|
||||||||
| Total |
|
|
|
||||||||
F-31
Subsidiary Plans
Certain subsidiaries of the Group have adopted stock option plans.
A summary of stock option activity by number of shares in these subsidiaries is presented in the following table:
|
Outstanding as of January 1, 2023
|
Granted During the Year | Exercised During the Year | Expired During the Year | Forfeited During the Year | Deconsolidation During the Year |
Outstanding as of December 31, 2023
|
|||||||||||||||||
| Entrega |
|
|
|
|
|
|
|
||||||||||||||||
| Follica |
|
|
|
(
|
(
|
|
|
||||||||||||||||
| Vedanta |
|
|
|
(
|
(
|
(
|
|
||||||||||||||||
|
Outstanding as of January 1, 2022
|
Granted During the Year | Exercised During the Year | Expired During the Year | Forfeited During the Year | Deconsolidation During the Year |
Outstanding as of December 31, 2022
|
|||||||||||||||||
| Entrega |
|
|
|
(
|
|
|
|
||||||||||||||||
| Follica |
|
|
|
|
|
|
|
||||||||||||||||
| Sonde |
|
|
|
|
|
(
|
|
||||||||||||||||
| Vedanta |
|
|
(
|
(
|
(
|
|
|
||||||||||||||||
|
Outstanding as of January 1, 2021
|
Granted During the Year | Exercised During the Year | Expired During the Year | Forfeited During the Year | Deconsolidation During the Year |
Outstanding as of December 31, 2021
|
|||||||||||||||||
| Alivio |
|
|
(
|
(
|
(
|
|
|
||||||||||||||||
| Entrega |
|
|
(
|
(
|
|
|
|
||||||||||||||||
| Follica |
|
|
|
(
|
|
|
|
||||||||||||||||
| Sonde |
|
|
|
(
|
(
|
|
|
||||||||||||||||
| Vedanta |
|
|
(
|
(
|
(
|
|
|
||||||||||||||||
The weighted-average exercise prices and remaining contractual life for the options outstanding as of December 31, 2023, were as follows:
|
Outstanding at December 31, 2023
|
Number of options |
Weighted-average exercise price
$
|
Weighted-average contractual life outstanding | ||||||||
| Entrega |
|
|
|
||||||||
There were no grants in 2023 under any of the subsidiary option plans.
The weighted average exercise prices for the options granted for the years ended December 31, 2022 and 2021, were as follows:
|
For the years ended December 31,
|
2022
$
|
2021
$
|
||||||
| Entrega |
|
|
||||||
| Follica |
|
|
||||||
|
Vedanta
|
|
|
||||||
The weighted average exercise prices for options forfeited during the year ended December 31, 2023, were as follows:
| Forfeited during the year ended December 31, 2023 | Number of options |
Weighted-average exercise price
$
|
||||||
| Follica |
|
|
||||||
| Vedanta |
|
|
||||||
The weighted average exercise prices for options exercisable as of December 31, 2023, were as follows:
| Exercisable at December 31, 2023 | Number of Options |
Weighted-average exercise price
$
|
Exercise Price Range
$ |
||||||||
| Entrega |
|
|
|
||||||||
There were
no
subsidiary options exercised during the year ended December 31, 2023.
F-32
10.
Finance Income/(Costs), net
The following table shows the breakdown of finance income and costs:
|
2023
$
|
2022
$
|
2021
$
|
|||||||||
|
For the years ended December 31,
|
|||||||||||
| Finance income | |||||||||||
| Interest income from financial assets |
|
|
|
||||||||
| Total finance income |
|
|
|
||||||||
| Finance costs | |||||||||||
| Contractual interest expense on notes payable |
(
|
(
|
(
|
||||||||
| Interest expense on other borrowings |
(
|
(
|
(
|
||||||||
| Interest expense on lease liability |
(
|
(
|
(
|
||||||||
| Gain/(loss) on foreign currency exchange |
(
|
|
(
|
||||||||
| Total finance cost – contractual |
(
|
(
|
(
|
||||||||
| Gain/(loss) from change in fair value of warrant liability |
|
|
|
||||||||
| Gain/(loss) from change in fair value of preferred shares |
|
|
|
||||||||
| Gain/(loss) from change in fair value of convertible debt |
|
(
|
(
|
||||||||
| Total finance income/(costs) – fair value accounting |
|
|
|
||||||||
| Total finance costs - non cash interest expense related to sale of future royalties |
(
|
|
|
||||||||
| Finance income/(costs), net |
|
|
|
||||||||
F-33
11.
Earnings/(Loss) per Share
Basic earnings/(loss) per share is calculated by dividing the Group's net income or loss for the year attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding, net of treasury shares.
Diluted EPS is calculated by dividing the Group's net income or loss for the year by the weighted average number of ordinary shares outstanding, net of treasury shares, plus the weighted average number of ordinary shares that would be issued at conversion of all the dilutive potential ordinary shares into ordinary shares. Dilutive effects arise from equity-settled shares from the Group's share-based plans.
For the years ended December 31, 2023, 2022 and 2021, the Group incurred a net loss and therefore all outstanding potential securities were considered anti-dilutive. The amount of potential securities that were excluded from the diluted calculation amounted to
1,509,900
,
3,134,131
and
6,553,905
shares, respectively.
Earnings/(Loss) Attributable to Owners of the Group:
| 2023 | 2022 | 2021 | ||||||||||||||||||||||||
| Basic $ | Diluted $ | Basic $ | Diluted $ | Basic $ | Diluted $ | |||||||||||||||||||||
| Income/(loss) for the year, attributable to the owners of the Group |
(
|
(
|
(
|
(
|
(
|
(
|
||||||||||||||||||||
Weighted-Average Number of Ordinary Shares:
| 2023 | 2022 | 2021 | ||||||||||||||||||||||||
| Basic | Diluted | Basic | Diluted | Basic | Diluted | |||||||||||||||||||||
| Issued ordinary shares at January 1, |
|
|
|
|
|
|
||||||||||||||||||||
| Effect of shares issued treasury shares purchased |
(
|
(
|
(
|
(
|
|
|
||||||||||||||||||||
| Weighted average number of ordinary shares at December 31, |
|
|
|
|
|
|
||||||||||||||||||||
Earnings/(Loss) per Share:
| 2023 | 2022 | 2021 | ||||||||||||||||||||||||
| Basic $ | Diluted $ | Basic $ | Diluted $ | Basic $ | Diluted $ | |||||||||||||||||||||
| Basic and diluted earnings/(loss) per share |
(
|
(
|
(
|
(
|
(
|
(
|
||||||||||||||||||||
F-34
12.
Property and Equipment
| Cost |
Laboratory and Manufacturing Equipment
$
|
Furniture and
Fixtures
$
|
Computer Equipment and
Software
$
|
Leasehold Improvements
$
|
Construction in
process
$
|
Total
$
|
||||||||||||||
| Balance as of January 1, 2022 |
|
|
|
|
|
|
||||||||||||||
| Additions, net of transfers |
|
|
|
|
|
|
||||||||||||||
| Disposals |
(
|
|
|
|
(
|
(
|
||||||||||||||
| Deconsolidation of subsidiaries |
|
|
(
|
|
|
(
|
||||||||||||||
| Reclassifications |
|
|
|
|
(
|
|
||||||||||||||
| Balance as of December 31, 2022 |
|
|
|
|
|
|
||||||||||||||
| Additions, net of transfers |
|
|
|
|
|
|
||||||||||||||
| Disposals/Impairment |
(
|
|
(
|
|
|
(
|
||||||||||||||
| Deconsolidation of subsidiaries |
(
|
(
|
(
|
(
|
(
|
(
|
||||||||||||||
| Reclassifications |
|
|
|
|
(
|
(
|
||||||||||||||
| Balance as of December 31, 2023 |
|
|
|
|
|
|
||||||||||||||
| Accumulated depreciation and impairment loss |
Laboratory and Manufacturing Equipment
$
|
Furniture and
Fixtures
$
|
Computer Equipment and
Software
$
|
Leasehold Improvements
$
|
Construction in
process
$
|
Total
$
|
||||||||||||||
| Balance as of January 1, 2022 |
(
|
(
|
(
|
(
|
|
(
|
||||||||||||||
| Depreciation |
(
|
(
|
(
|
(
|
|
(
|
||||||||||||||
| Disposals |
|
|
|
|
|
|
||||||||||||||
| Deconsolidation of subsidiaries |
|
|
|
|
|
|
||||||||||||||
| Balance as of December 31, 2022 |
(
|
(
|
(
|
(
|
|
(
|
||||||||||||||
| Depreciation |
(
|
(
|
(
|
(
|
|
(
|
||||||||||||||
| Disposals |
|
|
|
|
|
|
||||||||||||||
| Deconsolidation of subsidiaries |
|
|
|
|
|
|
||||||||||||||
| Balance as of December 31, 2023 |
(
|
(
|
(
|
(
|
|
(
|
||||||||||||||
| Property and Equipment, net |
Laboratory and Manufacturing Equipment
$
|
Furniture and
Fixtures
$
|
Computer Equipment and
Software
$
|
Leasehold Improvements
$
|
Construction in
process
$
|
Total
$
|
||||||||||||||
| Balance as of December 31, 2022 |
|
|
|
|
|
|
||||||||||||||
| Balance as of December 31, 2023 |
|
|
|
|
|
|
||||||||||||||
Depreciation of property and equipment is included in the general and administrative expenses and research and development expenses in the Consolidated Statement of Comprehensive Income/(Loss). The Group recorded depreciation expense of $
2,955
, $
5,845
and $
4,347
for the years ended December 31, 2023, 2022 and 2021, respectively.
13.
Intangible Assets
Intangible assets consist of licenses of intellectual property acquired by the Group through various agreements with third parties and are recorded at the value of the consideration transferred.
Information regarding the cost and accumulated amortization of intangible assets is as follows:
| Cost |
Licenses
$
|
||||
| Balance as of January 1, 2022 |
|
||||
| Additions |
|
||||
| Impairment |
(
|
||||
| Deconsolidation of subsidiary |
(
|
||||
| Balance as of December 31, 2022 |
|
||||
| Additions |
|
||||
| Impairment |
(
|
||||
| Deconsolidation of subsidiaries |
(
|
||||
|
Balance as of December 31, 2023
|
|
||||
F-35
| Accumulated amortization |
Licenses
$
|
||||
| Balance as of January 1, 2022 |
(
|
||||
| Amortization |
(
|
||||
| Deconsolidation of subsidiary |
|
||||
| Balance as of December 31, 2022 |
|
||||
| Amortization |
|
||||
| Deconsolidation of subsidiary |
|
||||
|
Balance as of December 31, 2023
|
|
||||
| Intangible assets, net |
Licenses
$
|
||||
| Balance as of December 31, 2022 |
|
||||
|
Balance as of December 31, 2023
|
|
||||
Substantially all the intangible asset licenses represent in-process-research-and-development assets since they are still being developed and not ready for their intended use. As such, these assets are not amortized but tested for impairment annually.
During the year ended December 31, 2023, the Group wrote off
two
of its research intangible assets for which research was ceased in the amount of $
105
.
During the year ended December 31, 2023, Vedanta , Inc. was deconsolidated and as such, $
19
net in intangible assets were derecognized.
During the year ended December 31,2022, the Group wrote off one of its research intangible assets for which research was ceased in the amount of $
163
.
During the year ended December 31, 2022, Sonde Health, Inc. was deconsolidated and as such, $
18
net intangible assets were derecognized.
The Group tested all intangible assets for impairment as of the balance sheet date and concluded that none of such assets were impaired.
14.
Other Financial Assets
Other financial assets consist primarily of restricted cash reserved as collateral against a letter of credit with a bank that is issued for the benefit of a landlord in lieu of a security deposit for office space leased by the Group. The restricted cash was $
1,628
and $
2,124
as of December 31, 2023 and 2022, respectively.
15.
Equity
Total equity for the Group as of December 31, 2023, and 2022, was as follows:
|
December 31, 2023
$
|
December 31, 2022
$
|
|||||||
| Equity | ||||||||
|
Share capital, £
|
|
|
||||||
| Share premium |
|
|
||||||
|
Treasury shares,
|
(
|
(
|
||||||
| Merger Reserve |
|
|
||||||
| Translation reserve |
|
|
||||||
| Other reserves |
(
|
(
|
||||||
| Retained earnings/(accumulated deficit) |
|
|
||||||
| Equity attributable to owners of the Group |
|
|
||||||
| Non-controlling interests |
(
|
|
||||||
| Total equity |
|
|
||||||
Changes in share capital and share premium relate primarily to incentive options exercises during the period.
Shareholders are entitled to vote on all matters submitted to shareholders for a vote. Each ordinary share is entitled to
one
vote and is entitled to receive dividends when and if declared by the Group’s Directors.
On June 18, 2015, the Group acquired the entire issued share capital of PureTech LLC in return for
159,648,387
ordinary shares. This was accounted for as a common control transaction at cost. It was deemed that the share capital was issued in line with movements in share capital as shown prior to the transaction taking place. In addition, the merger reserve records amounts previously recorded as share premium.
Other reserves comprise the cumulative credit to share-based payment reserves corresponding to share-based payment expenses recognized through Consolidated Statement of Comprehensive Income/(Loss), settlements of vested stock awards as well as other additions that flow directly through equity such as the excess or deficit from changes in ownership of subsidiaries while control is maintained by the Group.
F-36
On May 9, 2022, the Group announced the commencement of a $
50,000
share repurchase program (the "Program") of its ordinary shares of
one
pence each (the “Ordinary Shares”). The Group executed the Program in
two
equal tranches. The Group entered into an irrevocable non-discretionary instruction with Jefferies International Limited (“Jefferies”) in relation to the purchase by Jefferies of the Ordinary Shares for an aggregate consideration (excluding expenses) of no greater than $
25,000
for each tranche, and the simultaneous on-sale of such Ordinary Shares by Jefferies to the Group, subject to certain volume and price restrictions. Jefferies made its trading decisions in relation to the Ordinary Shares independently of, and uninfluenced by, the Group. Purchases could continue during any close period to which the Group was subject. The instruction to Jeffries could be amended or withdrawn so long as the Group was not in a close period or otherwise in possession of inside information.
Any purchases of the Ordinary Shares under the Program were carried out on the London Stock Exchange and could be carried out on any other UK recognized investment exchange in accordance with pre-set parameters and subject to limits prescribed by the Group’s general authority to repurchase the Ordinary Shares granted by its shareholders at its annual general meeting on May 27, 2021, and relevant Rules and Regulations. All Ordinary Shares repurchased under the Program are held in treasury and re-issued for settlement of share-based awards. As of December 31, 2023, the Group had repurchased an aggregate of
18,278,873
Ordinary Shares under the share repurchase program with
7,683,526
shares repurchased in 2023. The Program was completed during the month ended February 2024.
As of December 31, 2023, the Group’s issued share capital was
289,468,159
shares, including
17,614,428
shares repurchased under the Program and were held by the Group in treasury. The Group does not have a limited amount of authorized share capital.
16.
Subsidiary Preferred Shares
Preferred shares issued by subsidiaries often contain redemption and conversion features that are assessed under IFRS 9 in conjunction with the host preferred share instrument. This balance represents subsidiary preferred shares issued to third parties.
The subsidiary preferred shares are redeemable upon the occurrence of a contingent event, other than full liquidation of the Group, that is not considered to be within the control of the Group. Therefore these subsidiary preferred shares are classified as liabilities. These liabilities are measured at fair value through profit and loss. The preferred shares are convertible into ordinary shares of the subsidiaries at the option of the holders and are mandatorily convertible into ordinary shares under certain circumstances. Under certain scenarios, the number of ordinary shares receivable on conversion will change and therefore, the number of shares that will be issued is not fixed. As such the conversion feature is considered to be an embedded derivative that normally would require bifurcation. However, since the preferred share liabilities are measured at fair value through profit and loss, as mentioned above, no bifurcation is required.
The preferred shares are entitled to vote with holders of common shares on an as converted basis.
The fair value of all subsidiary preferred shares as of December 31, 2023 and December 31, 2022, is as follows:
|
2023
$
|
2022
$
|
|||||||
|
As of December 31,
|
||||||||
| Entrega |
|
|
||||||
| Follica |
|
|
||||||
| Vedanta Biosciences |
|
|
||||||
| Total subsidiary preferred share balance |
|
|
||||||
As is customary, in the event of any voluntary or involuntary liquidation, dissolution or winding up of a subsidiary, the holders of subsidiary preferred shares which are outstanding shall be entitled to be paid out of the assets of the subsidiary available for distribution to shareholders and before any payment shall be made to holders of ordinary shares. A merger, acquisition, sale of voting control or other transaction of a subsidiary in which the shareholders of the subsidiary immediately before the transaction do not own a majority of the outstanding shares of the surviving company shall be deemed to be a liquidation event. Additionally, a sale, lease, transfer or other disposition of all or substantially all of the assets of the subsidiary shall also be deemed a liquidation event.
As of December 31, 2023 and December 31, 2022, the minimum liquidation preference reflecting the amounts that would be payable to the subsidiary preferred holders upon a liquidation event of the subsidiaries, is as follows:
|
2023
$
|
2022
$
|
|||||||
|
As of December 31,
|
||||||||
| Entrega |
|
|
||||||
| Follica |
|
|
||||||
| Vedanta Biosciences |
|
|
||||||
| Total minimum liquidation preference |
|
|
||||||
F-37
For the years ended December 31, 2023 and 2022, the Group recognized the following changes in the value of subsidiary preferred shares:
|
$
|
|||||
| Balance as of January 1, 2022 |
|
||||
| Decrease in value of preferred shares measured at fair value – finance costs (income) |
(
|
||||
| Deconsolidation of subsidiary - (Sonde) |
(
|
||||
| Balance as of December 31, 2022 |
|
||||
| Decrease in value of preferred shares measured at fair value – finance costs (income) |
(
|
||||
| Deconsolidation of subsidiary – (Vedanta) |
(
|
||||
| Balance as of December 31, 2023 |
|
||||
F-38
17.
Sale of Future Royalties Liability
On March 4, 2011, the Group entered into a license agreement with Karuna Therapeutics, Inc. (“Karuna”) according to which the Group granted Karuna an exclusive license to research, develop and sell KarXT in exchange for a royalty on annual net sales, development and regulatory milestones and a fixed portion of sublicensing income, if any (hereinafter “License Agreement”).
On March 22, 2023, the Group signed an agreement with Royalty Pharma (hereinafter "Royalty Purchase Agreement"), according to which the Group sold Royalty Pharma a partial right to receive royalty payments made by Karuna in respect of net sales of KarXT, if and when received. According to the Royalty Purchase Agreement, all royalties due to the Group under the License Agreement will be paid to Royalty Pharma up until an annual threshold of $
60,000
, while all royalties above such annual threshold in a given year will be split
33
% to Royalty Pharma and
67
% to the Group. Under the terms of the Royalty Purchase Agreement, the Group received a non-refundable initial payment of $
100,000
at the execution of the Royalty Purchase Agreement and is eligible to receive additional payments in the aggregate of up to an additional $
400,000
based on the achievement of certain regulatory and commercial milestones.
The Group continues to hold the rights under the License Agreement and has a contractual obligation to deliver cash to Royalty Pharma for a portion of the royalties it receives. Therefore, the Group will continue to account for any royalties and regulatory milestones due to the Group under the License Agreement as revenue in its Consolidated Statement of Comprehensive Income/(Loss) and record the proceeds from the Royalty Purchase Agreement as a financial liability on its Consolidated Statement of Financial Position. In determining the appropriate accounting treatment for the Royalty Purchase Agreement, management applied significant judgement.
The acquisition of Karuna by Bristol Meyers Squibb (NYSE: BMY), which closed on March 18, 2024, had no impact on the Group's rights or obligations under the License Agreement or Royalty Purchase Agreement, each of which remains in full force and effect.
In order to determine the amortized cost of the sale of future royalties liability, management is required to estimate the total amount of future receipts from and payments to Royalty Pharma under the Royalty Purchase Agreement over the life of the agreement. The $
100,000
liability, recorded at execution of the Royalty Purchase Agreement, will be accreted to the total of these receipts and payments as interest expense over the life of the Royalty Purchase Agreement. These estimates contain assumptions that impact both the amortized cost of the liability and the interest expense that will be recognized in future periods.
Additional proceeds received from Royalty Pharma will increase the Group’s financial liability. As royalty payments are made to Royalty Pharma, the balance of the liability will be effectively repaid over the life of the Royalty Purchase Agreement. The estimated timing and amount of royalty payments to and proceeds from Royalty Pharma are likely to change over the life of the Royalty Purchase Agreement. A significant increase or decrease in estimated royalty payments, or a significant shift in the timing of cash flows, will materially impact the sale of future royalties liability, interest expense and the time period for repayment. The Group will periodically assess the expected payments to, or proceeds from, Royalty Pharma, and any such changes in amount or timing of cash flows will require the Group to re-calculate the amortized cost of the sale of future royalties liability as the present value of the estimated future cash flows from the Royalty Purchase Agreement that are discounted at the liability’s original effective interest rate. The adjustment is recognized immediately in profit or loss as income or expense.
The following shows the activity in respect of the sale of future royalties liability:
| Sale of future royalties liability |
$
|
||||
|
Balance as of January 1, 2023
|
|
||||
| Amounts received at closing |
|
||||
| Non cash interest expense recognized |
|
||||
|
Balance as of December 31, 2023
|
|
||||
F-39
18.
Financial Instruments
The Group’s financial instruments consist of financial assets in the form of notes, convertible notes and investment in shares, and financial liabilities, including preferred shares. Many of these financial instruments are presented at fair value, with changes in fair value recorded through profit and loss.
Fair Value Process
For financial instruments measured at fair value under IFRS 9, the change in the fair value is reflected through profit and loss. Using the guidance in IFRS 13, the total business enterprise value and allocable equity of each entity being valued can be determined using a market backsolve approach through a recent arm’s length financing round (or a future probable arm's length transaction), market/asset probability-weighted expected return method ("PWERM") approach, discounted cash flow approach, or hybrid approaches.
The approaches, in order of strongest fair value evidence, are detailed as follows:
| Valuation Method | Description | ||||
| Market – Backsolve | The market backsolve approach benchmarks the original issue price (OIP) of the company’s latest funding transaction as current value. | ||||
| Market/Asset – PWERM | Under a PWERM, the company value is based upon the probability-weighted present value of expected future investment returns, considering each of the possible future outcomes available to the enterprise. Possible future outcomes can include IPO scenarios, potential SPAC transactions, merger and acquisition transactions as well as other similar exit transactions of the investee. | ||||
|
I
ncome Based – DCF
|
The income approach is used to estimate fair value based on the income streams, such as cash flows or earnings, that an asset or business can be expected to generate. | ||||
At each measurement date, investments held at fair value (that are not publicly traded) as well as the fair value of preferred share liabilities, including embedded conversion rights that are not bifurcated, were determined using the following allocation methods: option pricing model (“OPM”), PWERM, or hybrid allocation framework.
The methods are detailed as follows:
| Allocation Method | Description | ||||
| OPM |
The OPM model treats preferred stock as call options on the enterprise’s equity value, with exercise prices based on the liquidation preferences of the preferred stock.
|
||||
| PWERM | Under a PWERM, share value is based upon the probability-weighted present value of expected future investment returns, considering each of the possible future outcomes available to the enterprise, as well as the rights of each share class. | ||||
| Hybrid |
The hybrid method is a combination of the PWERM and OPM. Under the hybrid method, multiple liquidity scenarios are weighted based on the probability of the scenario's occurrence, similar to the PWERM, while also utilizing the OPM to estimate the allocation of value in one or more of the scenarios.
|
||||
Valuation policies and procedures are regularly monitored by the Group. Fair value measurements, including those categorized within Level 3, are prepared and reviewed for reasonableness and compliance with the fair value measurements guidance under IFRS accounting standards.
The Group measures fair value using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements:
|
Fair Value
Hierarchy Level |
Description | ||||
| Level 1 | Inputs that are quoted market prices (unadjusted) in active markets for identical instruments. | ||||
| Level 2 | Inputs other than quoted prices included within Level 1 that are observable either directly (i.e. as prices) or indirectly (i.e. derived from prices). | ||||
| Level 3 |
Inputs that are unobservable. This category includes all instruments for which the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instruments' valuation.
|
||||
Whilst the Group considers the methodologies and assumptions adopted in fair value measurements as supportable and reasonable, because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market for the investment existed.
F-40
Subsidiary Preferred Shares Liability and Subsidiary Convertible Notes
The following table summarizes the changes in the Group’s subsidiary preferred shares and convertible notes liabilities measured at fair value, which were categorized as Level 3 in the fair value hierarchy:
|
|
Subsidiary Preferred Shares
$ |
Subsidiary Convertible
Notes $ |
||||||
| Balance at January 1, 2021 |
|
|
||||||
| Value at issuance |
|
|
||||||
| Conversion to subsidiary preferred shares |
|
(
|
||||||
| Accrued interest - contractual |
|
|
||||||
| Change in fair value |
(
|
|
||||||
| Balance at December 31, 2021 and January 1, 2022 |
|
|
||||||
| Value at issuance |
|
|
||||||
| Accrued interest - contractual |
|
|
||||||
| Deconsolidation - Sonde |
(
|
(
|
||||||
| Change in fair value |
(
|
|
||||||
| Balance at December 31, 2022 and January 1, 2023 |
|
|
||||||
| Change in fair value |
(
|
|
||||||
| Deconsolidation - Vedanta |
(
|
|
||||||
| Balance at December 31, 2023 |
|
|
||||||
The change in fair value of preferred shares and convertible notes liabilities are recorded in finance income/(costs) – fair value accounting in the Consolidated Statement of Comprehensive Income/(Loss).
Investments Held at Fair Value
Karuna, Vor and Akili Valuation
Karuna (Nasdaq: KRTX), Vor (Nasdaq: VOR), Akili (Nasdaq: AKLI) and additional immaterial investments are listed entities on an active exchange, and as such, the fair value as of December 31, 2023, was calculated utilizing the quoted common share price which is categorized as Level 1 in the fair value hierarchy.
Vedanta and Sonde
As of December 31, 2023, the Group accounts for the following investments under IFRS 9 as investments held at fair value with changes in fair value through the profit and loss: Sonde preferred A-2 and B shares and Vedanta convertible preferred shares (subsequent to the date of deconsolidation). The valuation of the aforementioned investments is categorized as Level 3 in the fair value hierarchy due to the use of significant unobservable inputs to value such assets. During the year ended December 31, 2023, the Group recorded such investments at fair value and recognized a loss of $
7,298
for the change in fair value of the investments. In addition, the Group determined that the fair value of its investment in the Gelesis 2023 Warrants was $
0
as Gelesis ceased operations in October 2023.
The following table summarizes the changes in all the Group’s investments held at fair value, which were categorized as Level 3 in the fair value hierarchy:
|
$
|
|||||
| Balance at January 1, 2021 |
|
||||
| Cash purchase of Vor preferred shares |
|
||||
| Reclassification of Vor from level 3 to level 1 |
(
|
||||
| Gain/(loss) on change in fair value |
|
||||
| Balance at December 31, 2021 |
|
||||
| Deconsolidation of Sonde |
|
||||
|
Gelesis Earn-out Shares received in the SPAC exchange
|
|
||||
| Exchange of Gelesis preferred shares to Gelesis common shares |
(
|
||||
| Reclassification of Akili to level 1 investment |
(
|
||||
| Gain/(loss) on change in fair value |
(
|
||||
| Balance at December 31, 2022 |
|
||||
| Deconsolidation of Vedanta - new investment in Vedanta preferred shares |
|
||||
| Investment in Gelesis 2023 Warrants |
|
||||
|
Gain/(loss) on changes in fair value
|
(
|
||||
| Balance as of December 31, 2023 |
|
||||
The change in fair value of investments held at fair value is recorded in gain/(loss) on investments held at fair value in the Consolidated Statement of Comprehensive Income/(Loss).
At December 31, 2023, the Group’s material investments held at fair value categorized as Level 3 in the fair value hierarchy include the preferred shares of Sonde and Vedanta, with fair value of $
10,408
and $
14,153
, respectively.
The significant unobservable inputs used at December 31, 2023 in the fair value measurement of these investments and the sensitivity of the fair value measurements for these investments to changes to these significant unobservable inputs are summarized in the table below.
F-41
|
As of December 31, 2023
|
Investment (Sonde) Measured through
Market Backsolve OPM
|
||||||||||
| Unobservable Inputs | Input Value | Sensitivity Range |
Investment Fair Value Increase/(Decrease)
$
|
||||||||
|
Equity Value
|
|
-
|
% |
(
|
|||||||
|
|
|
||||||||||
| Time to Liquidity |
|
-
|
|
||||||||
|
+
|
(
|
||||||||||
|
Volatility
|
|
% |
-
|
% |
|
||||||
|
|
(
|
||||||||||
|
As of December 31, 2023
|
Investment (Vedanta) Measured through Market Backsolve that Leverages a Monte Carlo Simulation
|
||||||||||
| Unobservable Inputs | Input Value | Sensitivity Range |
Investment Fair Value Increase/(Decrease)
$
|
||||||||
|
Equity Value
|
|
-
|
% |
(
|
|||||||
|
|
|
||||||||||
| Time to Liquidity |
|
-
|
(
|
||||||||
|
+
|
|
||||||||||
| Volatility |
|
% |
-
|
% |
(
|
||||||
|
|
|
||||||||||
Investments in Notes from Associates
As of December 31, 2022, the investment in notes from associates was $
16,501
and represents investments the Group made in convertible promissory notes of Gelesis. During the year ended December 31, 2023, the Group invested $
10,729
in convertible promissory notes of Gelesis and $
5,000
in a convertible note of Vedanta. The Group recorded a loss of $
27,630
for the change in fair value of the notes from associates in the gain/(loss) on investments in notes from associates within the Consolidated Statement of Comprehensive Income/Loss. The loss was driven by a reduction in the fair value of the Gelesis convertible promissory notes of $
27,230
as Gelesis filed for bankruptcy in October 2023 and a change in the fair value of the Vedanata convertible note of $
400
.
The convertible debt issued by Vedanta was valued using a market backsolve approach that leverages a Monte Carlo simulation. The significant unobservable inputs categorized as Level 3 in the fair value hierarchy used at December 31, 2023, in the fair value measurement of the convertible debt are the same as the inputs disclosed above for Vedanta preferred shares.
Fair Value Measurement and Classification
The fair value of financial instruments by category as of December 31, 2023 and 2022:
| 2023 | |||||||||||||||||||||||
| Carrying Amount | Fair Value | ||||||||||||||||||||||
|
Financial Assets
$ |
Financial Liabilities
$ |
Level 1
$ |
Level 2
$ |
Level 3
$ |
Total
$ |
||||||||||||||||||
|
Financial assets
3
:
|
|||||||||||||||||||||||
|
Money Markets
1,2
|
|
— |
|
|
|
|
|||||||||||||||||
| Investment in notes from associates |
|
— |
|
|
|
|
|||||||||||||||||
| Investments held at fair value |
|
— |
|
|
|
|
|||||||||||||||||
| Total financial assets |
|
— |
|
|
|
|
|||||||||||||||||
| Financial liabilities: | |||||||||||||||||||||||
| Subsidiary preferred shares | — |
|
|
|
|
|
|||||||||||||||||
| Share-based liability awards | — |
|
|
|
|
|
|||||||||||||||||
| Total financial liabilities | — |
|
|
|
|
|
|||||||||||||||||
1 Issued by a diverse group of corporations, largely consisting of financial institutions, virtually all of which are investment grade.
2 Included within cash and cash equivalents.
3. Excluded from the table above are short-term investments of $
136,062
that are classified at amortized cost as of December 31, 2023. The cost of these short-term investments approximates current fair value.
F-42
The Group has a number of financial instruments that are not measured at fair value in the Consolidated Statement of Financial Position. For these instruments the fair values are not materially different from their carrying amounts.
| 2022 | |||||||||||||||||||||||
|
|
Carrying Amount | Fair Value | |||||||||||||||||||||
|
Financial Assets
$ |
Financial Liabilities
$ |
Level 1
$ |
Level 2
$ |
Level 3
$ |
Total
$ |
||||||||||||||||||
| Financial assets: | |||||||||||||||||||||||
|
Money Markets
1,2
|
|
— |
|
|
|
|
|||||||||||||||||
|
Short-term investments
1
|
|
— |
|
|
|
|
|||||||||||||||||
| Note from associate |
|
— |
|
|
|
|
|||||||||||||||||
| Investments held at fair value |
|
— |
|
|
|
|
|||||||||||||||||
|
Trade and other receivables
3
|
|
— |
|
|
|
|
|||||||||||||||||
| Total financial assets |
|
— |
|
|
|
|
|||||||||||||||||
| Financial liabilities: | |||||||||||||||||||||||
| Subsidiary warrant liability | — |
|
|
|
|
|
|||||||||||||||||
| Subsidiary preferred shares | — |
|
|
|
|
|
|||||||||||||||||
| Subsidiary notes payable | — |
|
|
|
|
|
|||||||||||||||||
| Share-based liability awards | — |
|
|
|
|
|
|||||||||||||||||
| Total financial liabilities | — |
|
|
|
|
|
|||||||||||||||||
1 Issued by a diverse group of corporations, largely consisting of financial institutions, virtually all of which are investment grade.
2 Included within cash and cash equivalents.
3 Outstanding receivables are owed primarily by government agencies and large corporations, virtually all of which are investment grade.
F-43
19.
Subsidiary Notes Payable
The subsidiary notes payable are comprised of loans and convertible notes. As of December 31, 2023 and December 31, 2022, the loan in Follica and the convertible notes for Knode and Appeering did not contain embedded derivatives and therefore these instruments continue to be held at amortized cost.
The notes payable consist of the following:
|
2023
$
|
2022
$
|
|||||||
| As of December 31, | ||||||||
| Loans |
|
|
||||||
| Convertible notes |
|
|
||||||
| Total subsidiary notes payable |
|
|
||||||
Loans
In October 2010, Follica entered into a loan and security agreement with Lighthouse Capital Partners VI, L.P. The loan is secured by Follica’s assets, including Follica’s intellectual property and bears interest at a rate of
5.0
percent in the interest only period and
12.0
percent in the repayment period.
Convertible Notes
Convertible Notes outstanding were as follows:
|
|
Knode
$
|
Appeering
$
|
Sonde
$
|
Total
$
|
||||||||||
|
January 1, 2022
|
|
|
|
|
||||||||||
| Gross principal - issuance of notes - financing activity |
|
|
|
|
||||||||||
| Accrued interest on convertible notes - finance costs |
|
|
|
|
||||||||||
| Change in fair value - finance costs |
|
|
|
|
||||||||||
| Deconsolidation |
|
|
(
|
(
|
||||||||||
|
December 31, 2022 and January 1, 2023
|
|
|
|
|
||||||||||
| Accrued interest on convertible notes - finance costs |
|
|
|
|
||||||||||
|
December 31, 2023
|
|
|
|
|
||||||||||
On April 6, 2021, and on November 24, 2021, Sonde issued unsecured convertible promissory notes to its existing shareholders for a combined total of $
4,329
, of which $
2,215
were issued to third-party shareholders (and $
2,113
were issued to the Group and eliminated in consolidation). In addition, in March 2022, Sonde issued an additional amount of $
921
, of which $
393
were issued to third parties (and $
528
issued to the Group and eliminated in consolidation). The notes bore interest at an annual rate of
6.0
percent and were to mature on the second anniversary of the issuance. The notes were to mandatorily convert in a Qualified Financing, as defined in the note purchase agreement, at a discount of
20.0
percent from the price per share in the Qualified Financing. In addition, the notes allowed for optional conversion concurrently with a discount of
20.0
percent from the price per share in the Non Qualified Equity Financing. Upon the completion of the Preferred B round of financing in Sonde on May 25, 2022, the Group lost control in Sonde and all convertible notes were derecognized as part of the deconsolidation - See Note 5. Investments Held at Fair Value.
For Sonde convertible notes, since these notes contained embedded derivatives, the notes were assessed under IFRS 9 and the entire financial instruments were elected to be accounted for as FVTPL. The Sonde notes were deconsolidated in May 2022 as described above.
F-44
20.
Non-Controlling Interest
As of December 31, 2023, non-controlling interests include Entrega and Follica. Ownership interests of the non-controlling interests in these entities as of December 31, 2023 were
11.7
percent, and
19.9
percent, respectively. As of December 31, 2022, non-controlling interests include Entrega, Follica, and Vedanta. Ownership interests of the non-controlling interests in these entities were
11.7
percent ,
19.9
percent, and
12.2
percent, respectively. As of December 31, 2021, non-controlling interests include Entrega, Follica, Sonde, and Vedanta. Ownership interests of the non-controlling interests in these entities were
11.7
percent,
19.9
percent,
6.2
percent and
3.7
percent, respectively. During the year ended December 31, 2023, Vedanta Biosciences, Inc was deconsolidated. During the year ended December 31, 2022, Sonde Health, Inc was deconsolidated. See Note 5. Investments Held at Fair Value.
Non-controlling interests include the amounts recorded for subsidiary stock options.
On June 11, 2021, the Group acquired the remaining
17.1
percent of the minority non-controlling interests of Alivio (after exercise of all in the money stock options) increasing its ownership to
100.0
percent of Alivio. The consideration for such non-controlling interests amounted to $
1,224
, to be paid in
three
equal installments, with the first installment of $
408
paid at the effective date of the transaction and two additional installments to be paid upon the occurrence of certain contingent events. The Group recorded a contingent consideration liability of $
560
at fair value for the two additional installments, resulting in a total acquisition cost of $
968
. The excess of the consideration paid over the book value of the non-controlling interest of approximately $
9,636
was recorded directly as a charge to shareholders’ equity. The second installment of $
408
was paid in July 2021, upon the occurrence of the contingent event specified in the agreement. The contingent consideration liability was adjusted to fair value at the end of each reporting period with changes in fair value recorded in earnings. Changes in fair value of the aforementioned contingent consideration liability were not material. As of December 31, 2022, the remaining contingent liability was reduced to zero as the second contingent event did not occur.
On December 1, 2021, option holders in Entrega exercised options into shares of common stock, increasing the NCI interest held from
0.2
percent to
11.7
percent. During 2021, option holders in Vedanta exercised options and increased the NCI interest to
3.7
percent. The exercise of the options resulted in an increase in the NCI share in Entrega and Vedanta shareholder's deficit of $
5,887
. The amount together with the consideration paid by NCI ($
101
) amounted to $
5,988
and was recorded as a gain directly in shareholders' equity.
On February 15, 2022, option holders in Vedanta exercised options into shares of common stock, increasing the NCI interest held from
3.7
percent to
12.2
percent. The exercise of the options resulted in an increase in the NCI share in Vedanta shareholder's deficit of $
15,171
. The amount together with the consideration paid by NCI ($
7
) amounted to $
15,171
and was recorded as a gain directly in shareholders' equity.
F-45
21.
Trade and Other Payables
Information regarding Trade and other payables was as follows:
| As of December 31, |
2023
$
|
2022
$
|
||||||
| Trade payables |
|
|
||||||
| Accrued expenses |
|
|
||||||
| Income tax payable |
|
|
||||||
| Liability for share-based awards |
|
|
||||||
| Other |
|
|
||||||
| Total trade and other payables |
|
|
||||||
22.
Long-term loan
In September 2020, Vedanta entered into a $
15,000
loan and security agreement with Oxford Finance LLC. The loan is secured by Vedanta's assets, including equipment, inventory and intellectual property. The loan bears a floating interest rate of
7.7
percent plus the greater of (i) 30 day U.S. Dollar LIBOR reported in the Wall Street Journal or (ii)
0.17
percent. The loan matures September 2025 and requires interest-only payments prior to 2023. The loan also carries a final fee upon full repayment of
7.0
percent of the original principal, or $
1,050
. As part of the loan agreement, Vedanta also issued Oxford Finance LLC
12,886
Series C-2 preferred share warrants with an exercise price of $
23.28
per share, expiring September 2030. The outstanding loan balance totaled approximately $
15,400
as of December 31, 2022. On March 1, 2023, the Group derecognized the loan in connection with Vedanta's deconsolidation. Refer to Note 5. Investments Held at Fair Value.
The following table summarizes long-term loan activity for the years ended December 31, 2023 and 2022:
| Long-term loan | ||||||||
|
2023
$
|
2022
$
|
|||||||
| Balance at January 1, |
|
|
||||||
| Accrued interest |
|
|
||||||
| Interest paid |
(
|
(
|
||||||
| Other |
(
|
(
|
||||||
|
Deconsolidation of subsidiary
|
(
|
|
||||||
|
Balance at December 31,
|
|
|
||||||
The long-term loan is presented as follows in the Statement of Financial Position as of December 31, 2023 and 2022:
| Long-term loan | ||||||||
|
2023
$
|
2022
$
|
|||||||
|
Current portion of long-term loan
|
|
|
||||||
| Long-term loan |
|
|
||||||
| Total Long-term loan |
|
|
||||||
F-46
23.
Leases and subleases
The activity related to the Group’s right of use asset and lease liability for the years ended December 31, 2023 and 2022 is as follows:
| Right of use asset, net | ||||||||
|
2023
$
|
2022
$
|
|||||||
| Balance at January 1, |
|
|
||||||
| Additions |
|
|
||||||
| Depreciation |
(
|
(
|
||||||
| Deconsolidated |
(
|
|
||||||
| Balance at December 31, |
|
|
||||||
| Total lease liability | ||||||||
|
2023
$
|
2022
$
|
|||||||
| Balance at January 1, |
|
|
||||||
| Additions |
|
|
||||||
| Cash paid for rent - principal - financing cash flow |
(
|
(
|
||||||
| Cash paid for rent - interest |
(
|
(
|
||||||
| Interest expense |
|
|
||||||
| Deconsolidated |
(
|
|
||||||
| Balance at December 31, |
|
|
||||||
Depreciation of the right-of-use assets, which virtually all consist of leased real estate, is included in the general and administrative expenses and research and development expenses line items in the Statement of Comprehensive Income/(Loss). The Group recorded depreciation expense of $
1,979
, $
3,047
and $
2,938
for the years ended December 31, 2023, 2022 and 2021, respectively.
The following table details the short-term and long-term portion of the lease liability as of December 31, 2023 and 2022:
| Total lease liability | ||||||||
|
2023
$
|
2022
$
|
|||||||
| Short-term portion of lease liability |
|
|
||||||
| Long-term portion of lease liability |
|
|
||||||
| Total lease liability |
|
|
||||||
The following table details the future maturities of the lease liability, showing the undiscounted lease payments to be paid after the reporting date:
|
2023
$
|
|||||
| Less than one year |
|
||||
| One to two years |
|
||||
| Two to three years |
|
||||
| Three to four years |
|
||||
| Four to five years |
|
||||
| More than five years |
|
||||
| Total undiscounted lease maturities |
|
||||
| Interest |
|
||||
| Total lease liability |
|
||||
During the year ended December 31, 2019, the Group entered into a lease agreement for certain premises consisting of
50,858
rentable square feet of space located at 6 Tide Street, Boston, Massachusetts. The lease commenced on April 26, 2019 for an initial term consisting of ten years and three months, and there is an option to extend the lease for
two
consecutive periods of
five years
each. The Group assessed at the lease commencement date whether it was reasonably certain to exercise the extension options, and deemed such options were not reasonably certain to be exercised. The Group will reassess whether it is reasonably certain to exercise the options only if there is a significant event or significant change in circumstances within its control.
F-47
On June 26, 2019, the Group executed a sublease agreement with Gelesis. The lease is for
9,446
rentable square feet located on the sixth floor of the Group’s former office at 501 Boylston Street, Boston, Massachusetts. The sublease was set to expire on August 31, 2025, and was determined to be a finance lease. Gelesis ceased operations and filed for bankruptcy on October 30, 2023. As a result, the Group wrote off its receivable in the lease of $
1,266
in 2023.
Rental income recognized by the Group during the year ended December 31, 2023 was $
781
which was included in the other income/(expense) line item in the Consolidated Statement of Comprehensive Income/(Loss). In the year ended December 31, 2022, the Group did
no
t recognize any rental income.
24.
Capital and Financial Risk Management
Capital Risk Management
The Group's capital and financial risk management policy is to maintain a strong capital base to support its strategic priorities, maintain investor, creditor and market confidence as well as sustain the future development of the business. The Group’s objectives when managing capital are to safeguard its ability to continue as a going concern, to provide returns for shareholders and benefits for other stakeholders, and to maintain an optimal capital structure to reduce the cost of capital. To maintain or adjust the capital structure, the Group may issue new shares or incur new debt. The Group has no material externally imposed capital requirements. The Group’s share capital is set out in Note 15. Equity.
Management continuously monitors the level of capital deployed and available for deployment in the Wholly-Owned Programs segment and at Founded Entities. The Directors seek to maintain a balance between the higher returns that might be possible with higher levels of deployed capital and the advantages and security afforded by a sound capital position.
The Group’s Directors have overall responsibility for the establishment and oversight of the Group's capital and risk management framework. The Group is exposed to certain risks through its normal course of operations. The Group’s main objective in using financial instruments is to promote the development and commercialization of intellectual property through the raising and investing of funds for this purpose. The nature, amount and timing of investments are determined by planned future investment activity. Due to the nature of activities and with the aim to maintain the investors’ funds as secure and protected, the Group’s policy is to hold any excess funds in highly liquid and readily available financial instruments and maintain minimal exposure to other financial risks.
The Group has exposure to the following risks arising from financial instruments:
Credit Risk
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations. Financial instruments that potentially subject the Group to concentrations of credit risk consist principally of cash and cash equivalents, short-term investments, and trade and other receivables.
The Group held the following balances (not including the income tax receivable resulting from overpayment of income taxes as of December 31, 2022. See Note 27. Taxation):
|
2023
$
|
2022
$
|
|||||||
| As of December 31 | ||||||||
| Cash and cash equivalents |
|
|
||||||
| Short-term investments |
|
|
||||||
| Trade and other receivables |
|
|
||||||
| Total |
|
|
||||||
The Group invests its excess cash in U.S. Treasury Bills (presented as short-term investments), and money market accounts, which the Group believes are of high credit quality. Further, the Group's cash and cash equivalents and short-term investments are held at diverse, investment-grade financial institutions.
The Group assesses the credit quality of customers on an ongoing basis. The credit quality of financial assets is assessed by historical and recent payment history, counterparty financial position, and reference to credit ratings (if available) or to historical information about counterparty default rates. The Group does not have expected credit losses due to the high credit quality or healthy financial conditions of these counterparties. As of December 31, 2023 and 2022, none of the trade and other receivables were impaired.
Liquidity Risk
Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Group actively manages its liquidity risk by closely monitoring the maturity of its financial assets and liabilities and projected cash flows from operations, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. Due to the nature of these financial liabilities, the funds are available on demand to provide optimal financial flexibility.
F-48
The table below summarizes the maturity profile of the Group’s financial liabilities, including subsidiary preferred shares that have customary liquidation preferences, as of December 31, 2023 and 2022, based on contractual undiscounted payments:
| As of December 31 | 2023 | ||||||||||||||||
|
Carrying Amount
$ |
Within Three Months
$ |
Three to Twelve Months
$ |
One to Five Years
$ |
Total
$ (*) |
|||||||||||||
|
Subsidiary notes payable
|
|
|
|
|
|
||||||||||||
| Trade and other payables |
|
|
|
|
|
||||||||||||
|
Subsidiary preferred shares (Note 16)
1
|
|
|
|
|
|
||||||||||||
| Total |
|
|
|
|
|
||||||||||||
| As of December 31 | 2022 | ||||||||||||||||
|
Carrying Amount
$ |
Within Three Months
$ |
Three to Twelve Months
$ |
One to Five Years
$ |
Total
$ (*) |
|||||||||||||
| Long-term loan |
|
|
|
|
|
||||||||||||
| Subsidiary notes payable |
|
|
|
|
|
||||||||||||
| Trade and other payables |
|
|
|
|
|
||||||||||||
|
Warrants
2
|
|
|
|
|
|
||||||||||||
|
Subsidiary preferred shares (Note 16)
1
|
|
|
|
|
|
||||||||||||
| Total |
|
|
|
|
|
||||||||||||
1 Redeemable only upon a liquidation or deemed liquidation event, as defined in the applicable shareholder documents.
2 Warrants issued by subsidiaries to third parties to purchase preferred shares.
* Does not include payments in respect of lease obligations. For the contractual future payments related to lease obligation
s, see Note 23. Leases and subleases.
Interest Rate Sensitivity
As of December 31, 2023, the Group had cash and cash equivalents of $
191,081
, and short-term investments of $
136,062
. The Group's exposure to interest rate sensitivity is impacted by changes in the underlying U.K. and U.S. bank interest rates. The Group has not entered into investments for trading or speculative purposes. Due to the conservative nature of the Group's investment portfolio, which is predicated on capital preservation and investments in short duration, high-quality U.S. Treasury Bills and related money market accounts, a change in interest rates would not have a material effect on the fair market value of the Group's portfolio, and therefore, the Group does not expect operating results or cash flows to be significantly affected by changes in market interest rates.
Controlled Founded Entity Investments
The Group maintains investments in certain Controlled Founded Entities. The Group’s investments in Controlled Founded Entities are eliminated as intercompany transactions upon financial consolidation. The Group is, however, exposed to a preferred share liability owing to the terms of existing preferred shares and the ownership of Controlled Founded Entities preferred shares by third parties. As discussed in Note 16. Subsidiary Preferred Shares, certain of the Group’s subsidiaries have issued preferred shares that include the right to receive a payment in the event of any voluntary or involuntary liquidation, dissolution or winding up of a subsidiary, including in the event of "deemed liquidation" as defined in the incorporation documents of the entities, which shall be paid out of the assets of the subsidiary available for distribution to shareholders, and before any payment shall be made to holders of ordinary shares. The liability of preferred shares is maintained at fair value through the profit and loss. The Group’s cash position supports the business activities of the Controlled Founded Entities. Accordingly, the Group views exposure to the third party preferred share liability as low.
Deconsolidated Founded Entity Investments
The Group maintains certain debt or equity holdings in Founded Entities that are deconsolidated. These holdings are deemed either as investments and accounted for as investments held at fair value, or as associates and accounted for under the equity method. The Group's exposure to investments held at fair value is $
317,841
as of December 31, 2023, and the Group may or may not be able to realize the value in the future. Accordingly, the Group views the risk as high. The Group’s exposure to investments in associates is limited to the carrying amount of the investment in an associate. The Group is not exposed to further contractual obligations or contingent liabilities beyond the value of the initial investments. Accordingly, the Group does not view this as a high risk. As of December 31, 2023, Sonde is the only associate, and the carrying amount of the investment as associate is $
3,185
.
Equity Price Risk
As of December 31, 2023, the Group held
886,885
common shares of Karuna,
2,671,800
common shares of Vor and
12,527,477
common shares of Akili. The fair value of these investments in Karuna, Vor and Akili was $
292,831
, of which approximately
96
% is related to the Karuna common shares.
The investments in Karuna, Vor and Akili are exposed to fluctuations in the market price of these common shares. The effect of a
10.0
percent adverse change in the market price of Karuna, Vor and Akili common shares would cause a loss of approximately $
29,283
to be recognized as a component of other income (expense) in the Consolidated Statement of Comprehensive Income/(Loss). However, the Group views exposure to equity price risk as low due to the definitive merger agreement Karuna entered into with Bristol Myers Squibb "BMS") in December 2023 under which Karuna common shares were acquired by Bristol Myers Squibb for $
330
per share in March 2024.
F-49
Foreign Exchange Risk
The Group maintains consolidated financial statements in the Group's functional currency, which is the U.S. dollar. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at exchange rates prevailing at the balance sheet dates. Non-monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the date of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income (loss) for the respective periods. Such foreign currency gains or losses were not material for all reported periods.
The Group does not currently engage in currency hedging activities since its foreign currency risk is limited, but the Group may begin to do so in the future if and when its foreign currency risk exposure changes.
25.
Commitments and Contingencies
The Group is a party to certain licensing agreements where the Group is licensing IP from third parties. In consideration for such licenses, the Group has made upfront payments and may be required to make additional contingent payments based on developmental and sales milestones and/or royalty on future sales. As of December 31, 2023, certain milestone events have not yet occurred, and therefore, the Group does not have a present obligation to make the related payments in respect of the licenses. Such milestones are dependent on events that are outside of the control of the Group, and many of these milestone events are remote of occurring. As of December 31, 2023 and December 31, 2022, payments in respect of developmental milestones that are dependent on events that are outside the control of the Group but are reasonably possible to occur amounted to approximately $
7,371
and $
8,666
, respectively. These milestone amounts represent an aggregate of multiple milestone payments depending on different milestone events in multiple agreements. The probability that all such milestone events will occur in the aggregate is remote. Payments made to license IP represent the acquisition cost of intangible assets.
The Group was a party to certain sponsored research arrangements and is a party to arrangements with contract manufacturing and contract research organizations, whereby the counterparty provides the Group with research and/or manufacturing services. As of December 31, 2023 and 2022, the noncancellable commitments in respect of such contracts amounted to approximately $
16,422
and $
11,288
, respectively.
In March 2024, a complaint was filed in Massachusetts District Court against the Group alleging breach of contract with respect to certain payments alleged to be owed to a previous employee of a Group subsidiary based on purported terms of a contract between such individual and the Group. The Group intends to defend itself vigorously though the ultimate outcome of this matter and the timing for resolution remains uncertain. No determination has been made that a loss, if any, arising from this matter is probable or that the amount of any such loss, or range of loss, is reasonably estimable.
The Group is involved from time-to-time in various legal proceedings arising in the normal course of business. Although the outcomes of these legal proceedings are inherently difficult to predict, the Group does not expect the resolution of such legal proceedings to have a material adverse effect on its financial position or results of operations. The Group did not book any provisions and did not identify any contingent liabilities requiring disclosure for any legal proceedings other than already included above for the years ended December 31, 2023 and 2022.
26.
Related Parties Transactions
Related Party Subleases and Royalties
During 2019, the Group executed a sublease agreement with a related party, Gelesis. As of December 31, 2022, the sublease receivable amounted to $
1,285
. During 2023, the sublease receivable was written down to $
0
as Gelesis ceased operations and filed for bankruptcy.
The Group recorded $
23
, $
89
and $
113
of interest income with respect to the sublease during the years ended December 31, 2023, 2022, and 2021, respectively, which is presented within finance income in the Consolidated Statement of Comprehensive Income/(Loss).
The Group received royalties from Gelesis on its product sales. The Group recorded
zero
, $
509
, and $
231
of royalty revenue during the years ended December 31, 2023, 2022, 2021, respectively, which is presented in contract revenue in the Consolidated Statement of Comprehensive Income/(Loss).
Key Management Personnel Compensation
Key management includes executive directors and members of the executive management team of the Group (not including non-executive directors).
The key management personnel compensation of the Group was as follows for the years ended December 31:
|
2023
$
|
2022
$
|
2021
$
|
|||||||||
| As of December 31 | |||||||||||
| Short-term employee benefits |
|
|
|
||||||||
| Post-employment benefits |
|
|
|
||||||||
| Termination Benefits |
|
|
|
||||||||
| Share-based payment expense |
|
|
|
||||||||
| Total |
|
|
|
||||||||
Short-term employee benefits include salaries, health care and other non-cash benefits. Post-employment benefits include 401K contributions from the Group. Termination benefits include severance pay. Share-based payments are generally subject to vesting terms over future periods. See Note 9. Share-based Payments. As of 12/31/2023, the payable due to the key management employees was $
4,732
.
F-50
In addition the Group paid remuneration to non-executive directors in the amounts of $
475
, $
655
and $
605
for the years ended December 31, 2023, 2022 and 2021, respectively. Also, the Group incurred $
373
, $
365
, and $
161
of stock based compensation expense for such non-executive directors for the years ended December 31, 2023, 2022, and 2021, respectively.
During the years ended December 31, 2023 and 2022, the Group incurred $
46
, and $
51
, respectively, of expenses paid to related parties.
Convertible Notes Issued to Directors
Certain related parties of the Group have invested in convertible notes issued by the Group’s subsidiaries. As of
December 31, 2023 and December 31, 2022,
the outstanding related party notes payable
totaled $
104
and $
99
,
respectively, including principal and interest.
The notes issued to related parties bear interest rates, maturity dates, discounts and other contractual terms that are the same as those issued to outside investors during the same issuances.
Directors’ and Senior Managers’ Shareholdings and Share Incentive Awards
The Directors and senior managers hold beneficial interests in shares in the following businesses and sourcing companies as of December 31, 2023:
| Business name (share class) | Number of shares held as of December 31, 2023 | Number of options held as of December 31, 2023 | Number of RSUs held as of December 31, 2023 |
Ownership
interest¹ |
|||||||||||||
| Directors: | |||||||||||||||||
| Dr Robert Langer | Entrega (Common) |
|
|
|
|
% | |||||||||||
| Dr Raju Kucherlapati | Enlight (Class B Common) |
|
|
|
|
% | |||||||||||
|
Dr John LaMattina
2
|
Akili (Common) |
|
|
|
|
% | |||||||||||
| Vedanta Biosciences (Common) |
|
|
|
|
% | ||||||||||||
| Senior Managers: | |||||||||||||||||
| Dr Bharatt Chowrira | Karuna (Common) |
|
|
|
|
% | |||||||||||
1 Ownership interests as of December 31, 2023 are calculated on a diluted basis, including issued and outstanding shares, warrants and options (and written commitments to issue options) but excluding unallocated shares authorized to be issued pursuant to equity incentive plans and any shares issuable upon conversion of outstanding convertible promissory notes.
2 Dr John LaMattina holds convertible notes issued by Appeering in the aggregate principal amount of $
50,000
.
Directors and senior managers hold
23,547,554
ordinary shares and
11.5
percent voting rights of the Group as of December 31, 2023. This amount excludes options to purchase
2,262,500
ordinary shares. This amount also excludes
7,301,547
shares, which are issuable based on the terms of performance based RSU awards granted to certain senior managers covering the financial years 2023, 2022 and 2021, and
102,732
shares, which are issuable to directors immediately prior to the Group's 2024 Annual General Meeting of Stockholders, based on the terms of the RSU awards granted to non-executive directors in 2023. Such shares will be issued to such senior managers and non-executive directors in future periods provided that performance and/or service conditions are met, and certain of the shares will be withheld for payment of customary withholding taxes.
Other
See Note 7. Investment in Notes from Associates for details on the notes issued by Gelesis and Vedanta to the Group.
As of December 31, 2023, the Group has a receivable from Sonde and Vedanta in the amount of $
1,569
.
See Note 6. Investments in Associates for details on the execution and termination of Merger Agreement with Gelesis.
27.
Taxation
Tax on the profit or loss for the year comprises current and deferred income tax. Tax is recognized in the Consolidated Statement of Comprehensive Income/(Loss) except to the extent that it relates to items recognized directly in equity.
For the years ended December 31, 2023, 2022 and 2021, the Group filed a consolidated U.S. federal income tax return which included all subsidiaries in which the Group owned greater than
80
percent of the vote and value. For the years ended December 31, 2023, 2022 and 2021, the Group filed certain consolidated state income tax returns which included all subsidiaries in which the Group owned greater than
50
percent of the vote and value. The remaining subsidiaries file separate U.S. tax returns.
Amounts recognized in Consolidated Statement of Comprehensive Income/(Loss):
|
2023
$
|
2022
$
|
2021
$
|
|||||||||
| For the year ended December 31 | |||||||||||
| Income/(loss) for the year |
(
|
(
|
(
|
||||||||
| Income tax expense/(benefit) |
|
(
|
|
||||||||
| Income/(loss) before taxes |
(
|
(
|
(
|
||||||||
Recognized Income Tax Expense/(Benefit):
|
2023
$
|
2022
$
|
2021
$
|
|||||||||
| For the year ended December 31 | |||||||||||
| Federal - current |
(
|
|
|
||||||||
| State - current |
(
|
|
|
||||||||
| Total current income tax expense/(benefit) |
(
|
|
|
||||||||
| Federal - deferred |
|
(
|
(
|
||||||||
| State - deferred |
|
(
|
(
|
||||||||
F-51
| Total deferred income tax expense/(benefit) |
|
(
|
(
|
||||||||
| Total income tax expense/(benefit), recognized |
|
(
|
|
||||||||
F-52
The income tax expense/(benefit) was $
30,525
, $(
55,719
) and $
3,756
in 2023, 2022 and 2021 respectively. The increase in tax expense for the year ended December 31, 2023 was primarily attributable to a lower pre-tax loss in the tax consolidated U.S. group, the tax in respect of the sale of future royalties to Royalty Pharma and the tax impact of derecognizing previously recognized deferred tax assets that are no longer expected to be utilized.
Reconciliation of Effective Tax Rate
The Group is primarily subject to taxation in the U.S. A reconciliation of the U.S. federal statutory tax rate to the effective tax rate is as follows:
| 2023 | 2022 | 2021 | ||||||||||||||||||||||||
| For the year ended December 31 |
$
|
% |
$
|
% |
$
|
% | ||||||||||||||||||||
| US federal statutory rate |
(
|
|
(
|
|
(
|
|
||||||||||||||||||||
| State taxes, net of federal effect |
(
|
|
(
|
|
(
|
|
||||||||||||||||||||
| Tax credits |
(
|
|
(
|
|
(
|
|
||||||||||||||||||||
| Stock-based compensation |
|
(
|
|
(
|
|
(
|
||||||||||||||||||||
| Finance income/(costs) – fair value accounting |
(
|
|
(
|
|
(
|
|
||||||||||||||||||||
| Loss with respect to associate for which no deferred tax asset is recognized |
|
(
|
|
(
|
|
(
|
||||||||||||||||||||
| Revaluation of deferred due to rate change |
|
|
(
|
|
|
|
||||||||||||||||||||
| Nondeductible compensation |
|
(
|
|
(
|
|
(
|
||||||||||||||||||||
| Recognition of deferred tax assets and tax benefits not previously recognized |
(
|
|
(
|
|
(
|
|
||||||||||||||||||||
| Unrecognized deferred tax asset |
|
(
|
|
(
|
|
(
|
||||||||||||||||||||
| Deconsolidation of subsidiary |
(
|
|
(
|
|
|
|
||||||||||||||||||||
| Other |
|
(
|
|
(
|
|
(
|
||||||||||||||||||||
| Worthless stock deduction |
(
|
|
|
|
|
|
||||||||||||||||||||
|
|
(
|
(
|
|
|
(
|
|||||||||||||||||||||
The Group is also subject to taxation in the UK, but to date, no taxable income has been generated in the UK. Changes in corporate tax rates can change both the current tax expense (benefit) as well as the deferred tax expense (benefit).
Deferred Tax Assets and Liabilities
Deferred tax assets have been recognized in the U.S. jurisdiction in respect of the following items:
|
2023
$
|
2022
$
|
|||||||
| For the year ended December 31 | ||||||||
| Operating tax losses |
|
|
||||||
| Tax credits |
|
|
||||||
| Share-based payments |
|
|
||||||
| Capitalized research development expenditures |
|
|
||||||
| Investment in Associates |
|
|
||||||
| Lease liability |
|
|
||||||
| Sale of future royalties |
|
|
||||||
| Other temporary differences |
|
|
||||||
| Deferred tax assets |
|
|
||||||
| Investments held at fair value |
(
|
(
|
||||||
| Right of use assets |
(
|
(
|
||||||
| Property and equipment, net |
(
|
(
|
||||||
| Investment in Associates |
(
|
|
||||||
| Deferred tax liabilities |
(
|
(
|
||||||
| Deferred tax assets (liabilities), net |
|
|
||||||
| Deferred tax liabilities, net, recognized |
(
|
(
|
||||||
| Deferred tax assets (liabilities), net, not recognized |
|
|
||||||
The Group has recognized deferred tax assets due to future reversals of existing taxable temporary differences that will be sufficient to recover the deferred tax assets. Our unrecognized deferred tax assets of $
88,058
are primarily related to tax credits, capitalized research development expenditures and deferred tax asset related to the sale of future royalties to Royalty Pharma. The Group does not believe it is probable that future taxable profit will be available to support the realizability of these unrecognized deferred tax assets.
Unrecognized Deferred Tax Assets
Deferred tax assets have not been recognized in respect of the following carryforward losses, credits and temporary differences, because it is not probable that future taxable profit will be available against which the Group can use the benefits therefrom.
F-53
|
2023
$
|
2022
$
|
||||||||||||||||
| For the year ended December 31 | |||||||||||||||||
| Gross Amount | Tax Effected | Gross Amount | Tax Effected | ||||||||||||||
| Deductible temporary difference |
|
|
|
|
|||||||||||||
| Tax losses |
|
|
|
|
|||||||||||||
| Tax credits |
|
|
|
|
|||||||||||||
| Total |
|
|
|
|
|||||||||||||
Tax Losses and Tax Credits Carryforwards
Tax losses and tax credits for which no deferred tax asset was recognized are presented below:
| As of December 31 |
2023
$
|
2022
$
|
|||||||||||||||
| Gross Amount | Tax Effected | Gross Amount | Tax Effected | ||||||||||||||
| Tax losses expiring: | |||||||||||||||||
| Within 10 years |
|
|
|
|
|||||||||||||
| More than 10 years |
|
|
|
|
|||||||||||||
| Available Indefinitely |
|
|
|
|
|||||||||||||
| Total |
|
|
|
|
|||||||||||||
| Tax credits expiring: | |||||||||||||||||
| Within 10 years |
|
|
|
|
|||||||||||||
| More than 10 years |
|
|
|
|
|||||||||||||
| Available indefinitely |
|
|
|
|
|||||||||||||
| Total |
|
|
|
|
|||||||||||||
The Group had U.S. federal net operating losses carry forwards (“NOLs”) of $
13,681
, $
219,466
and $
215,400
as of December 31, 2023, 2022 and 2021, respectively, which are available to offset future taxable income. These NOLs expire through 2037 with the exception of $
2,305
which is not subject to expiration. The Group had U.S. federal research and development tax credits of approximately $
1,396
, $
4,500
and $
3,900
as of December 31, 2023, 2022 and 2021, respectively, which are available to offset future taxes that expire at various dates through 2043. The Group also had Federal Orphan Drug credits of approximately $
930
and $
6,100
as of December 31, 2023, and 2022, which are available to offset future taxes that expire at various dates through 2043. A portion of these federal NOLs and credits can only be used to offset the profits from the Group’s subsidiaries who file separate federal tax returns. These NOLs and credits are subject to review and possible adjustment by the Internal Revenue Service.
The Group had state net operating losses carry forwards (“NOLs”) of approximately $
111,446
, $
71,700
and $
27,900
for the years ended December 31, 2023, 2022 and 2021, respectively, which are available to offset future taxable income. These NOLs expire at various dates beginning in 2030. The Group had Massachusetts research and development tax credits of approximately $
98
, $
600
and $
1,300
for the years ended December 31, 2023, 2022 and 2021, respectively, which are available to offset future taxes and expire at various dates through 2038. These NOLs and credits are subject to review and possible adjustment by state taxing authority.
Utilization of the NOLs and research and development credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986 due to ownership change limitations that have occurred previously or that could occur in the future. These ownership changes may limit the amount of NOL and research and development credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. The Group has performed a Section 382 analysis through December 31, 2023. The results of this analysis concluded that certain net operating losses were subject to limitation under Section 382 of the Internal Revenue Code. None of the Group’s net operating losses which are subject to a Section 382 limitation has been recognized in the financial statements.
Tax Balances
The tax related balances presented in the Statement of Financial Position are as follows:
| For the year ended December 31 |
2023
$
|
2022
$
|
||||||
| Income tax receivable – current |
|
|
||||||
|
Trade and other payables
|
|
(
|
||||||
Uncertain Tax Positions
The Group has no uncertain tax positions as of December 31, 2023. U.S. corporations are routinely subject to audit by federal and state tax authorities in the normal course of business.
F-54
28.
Subsequent Events
The Group has evaluated subsequent events after December 31, 2023, up to the date of issuance, April 25, 2024, of the Consolidated Financial Statements, and has not identified any recordable or disclosable events not otherwise reported in these Consolidated Financial Statements or notes thereto, except for the following:
In January 2024, the Group launched
two
new Founded Entities (Seaport Therapeutics and Gallop Oncology) to advance certain programs from the Wholly-Owned Programs segment. Seaport Therapeutics ("Seaport") will advance certain central nervous system programs and relevant Glyph intellectual property. Gallop Oncology will advance LYT-200 and other galectin-9 intellectual property. The financial results of these programs were included in the Wholly-Owned Programs segment in the footnotes to the Consolidated Financial Statements, as of December 31, 2023 and 2022, and for the three years ended December 31, 2023, 2022 and 2021, respectively. Upon raising dilutive third-party financing, the financial results of these
two
entities will be included in the Controlled Founded Entities segment to the extent that the Group maintains control over these entities.
On May 9, 2022, the Group announced the commencement of a $
50,000
share repurchase program ( the "Program") of its ordinary shares of
one
pence each. In February 2024, the Group completed the Program and has repurchased an aggregate of
20,182,863
ordinary shares under the Program. These shares have been held as treasury shares and are being used to settle the vesting of restricted stock units or exercise of options.
In March 2024, Karuna was acquired by Bristol Myers Squibb (“BMS”) in accordance with a definitive merger agreement signed in December 2023. As a result of this transaction, the Group received total proceeds of
$
292,672
before income tax in exchange for its holding of
886,885
shares of Karuna common stock.
In March 2024, the Group announced a proposed capital return of $
100,000
to its shareholders by way of a tender offer (the "Tender Offer"). The Tender Offer is expected to be launched in early May, subject to market conditions and shareholder approval. If the full $
100,000
is not returned, then the Group intends to return any remainder following the completion of the Tender Offer, by way of a special dividend.
In April 2024, Seaport Therapeutics, the Group's latest Founded Entity, raised $
100,000
in a Series A financing, out of which $
32,000
was invested by the Group. Following the Series A financing, the Group holds equity ownership in Seaport of
61.5
percent on a diluted basis.
In April 2024, the Gelesis' Chapter 7 Trustee provided notice that a third party bid to purchase the assets subject to the bankruptcy had been accepted as a stalking horse bid, subject to Bankruptcy Court approval. If such sale of the assets is ultimately approved by the Bankruptcy Court and consummated, it is expected that PureTech could recover a portion of its investment in Gelesis senior secured convertible promissory notes. The ultimate resolution of this matter, any potential recovery, and the associated timing remain uncertain. The Group has not recorded any amount in its Consolidated Financial Statements related to amounts that may be received as a result of the bankruptcy process.
F-55
TABLE OF CONTENTS
Part I: Gender IdentityPart Ii: Demographic BackgroundItem 7. Major Shareholders and Related Party TransactionsItem 8. Financial InformationItem 9. The Offer and ListingItem 10. Additional InformationItem 11. Quantitative and Qualitative Disclosures About Market RiskItem 12. Description Of Securities Other Than Equity SecuritiesPart IIItem 13. Defaults, Dividend Arrearages and DelinquenciesItem 14. Material Modifications To The Rights Of Security Holders and Use Of ProceedsItem 15. Controls and ProceduresItem 16. ReservedItem 16A. Audit Committee Financial ExpertItem 16B. Code Of EthicsItem 16C. Principal Accountant Fees and ServicesItem 16D. Exemptions From The Listing Standards For Audit CommitteesItem 16E. Purchases Of Equity Securities By The Issuer and Affiliated PurchasersItem 16F. Change in Registrant S Certifying AccountantItem 16G. Corporate GovernanceItem 16H. Mine Safety DisclosureItem 16I. Disclosure Regarding Foreign Jurisdictions That Prevent InspectionsItem 16J. Insider Trading PoliciesItem 16K. Cybersecurity DisclosurePart IIIItem 17. Financial StatementsItem 18. Financial StatementsItem 19. Exhibits