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VITAE PHARMACEUTICALS, INC filed this Form S-1 on 08/12/2014
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VITAE PHARMACEUTICALS, INC. Index to Financial Statements

As filed with the Securities and Exchange Commission on August 12, 2014

Registration No. 333-          


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933



VITAE PHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in its Charter)



Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
  2834
(Primary Standard Industrial
Classification Code Number)
  04-3567753
(I.R.S. Employer
Identification Number)

Vitae Pharmaceuticals, Inc.
502 West Office Center Drive
Fort Washington, PA 19034
(215) 461-2000

(Address, including zip code and telephone number, including
area code, of registrant's principal executive offices)



Jeffrey S. Hatfield
Chief Executive Officer
Vitae Pharmaceuticals, Inc.
502 West Office Center Drive
Fort Washington, PA 19034
(215) 461-2000
(Name, address, including zip code and telephone number, including area code, of agent for service)



Copies to:

Jay K. Hachigian, Esq.
Timothy H. Ehrlich, Esq.
Keith J. Scherer, Esq.
Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP
One Marina Park Drive, Suite 900
Boston, MA 02210
(617) 648-9100

 

Richard Morris
Chief Financial Officer
Vitae Pharmaceuticals, Inc.
502 West Office Center Drive
Fort Washington, PA 19034
(215) 461-2000

 

Babak Yaghmaie, Esq.
Stephane Levy, Esq.
Cooley LLP
1114 Avenue of the Americas
New York, NY 10036
(212) 479-6000



Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.

          If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    o

          If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

          If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

          If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

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

Large accelerated filer o   Accelerated filer o   Non-accelerated filer ý
(Do not check if a
smaller reporting company)
  Smaller reporting company o

CALCULATION OF REGISTRATION FEE

       
 
Title of Each Class of Securities
to be Registered

  Proposed Maximum
Aggregate Offering
Price(1)(2)

  Amount of
Registration Fee

 

Common Stock, $0.0001 par value

  $55,000,000   $7,084

 

(1)
Estimated pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

(2)
Includes the aggregate offering price of additional shares that the underwriters have the option to purchase.

          The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine.

   


Table of Contents

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

Subject To Completion, Dated August 12, 2014

Preliminary Prospectus


GRAPHIC

                 Shares
Common Stock
$      .      per share


This is the initial public offering of Vitae Pharmaceuticals, Inc. We are offering                  shares of common stock. Prior to this offering, there has been no public market for our common stock. We estimate that the initial public offering price will be between $            and $            per share.

We have applied to list our common stock on The NASDAQ Global Market under the symbol "VTAE."

We are an "emerging growth company" under the Jumpstart Our Business Startups Act of 2012 and applicable Securities and Exchange Commission rules, and, as such, have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings. See "Prospectus Summary—Emerging Growth Company Status."


Investing in our common stock involves a high degree of risk. See "Risk Factors" beginning on page 11.


 
  Per Share
  Total
 

Initial public offering price

  $     $    

Underwriting discounts and commissions(1)

  $     $    

Proceeds, before expenses, to us

  $     $    

(1)
See "Underwriting" beginning on page 156 for additional information regarding underwriting compensation.

We have granted the underwriters a 30-day option to purchase up to                        additional shares of common stock on the same terms and conditions set forth above.

The underwriters expect to deliver the shares to purchasers on                        , 2014.


Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.


Stifel

  BMO Capital Markets

JMP Securities

  Wedbush PacGrow Life Sciences

   

The date of this prospectus is                        , 2014.


Table of Contents


TABLE OF CONTENTS

 
  Page  

Prospectus Summary

    1  

Risk Factors

    11  

Information Regarding Forward-Looking Statements

    44  

Industry and Market Data

    45  

Use of Proceeds

    46  

Dividend Policy

    47  

Capitalization

    48  

Dilution

    50  

Selected Financial Data

    52  

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

    54  

Business

    74  

Management

    119  

Executive Compensation

    126  

Certain Relationships and Related Party Transactions

    141  

Principal Stockholders

    143  

Description of Capital Stock

    146  

Shares Eligible for Future Sale

    150  

Material United States Tax Considerations to Non-U.S. Holders

    152  

Underwriting

    156  

Legal Matters

    164  

Experts

    164  

Where You Can Find Additional Information

    164  

Index to Financial Statements

    F-1  

        You should rely only on the information contained in this prospectus and any free writing prospectus we have prepared in connection with this offering. Neither we nor the underwriters have authorized anyone to provide you with information or make any representations different from or in addition to those contained in this prospectus or any free writing prospectus we have prepared in connection with this offering. We and the underwriters take no responsibility for and can provide no assurance as to the reliability of any information that others may give you. We are offering to sell shares of common stock and seeking offers to buy shares of our common stock only in jurisdictions where offers and sales are permitted. Our business, financial condition, results of operations and prospectus may have changed since that date.

        Unless the context indicates otherwise, as used in this prospectus, the terms "Vitae," "Company," "we," "us" and "our" refer to Vitae Pharmaceuticals, Inc. The Vitae design logo and the marks "Vitae," "Vitae Pharmaceuticals" and "Contour" are the property of Vitae. This prospectus contains additional trade names, trademarks and service marks of ours and of other companies. We do not intend our use or display of other companies' trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.

        For investors outside the United States: Neither we nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and observe any restrictions relating to this offering and the distribution of this prospectus outside of the United States.


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PROSPECTUS SUMMARY

        This summary highlights information contained in greater detail elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider in making your investment decision. You should read the entire prospectus carefully before making an investment in our common stock. You should carefully consider, among other things, our financial statements and the related notes and the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus.


Overview

Our Company

        We are a clinical stage biotechnology company focused on discovering and developing novel, small molecule drugs for diseases that represent large market opportunities where there are significant unmet medical needs. We are developing a robust and growing portfolio of novel product candidates generated by Contour®, our proprietary structure-based drug discovery platform. Our team of accomplished scientists utilizes Contour to rapidly discover highly potent and selective product candidates for validated but difficult-to-drug targets in multiple disease areas. Our most advanced product candidates include VTP-34072, which is expected to commence a Phase 2 clinical trial for the treatment of type 2 diabetes in July 2014, with data expected in the first half of 2015, and VTP-37948, which is in Phase 1 clinical trials for the treatment of Alzheimer's disease, or Alzheimer's, with data expected in the second half of 2014. Both product candidates are being exclusively developed and following regulatory approval, if any, commercialized by Boehringer Ingelheim GmbH, or BI, under separate collaborations. These collaborations have provided us with an aggregate of $152.4 million in funding to date, including upfront license fees, research funding and success-based milestone payments as well as equity investments. In addition, we have several wholly-owned product candidates advancing in preclinical studies, including: VTP-43742 for the treatment of autoimmune disorders, where the immune system attacks normal tissues, with Phase 1 proof-of-concept data, which is the demonstration of therapeutic activity, expected by the end of 2015; VTP-38443 for the treatment of acute coronary syndrome, which includes unstable angina and heart attacks; and VTP-38543 for the treatment of atopic dermatitis, an immune system mediated inflammation of the skin. However, we currently do not hold any active authorizations to conduct clinical trials with respect to any of our wholly-owned product candidates and, at this time, we rely on BI for the conduct of clinical trials for our two partnered product candidates.

Our Contour Technology Platform

        We believe we are a leader in the field of structure-based drug discovery, which is the use of computers to design drugs utilizing detailed target protein structures as the guide for design, and have leveraged our expertise to create a growing portfolio of novel, potent and selective product candidates. We utilize Contour to discover and develop product candidates for validated therapeutic targets, which are the proteins through which a drug mediates activity, against which the industry has traditionally struggled to develop drugs due to challenges related to potency, selectivity, pharmacokinetics, or the change in drug levels over time, or patentability issues. We refer to these targets as "difficult-to-drug." Contour's computational software uses artificial intelligence and sophisticated algorithms to model the assembly of molecular fragments into fully elaborated, drug-like structures that precisely fit each target's 3-dimensional binding site. These molecules are then assessed by Contour's state-of-the-art scoring function, which is a computer program that predicts how tightly a drug will bind to its active site, to identify the most promising and drug-like structures. Together, these functions allow us to rapidly focus on those structures with the highest potential from among hundreds of billions of possibilities for a given biologic target. We chemically synthesize, comprehensively test, and critically evaluate and modify these novel structures until we identify product candidates with demonstrable first- or best-in-class potential. Our scientists utilize our platform and approach to develop each of our product candidates to rapidly overcome discovery obstacles. We have

 

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achieved animal proof-of-concept, which is the demonstration of activity in an animal, for each of our programs in less than 18 months from the initiation of a program.

Our Most Advanced Product Candidates

        The following table summarizes key information about our most advanced product candidates.

PRODUCT
CANDIDATE
  INDICATION
(TARGET)
  WORLDWIDE
COMMERCIAL
RIGHTS
  STAGE OF CLINICAL DEVELOPMENT AND
ANTICIPATED MILESTONES
VTP-34072   Type 2 Diabetes and metabolic syndrome   BI  

Phase 2 clinical trial initiated in July 2014

    (11b HSD1)      

Results expected in first half of 2015

             
VTP-37948   Alzheimer's Disease (BACE)   BI  

Phase 1 clinical trial initiated in first half of 2014

           

Phase 1 clinical biomarker trial initiated in first half of 2014

           

Results for both trials expected in second half of 2014

             
VTP-43742   Psoriasis, Multiple Sclerosis, other autoimmune diseases (RORgt)   Vitae  

Phase 1 clinical trial expected to begin in first half of 2015

Phase 1 proof-of-concept results expected by end of 2015

             
VTP-38443   Acute Coronary Syndrome (LXRb)   Vitae  

Phase 1 clinical trial expected to begin in first half of 2016

             
VTP-38543   Atopic Dermatitis (LXRb)   Vitae  

Phase 1 clinical trial expected to begin in second half of 2015

VTP-34072

        VTP-34072 is being developed for type 2 diabetes. We expect VTP-34072 to be differentiated from other oral anti-diabetic agents because, based on its mechanism of action and our preclinical data, it lowers glucose and also has a positive impact on multiple cardiovascular and metabolic risk factors associated with metabolic syndrome. Patients with metabolic syndrome, which afflicts approximately 85% of type 2 diabetics, are characterized by being overweight and having elevated glucose, blood pressure, cholesterol and triglycerides, while having decreased levels of high-density lipoprotein, or HDL, cholesterol, HDL-C or "good cholesterol." Cortisol plays a key role in the pathogenesis, or disease mechanism, of metabolic syndrome. VTP-34072 is designed to inhibit 11b hydroxysteroid dehydrogenase type 1, or 11b HSD1, the enzyme responsible for production of cortisol in tissues where active glucose metabolism takes place, including the liver and adipose, or fat, tissue. VTP-34072 is partnered with BI. In Phase 1 clinical trials in 142 patients, VTP-34072 was well tolerated and demonstrated highly potent and selective inhibition of 11b HSD1 in adipose tissue, and had a pharmacokinetic profile which we believe is consistent with once-a-day dosing in humans. VTP-34072 is expected to commence a Phase 2 clinical trial involving 126 type 2 diabetic patients in July 2014 and is expected to report data in the first half of 2015. We are eligible to receive a milestone payment of $6.0 million from BI upon the first patient dosed in this trial.

VTP-37948

        VTP-37948 is being developed for treatment of Alzheimer's. Alzheimer's is characterized by the accumulation of extracellular protein deposits in the brain that are called amyloid plaques. The accumulation of these plaques is believed to directly damage neurons and to trigger additional responses

 

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that further contribute to the disease. Amyloid production begins with an enzyme in the brain known as b-Site Amyloid Precursor Protein Cleaving Enzyme 1, or BACE. There are significant genetic data that implicate BACE as playing a direct role in the disease process itself. We discovered and are developing VTP-37948, a BACE inhibitor, in collaboration with BI. In preclinical studies, VTP-37948 demonstrated highly potent and selective inhibition of BACE in the brain, with up to 95% lowering of brain amyloid beta levels. VTP-37948 is currently in two Phase 1 clinical trials involving a total of 68 healthy volunteers. The first trial includes endpoints of safety, tolerability and pharmacokinetics. The second study looks at the effects of VTP-37948 on a key biomarker of activity, amyloid beta concentration in the cerebrospinal fluid, or CSF. Results from both of these studies are expected in the second half of 2014.

VTP-43742

        We are developing VTP-43742 for autoimmune disorders. Autoimmune disorders include commonly known diseases such as psoriasis, multiple sclerosis, or MS, and rheumatoid arthritis, or RA, as well as rarer conditions such as Behcet's disease, an inflammatory disease of blood vessels, and autoimmune uveitis, an inflammatory disease of the eye. Increased activity of a class of lymphocytes, which are a type of white blood cells called Th17 cells, is a critical part of the pathophysiology of many human autoimmune disorders. RAR-Related Orphan Receptor gamma-t, or RORgt, is a protein that is essential for the formation and function of Th17 cells. Preclinical studies in animal models have demonstrated that inhibition of RORgt activity is beneficial for the treatment of multiple autoimmune disorders. In preclinical studies, VTP-43742 has been shown to inhibit the secretion of Interleukin 17, or IL-17, and other inflammatory proteins from Th17 cells, and has been demonstrated to be therapeutically beneficial in an animal model of MS. These studies also show that VTP-43742 is well absorbed after oral administration in multiple animal species and has a long half-life in plasma, which we believe is consistent with once-a-day dosing in humans. We plan to file an Investigational New Drug application, or IND, with the U.S. Food and Drug Administration, or FDA, for VTP-43742 in the first half of 2015, with Phase 1 clinical trials commencing thereafter. We expect to have Phase 1 proof-of-concept data demonstrating clinical efficacy by the end of 2015.

VTP-38443

        We are developing VTP-38443 for acute coronary syndrome, or ACS. Liver X receptors, or LXRs, which include, LXRa and LXRb, stimulate the production of proteins to transport cholesterol out of cells and inhibit the production of inflammatory proteins. Several studies have demonstrated that LXR agonists promote reverse cholesterol transport, or RCT, in vivo in mice and prevent the development of atherosclerosis. VTP-38443, an orally active LXRb selective agonist, works by augmenting RCT, helping remove cholesterol from the plaque in vessel walls and by inhibiting the production of pro-inflammatory proteins around the plaque. Both of these mechanisms make the plaque less inflamed and more stable, which we believe lowers the risk of plaque rupture and blood clot formation that may lead to a heart attack, and could make VTP-38443 a potential complement to current therapies for ACS. In preclinical studies, VTP-38443 decreased cholesteryl ester formation in plaques by more than 90% and lowered the plaque's inflammatory state. We anticipate completing the necessary preclinical studies and filing an IND for VTP-38443 in the first half of 2016, with Phase 1 clinical trials commencing thereafter.

VTP-38543

        We are developing VTP-38543 topically for atopic dermatitis, also known as eczema. Atopic dermatitis is characterized by a loss of barrier function of the skin and skin inflammation. Similar to VTP-38443, VTP-38543 transports lipids out of cells and decreases inflammation, in this case in damaged skin tissue. VTP-38543, an LXRb selective agonist, has been shown in preclinical studies to stimulate mature skin cells to synthesize and secrete lipids to improve its barrier function, while also decreasing skin inflammation. In an animal model of skin inflammation, VTP-38543 has demonstrated equal or superior efficacy versus a

 

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high potency topical corticosteroid, the current standard of care. We anticipate completing the necessary preclinical studies and filing an IND for VTP-38543 by the second half of 2015, with Phase 1 clinical trials commencing thereafter.

        In addition to our existing product candidates, our team of scientists is currently utilizing Contour in our new discovery program in immuno-oncology for stimulating the immune system to attack the cancer cells.

Our Collaborations

        We currently have two collaborations with BI relating to VTP-34072 for the treatment of type 2 diabetes and VTP-37948 for the treatment of Alzheimer's.

11b HSD1 (VTP-34072)

        We entered into a research collaboration and license agreement with BI under which the companies agreed to combine their respective 11b HSD1 drug discovery programs and to give BI the exclusive right to identify, develop and commercialize compounds for treating patients with type 2 diabetes, which is sometimes called adult onset or non-insulin dependent diabetes, and certain related metabolic disease conditions, such as dyslipidemia, obesity and hypertension. As of June 30, 2014, we have received $74.2 million from BI related to the 11b HSD1 agreement, including a $15 million equity investment, $22.2 million in upfront license fees and research funding and $37 million in success-based development milestone payments. In addition, we are eligible to receive up to $278.0 million in additional milestone payments based on the first product to achieve certain pre-specified events, including up to $153.0 million in development and regulatory milestone payments and up to $125.0 million in commercialization milestone payments, as well as additional milestone payments for certain other products that achieve them. We are also eligible to receive tiered royalty payments from BI, ranging from the upper single digits up to the low double digits percentages, based on the net sales of potential future products. We have the option to participate in funding the Phase 3 clinical trials in exchange for increased royalties. We are be eligible to receive a $6.0 million milestone payment upon the first patient dosed in the Phase 2 clinical trial which commenced in July 2014.

BACE (VTP-37948)

        We entered into a second research collaboration and license agreement with BI which allows them to exclusively identify, develop and commercialize BACE inhibitors for the treatment of certain indications, including Alzheimer's. As of June 30, 2014, we have received $78.2 million from BI related to BACE, including a $15 million equity investment, $34.2 in upfront fees and research funding and $29 million in success-based development milestone payments. In addition, we are eligible to receive up to $326.0 million in additional milestone payments based on the first product to achieve certain pre-specified events, including up to $176.0 million in development and regulatory milestone payments and up to $150.0 million in commercialization milestone payments, as well as additional milestone payments for certain other products that achieve them. We are also eligible to receive tiered royalty payments from BI, ranging from the upper single digits up to the low double digits percentages, based on the net sales of potential future products. We have the option to participate in funding the Phase 3 clinical trials in exchange for increased royalties.

Our Strategy

        Our goal is to leverage our leadership in structure-based drug discovery to deliver first- or best-in-class small molecule compounds to patients in disease indications that represent large market opportunities where there are significant unmet medical needs.

 

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        The key elements of our business strategy are to:

    advance our growing portfolio of product candidates;
    establish late stage development and commercialization capabilities for certain of our product candidates in the United States and potential other markets;
    selectively collaborate with large biotechnology and pharmaceutical companies to maximize the value of our product candidates;
    leverage Contour, our proprietary structure-based drug discovery platform, to rapidly discover novel small molecule product candidates for additional validated, difficult-to-drug targets; and
    continue investing in technology, people and intellectual property.

Intellectual Property

        Each of our most advanced product candidates is the subject of patents and patent applications for composition of matter and methods of treatment in major markets worldwide. These patents and patent applications, if granted, are expected to provide us with intellectual property protection for all of our current product candidates until 2030 and beyond. We intend to continue to expand our intellectual property protections by seeking and maintaining domestic and international patents on inventions that are commercially important to our business. We will also rely on know-how and continuing technological innovation to develop and maintain our proprietary position.

Financial Overview

        Our revenue to date has been generated primarily through our collaborations. We have not generated any commercial product revenue. As of June 30, 2014, we had $18.1 million of cash, cash equivalents and marketable securities and an accumulated deficit of $120.9 million. We expect to incur significant expenses and operating losses for the foreseeable future as we advance our current and future product candidates from discovery through preclinical development and clinical trials, and to eventually seek regulatory approval and pursue commercialization.

Risks Associated with Our Business

        Our ability to implement our business strategy is subject to numerous risks and uncertainties. As a clinical stage biopharmaceutical company, we face many risks inherent in our business and our industry generally. You should carefully consider all of the information set forth in this prospectus and, in particular, the information under the heading "Risk Factors" in this prospectus prior to making an investment in our common stock. These risks include, among others, the following:

    We have incurred substantial operating expenses in every year since our inception and anticipate that we will continue to incur substantial operating expenses for the foreseeable future. We may never achieve profitability from product sales.
    We currently have no source of product sales revenue.
    We will require substantial additional financing to achieve our goals, and a failure to obtain this necessary capital when needed could force us to delay, limit, reduce or terminate our product development or commercialization efforts.
    We may not successfully identify, develop, commercialize or market potential product candidates.
    If we or our partners do not obtain regulatory approval for our current and future product candidates, our business will be adversely affected.
    We are dependent on BI for the successful development and commercialization of two of our most advanced product candidates, VTP-34072 and VTP-37948. If BI does not devote sufficient resources to the development of these candidates, is unsuccessful in its efforts, or chooses to terminate any of its agreements with us, our business will be materially harmed.

 

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    We and BI rely on third parties to conduct preclinical studies and clinical trials for our product candidates, and if they do not properly and successfully perform their obligations to us, we may not be able to obtain regulatory approvals for our product candidates.
    If we are unable to obtain or protect intellectual property rights related to our product candidates, we may not be able to compete effectively.
    If we fail to attract and keep senior management and key scientific personnel, we may be unable to successfully develop our product candidates, conduct our clinical trials and commercialize our product candidates.

Corporate Information

        We were incorporated in Delaware in May 2001. Our principal executive offices are located at 502 West Office Center Drive, Fort Washington, Pennsylvania 19034 and our telephone number is (215) 461-2000. Our website address is www.vitaepharma.com. The inclusion of our website address in this prospectus is, in each case, intended to be an inactive textual reference only and not an active hyperlink to our website. The information contained in, or that can be accessed through, our website is not part of this prospectus.

Emerging Growth Company Status

        We are an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not "emerging growth companies," including, but not limited to: presenting only two years of audited financial statements in addition to any required unaudited interim financial statements with correspondingly reduced "Management's Discussion and Analysis of Financial Condition and Results of Operations" disclosure in this prospectus; not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act; having reduced disclosure obligations regarding executive compensation in our periodic reports and proxy or information statements; being exempt from the requirements to hold a non-binding advisory vote on executive compensation or seek stockholder approval of any golden parachute payments not previously approved; and not being required to adopt certain accounting standards until those standards would otherwise apply to private companies. As an "emerging growth company" under the JOBS Act, we are permitted to delay the adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. However, we are electing not to take advantage of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to not take advantage of the extended transition period for complying with new or revised accounting standards is irrevocable.

        Although we are still evaluating our options under the JOBS Act, we may take advantage of some or all of the reduced regulatory and reporting requirements that will be available to us so long as we qualify as an "emerging growth company" and thus the level of information we provide may be different than that of other public companies. If we do take advantage of any of these exemptions, some investors may find our securities less attractive, which could result in a less active trading market for our common stock, and our stock price may be more volatile.

        We could remain an "emerging growth company" until the earliest to occur of:

    the last day of the fiscal year following the fifth anniversary of this offering;
    the last day of the first fiscal year in which our annual gross revenues exceed $1 billion;
    the last day of the fiscal year in which we are deemed to be a "large accelerated filer" as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of our common stock held by non-affiliates exceeded $700 million as of the last business day of the second fiscal quarter of such fiscal year; or
    the date on which we have issued more than $1 billion in non-convertible debt securities during the preceding three-year period.

 

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The Offering

Common stock offered by us

                      shares

Common stock to be outstanding after this offering

 

                    shares

Underwriters' option

 

The underwriters have an option for a period of 30 days to purchase up to                        additional shares of our common stock.

Use of proceeds

 

We intend to use the net proceeds of this offering, together with our existing cash reserves to advance our development of VTP-43742, VTP-38443 and VTP-38543, to fund our continued discovery efforts to identify additional drug candidates for new therapeutic molecular targets, including our immuno-oncology program, and for working capital, debt maintenance and general corporate purposes. See "Use of Proceeds" in this prospectus for a more complete description of the intended use of proceeds from this offering.

Risk factors

 

You should read the "Risk Factors" section of this prospectus beginning on page 11 for a discussion of factors to consider carefully before deciding to invest in shares of our common stock.

Proposed NASDAQ Global Market trading symbol

 

VTAE

        The shares of common stock to be outstanding after this offering is based on shares of common stock outstanding as of June 30, 2014, after giving effect to the conversion of all of our outstanding shares of preferred stock into 218,309,741 shares of our common stock and excludes:

    1,045,834 shares issuable upon the exercise of warrants outstanding as of June 30, 2014, at a weighted-average exercise price of $1.19 per share;
    35,252,515 shares of common stock issuable upon the exercise of options outstanding as of June 30, 2014, with a weighted-average exercise price of $0.19 per share;
    9,000,000 shares of common stock subject to restricted stock units, or RSUs, outstanding as of June 30, 2014;
    1,070,687 shares of common stock reserved for future grants under our 2013 Stock Plan, 2004 Stock Plan and 2001 Stock Plan as of June 30, 2014;
    shares of common stock reserved for future grants under our 2014 Equity Incentive Plan, which became effective in                        2014 (subject to automatic annual adjustment in accordance with the terms of the plan), but with respect to which no awards will be granted prior to the completion of the offering; and
    shares reserved for future issuance under our 2014 Employee Stock Purchase Plan, which became effective in                        2014 but with respect to which no shares will be purchased prior to the effective date of the registration statement of which this prospectus is a part, subject to automatic annual adjustment in accordance with the terms of the plan.

        Unless otherwise noted, the information in this prospectus assumes:

    that our restated certificate of incorporation, which we will file in connection with the completion of this offering, is in effect;

 

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    no exercise by the underwriters of their option to purchase up to                        additional shares of common stock from us;
    the conversion of all outstanding shares of our convertible preferred stock into 218,309,741 shares of our common stock, which is expected to occur immediately prior to consummation of this offering, either through satisfaction of the conditions for automatic conversion, based on the aggregate proceeds of this offering, or with the consent of the required preferred stockholders, which we refer to as the automatic preferred stock conversion; and
    a 1-for-            reverse split of our common stock prior to the effectiveness of the registration statement of which this prospectus forms a part.

 

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SUMMARY FINANCIAL DATA

        The following table summarizes our historical financial data as of the dates indicated and for the periods then ended. We have derived the following statement of operations data for the years ended December 31, 2013 and 2012 from our audited financial statements included elsewhere in this prospectus. We have derived the following statement of operations data for the six months ended June 30, 2014 and 2013 and balance sheet data as of June 30, 2014 from our unaudited financial statements included elsewhere in this prospectus. Our unaudited financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of management, include all adjustments, consisting of normal recurring adjustments and accruals, necessary for a fair statement of the information for the interim periods. Our historical results are not necessarily indicative of the results that may be expected in the future, and our interim period results are not necessarily indicative of results to be expected for a full year or any other interim period. The summary of our financial data set forth below should be read together with our financial statements and the related notes to those statements, and the information under "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus.

 
  Year Ended December 31,   Six Months Ended June 30,  
 
  2013   2012   2014   2013  
 
  (in thousands, except share and
per share data)

  (unaudited, in thousands,
except share and per share
data)

 

Statement of operations data:

                         

Collaborative revenues

  $ 22,513   $ 22,348   $ 2,329   $ 1,962  

Operating expenses:

                         

Research and development

    14,917     15,927     9,425     7,584  

General and administrative

    5,406     4,915     2,629     2,680  
                   

Total operating expenses

    20,323     20,842     12,054     10,264  
                   

Operating income (loss)

    2,190     1,506     (9,725 )   (8,302 )

Other (expenses) income:

                         

Other income

    327     243     218     304  

Interest income

    70     101     29     43  

Interest expense

    (1,425 )   (1,627 )   (541 )   (768 )
                   

Total other (expenses) income

    (1,028 )   (1,283 )   (294 )   (421 )

Net income (loss) before income taxes

    1,162     223     (10,019 )   (8,723 )
                   

Net income (loss)

  $ 1,162   $ 223   $ (10,019 ) $ (8,723 )
                   
                   

Per share information:

                         

Net income (loss) per share of common stock, basic and diluted(1)

  $ 0.00   $ 0.00   $ (0.73 ) $ (0.69 )
                   
                   

Basic and diluted weighted average shares outstanding(1)

    12,955,471     12,476,508     13,770,634     12,697,213  
                   
                   

Pro forma net income (loss) per share of common stock:(1)

                         

Basic

  $ 0.01         $ (0.04 )      

Diluted

  $ 0.00         $ (0.04 )      

Pro forma weighted average shares outstanding(1):

                         

Basic

    231,265,212           232,080,375        

Diluted

    240,654,104           232,080,375        

(1)
See Note 2 to our financial statements for an explanation of the method used to calculate net income (loss) per share of common stock, basic and diluted, pro forma net income (loss) per share of common stock, basic and diluted, and the basic and diluted pro forma weighted average shares outstanding used to calculate the pro forma per share amounts.

 

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        The following table presents our summary balance sheet data:

    on an actual basis as of June 30, 2014;
    on a pro forma basis to give effect to the automatic preferred stock conversion, which will occur automatically upon the closing of this offering; and
    on a pro forma as adjusted basis to give further effect to our sale of              shares of common stock in this offering at an assumed initial public offering price of $        per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

        The pro forma as adjusted information presented in the summary balance sheet data is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase or decrease in the assumed initial public offering price of $        per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease each of cash, total assets and total stockholders' equity on a pro forma as adjusted basis by approximately $            , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. Similarly, each increase or decrease of 1.0 million shares offered by us at the assumed initial public offering price would increase or decrease each of cash and cash equivalents, total assets and total stockholders' equity on a pro forma as adjusted basis by approximately $            .

 
  As of June 30, 2014  
 
  Actual   Pro Forma   Pro Forma
As Adjusted
 
 
  (unaudited, in thousands)
 

Balance sheet data:

                   

Cash, cash equivalents, and marketable securities

  $ 18,141   $ 18,141   $    

Working capital

    10,031     10,031        

Total assets

    20,562     20,562        

Notes payable, including current portion

    7,505     7,505        

Convertible preferred stock

    125,870            

Accumulated deficit

    (120,896 )   (120,896 )      

Total stockholders' (deficit) equity

    (116,763 )   9,106        

 

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RISK FACTORS

        Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below together with all of the other information contained in this prospectus, including our financial statements and the related notes appearing at the end of this prospectus, before deciding to invest in our common stock. If any of the following risks actually occurs, our business, prospects, operating results and financial condition could suffer materially, the trading price of our common stock could decline and you could lose all or part of your investment. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business.

Risks Related to Our Financial Position and Capital Needs

We have incurred substantial operating expenses in every year since our inception and anticipate that we will continue to incur substantial operating expenses for the foreseeable future. We may never achieve profitability from product sales.

        We are a clinical stage biotechnology company with no product sales to date. Investment in biotechnology product development is highly speculative because it entails substantial upfront capital expenditures and significant risk that any potential product candidate will fail to demonstrate adequate effect or an acceptable safety profile, gain regulatory approval and become commercially viable. We have no products approved for commercial sale and have not generated any revenue from product sales to date, and we continue to incur significant research and development and other expenses related to our ongoing operations. As a result, we have incurred substantial operating expenses in every period since our inception in 2001. With the exception of collaboration revenues from product candidates that we partnered, we have no revenues. For the year ended December 31, 2013 and the six months ended June 30, 2014, we had operating expenses of $20.3 million and $12.1 million, respectively. As of June 30, 2014, we had an accumulated deficit of $120.9 million. Our operating expenses have resulted principally from costs incurred in our discovery, research and development activities.

        We anticipate that our expenses will increase in the future as we expand our development, manufacturing and commercialization activities, continue our discovery and research activities, and seek regulatory approval for our product candidates. If we do not receive the anticipated milestone or royalty payments under our current agreements with Boehringer Ingelheim GmbH, or BI, or if we do not enter into partnerships for other product candidates on acceptable terms, we may incur substantial operating losses over the next several years as we execute our plan to expand our development and commercialization activities and continue our discovery and research activities. There can be no assurance that we will enter into a new collaboration or receive milestone payments or royalties and, therefore, no assurance our operating expenses and net losses will not increase prohibitively in the future.

        To become and remain profitable, we or our partners must succeed in developing our product candidates, obtaining regulatory approval for them, and manufacturing, marketing and selling those products for which we or our partners may obtain regulatory approval. We or they may not succeed in these activities, and we may never generate revenue from product sales. Even if we are profitable in the future, we may not be able to sustain profitability in subsequent periods. Our failure to become and remain profitable would depress our market value and could impair our ability to raise capital, expand our business, discover or develop other product candidates or continue our operations. A decline in the value of our company could cause you to lose all or part of your investment.

We currently have no source of product sales revenue.

        To date, we have not generated any revenues from commercial sales of our product candidates. Our ability to generate product revenue depends upon our ability, alone or with our partners, to successfully commercialize products, including any of our current product candidates or other product candidates that

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we may develop, in-license or acquire in the future. We do not anticipate generating revenue from the sale of products for the foreseeable future. Our ability to generate future product revenue from our current or future product candidates also depends on a number of additional factors, including our or our partners' ability to:

    successfully complete research and clinical development of current and future product candidates;
    establish and maintain supply and manufacturing relationships with third parties, and ensure adequate and legally compliant manufacturing of bulk drug substances and drug products to maintain that supply;
    obtain marketing approval from relevant regulatory authorities in jurisdictions where we or our partners intend to market our product candidates;
    launch and commercialize future product candidates for which we or our partners obtain marketing approval, if any, and if launched independently, successfully establish a sales force, marketing and distribution infrastructure;
    obtain coverage and adequate product reimbursement from third-party payors, including government payors;
    achieve market acceptance for our or our partners' products, if any;
    establish, maintain and protect our intellectual property rights; and
    attract, hire and retain qualified personnel.

        In addition, because of the numerous risks and uncertainties associated with biotechnology product development, including that our product candidates may not advance through development or achieve the endpoints of applicable clinical trials, we are unable to predict the timing or amount of any potential future product sales revenues. In addition, our expenses could increase beyond expectations if we decide to or are required by the U.S. Food and Drug Administration, or FDA, or foreign regulatory authorities to perform studies or trials in addition to those that we currently anticipate. Even if we complete the development and regulatory processes described above, we anticipate incurring significant costs associated with launching and commercializing these products.

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

        As of June 30, 2014, our cash, cash equivalents and marketable securities were approximately $18.1 million. We believe that we will continue to expend substantial resources for the foreseeable future as we continue to develop VTP-43742, VTP-38443, VTP-38543 and any future product candidates. These expenditures will include costs associated with research and development, potentially acquiring new technologies, conducting preclinical studies and clinical trials, seeking regulatory approvals and manufacturing products, as well as marketing and selling products approved for sale, if any. In addition, other unanticipated costs may arise. Because the outcome of our planned and anticipated clinical trials is highly uncertain, we cannot reasonably estimate the actual amounts necessary to successfully complete the development and commercialization of our product candidates.

        BI pays all of the development, manufacturing and commercialization costs and certain patent costs in connection with the activities carried out under our VTP-34072 and VTP-37948 collaborations. Other than those costs, our future capital requirements depend on many factors, some of which may be beyond our control, including:

    the scope, progress, results and costs of researching and developing our other product candidates, and conducting preclinical studies and clinical trials;
    the timing of, and the costs involved in, obtaining regulatory approvals for our other product candidates if clinical trials are successful;
    the timing, receipt, and amount of milestone payments on VTP-34072 and VTP-37948;

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    the cost of commercialization activities for our other product candidates, if any of these product candidates is approved for sale, including marketing, sales and distribution costs;
    if VTP-34072 and VTP-37948 receive regulatory approval, the timing, amount of sales and royalties thereon of each;
    the cost of manufacturing our other product candidates for clinical trials in preparation for regulatory approval and commercialization;
    our ability to establish and maintain strategic partnerships, licensing or other arrangements and the financial terms of such agreements;
    the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including litigation costs and the outcome of such litigation; and
    the timing, receipt, and amount of sales of, or royalties on, other future product candidates, if any.

        Based on our current operating plan, we believe that the net proceeds we receive from this offering, together with receipt of anticipated milestone payments and our existing cash, cash equivalents and marketable securities will be sufficient to fund our projected operating requirements through the first half of 2016. However, our operating plan may change as a result of many factors currently unknown to us, and we may need additional funds sooner than planned. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. Additional funds may not be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available to us on a timely basis, we may be required to delay, limit, reduce or terminate preclinical studies, clinical trials or other development activities for one or more of our product candidates or delay, limit, reduce or terminate our establishment of sales and marketing capabilities or other activities that may be necessary to commercialize our product candidates.

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

        We may seek additional capital through a variety of means, including through private and public equity offerings, debt financings and strategic partnerships. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take certain actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through strategic partnerships with third parties, we may have to relinquish valuable rights to our technologies or product candidates, or grant licenses on terms that are not favorable to us. If we are unable to raise additional funds through equity or debt financing when needed, we may be required to delay, limit, reduce or terminate our product development or commercialization efforts for VTP-43742, VTP-38443, VTP-38543 or other future product candidates or grant rights to develop and market our product candidates that we would otherwise prefer to develop and market ourselves.

The terms of our secured debt facility require us to meet certain operating covenants and place restrictions on our operating and financial flexibility. If we raise additional capital through debt financing, the terms of any new debt could further restrict our ability to operate our business.

        We have a $15 million loan and security agreement with Oxford Finance LLC and Silicon Valley Bank that is secured by a lien covering all of our assets, other than our intellectual property. As of December 31, 2013 and June 30, 2014, the outstanding principal balance of the loan was approximately $10.4 million and $7.7 million, respectively. The loan agreement contains customary affirmative and negative covenants and events of default. Affirmative covenants include, among others, covenants requiring us to maintain our legal existence and governmental approvals, deliver certain financial reports and maintain insurance coverage. Negative covenants include, among others, restrictions on transferring any part of our business

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or property, changing our business, including changing the composition of our executive team or board of directors, incurring additional indebtedness, engaging in mergers or acquisitions, paying dividends or making other distributions, making investments and creating other liens on our assets and other financial covenants, in each case subject to customary exceptions. If we default under the terms of the loan agreement, including failure to satisfy our operating covenants, the lender may accelerate all of our repayment obligations and take control of our pledged assets, potentially requiring us to renegotiate our agreement on terms less favorable to us or to immediately cease operations. Further, if we are liquidated, the lender's right to repayment would be senior to the rights of the holders of our common stock. The lender could declare a default upon the occurrence of any event that they interpret as a material adverse change as defined under the loan agreement. Any declaration by the lender of an event of default could significantly harm our business and prospects and could cause the price of our common stock to decline. If we raise any additional debt financing, the terms of such additional debt could further restrict our operating and financial flexibility.

Our ability to use net operating loss and tax credit carryforwards and certain built-in losses to reduce future tax payments may be limited by provisions of the Internal Revenue Code, and may be subject to further limitation as a result of the transactions contemplated by this offering.

        Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an "ownership change" (generally defined as a greater than 50% change (by value) in its equity ownership over a three year period), the corporation's ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income may be limited. We believe that, as a result of this offering, our preferred stock financings and other transactions, we have experienced, or may upon completion of this offering experience, an "ownership change." We may also experience ownership changes in the future as a result of subsequent shifts in our stock ownership. As of December 31, 2013, we had federal and state net operating loss carryforwards of approximately $66.4 million and $61.6 million, respectively, and federal research and development credits of approximately $5.1 million, which could be limited if we experience an "ownership change." Any such limitations would generally be equal to our equity value at the time of the ownership change multiplied by a risk-free rate of return published monthly by the IRS, which may result in greater tax liabilities than we would incur in the absence of such limitation. Such an increased liability could adversely affect our business, results of operations, financial condition and cash flow.

Unstable market and economic conditions may have serious adverse consequences on our business, financial condition and stock price.

        As has been widely reported, global credit and financial markets have been experiencing extreme disruptions over the past several years, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. There can be no assurance that further deterioration in credit and financial markets and confidence in economic conditions will not occur. Our general business strategy may be compromised by economic downturns, a volatile business environment and unpredictable and unstable market conditions. If the current equity and credit markets deteriorate, or do not improve, it may make any necessary equity or debt financing more difficult to secure, more costly or more dilutive. Failure to secure any necessary financing in a timely manner and on favorable terms could harm our growth strategy, financial performance and stock price and could require us to delay or abandon plans with respect to our business, including clinical development plans. In addition, there is a risk that one or more of our current service providers, manufacturers or other third parties with which we conduct business may not survive difficult economic times, which could directly affect our ability to attain our operating goals on schedule and on budget.

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

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

        Our product candidates are and will be subject to extensive governmental regulations relating to, among other things, development, clinical trials, manufacturing and commercialization. In order to obtain regulatory approval for the commercial sale of any product candidates, we or our partners must demonstrate through extensive preclinical studies and clinical trials that the product candidate is safe and effective for use in each target indication. Clinical testing is expensive, time-consuming and uncertain as to outcome. We or our partners may gain regulatory approval for VTP-34072, VTP-37948, VTP-43742, VTP-38443, VTP-38543, or other future product candidates in some but not all of the territories available or some but not all of the target indications, resulting in limited commercial opportunity for the approved product candidates, or we or they may never obtain regulatory approval for these product candidates.

Delays in the commencement, enrollment or completion of clinical trials of our product candidates could result in increased costs to us as well as a delay or failure in obtaining regulatory approval, or prevent us from commercializing our product candidates on a timely basis, or at all.

        We cannot guarantee that clinical trials will be conducted as planned or completed on schedule, if at all. A failure of one or more clinical trials can occur at any stage of testing. Events that may prevent successful or timely commencement, enrollment or completion of clinical development include:

    delays by us or our partners in reaching a consensus with regulatory agencies on trial design;
    delays in reaching agreement on acceptable terms with prospective clinical research organizations, or CROs, and clinical trial sites;
    delays in obtaining required Institutional Review Board, or IRB, approval at each clinical trial site;
    delays in recruiting suitable patients to participate in clinical trials;
    imposition of a clinical hold by regulatory agencies for any reason, including safety concerns or after an inspection of clinical operations or trial sites;
    failure by CROs, other third parties or us or our partners to adhere to clinical trial requirements;
    failure to perform in accordance with the FDA's good clinical practices, or GCP, or applicable regulatory guidelines in other countries;
    delays in the testing, validation, manufacturing and delivery of the product candidates to the clinical sites;
    delays caused by patients not completing participation in a trial or not returning for post-treatment follow-up;
    clinical trial sites or patients dropping out of a trial;
    occurrence of serious adverse events in clinical trials that are associated with the product candidates that are viewed to outweigh its potential benefits; or
    changes in regulatory requirements and guidance that require amending or submitting new clinical protocols.

        Delays, including delays caused by the above factors, can be costly and could negatively affect our or our partners' ability to complete a clinical trial. If we or our partners are not able to successfully complete clinical trials, we will not be able to continue development, obtain regulatory approval or commercialize our product candidates. We currently do not hold any active investigational new drug, or IND, applications or clinical trial authorizations and are reliant at this time entirely upon BI for conduct of clinical trials for our two partnered product candidates.

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Clinical failure may occur at any stage of clinical development, and because our product candidates are in an early stage of development, there is a high risk of failure, and we may never succeed in developing marketable products or generating product revenue.

        Our early encouraging preclinical results for VTP-43742, VTP-38443 or VTP-38543, and clinical results for VTP-34072 and VTP-37948 are not necessarily predictive of the results of our ongoing or future clinical trials. Promising results in preclinical studies of a drug candidate may not be predictive of similar results in humans during clinical trials, and successful results from early clinical trials of a drug candidate may not be replicated in later and larger clinical trials or in clinical trials for different indications. If the results of our or our partners' ongoing or future clinical trials are inconclusive with respect to the efficacy of our product candidates or if we or they do not meet the clinical endpoints with statistical significance or if there are safety concerns or adverse events associated with our product candidates, we or our partner may be prevented or delayed in obtaining marketing approval for our product candidates. In addition, if our competitor's clinical trials in similar indications are not successful, we may need to conduct additional or cost prohibitive clinical studies to overcome the presumptions resulting from these unsuccessful trials. For instance, in 2012, we halted our plans for a large Phase 2 clinical trial for a former product candidate, VTP-27999, which was being developed for renin inhibition, a protein important for kidney function and blood pressure control, following the release of clinical data from another pharmaceutical company that would have required us to significantly increase the scope, scale and duration of clinical trial work to obtain regulatory approval. Moreover, data obtained from trials and studies are susceptible to varying interpretations, and regulators may not interpret our data as favorably as we do, which may delay or prevent regulatory approval. Alternatively, even if we or our partners obtain regulatory approval, that approval may be for indications or patient populations that are not as broad as intended or desired or may require labeling that includes significant use or distribution restrictions or safety warnings. We or our partners may also be required to perform additional or unanticipated clinical trials to obtain approval or be subject to additional post-marketing testing requirements to maintain regulatory approval. In addition, regulatory authorities may withdraw their approval of a product or impose restrictions on its distribution, such as in the form of a modified risk evaluation and mitigation strategy.

Even if we or our partners receive regulatory approval for our product candidates, such approved products will be subject to ongoing regulatory review, which may result in significant additional expense. Additionally, our product candidates, if approved, could be subject to labeling and other restrictions, and we or our partners may be subject to penalties if we fail to comply with regulatory requirements or experience unanticipated problems with our approved products.

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

        Later discovery of previously unknown problems with an approved product, including adverse events of unanticipated severity or frequency, or with manufacturing operations or processes, or failure to comply with regulatory requirements, may result in, among other things:

    restrictions on the marketing or manufacturing of the product, withdrawal of the product from the market, or voluntary or mandatory product recalls;
    fines, warning letters, or holds on clinical trials;

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    refusal by the FDA to approve pending applications or supplements to approved applications filed by us or our partners, or suspension or revocation of product license approvals;
    product seizure or detention, or refusal to permit the import or export of products; and
    injunctions or the imposition of civil or criminal penalties.

        The FDA's policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we or our partners are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or not able to maintain regulatory compliance, we or our partners may lose any marketing approval that may have been obtained and we may not achieve or sustain profitability, which would adversely affect our business.

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

        We and our partners intend to market our product candidates, if approved, in international markets, alone or in conjunction with others. Such marketing will require separate regulatory approvals in each market and compliance with numerous and varying regulatory requirements. The approval procedures vary from country-to-country and may require additional testing. Moreover, the time required to obtain approval may differ from that required to obtain FDA approval. In addition, in many countries outside the United States, a product candidate must be approved for reimbursement before it can be approved for sale in that country. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval. We or our partners may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market.

Risks Related to Our Reliance on Third Parties

We are dependent on BI for the successful development and commercialization of two of our most advanced product candidates, VTP-34072 and VTP-37948. If BI does not devote sufficient resources to the development of these candidates, is unsuccessful in its efforts, or chooses to terminate any of its agreements with us, our business will be materially harmed.

        We have entered into collaboration agreements with BI pursuant to which BI has the responsibility to develop and commercialize VTP-34072 and VTP-37948. Pursuant to these collaboration agreements, BI is responsible for all clinical and other product development, regulatory, manufacturing and commercialization activities and cost for VTP-34072 and VTP-37948.

        BI is obligated to use commercially reasonable efforts to develop and commercialize VTP-34072 and VTP-37948. Under our collaboration agreements, once BI takes over development activities of a product candidate, it may determine the development plan and activities for that product candidate. We may disagree with BI about the development strategy it employs, but we will have no rights to impose our development strategy on BI. In addition, BI may determine that it is commercially reasonable to develop and commercialize only VTP-34072 or VTP-37948 and discontinue the development or commercialization of the other product candidate, or BI may determine that it is not commercially reasonable to continue development of one or both of VTP-34072 and VTP-37948. In the event of any such decision, we may be unable to progress the discontinued candidate or candidates ourselves. Similarly, BI may decide to seek regulatory approval for, and limit commercialization of, either or both of VTP-34072 and VTP-37948 to narrower indications than we would pursue. We would be prevented from developing or commercializing a candidate in an indication covered by the collaboration agreements that BI has chosen not to pursue.

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        Our collaborations with BI may not be scientifically or commercially successful due to a number of important factors, including the following:

    BI has wide discretion in determining the efforts and resources that it will apply to its collaborations with us. The timing and amount of any development milestone payments, and downstream commercial milestone payments and royalties that we may receive under such partnership will depend on, among other things, the efforts, allocation of resources and successful development and commercialization of these product candidates by BI.
    BI may terminate either or both of its collaborations with us without cause and for circumstances outside of our control, which could make it difficult for us to attract new strategic partners or adversely affect how we are perceived in scientific and financial communities.
    BI may develop or commercialize our product candidates in such a way as to elicit litigation that could jeopardize or invalidate our intellectual property rights or expose us to potential liability.
    BI may not comply with all applicable regulatory requirements, or fail to report safety data in accordance with all applicable regulatory requirements.
    If BI were to breach its arrangements with us, we may need to enforce our right to terminate the applicable agreement in legal proceedings, which could be costly and cause delay in our ability to receive rights back to the relevant product candidates. If we were to terminate an agreement with BI due to BI's breach or BI terminated the agreement without cause, the development and commercialization of VTP-34072 and VTP-37948 could be delayed, curtailed or terminated because we may not have sufficient financial resources or capabilities to continue development and commercialization of these candidates on our own.
    BI may enter into one or more transactions with third parties, including a merger, consolidation, reorganization, sale of substantial assets, sale of substantial stock or other change in control, which could divert the attention of its management and adversely affect BI's ability to retain and motivate key personnel who are important to the continued development of the programs under the strategic partnership with us. In addition, the third-party to any such transaction could determine to reprioritize BI's development programs such that BI ceases to diligently pursue the development of our programs or cause the respective collaboration with us to terminate.

We and BI rely on third parties to conduct preclinical studies and clinical trials for our product candidates, and if they do not properly and successfully perform their obligations to us, we may not be able to obtain regulatory approvals for our product candidates.

        We plan to design the clinical trials for VTP-43742, VTP-38443, VTP-38543 and expect to do so for any future unpartnered product candidates, and we will continue to work with BI on trials for VTP-34072 and VTP-37948. However, we and BI rely on CROs and other third parties to assist in managing, monitoring and otherwise carrying out many of these studies and trials. We and BI compete with many other companies for the resources of these third parties. The third parties on whom we and BI rely generally may terminate their engagements at any time, and having to enter into alternative arrangements would delay development and commercialization of our product candidates.

        The FDA and foreign regulatory authorities require compliance with regulations and standards, including GCP, for designing, conducting, monitoring, recording, analyzing, and reporting the results of clinical trials to assure that the data and results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. Although we and BI rely on third parties to conduct many of our and their clinical trials, we and BI are responsible for ensuring that each of these clinical trials is conducted in accordance with its general investigational plan, protocol and other requirements.

        If these third parties do not successfully carry out their duties under their agreements, if the quality or accuracy of the data they obtain is compromised due to their failure to adhere to clinical trial protocols or to regulatory requirements, or if they otherwise fail to comply with clinical trial protocols or meet expected deadlines, the clinical trials of our product candidates may not meet regulatory requirements. If clinical

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trials do not meet regulatory requirements or if these third parties need to be replaced, preclinical development activities or clinical trials may be extended, delayed, suspended or terminated. If any of these events occur, we or BI may not be able to obtain regulatory approval of our product candidates on a timely basis or at all.

We intend to rely on third-party manufacturers, including BI with respect to VTP-34072 and VTP-37948, to make our product candidates, and any failure by these manufacturers may delay or impair the ability to complete clinical trials or commercialize our product candidates.

        Manufacturing small molecule therapeutics is complicated and is tightly regulated by the FDA, the European Medicines Agency, or EMA, and comparable regulatory authorities around the world. For preclinical studies, clinical trials and commercial supply of our products that we have not partnered, we use and expect to continue to use contract manufacturing organizations. Successfully transferring complicated manufacturing techniques to contract manufacturing organizations and scaling up these techniques for commercial quantities will be time consuming and we may not be able to achieve such transfer. Moreover, the market for contract manufacturing services for product candidates is highly cyclical, with periods of relatively abundant capacity alternating with periods in which there is little available capacity. If any need we or BI have for contract manufacturing services increases during a period of industry-wide tight capacity, we or BI may not be able to access the required capacity on a timely basis or on commercially viable terms.

        In addition, we contract with fill-and-finishing providers with the appropriate expertise, facilities and scale to meet our needs. Failure to maintain cGMP can result in a contractor receiving FDA sanctions, which can impact our and BI's contractors' ability to operate or lead to delays in our clinical development programs. We have been notified by BI that it previously received a warning letter from the FDA in May 2013 concerning its manufacturing practices. In the warning letter, the FDA said it had identified significant violations of cGMP for the manufacture of active product ingredients, or APIs, and the cGMP regulations for finished pharmaceuticals. In June 2014, the FDA issued a close out letter to BI which stated that the FDA had completed an evaluation of BI's corrective actions in response to the May 2013 warning letter. While the FDA's close out letter stated that, based on its evaluation, it appeared that BI had addressed the violations contained in the May 2013 warning letter, the FDA stated that future FDA inspections and regulatory activities would further assess the adequacy and sustainability of BI's corrections of the violations. We can provide no assurances that BI will continue to comply with cGMP or that it will not receive additional warning letters or sanctions from the FDA. We believe that our and BI's current fill-and-finish contractors are operating in accordance with cGMP, but we can give no assurance that FDA or other regulatory agencies will not conclude that another lack of compliance exists. In addition, any delay in contracting for fill-and-finish services, or failure of the contract manufacturer to perform the services as needed, may delay clinical trials, registration and launches, and delay or limit our ability to receive any corresponding milestone or royalty payments. Any such issues may have a substantial negative effect on our business.

For two of our product candidates, VTP-34072 and VTP-37948, we rely on BI to produce, or contract for the production of, bulk drug substance and finished drug product for late stage clinical trials and for commercial supplies of any approved candidates. Any failure by BI or by third-parties with which BI contracts may delay or impair the ability to complete late stage clinical trials or commercialize either or both of VTP-34072 and VTP-37948, if approved.

        BI is responsible for manufacturing VTP-34072 and VTP-37948. BI currently performs the manufacture of the drug substance and will be responsible for the manufacture of the drug product for both VTP-34072 and VTP-37948. BI may in the future use contract manufacturers for the manufacture of drug substance and drug product for VTP-34072 and VTP-37948 and we have no expectation that BI plans to perform the manufacture of bulk drug substance or drug product for either VTP-34072 or VTP-37948 in the future. We have been notified by BI that it previously received a warning letter from the FDA in May

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2013 concerning its manufacturing practices. In the warning letter, the FDA said it had identified significant violations of cGMP for the manufacture of active pharmaceutical ingredients, or API, which is the actual drug substance, and the cGMP regulations for finished pharmaceuticals. In June 2014, the FDA issued a close out letter to BI which stated that the FDA had completed an evaluation of BI's corrective actions in response to the May 2013 warning letter. While the FDA's close out letter stated that, based on the its evaluation, it appeared that BI had addressed the violations contained in the May 2013 warning letter, the FDA stated that future FDA inspections and regulatory activities would further assess the adequacy and sustainability of BI's corrections of the violations. We can provide no assurances that BI will continue to comply with cGMP or that it will not receive additional warning letters or sanctions from the FDA. We believe that our and BI's current fill-and-finish contractors are operating in accordance with cGMP, but we can give no assurance that FDA or other regulatory agencies will not conclude that another lack of compliance exists. If BI is unable to manufacture or unable to contract at the appropriate time with a manufacturer willing and able to manufacture sufficient quantities of VTP-34072 and VTP-37948 to meet their clinical trial needs and ultimately commercial demand, either for technical or business reasons, the development and commercialization of VTP-34072 and VTP-37948 may be delayed.

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

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

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

Risks Related to Our Intellectual Property

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

        We rely upon a combination of patents, trade secret protection and confidentiality agreements to protect the intellectual property related to our drug discovery platform and product candidates. We will only be able to protect our technologies from unauthorized use by third parties to the extent that valid and enforceable patents or trade secrets cover them. The patent position of biotechnology and pharmaceutical companies is generally uncertain because it involves complex legal and factual considerations. The standards applied by the United States Patent and Trademark Office, or USPTO, and foreign patent offices in granting patents are not always applied uniformly or predictably. For example, there is no uniform worldwide policy regarding patentable subject matter or the scope of claims allowable in biotechnology patents. The patent applications that we own or in-license may fail to result in issued patents with claims that cover our product candidates in the United States or in other countries. There is no

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assurance that all potentially relevant prior art relating to our patents and patent applications has been found. We may be unaware of prior art that could be used to invalidate an issued patent or prevent our pending patent applications from issuing as patents. Even if patents do successfully issue and even if such patents cover our product candidates, third parties may challenge their validity, enforceability or scope, which may result in such patents being narrowed or invalidated. Furthermore, even if they are unchallenged, our patents and patent applications may not adequately protect our intellectual property, provide exclusivity for our product candidates or prevent others from designing around our claims. Any of these outcomes could impair our ability to prevent competition from third parties, which may have an adverse impact on our business.

        If patent applications we or our partners hold or have in-licensed with respect to our platform or product candidates fail to issue, if their breadth or strength of protection is threatened, or if they fail to provide meaningful exclusivity for our product, it could dissuade companies from collaborating with us. Several patent applications covering our product candidates and compounds have been filed recently. We cannot offer any assurances about which, if any, patents will issue, the breadth of any such patents or whether any issued patents will be found invalid and unenforceable or will be threatened by third parties. Any successful challenge to these patents or any other patents owned by or licensed to us could deprive us of rights necessary for the successful commercialization of any product candidate that we or our partners may develop. Since patent applications in the United States and most other countries are confidential for a period of time after filing, and some remain so until issued, we and our partners cannot be certain that we were the first to file any patent application related to a product candidate. Furthermore, if third parties have filed such patent applications, an interference or derivation proceeding in the United States can be initiated by the USPTO or a third party to determine who was the first to invent any of the subject matter covered by the patent claims of our applications. In addition, patents have a limited lifespan. In the United States, the natural expiration of a patent is generally 20 years after the earliest non-provisional filing date. Various extensions may be available; however, the life of a patent and the protection it affords is limited and all patents will eventually expire. If we encounter delays in obtaining regulatory approvals, the period of time during which we could market a product under patent protection could be reduced. Even if patents covering our product candidates are obtained, once the patent life has expired for a product, we may be open to competition from generic products.

        The patent prosecution process is expensive and time-consuming, and we and our current or future licensors, licensees or collaborators may not be able to prepare, file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. Moreover, in some circumstances, we may not have the right to control the preparation, filing and prosecution of patent applications, or to maintain the patents, covering technology that we license from or license to third parties and are reliant on our licensors, licensees or collaborators. Therefore, these patents and applications may not be prosecuted and enforced in a manner consistent with the best interests of our business. If our current or future licensors, licensees or collaborators fail to establish, maintain or protect such patents and other intellectual property rights, such rights may be reduced or eliminated. If our licensors, licensees or collaborators are not fully cooperative or disagree with us as to the prosecution, maintenance or enforcement of any patent rights, such patent rights could be compromised.

        Furthermore, we may not have identified all United States and foreign patents or published applications that affect our business either by blocking our ability to commercialize our product candidates or by covering similar technologies that affect our market. In addition, some countries do not grant patent claims directed to methods of treating humans, and in these countries patent protection may not be available at all to protect our product candidates. Even if patents issue, we cannot guarantee that the claims of those patents will be valid and enforceable or provide us with any significant protection against competitive products, or otherwise be commercially valuable to us.

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        We also rely on trade secrets to protect our technology, particularly where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. While we use reasonable efforts to protect our trade secrets, our licensors, employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally or willfully disclose our information to competitors. Enforcing a claim that a third party illegally obtained and is using our trade secrets is expensive and time-consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how.

        If we fail to obtain or maintain patent protection or trade secret protection for any of our product candidates that we may develop, license or acquire, third parties could use our proprietary information, which could impair our ability to compete in the market and adversely affect our ability to generate revenues and achieve profitability.

        Even if our patent applications issue as patents, they may not issue in a form that will provide us with any meaningful protection, prevent competitors from competing with us or otherwise provide us with any competitive advantage. Our competitors may be able to circumvent our owned or licensed patents by developing similar or alternative technologies or products in a non-infringing manner.

        The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and our owned and licensed patents may be challenged in the courts or patent offices in the United States and abroad. Such challenges may result in loss of exclusivity or freedom to operate or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit our ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of our technology and products. Given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such product candidates might expire before or shortly after such product candidates are commercialized. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.

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

Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our and our partners' patent applications and the enforcement or defense of our issued patents.

        On September 16, 2011, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law. The Leahy-Smith Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. In particular, under the Leahy-Smith Act, the United States transitioned in March 2013 to a "first to file" system in which the first inventor to file a patent application will be entitled to the patent. Third parties are allowed to submit prior art before the issuance of a patent by the USPTO, in which case a patent may become subject to post-grant proceedings including opposition, derivation, reexamination, inter-partes review or interference proceedings challenging our patent rights or the patent rights of others. An adverse determination in any such submission, proceeding or litigation could reduce the scope or enforceability of, or invalidate, our patent rights, which could adversely affect our or our partners' competitive position.

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

        Periodic maintenance and annuity fees on any issued patent are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime of the patent. The USPTO and various foreign

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governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. While an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could result in abandonment or lapse of a patent or patent application include failure to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. If we or our partners fail to maintain the patents and patent applications covering our product candidates, our competitors might be able to enter the market, which would have a material adverse effect on our business.

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

        Our commercial success depends in part on us and our partners not infringing the patents and proprietary rights of third parties. There is a substantial amount of litigation, both within and outside the United States, involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries, including patent infringement lawsuits, interferences, oppositions, ex-parte review and inter partes reexamination and post grant review proceedings before the USPTO and corresponding foreign patent offices. Numerous U.S. and foreign issued patents and pending patent applications owned by third parties exist in the fields in which we and our partners are developing and may develop our product candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that our product candidates may be subject to claims of infringement of the patent rights of third parties. If a third party claims that we infringe on their products or technology, we could face a number of issues, including:

    infringement and other intellectual property claims which, with or without merit, can be expensive and time-consuming to litigate and can divert management's attention from our core business;
    substantial damages for past infringement, which we may have to pay if a court decides that our product infringes on a competitor's patent;
    a court prohibiting us from selling or licensing our product unless the patent holder licenses the patent to us, which the partner would not be required to do;
    if a license is available from a patent holder, we may have to pay substantial royalties or grant cross licenses to our patents; and
    redesigning our processes so they do not infringe, which may not be possible or could require substantial funds and time.

        Third parties may assert that we are employing their proprietary technology without authorization. There may be third-party patents or patent applications with claims to materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of our product candidates, that we failed to identify. For example, applications filed before November 29, 2000 and certain applications filed after that date that will not be filed outside the United States remain confidential until issued as patents. Except for the preceding exceptions, patent applications in the United States and elsewhere are generally published only after a waiting period of approximately 18 months after the earliest filing. Therefore, patent applications covering our platform technology or our product candidates could have been filed by others without our knowledge. Additionally, pending patent applications which have been published can, subject to certain limitations, be later amended in a manner that could cover our platform technologies, our product candidates or the use or manufacture of our product candidates. We may also face a claim of misappropriation if a third party believes that we inappropriately obtained and used trade secrets of such third party. If we are found to have misappropriated a third party's trade secrets, we may be prevented from further using such trade secrets, limiting our ability to develop our product candidates, and we may be required to pay damages.

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        If any third-party patents were held by a court of competent jurisdiction to cover aspects of our materials, formulations, methods of manufacture or methods for treatment, the holders of any such patents would be able to block our ability to develop and commercialize the applicable product candidate until such patent expired or unless we or our partners obtain a license. These licenses may not be available on acceptable terms, if at all. Even if we or our partners were able to obtain a license, the rights may be nonexclusive, which could result in our competitors gaining access to the same intellectual property. Ultimately, we or our partners could be prevented from commercializing a product, or be forced to cease some aspect of our business operations, if, as a result of actual or threatened patent infringement claims, we or our partners are unable to enter into licenses on acceptable terms. If BI is required to enter a license agreement with a third party in order to import, develop, manufacture or commercialize any BACE inhibitors, each of the royalty payments that we could receive may be reduced by up to 50%. This could harm our business significantly. In addition, during the course of any patent or other intellectual property litigation, there could be public announcements of the results of hearings, rulings on motions, and other interim proceedings in the litigation. If securities analysts or investors regard these announcements as negative, the perceived value of our products, programs, or intellectual property could be diminished. Accordingly, the market price of our common stock may decline.

        Parties making claims against us or our partners may obtain injunctive or other equitable relief, which could effectively block our or our partners' ability to further develop and commercialize one or more of our product candidates. Defending against claims of patent infringement or misappropriation of trade secrets could be costly and time-consuming, regardless of the outcome. Thus, even if we were to ultimately prevail, or to settle at an early stage, such litigation could burden us with substantial unanticipated costs. In addition, litigation or threatened litigation could result in significant demands on the time and attention of our management team, distracting them from the pursuit of other company business. In the event of a successful claim of infringement against us or our partners, we may have to pay substantial damages, including treble damages and attorneys' fees for willful infringement, pay royalties, redesign our infringing products or obtain one or more licenses from third parties, which may be impossible or require substantial time and monetary expenditure. In addition, the uncertainties associated with litigation could have a material adverse effect on our ability to raise the funds necessary to continue our clinical trials, continue our research programs, license necessary technology from third parties, or enter into development partnerships that would help us bring our product candidates to market.

We may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time-consuming, and unsuccessful. Further, our issued patents could be found invalid or unenforceable if challenged in court.

        If we or any of our partners were to initiate legal proceedings against a third party to enforce a patent directed at one of our product candidates, or one of our future product candidates, the defendant could counterclaim that our patent is invalid or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness, non-enablement or insufficient written description. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO or made a misleading statement during prosecution. Third parties may also raise similar claims before the USPTO, even outside the context of litigation. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity or unenforceability, we would lose at least part, and perhaps all, of the patent protection on such product candidate. Such a loss of patent protection would have a material adverse impact on our business.

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        Interference proceedings provoked by third parties or brought by us or declared by the USPTO may be necessary to determine the priority of inventions with respect to our patents or patent applications or those of our licensors. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms.

        Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation.

        Most of our competitors are larger than we are and have substantially greater resources. They are, therefore, likely to be able to sustain the costs of complex patent litigation longer than we could. In addition, the uncertainties associated with litigation could have a material adverse effect on our ability to raise the funds necessary to continue our clinical trials, continue our internal research programs, in-license needed technology, or enter into development partnerships that would help us bring our product candidates to market.

We may need to license certain intellectual property from third parties, and such licenses may not be available or may not be available on commercially reasonable terms.

        A third party may hold intellectual property, including patent rights that are important or necessary to the development or commercialization of our products. It may be necessary for us to use the patented or proprietary technology of third parties to commercialize our products, in which case we would be required to obtain a license from these third parties. Such a license may not be available on commercially reasonable terms or at all, which could materially harm our business.

We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

        As is common in the biotechnology and pharmaceutical industry, we employ individuals who were previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although no claims against us are currently pending, we may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.

We may not be able to protect our intellectual property rights throughout the world.

        Filing, prosecuting and defending patents on product candidates in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States can be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and further, may export otherwise infringing products to territories where we have patent protection, but enforcement rights are not as strong as those in the United States. These products may compete with our product candidates and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

        Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries do not favor the enforcement of patents and other intellectual property protection, which could make it difficult for us to stop the

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infringement of our patents generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.

Our reliance on third parties requires us to share our trade secrets, which increases the possibility that a competitor will discover them or that our trade secrets will be misappropriated or disclosed.

        Because we rely on third parties to assist with the research and develop and to manufacture our product candidates, we must, at times, share trade secrets with them. We seek to protect our proprietary technology in part by entering into confidentiality agreements and, if applicable, material transfer agreements, consulting agreements or other similar agreements with our advisors, employees, third-party contractors and consultants prior to beginning research or disclosing proprietary information. These agreements typically limit the rights of the third parties to use or disclose our confidential information, including our trade secrets. Despite the contractual provisions employed when working with third parties, the need to share trade secrets and other confidential information increases the risk that such trade secrets become known by our competitors, are inadvertently incorporated into the technology of others, or are disclosed or used in violation of these agreements. Given that our proprietary position is based, in part, on our know-how and trade secrets, a competitor's discovery of our trade secrets or other unauthorized use or disclosure would impair our competitive position and may have a material adverse effect on our business.

        In addition, these agreements typically restrict the ability of our advisors, employees, third-party contractors and consultants to publish data potentially relating to our trade secrets, although our agreements may contain certain limited publication rights. For example, any academic institution that we may collaborate with in the future will usually expect to be granted rights to publish data arising out of such collaboration, provided that we are notified in advance and given the opportunity to delay publication for a limited time period in order for us to secure patent protection of intellectual property rights arising from the collaboration, in addition to the opportunity to remove confidential or trade secret information from any such publication. In the future we may also conduct joint research and development programs that may require us to share trade secrets under the terms of our research and development or similar agreements. Despite our efforts to protect our trade secrets, our competitors may discover our trade secrets, either through breach of our agreements with third parties, independent development or publication of information by any of our third-party collaborators. A competitor's discovery of our trade secrets would impair our competitive position and have an adverse impact on our business.

The validity and enforceability of the patents and applications that cover our product candidates can be challenged by competitors.

        If any of our product candidates are approved by the FDA, one or more third parties may challenge the patents covering this approved product candidate, which could result in the invalidation of, or render unenforceable, some or all of the relevant patent claims. For example, if a third party files an Abbreviated New Drug Application, or ANDA, for a generic drug product containing an approved product candidate, and relies in whole or in part on studies conducted by or for us, the third party will be required to certify to the FDA that either: (1) there is no patent information listed in the FDA's Orange Book with respect to our NDA for the applicable approved product candidate; (2) the patents listed in the Orange Book have expired; (3) the listed patents have not expired, but will expire on a particular date and approval is sought after patent expiration; or (4) the listed patents are invalid or will not be infringed by the manufacture, use or sale of the third-party's generic drug product. A certification that the new product will not infringe the

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Orange Book-listed patents for the applicable approved product candidate, or that such patents are invalid, is called a paragraph IV certification. If the third party submits a paragraph IV certification to the FDA, a notice of the paragraph IV certification must also be sent to us once the third-party's ANDA is accepted for filing by the FDA. We may then initiate a lawsuit to defend the patents identified in the notice. The filing of a patent infringement lawsuit within 45 days of receipt of the notice automatically prevents the FDA from approving the third-party's ANDA until the earliest of 30 months or the date on which the patent expires, the lawsuit is settled, or the court reaches a decision in the infringement lawsuit in favor of the third party. If we do not file a patent infringement lawsuit within the required 45-day period, the third-party's ANDA will not be subject to the 30-month stay. Litigation or other proceedings to enforce or defend intellectual property rights are often very complex in nature, may be very expensive and time-consuming, may divert our management's attention from our core business, and may result in unfavorable results that could adversely impact our ability to prevent third parties from competing with our products.

If we do not obtain protection under the Hatch-Waxman Amendments by extending the patent terms and obtaining data exclusivity for our product candidates, our business may be materially harmed.

        Depending upon the timing, duration and specifics of FDA marketing approval of our product candidates, one or more of our United States patents may be eligible for limited patent term restoration under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However, we may not be granted an extension because of, for example, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than we request. If we are unable to obtain patent term extension or restoration or the term of any such extension is less than we request, our competitors may obtain approval of competing products following our patent expiration, and our revenue could be reduced, possibly materially.

If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected.

        Our registered or unregistered trademarks or trade names may be challenged, infringed, circumvented or declared generic or determined to be infringing on other marks. We may not be able to protect our rights to these trademarks and trade names, which we need to build name recognition among potential partners or customers in our markets of interest. At times, competitors may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of our registered or unregistered trademarks or trade names. Over the long-term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business may be adversely affected. Our efforts to enforce or protect our proprietary rights related to trademarks, trade secrets, domain names, copyrights or other intellectual property may be ineffective and could result in substantial costs and diversion of resources and could adversely impact our financial condition or results of operations.

Risks Related to Commercialization of Our Product Candidates

Our future commercial success depends upon attaining significant market acceptance of our product candidates, if approved, among physicians, patients, key opinion leaders and healthcare payors.

        Even if we or our partners obtain regulatory approval for VTP-34072, VTP-37948, VTP-43742, VTP-38443, VTP-38543 or any other product candidates that we may develop or acquire in the future, the

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product may not gain market acceptance among physicians, key opinion leaders, healthcare payors, patients and the medical community. Market acceptance of any approved products depends on a number of factors, including:

    the efficacy and safety of the product, as demonstrated in clinical trials;
    the clinical indications for which the product is approved and the label approved by regulatory authorities for use with the product, including any warnings that may be required on the label;
    acceptance by physicians, key opinion leaders and patients of the product as a safe and effective treatment;
    the cost, safety and efficacy of treatment in relation to alternative treatments;
    the availability of coverage and adequate reimbursement and pricing by third party payors and government authorities;
    the continued projected growth of drug markets in our various indications;
    relative convenience and ease of administration;
    the prevalence and severity of adverse side effects; and
    the effectiveness of our, and our partners' sales and marketing efforts.

        Market acceptance is critical to our ability to generate significant revenue. Any product candidate, if approved and commercialized, may be accepted in only limited capacities or not at all. If any approved products are not accepted by the market to the extent that we expect, we may not be able to generate significant revenue and our business would suffer.

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

        Market acceptance and sales of any approved product candidates will depend significantly on the availability of adequate coverage and reimbursement from third-party payors and may be affected by existing and future healthcare reform measures. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which drugs they will pay for and establish reimbursement levels. Increasingly, third-party payors are requiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices charged for drugs and products. Coverage and reimbursement may not be available for any product that we commercialize and, even if these are available, the level of reimbursement may not be satisfactory. Inadequate reimbursement levels may adversely affect the demand for, or the price of, any drug candidate for which we obtain marketing approval.

        Reimbursement by a third-party payor may depend upon a number of factors, including the third-party payor's determination that use of a product is, among other things:

    a covered benefit under its health plan;
    safe, effective and medically necessary;
    appropriate for the specific patient;
    cost-effective; and
    neither experimental nor investigational.

        Obtaining coverage and adequate reimbursement approval for a product from a government or other third party payor is a time consuming and costly process that could require us to provide supporting scientific, clinical and cost-effectiveness data for the use of our products to the payor. We or our partners may not be able to provide data sufficient to gain acceptance with respect to coverage and adequate reimbursement. Moreover, a third-party payor's decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will be approved. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development. Additionally, coverage and reimbursement for drug products can differ significantly from payor to payor. One third-party payor's decision to cover a particular drug product

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does not ensure that other payors will also provide coverage for the drug product, or will provide coverage at an adequate reimbursement rate.

        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. Patients are unlikely to use our product candidates, once approved, unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our products. Sales of our product candidates will, therefore, depend substantially on the extent to which the costs of our product candidates will be paid by third-party payors.

        We cannot be sure that coverage or adequate reimbursement will be available for any of our product candidates. Also, we cannot be sure that reimbursement amounts will not reduce the demand for, or the price of, our products. If reimbursement is not available or is available only to limited levels, we or our partners may not be able to commercialize certain of our products. In addition in the United States, third-party payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement of new drugs. As a result, significant uncertainty exists as to whether and how much third-party payors will reimburse patients for their use of newly approved drugs, which in turn will put pressure on the pricing of drugs.

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

        In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval of our drug candidates, restrict or regulate post-approval activities and affect our ability to profitably sell any drug candidates for which we obtain marketing approval.

        Our revenue prospects could be affected by changes in healthcare spending and policy in the United States and abroad. We operate in a highly regulated industry and new laws, judicial decisions, or new interpretations of existing laws, or decisions, related to healthcare availability, the method of delivery or payment for healthcare products and services could negatively impact our business, operations and financial condition. There is significant interest in promoting health care reform, as evidenced by the enactment in the United States of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or the Affordable Care Act. Among other things, the Affordable Care Act contains provisions that may reduce the profitability of drug products, including, for example, revised the methodology by which rebates owed by manufacturers to the state and federal government for covered outpatient under the Medicaid Drug Rebate Program, extended the Medicaid Drug Rebate Program to utilization of prescriptions of individuals enrolled in Medicaid managed care plans, imposed mandatory discounts for certain Medicare Part D beneficiaries, and subjected manufacturers to new annual fees based on a pharmaceutical companies' share of sales to federal healthcare programs.

        We expect that the Affordable Care Act, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that we receive for any approved product. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue or commercialize our drugs.

        It is likely that federal and state legislatures within the United States and foreign governments will continue to consider changes to existing healthcare legislation. We cannot predict the reform initiatives that may be adopted in the future or whether initiatives that have been adopted will be repealed or

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modified. The continuing efforts of the government, insurance companies, managed care organizations and other payors of healthcare services to contain or reduce costs of healthcare may adversely affect:

    the demand for any drug products for which we may obtain regulatory approval;
    our ability to set a price that we believe is fair for our products;
    our ability to obtain coverage and reimbursement approval for a product;
    our ability to generate revenues and achieve or maintain profitability; and
    the level of taxes that we are required to pay.

We face substantial competition, which may result in others discovering, developing or commercializing products before, or more successfully, than we do.

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

        If our product candidates are approved, they will compete with currently marketed drugs and potentially with product candidates currently in development focusing on the same mechanism or action which include:

    11b HSD1:  We believe that Bristol-Myers Squibb Company, or BMS, Eli Lilly & Co., and Roche Holding AG are studying their 11b HSD1 inhibitors in clinical trials.
    BACE:  We believe that Merck & Co., AstraZeneca PLC and Eisai Co., Ltd. in collaboration with Biogen Idec are studying BACE inhibitors in clinical trials.
    RORgt:  We believe that a number of companies including large pharmaceutical companies and large biotech companies are actively assessing RORgt inhibitors in preclinical studies.
    LXRb:  We believe that BMS is studying an LXRb inhibitor in cardiovascular clinical trials and Alexar Therapeutics, Inc. is developing an LXRb inhibitor for dermatologic conditions.

        Many of our potential competitors have significantly greater financial, manufacturing, marketing, drug development, technical and human resources than we do. Large pharmaceutical companies, in particular, have extensive experience in clinical testing, obtaining regulatory approvals, recruiting patients and in manufacturing biotechnology products. These companies also have significantly greater research and marketing capabilities than we do and may also have products that have been approved or are in late stages of development, and have collaborative arrangements in our target markets with leading companies and research institutions. Established pharmaceutical companies may also invest heavily to accelerate discovery and development of novel compounds or to in-license novel compounds that could make the product candidates that we develop obsolete. As a result of all of these factors, our competitors may succeed in obtaining patent protection or FDA approval or discovering, developing and commercializing product candidates before we do. In addition, any new product that competes with an approved product must demonstrate compelling advantages in efficacy, convenience, tolerability and safety in order to overcome price competition and to be commercially successful. If we are not able to compete effectively against potential competitors, our business will not grow and our financial condition and operations will suffer.

        We believe that our ability to successfully compete will depend on, among other things:

    the efficacy and safety profile of our product candidates, including relative to marketed products and product candidates in development by third parties;
    the time it takes for our product candidates to complete clinical development and receive marketing approval;
    the ability to commercialize any of our product candidates that receive regulatory approval;
    the price of our products, including in comparison to branded or generic competitors;

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    whether coverage and adequate levels of reimbursement are available under private and governmental health insurance plans, including Medicare;
    the ability to establish, maintain and protect intellectual property rights related to our product candidates;
    the ability to manufacture commercial quantities of any of our product candidates that receive regulatory approval; and
    acceptance of any of our product candidates that receive regulatory approval by physicians and other healthcare providers.

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

        Undesirable side effects caused by our product candidates could cause us, BI or regulatory authorities to interrupt, delay or halt clinical trials and could result in the denial of regulatory approval by the FDA or other regulatory authorities and potential products liability claims. BI has completed two Phase 1 trials and is expected to commence a Phase 2 trial for VTP-34072 in July 2014 and has initiated the first Phase 1 trial for VTP-37948. We plan to submit IND applications and commence clinical trials for VTP-43742, VTP-38443, VTP-38543 and continue the research and development of other product candidates. Serious adverse events deemed to be caused by our product candidates could have a material adverse effect on the development of our product candidates and our business as a whole. Our understanding of the relationship between our product candidates and potential adverse events may change as we gather more information or future unexpected adverse events may occur. There can be no assurance that adverse events associated with our product candidates will not be observed. As is typical in drug development, we have a program of ongoing toxicology studies in animals for our other clinical stage product candidates and cannot provide assurance that the findings from such studies or any ongoing or future clinical trials will not adversely affect our clinical development activities.

        If we or others identify undesirable side effects caused by our product candidates either before or after receipt of marketing approval, a number of potentially significant negative consequences could result, including:

    our clinical trials may be put on hold;
    we or our partners may be unable to obtain regulatory approval for our product candidates;
    regulatory authorities may withdraw approvals of our product candidates;
    regulatory authorities may require additional warnings on the label;
    a medication guide outlining the risks of such side effects for distribution to patients may be required;
    we could be sued and held liable for harm caused to patients; and
    our reputation may suffer.

        Any of these events could prevent us from achieving or maintaining market acceptance of our product candidates and could substantially increase commercialization costs.

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

        In some countries, particularly member states of the European Union, the pricing of prescription drugs is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after receipt of marketing approval for a product. In addition, there can be considerable pressure by governments and other stakeholders on prices and reimbursement levels, including as part of cost containment measures. Political, economic and regulatory developments may further complicate pricing negotiations, and pricing negotiations may continue after reimbursement has been obtained. Reference pricing used by various European Union member states and parallel distribution, or arbitrage between low-priced and high-priced member states, can further reduce prices. In

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some countries, we or our partners may be required to conduct a clinical trial or other studies that compare the cost-effectiveness of our product candidates to other available therapies in order to obtain or maintain reimbursement or pricing approval. Publication of discounts by third-party payors or authorities may lead to further pressure on the prices or reimbursement levels within the country of publication and other countries. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be adversely affected.

Risks Related to Our Business and Industry

We may not successfully identify, develop, commercialize or market potential product candidates.

        A key element of our strategy is to use our technology platform, Contour®, to build a pipeline of novel drug candidates. The drug discovery that we are conducting using our proprietary technology may not be successful in identifying compounds that are useful in treating diseases. Our research programs may initially show promise in identifying potential drug candidates, yet fail to yield drug candidates for clinical development for a number of reasons, including:

    our research methodology, including our screening technology, may not successfully identify medically relevant potential product candidates;
    our pursuit of difficult-to-drug targets may make it challenging to design potential product candidates;
    results of clinical trials conducted by others on similar indications or on compounds with similar mechanisms of action could result in our having to conduct additional or cost prohibitive clinical trials, which could delay development and possibly make commercialization prohibitively expensive;
    we may encounter product manufacturing difficulties that limit yield or produce undesirable characteristics that increase the cost of goods, cause delays or make the product candidates unmarketable;
    our product candidates may cause adverse effects in patients or subjects, even after successful initial toxicology studies, which may make the product candidates unmarketable;
    our product candidates may not demonstrate a meaningful benefit to patients or subjects; and
    our collaboration partners may change their development profiles or plans for potential product candidates or abandon a therapeutic area or the development of a partnered product.

        If any of these events occur, we may be forced to abandon our development efforts for a program or programs, which would have a material adverse effect on our business, operating results and prospects and could potentially cause us to cease operations. For instance, in 2012, we halted our plans for a Phase 2 clinical trial for a former product candidate, VTP-27999, which was being developed for renin inhibition, following the release of clinical data from another pharmaceutical company that would have required us to significantly increase the scope, scale and duration of clinical trial work to obtain regulatory approval. Research programs to identify new product candidates require substantial technical, financial and human resources. We may focus our efforts and resources on potential programs or product candidates that ultimately prove to be unsuccessful.

        If we are unable to identify suitable compounds for preclinical and clinical development, we will not be able to obtain revenues from sale of drugs in future periods, which likely would result in significant harm to our financial position and adversely impact our stock price.

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

        We are highly dependent on members of our management and scientific teams, including Jeffrey Hatfield, our Chief Executive Officer and President, and Richard Gregg, M.D., our Chief Scientific Officer. The loss of the services of either of these persons could impede the achievement of our research, development and commercialization objectives. We do not maintain "key person" insurance for any of our executives or other employees.

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        Recruiting and retaining qualified scientific, clinical, manufacturing, sales and marketing personnel will also be critical to our success. We may not be able to attract and retain these personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us.

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

        We are exposed to the risk of employee and other third-party fraud or other misconduct. Misconduct by employees and other third-parties could include intentional failures to comply with FDA regulations, to provide accurate information to the FDA, to comply with manufacturing standards we have established, to comply with federal and state healthcare fraud and abuse laws and regulations, to report financial information or data accurately or to disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee and other third-party misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. It is not always possible to identify and deter employee and other third-party misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant civil, criminal and administrative penalties, damages, monetary fines, disgorgement, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings and curtailment or restructuring of our operations, any of which could adversely affect our ability to operate.

Our current and future relationships with healthcare professionals, principal investigators, consultants, commercial partners, customers (actual and potential) and third-party payors in the United States and elsewhere may be subject, directly or indirectly, to applicable anti-kickback, fraud and abuse, false claims, physician payment transparency, health information privacy and security and other healthcare laws and regulations, which could expose us to penalties.

        Healthcare providers, physicians and third-party payors in the United States and elsewhere will play a primary role in the recommendation and prescription of any drug candidates for which we obtain marketing approval. Our current and future arrangements with healthcare professionals, principal investigators, consultants, customers (actual and potential) and third-party payors may expose us to broadly applicable fraud and abuse and other healthcare laws, including, without limitation, the federal Anti-Kickback Statute and the federal False Claims Act, that may constrain the business or financial arrangements and relationships through which we sell, market and distribute any drug candidates for which we obtain marketing approval. In addition, we may be subject to physician payment transparency laws and patient privacy and security regulation by the federal government and by the U.S. states and foreign

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jurisdictions in which we conduct our business. The applicable federal, state and foreign healthcare laws that may affect our ability to operate include the following:

    the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, lease, order or recommendation of, any good, facility, item or service, for which payment may be made, in whole or in part, under federal and state healthcare programs such as Medicare and Medicaid;
    federal civil and criminal false claims laws and civil monetary penalty laws, including the federal False Claims Act, which impose criminal and civil penalties, including civil whistleblower or qui tam actions, against individuals or entities for, among other things, knowingly presenting, or causing to be presented, to the federal government, including the Medicare and Medicaid programs, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government;
    the civil monetary penalties statute, which imposes penalties against any person or entity who, among other things, is determined to have presented or caused to be presented a claim to a federal health program that the person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent;
    the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created new federal criminal statutes that prohibit knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or obtain, by means of false or fraudulent pretenses, representations or promises, any of the money or property owned by, or under the custody or control of, any healthcare benefit program, regardless of the payor (e.g., public or private), knowingly and willfully embezzling or stealing from a health care benefit program, willfully obstructing a criminal investigation of a healthcare offense and knowingly and willfully falsifying, concealing or covering up by any trick or device a material fact or making any materially false statements in connection with the delivery of, or payment for, healthcare benefits, items or services relating to healthcare matters;
    HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and their respective implementing regulations, which impose obligations on covered entities, including healthcare providers, health plans, and healthcare clearinghouses, as well as their respective business associates that create, receive, maintain or transmit individually identifiable health information for or on behalf of a covered entity, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;
    the federal Open Payments program, created under Section 6002 of the Affordable Care Act and its implementing regulations, imposed new annual reporting requirements for manufacturers of drugs, devices, biologicals and medical supplies for certain payments and "transfers of value" provided to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members. Failure to submit timely, accurately and completely the required information for all payments, transfers of value and ownership or investment interests may result in civil monetary penalties of up to an aggregate of $150,000 per year and up to an aggregate of $1 million per year for "knowing failures"; and
    analogous state and foreign laws, such as state anti-kickback and false claims laws, which may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers; state and foreign laws that require pharmaceutical companies to comply with the pharmaceutical industry's voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers; state and foreign laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; and state and foreign laws

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      governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

        Further, the Affordable Care Act, among other things, amended the intent requirement of the federal Anti-Kickback Statute and certain criminal statutes governing healthcare fraud. A person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it. In addition, the Affordable Care Act provided that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act.

        Efforts to ensure that our future business arrangements with third parties will comply with applicable healthcare laws and regulations may involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, including, without limitation, damages, fines, imprisonment, exclusion from participation in government healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations, which could significantly harm our business. If any of the physicians or other healthcare providers or entities with whom we expect to do business, including our current and future collaborators, is found not to be in compliance with applicable laws, it may be subject to criminal, civil or administrative sanctions, including exclusions from participation in government healthcare programs, which could also affect our business.

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

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

We have no sales, marketing or distribution capabilities and we will have to invest significant resources to develop these capabilities.

        We have no internal sales, marketing or distribution capabilities. If any of our unpartnered product candidates ultimately receives regulatory approval, we may not be able to effectively market and distribute the product candidate. We will have to invest significant amounts of financial and management resources to develop internal sales, distribution and marketing capabilities, some of which will be committed prior to any confirmation that any of such product candidates will be approved. We may not be able to hire consultants or external service providers to assist us in sales, marketing and distribution functions on acceptable financial terms or at all. Even if we determine to perform sales, marketing and distribution functions ourselves, we could face a number of additional related risks, including:

    we may not be able to attract and build an effective marketing department or sales force;

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    the cost of establishing a marketing department or sales force may exceed our available financial resources and the revenues generated by our product candidates that we may develop, in-license or acquire; and
    our direct sales and marketing efforts may not be successful.

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

        We face an inherent risk of product liability as a result of the clinical testing of our product candidates and will face an even greater risk if we commercialize any products. For example, we may be sued if any product we develop allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability, and a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates. Even a successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:

    injury to our reputation;
    withdrawal of clinical trial participants;
    costs to defend the related litigations;
    a diversion of management's time and our resources;
    substantial monetary awards to trial participants or patients;
    product recalls, withdrawals, or labeling, marketing or promotional restrictions;
    loss of revenue;
    the inability to commercialize our product candidates; and
    a decline in our stock price.

        Failure to obtain and retain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of products we develop. We currently carry product liability insurance covering our clinical trials in the amount of $5.0 million in the aggregate. Although we maintain such insurance, any claim that may be brought against us could result in a court judgment or settlement in an amount that is not covered, in whole or in part, by our insurance or that is in excess of the limits of our insurance coverage. Our insurance policies also have various exclusions, and we may be subject to a product liability claim for which we have no coverage. We will have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts.

We and our development partners, third-party manufacturers and suppliers use biological materials and may use hazardous materials, and any claims relating to improper handling, storage, or disposal of these materials could be time consuming or costly.

        We and our development partners, third-party manufacturers and suppliers may use hazardous materials, including chemicals and biological agents and compounds that could be dangerous to human health and safety or the environment. Our operations and the operations of our development partner, third-party manufacturers and suppliers also produce hazardous waste products. Federal, state, and local laws and regulations govern the use, generation, manufacture, storage, handling, and disposal of these materials and wastes. Compliance with applicable environmental laws and regulations may be expensive and current or future environmental laws and regulations may impair our product development efforts. In addition, we cannot entirely eliminate the risk of accidental injury or contamination from these materials or wastes. We do not carry specific biological or hazardous waste insurance coverage and our property,

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casualty, and general liability insurance policies specifically exclude coverage for damages and fines arising from biological or hazardous waste exposure or contamination. Accordingly, in the event of contamination or injury we could be held liable for damages or be penalized with fines in an amount exceeding our resources, and our clinical trials or regulatory approvals could be suspended.

Our internal computer systems, or those of our development partners, third-party clinical research organizations or other contractors or consultants, may fail or suffer security breaches, which could result in a material disruption of our product development programs.

        Despite the implementation of security measures, our internal computer systems and those of our current and any future CROs and other contractors, consultants and collaborators are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. While we have not experienced any such material system failure, accident or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our development programs and our business operations. For example, the loss of clinical trial data from completed or future clinical trials could result in delays in our or our partners' regulatory approval efforts and significantly increase our costs to recover or reproduce the data. Likewise, we rely on third parties to manufacture our product candidates and conduct clinical trials, and similar events relating to their computer systems could also have a material adverse effect on our business. To the extent that any disruption or security breach were to result in a loss of, or damage to, our or any of our partners' data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development and commercialization of our product candidate could be delayed.

Business disruptions could seriously harm our future revenues and financial condition and increase our costs and expenses.

        Our operations could be subject to earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and other natural or manmade disasters or business interruptions, for which we are predominantly self-insured. The occurrence of any of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses. We rely on third-party manufacturers to produce our product candidates. Our ability to obtain clinical supplies of our product candidates could be disrupted, if the operations of these suppliers are affected by a man-made or natural disaster or other business interruption.

Risks Related to Our Common Stock and this Offering

An active trading market for our common stock may not develop.

        Prior to this offering, there has been no public market for our common stock. Although we have applied to list our common stock on The NASDAQ Global Market, an active trading market for our shares may never develop or be sustained following this offering. If the market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at a price that is attractive to you or at all. In addition, an inactive market may impair our ability to raise capital by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration, which, in turn, could materially adversely affect our business.

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The trading price of the shares of our common stock could be highly volatile, and purchasers of our common stock may not be able to resell the shares of our common stock at or above the initial public offering price and could incur substantial losses.

        The initial public offering price for our shares will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the trading market. Our stock price is likely to be volatile. The stock market in general and the market for biotechnology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above the initial public offering price. The market price for our common stock may be influenced by many factors, including:

    our and our partners' ability to enroll patients in planned clinical trials;
    results of the clinical trials, and the results of trials of our competitors or those of other companies in our market sector, and the timing of the release of those results;
    the passage of legislation or other regulatory developments in the United States and foreign countries;
    actual or anticipated variations in our financial results or those of companies that are perceived to be similar to us;
    changes in the structure of healthcare payment systems, especially in light of current reforms to the U.S. healthcare system;
    our ability to discover and develop or partner additional product candidates;
    announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
    our ability to enter into strategic partnerships for the development of our product candidates;
    market conditions in the pharmaceutical and biotechnology sectors and issuance of securities analysts' research reports or recommendations;
    sales of our stock by us, our insiders and our other stockholders;
    trading volume of our common stock;
    speculation in the press or investment community;
    general economic, industry and market conditions other events or factors, many of which are beyond our control;
    additions or departures of key personnel; and
    intellectual property, product liability or other litigation against us.

        In addition, the stock market has recently experienced significant volatility, particularly with respect to pharmaceutical, biotechnology and other life sciences company stocks. The volatility of pharmaceutical, biotechnology and other life sciences company stocks often does not relate to the operating performance of the companies represented by the stock. As we operate in a single industry, we are especially vulnerable to these factors to the extent that they affect our industry or our products, or to a lesser extent our markets. In the past, stockholders have initiated class action lawsuits against biotechnology and pharmaceutical companies following periods of volatility in the market prices of these companies' stock. Such litigation, if instituted against us, could cause us to incur substantial costs and divert management's attention and resources, which could have a material adverse effect on our business, financial condition and results of operations.

Our quarterly operating results may fluctuate significantly.

        We expect our operating results to be subject to quarterly fluctuations. Our net loss and other operating results will be affected by numerous factors, including:

    variations in the level of expenses related to our clinical trial and development programs;
    addition or termination of clinical trials;

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    regulatory developments affecting our current or future product candidates;
    our execution of any collaborative, licensing or similar arrangements and the timing of payments we may make or receive under these arrangements; and
    nature and terms of stock-based compensation grants and any intellectual property infringement lawsuit in which we may become involved.

        If our quarterly operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Furthermore, any quarterly fluctuations in our operating results may, in turn, cause the price of our stock to fluctuate substantially.

If securities or industry analysts do not publish research or reports or publish unfavorable research or reports about our business, our stock price and trading volume could decline.

        The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us, our business, our market or our competitors. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our stock would be negatively impacted. In the event we obtain securities or industry analyst coverage, if one or more of the analysts who covers us downgrades our stock, our stock price would likely decline. If one or more of these analysts ceases to cover us or fails to regularly publish reports on us, interest in our stock could decrease, which could cause our stock price or trading volume to decline.

We may use the net proceeds from this offering in ways that you and other stockholders may not approve.

        Our management will have broad discretion in the application of the net proceeds from this offering, including for any of the purposes described in the section entitled "Use of Proceeds," and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. Our management might not apply our net proceeds in ways that ultimately increase the value of your investment. We intend to use the net proceeds from this offering, together with our existing cash resources to fund the continued development of VTP-43742, VTP-38443 and VTP-38543, to fund our continued discovery efforts to identify additional drug candidates for new therapeutic molecular targets, including our immuno-oncology program and for working capital, debt maintenance and general corporate purposes. The failure by our management to apply the net proceeds from this offering effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in a variety of capital preservation investments, including short-term, interest-bearing, investment-grade instruments and U.S. government securities. These investments may not yield a favorable return to our stockholders.

You will suffer immediate and substantial dilution in the net tangible book value of the common stock you purchase.

        The initial public offering price of our common stock is substantially higher than the pro forma as adjusted net tangible book value per share of our outstanding common stock immediately after the completion of this offering. Purchasers of common stock in this offering will experience immediate dilution of approximately $            per share, assuming an initial public offering price of $            per share, the midpoint of the range set forth on the cover of this prospectus. In the past, we issued options and warrants to acquire common stock at prices significantly below the initial public offering price. To the extent these outstanding options and warrants are ultimately exercised, investors purchasing common stock in this offering will sustain further dilution. For a further description of the dilution that you will experience immediately after this offering, see "Dilution."

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Sales of a substantial number of shares of our common stock by our existing stockholders in the public market could cause our stock price to fall.

        Sales of a substantial number of shares of our common stock in the public market or the perception that these sales might occur, could significantly reduce the market price of our common stock and impair our ability to raise adequate capital through the sale of additional equity securities.

        Based on shares of common stock outstanding as of June 30, 2014, upon the closing of this offering, we will have outstanding a total of            shares of common stock after this offering, assuming no exercise of the underwriters' option to purchase additional shares and no exercise of outstanding options and warrants. Of these shares, only the             shares of common stock sold in this offering by us, plus any shares sold upon exercise of the underwriters' option to purchase additional shares, will be freely tradable without restriction in the public market immediately following this offering, unless they are purchased by one of our affiliates.

        We and our executive officers, directors and stockholders have agreed, subject to certain exceptions, not to engage in sales or dispositions of, or other transactions relating to, our common stock or securities convertible into or exercisable or exchangeable for our common stock or warrants or other rights to acquire shares of our common stock. These "lock-up" restrictions end 180 days after the date of this prospectus. However, Stifel, Nicolaus & Company, Incorporated and BMO Capital Markets Corp. may permit persons who are subject to these lock-up agreements to sell shares prior to the expiration of the lock-up agreements.

        After the lock-up agreements expire, up to an additional            shares of common stock will be eligible for sale in the public market of which            shares are held by directors, executive officers and other affiliates and will be subject to volume limitations under Rule 144 under the Securities Act of 1933, as amended, or the Securities Act. In addition, shares of common stock that are either subject to outstanding options or reserved for future issuance under our employee benefit plans will become eligible for sale in the public market to the extent permitted by the provisions of various vesting schedules, the lock-up agreements and Rule 144 and Rule 701 under the Securities Act. If these additional shares of common stock are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

        Following completion of this offering, the holders of 218,309,741 shares of our outstanding common stock, or approximately            of our total outstanding common stock, will be entitled to rights with respect to the registration of their shares under the Securities Act, subject to the 180-day lock-up agreements described above. See "Description of Capital Stock—Registration Rights." Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares held by affiliates, as defined in Rule 144 under the Securities Act. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock.

We do not intend to pay dividends on our common stock, and, consequently, your ability to achieve a return on your investment will depend on appreciation, if any, in the price of our common stock.

        We have never declared or paid any cash dividend on our common stock and do not currently intend to do so for the foreseeable future. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business. In addition, our loan and security agreement with Oxford Finance LLC and Silicon Valley Bank currently prohibits us from paying dividends on our equity securities, and any future debt financing arrangement may contain terms prohibiting or limiting the amount of dividends that may be declared or paid on our common stock. Any return to stockholders will therefore be limited to the appreciation of their stock. Therefore, the success of an investment in shares of our common stock will depend upon any future appreciation in their value. There is no guarantee that

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shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.

We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.

        As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. We will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which will require, among other things, that we file with the Securities and Exchange Commission, or the SEC, annual, quarterly and current reports with respect to our business and financial condition. In addition, the Sarbanes-Oxley Act, as well as rules subsequently adopted by the SEC, and The NASDAQ Global Market to implement provisions of the Sarbanes-Oxley Act, imposes significant requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Further, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC has adopted additional rules and regulations in these areas, such as mandatory "say on pay" voting requirements that will apply to us when we cease to be an emerging growth company. Stockholder activism, the current political environment and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and may impact the manner in which we operate our business in ways we cannot currently anticipate.

        We expect the rules and regulations applicable to public companies to substantially increase our legal and financial compliance costs and to make some activities more time-consuming and costly. If these requirements divert the attention of our management and personnel from other business concerns, they could have a material adverse effect on our business, financial condition and results of operations. The increased costs will decrease our net income or increase our net loss, and may require us to reduce costs in other areas of our business or increase the prices of our products or services. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantial costs to maintain the same or similar coverage. We cannot predict or estimate the amount or timing of additional costs we may incur to respond to these requirements. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.

We are an emerging growth company, and the reduced reporting requirements applicable to emerging growth companies may make our common stock less attractive to investors.

        We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act and are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, only two years of audited financial statements in addition to any required unaudited interim financial statements with correspondingly reduced "Management's Discussion and Analysis of Financial Condition and Results of Operations" disclosure, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in this prospectus and our periodic reports and proxy statements, exemptions from the requirements of holding non-binding advisory votes on executive compensation and seeking stockholder approval of any golden parachute payments not previously approved and not being required to adopt certain accounting standards until those standards would otherwise apply to private companies. We could be an emerging growth company until the last day of the fiscal year following the fifth anniversary of this offering, although circumstances could cause us to lose that status earlier, including if we become a large accelerated filer (in which case we will cease to be an

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emerging company as of the date we become a large accelerated filer, which, generally, would occur if, at the end of a fiscal year, among other things, the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter), if we have total annual gross revenue of $1.0 billion or more during any fiscal year (in which cases we would no longer be an emerging growth company as of December 31 of such fiscal year), or if we issue more than $1.0 billion in non-convertible debt during any three year period before that time (in which case we would cease to be an emerging growth company immediately). Even after we no longer qualify as an emerging growth company, we may still qualify as a "smaller reporting company," which would allow us to take advantage of many of the same exemptions from disclosure requirements including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in this prospectus and our periodic reports and proxy statements. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

If we fail to maintain proper and effective internal control over financial reporting in the future, our ability to produce accurate and timely financial statements could be impaired, which could harm our operating results, investors' views of us and, as a result, the value of our common stock.

        Pursuant to Section 404 of the Sarbanes-Oxley Act, our management will be required to report upon the effectiveness of our internal control over financial reporting beginning with the annual report for our fiscal year ending December 31, 2015. When and if we are a "large accelerated filer" or an "accelerated filer" and are no longer an "emerging growth company," each as defined in the Exchange Act, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting. However, for so long as we remain an emerging growth company, we intend to take advantage of an exemption available to emerging growth companies from these auditor attestation requirements. The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex and require significant documentation, testing, and possible remediation. To comply with the requirements of being a reporting company under the Exchange Act, we will need to upgrade our systems including information technology; implement additional financial and management controls, reporting systems, and procedures; and hire additional accounting and finance staff. If we or, if required, our auditors are unable to conclude that our internal control over financial reporting is effective, investors may lose confidence in our financial reporting, and the trading price of our common stock may decline.

Because a small number of our existing stockholders own a majority of our voting stock, your ability to influence corporate matters will be limited.

        As of July 31, 2014, our current executive officers, directors and greater than 5% stockholders, together with their respective affiliates, owned approximately 85.4% of our common stock, including shares subject to outstanding options and warrants that are exercisable within 60 days after such date, and we expect that following the completion of this offering, our executive officers, directors and greater than 5% stockholders, in the aggregate, will own approximately        % of our outstanding common stock. As a result, such persons, acting together, will have the ability to control our management and affairs and substantially all matters submitted to our stockholders for approval, including the election and removal of directors and approval of any significant transaction. These persons will also have the ability to control our management and business affairs. This concentration of ownership may have the effect of delaying, deferring or preventing a change in control, impeding a merger, consolidation, takeover or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our business, even if such a transaction would benefit other stockholders.

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Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

        Provisions in our amended and restated certificate of incorporation and amended and restated bylaws that will become effective immediately prior to the completion of this offering, as well as provisions of Delaware law, may delay or prevent an acquisition of us or a change in our management. These provisions include:

    authorizing the issuance of "blank check" preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval;
    limiting the removal of directors by the stockholders;
    creating a staggered board of directors;
    prohibiting cumulative voting in the election of directors, which would otherwise allow for less than a majority of stockholders to elect director candidates;
    prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders;
    eliminating the ability of stockholders to call a special meeting of stockholders;
    permitting our board of directors to accelerate the vesting of outstanding option grants upon certain transactions that result in a change of control; and
    establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at stockholder meetings.

        These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, who are responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us. These provisions would apply even if an offer rejected by our board were considered beneficial by some stockholders. Any provision of our amended and restated certificate of incorporation or amended and restated bylaws or Delaware law that has the effect of delaying or deterring a change of control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

        This prospectus includes forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, strategy and plans, and our expectations for future operations, are forward-looking statements. The words "believe," "may," "will," "estimate," "continue," "anticipate," "design," "intend," "expect," "could," "plan," "potential," "predict," "seek," "should," "would" or the negative version of these words and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, strategy, short- and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, assumptions and other important factors, including those described in "Risk Factors." In light of these risks, uncertainties, assumptions and other factors, the forward-looking events and circumstances discussed in this prospectus may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements.

        Forward-looking statements include, but are not limited to, statements about:

    the timing and success of preclinical studies and clinical trials conducted by us and our development partners;
    the ability to obtain and maintain regulatory approval of our product candidates, and the labeling for any approved products;
    the scope, progress, expansion, and costs of developing and commercializing our current or future product candidates;
    the size and growth of the potential markets for our current or future product candidates and the ability to serve those markets;
    our expectations regarding our expenses and revenue, the sufficiency of our cash resources and needs for additional financing;
    the rate and degree of market acceptance of any of our current or future product candidates;
    our expectations regarding competition;
    our anticipated growth strategies;
    our ability to attract or retain key personnel;
    our ability to establish and maintain development partnerships;
    our expectations regarding federal, state and foreign regulatory requirements;
    regulatory developments in the United States and foreign countries;
    our ability to obtain and maintain intellectual property protection for our structure-based drug discovery platform and our product candidates;
    the anticipated trends and challenges in our business and the market in which we operate; and
    our use of proceeds from this offering and existing cash reserves.

        Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Any forward-looking statement made by us in this prospectus speaks only as of the date on which it is made. Except as required by law, we disclaim any duty to update any of these forward-looking statements after the date of this prospectus publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

        You should rely only on the information contained in this prospectus and any free writing prospectus prepared by us or on our behalf or to which we have referred you. You should read this prospectus and any such free writing prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement of which this prospectus is a part completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

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INDUSTRY AND MARKET DATA

        We obtained the industry, market and competitive position data used throughout this prospectus from our own internal estimates and research, as well as from industry and general publications, in addition to research, surveys and studies conducted by third parties. Internal estimates are derived from publicly available information released by industry analysts and third-party sources, our internal research and our industry experience, and are based on assumptions made by us based on such data and our knowledge of our industry and market, which we believe to be reasonable. In addition, while we believe the industry, market and competitive position data included in this prospectus is reliable and is based on reasonable assumptions, such data involves risks and uncertainties and are subject to change based on various factors, including those discussed in "Risk Factors." These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

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USE OF PROCEEDS

        We estimate that the net proceeds from the sale of shares of our common stock in this offering will be approximately $             million, based on an assumed initial public offering price of $            per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters' option to purchase additional shares from us is exercised in full, we estimate that our net proceeds will be approximately $             million. A $1.00 increase (decrease) in the assumed initial public offering price of $            per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the estimated net proceeds to us by $             million, assuming that the number of shares offered by us as set forth on the cover page of this prospectus remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase (decrease) of 1.0 million in the number of shares offered by us would increase (decrease) the net proceeds to us by $             million, assuming an initial public offering price of $            per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

        As of June 30, 2014, we had cash, cash equivalents and marketable securities of $18.1 million. We intend to use the net proceeds from this offering, together with such existing cash resources, as follows:

    approximately $             million to fund the costs for progressing our RORgt program through a single ascending and a multiple ascending dose Phase 1 clinical trials for VTP-43742;

    approximately $             million to fund the costs for progressing VTP-38443 through filing an IND in preparation for a Phase 1 clinical trial for the treatment of ACS;

    approximately $             million to fund the costs for progressing VTP-38543 through a single ascending dose Phase 1 clinical trial for the treatment of atopic dermatitis;

    approximately $             million to fund our continued discovery efforts to identify additional drug candidates for new therapeutic molecular targets, including our immuno-oncology efforts;

    approximately $             million for debt maintenance (our credit facility bears interest at 8.85% per annum and the final payment is due in October 2015); and

    the remainder for working capital and other general corporate purposes.

        This expected use of net proceeds from this offering represents our intentions based upon our current plans and business conditions, which could change in the future as our plans and business conditions evolve. We will require substantial future capital in order to complete the remaining clinical development of VTP-43742, VTP-38443, VTP-38543 and our future product candidates and to potentially commercialize these products. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors, including the progress of our development, feedback from regulatory authorities, the status of and results from clinical trials, as well as any collaborations that we may enter into with third parties for our drug candidates, and any unforeseen cash needs. Accordingly, our management will have broad discretion in using the net proceeds from this offering.

        Pending use of the proceeds as described above, we intend to invest the proceeds in a variety of capital preservation investments, including short-term, interest-bearing, investment-grade instruments and U.S. government securities.

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DIVIDEND POLICY

        We have never declared or paid any cash dividend on our capital stock. We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business. We do not expect to pay any dividends in the foreseeable future. In addition, unless amended, the terms of our loan and security agreement with Oxford Finance LLC and Silicon Valley Bank do not allow us to pay cash dividends. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend on, among other factors, our financial condition, operating results, capital requirements, general business conditions, contractual restrictions and other factors that our board of directors may deem relevant.

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CAPITALIZATION

        The following table sets forth our cash, cash equivalents and marketable securities and our capitalization as of June 30, 2014, as follows:

    on an actual basis;
    on a pro forma basis to give effect to the automatic preferred stock conversion; and
    on a pro forma as adjusted basis to give further effect to the issuance and sale of                shares of our common stock by us and the receipt of the estimated net proceeds from such sale, assuming an initial public offering price of $            per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us.

        You should read this table together with our financial statements and the related notes appearing at the end of this prospectus and "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus.

 
  As of June 30, 2014  
 
  Actual   Pro Forma   Pro Forma
as Adjusted
 
 
  (in thousands, except share and per share data)
(unaudited)

 

Notes payable, including current portion

  $ 7,505   $ 7,505   $    

Series A-1 noncumulative convertible preferred stock, par value $0.0001: 675,000 shares authorized, 675,000 issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

    675                   

Series A-2 noncumulative convertible preferred stock, par value $0.0001: 16,575,000 shares authorized, 16,500,000 issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

    16,379                   

Series B noncumulative convertible preferred stock, par value $0.0001: 151,812,780 shares authorized, 151,112,779 issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

    63,964                   

Series C noncumulative convertible preferred stock, par value $0.0001: 16,700,007 shares authorized, 16,666,673 issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

    14,937                   

Series D noncumulative convertible preferred stock, par value $0.0001: 26,012,500 shares authorized, 25,000,000 issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

    29,915                   

Stockholders' (deficit) equity:

   
 
   
 
   
 
 

Preferred stock, $0.0001 par value, no shares authorized, no shares issued and outstanding, actual;              shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

                   

Common stock, par value $0.0001: 312,825,000 shares authorized, 14,111,936 shares issued and outstanding, actual; 312,825,000 shares authorized, 232,421,677 shares issued and outstanding, pro forma;              shares authorized and              shares issued and outstanding, pro forma as adjusted

    1     23               

Additional paid-in capital

    4,132     129,980               

Accumulated comprehensive loss

    (1 )   (1 )             

Accumulated deficit

    (120,896 )   (120,896 )             
               

Total stockholders' (deficit) equity

    (116,764 )   9,106               
               

Total capitalization

  $ 16,611   $ 16,611               
               
               

        The pro forma as adjusted information below is illustrative only and our cash and cash equivalents and capitalization following the closing of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. A $1.00 increase (decrease) in the assumed initial public offering price of $            per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total stockholders' (deficit) equity and total capitalization by $             million, assuming

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that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each increase (decrease) of 1.0 million in the number of shares offered by us would increase (decrease) cash and cash equivalents, additional paid-in capital, total stockholders' (deficit) equity and total capitalization by approximately $             million, assuming an initial public offering price of $            per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

        The table above excludes the following shares:

    1,045,834 shares issuable upon the exercise of warrants outstanding as of June 30, 2014, at a weighted-average exercise price of $1.19 per share;
    35,252,515 shares of common stock issuable upon the exercise of options outstanding as of June 30, 2014, with a weighted-average exercise price of $0.19 per share;
    9,000,000 shares of common stock subject to RSUs outstanding as of June 30, 2014;
    1,070,687 shares of common stock reserved for future grants under our 2013 Stock Plan, 2004 Stock Plan and 2001 Stock Plan as of June 30, 2014;
    shares of common stock reserved for future grants under our 2014 Equity Incentive Plan, which became effective in                    2014 (subject to automatic annual adjustment in accordance with the terms of the plan), but with respect to which no awards will be granted prior to the completion of the offering; and
    shares reserved for future issuance under our 2014 Employee Stock Purchase Plan, which became effective in                     2014 but with respect to which no shares will be purchased prior to the effective date of the registration statement of which this prospectus is a part, subject to automatic annual adjustment in accordance with the terms of the plan.

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DILUTION

        If you invest in our common stock in this offering, you will experience dilution to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering.

        Historical net tangible book value per share is determined by subtracting our total liabilities and convertible preferred stock from our total tangible assets, and dividing the result by the number of shares of common stock outstanding. Our historical net tangible book deficit as of June 30, 2014, was $116.8 million, or $8.27 per share of common stock. On a pro forma basis, after giving effect to the automatic preferred stock conversion, our pro forma net tangible book value as of June 30, 2014, would have been $9.1 million, or $0.04 per share.

        After giving further effect to the issuance and sale of                shares of our common stock by us and the receipt of the estimated net proceeds from such sale, assuming an initial public offering price of $            per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us, our pro forma as adjusted net tangible book deficit as of June 30, 2014 would have been $             million, or $            per share. This represents an immediate increase in pro forma net tangible book value of $            per share to existing stockholders and an immediate dilution of $            per share to purchasers of common stock in this offering, as illustrated in the following table:

Assumed initial public offering price per share

        $           

Historical net tangible book deficit per share as of June 30, 2014

  $ (116.8 )      

Pro forma net tangible book deficit per share as of June 30, 2014

    (0.04 )      

Decrease in pro forma net tangible book deficit per share attributable to new investors

             
             

Pro forma as adjusted net tangible book deficit per share after this offering

             
             

Pro forma dilution per share to investors participating in this offering

        $           
             
             

        If the underwriters' over-allotment option to purchase additional shares is exercised in full, the pro forma as adjusted net tangible book value per share after this offering would be $            per share, the increase in pro forma as adjusted net tangible book value per share to existing stockholders would be $            per share and the dilution to new investors purchasing shares in this offering would be $             per share.

        The following table presents, on a pro forma as adjusted basis as of June 30, 2014, the differences between existing stockholders and purchasers of shares in this offering with respect to the number of shares purchased from us, the total consideration paid or to be paid and the average price paid per share, assuming, with respect to the purchasers of shares in this offering, an initial public offering price of $            per share, the midpoint of the price range on the cover of this prospectus and before deducting estimated underwriting discounts and commissions and estimated expenses payable by us:

 
  Shares Purchased   Total Consideration    
 
 
  Average
Price per
Share
 
 
  Number   Percent   Amount   Percent  

Existing stockholders before this offering

                 % $                   % $         

Investors participating in this offering

                               
                         

Total

          100 % $            100 %      
                         
                         

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        The table above is based on 232,421,677 shares outstanding as of June 30, 2014 after giving effect to the automatic preferred stock conversion and excludes:

    1,045,834 shares issuable upon the exercise of warrants outstanding as of June 30, 2014, at a weighted-average exercise price of $1.19 per share;
    35,252,515 shares of common stock issuable upon the exercise of options outstanding as of June 30, 2014, with a weighted-average exercise price of $0.19 per share;
    9,000,000 shares of common stock subject to RSUs outstanding as of June 30, 2014;
    1,070,687 shares of common stock reserved for future grants under our 2013 Stock Plan, 2004 Stock Plan and 2001 Stock Plan as of June 30, 2014;
    shares of common stock reserved for future grants under our 2014 Equity Incentive Plan, which became effective in                    2014 (subject to automatic annual adjustment in accordance with the terms of the plan), but with respect to which no awards will be granted prior to the completion of the offering; and
    shares reserved for future issuance under our 2014 Employee Stock Purchase Plan, which became effective in                     2014 but with respect to which no shares will be purchased prior to the effective date of the registration statement of which this prospectus is a part, subject to automatic annual adjustment in accordance with the terms of the plan.

        To the extent that any outstanding options or warrants are exercised or new options are issued under our incentive plans, there will be further dilution to investors participating in this offering.

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SELECTED FINANCIAL DATA

        The following selected financial data should be read together with our financial statements and accompanying notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this prospectus.

        We have derived the following statement of operations data for the years ended December 31, 2013 and 2012 and balance sheet data as of December 31, 2013 from our audited financial statements included elsewhere in this prospectus. We have derived the following statement of operations data for the six months ended June 30, 2014 and 2013 and balance sheet data as of June 30, 2014 from our unaudited condensed financial statements included elsewhere in this prospectus. Our unaudited financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of management, include all adjustments, consisting of normal recurring adjustments and accruals, necessary for a fair statement of the information for the interim periods. Our historical results are not necessarily indicative of the results that may be expected in the future, and our interim period results are not necessarily indicative of results to be expected for a full year or any other interim period.

 
  Year Ended December 31,   Six Months Ended June 30,  
 
  2013   2012   2014   2013  
 
  (in thousands, except for share and per share data)
  (unaudited, in thousands, except for share and per share data)
 

Statement of operations data:

                         

Collaborative revenues

  $ 22,513   $ 22,348   $ 2,329   $ 1,962  

Operating expenses:

                         

Research and development

    14,917     15,927     9,425     7,584  

General and administrative

    5,406     4,915     2,629     2,680  
                   

Total operating expenses

    20,323     20,842     12,054     10,264  
                   

Operating income (loss)

    2,190     1,506     (9,725 )   (8,302 )

Other (expenses) income:

                         

Other income

    327     243     218     304  

Interest income

    70     101     29     43  

Interest expense

    (1,425 )   (1,627 )   (541 )   (768 )
                   

Total other (expenses) income

    (1,028 )   (1,283 )   (294 )   (421 )

Net income (loss) before income taxes

    1,162     223     (10,019 )   (8,723 )

Net income (loss)

  $ 1,162   $ 223   $ (10,019 ) $ (8,723 )
                   
                   

Per share information:

                         

Net income (loss) per share of common stock, basic and diluted(1)

  $ 0.00   $ 0.00   $ (0.73 ) $ (0.69 )
                   
                   

Basic and diluted weighted average shares outstanding(1)

    12,955,471     12,476,508     13,770,634     12,697,213  
                   
                   

Pro forma net income (loss) per share of common stock:(1)

                         

Basic

  $ 0.01         $ (0.04 )      

Diluted

  $ 0.00         $ (0.04 )      

Pro forma weighted average shares outstanding:(1)

                         

Basic

    231,265,212           232,080,375        

Diluted

    240,654,104           232,080,375        

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  As of December 31    
 
 
  As of
June 30,
2014
 
 
  2013   2012  
 
   
   
  (unaudited)
 
 
  (in thousands)
 

Balance sheet data:

                   

Cash, cash equivalents, and marketable securities

  $ 32,454   $ 24,782   $ 18,141  

Working capital

    23,905     27,173     10,031  

Total assets

    34,028     35,329     20,562  

Notes payable, including current portion

    10,086     14,506     7,505  

Convertible preferred stock

    125,870     125,870     125,870  

Accumulated deficit

    (110,877 )   (112,016 )   (120,896 )

Total stockholders' deficit

    (106,894 )   (108,224 )   (116,763 )

(1)
See Note 2 to our financial statements for an explanation of the method used to calculate net income (loss) per share of common stock, basic and diluted, pro forma net income (loss) per share of common stock, basic and diluted, and the basic and diluted pro forma weighted average shares outstanding used to calculate the pro forma per share amounts.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        You should read the following discussion and analysis of our financial condition and results of operations together with the "Selected Financial Data" and our financial statements and the related notes appearing at the end of this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks, uncertainties and assumptions. You should read the "Risk Factors" and "Information Regarding Forward-Looking Statements" sections of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

        We are a clinical-stage biotechnology company focused on discovering and developing novel, small molecule drugs for diseases that represent large market opportunities where there are significant unmet medical needs. We are developing a growing portfolio of novel product candidates internally generated by Contour®, our proprietary structure-based drug discovery platform. We have two partnered product candidates in the clinic and several wholly-owned product candidates in preclinical development:

    Our most advanced product candidates include VTP-34072, for which a Phase 2 clinical trial for the treatment of type 2 diabetes commenced in July 2014, and VTP-37948, which is in a Phase 1 clinical trial for the treatment of Alzheimer's disease, or Alzheimer's. Both products are being developed exclusively by Boehringer Ingelheim GmbH, or BI, under separate collaborations with them, pursuant to which we have received an aggregate of $122 million in non-equity funding as of June 30, 2014, including upfront cash, research funding and success-based milestone payments.
    We have several wholly-owned product candidates advancing in preclinical development, including VTP-43742 for the treatment of autoimmune disorders, VTP-38443 for the treatment of acute coronary syndrome and VTP-38543 for the treatment of atopic dermatitis. We intend to advance and retain rights to these and other programs and product candidates that we believe can be developed and commercialized by us, and to strategically partner where doing so can accelerate the program and generate non-dilutive capital for us.

        We believe we are a leader in the field of structure-based drug discovery, and we have leveraged our expertise and ability to create a growing portfolio of novel, potent and selective product candidates. Our goal is to leverage this leadership in structure-based drug discovery to deliver first- or best-in-class small molecule drugs to patients in diseases with significant unmet medical needs. The key elements of our business strategy are to:

    advance our growing portfolio of product candidates;
    establish late-stage development and commercialization capabilities for certain of our product candidates in the United States and potentially other markets;
    selectively collaborate with large biotechnology and pharmaceutical companies to maximize the value of our product candidates;
    leverage Contour to rapidly discover novel small molecule product candidates for additional validated, difficult-to-drug targets; and
    continue investing in technology, people and intellectual property.

        We believe these strategies provide us with multiple, sustainable-growth opportunities.

        We were incorporated in May 2001 and commenced principal operations during 2002. Since that time, we have been principally engaged in the discovery and development of novel product candidates. We have funded our operations principally with $132.7 million of capital in the form of license fees, milestone payments and research and development funding from our strategic partners and $120.1 million from the

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sale of convertible preferred stock, including $40.0 million of equity sales to our strategic partners, including BI. We have also funded our operations through credit facilities, equipment lease financings, federal grants and investment income.

        For the years ended December 31, 2013 and 2012, we had net income of $1.2 million and $0.2 million, respectively. Our historical net income is not necessarily indicative of results for any future period. For the six months ended June 30, 2014 and 2013, we had a net loss of $10.0 million and $8.7 million, respectively, and at June 30, 2014, we had an accumulated deficit of $120.9 million. We have devoted substantially all of our capital resources to the research and development of our product candidates. Since our inception in 2001, we have had no revenues from product sales. We expect to incur significant expenses and operating losses for the foreseeable future as we advance our product candidates from discovery through preclinical development and clinical trials, and to eventually seek regulatory approval and pursue commercialization. Furthermore, upon the closing of this offering, we expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company.

        We will need to obtain substantial additional funding in connection with our continuing operations, in addition to the net proceeds from this offering. As of June 30, 2014, we had cash, cash equivalents and marketable securities of approximately $18.1 million. We will seek to fund our operations through the sale of equity, debt financings or other capital sources, including potential collaborations or partnerships with other companies or other strategic transactions. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates.

Strategic Partnerships

11b HSD1 Inhibitors with BI

        In October 2007, we entered into a research collaboration and license agreement with BI, which we refer to as the 11b Agreement. Based upon discoveries we made using Contour, we and BI formed a worldwide strategic partnership granting BI exclusive rights to develop and commercialize novel compounds for patients with type 2 diabetes and certain related metabolic disease conditions, such as abnormal blood cholesterol and triglyceride levels, obesity and hypertension, or high blood pressure. The alliance encompasses multiple series of novel, orally available 11b HSD1 inhibitors that were discovered using Contour. We also retained the right, subject to the approval of the joint steering committee established pursuant to the 11b Agreement, to develop 11b HSD1 inhibitors for certain indications outside of the core focus of diabetes and related metabolic conditions. The collaborative research program portion of this strategic partnership began in October 2007 and expired in December 2009.

        Under the 11b Agreement, we have received an aggregate of $59.2 million in non-equity funding as of June 30, 2014, including upfront license fees, research funding and success-based milestone payments. We received an upfront license fee from BI of $15.0 million upon execution of the 11b Agreement. In addition, BI made quarterly payments of $0.8 million during the 27-month collaborative research program period, for a total of $7.2 million. The upfront fee and the research collaboration payments were recognized as revenue over the 27-month funded research program period, from October 2007 through December 2009. Also, as of June 30, 2014, we earned $37.0 million for achieving substantive development milestone payments, including a $7.0 million milestone payment from BI in May 2012 related to our most advanced 11b compound VTP-34072, and we are eligible to receive up to $278.0 million in additional milestone payments based on the achievement of pre-specified events, including up to $153.0 million in development and regulatory milestone payments and up to $125.0 million in commercialization milestone payments.

        The additional development, regulatory and commercialization milestone payments are payable upon the first occurrence of any product to meet the requirements specified in the 11b Agreement. Any

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subsequent compound that achieves the same milestone will earn 50% of the initial milestone payment, unless otherwise agreed to by the parties. In addition, second indications for a product covered by the 11b Agreement to achieve the regulatory milestone payments will earn us 50% of the milestone amount. We are also eligible to receive tiered royalties from the high-single digits to the low-double digits. We have the option to participate in funding the Phase 3 clinical trials in exchange for increased royalties. BI's obligation to pay the royalties continues on a country-by-country and product-by-product basis for the later of 10 years following the first commercial sale of such product in such country or as long as such product is covered by any of the patents licensed to BI under the 11b Agreement or any patents controlled by BI as of the effective date of the 11b Agreement.

B-site Amyloid Precursor Protein-Cleaving Enzyme Inhibitors with BI

        In June 2009, we entered into a research collaboration and license agreement with BI, which we refer to as the BACE Agreement. Based upon discoveries we made using Contour, we and BI formed a worldwide strategic partnership granting BI exclusive rights to develop and commercialize BACE inhibitors for the treatment of certain indications, including Alzheimer's. The inhibition of BACE, an enzyme involved in the formation of amyloid-b plaques, which are insoluble aggregates made up of amyloid-b protein and which accumulate in the brains of patients with Alzheimer's, offers the potential to slow or even halt disease progression. BI will lead development and commercialization of all products for Alzheimer's to capitalize on its global marketing and sales expertise. If a particular BACE inhibitor is not advanced to the development phase, subject to the approval of the joint steering committee established pursuant to the BACE Agreement, we have the right to use our patents and other intellectual property assets licensed to BI as well as certain patents and other intellectual property assets of BI to develop and commercialize that BACE inhibitor for indications other than those referred to above.

        Under the BACE Agreement, we have received an aggregate of $63.2 million in non-equity funding as of June 30, 2014, including upfront license fees, research funding and success-based milestone payments. During the collaborative research program period, we were obligated to provide twelve full-time equivalent employees, or FTEs, per month for a period of 36 months to provide research services, and we received an upfront license fee from BI of $15.0 million upon execution of the BACE Agreement. In addition, BI made quarterly payments of approximately $1.0 million during the 36-month collaborative research program period, for a total of $12.2 million. The license fee and the research collaboration payments were recognized as revenue over the 36-month research program period, from June 2009 through June 2012. In April 2012, the initial research program was extended for an additional year through June 2013, and BI made quarterly payments of approximately $0.8 million over the 12-month extension period, for a total of $3.0 million. During this extension period, we were obligated to provide eight FTEs per month. The additional payments totaling $3.0 million were recognized ratably over the extension period through June 2013. The revenue recognition period for the license fee was also extended on a prospective basis through June 2013.

        In December 2012, we amended the BACE Agreement to expand the core indication definition to include additional indications, including type 2 diabetes and metabolic syndrome. Under the terms of the amendment, we received a nonrefundable fee of $4.0 million upon execution of the amendment. In accordance with the amendment, we were obligated to provide 12 months of research contributions at BI's discretion commencing in June 2013. In accordance with Accounting Standards Update, or ASU, 2009-13, we determined that the BACE Agreement amendment was a new arrangement and not a material modification to the original agreement. We determined that the delivered items did not have stand-alone value due to the fact that the program was in early preclinical development and required our experience to advance development of the product candidate. As such, the BACE Agreement is being accounted for as a single unit of accounting. Accordingly, deferred revenue was recorded upon receipt of the cash payments, and revenue relating to the upfront payment was recognized over the 12-month period in which research contributions were delivered through June 30, 2014. We recorded $2.0 million in revenues related to the

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amendment for the year ended December 31, 2013 and $2.0 million in revenues for the six-months ended June 30, 2014.

        For the years ended December 31, 2013 and 2012, we earned $18.0 million and $9.0 million, respectively, for achieving substantive development milestones related to BACE inhibitors under the BACE Agreement. Milestone revenue for the year ended December 31, 2013 include $14.0 million related to the advancement of our most advanced compound in the BACE program, VTP-37948, into Phase 1 clinical studies. As of June 30, 2014, we have earned $29.0 million in development milestone payments since the inception of the BACE Agreement, and we are eligible to receive up to $326.0 million in additional milestone payments based on the achievement of pre-specified events, including up to $176.0 million in development and regulatory milestone payments and up to $150.0 million in commercialization milestone payments.

        The additional development, regulatory and commercialization milestone payments are payable upon the first occurrence of any product to meet the requirements specified in the BACE Agreement. Any subsequent product to achieve the same milestone will earn 50% of the initial milestone payment, unless otherwise agreed to by the parties. In addition, second indications for a product covered by the BACE Agreement to achieve the regulatory milestones will earn us 50% of the applicable milestone amount at 50%. We are also eligible to receive tiered royalties from the high-single digits to the low-double digits. We have the option to participate in funding the Phase 3 clinical trials in exchange for increased royalties. BI's obligations to pay the royalties continues on a country-by-country basis for the later of ten (10) years following the first commercial sale of each product in such country or as long as the product is covered by patents licensed to BI under the BACE Agreement.

Financial Operations Overview

Revenue

        To date, we have not generated any revenue from product sales. Primarily all of our revenue to date has been derived from license fees, milestone payments and collaborative research and development payments received from our strategic partners. Below is a summary of our revenue for the six months ended June 30, 2014 and 2013 and the years ended December 31, 2013 and 2012.

 
  Six Months
Ended
June 30,
   
 
 
  Increase/
(decrease)
 
 
  2014   2013  
 
  (in thousands)
   
 

Amortization of upfront license fees

  $ 150   $ 204   $ (54 )

Collaborative research payments:

                   

FTE Funding

    1,850     1,258     592  

Intellectual property costs

    329     500     (171 )
               

Total collaborative research payments

    2,179     1,758     421  
               

Total collaborative revenues

  $ 2,329   $ 1,962   $ 367  
               
               

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  Years Ended
December 31,
   
 
 
  Increase/
(decrease)
 
 
  2013   2012  
 
  (in thousands)
   
 

Amortization of upfront license fees

  $ 354   $ 1,921   $ (1,567 )

Collaborative research payments:

                   

FTE Funding

    3,108     3,436     (328 )

Research and development costs

        20     (20 )

Intellectual property costs

    1,051     971     80  
               

Total collaborative research payments

    4,159     4,427     (268 )
               

Milestone revenue

    18,000     16,000     2,000  
               

Total collaborative revenues

  $ 22,513   $ 22,348   $ 165  
               
               

    Milestone Revenue

        Revenue for the year ended December 31, 2013 included $18.0 million in milestone payments from BI related to the BACE Agreement. In 2012, we earned $7.0 million in milestone revenue from BI related to the 11b Agreement and $9.0 million related to the BACE Agreement.

    Upfront and License Fee Revenue

        For the six months ended June 30, 2014 and 2013 and the years ended December 31, 2013 and 2012, all upfront and license fee revenue was associated with the BACE Agreement. Such revenue for the year ended December 31, 2013 was $0.3 million compared to $1.9 million for the year ended December 31, 2012. The $1.6 million decrease was primarily attributable to a decrease of $1.7 million in amortization of deferred revenue for the BACE Agreement, due to the initial collaborative research period ending as of June 3, 2013; slightly offset by the $0.1 million amortization of the upfront fee received upon execution of the second amendment to the BACE Agreement in December 2012 to expand the core BACE indication to include diabetes and metabolic disease.

        In the future, we may generate revenue from a combination of product sales, license fees, milestone payments and research and development payments in connection with strategic partnerships, and royalties resulting from the sales of products developed under licenses of our intellectual property. We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the timing and amount of license fees, research and development reimbursements, milestone and other payments received under our strategic partnerships, and the amount and timing of payments that we receive upon the sale of our products, to the extent any of our products are successfully commercialized. We do not expect to generate revenue from product sales for many years, if ever. If we or our strategic partners fail to complete the development of our product candidates in a timely manner or obtain regulatory approval for them, our ability to generate future revenue, and our results of operations and financial position, would be materially adversely affected.

Research and Development Expenses

        Research and development expense consists of expenses incurred in connection with the discovery and development of our product candidates. We expense research and development costs as incurred.

        These expenses include, but are not limited to:

    employee-related expenses, which include salaries, benefits and stock-based compensation;
    expenses incurred under agreements with contract research organizations, investigative sites and consultants that conduct our clinical trials and a substantial portion of our preclinical studies;
    the cost of acquiring and manufacturing preclinical and clinical trial materials;

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    outsourced professional scientific services;
    laboratory materials and supplies used to support our research activities;
    allocated expenses for rent, utilities and other facility-related costs; and
    software license fees associated with in-licensed products and technology.

        The successful development of our product candidates is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the remainder of the development of, or the period, if any, in which material net cash inflows may commence from any of our other product candidates. This uncertainty is due to the numerous risks and uncertainties associated with the duration and cost of clinical trials which vary significantly over the life of a project as a result of differences arising during clinical development, including:

    the number of clinical sites included in the trials;
    the length of time required to enroll suitable patients;
    the number of patients that ultimately participate in the trials;
    the number of doses patients receive;
    the duration of patient follow-up; and
    the results of our clinical trials.

        Our expenditures are subject to additional uncertainties, including the terms and timing of regulatory approvals, and the expense of filing, prosecuting, defending and enforcing any patent claims or other intellectual property rights. We may never succeed in achieving regulatory approval for any of our product candidates. We may obtain unexpected results from our clinical trials. We may elect to discontinue, delay or modify clinical trials of some product candidates or focus on others. A change in the outcome of any of the foregoing variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the U.S. Food and Drug Administration, or FDA, or other regulatory authorities were to require us to conduct clinical trials beyond those which we currently anticipate, or if we experience significant delays in enrollment in any our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development. Drug commercialization will take several years and millions of dollars in development costs.

        We track research and development expenses on a program-by-program basis and have allocated common expenses, such as facilities, depreciation, stock-based compensation and other research and development support expenses to each program based on the personnel resources allocated to each program. Below is a summary of our research and development expenses for the six months ended June 30, 2014 and 2013 and the years ended December 31, 2013 and 2012:

 
  Six Months
Ended
June 30,
 
 
  2014   2013  
 
  (in thousands)
 

RORgt

  $ 5,971   $ 5,299  

BACE

        915  

LXRb

    161     512  

Discovery and Other

    2,889     407  

Contour and Technology Development

    404     452  
           

Total research and development expenses

  $ 9,425   $ 7,585  
           
           

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  Years Ended
December 31,
 
 
  2013   2012  
 
  (in thousands)
 

RORgt

  $ 10,186   $ 1,998  

BACE

    937     3,614  

LXRb

    607     8,386  

Discovery and Other

    2,397     1,009  

Contour and Technology Development

    790     920  
           

Total research and development expenses

  $ 14,917   $ 15,927  
           
           

    RORgt

        Our RORgt program is focused on the discovery of small molecule compounds with the potential to treat various autoimmune disorders. Autoimmune disorders comprise a large number of disease conditions where the body mounts an inappropriate immune response against normal, healthy tissues. These disorders include commonly known diseases such as psoriasis, multiple sclerosis, and rheumatoid arthritis, as well as rarer conditions such as Behcet's disease and autoimmune uveitis. We commenced discovery efforts for this program in the fourth quarter of 2012 and selected VTP-43742 as a product candidate in the first quarter of 2014. As a result of these activities, expenses related to RORgt increased in 2013 as compared with 2012. We plan to file an investigational new drug application, or IND, with the FDA for VTP-43742 to treat psoriasis in the first half of 2015 with Phase 1 clinical trials commencing thereafter. We expect to have Phase 1 data by the end of 2015.

    BACE

        We entered into the BACE Agreement in 2009. The funded research obligation of our strategic partnership began in June 2009 and expired in June 2013. In addition, the second amendment to the BACE Agreement in December 2012 obligated us, at BI's discretion, to supply a specified number of FTEs on a monthly basis during the period July 1, 2013 through June 30, 2014. Certain expenses, including patent expenses and animal studies, are incurred by us and reimbursed by BI on a quarterly basis. We record revenue and expenses on a gross basis under this arrangement.

    LXRb

        Our LXRb program is focused on the discovery and development of small molecule pharmaceutical agents with the potential to treat acute coronary syndrome and atopic dermatitis, also known as eczema. In 2012, discovery efforts were substantially complete, and in 2013, we focused primarily on clinical development, regulatory strategy and formula development. We have selected VTP-38443 as a product candidate for acute coronary syndrome, or ACS, and have selected VTP-38543 as a product candidate for atopic dermatitis. Ongoing expenses will be for the preclinical and clinical development of our existing candidates. The amount of future expense related to these programs will be dependent upon the design, timing and cost of studies and whether or not collaboration agreements are entered into to further their development. For VTP-38443, we anticipate completing the necessary preclinical development work and filing an IND in the first half of 2016, with Phase 1 clinical trials commencing thereafter. For VTP-38543, we anticipate completing the necessary preclinical development work and filing an IND by the second half of 2015, with Phase 1 clinical trials commencing thereafter.

    Discovery and Other

        Discovery and Other includes expenses related primarily to the investigation of potential scientific targets across multiple indications and for previous product candidates for which we have decided not to

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pursue further development. These costs include attempts to replicate literature data, structural biology around the target and, to a limited extent, compound synthesis. Generally, these costs include activities up to and including animal proof-of-concept.

        In the third quarter of 2013, we commenced significant discovery work on a known immuno-oncology target. Future research and development costs for this program are expected to increase significantly should the exploratory work confirm the potential of this target.

    Contour and Technology Development

        We have developed Contour, a computational structure-based drug discovery platform, to design and optimize compounds across a range of therapeutic targets and disease areas. Technology development expenses consist principally of salaries and related costs for personnel engaged in the development and enhancement of the technology. We expect future technology development expenses to be in line with 2013 costs for the next few years.

        We expect that the expenses related to our entire pipeline will continue to increase with successful progression of our compounds into later stages of development and as we commence new discovery efforts on promising biological targets. However, future research and development costs for any particular program or product candidate are not reasonably certain because such costs are dependent on a number of variables, including successful completion of preclinical and clinical studies, the design and cost of future studies and the amount and timing of discovery efforts committed to back-up compounds.

General and Administrative Expenses

        General and administrative expenses consist principally of salaries and related costs for personnel in executive, finance, business development, legal and human resources functions. Other general and administrative expenses include facility costs not otherwise included in research and development expenses, patent filing and prosecution costs and professional fees for investor relations, legal, auditing and tax services.

        We anticipate that our general and administrative expenses will increase as a result of increased payroll, expanded infrastructure and higher consulting, legal, regulatory and tax-related services associated with maintaining compliance with stock exchange listing and SEC requirements, accounting and investor relations costs, and director and officer insurance premiums associated with being a public company.

Other Income

        Other income primarily relates to the revaluation of our warrant liability and the sale of Pennsylvania tax credits.

Interest Income and Interest Expense

        Interest income consists of interest earned on our cash, cash equivalents and marketable securities. The primary objective of our investment policy is capital preservation.

        Interest expense consists primarily of interest, amortization of debt discount, and amortization of deferred financing costs associated with our notes payable.

Critical Accounting Policies and Significant Judgments and Estimates

        Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of

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contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. In accordance with GAAP, we base our estimates on historical experience, known trends and events and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

        We define our critical accounting policies as those accounting principles generally accepted in the United States that require us to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations as well as the specific manner in which we apply those principles. While our significant accounting policies are more fully described in detail in Note 2 to our financial statements appearing elsewhere in this prospectus, we believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our financial statements.

Revenue Recognition

        Our revenues are generated primarily through collaborative arrangements which generally contain multiple elements, or deliverables, including licenses and research and development activities to be performed by us on behalf of the licensee. Payments to us under these arrangements typically include one or more of the following: (1) nonrefundable, upfront license fees, (2) funding of discovery research efforts on an FTE basis, (3) reimbursement of research, development and intellectual property costs, (4) milestone payments, and (5) royalties on future product sales.

        We account for revenue arrangements with multiple deliverables entered into prior to January 1, 2011 in accordance with Accounting Standard Codification, or ASC, Topic 605-25, Revenue Recognition: Multiple-Element Arrangements. The multiple-deliverable items are divided into separate units of accounting if certain criteria are met, including whether the delivered item has stand-alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered items. We allocate the consideration we receive among the separate units of accounting based on their respective fair value, and apply the applicable revenue recognition criteria to each of the separate units. Where an item in a revenue arrangement with multiple deliverables does not constitute a separate unit of accounting and for which delivery has not occurred, we defer revenue until the delivery of the item is completed.

        Effective January 1, 2011, we adopted, on a prospective basis, ASU 2009-13, Multiple-Deliverable Revenue Arrangements, which amends ASC 605-25 and also adopted ASU 2010-17, Revenue Recognition–Milestone Method. Our collaborations with BI were entered into prior to the adoption of this guidance. The BACE Agreement amendment entered into December 2012 was accounted for under ASC 2009-13.

        In accordance with ASU 2009-13, we will consider whether the deliverables under the arrangement represent separate units of accounting. In determining the units of accounting, we will evaluate certain criteria, including whether the deliverables have stand-alone value. The consideration received will be allocated to the separate units of accounting using the relative selling price method, and the applicable revenue recognition criteria will be applied to each of the separate units.

        We determine the estimated selling price for agreement deliverables using the following hierarchy: (1) vendor-specific objective evidence, or VSOE, (2) third-party evidence, or TPE or (3) best estimate of selling price if neither VSOE nor TPE is available. Determining the best estimate of selling price for a deliverable requires significant judgment and consideration of various factors, including market conditions, items contemplated during agreement negotiation as well as internally developed net present value models.

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        We typically receive upfront, nonrefundable payments when licensing our intellectual property. For intellectual property licenses that do not have stand-alone value from the other deliverables to be provided, revenue is recognized over the contractual or estimated performance period, which is typically the term of the research and development obligations. The periods over which revenue should be recognized are subject to estimates by us and may change over the course of the research and development agreement. Such a change could have a material impact on the amount of revenue we record in future periods.

        Payments or reimbursements resulting from our research and development efforts are recognized as the services are performed and are presented on a gross basis so long as there is persuasive evidence of an arrangement, the fee is fixed or determinable, and collection of the related receivable is reasonably assured. Amounts received prior to satisfying the above revenue recognition criteria are recorded as deferred revenue.

        In accordance with ASU 2010-17, we will recognize revenue from milestone payments when: (i) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement; and (ii) we do not have ongoing performance obligations related to the achievement of the milestone earned. Milestone payments are considered substantive if all of the following conditions are met: the milestone payment (a) is commensurate with either our performance to achieve the milestone or the enhancement of the value of the delivered item or items as a result of a specific outcome resulting from our performance to achieve the milestone, (b) relates solely to past performance and (c) is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangement. We have concluded that the clinical and development and regulatory milestones pursuant to our research and development arrangements are substantive.

        Royalty revenue will be recognized when earned. We have not earned any royalty revenues to date.

Accrued Clinical and Preclinical Expenses

        As part of the process of preparing our financial statements, we are required to estimate our accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost. The majority of our service providers invoice us monthly in arrears for services performed. We make estimates of our accrued expenses as of each balance sheet date based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. Examples of estimated accrued clinical expenses include:

    fees paid to vendors in connection with the preclinical development activities;
    fees paid to contract manufacturers in connection with the production of preclinical and clinical trial materials;
    fees paid to contract research organizations in connection with clinical studies; and
    fees paid to investigative sites in connection with clinical studies.

        We base our expenses related to preclinical and clinical studies on our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and contract research organizations that conduct and manage clinical studies on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting amounts that are too high or too low in any particular period.

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Stock-Based Compensation

        We account for stock-based compensation expense in accordance with the provisions of ASC 718, Compensation—Stock Compensation, which addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of or may be settled by the issuance of the enterprise's equity instruments. ASC 718 requires that we measure the cost of equity-based service awards based on the grant-date fair value of the award, net of estimated forfeitures, and recognize the cost of such awards over the period during which the employee is required to provide service in exchange for the award (the vesting period) on a straight-line basis.

        We issue both performance-based stock options and performance-based restricted stock units, or RSUs. Stock-based compensation expense is recognized beginning when it is deemed probable that the performance-based goal will be met, as determined by our board of directors.

        Stock-based compensation expense recognized in accordance with ASC 718 for the years ended December 31, 2013 and 2012 and the six months ended June 30, 2014 and 2013:

 
  Year Ended
December 31,
  Six Months
Ended
June 30,
 
 
  2013   2012   2014   2013  
 
  (in thousands)
  (in thousands)
 

Research and development

    $  19     $115     $    7     $  9  

General and administrative

    81     166     105     48  
                   

Total stock-based compensation

    $100     $281     $112     $57  
                   
                   

        As of June 30, 2014, there was $1.2 million of total unrecognized compensation expense, excluding performance-based stock options for which vesting has not been deemed probable, net of estimated forfeitures, related to unvested options granted under our 2013 Stock Plan, 2004 Stock Plan and 2001 Stock Plan. That expense is expected to be recognized as follows:

Year ending December 31,
  (in thousands)
 

2014

  $ 158  

2015

      311  

2016

      308  

2017

        304  

2018

        112  
       

  $ 1,193  
       
       

        We expect to continue to grant stock options, and potentially other forms of equity awards, in the future, and to the extent that we do, our actual stock-based compensation expense recognized in future periods will likely increase.

        The intrinsic value of all outstanding options as of June 30, 2014 was approximately $       million, based on an assumed initial public offering price of $       per share, which is the midpoint of the price range on the cover page of this prospectus, of which approximately $       million related to vested options and approximately $      related to unvested options.

    Determining Fair Value of Stock-Based Awards

        We apply the fair value recognition provisions of ASC 718. Determining the amount of share-based compensation to be recorded requires us to develop estimates of the fair value of stock options as of their

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grant date. Calculating the fair value of share-based awards requires that we make highly subjective assumptions.

        The fair value of stock options granted were calculated using the following weighted-average assumptions in the Black-Scholes option pricing model for the years ended December 31, 2013 and 2012 and the six months ended June 30, 2014 and 2013:

 
  Year Ended
December 31,
  Six Months
Ended June 30,
 
 
  2013   2012   2014   2013  

Expected stock price volatility

    85.00 %   86.16 %   83.00 %   87.00 %

Expected term of options (in years)

    6.25     6.25     6.15     6.25  

Weighted-average risk-free interest Rate

    1.42 %   0.90 %   1.96 %   1.05 %

Expected dividend yield

    0 %   0 %   0 %   0 %

        The per share estimated fair value of our common stock in the table below represents the determination by our board of directors of the fair value of our common stock as of the date of grant, taking into consideration the various objective and subjective factors described above, including the conclusions, if applicable, of independent third-party valuations of our common stock as discussed below. We computed the per share weighted average estimated fair value for stock option grants based on the Black-Scholes option pricing model. During 2013 and 2012, our board of directors granted stock options, each having an exercise price based on the grant date fair value of our common stock. The following table sets forth information about our stock grants during the years ended December 31, 2013 and 2012 and the six months ended June 30, 2014:

Date of Issuance
  Number of Stock
Options Granted
  Per Share
Exercise Price
 

June 25, 2014

    7,627,279   $ 0.23  

March 26, 2014

    285,000   $ 0.16  

September 25, 2013

    10,000   $ 0.16  

March 27, 2013

    10,000   $ 0.27  

September 26, 2012

    75,000   $ 0.27  

May 23, 2012

    20,000   $ 0.33  

        The above per share exercise prices were supported by valuations of our common stock with the assistance of an independent third-party valuation firm.

        We have historically granted stock options at exercise prices not less than the fair market value of our common stock as determined by our board of directors, with input from management. In the absence of a public trading market for our common stock, our board of directors was required to estimate the fair value of our common stock at each option grant date. The board of directors, in making its independent determination, utilized a number of different sources, including the assistance of an independent valuation firm. We obtained third party valuations of our common stock as of June 30, 2011, June 30, 2012, June 30, 2013 and June 24, 2014, which resulted in valuations of our common stock of $0.33, $0.27, $0.16 and $0.23 per share, respectively, as of those dates. Our board of director's determination of the fair market values was consistent with the results and conclusions of the independent third party valuation. We used methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants Practice Guide Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, considering numerous objective and subjective factors to determine common stock fair market value at each option grant date, including third party valuations of the common stock, external market conditions affecting the life sciences industry sector, the prices at which we sold shares of convertible preferred stock, the superior rights and preferences of securities senior to our common stock at the time of each grant, our results of operations and financial position, the status of our research and

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development efforts, our stage of development and business strategy and the likelihood of achieving a liquidity event such as an initial public offering or sale of our company.

        For each of the above valuations, we used the Hybrid approach, which combines the concepts of the option pricing method, or OM, and the Probability Weighted Expected Return Method, or PWERM, in a single framework.

        The OM treats common stock as call options on the enterprise's value, to be distributed among the common and convertible preferred security classes, with exercise prices based on the liquidation preference of the convertible preferred stock. Therefore, by extension, the common stock has value only if the funds available for distribution to the stockholders exceed the value of the liquidation preference at the time of a liquidity event such as a merger, sale or initial public offering, assuming the enterprise has funds available to make a liquidation preference meaningful and collectible by the stockholders. The common stock is modeled to be a call option with a claim on the enterprise at an exercise price equal to the remaining value immediately after the convertible preferred stock is liquidated. The OM uses the Black-Scholes option pricing model to price the call option. The OM is appropriate to use when the range of possible future outcomes is so difficult to predict that forecasting discrete exit events would be highly speculative.

        The PWERM is a scenario-based analysis that estimates the value per share based on the probability-weighted present value of expected future investment returns, considering each of the possible outcomes available to us, as well as the rights of each share class. PWERM estimates the common stock value to our stockholders under possible future scenarios. The value per share under each scenario is then probability weighted and the resulting weighted values per share are summed to determine the fair value per share of our common stock. In the IPO scenarios, it is assumed that all outstanding shares of our preferred stock will convert into common stock. Over time, as we achieve certain company-related milestones, the probability of each scenario is evaluated and adjusted accordingly.

        The Hybrid Method employs the concepts of the PWERM for a range of exit scenarios and OM for scenarios where the company remains private.

        In determining the estimated fair value of our common stock, our board of directors also considered the fact that our common stock is not freely tradable in the public market. The estimated fair value of our common stock at each grant date reflects a non-marketability discount partially based on the anticipated likelihood and timing of a future liquidity event.

Results of Operations

Comparison of Six Months Ended June 30, 2014 and 2013

 
  Six Months
Ended June 30,
   
 
 
  Increase/
(decrease)
 
 
  2014   2013  
 
  (in thousands)
   
 

Collaborative revenues

  $ 2,329   $ 1,962   $ 367  

Operating expenses:

                   

Research and development

    9,425     7,584     1,841  

General and administrative

    2,629     2,680     (51 )
               

Total operating expenses

    12,054     10,264     1,790  
               

Operating income

    (9,725 )   (8,302 )   (1,423 )

Other income

    218     304     (86 )

Interest income

    29     43     (14 )

Interest expense

    (541 )   (768 )   227  
               

Net income

  $ (10,019 ) $ (8,723 ) $ (1,296 )
               
               

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        Collaborative Revenues.    Revenue for the six months ended June 30, 2014 was $2.3 million compared to $2.0 million for the six months ended June 30, 2013, an increase of approximately $0.3 million. The increase was primarily due to an increase of collaborative research payments of $0.4 million, partially offset by a decrease of upfront license fee amortization of $0.1 million.

        Research and Development.    Research and development expense for the six months ended June 30, 2014 was $9.4 million compared to $7.6 million for the six months ended June 30, 2013, an increase of approximately $1.8 million. The increase was attributable to a $1.5 million increase in preclinical trial expenses associated with our RORgt program and new discovery program in immuno-oncology; and a $0.3 million increase in outsourced professional scientific services.

        Included in research and development expense were stock-based compensation charges of $7,000 and $9,000 for the six months ended June 30, 2014 and 2013, respectively.

        General and Administrative.    General and administrative expense for the six months ended June 30, 2014 was $2.6 million compared to $2.7 million for the six months ended June 30, 2013, a decrease of $0.1 million. The decrease was primarily a result of $0.4 million decrease in outside patent costs partially offset by a $0.3 million increase in recruiting expenses.

        Included in general and administrative expense were stock-based compensation charges of $105,000 and $48,000 for the six months ended June 30, 2014 and 2013, respectively.

        Other Income.    Other income for the six months ended June 30, 2014 was $0.2 million compared to $0.3 million for the six months ended June 30, 2013. The decrease was primarily attributable to the revaluation of the fair value of our warrant liability.

        Interest Income.    Interest income for the six months ended June 30, 2014 was $28,815 compared to $43,106 for the six months ended June 30, 2013. The decrease in interest income was attributable to a decrease in our average cash balance and the average interest rates of our investments for the six months ended June 30, 2014 compared to June 30, 2013.

        Interest Expense.    Interest expense for the six months ended June 30, 2014 was $0.6 million compared to $0.8 million for the six months ended June 30, 2013, a decrease of $0.2 million. The decrease was entirely due to a reduction in our average loan balance in 2014 from monthly principal payments being applied against our notes payable.

Comparison of Years Ended December 31, 2013 and 2012

 
  Year Ended
December 31,
   
 
 
  Increase/
(decrease)
 
 
  2013   2012  
 
  (in thousands)
   
 

Collaborative revenues

  $ 22,513   $ 22,348   $ 165  

Operating expenses:

                   

Research and development

    14,917     15,927     (1,010 )

General and administrative

    5,406     4,915     491  
               

Total operating expenses

    20,323     20,842     (519 )
               

Operating income

    2,190     1,506     684  

Other income

    327     243     84  

Interest income

    70     101     (31 )

Interest expense

    (1,425 )   (1,627 )   202  
               

Net income

  $ 1,162   $ 223   $ 939  
               
               

        Collaborative Revenues.    Revenue for the year ended December 31, 2013 was $22.5 million compared to $22.3 million for the year ended December 31, 2012, an increase of approximately $0.2 million. The

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increase was primarily due to an increase in milestone revenue of $2.0 million, partially offset by a decrease in upfront license fee amortization of $1.6 million. In both periods, all of our revenue was related to our BI strategic partnerships. Specifically, in 2013, we received $18.0 million in milestone payments related to the BACE Agreement, and in 2012, we earned $7.0 million in milestone revenue related to the 11b Agreement and $9.0 million related to the BACE Agreement.

        Research and Development.    Research and development expense for the year ended December 31, 2013 was $14.9 million compared to $15.9 million for the year ended December 31, 2012, a decrease of approximately $1.0 million. The decrease was primarily attributable to a $2.0 million decrease in pre-clinical trial expenses associated with our LXRb program and a $0.6 million decrease in outsourced professional scientific services, partially offset by a $1.1 million increase in preclinical trial expenses associated with the RORgt program and an increase in salaries and benefits costs of $0.9 million primarily due to successfully obtaining non-equity incentive plan targets for the year ended December 31, 2013. Non-equity incentive plan bonuses were not paid for the year ended December 31, 2012.

        Included in research and development expense were stock-based compensation charges of $19,000 and $115,000 for the years ended December 31, 2013 and 2012, respectively.

        General and Administrative.    General and administrative expense for the year ended December 31, 2013 was $5.4 million compared to $4.9 million for the year ended December 31, 2012, an increase of $0.5 million. The increase was primarily attributable to a $0.5 million increase in salaries and benefits expenses due to successfully obtaining non-equity incentive plan targets for the year ended December 31, 2013. Non-equity incentive plan bonuses were not paid for the year ended December 31, 2012.

        Included in general and administrative expense were stock-based compensation charges of $81,000 and $166,000 for the years ended December 31, 2013 and 2012, respectively.

        Other Income.    Other income for the year ended December 31, 2013 was $0.3 million compared to $0.2 million for the year ended December 31, 2012, an increase of $0.1 million. The increase was due to the sale of Pennsylvania tax credits of $0.1 million.

        Interest Income.    Interest income for the year ended December 31, 2013 was $70,000 compared to $101,000 for the year ended December 31, 2012. The decrease in interest income was primarily attributable to a decrease in the average interest rates of our investments of 0.3% in 2012 to 0.2% in 2013.

        Interest Expense.    Interest expense for the year ended December 31, 2013 was $1.4 million compared to $1.6 million for the year ended December 31, 2012, a decrease of $0.2 million. The decrease was entirely due to a reduction in our average loan balance in 2013 from monthly principal payments being applied against outstanding notes payable.

Liquidity and Capital Resources and Plan of Operations

        We have funded our operations principally through the private placement of equity securities, revenue from strategic partnerships, debt financing and interest income. As of June 30, 2014, we have received gross proceeds of $120.1 million from the issuance of convertible preferred stock, including $40.0 million of equity sales to our strategic partners. As of June 30, 2014, we had received an aggregate of $132.7 million in cash from non-equity capital in the form of license fees, milestone payments and research and development funding received from our strategic partners. In addition, we have received approximately $39.8 million in funding from our debt financings with various commercial lenders. As of June 30, 2014, we had an accumulated deficit of $120.9 million and working capital of $10.0 million which includes cash, cash equivalents and short-term investments of approximately $18.1 million. Currently, our funds are invested in money market funds, certificates of deposit, and U.S. Treasury notes.

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Cash Flows

Comparison of Six Months Ended June 30, 2014 and 2013

        The following table summarizes our cash flows for the six months ended June 30, 2014 and 2013:

 
  Six Months Ended
June 30,
 
 
  2014   2013  
 
  (in thousands)
 

Net cash (used in) provided by:

             

Operating activities

  $ (11,441 ) $ 3,710  

Investing activities

    1,752     (1,593 )

Financing activities

    (2,748 )   (1,759 )
           

Net (decrease) increase in cash and cash equivalents

  $ (12,437 ) $ 358  
           
           

Net cash provided by (used in) operating activities

        During the six months ended June 30, 2014, our operating activities used cash of $11.4 million. The cash used in operating activities primarily resulted from our net loss of $10.0 million and cash outflow from net changes in operating assets and liabilities of $1.6 million. Changes in operating assets and liabilities included a decrease in deferred revenue of $2.0 million, due primarily to the amortization of upfront license and FTE payments from BI, partially offset by a $0.2 million increase in accounts payable and accrued expenses and a $0.2 million decrease in prepaid expenses and other current assets.

        During the six months ended June 30, 2013, our operating activities provided cash of $3.7 million. The cash provided by operations primarily resulted from our net loss of $8.7 million and cash inflow from net changes in operating assets and liabilities of $12.4 million, which included a reduction in accounts receivable of $8.7 million and an increase in deferred revenue of $3.1 million, due primarily from an amendment to BACE Agreement to expand the core BACE indication to include diabetes and metabolic disease, which was received in the first quarter of 2013 and was recognized through June 30, 2014.

Net cash used in investing activities

        During the six months ended June 30, 2014 our investing activities provided cash of $1.8 million. The cash provided by investing activities was primarily a result of the sale and maturity of marketable securities exceeding the purchase price of similar marketable securities. Purchases of property and equipment for the six months ended June 30, 2014 were $127,000.

        During the six months ended June 30, 2013, our investing activities used cash of $1.6 million. The cash used in investing activities was primarily a result of purchases of marketable securities exceeding the sale and maturity of similar marketable securities. Purchases of property and equipment for the six months ended June 30, 2013 was $141,000.

Net cash used in financing activities

        During the six months ended June 30, 2014 and 2013, our financing activities used cash of $2.7 million and $1.8 million, respectively. The cash used in financing activities in 2014 was a result of principal payments on notes payable of $2.7 million and payment of offering costs of $0.1 million. The cash used in 2013 was primarily a result of principal payments on notes payable of $2.0 million, partially offset by the reduction of restricted cash of $0.2 million.

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Comparison of Years Ended December 31, 2013 and 2012

        The following table summarizes our cash flows for the year ended December 31, 2013 and 2012:

 
  Year Ended
December 31,
 
 
  2013   2012  
 
  (in thousands)
 

Net cash provided by (used in):

             

Operating activities

  $ 12,135   $ (9,837 )

Investing activities

    5,672     (3,519 )

Financing activities

    (4,281 )   33  
           

Net increase (decrease) in cash and cash equivalents

  $ 13,526   $ (13,323 )
           
           

Net cash provided by (used in) operating activities

        During the year ended December 31, 2013, our operating activities provided cash of $12.1 million. The cash provided by operating activities primarily resulted from our net income of $1.2 million and cash inflows from net changes in operating assets and liabilities of $10.7 million, which included a reduction in accounts receivable of $8.7 million and an increase in deferred revenue of $1.1 million, due primarily from an amendment to BACE Agreement to expand the core BACE indication to include diabetes and metabolic disease which is being recognized through June 30, 2014.

        During the year ended December 31, 2012, our operating activities used cash of $9.8 million. The cash used in operations primarily resulted from our net income of $0.2 million adjusted for noncash increases of $0.7 million and cash outflows from net changes in operating assets and liabilities of $10.8 million. Non-cash increases were primarily attributable to depreciation and amortization of $0.5 million. Changes in operating assets and liabilities included an increase in accounts receivable of $8.7 million due to a milestone earned in December 2012 and a decrease in deferred revenue of $2.2 million primarily related to the amortization of upfront license fees from BI.

Net cash provided by (used in) investing activities

        During the year ended December 31, 2013, our investing activities provided cash of $5.7 million. The cash provided by investing activities for the year ended 2013 was due primarily from the sales and maturities of marketable securities exceeding the purchases of similar marketable securities. Purchases of property and equipment for the year ended December 31, 2013 was $0.2 million.

        During the year ended December 31, 2012, our investing activities used cash of $3.5 million. The cash used by investing activities for the year ended 2012 was due primarily from the net result of purchases of marketable securities exceeding the sale and maturity of similar marketable securities. Purchases of property and equipment for the year ended December 31, 2012 was $0.1 million.

Net cash provided by (used in) financing activities

        During the year ended December 31, 2013, our financing used cash of $4.3 million. The cash used in financing activities in 2013 was a result of the beginning of principal payments on notes payable of $4.6 million partially offset by the reduction of restricted cash of $0.3 million.

        During the year ended December 31, 2012, our financing activities provided cash of $33,000. The cash provided in 2012 was primarily due to cash received from the reduction of restricted cash of $50,000, offset partially by the payment of loan financing fees in the amount of $31,000.

    Credit Facility

        On December 22, 2011, we entered into a $15.0 million senior secured credit facility with Oxford Finance LLC and Silicon Valley Bank and drew all funds at that time. Pursuant to the terms of the loan

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and security agreement evidencing the credit facility, we made monthly payments of interest only through January 1, 2013 and, thereafter, we make monthly payments of principal and interest over the remaining 33 months of the loan. The credit facility bears interest at the rate of 8.85% per annum. Monthly payments are $513,765. The final payment will include an additional interest payment of $0.3 million, which is being recognized as interest expense over the term of the loan. As a result, the effective interest rate on the loan is 9.49% per annum. We may prepay the debt subject to certain prepayment fees. The credit facility also prohibits us from paying dividends on our equity securities.

        The credit facility is secured by all of our assets other than intellectual property for which we have provided a negative pledge. The credit facility contains customary affirmative and negative covenants. As of June 30, 2014 and December 31, 2013, we were in compliance with all of the covenants under our credit facility.

        The principal balance of the loan was $7.7 million and $10.4 million at June 30, 2014 and December 31, 2013, respectively.

    Plan of Operation

        We anticipate we will incur net losses for the next several years as we complete preclinical studies and initiate clinical development of our RORgt and LXRb programs. In addition, we plan to continue to invest in discovery efforts to explore additional targets, including our new discovery program in immuno-oncology, build commercial capabilities and expand our corporate infrastructure. We may not be able to complete the development and initiate commercialization of these programs if, among other things, our preclinical research and clinical trials are not successful or if the FDA does not approve our product candidates arising out of our current preclinical program when we expect, or at all.

        Following this offering, we will be a publicly-traded company and will incur significant legal, accounting and other expenses that we were not required to incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as rules adopted by the SEC and The NASDAQ Stock Market, requires public companies to implement specified corporate governance practices that are currently inapplicable to us as a private company. We expect these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly.

        We believe that the net proceeds from this offering, together with receipt of anticipated milestone payments and our existing cash, cash equivalents and marketable securities, will be sufficient to fund our operations through the first half of 2016. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. If we are required to raise additional capital, we may seek to sell additional equity or debt securities or incur indebtedness. The sale of additional equity and debt securities may result in additional dilution to our stockholders. If we raise additional funds through the issuance of debt securities or preferred stock, these securities could have rights senior to those of our common stock and could contain covenants that would restrict our operations. We may also seek funding through collaborations or other similar arrangements with third parties. If we are unable to raise sufficient additional capital we may need to substantially curtail our planned operations.

        Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements will depend on many factors, including, but not limited to:

    the number and characteristics of the product candidates we pursue;
    the scope, progress, results and costs of researching and developing our product candidates, and conducting preclinical and clinical trials;
    the timing of, and the costs involved in, obtaining regulatory approvals for our product candidates;
    the cost of manufacturing our product candidates and any products we successfully commercialize;

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    our ability to establish and maintain strategic partnerships, licensing or other arrangements and the financial terms of such agreements;
    the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including litigation costs and the outcome of such litigation; and
    the timing, receipt and amount of sales of, or milestone payments related to or royalties on, our current or future product candidates, if any.

Please see "Risk Factors" for additional risks associated with our substantial capital requirements.

Contractual Obligations and Commitments

        The following table summarizes our contractual obligations at December 31, 2013:

 
  Total   Less than
1 Year
  1 to 3
Years
  4 to 5
Years
  More than
5 Years
 
 
  (in thousands)
 

Short and long-term debt obligation (including interest)

  $ 11,603     $6,165     $5,438     $  —     $—  

Operating lease obligations(1)

    3,263     778     1,595     890      
                       

Total contractual cash obligations

  $ 14,866     $6,943     $7,033     $890     $—  
                       
                       

(1)
Our operating lease obligations are primarily related to leases for our office and lab facilities.

        The table above detailing contractual commitments and obligations does not include severance pay obligations to certain of our executive officers in the event of a not-for-cause termination under existing employment contracts. The cash amount for which we might be liable upon any such termination, based on current executive pay and bonus levels, could range between $0.1 million to $1.3 million.

        As of June 30, 2014, there has been no material change in the contractual obligations set forth above since December 31, 2013 other than scheduled payments through such date.

Purchase Commitments

        We have no material non-cancelable purchase commitments with contract manufacturers or service providers as we have generally contracted on a cancelable basis.

Off-Balance Sheet Arrangements

        During the years ended December 31, 2013 and 2012, and the six months ended June 30, 2014, we did not have any off-balance sheet arrangements, as defined under SEC rules.

Tax Loss Carryforwards

        As of December 31, 2013, we have net operating loss, or NOL, carryforwards of approximately $66.4 million to offset future federal income taxes and approximately $61.6 million to offset future state income taxes. The federal and state net operating loss carryforwards begin to expire in 2024. Pennsylvania limits the amount of NOL carryforwards which can be used to offset Pennsylvania taxable income. For tax years beginning after 2013, the limitations on using NOLs generated in prior years is the greater of $4.0 million or 25% of Pennsylvania taxable income before the NOL deduction. For taxable years beginning after 2014, the limitation will increase to the greater of $5.0 million or 30% of Pennsylvania taxable income before the NOL deduction. We also have research and development and investment tax credit carryforwards of approximately $5.1 million to offset future federal income taxes, and approximately $0.2 million to offset future Pennsylvania state income taxes. The federal tax credits begin to expire in 2021. In addition, the occurrence of certain events, including significant changes in ownership interests, may limit the amount of the net operating loss carryforwards and tax credit carryforwards available to be used in future years.

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        At December 31, 2013, we recorded a 100% valuation allowance against our deferred tax assets of approximately $49.5 million, as our management believes it is not more likely than not that they will be realized. If we determine in the future that we will be able to realize all or a portion of our net operating loss carryforwards, an adjustment to our net operating loss carryforwards would increase net income in the period in which we make such a determination.

Recently Adopted Accounting Standards

        We did not adopt any new accounting pronouncements during the year ended December 31, 2013 or six months ended June 30, 2014 that had a material effect on our financial statements.

        In May 2014, the Financial Accounting Standards Board issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 will supersede and replace nearly all existing U.S. GAAP revenue recognition guidance, including industry-specific guidance. The guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods therein. We are evaluating ASU 2014-09 and have not yet determined what, if any, effect ASU 2014-09 will have on our results of operations or financial condition.

Quantitative and Qualitative Disclosures about Market Risks

        We are exposed to market risk related to changes in interest rates. As of June 30, 2014 and December 31, 2013, we had cash and cash equivalents and marketable securities of $18.1 million and $32.5 million, respectively, consisting of money market funds, certificates of deposit, and U.S. Treasury notes. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our investments are in short-term marketable securities. Our marketable securities are subject to interest rate risk and will fall in value if market interest rates increase. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 10% change in interest rates would not have a material effect on the fair market value of our portfolio. We have the ability to hold our marketable securities until maturity, and therefore we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a change in market interest rates on our investments. We do not currently have any auction rate securities.

        We contract with research organizations and investigational sites globally. We may be subject to fluctuations in foreign currency rates in connection with these agreements. We do not hedge our foreign currency exchange rate risk.

        Our long-term debt obligations bear interest at fixed rates. As a result, we have limited exposure to changes in interest rates.

JOBS Act

        We are an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, only two years of audited financial statements in addition to any required unaudited interim financial statements with correspondingly reduced "Management's Discussion and Analysis of Financial Condition and Results of Operations" disclosure, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy or information statements, exemptions from the requirements of holding a non-binding advisory vote on executive compensation and seeking stockholder approval of any golden parachute payments not previously approved and not being required to adopt certain accounting standards until those standards would otherwise apply to private companies.

        As an emerging growth company, we have irrevocably elected to not take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards and, as a result, will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies.

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BUSINESS

Overview

        We are a clinical stage biotechnology company focused on discovering and developing novel, small molecule drugs for diseases that represent large market opportunities where there are significant unmet medical needs. We are developing a robust and growing portfolio of novel product candidates generated by Contour®, our proprietary structure-based drug discovery platform. Our team of accomplished scientists utilizes Contour to rapidly discover highly potent and selective product candidates for validated but difficult-to-drug targets in multiple disease areas. Our most advanced product candidates include VTP-34072, which commenced the first Phase 2 clinical trial for the treatment of type 2 diabetes in July 2014, with data expected in the first half of 2015, and VTP-37948, which is in Phase 1 clinical trials for the treatment of Alzheimer's disease, or Alzheimer's, with data expected in the second half of 2014. Both products are being developed by Boehringer Ingelheim GmbH, or BI, under separate collaborations. These collaborations have provided us with an aggregate of $152 million in funding to date, including upfront license fees, research funding and success-based milestone payments as well as equity investments. In addition, we have several wholly-owned products advancing in preclinical studies, including VTP-43742 for the treatment of autoimmune disorders, with Phase 1 proof-of-concept expected by the end of 2015, VTP-38443 for the treatment of acute coronary syndrome, and VTP-38543 for the treatment of atopic dermatitis. We intend to advance and retain rights to these and other programs and product candidates that we believe can be developed and commercialized by us, and to strategically partner where doing so can accelerate a program and generate non-dilutive capital for us.

        We believe we are a leader in the field of structure-based drug discovery, and have leveraged our expertise to create a growing portfolio of novel, potent and selective product candidates. We utilize Contour to discover and develop product candidates for validated therapeutic targets against which the industry has traditionally struggled to develop drugs due to challenges related to potency, selectivity, pharmacokinetics, or patentability issues. We refer to these targets as "difficult-to-drug." Contour's computational software uses artificial intelligence and sophisticated algorithms to model the assembly of molecular fragments, which are chemical structures consisting of one to several atoms, into fully elaborated, drug-like structures that precisely fit each target's 3-dimensional binding site. These molecules are then assessed by Contour's state-of-the-art scoring function to identify the most promising and drug-like structures. Together, these functions allow us to rapidly focus on those structures with the highest potential from among hundreds of billions of possibilities for a given biologic target. We chemically synthesize, comprehensively test and critically evaluate these novel structures rapidly, iterating each new data set back into the design process until we identify product candidates with demonstrable first- or best-in-class potential. Our experienced scientists are experts in the related disciplines of structural biology, molecular modeling (i.e., the design of drugs using computers), medicinal chemistry and biology. Our scientists utilize our platform and approach for each of our product candidates to rapidly overcome discovery obstacles. We have achieved animal proof-of-concept with a qualified product candidate in less than 18 months from the initiation of a program.

        Our current portfolio of product candidates includes:

    VTP-34072 is being developed for type 2 diabetes. According to the American Diabetes Association, approximately 17 million Americans had a diagnosis of type 2 diabetes as of 2010. If the present trends continue, as many as 1 in 3 American adults are expected to have type 2 diabetes in 2050. Overall, the economic cost of diagnosed type 2 diabetes in the United States was approximately $245 billion in 2012 and of that approximately $9.6 billion was spent on prescription products to treat the disease. We expect VTP-34072 to be differentiated from other oral anti-diabetic agents because, based on its mechanism of action and our preclinical data, in addition to having a glucose lowering effect, it has a positive impact on multiple cardiovascular and metabolic risk factors associated with metabolic syndrome. Patients with metabolic syndrome, which

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      afflicts approximately 85% of type 2 diabetics, are characterized by being overweight and having elevated glucose, blood pressure, cholesterol and triglycerides, or TGs, while having decreased levels of high-density lipoprotein, or HDL, cholesterol, HDL-C or "good cholesterol." Cortisol, a steroid hormone made by the body, plays a key role in the pathogenesis, or disease mechanism, of metabolic syndrome. VTP-34072 inhibits 11b hydroxysteroid dehydrogenase type 1, or 11b HSD1, the enzyme responsible for the production of cortisol in tissues where active glucose metabolism takes place, including the liver and adipose, or fat, tissue. In Phase 1 clinical trials involving 142 patients, VTP-34072 was well tolerated and demonstrated highly potent and selective inhibition of 11b HSD1 in adipose tissue, and had a pharmacokinetic profile which we believe is consistent with once-a-day dosing in humans. VTP-34072 commenced the first Phase 2 clinical trial involving 126 type 2 diabetic patients in July 2014 and is expected to have results in the first half of 2015. We are eligible to receive a milestone payment of $6.0 million from BI upon the first patient dosed in this trial.

    VTP-37948 is being developed for Alzheimer's. Alzheimer's is a devastating disease that causes problems with memory, thinking and behavior. According to the Alzheimer's Foundation of America, an estimated 5.1 million Americans had Alzheimer's as of 2013 and the average annual cost of care for Alzheimer's patients over the age of 70 in the United States was estimated to be between $157 billion and $210 billion in 2010. Alzheimer's is characterized by the accumulation of extracellular protein deposits in the brain that are called amyloid plaques. The accumulation of these plaques is believed to directly damage neurons and to trigger additional responses that further contribute to the disease. Amyloid production begins with an enzyme in the brain known as b-Site Amyloid Precursor Protein Cleaving Enzyme 1, or BACE. There are significant genetic data that implicate BACE as playing a direct role in the disease process itself. We discovered and are developing VTP-37948, a BACE inhibitor, in collaboration with BI. In preclinical studies, VTP-37948 demonstrated highly potent and selective inhibition of BACE in the brain, with up to 95% lowering of brain amyloid beta levels. VTP-37948 is currently in two Phase 1 clinical trials involving a total of 68 healthy volunteers. The first clinical trial includes endpoints of safety, tolerability and pharmacokinetics. The second clinical trial looks at the effects of VTP-37948 on a key biomarker of activity, amyloid beta concentration in the cerebrospinal fluid. Results from both of these clinical trials are expected in the second half of 2014.
    We are developing VTP-43742 for autoimmune disorders. Autoimmune disorders comprise a large number of disease conditions where the body mounts an inappropriate immune response against normal, healthy tissues. These disorders include commonly known diseases such as psoriasis, multiple sclerosis, or MS, and rheumatoid arthritis, or RA, as well as rarer conditions such as Behcet's disease and autoimmune uveitis. Increased activity of a class of lymphocytes called Th17 cells is a critical part of the pathophysiology of many human autoimmune disorders. RAR-Related Orphan Receptor gamma-t, or RORgt, is a nuclear hormone receptor that is essential for the formation and function of these Th17 cells. Preclinical studies in animal models have demonstrated that inhibition of RORgt activity is beneficial for the treatment of multiple autoimmune disorders. In preclinical studies, VTP-43742 has been shown to inhibit the secretion of Interleukin 17, or IL-17, and other cytokines, which are pro-inflammatory proteins, from Th17 cells, and has been demonstrated to be therapeutically beneficial in an animal model of MS. These studies also show that VTP-43742 is well absorbed after oral administration in multiple animal species and has a long half-life in plasma, which we believe is consistent with once-a-day dosing in humans. We plan to file an Investigational New Drug Application, or IND, with the U.S. Food and Drug Administration, or FDA, for VTP-43742 in the first half of 2015, with Phase 1 clinical trials commencing thereafter. We expect to have Phase 1 proof-of-concept data by the end of 2015.
    We are developing VTP-38443 for acute coronary syndrome, or ACS. According to the American Heart Association, as of 2005, there were approximately 1.4 million hospital discharges in the United States due to ACS. In an article published in the American Journal of Managed Care, the economic impact of ACS is estimated to be greater than $150 billion annually and the direct

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      medical cost for ACS is estimated at $75 billion, with a significant portion associated with drug therapy. ACS patients have cholesterol plaque build-up in their blood vessels and specific evidence of risk for an impending heart attack. Patients diagnosed with ACS have a 10-20% incidence of a serious cardiovascular event within six months. Liver X receptors, or LXRs, which include LXRa and LXRb, work to transport cholesterol out of cells and inhibit the production of inflammatory proteins. Several studies have demonstrated that LXR agonists will promote reverse cholesterol transport, or RCT, which is the transport of cholesterol from cells back to liver for excretion from the body, in vivo in mice and prevent the development of atherosclerosis. Our research suggests that it is important to develop LXR modulators that are agonists for LXRb while avoiding activity of LXRa to reduce effects on liver and plasma TGs. VTP-38443, an orally active LXRb selective agonist, works by augmenting RCT, helping remove cholesterol from the plaque in vessel walls and by inhibiting the production of pro-inflammatory proteins around the plaque. Both of these mechanisms make the plaque less inflamed and more stable, which we believe lowers the risk of plaque rupture and blood clot formation that may lead to a heart attack, and could make VTP-38443 a potential complement to current therapies for ACS. In preclinical studies, VTP-38443 decreased plaque formation by more than 60% and lowered the plaque's inflammatory state. We anticipate completing the necessary preclinical studies and filing an IND for VTP-38443 in the first half of 2016, with Phase 1 clinical trials commencing thereafter.

    We are developing VTP-38543 topically for atopic dermatitis, also known as eczema. Atopic dermatitis is a common inflammatory skin disease most commonly seen in children. According to the National Eczema Association, an estimated 31.6 million people in the United States have symptoms of eczema or eczematous conditions. In 2002, it was estimated that third party payors, such as Medicaid and private insurers, incurred costs as high as $3.8 billion for patients 65 and younger. Atopic dermatitis is characterized by a loss of barrier function, which is the impermeable outer layer of the skin, and skin inflammation. Similar to VTP-38443, VTP-38543 transports lipids out of cells and decreases inflammation, in this case in damaged skin tissue. VTP-38543, an LXRb selective agonist, has been shown in preclinical studies to stimulate the development of mature skin cells known as corneocytes as well as to increase the surrounding lamellar body lipids in the skin to improve its barrier function, while also decreasing skin inflammation. In a preclinical model of atopic dermatitis, VTP-38543 has demonstrated equal or superior efficacy versus high potency topical corticosteroids, the current standard of care. We anticipate completing the necessary preclinical studies and filing an IND for VTP-38543 by the second half of 2015, with Phase 1 clinical trials commencing thereafter.

        In addition to our existing product candidates, our team of scientists is currently utilizing Contour in our new discovery program in immuno-oncology.

        Our executive management team and accomplished drug discovery scientists possess substantial experience across the full spectrum of drug discovery, development and commercialization. Our Chief Executive Officer previously held a number of executive and commercial positions at Bristol-Myers Squibb Company, or BMS, including head of BMS' Immunology and Virology divisions. While at BMS, he successfully launched products in several therapeutic areas. Our Chief Scientific Officer was previously head of Clinical Discovery for BMS, where he was involved in the development of all of BMS' compounds from preclinical candidate selection through to human proof-of-concept, including central nervous system agent Abilify (aripriprazole), cardiovascular agent Eliquis (apixaban), oncology agent Erbitux (cetuximab) and Sprycel (dasatinib), virology agent Reyataz (atazanavir) and immunology agent Orencia (abatacept). Three internationally recognized medicinal chemists—two professors of chemistry from Harvard University and a former Merck distinguished scientist now in the American Chemical Society's Hall of Fame—founded our company.

        We seek to aggressively protect our assets by broadly filing patent applications that cover the novel discoveries we create. Each of our most advanced product candidates is the subject of patents and patent

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applications for composition of matter and methods of treatment in major markets worldwide. These patents and patent applications, if granted, are expected to provide us with intellectual property protection for all of our current product candidates until 2030 and beyond. We intend to continue to expand our intellectual property protections by seeking and maintaining domestic and international patents on inventions that are commercially important to our business. We will also rely on know-how and continuing technological innovation to develop and maintain our proprietary position.

Our Strategy

        Our goal is to leverage our leadership in structure-based drug discovery to deliver first- or best-in-class small molecule compounds to patients in diseases that represent large market opportunities where there are significant unmet medical needs.

        The key elements of our business strategy are to:

    Advance our growing portfolio of product candidates.  We have discovered internally a pipeline of novel product candidates in a variety of important disease areas, including VTP-34072 for type 2 diabetes / metabolic syndrome, VTP-37948 for Alzheimer's, VTP-43742 for autoimmune disorders, VTP-38443 for acute coronary syndrome, VTP-38543 for atopic dermatitis and have recently initiated a discovery program in immuno-oncology. We have entered into separate collaborations with BI to advance VTP-34072 and VTP-37948. We intend to retain rights to VTP-43742, VTP-38443 and VTP-38543, which we believe we can effectively advance through the next phase of clinical development.
    Establish late-stage development and commercialization capabilities for certain of our product candidates in the United States and potentially other markets.  We intend to retain rights to and advance product candidates in certain therapeutic and geographic areas where we believe that we can effectively further develop and, if approved, commercialize a product candidate. For example, we intend to progress VTP-43742 for autoimmune disorders in the United States because we believe that many potential autoimmune disorders are treated by specialist physicians who could be reached by a focused commercial organization.
    Selectively collaborate with large biotechnology and pharmaceutical companies to maximize the value of our product candidates.  We intend to continue to seek opportunities to collaborate with large pharmaceutical and biotechnology companies for certain therapeutic areas and geographies where we can leverage our collaborators' development, regulatory and commercial expertise to maximize the value of our product candidates. We currently have two collaborations, both with BI, from which, through June 30, 2014, we have received $152.4 million, including upfront license fees, research funding and success-based milestone payments as well as equity investments. These collaborations have enhanced the progress of our type 2 diabetes and Alzheimer's programs and given us access to BI's global commercialization infrastructure to pursue these large market opportunities.
    Leverage Contour, our proprietary structure-based drug discovery platform, to rapidly discover novel small molecule product candidates for additional validated, difficult-to-drug targets.  We plan to continue to apply Contour to targets that have significant unmet medical needs and well validated biology, but which have traditionally been considered difficult-to-drug. We believe targets with validated biology, achieved through genetics, animal data and direct clinical experience, increase the probability of success of our discoveries. Difficult-to-drug targets provide an opportunity to leverage our structure-based drug discovery capabilities with Contour to overcome significant discovery obstacles, including potency, selectivity, pharmacokinetics properties and novelty, and to discover and advance new product candidates with first- or best-in-class potential. We expect that using Contour and applying these selection criteria will result in the discovery and development of product candidates with the potential to have significant competitive advantages.

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    Continue investing in technology, people and intellectual property.  We believe that our technological approach to drug discovery, combined with our world class team of scientists spanning various scientific functions, enhances our ability to quickly and effectively discover and develop novel compounds. We have invested significant resources in these areas, including $18.6 million spent on development and enhancement of Contour. We intend to continue to invest in Contour and to recruit the world's leading scientists in order to maintain our leadership in the field. We seek to aggressively protect our assets by broadly filing patent applications that cover the novel discoveries we create.

Product Pipeline

        The following table summarizes key information about our most advanced product candidates:

PRODUCT
CANDIDATE
  INDICATION
(TARGET)
  WORLDWIDE
COMMERCIAL
RIGHTS
  STAGE OF CLINICAL DEVELOPMENT AND
ANTICIPATED MILESTONES
VTP-34072   Type 2 Diabetes and
metabolic syndrome
(11b HSD1)
  BI  

Phase 2 clinical trial initiated in July 2014

Results expected in first half of 2015

             
VTP-37948   Alzheimer's Disease
(BACE)
  BI  

Phase 1 clinical trial initiated in first half of 2014

Phase 1 biomarker trial initiated in first half of 2014

Results for both trials expected in second half of 2014

             
VTP-43742   Psoriasis, Multiple
Sclerosis, other
autoimmune diseases
(RORgt)
  Vitae  

Phase 1 clinical trial expected to begin in first half of 2015

Phase 1 human proof-of-concept results expected by end of 2015

             
VTP-38443   Acute Coronary Syndrome (LXRb)   Vitae  

Phase 1 clinical trial expected to begin in first half of 2016

             
VTP-38543   Atopic Dermatitis (LXRb)   Vitae  

Phase 1 clinical trial expected to begin in second half of 2015

    VTP-34072 Targeting 11b Hydroxysteroid Dehydrogenase Type 1 (11b HSD1) for Type 2 Diabetes and Metabolic Syndrome

    Overview

        VTP-34072, our orally active 11b HSD1 inhibitor, is being developed in collaboration with BI for type 2 diabetes. For FDA regulatory purposes, we expect the indication for VTP-34072 will be for the improvement of glycemic control in type 2 diabetes. However, we believe it will be differentiated from other oral anti-diabetic agents by having a positive impact on multiple cardiovascular and metabolic risk factors associated with metabolic syndrome. Patients with metabolic syndrome, which afflicts approximately 85% of type 2 diabetics, are characterized by being overweight and having elevated glucose, blood pressure, cholesterol and triglycerides, while having decreased levels of HDL-C or "good cholesterol." Individuals with metabolic syndrome have demonstrated abnormalities in cortisol metabolism. Cortisol is synthesized by the adrenal gland and is produced in tissues from the precursor, cortisone, by the enzyme 11b HSD1. This enzyme is present in multiple tissues, especially in liver and adipose tissue. Clinical trials and preclinical studies have shown that 11b HSD1 inhibition can suppress the conversion of inactive cortisone into active cortisol in tissue and thereby reduce cortisol levels in relevant

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tissues. We believe inhibition of cortisol activation should increase glucose uptake in muscle and adipose tissue, decrease hepatic glucose production and offer a new therapeutic option in type 2 diabetes with metabolic syndrome.

        Using Contour, we have discovered potent, selective 11b HSD1 inhibitors in collaboration with BI. We optimized these compounds for inhibiting the isolated enzyme and inhibiting the conversion of cortisone to cortisol in biopsies of human adipose tissue and selected VTP-34072 for further development. In Phase 1 clinical trials involving 142 individuals conducted by BI, VTP-34072 was found to be safe and well tolerated in a single ascending dose trial and an ascending two week daily dosing trial. In these clinical trials, VTP-34072 inhibited 11b HSD1 enzyme activity in adipose tissue by greater than 90% at multiple dose levels at 24 hours after the last dose, and demonstrated a long half-life in plasma, which we believe is consistent with once-a-day dosing in humans. A Phase 2 clinical trial in obese patients with type 2 diabetes is expected to commence in July 2014, with data expected in the first half of 2015.

    Cortisol in Metabolic Disease

        Two diseases, Cushing's syndrome and Addison's disease, support the role of cortisol in metabolic syndrome. In Cushing's syndrome, patients have high levels of cortisol which causes many of the same morbidities that afflict metabolic syndrome patients, including visceral obesity, abdominal obesity, high TGs, low HDL-C, elevated blood pressure and elevated glucose levels, with Cushing's Syndrome patients being predisposed to having overt diabetes. Conversely, in Addison's disease, which is caused by a deficiency in cortisol, patients have decreased hepatic glucose production and hypoglycemia, or low blood glucose. Rodent models of metabolic syndrome also provide support for the role of elevated cortisol levels in metabolic syndrome. Rodents with elevated levels of corticosteroids have impaired glucose uptake in muscle and adipose tissue, and enhanced liver glucose production.

    11b HSD1 as a Target in Type 2 Diabetes and Metabolic Syndrome

        As shown in the Figure 1 below, 11b HSD1 catalyzes the conversion of inactive cortisone to the active steroid hormone, cortisol. 11b HSD1 is highly expressed in most tissues, including liver, adipose and brain tissue and is the only enzyme known to generate cortisol from cortisone in peripheral tissues. Another enzyme, 11b HSD2, catalyzes the reverse reaction, inactivating cortisol and converting it to cortisone. 11b HSD2 is expressed in the kidney, sweat and salivary glands. Its main biological role is to protect the kidney from excess cortisol.

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Figure 1: The interconversion between inactive cortisone and active cortisol is mediated by two distinct enzymes, 11b HSD1 and 11b HSD2.

        We believe that 11b HSD1 inhibition in metabolic syndrome patients will protect them from progression to type 2 diabetes and the associated atherosclerotic vascular disease, also known as hardening of the arteries, by lowering their liver and adipose tissue cortisol levels, without lowering cortisol levels in the blood. This tissue specific lowering of cortisol levels, without lowering blood levels, is important to prevent treated patients from developing symptoms of Addison's disease. The beneficial effects of

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inhibiting 11b HSD1 is supported in the literature by genetic studies. For instance, in a study by Kotelevtsev, et al published in 1997 in the Proceedings of the National Academy of Sciences, mice lacking 11b HSD1 were reported to be protected from becoming hyperglycemic and were insulin responsive, while in a study by Masuzaki, et al published in 2001 in Science, mice with increased 11b HSD1 expression in adipose tissue were reported to gain weight and had findings of metabolic syndrome. In addition, pharmacological experiments inhibiting the enzyme have demonstrated that reduction of cortisol in adipose tissue produces a significant decrease in blood glucose, lipid levels and blood pressure. In a clinical trial assessing type 2 diabetics inadequately controlled by metformin, an 11b HSD1 inhibitor demonstrated significant reductions in blood sugar and cholesterol and modest reductions in weight.

        We believe that any inhibitor of 11b HSD1 needs to be highly specific and avoid inhibition of 11b HSD2. Human genetic studies show that inherited loss of 11b HSD2 activity leads to severely elevated blood pressure and low potassium due to excess cortisol activity in the kidney. Based on clinical and preclinical data generated to date for VTP-34072, we believe that it is highly specific for 11b HSD1 inhibition without inhibiting 11b HSD2.

    Market Opportunity

        Type 2 diabetes is a common and increasingly prevalent diagnosis. According to the American Diabetes Association, in 2010, approximately 17 million Americans had a diagnosis of type 2 diabetes and another 7 million were undiagnosed and may have been unaware that they had type 2 diabetes. If the present trends continue, as many as 1 in 3 American adults are expected to have type 2 diabetes in 2050. Overall, the economic cost of diagnosed type 2 diabetes in the United States was estimated to be $245 billion in 2012 and of that approximately $9.6 billion was spent on prescription products to treat the disease.

        We believe that the most appropriate patient population for VTP-34072 is the approximately 85% of Americans suffering from type 2 diabetes who are classified as having metabolic syndrome. Metabolic syndrome manifests as a linked combination of abnormalities which includes elevated blood pressure, levels of plasma glucose and lipids and weight that together significantly increase a patient's risk for cardiovascular disease. Published data have demonstrated that improving one or more of these conditions can have a direct impact on reducing cardiovascular risk.

        There are many classes of orally active drugs that work in different ways to treat type 2 diabetes. They include sulfonylureas, biguanides, meglitinides, thiazolidinediones, alpha-glucosidase inhibitors, bile acid sequestrants, DPP-4 inhibitors, and SGLT2 Inhibitors. We believe the continued and significant unmet medical need for diabetes treatments is demonstrated by DPP-4s, a new class of drugs which were first approved in the United States in 2006 and by 2013 had sales of $5.2 billion. If approved, we believe that VTP-34072 may be differentiated from currently available treatments for type 2 diabetes because of its potential to have a broader beneficial effect on a patient's overall metabolic syndrome associated cardiovascular risk profile by lowering their glucose, lipids, blood pressure and weight.

    Clinical Trials

        The clinical development of VTP-34072 is being led by BI. Two Phase 1 clinical trials have been completed and a Phase 2 clinical trial was initiated in July 2014, with data expected in the first half of 2015.

        The first Phase 1 clinical trial for VTP-34072 was a single dose escalating trial in 72 healthy, overweight volunteers. VTP-34072 was well tolerated at all doses. There were no clinically relevant changes in vital signs, laboratory values or electrocardiograms. The half-life for clearance from the plasma was 14 to 24 hours, which we believe is consistent with once-a day dosing in humans. The activity of 11b HSD1 was assessed in the adipose tissue biopsies that were taken prior to dosing and at 24 hours after the dose. The enzyme activity in the adipose biopsies showed that 11b HSD1 activity was inhibited by greater than 90% at 24 hours in multiple dose groups. In addition, no evidence of changes in plasma or urinary

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hormone levels indicating inhibition of 11b HSD2 were observed. The second Phase 1 clinical trial was a once-a-day dose, two week trial in 70 overweight type 2 diabetic patients, starting at a low dose, with the dose being increased in each subsequent study group. VTP-34072 was well tolerated at all doses. There were no clinically relevant changes in vital signs, laboratory values, or electrocardiograms. No dose dependent adverse events and no serious adverse events were reported. There were no clinically significant changes in plasma cortisol levels or in levels of ACTH, the hormone that regulates cortisol production by the adrenal gland, and there were no changes in plasma or urinary hormone levels indicating inhibition of 11b HSD2. The activity of 11b HSD1 was assessed in adipose tissue biopsies taken before the first day of dosing and at 24 hours after the day 14 dose. The enzyme activity in the adipose tissue biopsies showed that the 11b HSD1 activity was inhibited by greater than 90% at 24 hours in multiple dose groups.

    Preclinical Data

        VTP-34072's ability to inhibit 11b HSD1 was tested in an in vitro enzyme assay and it was shown to have low, single digit nanomolar, or nM, activity. In addition, it was shown to be greater than 1000-fold more potent for 11b HSD1 as compared to 11b HSD2. As shown in Figure 2 below, VTP-34072 demonstrated potent, single digit nanomolar inhibition of 11b HSD1 activity in human adipose tissue.

Inhibition of Human 11b HSD1 by VTP-34072

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Figure 2: Inhibition of 11b HSD1 activity by VTP-34072 in human adipose tissue.

        VTP-34072's pharmacokinetic profile was assessed in rats and cynomolgus monkeys by administering VTP-34072 via oral and intravenous routes in both species. The pharmacokinetics results showed that the compound was well absorbed with high oral bioavailability and with a plasma half-life, which we believe is consistent with once-a-day dosing in humans.

    Development Plans

        VTP-34072 is being tested by BI in a Phase 2 clinical trial in 126 overweight type 2 diabetic patients, which commenced in July 2014. The patients will have their anti-diabetic medications discontinued, or if they are on metformin, their metformin will be continued. This is a placebo-controlled, randomized, double-blinded clinical trial, where neither the patient nor the physicians treating the patient know if the patient is getting the drug or a placebo, in which patients will be dosed once-a-day for four weeks at one of three dose levels. The endpoints in this clinical trial include safety, tolerability and glucose lowering. Data from this clinical trial are expected in the first half of 2015.

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    VTP-37948 Targeting b-Site Amyloid Precursor Protein Cleaving Enzyme 1 (BACE) for Alzheimer's Disease

    Overview

        VTP-37948, our orally active BACE inhibitor, is being developed in collaboration with BI for Alzheimer's. Alzheimer's is a devastating disease that causes problems with memory, thinking and behavior. According to the Alzheimer's Foundation of America, or the AFA, an estimated 5.1 million Americans had Alzheimer's as of 2013 and due to the increasing number of people age 65 or older that the number of Americans with Alzheimer's or dementia will double by 2015. In addition, according to the AFA, the average annual cost of care for Alzheimer's patients over the age of 70 in the United States was estimated to be between $157 billion and $210 billion in 2010. Alzheimer's eventually impairs an individual's ability to carry out such basic bodily functions as walking and swallowing and can ultimately be fatal. One of the primary indicators of Alzheimer's is the presence in the brain of large complexes or plaques of a toxic peptide, called amyloid beta or Ab. One of the proteins involved in the generation of Ab is b-Site Amyloid Precursor Protein Cleaving Enzyme 1, also known as beta secretase or BACE. BACE cleaves a larger protein, called amyloid precursor protein, or APP, into two pieces at a particular site, and then another protein complex makes a second cleavage resulting in the generation of the Ab peptide. We believe there is strong genetic evidence for Ab and BACE being important factors in the pathogenesis of Alzheimer's.

        Using our Contour platform, we discovered potent BACE inhibitors that were orally active for lowering brain Ab levels in animal models. In collaboration with BI, these potent, selective BACE inhibitors were optimized. The resulting optimized BACE inhibitor, VTP-37948, penetrates the brain and has been shown to lower Ab levels by up to 95% in preclinical studies. In these studies, VTP-37948 shows no significant off-target activity, has high bioavailability and is projected to be a once-a-day drug in humans. BI has initiated clinical development of VTP-37948. A human single dose Phase 1 clinical trial for safety, tolerability and pharmacokinetics was initiated in January 2014. A second human single dose Phase 1 clinical trial is expected to be initiated in the second half of 2014, in which cerebral spinal fluid, or CSF, will be assayed for Ab lowering.

    Amyloidb and Alzheimer's Disease

        Alzheimer's is the most common form of dementia. Alzheimer's is characterized by the accumulation of extracellular protein deposits in the brain that are called amyloid plaques. The plaques are composed of Ab peptides, which are derived from the larger protein APP. The accumulation of Ab containing plaques, or small soluble complexes derived from the plaques, in the brain is thought to damage neurons, or nerve cells, which, in turn, triggers additional inflammatory responses that further aggravate the disease. Studies show that Ab accumulation is critical to the pathogenesis of Alzheimer's. Human genetics studies have established that mutations that accelerate the rate of production of Ab peptides universally cause early onset Alzheimer's. Conversely, a mutation in the APP protein at the BACE cleavage site that suppresses production of Ab peptides by 40% and decreases the rate of cleavage by BACE is associated with a decreased incidence of Alzheimer's of approximately 7.5x and an improvement in cognitive function in non-Alzheimer's elderly individuals. Therefore, we believe that the inhibition of Ab production in the brain should benefit patients with Alzheimer's.

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    BACE as a Target in Alzheimer's Disease

        As depicted in Figure 3 below, Ab peptides are produced by excision from a larger protein, APP. The path to the production of Ab begins with the cleavage of APP by BACE. A second cut occurs by the membrane bound g-secretase complex, which releases the Ab peptide, or a small fragment of the protein.

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Figure 3: Production of Ab peptides is mediated by cleavage of APP by BACE and g-secretase.

        Therapies targeting Alzheimer's have included anti-Ab antibodies that bind to different forms of Ab to promote the clearance of Ab and plaques from the brain, and small molecule inhibitors of the g-secretase complex or of BACE to decrease the production of Ab. Recently, two anti-Ab antibodies, bapineuzumab and solanezumab, were tested in several large Phase 3 clinical trials by Pfizer Inc. and Eli Lilly & Co. The therapeutic hypothesis was that the antibodies would promote Ab clearance and affect disease progression. Both sets of trials failed to meet their primary end points. However, a post-hoc analysis of solanezumab showed an improvement versus placebo in a subgroup of patients with early Alzheimer's. In addition, animal studies have suggested that when Alzheimer's has progressed beyond a certain point, the disease becomes self-sustaining and resistant to therapy. These data and data from other studies suggest that initiating Ab lowering therapy earlier in the disease process, which we intend to do in our development program, will be important to generating a positive therapeutic effect.

        The inhibition of g-secretase activity for Alzheimer's with small molecules has been pursued, and Ab lowering has been demonstrated. However, the lack of specificity for inhibiting only Ab production has been a problem. In addition to its role in Ab production, the g-secretase complex generates a vital signaling protein named Notch, which is key to the survival of many cell types. Inactivation in mice by gene knockout methods of a component of the g-secretase complex, presenilin, leads to developmental defects that cause a lethality around the time of birth due to Notch suppression. In addition, in human trials with g-secretase inhibitors, there have been serious adverse events including colitis, which is inflammation of the colon, and skin cancer. Thus, inhibiting g-secretase has multiple unintended and serious consequences. In contrast to g-secretase, the absence of BACE in gene knock-out mice has been shown to have insignificant impact on mouse physiology.

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        We believe BACE inhibition offers advantages over g-secretase inhibitors by being able to reduce Ab production without serious off-target activities, and advantages over antibody therapies by ease of oral administration for long-term chronic treatment, being able to penetrate the brain to reach the drug target, cost of goods for a potential life-long therapy, and ease of dose adjustment. Because of these advantages and what we expect to be a very safe profile, we feel that BACE inhibition is the preferred way to lower brain Ab levels for the prevention and treatment of Alzheimer's.

    Market Opportunity

        Alzheimer's is the most common type of dementia and is increasing in prevalence as the United States population ages. According to the Centers for Disease Control, Alzheimer's was the 6th leading cause of death in the United States in 2013. In addition, as of 2013, an estimated 5.1 million Americans had Alzheimer's, nearly all of whom are aged 65 or older, and approximately 200,000 individuals under age 65 have early-onset Alzheimer's. The demographics highlight that the economic impact of Alzheimer's is large and continuing to grow. According to the Alzheimer's Foundation of America, in 2010, the cost of care for people over age 70 in the United States in 2010 was between $157 billion and $210 billion. Aricept, a leading treatment for managing the symptoms of Alzheimer's achieved United States sales of approximately $2.1 billion in its final full year of sales before a generic entrant.

        There are two classes of medication currently approved to treat the symptoms of patients with Alzheimer's, cholinesterase inhibitors and NMDA inhibitors. Both classes of drugs are used to treat symptoms of Alzheimer's such as confusion and memory loss but they do not impact disease progression. Compared to these palliative agents, we believe VTP-37948 has the potential to promote neuronal survival which will modify progression of disease and maintain cognitive function.

    Preclinical Data

        Using our Contour platform, we discovered certain BACE inhibitors that were orally active for lowering brain Ab levels in animal models. In collaboration with BI, these potent, selective BACE inhibitors were further optimized, and VTP-37948 was selected to advance into clinical development. Inhibition of BACE enzymatic activity was determined in cell-free biochemical assays using purified recombinant human BACE. As shown in Figure 4 below, results from this preclinical study demonstrated that VTP-37948 is a potent low nM inhibitor of BACE activity.


Inhibition of BACE by VTP-37948

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Figure 4: Inhibition of purified human BACE by VTP-37948.

        BACE shares a degree of structural homology with several other proteins that cleave proteins, including renin, pepsin and cathepsins D and E. To determine the selectivity of VTP-37948, we tested its

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ability to inhibit the activity of these enzymes in biochemical assays. VTP-37948 was greater than 1000-fold more potent for BACE as compared to renin and cathepsin D, and showed no activity against pepsin and cathepsin E.

        VTP-37948 has been shown to be highly effective at lowering brain and cerebral spinal fluid, or CSF, Ab in rats. To test the ability of VTP-37948 to lower CSF Ab in rats, the product candidate was administered orally and CSF levels of drug and Ab were measured using various doses and at multiple time points. As shown in Figure 5 below, VTP-37948 lowered CSF Ab levels in a drug exposure-dependent manner.

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Figure 5: Rats brain tissue assayed for levels of Ab and concentrations of VTP-37948. The various symbols in the figure represent results for individual specimens.

        Preclinical studies in rats and dogs of VTP-37948 show that the compound was well absorbed in both species with high oral bioavailability, good brain penetration, and a relatively long plasma half-life, which we believe is consistent with once-a-day dosing in humans.

    Development Plans

        BI is currently conducting two Phase 1 clinical trials for VTP-37948 in 68 total individuals. The first Phase 1 clinical trial for VTP-37948 was initiated in January 2014. It is a single dose, randomized, double-blind, placebo controlled Phase 1 clinical trial. The clinical trial started at a low dose and increased the dose in each new dose group. The clinical trial will assess the safety and tolerability of VTP-37948 as well as the pharmacokinetics. The Phase 1 clinical trial results are expected in the second half of 2014. The second Phase 1 clinical trial is a single dose trial at various dose levels of drug in healthy volunteers. This trial will assess safety, tolerability, and pharmacokinetics, and in addition, will assess changes in the levels of CSF Ab at various times after dosing of VTP-37948. The data on CSF Ab lowering will enable us to determine how well VTP-37948 inhibits BACE in the brain and lowers brain Ab levels, which will give us early insights into the potential for clinical efficacy. Results from both of these clinical trials are expected in the second half of 2014.

VTP-43742 Targeting RAR-Related Orphan Receptor gamma-t (RORgt) for Autoimmune Disorders

    Overview

        We discovered and are developing VTP-43742, an orally active small molecule inhibitor of RORgt activity which is wholly owned by us, for the treatment of a variety of autoimmune disorders. Autoimmune disorders comprise a large number of diseases in which the body mounts an inappropriate immunological response against normal human tissues. These disorders include common autoimmune disorders such as psoriasis, MS, RA and steroid-resistant asthma, as well as rarer conditions such as Behcet's disease and autoimmune uveitis. Increased activity of a class of lymphocytes called Th17 cells and excess production of inflammatory proteins, including Interleukin 17, or IL-17, by these cells are believed to be critical parts of the pathophysiology of many human autoimmune disorders. RORgt is a nuclear hormone receptor that is essential for the formation and function of Th17 cells. We believe inhibition of RORgt activity in

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Th17 cells will be beneficial for the treatment of multiple autoimmune disorders, specifically, psoriasis, MS, steroid-resistant asthma, Behcet's disease and autoimmune uveitis.

        In preclinical studies we have determined that VTP-43742 is a potent binder to RORgt that inhibits the conversion of naïve T cells into Th17 cells and the secretion of multiple inflammatory proteins. It was shown to be greater than 1000-fold more potent for binding to RORgt relative to two closely related receptors, RORa and RORb. Those preclinical studies have also shown that VTP-43742 inhibits the secretion of IL-17 and other inflammatory proteins from Th17 cells, and is therapeutically beneficial in an animal model of autoimmunity. VTP-43742 is well absorbed after oral administration in multiple animal species and has a long half-life in plasma, which we believe is consistent with once-a-day dosing in humans.

        We expect to begin the first single dose Phase 1 clinical trial for VTP-43742 in the first half of 2015 and expect to begin a two week Phase 1 proof-of-concept clinical trial in psoriasis patients in the second half of 2015. The multiple dose Phase 1 clinical trial will be performed in psoriasis patients because psoriasis typically responds rapidly to therapy and is straightforward to assess for improvement of disease activity. We expect results for this multiple dose Phase 1 proof-of-concept clinical trial by the end of 2015.

    IL-17 and Th17 Cells in Autoimmunity

        IL-17 was discovered in the 1990's as a pro-inflammatory protein, or cytokine. It has been implicated in multiple autoimmune disorders including psoriasis, MS and RA. In 2000, it was determined that IL-17 is produced primarily by a subset of T cells, which are a type of lymphocyte, called Th17 cells. Th17 cells are normally involved in mounting the immune response against disease causing organisms like fungi and bacteria. However, inappropriately regulated Th17 cells can attack normal human tissues, and have been shown to play a significant role in multiple autoimmune disorders. Persistent secretion of cytokines by Th17 cells, especially IL-17, promotes chronic inflammation by activating other cells to make additional inflammatory mediators such as tumor necrosis factor, or TNF,-a, and the interleukins IL-1b, IL-6, and IL-8. Blockade of IL-17 activity by the monoclonal antibodies ixekizumab, secukinumab and brodalumab has been shown to ameliorate autoimmune disorders both in human clinical trials and in preclinical models. These results have created interest in identifying targets in Th17/IL-17 pathway that could be exploited to treat chronic inflammation and autoimmunity.

        As shown in Figure 6 below, Th17 cells are derived from naïve T cells. A mix of cytokines and growth factors induce RORgt expression which helps to complete the differentiation process from naïve T cells to Th17 cells. The expression of RORgt drives the secretion of IL-17 from Th17 cells along with a group of additional cytokines, and it also upregulates the IL-23 receptor, providing a positive feedback loop, further driving the activity of Th17 cells. These cytokines are inflammatory mediators that, in turn, activate other inflammatory cells and the production of additional inflammatory molecules down stream of Th17 cells as depicted below.

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Figure 6: Naive T cells differentiate into Th17 cells by action of multiple factors. Expression of RORgt in Th17 cells drives expression of inflammatory cytokines that exacerbate autoimmune disease.

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    RORgt as a Target in Autoimmunity

        The ROR protein family consists of three related receptor isotypes—RORa, RORb and RORg. RORa is expressed in many tissues, including brain, liver, thymus, and skeletal muscle. RORb has a limited expression pattern and is found mainly in the retina of the eye and the pineal gland, which is a small gland in the brain. RORg has a broad pattern of expression, similar to RORa. RORgt is a variant of the RORg gene and is found only in immune cells. Mice lacking RORa have a movement disorder due to deficiency and degeneration of specific brain cells. Similarly, lack of RORb in mice leads to blindness due to abnormal retinal development. Mice deficient in RORgt have impaired Th17 cell differentiation; however, these mice are otherwise healthy and are also resistant to many autoimmune disorders. We believe that these immuno-protective findings have stimulated a broad interest in developing RORgt inhibitors as a novel mechanism to control Th17 function to treat autoimmune disease. We believe that any viable product candidate needs to be highly specific for RORgt because of the potential safety concerns that are associated with inhibiting RORa or RORb activity.

        RORgt acts by binding to specific DNA sequences, called ROR Response Elements, or ROREs, to regulate the production of messenger RNA. When bound to the RORE of the IL-17 gene, RORgt stimulates the production of the IL-17 messenger RNA. As depicted in Figure 7 below, this activity of RORgt can be modulated by inverse agonists, or inhibitors, that block the activity of the receptor. These compounds bind to a specific ligand pocket in the receptor and suppress receptor activity.

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Figure 7: RORgt binds to DNA and initiates transcription of target genes, e.g., IL-17. An inverse agonist can bind to a specific pocket in RORgt and block its activity, leading to suppression of cytokine synthesis.

        Antibodies being developed to target the Th17/IL-23/IL-17 pathways have been extensively studied and have demonstrated efficacy in human trials in psoriasis, MS, RA and ankylosing spondylitis, which is an immune mediated inflammatory disease of the lower back. One of the anti-IL-17 antibodies, secukinumab, was shown to be superior to a TNF-a antibody in psoriatic patients. We believe that a small molecule, such as VTP-43742, that targets the same pathway by inhibiting the activity of RORgt in Th17 cells, may have the advantage of being orally active, affecting a broader spectrum of inflammatory proteins, having a lower cost of goods, and being easier to dose adjust or stop therapy when needed, and could compliment or compete with antibody approaches currently in development.

        The RORgt ligand pocket is well characterized and is particularly suitable for targeting with small molecules. Several inverse agonists of RORgt have been reported in medical and scientific literature. These compounds are effective in preclinical models of autoimmune disease and the anti-inflammatory effects observed with these RORgt blockers are similar to those seen with IL-17 antibodies. Many competing RORgt programs have struggled to achieve the potency and the requisite selectivity needed for a clinical candidate. There are subtle variations among the three ROR receptors in the ligand binding pocket. We have attempted to exploit these variations using Contour to develop VTP-43742. Our preclinical studies of VTP-43742 have shown that it is potent and is more than 1000-fold more potent at binding to RORgt than binding to RORa and RORb.

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    Market Opportunity

        Autoimmune disorders make up a large number of human disorders which include more common disorders such as psoriasis, MS, RA and steroid-resistant asthma, as well as rarer disorders such as Behcet's disease and autoimmune uveitis. Due to its Th17 activity, we believe VTP-43742 will be most effective in psoriasis, MS, Behcet's disease and autoimmune uveitis. Psoriasis, a chronic autoimmune disorder of the skin, affects an estimated 7.4 million Americans. Based on various reports estimating the prevalence of diagnosis per 100,000 people and the U.S. 2014 census, we estimate that, as of 2014, the number of Americans diagnosed with MS, Behcet's disease and autoimmune uveitis was 400,000, 16,500 and 5,400, respectively.

        Currently available therapies for the treatment of psoriasis include topical steroids, phototherapy or light therapy, systemic agents including oral retinoids, cyclosporine, and methotrexate and finally biologics that act by blocking the action of T cells, or by blocking various proteins in the immune system. We anticipate that VTP-43742 will be used for the treatment of mild to moderate psoriasis, prior to antibody therapy, as well as for the treatment of severe psoriasis, in conjunction with or in replacement of antibody therapy.

    Preclinical Data

        We analyzed the ability of VTP-43742 to bind to RORgt in a biochemical binding assay. As shown in Figure 8 below, the Ki value of VTP-43742 to RORgt, which measures how tightly the compound binds to its target, is high (3.7 nM). The binding affinity of VTP-43742 to the other ROR isotypes, namely RORa and RORb, is much weaker as evidenced by the relatively higher Ki values, which is important because significant toxicities are associated with inhibition of these two related receptors. Our internal studies have shown VTP-43742 to be greater than 1000-fold more potent for RORgt as compared to RORa and RORb.

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Figure 8: Binding affinity of VTP-43742 to isolated human ROR a, b, and gt.

        VTP-43742 was also tested for its ability to block RORgt activity in Jurkat T cells, a well-established human T cell line for testing the functional activity of compounds. This assay was used to determine the inverse agonist activity of RORgt ligands. As shown in Figure 9 below, VTP-43742 is a potent inhibitor of RORgt activity in these cells with an IC50, which is the amount of drug necessary to inhibit the assay by 50%, of 17nM.

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Figure 9: VTP-43742 is a potent (IC50=17nM) and effective inverse agonist in a RORgt-dependent reporter human T cell assay.

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        The ability of VTP-43742 to block endogenous RORgt activity was determined in an assay system which we believe to be more representative of the treatment of humans. As shown in Figure 10 below, VTP-43742 was shown to be a potent inhibitor of RORgt dependent IL-17 production in lymphocytes in human whole blood assays with an IC50 potency of 221 nM, which is the concentration of drug needed to inhibit this assay by 50%. The whole blood assay is an important measure to gauge the effects that protein binding and cell penetration may have on a compound's activity. The assay is helpful in estimating drug levels needed to achieve RORgt blockade in animals and humans.

Human Whole Blood Assay

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Figure 10: VTP-43742 is a potent inhibitor of IL-17 in physiologically relevant primary human lymphocytes in whole blood.

        Experimental autoimmune encephalomyelitis, or EAE, is a mouse model of MS that we believe can serve as a useful surrogate model for human MS since both are associated with inflammation and demyelination, or loss of the protective sheath around nerves, along with a Th17 dependent disease process. VTP-43742 was tested in the EAE model to assess its effects on disease progression. It was orally administered twice daily from the time of disease induction. As shown in Figure 11 below, VTP-43742 significantly reduced the clinical score in a dose-dependent manner consistent with a decrease in inflammation and demyelination, where a higher clinical score represents a worsening condition in the animal model. The maximal reduction in clinical score (50%-60%) is similar to that seen with other IL-17 targeted therapies including IL-17 monoclonal antibodies and RORgt gene knock-out mice. Since IL-17 expression is induced in infiltrating T cells in the spinal cords of diseased animals, and RORgt regulates the expression of IL-17, spinal cords were harvested and analyzed for IL-17 expression. VTP-43742 showed a significant, dose-dependent decrease in the expression of IL-17.

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VTP-43742 in Mouse EAE Model

 
IL-17 Gene Expression


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Figure 11: Left: VTP-43742 treatment ameliorates severity of disease in the EAE model, where mpk refers to mg/kg. Right: VTP-43742 inhibits IL-17 gene expression within inflammatory cells in the spinal cord of treated animals.

        EAE is characterized by an immune mediated inflammatory response in the spinal cord of diseased mice which leads to the loss of the myelin sheaths around the nerve axons in the spinal cord. We therefore examined the effect of VTP-43742 on the spinal cord and the loss of myelin sheaths in EAE animals. Representative histological sections of hematoxylin and eosin, two tissue stains frequently used in the microscopic analysis of tissues, stained spinal cords from animals treated with dosing solution without drug, or vehicle, or VTP-43742 treated animals were examined after disease induction. As shown in Figure 12 below, the loss of axonal myelin sheaths results in the formation of vacuoles, or small bubbles, in the vehicle treated animals, as shown in a spinal cord cross section in Figure 12 on the left, whereas the vacuoles are substantially decreased or absent in the VTP-43742 treated animals as shown in Figure 12 on the right. In addition, inflammation, characterized by lymphocyte and neutrophil infiltration and necrotic cell debris were both significantly reduced in VTP-43742 treated animals compared with vehicle controls. Collectively, these data demonstrate that VTP-43742 is effective in reducing disease activity in a clinically relevant animal model of human MS via blockade of the immune mediated inflammatory process and an inhibition of RORgt driven gene expression.

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Figure 12: VTP-43742 reduces histologic abnormalities, indicative of loss of myelin sheaths around the nerve cell axons, in EAE mice.

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        The goal of the RORgt program is to develop an orally active agent. VTP-43742 was administered via oral and intravenous routes in rats and dogs to assess its pharmacokinetics, and the oral bioavailability in dogs was 66% and half-life was 15 hours; exhibiting good oral bioavailability and long plasma half-life. Based on additional preclinical studies, we believe VTP-43742 should be well absorbed in humans, and we believe it may offer a first-in-class therapy for patients suffering from autoimmune disease. We predict that VTP-43742 will have a plasma half-life of approximately 24 hours in humans.

    Development Plans

        We plan to file an investigational new drug application, or IND, with the FDA for VTP-43742 in the first half of 2015, and expect to begin Phase 1 clinical trials thereafter. The initial Phase 1 clinical trial is expected to be a single ascending dose trial in healthy human volunteers. The clinical trial will be designed to demonstrate that VTP-43742 is well tolerated by the trial subjects and that it does not cause clinically significant changes in clinical laboratory tests or vital signs. This clinical trial will also access the pharmacokinetics properties of the product candidate. We plan to begin a two week, Phase 1, multiple ascending dose clinical trial in the second half of 2015. This clinical trial will be performed in patients with psoriasis, in which we will analyze the safety, tolerability and pharmacokinetics of two weeks of once-a-day dosing of VTP-43742. This clinical trial is expected to provide proof-of-concept against an autoimmune disease since two weeks is generally a sufficient time period to test for improvements in the skin lesions of psoriasis patients. In addition to demonstrating clinical improvement in the skin lesions of psoriatic patients, skin biopsies will be performed to assess inflammation as well as treatment related changes in Th17, IL-17, and other effector cytokines.

VTP-38443 Targeting Liver X Receptor Beta (LXRb) for Acute Coronary Syndrome (ACS)

    Overview

        We discovered and are developing VTP-38443, an orally active LXRb selective agonist which is wholly owned by us, for the treatment of acute coronary syndrome, or ACS. ACS includes unstable angina and myocardial infarction, referred to herein as a MI or heart attack. Patients who have an ACS event have a 10-20% chance of having a significant cardiovascular event within six months of the original event. ACS patients have atherosclerotic plaques which contain lipid rich foam cells, inflammatory cell infiltrates, a thin cap of the atherosclerotic plaque prone to rupture, and a surface to the plaque that is prone to form blood clots. Current therapies include antiplatelet, anti-blood clotting and cholesterol lowering agents. LXRs are involved in cholesterol homeostasis and regulate removal of cholesterol from cells, or RCT, via ABCA1, which is a cellular transporter that moves cholesterol out of cells and onto HDL. We believe that an LXR agonist would be useful in treating ACS patients because it both augments RCT, which removes cholesterol from the plaque, and inhibits the production of pro-inflammatory proteins. Both of these mechanisms make the plaque less inflamed and less lipid rich, resulting in the plaque surface being less prone to formation of blood clots.

        In preclinical studies, VTP-38443 has been shown to be active in both rodent and human cell assays in inducing proteins that are involved in RCT and suppressing proteins involved in inflammation. In a mouse model that mimics the processes of ACS, VTP-38443 decreased cholesterol in the atherosclerotic vessels and simultaneously decreased inflammation in the vessels. In dose ranging toxicology studies, the safety margins between efficacious systemic exposures and toxic exposures were identified. VTP-38443 is progressing into preclinical development.

    Reverse Cholesterol Transport (RCT) in ACS

        ACS patients have a high rate of recurrent cardiovascular events. Statin treatment lowers cholesterol levels and has been demonstrated to reduce the number of subsequent cardiovascular events. While statin treatment has clinical benefit, protection is not complete. We believe treatment with agents that remove cholesterol from atherosclerotic plaques to induce direct plaque regression and stabilization may result in additional reduction in events. One approach is to directly target the active removal of cholesterol from

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plaque by the induction of RCT, which is a multi-step process that results in the elimination of cholesterol from the body. In RCT, cholesterol is actively transported out of peripheral cells onto HDL, and the excess cholesterol is transported to the liver and eliminated from the body. We believe activation of cholesterol removal from plaque by RCT will provide a novel avenue to remove cholesterol, and is expected to reduce plaque burden and to provide additional protection for ACS patients.

    Inflammation in ACS

        Inflammation plays an important role in ACS. Macrophages, other types of white blood cells and other inflammatory cells have been shown to infiltrate the atherosclerotic plaque. These inflammatory cells synthesize and secrete additional pro-inflammatory proteins that further increase the inflammatory process, as well as alter the endothelial surface, the thin layer of cells that lines the interior surface of blood vessels, of the plaque and make it prone to the formation of blood clots which can block the artery. In addition, the activated macrophages secrete proteases, a type of enzyme, which breaks down the extracellular proteins in the plaques and weakens the cap of the plaque, thereby predisposing the plaque to rupture. A ruptured plaque often results in the formation of blood clots which can block the artery, leading to a MI. Thus, the active inflammatory process in ACS atherosclerotic plaques exacerbates the disease process.

    Liver X Receptor b (LXRb) in ACS

        Liver X receptors, LXRs, which include, LXRa and LXRb, work to transport cholesterol out of cells as shown in Figure 13 below and inhibit the production of inflammatory proteins. VTP-38443 targets LXRb within macrophages in the atherosclerotic plaque in the vessel walls to remove cholesterol and decrease the production of inflammatory proteins. Clinical trials have established that LXRb is a major regulator of ABCA1, a cellular membrane transporter that moves cholesterol out of cells and on to HDL-C. A transporter related to ABCA1, called ABCG1, was also identified as a cholesterol exporter that is also regulated by LXRs. LXRa is mainly found in liver, kidney and intestine. LXRb is expressed in most organs and tissues. Several studies have demonstrated that LXR agonists will promote RCT in vivo in mice and prevent the development of atherosclerosis. However, undesired activation of LXRa can induce fatty acid production in liver, resulting in a fatty liver and elevated plasma TGs. Therefore, it is desirable to develop LXR modulators that are agonists for LXRb while avoiding activity of LXRa to reduce effects on liver and plasma TGs.

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Figure 13: Activation of LXRs increases the synthesis of cholesterol transporters ABCA1 and ABCG1 which leads to cholesterol efflux on Apolipoprotein A1, or ApoA-1, containing lipoproteins. ApoA-1 is the major protein associated with HDL-C.

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        In addition to augmenting RCT, activation of LXR receptors has also been shown to decrease the production of inflammatory proteins in macrophages. LXR agonism exerts general inhibitory action on the synthesis of inflammatory proteins. Inflammation in an atherosclerotic plaque makes the endothelial surface over the plaque prone to formation of blood clots and predisposes the plaque to rupture, and a ruptured plaque often leads to blood clots. Thus, LXR activation interferes with the pathology of atherosclerosis by directly activating genes to promote RCT, which decreases the amount of cholesterol in the plaque, and by inhibiting pro-inflammatory gene expression, which reduces plaque associated inflammation.

    Market Opportunity

        According to the American Heart Association, as of 2005, there were approximately 1.4 million hospital discharges in the United States due to ACS. According to an article published in the American Journal of Managed Care, the economic impact of ACS is estimated to be greater than $150 billion annually and the direct medical cost for ACS is estimated at $75 billion, with a significant portion associated with drug therapy. The goal of treating ACS after the acute event is to preserve patency of the coronary artery. After an ACS event, patients are usually treated with an anti-blood clotting agent and a cholesterol lowering agent. We believe that VTP-38443, when used in combination with existing therapies used to treat patients with ACS, may have a significant therapeutic benefit, by decreasing the propensity for formation of blood clots on the surface of a plaque.

    Preclinical Data

        The ability of VTP-38443 to bind to LXRa and LXRb was determined in biochemical binding assays. As shown in Figure 14 below, VTP-38443 is a potent binder to LXRb (12 nM), which is 22-fold more potent than binding to LXRa (262 nM). VTP-38443 was also tested for its ability to induce LXR-mediated activity in a cell-based assay. As shown in Figure 14 below, VTP-38443 is a potent agonist of LXRb with an EC50, which is the amount of drug necessary to achieve 50% of the maximum effect, of 19 nM. Consistent with the binding assays, VTP-38443 was approximately 20-fold more potent for LXRb activity compared to LXRa. Compounds with greater selectivity have a larger margin between having beneficial effects on an atherosclerotic plaque and the side effect of increased triglyceride synthesis.

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Figure 14: VTP-38443 binds to and activates LXRb more potently than LXRa in binding and cell-based assays.

        The ability of VTP-38443 to induce key LXR target genes and to promote cholesterol efflux has been determined in a human fibroblast cell line. As shown in Figure 15 below, VTP-38443 is a potent agonist for increasing the expression of ABCA1 mRNA, which encodes ABCA1 proteins, in human cells. In other cell based experiments, we have demonstrated that this increase is associated with an increased removal of cholesterol from human cells in an HDL dependent manner.

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ABCA1 mRNA in Human Skin Fibroblasts

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Figure 15: VTP-38443 is a potent inducer of ABCA1 mRNA expression in a human fibroblast cell line.

        LXR activation has been shown in preclinical studies to suppress inflammatory proteins in multiple human cell types, including macrophages. IL-6 is a key inflammatory protein and is expressed in human macrophages. As shown in Figure 16 below, VTP-38443 reduced IL-6 secretion from the human derived, activated, THP-1 macrophage cell line in a concentration dependent manner.


Inhibition of IL-6 Secretion in THP-1 Macrophages

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Figure 16: VTP-38443 significantly decreased secretion of IL-6 in activated THP-1 macrophages.

        One of the key issues with prior LXR agonists is their inability to clearly separate the induction of ABCA1 from the induction of plasma and liver TGs, driven primarily by LXRa. To test the hypothesis that a potent LXRb-selective partial agonist, such as our VTP-38443, in a reporter assay would show improved separation between these two effects, we looked at the ability of VTP-38443 to induce ABCA1 and TG levels upon oral administration to cynomolgus monkeys.

        Cynomolgus monkeys were dosed with VTP-38443 orally at 0.01 and 0.03 mg/kg, or mpk, per day for 14 days. As shown in Figure 17 below, VTP-38443 increased the expression of ABCA1 and ABCG1, markers of RCT, in monkey blood at both doses tested and did not have significant triglyceride elevations in plasma at either dose. Including data from these and other experiments, we have determined that there

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is approximately a 30-fold dose difference between the dose that increases the expression of ABCA1 and ABCG1 and the dose that causes the induction of plasma and liver TG levels.

Blood ABCA1
(Day 14)

  Blood ABCG1
(Day 14)
  Plasma Triglycerides


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Figure 17: Cynomolgus monkeys were dosed once-a-day for 14 days with VTP-38443. Levels of mRNA for ABCA1 and ABCG1 were measured in blood as well as plasma TG levels.

        We also tested the ability of VTP-38443 to promote RCT and reduce atherosclerosis in mice. For the RCT experiment, VTP-38443 was administered to mice, and the mice were injected with macrophages loaded with labeled cholesterol. The amount of labeled cholesterol in feces was determined over 48 hours after dosing. VTP-38443 treatment significantly increased the excretion of labeled cholesterol at both doses, indicating an increase in RCT in the treated mice.

        Finally, we tested the ability of VTP-38443 to prevent cholesterol accumulation and decrease inflammation in a cholesterol rich plaque in an experimental mouse model of accelerated atherosclerosis. Animals were put on a high fat diet for two weeks. The left common carotid artery, an artery in the neck that supplies blood to the brain, was then surgically ligated and the mice continued the high fat diet for two additional weeks. Under these conditions, atherosclerotic lesions form within the ligated carotid artery characterized by an increase in cholesteryl esters as well as an increase in vascular inflammation, both characteristics of an unstable atherosclerotic plaque. VTP-38443 was orally administered to these mice starting at the time of ligation surgery, and as shown in Figure 18 below, it produced a significant, dose-dependent decrease in cholesteryl esters at all doses, while demonstrating minimal change in TGs. In addition, vascular inflammation was diminished at all doses as evidenced by a decrease in the FDG-6-phosphate, an indirect marker of vascular inflammation. As such, VTP-38443 had a significant and potent anti-atherosclerotic effect in this experimental model of an unstable atherosclerotic plaque.


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Figure 18: VTP-38443 significantly decreased carotid cholesteryl ester content and vascular inflammation in a mouse model of experimental atherosclerosis.

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        VTP-38443 was administered via oral and intravenous routes in rats and cynomolgus monkeys to assess its pharmacokinetics. VTP-38443 was well absorbed in both species with approximately 50% bioavailability, and it exhibited a half-life which we believe is consistent with once-a-day dosing in humans.

Development Plans

        VTP-38443 is currently in preclinical development and we have successfully completed dose ranging toxicology studies. We anticipate completing the necessary preclinical studies and filing an IND in the first quarter of 2016, with Phase 1 clinical trials commencing thereafter. We expect that the single and multiple ascending dose Phase 1 clinical trials will be performed in healthy volunteers, and, in addition to assessing safety, tolerability, and pharmacokinetics, gene induction markers of RCT and inflammation will be analyzed.

VTP-38543 Targeted for Liver X Receptor Beta (LXRb) for Atopic Dermatitis

    Overview

        We have discovered and are developing VTP-38543, an LXRb selective agonist, as a topical agent for the treatment of atopic dermatitis. Atopic dermatitis is a common inflammatory skin disease in children that also affects a large number of adults. It is characterized by a loss of barrier function of the skin, as well as skin inflammation. Other diseases that have some of the same characteristics include contact or allergic dermatitis and psoriasis. The two most commonly used classes of topical therapies for atopic dermatitis are glucocorticoids and calcineurin inhibitors. Though effective, they both have been shown to have serious side effects in some patients. We believe there is a significant opportunity to develop a new therapy that is equally effective but has a better safety and tolerability profile.

        Activation of LXR in skin keratinocytes, the most common cell type in the outermost layer of "normal" skin, plays an important role in maintaining skin function. LXR activity is critical for maintaining the impermeable barrier of skin by stimulating the differentiation of keratinocytes into corneocytes, the major cell type in the protective outer layer of the skin, and stimulating the secretion of lipid rich bodies, called lamellar bodies, which "glue" the corneocytes into becoming the impermeable outer barrier of skin. LXR activation also has an anti-inflammatory effect in skin. We believe LXR agonists' ability to both improve skin inflammation and improve the barrier function of the skin is unique.

        In cell based assays, VTP-38543 has been shown to increase LXRb activity and increase markers of lipid synthesis and secretion of lipids from cells. Lipids is a general term for multiple types of fats. It has also shown decreases in the production of pro-inflammatory proteins from a human macrophage cell line. VTP-38543 decreases skin inflammation in a live mouse model of skin inflammation. It also increases the production of proteins in the skin that are involved in lipid synthesis and secretion that are critical for maintenance of barrier function. Early formulation work has been performed, and several formulations have been identified that provide acceptable skin penetration with appropriate efficacy. We expect to file an IND for VTP-38543 in the second half of 2015.

    Barrier Function and Inflammation in Atopic Dermatitis

        The most abundant cells in the epidermis are keratinocytes, shown in Figure 19 below. These cells differentiate to form the corneocytes, and also generate the lipids that, along with the corneocytes, make up the outermost layer of the epidermis, which is called the stratum corneum. The stratum corneum forms an impermeable protective barrier that prevents loss of water and blocks invasion by pathogens. Accumulating evidence from human genetic studies suggests that primary defects in the epidermal structure, particularly formation of the stratum corneum, play a pivotal role in driving the pathogenesis of atopic dermatitis. For example, filaggrin is an important structural protein in the stratum corneum. According to a 2009 study published in the Journal of Investigative Dermatology, up to 55% of Europeans with atopic dermatitis have mutations in the filaggrin gene. Other mutations have been identified in barrier

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proteins that decrease the formation of the lamellar lipids that also are a part of the stratum corneum. The net effect of these epidermal impairments is a reduced ability in atopic skin to self-repair, leading to extended signaling of repair and inflammatory cascades. These signals lead to further impairment of skin functions resulting in chronic activation of immune cells which eventually presents as atopic dermatitis and related conditions.

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Figure 19: Depiction of the composition and architecture of the epidermis.

    LXR in Promoting Barrier Function and Suppressing Inflammation

        LXRs are important regulators of epidermal biology. Activation of LXRs by ligands, which are molecules that bind to the active site on LXR, leads to stimulation of keratinocyte differentiation, epidermal lipid synthesis and an anti-inflammatory response in skin cells. LXR ligands stimulate keratinocyte differentiation by inducing the expression of genes involved in stratum corneum formation, including involucrin, loricrin and filaggrin. Lipids such as cholesterol, ceramides and fatty acids are produced in the epidermis and are essential for skin barrier formation and maintenance. Topical application of LXR agonists has been demonstrated to augment epidermal lipid synthesis and secretion into extracellular spaces in mouse skin by inducing new lipid synthesis and expression of the ABC family of lipid transporters. In addition, LXR ligands have been shown to have anti-inflammatory properties. LXR agonism exerts general inhibitory action on pro-inflammatory genes in multiple cell types. This anti-inflammatory activity is illustrated by the observed efficacy of LXR agonists in mouse models of atopic dermatitis, irritant dermatitis and epidermal proliferation. As a result, we believe LXR activation has potential as a novel therapeutic approach because it enhances the integrity of the epidermal barrier and simultaneously suppresses skin inflammation.

    Market Opportunity

        Atopic dermatitis, also known as eczema, affects both children and adults. The National Eczema Association reports that there are approximately 31.6 million people in the United States with symptoms of eczema or eczematous conditions and, among that group, at least 17.8 million people have symptoms of atopic dermatitis, considered a more severe form of eczema. The National Institute of Arthritis and Musculoskeletal and Skin Diseases estimates that the worldwide prevalence of atopic dermatitis in infants and children is approximately 7-17%, approximately 60% of whom have recurrence of the disease as adults. The two most commonly used classes of topical therapies for atopic dermatitis are glucocorticoids

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and calcineurin inhibitors. Though effective, they both have been shown to have serious side effects in some patients. For glucocorticoids, these side effects include thinning of the skin and loss of barrier function, adrenal suppression caused by drug absorption through the skin, and contraindications for use on the face and other sensitive areas of skin. For calcineurin inhibitors, these side effects include a burning sensation upon application and a black box warning for the potential to induce cancer. Two calcineurin inhibitors approved for sale in 2001 had combined annual sales of greater than $450 million in 2004. These two treatments were required to add a "black box warning" in 2005 for risk of cancer, and combined annual sales dropped. In 2013, the combined annual sales of these two products were approximately $240 million. We believe that VTP-38543 can be developed as a first-in-class therapy that controls inflammation and improves the skin barrier function in these patients while avoiding the side effects associated with existing treatments.

    Preclinical Data

        The ability of VTP-38543 to bind to LXR was determined in biochemical binding assays. VTP-38543 is a potent binder to LXRb (26 nM). VTP-38543 was also tested for its ability to induce LXR-mediated activity in a cell-based assay. VTP-38543 is a potent partial agonist of LXRb with an EC50 of 16 nM.

        We also assessed the ability of VTP-38543 to reduce inflammation in a mouse ear model of inflammation. As shown in Figure 20 below, the chemical tetradecanoylphorbol acetate, or TPA, induced a strong inflammatory response (Figure 20B) as shown by the infiltration of neutrophils (small arrows) and increased ear swelling as indicated by the width of the double headed arrow. Topical treatment with VTP-38543 significantly reduced both neutrophil infiltration and swelling (Figure 20D). The effect was comparable to the reduction observed upon topical treatment with a potent glucocorticoid, clobetasol (Figure 20C).

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Figure 20: VTP-38543 is efficacious in a chemically induced mouse ear model of inflammation. A: Vehicle treated, no chemical induction. B: Vehicle treated + chemical (TPA) induction. C: Glucocorticoid (clobetasol) + TPA induction. D: VTP-38543 + TPA induction.

        ABCG1 and SREBP1c are key LXR target genes that are involved in lipid transport and lipid synthesis. Mice lacking ABCG1 or SREBP1c display abnormal barrier formation. As shown in Figure 21 below, topical application of VTP-38543 to the skin of hairless mice increased expression of both genes.

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ABCG1 Gene Induction
(Hairless Mouse Skin, n=4)

  SREBP1c Gene Induction
(Hairless Mouse Skin, n=4)


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Figure 21: VTP-38543 induced genes critical for lipid transport and lipid synthesis in skin.

        VTP-38543 was also tested in primary cultures of human epidermal keratinocytes for induction of these same lipid metabolism and transport markers. As shown in Figure 22 below, VTP-38543 induced the expression of both ABCG1 and SREBP1c in a concentration-dependent manner in primary human cells.

ABCG1 Gene Induction
(Human Epidermal Keratinocytes)

  SREBP1c Gene Induction
(Human Epidermal Keratinocytes)


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Figure 22: In primary cultures of human epidermal keratinocytes, VTP-38543 significantly increased expression of ABCG1 and SREBP1c after 24 hours.

        LXR activation has been shown to reduce inflammation in multiple human cell types including macrophages. IL-6 is a key cytokine involved in skin inflammation and is expressed in human macrophages. Consistent with its anti-inflammatory effect in the mouse dermatitis model, as shown in Figure 23 below, VTP-38543 was able to reduce IL-6 expression in human THP-1 macrophages in a concentration dependent manner.

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Inhibition of IL-6 Secretion by THP-1 Macrophages

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Figure 23: VTP-38543 significantly decreased expression of IL-6 in activated THP-1 macrophages.

        In order to further progress VTP-38543 as a clinical candidate, we identified two suitable topical formulations with appropriate drug stability, release, permeation and aesthetic characteristics. VTP-38543 was formulated in these two topical formulations and then applied to the skin of hairless mice in order to determine if an LXR dependent marker of barrier function could be induced with these formulations. As shown in Figure 24 below, both topical formulations of VTP-38543 produced strong, dose-dependent induction of the marker ABCG1 in mouse skin.

ABCG1 Gene Induction in
Mouse Skin (formulation 1)
  ABCG1 Gene Induction in
Mouse Skin (formulation 2)


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Figure 24: VTP-38543 induced ABCG1 in mouse skin when applied topically.

    Development Plans

        VTP-38543 is in preclinical development for the LXR dermatology program. We anticipate filing an IND for VTP-38543 in the second half of 2015. We expect that the first Phase 1 clinical trial will be a single topical dose study in healthy volunteers. The endpoints for the clinical trial will be safety and tolerability, pharmacokinetics if there are detectable drug levels in plasma, and biomarkers of increased lipid synthesis and transport in skin biopsies. The second clinical trial is expected to be a two week, topical multiple dose Phase 1 trial. It will be performed in young adults with atopic dermatitis. In addition to safety, tolerability, and pharmacokinetics, improvement in the clinical signs and symptoms of the atopic dermatitis will be assessed.

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Immuno-Oncology Program

        We have initiated a discovery program focused on developing small molecule immuno-modulators for treating cancer. The goal of cancer immunotherapy is to harness the human immune system and direct it against the cancer to achieve durable responses or complete eradication of disease. The genetic and cellular changes that are present in most cancers provide the immune system with new antigens to generate tumor-directed T cells that can recognize and kill these cancer cells. However, the presence of immune suppressive factors from the cancer cells or in response to the cancer cells in the tumor micro-environment blunts an effective immune response, allowing tumors to escape immune-mediated clearance. The key to success in cancer immunotherapy is the ability to overcome tumor-induced mechanisms that antagonize the function of the immune system and limit its capacity to clear the tumors.

        Cancer immunotherapy has been a focus of the pharmaceutical industry and academia over the last several years due to the publicly disclosed clinical successes that immune activation has had in treating many tumor types. There is an emerging class of cell checkpoint blockers to treat cancer by targeting immune checkpoints, which are inhibitory signaling pathways that switch off T cells. These inhibitory pathways are upregulated in the tumor microenvironment, allowing cancers to actively suppress tumor infiltrating T cells and escape targeting. The first clinical success with checkpoint blockade was seen with Yervoy, an antibody shown to bind to and block the signaling of CTLA-4, an inhibitory protein on the T cell surface. Even more promising clinical results have been seen with antibodies targeting other checkpoint inhibitor pathway components (e.g. PD-1, Tim-3, LAG-3). In addition to checkpoint blockers, a number of complementary approaches are being pursued clinically, including novel vaccination strategies, adoptive T cell therapies and direct activation of T cell co-stimulatory pathways.

        With the initial success of anti-CTLA-4 directed therapies, the list of potential "checkpoint" modulators has continued to expand. A number of small molecular weight metabolites have been identified by others as potential immuno-modulators. These metabolites, which are generated by cells in the tumor microenvironment, directly suppress T cell function or activate immune suppressive mechanisms. The ability to inhibit the enzymes that generate these metabolites with small molecule drugs represents a new approach to tumor immunotherapy.

        As clinical experience grows with immuno-therapeutics, both preclinical and clinical studies in the published scientific literature suggest that combination regimens are likely to be the dominant route for development of agents in this area. This applies not only to combinations with other newer agents, but also with conventional therapies such as radiotherapy, surgery and chemotherapy, and multiple groups have demonstrated the potential for additivity or synergy of these combinations to promote broader and more durable responses. Regimens targeting multiple, discrete pathways to activate tumor immunity have the potential to improve patient outcomes dramatically.

        Using our Contour platform, we discovered certain potential compounds that bind to and inhibit our target protein which are candidates to develop within our immuno-oncology program. We plan to conduct preclinical animal studies to optimize these compounds and confirm that they are active.

Contour—Our Structure-Based Drug Design Platform

    Traditional Discovery Approach Compared to Contour

        Small molecule drugs continue to represent the majority of drug approvals in the United States. In 2013, the FDA approved 25 small molecule drugs out of 27 new drug approvals. Small molecule drugs interact with a target molecule, typically a protein, either to induce or to inhibit that molecule's function within the human body. Traditionally, small molecule drugs have been discovered through the screening of thousands to millions of compounds from existing chemical libraries against a predictive biological assay for a disease target. Under this method of small molecule drug discovery, molecules or potential drugs are

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inspected one at a time and modeled or docked by a scientist. We believe that traditional small molecule drug discovery is an inefficient, costly and time-consuming process due in part to:

    the use of molecules that have been generated based on targets other than the one of interest;
    the absence of high affinity molecules from the library;
    the need for each molecule in a library for docking to be assessed in the many different shapes, or confirmations, in which the molecule can exist, which can multiply the potential number of molecules to be docked to over a trillion members which vastly increases the complexity of the assessment; and
    the lack of a high quality scoring function, which is a computer program that predicts how tightly a molecule will bind to the active site on a protein, resulting in docking experiments of questionable reliability.

        By contrast, we are developing pharmaceutical product candidates through the use of our proprietary, structure-based drug design platform called Contour. The Contour platform combines our proprietary drug design and modeling software program with a proprietary directional model-based fast and accurate scoring function. Our experienced multi-disciplinary scientific staff integrates these features with the disciplines of x-ray crystallography, molecular modeling, medicinal chemistry and biology in order to create a rapid, iterative structure-based design and optimization process. We believe Contour enables our drug discovery process to be more efficient than traditional pharmaceutical approaches because it allows us to rationally design or alter chemical compounds to specifically interact with the targeted protein by computationally growing and scoring small molecules in a three dimensional structure of a target protein. We believe that the algorithms in Contour increase the chances for the discovery of potent and selective compounds for protein targets, and enable us to successfully pursue difficult-to-drug targets. Moreover, we believe that Contour accelerates optimization of lead compounds, since modification of a compound may be undertaken with knowledge of the relationship between the compound's structure and its desired biological effect, rather than through experimentation after randomly generated modifications to that compound.

    Contour Discovery Process

        Our discovery process is summarized in Figure 25 below.

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Figure 25: Contour discovery process.

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        We select drug targets that are implicated in diseases that represent large market opportunities where there are significant unmet medical needs and where the target has validated biology but has been difficult-to-drug. We believe that our proprietary drug discovery platform Contour provides a competitive advantage in solving difficult-to-drug targets, or those that have not been successfully solved using conventional high throughput library screening and optimization. We believe targets with validated biology, achieved through genetics, animal data and direct clinical experience, increases the probability of success of our discoveries. We frequently rely on mouse gene knock-out models or human genetic diseases for target validation. We combine the experience and judgment of our internal scientific leadership team with that of outside key scientific thought leaders to finalize the selection of a new therapeutic target to pursue.

        We believe that the proprietary software component of our Contour platform represents a compelling de novo design approach to drug discovery because it increases the probability of successfully generating novel molecules that best fit into a protein binding site, as compared to the traditional human-guided computational methods. Our Contour platform allows for the creation of novel, drug-like molecules by assembling synthetically viable fragments in a protein binding site using a high-resolution x-ray crystal structure or homology model of the protein. As shown in Figure 26 below, our Contour platform does this by virtually growing drug-like molecules by assembling fragments in well-defined binding pockets. Dynamic Fragment Selection, or DFS, is a novel component of Contour that uses the physical characteristics of the binding site in selecting complementary fragments during the growth process. Contour's proprietary artificial intelligence experientially optimizes performance in subsequent iterations. We believe that DFS avoids the limitations of the standard growth and scoring approach since it generates molecules by dynamically selecting only a subset of the fragment library that best matches the shape and features of a given pocket in the target binding site. Contour also provides a 3-dimensional representation of the small molecule bound to the binding site of the target protein and the optimal rotational position, or rotamer, of a fragment attached by a single, rotatable bond to the rest of the compound. In greater than 90% of the cases, this representation is nearly identical to the structural information obtained by x-ray crystallography.

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Figure 26: Our discovery process and illustration of the molecule assembly process by the Contour growth algorithm.

        The grown molecules are then scored by our proprietary empirical scoring function. The Contour scoring function is based on a directional contact model in which both distance and orientation are used to characterize interactions. The directional model captures the close, basic molecular interactions such as

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hydrogen bond, short-range electrostatic repulsion, non-polar interaction and desolvation effect. The score produced by Contour provides a prediction of the binding affinity or potency of enzyme inhibition. The Contour scoring function allows us to rank order grown molecules and helps identify those that have a high probability of exhibiting activity against the protein target of interest. The final Contour score is approximately equivalent to pKi (-logKi). For example, scores of 6.0, 7.0, 8.0, 9.0, and 10.0 correspond to binding constants of 1000, 100, 10, 1.0, and 0.1 nM, respectively.

        As compared to other software programs used to predict protein-ligand binding affinities, we believe that Contour's is amongst the most effective at accurately predicting potency and position of a molecule in the protein binding site. This enables our team of drug discovery scientists to rapidly improve and optimize drug molecules.

        The robust performance of the Contour scoring function, the incorporation of interaction terms and a scoring function that is effective at scoring protein-ligand complexes across multiple classes of protein targets, provides a method for our modelers and chemists to confidently identify new molecules that interact with target proteins. The Contour growth algorithm and scoring function has enabled us to successfully and rapidly identify potent small molecules, accurately predict and experimentally solve atomic level structures of them in target proteins, generate compounds that bind to the target protein, and optimize those compounds to produce product candidates.

        Once the computationally designed compounds with the highest predicted binding affinity have been identified and prioritized by our modelers and chemists, our chemists synthesize these priority compounds. Synthesized compounds are assayed in a set of biochemical and cell based assays to determine binding affinity and activity against the molecular target. The pharmacokinetics of the synthesized compounds are determined in mice or rats. In parallel to the testing, the compound is co-crystallized with the target protein, and the structure of the compound bound to protein is determined. Once these data are obtained, frequently within two weeks of the initial synthesis of the compound, the combined team of modelers, chemists and biologists meet to assess the results and decide on the specific objectives for the next iterative cycle of the drug discovery process.

        The efficiency and quality of this discovery process are exemplified by the speed at which important milestones have been reached for these challenging targets. As shown in Figure 27 below, by leveraging our Contour platform and through the efforts of our accomplished drug discovery scientists, we have in the case of each of our discovery programs been able to rapidly overcome the obstacles of the target and obtain novel compounds in 7 months or less and animal proof-of-concept with oral dosing in 16 months or less.

GRAPHIC


(1)
We voluntarily halted our plans to conduct a Phase 2 clinical trial for this former product candidate following the release of clinical data from another pharmaceutical company that would have required us to significantly increase the scope, scale and duration of clinical trial work to obtain regulatory approval.

Figure 27: Time to develop a novel chemistry solution and achieve animal proof-of-concept.

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Collaborations

        We currently have two collaborations with BI relating to VTP-34072, for the treatment of type 2 diabetes, and VTP-37948, for the treatment of Alzheimer's.

    11b HSD1

        On October 2, 2007, 21 months after initiating our 11b HSD1 program, we entered into a research collaboration and license agreement with BI, or the 11b Agreement, under which the companies agreed to combine their respective 11b HSD1 programs and to work together to identify and develop compounds for patients with type 2 diabetes and certain related metabolic disease conditions, such as dyslipidemia. As of June 30, 2014, we have received $74.2 million from BI since 2007 related to the 11b Agreement, including a $15 million equity investment, $22.2 million in upfront fees and research funding and $37 million in development milestones. In addition, we are eligible to receive up to $278.0 million in additional milestone payments based on the achievement of pre-specified events, including up to $153.0 million in development and regulatory milestone payments and up to $125.0 million in commercialization milestone payments. We are also eligible to receive tiered royalty payments from BI, ranging from the upper single digits up to the low double digits percentages, based on the net sales of potential future products, subject to certain reductions. We have the option to participate in funding the Phase 3 clinical trials in exchange for increased royalties. BI's obligation to pay the royalties continues on a country-by-country and product-by-product basis for the later of ten years following the first commercial sale of such product in such country, or as long as the product is covered by any of the patents licensed to BI under the agreement or any of the patents controlled by BI as of the effective date thereof. We are also eligible to receive 50% of the aforementioned milestone payments for any subsequent products and for any additional indications of a product to achieve those milestones. We are eligible to receive a $6.0 million milestone payment upon the first patient dosed in the Phase 2 clinical trial, which commenced in July 2014.

        Under the terms of the 11b Agreement, BI has the worldwide exclusive license to use certain of our patents and other intellectual property assets to develop and commercialize 11b HSD1 inhibitors for the treatment of the indications referred to above. BI will control and is responsible for the expenses of the preclinical and clinical development and commercialization of the product candidates resulting from the collaboration. We are responsible for carrying out certain activities relating to the identification, synthesis, characterization and optimization of compounds pursuant to an agreed-upon research plan and received research funding from BI in connection with those activities. We also have the right, subject to the approval of the joint steering committee established pursuant to the 11b Agreement, to use our patents and other intellectual property as licensed to BI as well as certain patents and other intellectual property assets of BI worldwide develop and commercialize any particular 11b HSD1 inhibitor that BI has not selected as a development candidate in accordance with the criteria agreed upon by the parties, for the treatment of indications other than those referred to above.

        We have entered into three amendments to the 11b Agreement: the first in October 2007, the second in February 2012, and the third in May 2014. The first and third amendments clarified the scope of the parties' rights with respect to certain intellectual property. The second amendment revised the development plan and the timing and amounts of payments from BI to us associated with BI's achievement of certain development milestones. There was no incremental monetary consideration provided by either party in connection with the execution of any of these amendments.

        Either party may terminate the 11b Agreement following an uncured material breach by the other party; however, we may not terminate the agreement following the first sale of a product in certain major markets except in the event of certain breaches by BI of its payment obligations under the 11b Agreement. If BI terminates the agreement due to our material breach, then, except in certain circumstances, we would continue to be eligible to receive royalty and milestone payments under the agreement. After the completion of the research phase of the collaboration, BI also has the right to terminate the 11b Agreement in its entirety or on a product-by-product basis without cause, in which case we would obtain

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certain exclusive rights to develop and commercialize the terminated products for the treatment of indications referred to above.

    BACE

        On June 4, 2009, 18 months after initiating our BACE program, we entered into a second research collaboration and license agreement with BI, or the BACE Agreement under which the companies agreed to work together to identify and develop BACE inhibitors for the treatment of Alzheimer's. As of June 30, 2014 we have received $78.2 million from BI related to BACE including a $15 million equity investment, $34.2 in upfront fees and research funding and $29 million in development milestones. In addition, we are eligible to receive up to $326.0 million in additional milestone payments based on the achievement of pre-specified events, including up to $176.0 million in development and regulatory milestone payments and up to $150.0 million in commercialization milestone payments. We are also eligible to receive 50% of the aforementioned milestone payments for any subsequent products and for any additional indications of a product to achieve those milestones. We are also eligible to receive tiered royalty payments from BI, ranging from the upper single digits up to the low double digits percentages, based on the net sales of potential future products, subject to certain reductions. We have the option to participate in funding the Phase 3 clinical trials in exchange for increased royalties. BI's obligations to pay the royalties continues on a country-by-country and product-by-product basis for the later of ten years following the first commercial sale of such product in such country, or as long as such product is covered by patents licensed to BI under the agreement or any of the patents controlled by BI as of the effective date of the BACE Agreement.

        Under the terms of the agreement, BI has the exclusive, worldwide license to use certain of our patents and other intellectual property assets to develop and commercialize BACE inhibitors. BI will control and is responsible for the expenses of preclinical and clinical development and commercialization of the product candidates resulting from the collaboration. We are responsible for carrying out certain activities relating to the identification, synthesis, characterization and optimization of compounds pursuant to an agreed-upon research plan and received research funding from BI in connection with those activities. If a particular BACE inhibitor is not advanced to the development phase, subject to the approval of the joint steering committee established pursuant to the BACE Agreement, we have the right to use our patents and other intellectual property assets licensed to BI as well as certain patents and other intellectual property assets of BI to develop and commercialize that BACE inhibitor for indications other than those referred to above.

        We have entered into three amendments to the BACE Agreement: the first in June 2011, the second in December 2012, and the third in December 2013. The June 2011 amendment modified one of the standards for selecting a potential lead product candidate in the parties' then-current research plan. The December 2012 amendment expanded the core indication definition to include diabetes and metabolic disease. In accordance with that amendment, we were obligated to provide twelve months of research contributions at no cost to, and at the option of, BI, with such contributions to be completed no later than June 30, 2014. The December 2013 amendment adjusted the timing and amount of certain of BI's development milestone payment obligations to us under the BACE Agreement. Under the terms of the December 2012 amendment, we received an upfront, nonrefundable, execution fee of $4 million. There was no incremental monetary consideration provided by either party in connection with the execution of the June 2011 or December 2013 amendments.

        Either party may terminate the BACE Agreement following an uncured material breach by the other party; however, we may not terminate the BACE Agreement following the first sale of a product in certain major markets except in the event of certain commercial conflicts or breaches by BI of its payment obligations to us under the BACE Agreement. If BI terminates the BACE Agreement due to our material breach, then, except in certain circumstances, we would continue to be eligible to