Kite Pharmaceuticals, Inc.
Kite Pharma, Inc. (Form: 10-Q, Received: 11/09/2016 08:58:55)


 
UNITED STATES  
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________________
FORM  10-Q
_________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to          
Commission file number: 001-36508
_________________________________________
KITE PHARMA, INC.
(Exact Name of Registrant as Specified in Its Charter)
_________________________________________
Delaware
27-1524986
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
2225 Colorado Avenue
Santa Monica, California
90404
(Address of Principal Executive Offices)
(Zip Code)
(310) 824-9999
(Registrant’s Telephone Number, Including Area Code)
_________________________________________  
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) .     Yes   x     No   ¨
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
 
x
 
Accelerated filer
 
¨
Non-accelerated filer
 
¨    (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x
As of November 8, 2016 , the number of outstanding shares of the registrant’s common stock, par value $0.001 per share, was 49,875,725 .
 




KITE PHARMA, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2016
INDEX
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trademarks and Trade Names
We have common law, unregistered trademarks for Kite Pharma and eACT based on use of the trademarks in the United States. This Quarterly Report contains references to our trademarks and to trademarks belonging to other entities. Solely for convenience, trademarks and trade names referred to in this Quarterly Report, including logos, artwork and other visual displays, may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.





PART I — FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
KITE PHARMA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
 
SEPTEMBER 30, 2016 (UNAUDITED)
 
DECEMBER 31, 2015
ASSETS
 

 
 

Current assets
 

 
 

Cash and cash equivalents
$
128,750

 
$
392,843

Marketable securities
348,369

 
221,879

Prepaid expenses and other current assets
13,988

 
16,371

Total current assets
491,107

 
631,093

Restricted cash
3,663

 
1,540

Property and equipment, net
43,548

 
30,116

Intangible assets, net
8,478

 
11,380

Goodwill
26,068

 
25,360

Other assets
11,653

 
8,474

Total assets
$
584,517

 
$
707,963

LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current liabilities
 

 
 

Accounts payable
$
11,293

 
$
8,049

Deferred revenue
15,083

 
16,333

Accrued expenses and other current liabilities
20,979

 
11,787

Total current liabilities
47,355

 
36,169

Deferred revenue, less current portion
22,461

 
32,176

Contingent consideration
14,797

 
16,080

Other non-current liabilities
5,551

 
7,778

Total liabilities
90,164

 
92,203

COMMITMENTS AND CONTINGENCIES (NOTE 11)


 


STOCKHOLDERS' EQUITY
 
 
 
Preferred Stock, $0.001 par value, 10,000,000 shares authorized, 0 shares issued and outstanding at September 30, 2016 and December 31, 2015

 

Common stock, $0.001 par value, 200,000,000 shares authorized, 49,801,792 and 48,671,757 shares issued and outstanding, excluding 446,895 and 1,091,306 shares subject to repurchase at September 30, 2016 and December 31, 2015, respectively
50

 
49

Additional paid-in capital
835,420

 
775,588

Accumulated other comprehensive income (loss)
675

 
(220
)
Accumulated deficit
(341,792
)
 
(159,657
)
Total stockholders' equity
494,353

 
615,760

Total liabilities and stockholders' equity
$
584,517

 
$
707,963

 
See accompanying notes.

3



KITE PHARMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per share amounts)
(Unaudited)

 
THREE MONTHS ENDED
SEPTEMBER 30,
 
NINE MONTHS ENDED
SEPTEMBER 30,
 
2016
 
2015
 
2016
 
2015
Revenue
$
7,341

 
$
5,087

 
$
17,263

 
$
12,371

Operating expenses:
 

 
 

 
 

 
 

Research and development
57,262

 
21,727

 
139,033

 
47,576

General and administrative
25,032

 
11,135

 
65,046

 
30,080

Total operating expenses
82,294

 
32,862

 
204,079

 
77,656

Loss from operations
(74,953
)
 
(27,775
)
 
(186,816
)
 
(65,285
)
Other income (expense):
 

 
 

 
 

 
 

Interest income
942

 
342

 
2,712

 
1,307

Interest expense
(196
)
 
(451
)
 
(519
)
 
(456
)
Other income (expense)
(31
)
 
(49
)
 
(94
)
 
521

Total other income (expense)
715

 
(158
)
 
2,099

 
1,372

Loss before income taxes
(74,238
)
 
(27,933
)
 
(184,717
)
 
(63,913
)
Benefit from income taxes
292

 
491

 
2,582

 
491

Net loss
$
(73,946
)
 
$
(27,442
)
 
$
(182,135
)
 
$
(63,422
)
Net loss per share, basic and diluted
$
(1.49
)
 
$
(0.63
)
 
$
(3.72
)
 
$
(1.47
)
Weighted-average shares outstanding, basic and diluted
49,624,622

 
43,817,798

 
48,914,865

 
43,171,632

Comprehensive loss:
 
 
 
 
 
 
 
Net loss
$
(73,946
)
 
$
(27,442
)
 
$
(182,135
)
 
$
(63,422
)
Foreign currency translation adjustments, net of tax
(98
)
 
55

 
257

 
736

Unrealized gain on available-for-sale securities, net
11

 
77

 
638

 
33

Comprehensive loss
$
(74,033
)
 
$
(27,310
)
 
$
(181,240
)
 
$
(62,653
)
 
See accompanying notes.

4



KITE PHARMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
NINE MONTHS ENDED
SEPTEMBER 30,
 
2016
 
2015
Cash flows from operating activities:
 

 
 

Net loss
$
(182,135
)
 
$
(63,422
)
Adjustment to reconcile net loss to net cash from operating activities:
 
 
 
Depreciation and amortization
7,469

 
2,897

Stock-based compensation
53,884

 
26,902

Deferred rent
466

 
1,178

Amortization of discount on marketable securities, net
1,178

 
399

Gain on sale of available for sale securities, net
(221
)
 
(1
)
Deferred tax benefit recorded in connection with currency translation

 
(491
)
Restricted cash
(2,122
)
 
(1,540
)
Gain on adjustment of contingent consideration

 
(580
)
Noncash interest expense
507

 

Loss related to equity investee operations
93

 

Changes in operating assets and liabilities:
 

 
 

Deferred revenue
(10,966
)
 
51,217

Prepaid expenses and other current assets
2,484

 
(8,643
)
Other assets
2,754

 
(8,391
)
Accounts payable
3,029

 
2,578

Accrued expenses and liabilities
8,588

 
3,574

Due to related party
(1
)
 
72

Net cash provided by (used in) operating activities
(114,993
)
 
5,749

Cash flows from investing activities:
 
 
 
Purchases of marketable securities
(327,424
)
 
(156,089
)
Sales and maturities of marketable securities
200,264

 
117,870

Purchase of property and equipment
(17,025
)
 
(18,710
)
Cash paid for equity investment in Cell Design Labs
(6,025
)
 

Net cash paid related to acquisition of T-Cell Factory, B.V.

 
(14,690
)
Net cash used in investing activities
(150,210
)
 
(71,619
)
Cash flows from financing activities:
 
 
 
Principal payments on capital lease obligations
(90
)
 
(24
)
Proceeds from issuance of common stock

 
26,664

Payment of contingent consideration related to acquisition of T-Cell Factory, B.V.
(2,259
)
 

Proceeds from exercise of stock options
3,463

 
2,780

Net cash provided by financing activities
1,114

 
29,420

Effect of exchange rate changes on cash
(4
)
 
117

Net change in cash and cash equivalents
(264,093
)
 
(36,333
)
Cash and cash equivalents at beginning of period
392,843

 
209,298

Cash and cash equivalents at end of period
$
128,750

 
$
172,965

Supplemental schedule of cash flows information:
 
 
 
Cash paid for interest
$

 
$
2

Supplemental schedule of non-cash investing and financing activities:
 
 
 
Tenant improvement allowance receivable
$

 
$
2,614

Employee stock purchase plan compensation
$
1,747

 
$
847

Issuance of stock to purchase T-Cell Factory, B.V.
$

 
$
4,209

See accompanying notes.

5



KITE PHARMA, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
 
NOTE 1—BUSINESS AND NATURE OF OPERATIONS
Nature of Operations
Kite Pharma, Inc. (the “Company”) was incorporated on June 1, 2009 in the State of Delaware. The Company is a clinical-stage biopharmaceutical company focused on the development and commercialization of novel cancer immunotherapy products designed to harness the power of a patient’s own immune system to target and kill cancer cells. The Company is developing multiple product candidates using its engineered autologous cell therapy (“eACT”), which involves the genetic engineering of T cells to express either chimeric antigen receptors (“CARs”) or T cell receptors (“TCRs”).
The Company’s headquarters and operations are in Santa Monica and El Segundo, California. Since commencing operations, the Company has devoted substantially all of its efforts to securing intellectual property rights, performing research and development activities, including clinical trials, both Company-sponsored and in collaboration with the National Cancer Institute (“NCI”), hiring personnel, and raising capital to support and expand these activities. On March 17, 2015, the Company acquired T-Cell Factory, B.V. (“TCF”), a Dutch company, for the opportunity to significantly expand the Company’s pipeline of TCR-based product candidates. TCF has been renamed Kite Pharma EU B.V. (“Kite Pharma EU”).
NOTE 2—BASIS OF PRESENTATION AND MANAGEMENT PLANS
The Company has not generated any revenue from the sale of products since its inception. The Company has experienced net losses since its inception and has an accumulated deficit of $341.8 million and $159.7 million as of September 30, 2016 and December 31, 2015 , respectively. The Company expects to incur losses and have negative net cash flows from operating activities as it expands its portfolio and engages in further research and development activities, particularly conducting preclinical studies and clinical trials.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of the Company’s management, the accompanying condensed consolidated financial statements contain all adjustments (consisting of normal recurring accruals and adjustments) necessary to present fairly the financial position, results of operations and cash flows of the Company at the dates and for the periods indicated. The interim results for the periods ended September 30, 2016 are not necessarily indicative of results for the full 2016 fiscal year or any other future interim periods.
The success of the Company depends on its ability to develop its technologies to the point of U.S. Food and Drug Administration (“FDA”) approval and subsequent revenue generation or through the sale, merger, or other transfer of all or substantially all of the Company’s assets and, accordingly, to raise enough capital to finance these developmental efforts. In the future, management will need to raise additional capital to finance the continued operating and capital requirements of the Company. Any amounts raised will be used to further develop the Company’s technologies, acquire additional product licenses and for other working capital purposes. There can be no assurances that the Company will be able to secure such additional financing, or if available, that it will be sufficient to meet its needs. If the Company cannot obtain adequate working capital, it will be forced to curtail its planned business operations.
NOTE 3—SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Accordingly, actual results could differ from those estimates.

6



Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist primarily of money market funds, certificates of deposit, and bank money market accounts and are stated at cost, which approximates fair value.
Investments
All investments have been classified as “available-for-sale” and are carried at fair value as determined based upon quoted market prices or pricing models for similar securities. Management determines the appropriate classification of its investments in debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Unrealized gains and losses are excluded from earnings and are reported as a component of comprehensive loss. Realized gains and losses and declines in fair value judged to be other than temporary, if any, on available-for-sale securities are included in interest income and other expense, net, respectively.
Restricted Cash
The Company has two certificates of deposit that are posted as secured collateral in connection with letters of credit relating to the Company’s leases of its commercial manufacturing and support facilities. Amounts related to the certificates of deposit were reported as restricted cash and totaled $3.7 million at September 30, 2016 .
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist primarily of cash and cash equivalents and marketable securities. The primary objectives for the Company’s investment portfolio are the preservation of capital and the maintenance of liquidity. The Company does not enter into any investment transaction for trading or speculative purposes.
The Company’s investment policy limits investments to certain types of instruments such as certificates of deposit, money market instruments, obligations issued by the U.S. government and U.S. government agencies as well as corporate debt securities, and places restrictions on maturities and concentration by type and issuer. The Company maintains cash balances in excess of amounts insured by the FDIC and concentrated within a limited number of financial institutions. The accounts are monitored by management to mitigate the risk.
Foreign Currencies
As a result of a business combination, the Company now operates in multiple currencies. Related to the wholly-owned subsidiary, Kite Pharma EU, the Company has determined that based on the nature of the transactions occurring within this entity, the functional currency of the subsidiary is the Euro, and accordingly, any net assets of Kite Pharma EU, including goodwill and identifiable intangible assets, will be translated into U.S. dollars at the rates prevailing as of the balance sheet date. The equity of Kite Pharma EU will be translated into U.S. dollars at the historical rate at which such equity was recorded. Any translation impact will be recognized in other comprehensive income or loss for the period. The operating results of Kite Pharma EU are translated into U.S. dollars using the average exchange rates for the period correlating with those operating results.
Income Taxes
The Company provides for income taxes based on pretax income, if any, and applicable tax rates available in the various jurisdictions in which the Company operates. Deferred income taxes are recorded for the expected tax consequences of temporary differences between the bases of assets and liabilities for financial reporting purposes and amounts recognized for income tax purposes. A valuation allowance is recorded to reduce the Company’s deferred tax assets to the amount of future tax benefit that is more likely than not to be realized.
Equity Investments and Business Combinations
For equity investments in other companies, the Company utilizes the cost method of accounting when it does not have the ability to exercise significant influence over the investee. For equity investments where the Company has the ability to exercise significant influence, the Company utilizes the equity method of accounting in accordance with ASC Topic 323, Investments – Equity Method and Joint Ventures.
For business combinations, the Company utilizes the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. These standards require that the total cost of an acquisition be allocated to the tangible and intangible

7



assets acquired and liabilities assumed based on their respective fair values at the date of acquisition. The allocation of the purchase price is dependent upon certain valuations and other studies. Acquisition costs are expensed as incurred. The Company recognizes separately from goodwill the fair value of assets acquired and the liabilities assumed. Goodwill as of the acquisition date is measured as the excess of consideration transferred and the acquisition date fair values of the assets acquired and liabilities assumed. While the Company uses its best estimates and assumptions as a part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, the Company’s estimates are subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the fair value of the assets acquired and liabilities assumed, with the corresponding offset to goodwill in the period in which the amounts are determined. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s condensed consolidated statements of operations.
Goodwill and Other Intangible Assets
Certain intangible assets were acquired as part of a business combination, and have been capitalized at their acquisition date fair value. Acquired definite life intangible assets are amortized using the straight-line method over their respective estimated useful lives, which are evaluated whenever events or circumstances would indicate that an adjustment to the estimated useful lives would be appropriate.  The Company will additionally test its goodwill and indefinite life intangible assets for impairment annually, or whenever events or changes in circumstances indicate an impairment may have occurred. Impairment may result from, among other things, deterioration in the performance of the acquired business, adverse market conditions, adverse changes in applicable laws or regulations and a variety of other circumstances. If the Company determines that an impairment has occurred, it is required to record a write-down of the carrying value and charge the impairment as an operating expense in the period the determination is made. In evaluating the recoverability of the carrying value of goodwill and other intangible assets, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the acquired assets. Changes in strategy or market conditions could significantly impact those judgments in the future and require an adjustment to the recorded balances. The Company tests its goodwill for impairment annually during the fourth quarter and more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired.
Property and Equipment
Property and equipment is recorded at historical cost, net of accumulated depreciation, amortization and, if applicable, impairment charges. The Company reviews its property and equipment assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Depreciation is provided over the assets’ useful lives on a straight-line basis, generally over three to seven years . Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or lease terms. See Note 5 for further discussion regarding property and equipment.
Consolidation
The Company’s condensed consolidated financial statements include the accounts of its subsidiary, Kite Pharma EU. Intercompany balances and transactions have been eliminated during consolidation.
Patent Costs
The costs related to acquiring patents and to prosecuting and maintaining intellectual property rights are charged to general and administrative expense as incurred due to the uncertainty surrounding the drug development process and the uncertainty of future benefits. Expenses related to patents were $0.7 million and $0.1 million for the three months ended September 30, 2016 and 2015 , respectively and were $2.1 million and $0.4 million for the nine months ended September 30, 2016 and 2015 , respectively.

8



Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following as of September 30, 2016 and December 31, 2015 (in thousands):
 
SEPTEMBER 30, 2016
 
DECEMBER 31, 2015
Accrued compensation costs
$
12,592

 
$
6,630

Accrued research and development costs
2,525

 
796

Accrued legal expenses
906

 
449

Stock option early exercise liability
473

 
940

Accrued clinical expenses
2,417

 
999

Deferred rent and capital lease obligations
557

 
101

Tenant improvement liabilities - short term
313

 
300

Accrued patent costs
186

 
156

Accrued related party costs
88

 
89

Accrued other expense
922

 
1,327

Total accrued expenses and other current liabilities
$
20,979

 
$
11,787

Revenues
On December 31, 2014 , the Company entered into a research and collaboration and license agreement with Amgen Inc. (“Amgen”) to develop and commercialize CAR-based product candidates directed against a number of Amgen cancer targets (the “Amgen Agreement”). To date, revenue has included a portion of the upfront payment the Company received under the Amgen Agreement, and reimbursed research and development costs relating to the Amgen targets. The Company received an upfront payment of $60.0 million from Amgen in February 2015. Amgen will fund the research and development costs for all programs with certain limitations through any investigational new drug application (“IND”) filing. Each company will then be responsible for clinical development and commercialization of their respective therapeutic candidates, including all related expenses. The Company may be responsible for the manufacturing and processing of Amgen program product candidates for a certain period following the completion of any Phase 2 clinical trials under a separately negotiated supply agreement, should Amgen choose not to transition manufacturing to itself or to a mutually agreed upon designee of Amgen. Additionally, the Company also recognized milestone revenues and revenue related to a portion of the upfront payment the Company received under a research, development and commercialization agreement with the Leukemia & Lymphoma Society, Inc. (“LLS”); see Note 6 – License and Collaboration Agreements for more information.
The Company applied the FASB Accounting Standards Update No. 2009-13, Multiple-Deliverable Revenue Arrangements, in evaluating the appropriate accounting for the upfront payment and research funding under the Amgen Agreement. In accordance with this guidance, the Company concluded that the Amgen Agreement should be accounted for as a single unit of accounting and recognize the Amgen Agreement consideration in the same manner as the final deliverable, which is research service. The $60.0 million upfront payment was recorded as deferred revenue and is being recognized over a 4 years period, which is the estimated period of performance for the research service under this agreement. In addition, the Amgen research funding relating to Amgen targets, which is due as the related services are performed under the Amgen Agreement, is recorded as revenue on a time and material basis, with the corresponding cost of revenue recorded as research and development expense in the condensed consolidated statements of operations.
Under certain circumstances, the Company may be required to reimburse Amgen for research and development services for Company targets. The Company will defer the recognition of revenue related to research and development services billed until the potential reimbursement contingency has lapsed. Any costs reimbursed by Amgen that relate to a Company program that progresses to an IND filing are recorded as deferred revenue until either an IND is filed and we are required to reimburse Amgen for such expenses, or the program ends without an IND filing, at which point the revenue would be recognized.  

During the three months ended September 30, 2016 and 2015 , the Company recognized $5.5 million and $5.0 million of revenue under the Amgen Agreement, respectively and recognized $15.2 million and $12.3 million of revenue for the nine months ended September 30, 2016 and 2015 , respectively. As of September 30, 2016 , the Company had deferred revenue relating to the Amgen Agreement of $37.5 million .

9



In the future, the Company may be eligible for development, regulatory and commercial milestone payments under the Amgen Agreement. The Company recognizes revenue related to the milestones under the Amgen Agreement in accordance with the Accounting Standards Codification 605-28, Milestone Method of Revenue Recognition (“ASC 605-28”). At the inception of the arrangement we evaluate whether each milestone is substantive and at risk. This evaluation includes an assessment of whether: (i) the consideration is commensurate with either the Company’s performance to achieve the milestone or the enhancement of the value of the delivered item(s) as a result of a specific outcome resulting from the Company’s performance to achieve the milestone; (ii) the consideration relates solely to past performance; and (iii) the consideration is reasonable relative to all of the deliverables and payment terms within the arrangement. The Company has concluded that all of the development and regulatory milestones pursuant to its collaboration with Amgen are substantive and at risk. Thus, in accordance with ASC 605-28, revenue will be recognized in its entirety upon successful accomplishment of the milestone, assuming all other revenue recognition criteria are met.
Milestones related to sales-based activities may be triggered upon meeting net sales benchmarks. Under the Amgen Agreement, the achievement of these commercial milestones is solely dependent on Amgen’s performance, and there are no continuing performance obligations from the Company. These commercial milestones would be achieved after the completion of the Company’s development activities. Revenue from commercial milestone payments will be accounted for as royalties and recorded as revenue upon achievement of the milestone, assuming all other revenue recognition criteria are met.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in executive, commercial, finance, accounting, legal, investor relations, facilities, patent prosecution, business development and human resources functions. Other significant costs include facility costs not otherwise included in research and development expenses, legal fees relating to corporate matters, sublicense royalties, insurance, public company expenses relating to maintaining compliance with NASDAQ listing rules and SEC requirements, insurance and investor relations costs, and fees for accounting and consulting services. General and administrative costs are expensed as incurred, and the Company accrues for services provided by third parties related to the above expenses by monitoring the status of services provided and receiving estimates from its service providers, and adjusting its accruals as actual costs become known.
Research and Development
Research and development costs are expensed as incurred. Expenses related to collaborative research and development activities approximate the revenue recognized under these agreements. Research and development costs consist of salaries and benefits, including associated stock-based compensation, laboratory supplies and facility costs, costs related to commercial manufacturing preparations, as well as fees paid to other entities that conduct certain research and development activities on our behalf and payments made pursuant to license agreements. Clinical trial and other development costs incurred by third parties are expensed as the contracted work is performed. The Company accrues for costs incurred as the services are being provided by monitoring the status of the trial or project and the invoices received from its external service providers. The Company adjusts its accrual as actual costs become known. Where contingent milestone payments are due to third parties under research and development arrangements or license agreements, the milestone payment obligations are expensed when the milestone results are achieved.
Stock-Based Compensation
Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the required service period, which is generally equal to the vesting period. Stock-based compensation is recognized only for those awards that are ultimately expected to vest. Common stock, stock options, restricted stock units (“RSUs”) and warrants or other equity instruments issued to non-employees, including consultants and members of the Company’s Scientific Advisory Board as consideration for goods or services received by the Company, are accounted for based on the fair value of the equity instruments issued unless the fair value of the consideration received can be more reliably measured. The fair value of stock options is determined using the Black-Scholes option-pricing model. The fair value of any options issued to non-employees is marked to market each period and recorded as expense over the vesting period. The fair value of an RSU equals the closing price of our common stock on the grant date. Proceeds from options exercised by employees prior to vesting pursuant to an early exercise provision, the related shares of which the Company has the option to repurchase prior to the vesting date should employment of the early exercised option holder be terminated, are recognized as a liability until the shares vest.
Net Loss per Common Share
Basic net loss per share is computed by dividing the net loss attributable to common shareholders by the weighted-average number of common shares outstanding. Diluted net loss per share is computed similarly to basic net loss per share except that

10



the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.
For all periods presented, potentially dilutive securities are excluded from the computation of fully diluted loss per share as their effect is anti-dilutive.
As of September 30, 2016 and 2015 , potentially dilutive securities include:
 
SEPTEMBER 30,
 
2016
 
2015
Warrants to purchase common stock
148,444

 
148,444

Unvested restricted stock units
510,997

 

Unvested early exercise options
446,895

 
1,288,822

Options to purchase common stock
6,099,038

 
5,395,079

Total
7,205,374

 
6,832,345

The unvested early exercised options represent stock options that were exercised pursuant to an early exercise provision in the option agreements of an employee. The Company has the option to repurchase these shares if they do not vest prior to the termination of this employee.
The following table details those securities which have been excluded from the computation of potentially dilutive securities as their exercise prices are greater than the fair market price per common share as of September 30, 2016 and 2015 , respectively.
 
SEPTEMBER 30,
 
2016
 
2015
Options to purchase common stock
2,683,100

 
1,329,500

Amounts in the tables above reflect the common stock equivalents of the noted instruments.  
The following table summarizes the calculation of unaudited basic and diluted net loss per common share for the three and nine months ended September 30, 2016 and 2015 (in thousands, except share and per share amounts):
 
THREE MONTHS ENDED
SEPTEMBER 30,
 
NINE MONTHS ENDED
SEPTEMBER 30,
 
2016
 
2015
 
2016
 
2015
Numerator:
 
 
 
 
 
 
 
Net loss
$
(73,946
)
 
$
(27,442
)
 
$
(182,135
)
 
$
(63,422
)
Denominator:
 
 
 
 
 
 
 
Weighted-average common shares outstanding
50,169,200

 
45,155,462

 
49,980,515

 
44,856,506

Less: weighted-average unvested common shares subject to
   repurchase
(544,578
)
 
(1,337,664
)
 
(1,065,650
)
 
(1,684,874
)
Weighted-average shares used to compute net loss per
   share, basic and diluted
49,624,622

 
43,817,798

 
48,914,865

 
43,171,632

Net loss per common share, basic and diluted
$
(1.49
)
 
$
(0.63
)
 
$
(3.72
)
 
$
(1.47
)
Recent Accounting Pronouncements
In March 2016, the FASB issued ASU No. 2016-7, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. The new standard no longer requires that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an adjustment must be made to the investment, results of operations and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The Company elected to adopt the new standard during the quarter ended June 30, 2016. See Note 12 for further discussion regarding the impact on our financial position or results of operations.


11



In June 2016 the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which (i) significantly changes the impairment model for most financial assets that are measured at amortized cost and certain other instruments from an incurred loss model to an expected loss model; and (ii) provides for recording credit losses on available-for-sale (AFS) debt securities through an allowance account. Topic 326 also requires certain incremental disclosures.  The guidance becomes effective on January 1, 2020. The Company is currently evaluating the potential impact that Topic 326 may have on its financial position and results of operations.

In August 2016, the FASB issued Accounting Standard Update 2016-15, Statement of Cash Flows (Topic 230), which provides greater clarity to preparers on the treatment of eight specific items within an entity’s statement of cash flows. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The guidance becomes effective on January 1, 2018 and early adoption is permitted. The Company elected to adopt the new standard during the quarter ended September 30, 2016. The early adoption of this standard did not have a material impact on the Company's financial position or results of operations.
NOTE 4—FAIR VALUE MEASUREMENTS AND INVESTMENTS IN MARKETABLE SECURITIES
The Company follows authoritative accounting guidance, which among other things, defines fair value, establishes a consistent framework for measuring fair value and provides disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.
As a basis for considering such assumptions, a three-tier fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value as follows:
Level 1 :
Observable inputs such as unadjusted   quoted prices in active markets for identical assets or liabilities.
Level 2 :
Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3 :
Unobservable inputs that reflect the reporting entity’s own assumptions.
The carrying amounts of the Company’s prepaid expenses, other current assets, accounts payable and accrued liabilities are generally considered to be representative of their fair value because of the short nature of these instruments. No transfers between levels have occurred during the periods presented.
Assets and liabilities measured at fair value on a recurring basis as of September 30, 2016 is as follows (in thousands):
 
 
 
Fair Value Measurements Using
 
Balance as of September 30, 2016
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 

 
 

 
 

 
 

Restricted cash
$
3,663

 
$
3,663

 
$

 
$

Money market funds (1)
33,003

 
33,003

 

 

Commercial paper
2,745

 

 
2,745

 

Corporate debt securities
126,789

 

 
126,789

 

Government-related debt securities (2)
268,835

 

 
268,835

 

Total assets
$
435,035

 
$
36,666

 
$
398,369

 
$

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Contingent consideration
$
14,797

 
$

 
$

 
$
14,797

(1)
Included within cash and cash equivalents on the Company’s condensed consolidated balance sheets.
(2)
$50.0 million of government-related debt securities had an original maturity of less than 90 days, and were included within cash and cash equivalents on the Company’s condensed consolidated balance sheets.

12



The Company’s investments in money market funds are valued based on publicly available quoted market prices for identical securities as of September 30, 2016 . The Company determines the fair value of corporate bonds and other government-sponsored enterprise related securities with the aid of valuations provided by third parties using proprietary valuation models and analytical tools. These valuation models and analytical tools use market pricing or prices for similar instruments that are both objective and publicly available, including matrix pricing or reported trades, benchmark yields, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids and/or offers.
Additionally, the Company has incurred contingent consideration obligations in connection with the acquisition of Kite Pharma EU.  These contingent consideration obligations are recorded at their estimated fair value, and are revalued when an event takes place or information becomes available that would indicate that the value of these obligations has changed, until such time that the contingencies related to these obligations are resolved. The value of the contingent consideration is accreted every reporting period based on the passage of time, using the discount rates used during their initial determination as of the acquisition date with a corresponding charge to interest expense. During the three and nine months ended September 30, 2016 the Company recorded $0.2 million and $0.5 million respectively as interest expense related to contingent consideration accretion, and there were no other changes in the fair value of the contingent consideration as of September 30, 2016 . The fair value measurements of these obligations are based on significant unobservable inputs related to sales and development milestones related to the Kite Pharma EU business combination and are reviewed periodically by management. These inputs include the estimated probabilities and timing of achieving specified development and sales milestones, as well as the discount rate used to determine the present value of these milestones. Significant changes that would increase or decrease the probabilities or timing of achieving the development and sales milestones would result in a corresponding increase or decrease in the fair value of the contingent consideration obligations, which would be recognized in other income (expense) in the condensed consolidated statements of operations.
Investments classified as available-for-sale at September 30, 2016 consisted of the following (in thousands):
 
Maturity (in years)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Aggregate
Estimated
Fair Value
Marketable Securities:
 
 

 
 
 
 
 
 

Commercial paper
1 year or less
$
2,745

 
$

 
$

 
$
2,745

Corporate debt securities
1 year or less
51,324

 
8

 
(23
)
 
51,309

Corporate debt securities
1-2 years
48,466

 
124

 
(19
)
 
48,571

Corporate debt securities
More than 2 years
26,913

 
39

 
(42
)
 
26,910

Government-related debt securities (1)
1 year or less
164,022

 
41

 
(1
)
 
164,062

Government-related debt securities
1-2 years
62,213

 
88

 
(23
)
 
62,278

Government-related debt securities
More than 2 years
42,525

 
2

 
(33
)
 
42,494

Total available-for-sale securities
 
$
398,208

 
$
302

 
$
(141
)
 
$
398,369

(1)
$50.0 million of government-related debt securities had an original maturity of less than 90 days, and were included within cash and cash equivalents on the Company’s condensed consolidated balance sheets.
The Company recognizes realized gains or losses on sales or maturities of available-for-sale securities as net interest income. Unrealized gains and losses on available-for-sale securities are included as a component of comprehensive income (loss). At September 30, 2016 , the aggregate fair value of securities held by the Company in an unrealized loss position was $114.3 million , which consisted of 58 securities. Of these securities, two securities have been in an unrealized loss position for more than twelve months, but have an aggregate unrealized loss of less than $2,000 . Accordingly, the Company does not believe an impairment is necessary on any of these securities at this time. The Company does not intend to sell these investments and it is not likely that the Company will be required to sell these investments before recovery of their amortized cost basis. The Company reviews its investments to identify and evaluate investments that have an indication of possible other-than-temporary impairment. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the investee, and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.


13



NOTE 5—PROPERTY AND EQUIPMENT
Property and equipment, consists of the following as of September 30, 2016 and December 31, 2015 (in thousands):
 
SEPTEMBER 30,
2016
 
DECEMBER 31,
2015
Laboratory equipment
$
18,515

 
$
9,392

Computer equipment and software
3,224

 
1,715

Office equipment and furniture
2,445

 
1,918

Leasehold improvements
24,846

 
3,595

Construction in progress
515

 
15,314

 
49,545

 
31,934

Less: accumulated depreciation and amortization
(5,997
)
 
(1,818
)
Property and equipment, net
$
43,548

 
$
30,116

Depreciation and amortization expense related to property and equipment was $1.9 million and $0.5 million for the three months ended September 30, 2016 and 2015 , respectively and was $4.3 million and $0.9 million for the nine months ended September 30, 2016 and 2015 , respectively. The book value of assets under capital leases at September 30, 2016 and December 31, 2015 was $0.3 million and $0.2 million respectively, net of accumulated depreciation of $0.1 million and $0.1 million , respectively.
NOTE 6—LICENSE AND COLLABORATION AGREEMENTS
Cooperative Research and Development Agreement with the NCI
In August 2012, the Company entered into a Cooperative Research and Development Agreement (the “CRADA”) with the U.S. Department of Health and Human Services, as represented by the NCI for the research and development of novel engineered peripheral blood autologous T cell therapeutics for the treatment of multiple cancer indications. This collaboration with the Surgery Branch at the NCI, provides the Company with access to inventions resulting from the CRADA work relating to the current and future clinical product pipeline of autologous peripheral blood T cells, engineered with the NCI’s proprietary tumor-specific TCRs and CARs, directed to multiple hematological and solid tumor types. The CRADA will help support the development of certain technologies licensed from the National Institutes of Health (“NIH”). Pursuant to the CRADA, the NCI will provide scientific staff and other support necessary to conduct research and related activities as described in the CRADA.
The CRADA had a five -year term commencing August 31, 2012 and expiring on August 30, 2017. On February 24, 2015, the Company amended the CRADA by expanding the research plan. To support the additional research activities under the amended CRADA, beginning in the first quarter of 2015, the Company’s quarterly payments to the NCI increased from $250,000 to $750,000 . Total expenses recognized under the CRADA were $0.8 million and $0.8 million for the three months ended September 30, 2016 and 2015 , respectively and were $2.3 million and $1.9 million for the nine months ended September 30, 2016 and 2015 , respectively.
Pursuant to the terms of the CRADA, the Company has agreed to hold the NCI harmless and to indemnify the NCI from all liabilities, demands, damages, expenses and losses arising out of the Company’s use for any purpose of the data generated, materials produced or inventions discovered in whole or in part by NCI employees under the CRADA, unless due to their negligence or willful misconduct. The CRADA may be terminated at any time upon the mutual written consent of the Company and NCI. The Company or NCI may unilaterally terminate the CRADA at any time by providing written notice at least 60 days before the desired termination date.
Pursuant to the terms of the CRADA, the Company has an option to elect to negotiate an exclusive or nonexclusive commercialization license to any inventions discovered in the performance of the CRADA, whether solely by an NCI employee or jointly with a Company employee for which a patent application has been filed.
The parties jointly own any inventions and materials that are jointly produced by employees of both parties in the course of performing activities under the CRADA.
Cabaret License
On December 12, 2013, the Company entered into an exclusive, worldwide license agreement, including the right to grant sublicenses, with Cabaret Biotech Ltd. (“Cabaret”) and Dr. Zelig Eshhar relating to certain intellectual property and know-how (the “Licensed IP”) owned or controlled by Cabaret (the “Cabaret License”) for use in the treatment of oncology and such other fields as may be agreed to by the parties. Should Cabaret propose to enter into an agreement with a third party relating to the

14



use of the Licensed IP outside of oncology (“Additional Indications”), then Cabaret shall notify the Company in writing and the Company shall have a 60 -day right of first negotiation to acquire a license to the Licensed IP in such Additional Indications.
The Company shall be required to make cash milestone payments upon successful completion of clinical and regulatory milestones in the United States and certain major European countries relating to each product covered by the Cabaret License (each, a “Cabaret Licensed Product”). The aggregate potential milestone payments are $3.9 million for each of the first two Cabaret Licensed Products, of which $3.0 million is due only after marketing approval in the United States and at least one major European country. Thereafter, for each subsequent Cabaret Licensed Product such aggregate milestone payments shall be reduced to $2.7 million . The first milestone payment was due upon the acceptance of an IND application by the FDA for the first Cabaret Licensed Product, and was paid during the first quarter of 2015. The Company has also agreed to pay Cabaret royalties on net sales of Cabaret Licensed Products at rates in the mid-single digits. Prior to the first commercial sale of a Cabaret Licensed Product, the Company will pay Cabaret an annual license fee equal to $30,000 . To the extent the Company enters into a sublicensing agreement relating to a Cabaret Licensed Product, the Company is required to pay Cabaret a percentage of all non-royalty income received as well as payment on Cabaret’s behalf of any applicable taxes due, which percentage will decrease based upon the stage of development of the Cabaret Licensed Product at the time of sublicensing.
The Company has agreed to defend, indemnify and hold Dr. Eshhar, Cabaret, its affiliates, directors, officers, employees and agents, and if applicable certain other parties, harmless from all losses, liabilities, damages and expenses (including attorneys’ fees and costs) incurred as a result of any claim, demand, action or proceeding to the extent resulting from (a) any breach of the Cabaret License by the Company or its sublicensees, (b) the gross negligence or willful misconduct of the Company or its sublicensees in the performance of its obligations under this Cabaret License, or (c) the manufacture, development, use or sale of Cabaret Licensed Products by the Company or its sublicensees, except in each case to the extent arising from the gross negligence or willful misconduct of Cabaret or Dr. Eshhar or the breach of this Agreement by Dr. Eshhar or Cabaret.
The Cabaret License expires on a product-by-product and country-by-country basis on the date on which the Company, its affiliates and sublicensees permanently cease to research, develop, sell and commercialize the Cabaret Licensed Products in such country. Either party may terminate the Cabaret License in the event of a material breach of the agreement that remains uncured following the date that is 60 days from the date that the breaching party is provided with written notice by the non-breaching party. Additionally, the Company may terminate the Cabaret License at its sole discretion at any time upon 30 days' written notice to Cabaret and Dr. Eshhar, provided, however, that if the Company elects to terminate the Cabaret License for convenience at any time prior to the third anniversary of the Cabaret License, then the Company will be obligated to pay Cabaret a termination fee equal to $500,000 .
Due to the receipt of the $60.0 million upfront license payment from Amgen in connection with the Amgen Agreement, in April 2015 the Company paid $13.8 million to Cabaret as a sublicense fee, which includes $1.8 million of applicable taxes paid on Cabaret’s behalf as required under the Cabaret License. As of September 30, 2016 , a $3.5 million deferred asset was recorded under the other current assets caption on the consolidated balance sheets, and a $4.6 million non-current deferred asset was recorded under the other assets caption of the consolidated balance sheets. Both of these amounts will be recognized as sublicense fee expense within general and administrative expense on a straight-line basis over the same period as the license income. For the three months ended September 30, 2016 and 2015 , the Company recorded $0.9 million and $0.9 million in sublicense fee expense related to the Cabaret license, respectively and $2.6 million and $2.3 million for the nine months ended September 30, 2016 and 2015 , respectively.
December 2014 NIH License Agreement
Pursuant to a patent license agreement with the NIH, dated December 31, 2014, the Company holds an exclusive, worldwide license to certain intellectual property related to TCR-based product candidates that target HPV antigens E6 and E7 of the HPV subtype 16.
The Company is required to make performance-based payments upon successful completion of clinical and regulatory benchmarks relating to the licensed products. The aggregate potential benchmark payments for each licensed product are $6.0 million , of which aggregate payments of $5.0 million are due only after marketing approval in the United States or in Europe, Japan, China or India. The first benchmark payment of $50,000 will be due upon the commencement of the Company’s first sponsored Phase 1 clinical trial.
In addition, the Company is required to pay the NIH one-time benchmark payments following aggregate net sales of up to $1.0 billion of licensed products. The aggregate potential amount of these benchmark payments is $7.0 million . The Company must also pay the NIH royalties on net sales of products covered by this license at rates in the mid-single digits. To the extent the Company enters into a sublicensing agreement relating to a licensed product, the Company is required to pay the NIH a percentage of all consideration received from a sublicensee, which percentage will decrease based on the stage of development of the licensed product at the time of the sublicense. Any such sublicense payment is subject to a certain cap.

15



The license will expire upon expiration of the last patent contained in the licensed patent rights, unless terminated earlier. None of the applications included in the NIH licensed patent rights have issued yet. Any patents issuing from these applications will have a base expiration date no earlier than 2034. The NIH may terminate or modify the license in the event of a material breach, including if the Company does not meet certain milestones by certain dates, or upon certain insolvency events that remain uncured following the date that is 90 days following written notice of such breach or insolvency event. The Company may terminate the license, or any portion thereof, at its sole discretion at any time upon 60 days' written notice to the NIH. In addition, the NIH has the right to require the Company to sublicense the rights to the product candidates covered by the license upon certain conditions, including if the Company is not reasonably satisfying required health and safety needs or if the Company is not satisfying requirements for public use as specified by federal regulations.
The expenses recognized under the NIH license were not material for the three and nine months ended September 30, 2016 and 2015, respectively.
October 2015 NIH License Agreement
Pursuant to a patent license agreement with the NIH, dated October 1, 2015, the Company holds an exclusive, worldwide license to certain intellectual property related to TCR-based product candidates directed against MAGE A3 and A3/A6 antigens for the treatment of tumors expressing MAGE.  Pursuant to the terms of this license, the Company paid the NIH a cash payment in the aggregate amount of $1.2 million in November 2015.
The Company is required to make performance-based payments upon successful completion of clinical and regulatory benchmarks relating to the licensed products. The aggregate potential benchmark payments for each licensed product are $8.4 million , of which aggregate payments of $6.0 million are due only after marketing approval in the United States or in Europe, Japan, China or India. Also, a benchmark payment of $150,000 will be due upon the commencement of the Company’s first sponsored Phase 1 clinical trial for each licensed product in each indication.
In addition, the Company is required to pay the NIH one-time benchmark payments following aggregate net sales of up to $1.0 billion of licensed products. The aggregate potential amount of these benchmark payments is $12.0 million . The Company must also pay the NIH royalties on net sales of products covered by this license at rates in the mid-single digits. To the extent the Company enters into a sublicensing agreement relating to a licensed product, the Company is required to pay the NIH a percentage of all consideration received from a sublicensee, which percentage will decrease based on the stage of development of the licensed product at the time of the sublicense. Any such sublicense payment is subject to a certain cap.
The license will expire upon expiration of the last patent contained in the licensed patent rights, unless terminated earlier. None of the applications included in the NIH licensed patent rights have issued yet. Any patents issuing from these applications will have a base expiration date no earlier than 2032. The NIH may terminate or modify the license in the event of a material breach, including if the Company does not meet certain milestones by certain dates, or upon certain insolvency events that remain uncured following the date that is 90 days following written notice of such breach or insolvency event. The Company may terminate the license, or any portion thereof, at its sole discretion at any time upon 60 days' written notice to the NIH. In addition, the NIH has the right to require the Company to sublicense the rights to the product candidates covered by the license upon certain conditions, including if the Company is not reasonably satisfying required health and safety needs or if the Company is not satisfying requirements for public use as specified by federal regulations.
The expenses recognized under the NIH license were not material for the three and nine months ended September 30, 2016 and 2015 , respectively.
Amgen Research Collaboration and License Agreement
On December 31, 2014, the Company entered into the Amgen Agreement, pursuant to which the Company and Amgen expect to develop and commercialize CAR-based product candidates directed against a number of Amgen cancer targets. Under the terms of the Amgen Agreement, the Company and Amgen will jointly create preclinical development plans through IND filing with the FDA for the research and development of CAR-based product candidates that target certain antigens expressed on the cell surface of various cancers. The Company and Amgen expect to progress multiple Amgen programs, each consisting of the development of one or more CAR-based product candidates directed against a certain Amgen selected cancer target. The Company and Amgen also expect to progress multiple Company programs, each consisting of the development of one or more CAR-based product candidates directed against a certain Company selected cancer target. Under certain circumstances, the collaboration may be expanded to include the research and development of other product candidates.
The Company received an upfront payment of $60.0 million from Amgen in February 2015 as partial consideration for the rights granted to Amgen by the Company for access to the Company platform technology and the Company undertaking preclinical development under certain programs. Amgen will fund the research and development costs for all programs with certain limitations through any IND filing. The Company will reimburse Amgen for the research and development costs for any

16



Company program that progresses to an IND filing, to the extent that Amgen had previously paid the Company for any such research and development costs. Each party will then be responsible for clinical development and commercialization of their respective therapeutic candidates, including all related expenses.
The Company will be responsible for the manufacturing and processing of Amgen program product candidates for a certain period following the completion of any Phase 2 clinical trials under a separately negotiated supply agreement, should Amgen choose not to transition manufacturing to itself or to a mutually agreed upon designee of Amgen. The Company will be eligible to receive a $100.0 million milestone payment upon receipt of the first marketing approval for the first Amgen product from each Amgen program to achieve approval and up to $425.0 million in commercial milestone payments for each Amgen program, based on the Amgen program products meeting certain net sales benchmarks in a calendar year, plus tiered high single to double digit royalties for sales and the license of the Company’s intellectual property for CAR-based product candidates. Amgen will be eligible to receive a $100 million milestone payment upon receipt of the first marketing approval for the first Company product from each Company program to achieve approval and up to $425.0 million in commercial milestone payments for each Company program, based on the Company program products meeting certain net sales benchmarks in a calendar year, plus tiered single digit sales royalties. The Company does not expect any milestones to be achieved or paid until 2021 at the earliest, as all of the collaboration product candidates are currently in the pre-clinical stage.
In addition, Amgen has a one-time option to convert a Company program to an Amgen program for a fee of $35.0 million at any time on or prior to the 60th day after the later of (a) delivery of a final report with data for use in an IND and (b) filing of the IND for the first Company product candidate from a Company program and delivery of such IND to Amgen. This option shall exclude the first and second Company programs for which the Company has filed an IND on the Company program product candidate.  In addition to the milestones described above that would be applicable to the converted Company program, the Company shall be eligible to receive additional milestones of $50.0 million upon the initiation of the first Phase 3 clinical trial for the first product from the converted Company program and $50.0 million upon receipt of marketing approval for a second indication from the converted Company program.
The term of the Amgen Agreement will continue on a target-by-target basis until the later of (1) the date on which the product candidates directed against the target are no longer covered by certain intellectual property rights, (2) the loss of certain regulatory exclusivity and (3) a defined term from the first commercial sale of the first product candidate directed against the target. Either party may terminate the agreement on a target-by-target basis with respect to its own programs with prior written notice. Either party may also terminate the agreement with written notice upon material breach by the other party, if such breach has not been cured within a defined period of receiving such notice.
During the three months ended September 30, 2016 and 2015 , the Company recognized $5.5 million and $5.0 million of revenue under the Amgen Agreement, respectively and recognized $15.2 million and $12.3 million of revenue for the nine months ended September 30, 2016 and 2015 , respectively. As of September 30, 2016 , the Company had deferred revenue relating to the Amgen Agreement of $37.5 million , of which $2.7 million relates to Kite programs that would be paid back to Amgen in the event that the Kite programs progress to an IND filing .
Research, Development and Commercialization Agreement with the Leukemia & Lymphoma Society, Inc.
On June 30, 2015, the Company and LLS entered into a research, development and commercialization agreement to enhance the development of the Company’s lead product candidate, KTE-C19.  Under the agreement, LLS will contribute up to $2.5 million through its Therapy Acceleration Program to help fund the Company’s ongoing ZUMA-1 clinical trial.
LLS made an upfront payment of $0.5 million in July 2015, in addition to milestone payments of $1.0 million in November 2015, and $0.4 million in August 2016. The remaining funding will be provided upon reaching certain clinical milestones over the duration of the Company’s ongoing ZUMA-1 clinical trial. Certain regulatory and commercial milestone payments will be made to LLS, based on the development progress of KTE-C19, or upon certain other events, including the out-licensing to a third party of the rights to develop or commercialize KTE-C19, or if the Company combines with or is sold to another company. The Company recognized $1.8 million of revenue for the three and nine months ended September 30, 2016 as it achieved substantive clinical milestones, of which $0.4 million was recorded as a receivable within the prepaid expenses and other current assets caption in the condensed consolidated balance sheets. 
Under the agreement, LLS will launch a broad scope educational program focusing on CAR T-cell therapy for the treatment of blood cancers, as well as support outreach for clinical trial enrollment. The Company separately paid $0.2 million in July 2015 and will pay an additional $0.2 million each year for two years starting in 2016 to support LLS for its rollout of the education program. The Company determined that this arrangement has identifiable benefits to the Company and the payments to LLS should be recognized as expense rather than reduction of the revenue from conducting the research and development services. This education program enables the Company to access one of the country’s largest voluntary health organizations and its patients and providers’ base to improve patients’ understanding of T cell therapy as a potential treatment for blood cancers and

17



enhance providers’ knowledge of T cell therapy including trials involving KTE-C19. The Company believes that the costs reflect the fair market value of the education program.
The Company considers its agreement with LLS to be a revenue arrangement with multiple deliverables.  The Company determined that the substantive deliverables are limited to the clinical development of KTE-C19, Research Advisory Committee (“RAC”) participation, and participating in LLS activities, which together represented a single unit of accounting. The Company deemed that the participation on the RAC is tied to the development of KTE-C19 and occurs concurrently with the research and development services. Participation on the RAC does not have a separate and stand-alone value, as it is essential to the development of KTE-C19 and the Company has sole responsibility for the research and development activities. Participation in activities for LLS are not considered to have a significant value to LLS as the participation is limited to two times per calendar year and the expected value is immaterial. The Company recorded the $1.5 million upfront payment as deferred revenue, which will be recognized as revenue over the expected development period. The Company recorded $0.1 million and $0.3 million in revenue related to the LLS upfront payment for the three and nine months ended September 30, 2016 , respectively and recognized $0.1 million for the three and nine months ended September 30, 2015.
License and Research Agreement with Alpine Immune Sciences, Inc.
On October 26, 2015, the Company and Alpine Immune Sciences, Inc. (“AIS”) entered into an exclusive, worldwide license and research agreement to research, develop, and commercialize engineered autologous T cell therapies incorporating two programs from AIS’ transmembrane immunomodulatory protein (“TIP™”) technology.
Under the terms of the Agreement, AIS is conducting initial research to deliver two program TIPs with certain pre-defined characteristics. The Company is conducting further research on the program TIPs with the goal of demonstrating proof-of-concept. If successful, the Company will further engineer the program TIPs into certain CAR and TCR product candidates that would potentially enhance anti-tumor response.
In connection with entering into the Agreement, the Company paid AIS a $5.0 million upfront payment and paid $0.5 million in additional payments to support AIS’ research. The Company recorded $4.4 million to research and development expense, and $0.5 million as a accrued liability that was recognized as research and development expense for certain research and development activities which were performed during the nine months ended September 30, 2016 . AIS will be eligible to receive up to $530.0 million in total milestone payments based on the successful completion of research, clinical and regulatory milestones relating to both program TIPs. At the Company’s option, a portion of the milestones may be paid in shares of the Company’s common stock. AIS will also be eligible to receive a low single digit royalty for sales on a licensed product-by-licensed product and country-by-country basis, until the later of (i) the date on which the licensed product is no longer covered by certain intellectual property rights, and (ii) a defined term from the first commercial sale of the licensed product. 
The Company may terminate the agreement with prior written notice after a defined research term. Either party may also terminate the agreement upon certain insolvency events of the other party, or with written notice upon material breach by the other party, if such breach has not been cured within a defined period of receiving such notice.
Research Collaboration and License Agreement with Cell Design Labs, Inc.
On June 1, 2016, the Company entered into a Research Collaboration and License Agreement with Cell Design Labs, Inc. (“Cell Design Labs”) for the development of next generation CAR-based product candidates that incorporate Cell Design Labs’ molecular “on/off switch” technology.
Under the terms of the agreement, Cell Design Labs will be responsible for developing the “on/off switches” for the Company’s CAR T cell pipeline. The Company will receive exclusive worldwide rights to develop and commercialize CAR-based product candidates containing Cell Design Labs’ “on/off switches” directed to certain targets that are associated with acute myeloid leukemia. The Company also has the exclusive option for a pre-defined period to develop and commercialize CAR-based product candidates containing “on/off switches” directed to certain targets that are associated with B-cell malignancies.
Pursuant to the agreement, the Company paid Cell Design Labs a $2.0 million upfront payment and will pay up to an additional $9.0 million during the research and development term to support Cell Design Labs’ research. The Company previously made a $1.0 million equity investment in Cell Design Labs in December 2015 and, in connection with entering into the agreement, the Company made an additional equity investment in Cell Design Labs of approximately $6.0 million during the three months ended June 30, 2016. Cell Design Labs will be eligible to receive up to $56.5 million in total milestone payments based on the successful completion of research, clinical, regulatory and commercial milestones. Cell Design Labs will also be eligible to receive tiered single digit royalties for sales on a licensed product-by-licensed product and country-by-country basis, until the date on which the licensed product is no longer covered by certain intellectual property rights.

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The Company may terminate the agreement with prior written notice. Either party may also terminate the agreement upon certain insolvency events of the other party, or with written notice upon material breach by the other party, if such breach has not been cured within a defined period of receiving such notice.

NOTE 7—STOCKHOLDERS’ EQUITY
On December 16, 2014, the Company completed its follow-on offering and sold an additional 3,485,000 shares of its common stock at a price of $54.00 per share.  As a result of the follow-on offering, the Company raised a total of approximately $177.1 million in net proceeds after deducting underwriting discounts and commissions of $10.8 million and offering expenses of $0.3 million . Costs directly associated with the follow-on offering were capitalized and recorded as deferred offering costs prior to the completion of the follow-on offering. These costs have been recorded as a reduction of the proceeds received from the follow-on offering. 
As part of the follow-on public offering, in January 2015, the Company sold an additional 522,750 shares of its common stock at a price of $54.00 per share pursuant to the underwriters’ exercise in full of their over-allotment option.  As a result, the total number of shares sold in the follow-on public offering was 4,007,750 shares, and the Company raised a total of approximately $203.7 million in net proceeds after deducting the underwriting discount and commission of $12.4 million and offering expenses of $0.3 million .
On December 15, 2015, the Company completed an additional follow-on offering and sold an additional 4,168,750 shares of its common stock (inclusive of 543,750 shares of common stock sold by the Company pursuant to the full exercise of an overallotment option granted to the underwriters in connection with the offering) at a price of $69.00 per share.  As a result of this offering, the Company raised a total of approximately $272.6 million in net proceeds after deducting underwriting discounts and commissions of $14.4 million and offering expenses of $0.7 million . Costs directly associated with the offering were capitalized and recorded as deferred offering costs prior to the completion of the follow-on offering. These costs have been recorded as a reduction of the proceeds received from the follow-on offering.  
NOTE 8—STOCK BASED COMPENSATION
Employee Stock Purchase Plan
During June 2014, the Company’s Board of Directors and stockholders approved and adopted the 2014 Employee Stock Purchase Plan (“ESPP”). The ESPP became effective and the first purchase period began on June 19, 2014. Stock compensation expense related to the ESPP was $0.2 million and $0.8 million for the three and nine months ended September 30, 2016 , respectively.
A maximum of 360,000 shares of our common stock may be sold pursuant to purchase rights under the ESPP, subject to adjustment for stock splits, stock dividends, and comparable restructuring activities.  The ESPP also includes an “evergreen” feature, which provides that an additional number of shares will automatically be added to the shares authorized for issuance under the ESPP on January 1st of each year, beginning on the first January 1 immediately following the effective date of June 19, 2014 and ending on (and including) January 1, 2024. The number of shares added each calendar year will be the lesser of (a) 1% of the total number of shares of the Company’s capital stock (including all classes of the Company’s common stock) outstanding on December 31st of the preceding calendar year, and (b) 720,000 shares.  However, the Board may decide to approve a lower number of shares (including no shares) before January 1 of any year.
In January 2015 in accordance with the evergreen feature of the ESPP, the maximum number of common shares issuable under the ESPP was increased by 440,354 shares to 800,354 shares. In January 2016, the maximum number of common shares issuable under the ESPP was increased by 497,630 to 1,297,984 in accordance with the evergreen feature of the ESPP. During the three and nine months ended September 30, 2016 , the Company issued 34,237 shares and 68,845 shares under the ESPP.
The stock purchasable under the ESPP will be shares of authorized but unissued or reacquired common stock, including shares repurchased by the Company on the open market. If a purchase right under the ESPP terminates without having been exercised in full, any shares not purchased under that purchase right will again become available for issuance under the ESPP.
Restricted Stock Units and Stock Options
Eligible employees may receive a grant of RSUs annually with the size and type of award generally determined by the employee’s salary grade and performance level. In addition, certain management and professional level employees typically receive stock options and RSU grants upon commencement of employment. Eligible employees may also receive a grant of stock options annually. Non-employee members of our Board of Directors will receive a grant of RSUs and stock options annually and any future new directors are expected to receive a grant of RSUs and stock options.

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The Company’s RSU and stock option grants provide for accelerated or continued vesting in certain circumstances as defined in the plans and related grant agreements, including a termination in connection with a change in control. RSUs generally vest in equal amounts on each of the first four anniversaries of the grant date. Stock options generally vest in a 25% increment upon the first anniversary of the grant date, and in equal monthly amounts for the three years following the one year anniversary of the grant date.
In 2009, the Company established an equity incentive plan (the “Plan”) pursuant to which incentives may be granted to officers, employees, directors, consultants and advisors. Incentives under the Plan may be granted in any one or a combination of the following forms: (a) incentive stock options and non-statutory stock options; (b) stock appreciation rights; (c) stock awards; (d) restricted stock; and (e) performance shares.
The Plan is administered by the Board of Directors of the Company or a committee appointed by the Board of Directors, which determines the types of awards to be granted, including the number of shares subject to the awards, the exercise price and the vesting schedule.
In June 2014, the Board of Directors approved an amendment and restatement of the Plan, increasing the shares of common stock issuable under the Plan to 9,150,000 shares as well as allowing for an automatic annual increase (the “evergreen provision”) to the shares issuable under the Plan to the lower of (i) 5% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year; or (ii) a lower number determined by the Board of Directors (which can also be zero ). The term of any stock option granted under the Plan cannot exceed 10 years . Options shall not have an exercise price less than 100% of the fair market value of the Company’s common stock on the grant date, and generally vest over a period of four years . If the individual possesses more than 10% of the combined voting power of all classes of stock of the Company, the exercise price shall not be less than 110% of the fair market value of a common share of stock on the date of grant.
In January 2015, the number of shares of common stock available for issuance under the Plan was automatically increased in accordance with the evergreen provision by 2,201,772 shares of common stock, for a total number of shares of common stock issuable under the Plan of 11,351,772 shares.
Under the evergreen provision of the Plan, an additional 2,488,153 shares became authorized and available for future grant on January 1, 2016, for a total number of shares of common stock issuable under the Plan of 13,839,925 .
A summary of the status of the options issued under the Plan as of September 30, 2016 , and information with respect to the changes in options outstanding is as follows:
 
OUTSTANDING
STOCK
OPTIONS
 
WEIGHTED-
AVERAGE
EXERCISE
PRICE
 
WEIGHTED-
AVERAGE
REMAINING
CONTRACTUAL
LIFE (YEARS)
 
AGGREGATE
INTRINSIC
VALUE
Balance at January 1, 2016
7,393,261

 
$
34.18

 
8.8
 
$
211,104,379

Granted under the Plans
1,864,700

 
51.12

 
 
 
 
Exercised
(427,281
)
 
8.10

 
 
 
 
Surrendered/Cancelled
(48,542
)
 
57.52

 
 
 
 
Balance at September 30, 2016
8,782,138

 
$
38.92

 
8.4
 
$
170,422,971

Exercisable at September 30, 2016
3,134,505

 
$
24.98

 
7.7
 
$
101,414,605

The fair value of each stock option granted has been determined using the Black-Scholes option pricing model. The material factors incorporated in the Black-Scholes model in estimating the fair value of the options granted during the nine months ended September 30, 2016 and 2015 included the following:
 
NINE MONTHS ENDED
SEPTEMBER 30,
 
2016
 
2015
Risk-free interest rate
1.17% - 2.00%
 
1.19% - 1.93%
Expected volatility
67.9% - 72.7%
 
68.0% - 80.0%
Stock price
$39.95 - $62.51
 
$50.02 - $72.45
Expected life
6.25 years
 
6 years
Expected dividend yield
0%
 
0%

20



Due to the Company’s lack of sufficient history as a publicly traded company, management’s estimate of expected volatility is based on the average volatilities of a sampling of five companies with similar attributes to the Company, including: industry, stage of life cycle, size and financial leverage.
Stock-based compensation for the three and nine months ended September 30, 2016 and 2015 is as follows (in thousands):
 
THREE MONTHS ENDED
SEPTEMBER 30,
 
NINE MONTHS ENDED
SEPTEMBER 30,
 
2016
 
2015
 
2016
 
2015
Research and development
$
8,940

 
$
5,471

 
$
25,890

 
$
13,015

General and administrative
10,322

 
5,374

 
27,993

 
13,888

Total
$
19,262

 
$
10,845

 
$
53,883

 
$
26,903

The weighted-average grant date fair value per share of options granted under the Plan was $30.74 and $39.29 for the three months ended September 30, 2016 and 2015 , respectively and was $30.93 and $39.98 for the nine months ended September 30, 2016 and 2015 , respectively.
As of September 30, 2016 , total compensation expense not yet recognized related to stock option grants amounted to approximately $177.5 million which will be recognized over a weighted average period of 2.6 years . Additionally, 446,895 options that were early exercised for total proceeds of $0.5 million were unvested, and were recorded as a current liability, based on their vesting date, on the condensed consolidated balance sheets.
The following table summarizes information about stock options outstanding as of September 30, 2016 :
 
OUTSTANDING
 
EXERCISABLE
EXERCISE PRICE
TOTAL SHARES
 
WEIGHTED-
AVERAGE
REMAINING
CONTRACTUAL LIFE
 
WEIGHTED-
AVERAGE
EXERCISE PRICE
 
TOTAL SHARES
 
WEIGHTED-
AVERAGE
EXERCISE PRICE
0.38 - 0.70
935,439

 
6.75
 
$
0.64

 
792,835

 
$
0.63

1.35
925,387

 
7.48
 
1.35

 
566,182

 
1.35

6.89-17.00
934,939

 
7.69
 
10.46

 
454,483

 
10.93

25.50 - 45.04
1,005,715

 
8.75
 
38.72

 
204,566

 
33.04

47.80 - 51.41
895,200

 
9.30
 
49.99

 
86,368

 
51.13

51.43 - 53.90
940,900

 
8.35
 
52.72

 
385,983

 
52.76

54.02 - 59.23
943,458

 
9.16
 
56.30

 
193,676

 
57.02

60.20 - 63.87
1,161,600

 
9.11
 
62.99

 
172,184

 
62.76

63.89 - 72.33
897,500

 
8.62
 
66.96

 
251,458

 
66.58

72.42 - 79.34
142,000

 
8.90
 
73.95

 
26,770

 
72.45

 
8,782,138

 
8.40
 
$
38.92

 
3,134,505

 
$
24.98

The following table summarizes information about RSU activity for the nine months ended September 30, 2016 :
 
OUTSTANDING
RESTRICTED STOCK
UNITS
 
WEIGHTED-
AVERAGE
GRANT DATE
FAIR VALUE
 
WEIGHTED-
AVERAGE
RECOGNITION
PERIOD
(YEARS)
 
AGGREGATE
UNRECOGNIZED
COMPENSATION
Unvested shares as of January 1, 2016
187,100

 
$
64.32

 
3.0
 
$
11,878,381

Granted
331,846

 
50.06

 
 
 
 
Vested
(5,449
)
 
50.13

 
 
 
 
Forfeited
(2,500
)
 
50.95

 
 
 
 
Balance at September 30, 2016
510,997

 
$
55.27

 
1.8
 
$
28,544,292



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NOTE 9—INCOME TAXES
As of September 30, 2016 , the Company recorded an income tax benefit of $2.6 million . The Company’s income tax benefit is related to losses from its foreign operations, domestic losses supported by available for sale securities, and a prior year true up related to deferred taxes in foreign jurisdictions.  
The Company continues to maintain a full valuation allowance on its net deferred tax assets in the U.S., as it is more likely than not that the Company may not realize the benefit of its deferred tax assets due to historical losses. Accordingly, the net deferred tax assets within the U.S. have been fully reserved. The Company will continue to assess the extent to which its deferred tax assets may be realized in the future, and will adjust the valuation allowance as needed. The Company is in a net deferred tax liability position within the Netherlands as of September 30, 2016 . The deferred tax liability represents a source of future income that continues to support the recognition of tax benefits related to current net operating losses in the Netherlands.  The Company is monitoring the composition of the deferred balances within the Netherlands, as net deferred tax assets would be subject to a valuation allowance.
The Company’s policy is to recognize interest and penalties related to uncertain tax positions in income tax expense.  The Company does not have any interest or penalties related to uncertain tax positions in income tax expense for the three and nine months ended September 30, 2016 .
Our legal entities file income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions, and the Netherlands. All tax years remain open to examination by major taxing jurisdictions until a future period when net operating losses are utilized.
NOTE 10—RELATED PARTIES
On June 1, 2009, the Company entered into a services agreement with Two River Consulting, LLC (“TRC”) to provide various clinical development, operational, managerial, administrative, accounting and financial services to the Company. The Company’s Chairman of the Board of Directors, CEO and President, a director of the Company, and the Company’s Secretary are each partners of TRC. The costs incurred for these services were $75,000 and $75,000 for the three months ended September 30, 2016 , and 2015 , respectively and were $225,000 and $225,000 for the nine months ended September 30, 2016 and 2015 , respectively.  
In addition, from time to time, some of the Company’s expenses are paid by TRC. The Company reimburses TRC for these expenses and no interest is charged on the outstanding balance. Reimbursable expenses were $13,000 and $14,393 for the three months ended September 30, 2016 and 2015 , respectively and $48,601 and $26,337 for the nine months ended September 30, 2016 and 2015 , respectively.  
As of September 30, 2016 and December 31, 2015 , the Company had a payable to TRC of $88,000 and $88,279 , respectively. The amounts are recorded as other current liabilities on the balance sheet. All balances owed as of December 31, 2015 were paid in full during the first quarter of 2016 and all balances owed as of September 30, 2016 are expected to be paid in full during the fourth quarter of 2016.
NOTE 11—COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company enters into contracts that contain a variety of indemnifications with its employees, licensors, suppliers and service providers. Further, the Company indemnifies its directors and officers who are, or were, serving at the Company’s request in such capacities. The Company’s maximum exposure under these arrangements is unknown as of September 30, 2016 and December 31, 2015 . The Company does not anticipate recognizing any significant losses relating to these arrangements.
Leases
On May 9, 2013, the Company entered into a lease agreement for a facility to be used for administrative and research and development activities. The lease commenced on June 15, 2013 and has a 10 -year initial term expiring on June 15, 2023 . The lease also provides for rent abatements and scheduled increases in base rent. The lease also contains options for the Company to extend the lease upon its initial expiration. In connection with the lease, the Company made a one-time cash security deposit in the amount of $100,000 .
On January 26, 2015, the Company entered into a lease agreement with Merritt SAB 17, LP, for manufacturing and processing of engineered autologous cell therapy, research and development, and office space in Santa Monica, California. The lease has a 10 -year term commencing on February 1, 2015 . Upon certain conditions, the Company has two options to extend the lease each for an additional five years . The Company is required to remit base rent of $46,906 per month, which will increase at a rate of

22



3% per year. The Company uses leased space for manufacturing and processing of engineered autologous cell therapy, research and development and offices.
On February 17, 2015, the Company entered into a lease agreement with 2355 Utah Industrial Capital, LLC, for manufacturing space in El Segundo which is adjacent to Los Angeles International Airport. The lease has a 10-year and seven month term commencing on January 1, 2016 . Upon certain conditions, the Company has two options to extend the lease, each for an additional five years . The Company paid $124,183 upon execution of the lease and is required to remit base rent of $124,183 per month, or $2.85 per square foot, which will increase at a rate of 3% per year. The monthly installments will be abated for the months of February 2016, January and February 2017, January 2018, January 2019, January 2020 and January 2021. The Company also has an option to expand the lease for additional square footage at the same rent per square foot as the base premises, which option must be exercised prior to July 1, 2017 .
On June 22, 2015, the Company entered into a sublease agreement with Goldline, LLC, for office space in Santa Monica, California. The lease has a term of 26 months commencing on June 22, 2015 . The Company is required to remit base rent of $47,689 per month, with rent abatement of 50% for the first three months and 25% the next three months.   Rent will increase to $50,389 from July 1, 2016 to the end of the lease term. On June 30, 2016, the Company expanded its sublease agreement with Goldline, LLC for additional office space in Santa Monica, California. The lease has a term of 14 months commencing on June 30, 2016 with monthly base rent of $10,908 .
On July 1, 2016, the Company entered into a lease agreement with 2383 Utah, LLC, for the lease of primarily office space in El Segundo, which is adjacent to the Company’s manufacturing facility. The lease has a nine year and six month term commencing on February 1, 2017. Upon certain conditions, the Company has two options to extend the lease, each for an additional five years. The Company paid $176,400 upon execution of the lease and is required to remit base rent of $176,400 per month, or $2.94 per square foot, which will increase at a rate of approximately 3% per year. The monthly installments will be abated for the months of February 2017, February 2018, February 2019, February 2020, February 2021, February 2022 and February 2023.
Rent expense charged to operations was $1.7 million and $0.9 million for the three months ended September 30, 2016 and 2015 , respectively and was $3.6 million and $2.0 million for the nine months ended September 30, 2016 and 2015 , respectively. The Company received from its landlords lease incentives related to tenant improvement allowances, which are recorded as a reduction of rent expense over the term of the respective leases. The Company has incurred expenses eligible for tenant improvement allowances related to its research and development facilities and received cash from its landlords in the amount of $3.4 million as of September 30, 2016 . The Company has recorded corresponding other current deferred rent liabilities and other non-current deferred rent liabilities related to these tenant improvement allowances within the condensed consolidated balance sheets and recognized a reduction in rent expense of $0.1 million and $0.3 million for the three and nine months ended September 30, 2016 as a result of the tenant improvement allowances.
NOTE 12—ACQUISITIONS AND INVESTMENTS
T-Cell Factory Acquisition
On March 17, 2015, the Company entered into a stock purchase agreement (the “SPA”) with TCF and the shareholders of TCF (collectively, the “Sellers”), to acquire all of the outstanding capital stock of TCF.  The signing and closing of the transaction happened concurrently whereupon TCF became the Company’s wholly-owned subsidiary and was renamed Kite Pharma EU B.V.  The SPA contains certain representations, warranties, covenants and indemnities by the parties thereto, in each case customary for a transaction of this nature and scope. The Company acquired TCF for the opportunity to significantly expand its pipeline of TCR-based product candidates.  Using its proprietary TCR-GENErator technology platform, TCF may be able to rapidly and systematically discover tumor-specific TCRs. 
Pursuant to the SPA, the Company paid approximately $15.1 million in cash and issued $4.2 million in shares of its common stock, which equated to 66,120 shares of its common stock, to the Sellers.  The cash paid to the Sellers is subject to customary adjustments for net working capital.  At the closing, €2.0 million was withheld from the Sellers to satisfy any potential indemnity claims arising under the SPA, the balance of which was paid to the Sellers upon the termination of the indemnity holdback period of 18 months during the three month period ended September 30, 2016. 
The Company is obligated to pay up to €242.5 million upon the achievement of certain clinical, regulatory and sales milestones relating to TCR-based product candidates that may be developed by TCF. A portion of these milestone payments will be made to TCF directly to pay its licensors and employees.  At the Company’s option, a portion of the clinical and regulatory milestones may be paid in shares of the Company’s common stock to the Sellers. In connection with the acquisition, each of the Sellers entered into non-competition and non-solicitation agreements with the Company, and certain of the Sellers and other key scientists entered into employment agreements with Kite Pharma EU.

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The TCF acquisition has been accounted for as a business combination in accordance with ASC 805. Accordingly, the Company has estimated the purchase price allocation based on the fair values of the assets acquired and liabilities assumed.  Intangible assets were valued using the relief from royalty method under the income approach for license agreements, and using the with-and-without method for non-compete agreements. In connection with the acquisition, the Company acquired an exclusive license agreement with IBA GmbH, or IBA, for intellectual property rights relating to certain methods of selecting TCRs.  Additionally, a non-exclusive license agreement with Sanquin Blood Supply Foundation relating to certain methods of detecting and selecting TCRs was acquired. Lastly, the Company acquired a license agreement with the Netherlands Cancer Institute-Antoni Van Leeuwenhoek (“NKI-AVL”) for know-how, materials and protocols, and the right of first negotiation for certain intellectual property rights with relevance to TCRs that may be developed in Dr. Schumacher’s lab at the NKI-AVL over the next several years.  NKI-AVL, IBA and Sanquin Blood Supply Foundation have a right to a certain portion of the milestone payments that may be paid under the SPA.  These license agreements are estimated to have a useful life of ten years .
The preparation of the valuation required the use of significant assumptions and estimates. Critical estimates included, but were not limited to, future expected cash flows, including projected revenues and expenses, and applicable discount rates. These estimates were based on assumptions that the Company believes to be reasonable.
The following table presents the calculation of the purchase price (in thousands):
Cash and stock consideration
$
19,260

Contingent consideration
16,622

Working capital adjustment
(59
)
 
$
35,823

The purchase price is allocated between the tangible and intangible assets and assumed liabilities based on their estimated fair values at March 17, 2015. Based on the Company’s valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, the purchase price is allocated as follows (in thousands):
Non-compete agreements
$
12,400

Licensing agreements
3,000

Goodwill
24,692

Tangible current assets
361

Tangible non-current assets
214

Liabilities assumed
(4,844
)
 
$
35,823

In connection with the non-compete agreements and license agreements acquired, the Company established a corresponding deferred tax liability of $3.8 million , which is included in the liabilities assumed in the table above. The Company determined that there was no meaningful in-process research and development that should be recorded related to the TCF acquisition. Further, as TCF’s operations were immaterial to the Company’s financial statements, no pro forma presentations have been made related to TCF.
The following table presents amortizable intangible assets acquired and their amortization periods (in thousands):
 
Estimated
Fair Value
 
Amortization
Period
Non-compete agreements
$
12,400

 
3 years
Licensing agreements
3,000

 
10 years
 
$
15,400

 
 
During the nine months ended September 30, 2015 , one of the non-compete agreements with a non-employee Seller was terminated.  As a result, the Seller likewise forfeited the future receipt of funds due under the contingent consideration agreement. As a result, the Company reduced its non-compete agreement intangible asset by $1.1 million as well as the deferred tax liability related to the non-compete agreement by $0.3 million , and also reduced its contingent consideration liability by $1.3 million , which would no longer be payable to this Seller. This resulted in a $0.5 million adjustment that was recorded as other income within the condensed consolidated statements of operations. During the three and nine months ended September 30, 2016 the Company recorded $0.2 million and $0.5 million as interest expense within the condensed consolidated statements of operations related to contingent consideration accretion, respectively, and recorded $0.5 million as interest

24



expense during the three and nine months ended September 30, 2015 . There were no other changes in the fair value of the contingent consideration as of September 30, 2016 .
Cell Design Labs Investment
The Company accounts for its equity investments under the cost method of accounting when it does not have the ability to exercise significant influence over the investees. For investments where the Company has the ability to exercise significant influence, the equity method of accounting is used. Significant influence is generally deemed to exist if the Company's ownership interest in the voting stock of the investee ranges between 20% and 50%, although other factors, such as representation on the investee's board of directors or any significant business relationships that may exist with the investee, are also considered in determining whether the equity method of accounting is appropriate. Under the equity method of accounting, the investment is recorded at cost in the consolidated balance sheets under the other assets caption, and adjusted for dividends received and our share of the investee's earnings or losses, together with other-than-temporary impairments which are recorded in the consolidated statements of operations.
The Company’s total equity investment in Cell Design Labs as of December 31, 2015 was $1.0 million and the Company accounted for the investment using the cost method of accounting. On June 1, 2016, the Company entered into a Research Collaboration and License Agreement with Cell Design Labs to develop “on/off switches” for the Company’s CAR T cell pipeline. On June 2, 2016, the Company made an additional equity investment in Cell Design Labs of approximately $6.0 million in cash.
Upon making the additional investment in June 2016, the Company reassessed its ability to exert influence over Cell Design Labs by quantitatively assessing its overall ownership position in Cell Design Labs and the number of voting seats it had on the Cell Design Labs board of directors, as well as by qualitatively assessing the effect of its research collaboration on the investee. Due to the additional June 2016 investment, the Company’s ownership interest increased and remains less than 20% , and the Company also obtained a seat on Cell Design Labs’ board of directors. Cell Design Labs’ primary research and development efforts are also conducted pursuant to the Company’s Research Collaboration and License Agreement with Cell Design Labs. As a result, the Company determined that the prospective application of the equity method of accounting would be appropriate. The equity investment is included in the other assets caption within the condensed consolidated balance sheets. During the three months ended September 30, 2016 , the Company recognized its share of Cell Design Labs’ operating loss, which was not material and is included under the other expenses caption within the condensed consolidated statements of operations.
NOTE 13—SUBSEQUENT EVENTS
On November 4, 2016, the Company entered into a lease agreement with CA-Colorado Center, LLC, for primarily office space in Santa Monica to serve as the Company's future headquarters. The lease has a term of fifteen years expected to commence on August 1, 2017 . Upon certain conditions, the Company has three options to extend the lease, each for an additional five years . Beginning on the expected lease commencement date of August 1, 2017, the first year of base rent will be abated and beginning on the second year after lease commencement, the base rent on 29,255 square feet of the premises will be abated. Subject to lease commencement and the lease abatement terms, the Company is required to remit base rent of $876,205 per month, or $5.50 per square foot, which will increase at a rate of approximately 3% per year for the first ten years and then 3.5% per year during years eleven through fifteen.  The Company is posting a customary letter of credit in the amount of $5.5 million as a security deposit, which will increase by $5.5 million in January 2017. The amount of the letter of credit may be subject to reductions during the term of the lease beginning in the fourth year of the lease term. Pursuant to a work letter attached to the lease, the landlord will contribute an aggregate of $17.5 million toward the tenant improvements for the leased space.


25



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto as of and for the year ended December 31, 2015 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2015 , or Annual Report, which has been filed with the Securities and Exchange Commission, or SEC. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “we,” “us,” “our” and "Kite" refer to Kite Pharma, Inc. and its subsidiaries.
Forward-Looking Statements
The information in this discussion contains forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are subject to the “safe harbor” created by those sections. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation, the risks set forth in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q and in our other filings with the SEC. The forward-looking statements are applicable only as of the date on which they are made, and we do not assume any obligation to update any forward-looking statements.
OVERVIEW
We are a clinical-stage biopharmaceutical company focused on the development and commercialization of novel cancer immunotherapy products designed to harness the power of a patient’s own immune system to target and kill cancer cells. We do this using our engineered autologous cell therapy, or eACT, which we believe is a transformational approach to the treatment of cancer. eACT involves the genetic engineering of T cells to express either chimeric antigen receptors, or CARs, or T cell receptors, or TCRs. These modified T cells are designed to recognize and destroy cancer cells.

We are currently conducting five company-sponsored trials of our lead product candidate, KTE-C19, a CAR-based therapy. We are conducting a Phase 2 clinical trial (ZUMA-1) of KTE-C19 in patients with refractory diffuse large B cell lymphoma, or DLBCL, including primary mediastinal B cell lymphoma, or PMBCL, and transformed follicular lymphoma, or TFL. DLBCL, PMBCL and TFL are types of aggressive non-Hodgkin lymphoma, or NHL. We are also conducting a Phase 2 clinical trial (ZUMA-2) of KTE-C19 in patients with relapsed/refractory mantle cell lymphoma, or MCL, a Phase 1-2 clinical trial (ZUMA-3) of KTE-C19 in adult patients with relapsed/refractory acute lymphoblastic leukemia, or ALL, and a Phase 1-2 clinical trial (ZUMA-4) of KTE-C19 in pediatric patients with relapsed/refractory ALL. In the third quarter of 2016, we initiated a multi-center Phase 1b/2 clinical trial (ZUMA-6) of KTE-C19 in combination with Genentech’s atezolizumab in patients with refractory DLBCL.

We plan to initiate a rolling submission of the Biologics License Application, or BLA, for accelerated approval of KTE-C19 as a treatment for patients with refractory aggressive NHL, which includes DLBCL, PMBCL and TFL. A rolling submission allows a company to submit portions of the marketing application to the FDA as they are completed.  We plan to initiate the submission at the end of 2016 and complete the submission by the end of the first quarter of 2017. After a 60-day filing review period, if accepted for FDA review, the FDA’s priority review goal of six months for reviewing and responding to the BLA would begin.  The BLA submission will be based on the primary analysis of ZUMA-1, which will include 72 patients with DLBCL from Cohort 1 and 20 patients with PMBCL or TFL from Cohort 2 with at least six months of follow-up. If approved, we plan to commercially launch KTE-C19 in 2017.  
We plan to report primary data on patients with at least six months of follow-up from ZUMA-2 and the Phase 2 portions of ZUMA-3 and ZUMA-4 in 2018. If we believe the data are compelling, we plan to pursue FDA approval for these additional indications.

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We opened an additional cohort in ZUMA-1 to allow us to evaluate prophylactic treatment of adverse events, broaden the patient population to include relapsed, transplant-ineligible subjects, and to expand the clinical trial to Europe. We also plan to initiate clinical trials of KTE-C19 for the treatment of indolent NHL, second line DLBCL, and chronic lymphocytic leukemia in 2017.
In addition to advancing our KTE-C19 clinical program, we are continuing to advance our other eACT-based product candidates. We plan to file an investigational new drug application, or IND, for a TCR-based product candidate, KITE-718, targeting a MAGE A3/A6 antigen for the treatment of MAGE A3/A6 positive cancers including non-small cell lung cancer and bladder cancer by the end of 2016. We plan to file an IND for a CAR-based product candidate, KITE-585, targeting B cell maturation antigen, or BCMA, for the treatment of multiple myeloma in 2017. In 2018, we plan to file an IND for a TCR-based product candidate, KITE-439, targeting HPV-16 E7 for the treatment of HPV-16 E7 positive cancers including cervical cancer and head and neck cancer, and a CAR-based product candidate, KITE-796, targeting C-type lectin-like molecule-1, or CLL-1, for the treatment of acute myeloid leukemia. KITE-796 is a Kite product candidate being developed under our collaboration with Amgen Inc., or Amgen.
Recent Developments
In September 2016, we announced positive topline results from a pre-planned interim analysis of Cohort 1 of ZUMA-1 Phase 2. KTE-C19 met the primary endpoint of objective response rate, or ORR, p < 0.0001, with ORR of 76% percent, including 47% complete remissions.
ZUMA-1 Phase 2 enrolled patients with chemorefractory aggressive NHL into two cohorts. Cohort 1 included patients with DLBCL, and Cohort 2 enrolled patients with TFL and PMBCL. The interim analysis of ZUMA-1 Phase 2 evaluated the ORR in the first 51 patients in Cohort 1 with at least three months of follow-up. This analysis also included an additional 11 patients in Cohort 2.
The table below summarizes the response rates from this interim analysis together with the updated results from the Phase 1 portion of our ZUMA-1 clinical trial, as reported at the European Society for Medical Oncology annual congress in October 2016.
 
 
 
 
 
ZUMA-1 Phase 1
 
 
 
 
ZUMA-1 Phase 2
 
 
 
 
 
DLBCL
(n=7)
 
 
 
 
DLBCL
(n=51)
 
TFL/PMBCL
(n=11)
 
Combined
(n=62)
 
 
 
 
 
ORR
(%)
 
CR
(%)
 
 
 
 
ORR
(%)
 
CR
(%)
 
 
ORR
(%)
 
CR
(%)
 
 
ORR
(%)
 
CR
(%)
ORR
 
 
 
 
71
 
57
 
 
 
 
76
 
47
 
 
91
 
73
 
 
79
 
52
Month 3
 
 
 
 
43
 
43
 
 
 
 
39
 
33
 
 
64
 
64
 
 
44
 
39
Months 6, 9 and 12
 
 
 
 
43
 
43
 
 
 
 
Data Pending
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Across the combined 62 patients in ZUMA-1 Phase 2, the most common grade 3 or higher adverse events included neutropenia (66%), anemia (40%), febrile neutropenia (29%), thrombocytopenia (29%), and encephalopathy (26%). Grade 3 or higher cytokine release syndrome, or CRS, and neurological toxicity was observed in 18% and 34% of patients, respectively. Two patients died from KTE-C19 related adverse events (hemophagocytic lymphohistiocytosis and cardiac arrest in the setting of CRS).
Also in September 2016, we entered into a patent license agreement with the National Institutes of Health, or NIH, for an exclusive, worldwide license to certain intellectual property related to multiple TCR-based product candidates for the treatment of tumors expressing mutated KRAS antigens.  We expect the first of the licensed KRAS product candidates to enter clinical study in 2016 as part of our Cooperative Research and Development Agreement, or CRADA, with the U.S. Department of Health and Human Services, as represented by the National Cancer Institute, or NCI, under the direction of Steven A. Rosenberg, M.D., Ph.D., Chief of the Surgery Branch at the NCI. KRAS is involved in a broad range of solid tumors, such as pancreatic, colorectal and lung cancers.

27



OUR RESEARCH AND DEVELOPMENT AND LICENSE AGREEMENTS
We have three CRADAs, through which we are funding the research and development of eACT-based product candidates utilizing CARs and TCRs for the treatment of advanced solid and hematological malignancies.
Under the CRADAs, we have an exclusive option to negotiate commercial licenses from the NIH to intellectual property relating to CAR-and TCR-based product candidates developed in the course of the CRADA research plans.  Since entering into the first CRADA in August 2012, we have secured multiple commercial license agreements with the NIH for intellectual property relating to TCR-based product candidates targeting certain SSX2, NY-ESO-1, HPV, MAGE and KRAS antigens, for a CAR-based product candidate targeting EGFRvIII and for a fully-human CAR-based product candidate targeting CD19.
In addition, we have a license agreement with Cabaret Biotech Ltd., or Cabaret, and its founder relating to intellectual property and know-how owned or licensed by Cabaret and relating to CAR constructs that encompass KTE-C19. We have also entered into a research collaboration and license agreement with Amgen, or the Amgen Agreement, a collaboration agreement with bluebird bio, Inc., and a license and research agreement with Alpine Immune Sciences, Inc.  
For additional information regarding our significant collaborations and license agreements, see Note 6 to our financial statements appearing elsewhere in this Form 10-Q.
COMPONENTS OF OPERATING RESULTS
Revenues
As of September 30, 2016 , our revenue has included a portion of the upfront payment we received under the Amgen Agreement, reimbursed research and development costs relating to the Amgen targets and a portion of the payments we received under a research, development and commercialization agreement with the Leukemia & Lymphoma Society, Inc. We received an upfront payment of $60.0 million from Amgen in February 2015. Amgen will fund the research and development costs for all programs with certain limitations through any IND filing. We will reimburse Amgen for the research and development costs for any Kite program that progresses to an IND filing. Each company will then be responsible for clinical development and commercialization of their respective therapeutic candidates, including all related expenses. We will be responsible for the manufacturing and processing of Amgen program product candidates for a certain period following the completion of any Phase 2 clinical trials under a separately negotiated supply agreement, should Amgen choose not to transition manufacturing to itself or to a mutually agreed upon designee of Amgen.
We applied the FASB Accounting Standards Update No. 2009-13, Multiple-Deliverable Revenue Arrangements, in evaluating the appropriate accounting for the upfront payment and research funding under the Amgen Agreement. In accordance with this guidance, the $60.0 million upfront payment was recorded as deferred revenue and is being recognized over a period of four years . In addition, the Amgen research funding, which is due as the related services are performed under the Amgen Agreement, is recorded as revenue on a time and material basis, and the related costs are recorded as research and development expense in the consolidated statements of operations.
Under certain circumstances, we may be required to reimburse Amgen for research and development services for Kite targets. We will defer the recognition of revenue related to research and development services billed until the potential reimbursement contingency has lapsed. Any costs reimbursed by Amgen that relate to a Kite program that progresses to an IND filing are recorded as deferred revenue until either an IND is filed and we are required to reimburse Amgen for such expenses, or the program ends without an IND filing, at which point the revenue will be recognized.
During the three months ended September 30, 2016 and 2015 , we recognized $5.5 million and $5.0 million of revenue under the Amgen Agreement, respectively, and recognized $15.2 million and $12.3 million of revenue for the nine months ended September 30, 2016 and 2015 , respectively. As of September 30, 2016 , we had deferred revenue relating to the Amgen Agreement of $37.5 million , of which $2.7 million relates to Kite programs that would be paid back to Amgen in the event that the Kite programs progress to an IND filing .
In the future, we may generate revenue from a combination of product sales, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements or a combination of these approaches. We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the timing and amount of license fees, milestone and other payments, and the amount and timing of payments that we receive upon the sale of our products, to the extent any are successfully commercialized. If we fail to complete the development of our product candidates in a timely manner or obtain regulatory approval of them, our ability to generate future revenue, and our results of operations and financial position, will be materially adversely affected.

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Research and Development Expenses
To date, our research and development expenses have related primarily to the development of eACT. Research and development costs consist of salaries and benefits, including associated stock-based compensation, laboratory supplies and facility costs, costs related to commercial manufacturing preparations, as well as fees paid to other entities that conduct certain research and development activities on our behalf and payments made pursuant to license agreements.  We estimate preclinical study and clinical trial expenses based on the services performed pursuant to contracts with research institutions and contract research organizations that conduct and manage preclinical studies and clinical trials on our behalf based on actual time and expenses incurred by them.
We accrue for costs incurred as the services are being provided by monitoring the status of the trial or project and the invoices received from our external service providers.  We adjust our accrual as actual costs become known. Where at risk contingent milestone payments are due to third parties under research and development and collaboration agreements, the milestone payment obligations are expensed when the milestone results are achieved.
Under certain circumstances, we may be required to reimburse Amgen for research and development services. We will defer the recognition of revenue related to research and development services billed until the potential reimbursement contingency has lapsed.
Research and development costs are expensed as incurred. Research and development expenses related to the development of eACT consist of expenses incurred in performing research and development activities, including cash and stock-based compensation and benefits for research and development employees and consultants, facilities expenses, overhead expenses, cost of laboratory supplies, manufacturing expenses, fees paid to third parties, including the NCI and contract research organizations.
Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect our research and development expenses to increase over the next several years as our ZUMA clinical program progresses and as we seek to initiate clinical trials of additional eACT-based product candidates.  We also expect to incur increased research and development expenses as we selectively identify and develop additional product candidates. However, it is difficult to determine with certainty the duration and completion costs of our current or future preclinical programs and clinical trials of our product candidates.
The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors that include, but are not limited to, the following:
per patient trial costs;
the number of patients that participate in the trials;
the number of sites included in the trials;
the countries in which the trials are conducted;
the length of time required to enroll eligible patients;
the number of doses that patients receive;
the drop-out or discontinuation rates of patients;
potential additional safety monitoring or other studies requested by regulatory agencies;
the duration of patient follow-up; and
the efficacy and safety profile of the product candidates.
In addition, the probability of success for each product candidate will depend on numerous factors, including competition, manufacturing capability and commercial viability. We will determine which programs to pursue and how much to fund each program in response to the scientific and clinical success of each product candidate, as well as an assessment of each product candidate’s commercial potential.
Because eACT is still in the early stages of clinical and preclinical development and the outcome of these efforts is uncertain, we cannot estimate the actual amounts necessary to successfully complete the development and commercialization of product candidates or whether, or when, we may achieve profitability. Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity or debt financings and collaboration or license arrangements.

29



General and Administrative Expenses
General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in executive, commercial, finance, accounting, business development, legal and human resources functions. Other significant costs include facility costs not otherwise included in research and development expenses, legal fees relating to corporate and patent matters, sublicense royalties, insurance, public company expenses relating to maintaining compliance with NASDAQ listing rules and SEC requirements, insurance and investor relations costs, and fees for accounting and consulting services.
We anticipate that our general and administrative expenses will increase in the future to support our continued research and development activities, potential commercialization of our product candidates and the increased costs of operating as a public company. These increases will likely include increased costs related to the hiring of additional personnel and fees to outside consultants, lawyers and accountants, among other expenses.
Critical Accounting Policies and Significant Judgments and Estimates
The preparation of our unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the revenues and expenses incurred during the reported periods. We base our estimates on historical experience and on various other factors that we believe are relevant under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We discussed accounting policies and assumptions that involve a higher degree of judgment and complexity in Note 3 to our financial statements in our Annual Report. There have been no material changes to our critical accounting policies and estimates as compared to those disclosed in our Annual Report.
RESULTS OF OPERATIONS
Comparison of the Three Months Ended September 30, 2016 and 2015
The following table sets forth our results of operations for the three months ended September 30, 2016 and 2015 :
 
THREE MONTHS ENDED
SEPTEMBER 30,
 
CHANGE
$
 
2016
 
2015
 
 
(unaudited, in thousands)
 
 
Revenue
$
7,341

 
$
5,087

 
$
2,254

Operating expenses:
 
 
 
 
 

Research and development
57,262

 
21,727

 
35,535

General and administrative
25,032

 
11,135

 
13,897

Total operating expenses
82,294

 
32,862

 
49,432

Loss from operations
(74,953
)
 
(27,775
)
 
(47,178
)
Other income (expense):
 
 
 
 
 

Interest income
942

 
342

 
600

Interest expense
(196
)
 
(451
)
 
255

Other income (expense)
(31
)
 
(49
)
 
18

Total other income
715

 
(158
)
 
873

Loss before income taxes
(74,238
)
 
(27,933
)
 
(46,305
)
Benefit from income taxes
292

 
491

 
(199
)
Net loss
$
(73,946
)
 
$
(27,442
)
 
$
(46,504
)
Revenue
Revenue was $7.3 million and $5.1 million for the three months ended September 30, 2016 and 2015 , respectively. The increase in revenue during this period of $2.2 million was primarily due to increased revenue recognized under the Amgen Agreement.

30



Research and Development Expenses
Research and development expenses were $57.3 million and $21.7 million for the three months ended September 30, 2016 and 2015 , respectively. The increase in research and development expenses during this period of $35.6 million was primarily due to:
$13.7 million in costs related to our eACT development program and Amgen pre-clinical development program;
$9.6 million in compensation expense related to increased research and development staff and consultant costs;
$5.7 million of expenses related to our clinical manufacturing activities and preparation for commercial manufacturing;
$3.5 million of stock based compensation expense related to increased research and development staff and consultants; and
$3.1 million of expenses related to facilities, depreciation, amortization, travel, and other expenses.
General and Administrative Expenses
General and administrative expenses were $25.0 million and $11.1 million for the three months ended September 30, 2016 and 2015 , respectively. The increase in general and administrative expenses during this period of $13.9 million was primarily due to:
$7.4 million of expenses related to increased personnel costs, including employees and professional fees;
$4.9 million of stock based compensation expense related to increased general and administrative staff and consultants; and
$1.6 million of expense related to marketing, travel, and other expenses.
Comparison of the Nine Months Ended September 30, 2016 and 2015
The following table sets forth our results of operations for the nine months ended September 30, 2016 and 2015 :
 
NINE MONTHS ENDED
SEPTEMBER 30,
 
CHANGE
$
 
2016
 
2015
 
 
(unaudited, in thousands)
 
 
Revenue
$
17,263

 
$
12,371

 
$
4,892

Operating expenses:
 
 
 
 
 

Research and development
139,033

 
47,576

 
91,457

General and administrative
65,046

 
30,080

 
34,966

Total operating expenses
204,079

 
77,656

 
126,423

Loss from operations
(186,816
)
 
(65,285
)
 
(121,531
)
Other income (expense):
 
 
 
 
 

Interest income
2,712

 
1,307

 
1,405

Interest expense
(519
)
 
(456
)
 
(63
)
Other income (expense)
(94
)
 
521

 
(615
)
Total other income
2,099

 
1,372

 
727

Loss before income taxes
(184,717
)
 
(63,913
)
 
(120,804
)
Benefit from income taxes
2,582

 
491

 
2,091

Net loss
$
(182,135
)
 
$
(63,422
)
 
$
(118,713
)
Revenue
Revenue was $17.3 million and $12.4 million for the nine months ended September 30, 2016 and 2015 , respectively. The increase in revenue during this period of $4.9 million was primarily due to increased revenue recognized under the Amgen Agreement.

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Research and Development Expenses
Research and development expenses were $139.0 million and $47.6 million for the nine months ended September 30, 2016 and 2015 , respectively. The increase in research and development expenses during this period of $91.4 million was primarily due to:
$23.3 million in costs related to our eACT development program and Amgen pre-clinical development program;
$21.7 million in compensation expense related to increased research and development staff and consultant costs;
$19.5 million of expenses related to clinical manufacturing activities and preparation for commercial manufacturing;
$12.9 million of stock based compensation expense related to increased research and development staff and consultants;
$7.2 million in expenses related to our collaborations with Cell Design Labs and Alpine Immune Sciences; and
$6.8 million of expenses related to facilities, depreciation, amortization, travel, and other expenses.
General and Administrative Expenses
General and administrative expenses were $65.0 million and $30.1 million for the nine months ended September 30, 2016 and 2015 , respectively. The increase in general and administrative expenses during this period of $34.9 million was primarily due to:
$17.7 million of expenses related to increased personnel costs, including employees and professional fees;
$14.1 million of stock based compensation expense related to increased general and administrative staff and consultants; and
$3.1 million of expense related to marketing, travel, and other expenses.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2016 , we had $128.8 million in cash and cash equivalents, and $348.4 million in marketable securities. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation.
We have funded our operations principally from the sale of common stock, and through the Amgen collaboration.  In 2015, we received an upfront payment of $60.0 million from Amgen, and raised approximately $300.7 million in net proceeds from our follow-on offering of common shares in December 2015 as well as from the net proceeds received in January 2015 from the underwriters’ exercise in full of their over-allotment option from the December 2014 follow-on offering, after deducting underwriting discounts and commissions and offering expenses.
We have incurred losses since our inception in 2009 and, as of September 30, 2016 , we had an accumulated deficit of $341.8 million . We anticipate that we will continue to incur losses for at least the next several years. Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, third-party clinical research and development services, laboratory and related supplies, clinical costs, legal and other regulatory expenses and general overhead costs.
Because eACT is still in the early stages of clinical and preclinical development and the outcome of these efforts is uncertain, we cannot estimate the actual amounts necessary to successfully complete the development and commercialization of product candidates or whether, or when, we may achieve profitability. Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity or debt financings and collaboration or license arrangements.

32



Cash Flows
The following table sets forth the significant sources and uses of cash for the periods set forth below:
 
NINE MONTHS ENDED
SEPTEMBER 30,
 
2016
 
2015
 
(unaudited, in thousands)
Net cash provided by (used in):
 

 
 

Operating activities
$
(114,993
)
 
$
5,749

Investing activities
(150,210
)
 
(71,619
)
Financing activities
1,114

 
29,420

Effect of exchange rate changes on cash
(4
)
 
117

Net change in cash and cash equivalents
$
(264,093
)
 
$
(36,333
)
Operating Activities
Net cash used in operating activities was $115.0 million during the nine months ended September 30, 2016 as compared to $5.7 million in cash provided by operating activities during the nine months ended September 30, 2015 . The increase in net cash used in operating activities of $120.7 million between the nine months ended September 30, 2016 and 2015 was primarily the result of cash received from Amgen as an upfront payment related to the Amgen Agreement in the nine months ended September 30, 2015 , as well as increased operating expenses due to additional headcount, facilities related costs, and other research and development and clinical activities during the nine months ended September 30, 2016 .
Investing Activities
Net cash used in investing activities was $150.2 million during the nine months ended September 30, 2016 as compared to $71.6 million of cash used by investing activities during the nine months ended September 30, 2015 . The increase in cash used in investing activities of $78.6 million between the nine months ended September 30, 2016 and 2015 was primarily the result of the investment of the proceeds from our December 2015 follow-on offering and transactional activity related to our marketable securities portfolio, as well as capital expenditures related to our clinical and commercial manufacturing facilities.
Financing Activities
Net cash provided by financing activities was $1.1 million during the nine months ended September 30, 2016 as compared to $29.4 million in cash provided by financing activities during the nine months ended September 30, 2015 . The decrease in cash provided by financing activities of $28.3 million between the nine months ended September 30, 2016 and 2015 was primarily the result of the underwriters’ exercise in full of their over-allotment option from the December 2014 follow-on offering during the nine months ended September 30, 2015 .
Off-Balance Sheet Arrangements
During the periods presented we did not have, nor do we currently have, any off-balance sheet arrangements as defined under SEC rules.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in our financial instruments and in our financial position represents the potential loss arising from adverse changes in interest rates. As of September 30, 2016 , we had $128.8 million in cash and cash equivalents, and $348.4 million in marketable securities. We generally hold our cash in interest-bearing money market accounts. Our exposure to market risk related to interest rate sensitivity is affected by changes in the general level of U.S. interest rates. Due to the short-term maturities of our cash equivalents and marketable securities and the low risk profile of our investments, an immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our cash equivalents and marketable securities. 
We are also exposed to foreign currency exchange rate risk relating to our funding of our European subsidiary, Kite Pharma EU.  Our balance sheet as of September 30, 2016 includes cash and cash equivalent balances of $0.5 million denominated in Euros.  We do not participate in any foreign currency hedging activities.  A hypothetical 10% increase (decrease) in the value of the Euro would result in a foreign currency translation effect of $0.1 million which would be recorded to other comprehensive income (loss). Future changes in the U.S. dollar and Euro exchange rate may result in future recognition of exchange rate losses

33



or higher than expected operating expenses as we fund the operations of our subsidiary.  We did not recognize any material exchange rate loss during the three and nine months ended September 30, 2016 .
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of September 30, 2016 , have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting

We are in the process of implementing new enterprise resource planning software, Oracle, as part of a plan to integrate and upgrade our systems and processes. The implementation of this software is scheduled to continue in phases over a number of years. During the third quarter of 2016, we migrated certain areas of our business to Oracle, including financial reporting and procurement. As the phased implementation of this system occurs, we are experiencing certain changes to our processes and procedures which, in turn, result in changes to our internal control over financial reporting. While we expect Oracle to strengthen our internal financial controls by automating certain manual processes and standardizing business processes and reporting, management will continue to evaluate and monitor our internal controls as processes and procedures in each of the affected areas evolve.
Other than as discussed above, no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the nine months ended September 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


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PART II. OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be involved in various claims and legal proceedings relating to claims arising out of our operations. We are not currently a party to any litigation that, in the opinion of our management, is likely to have a material adverse effect on our business. Regardless of outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
We are involved in an inter partes review and ex parte reexaminations before the United States Patent and Trademark Office.  For information regarding these proceedings, please see “Risk Factors—Risks Related to Our Intellectual Property—If our efforts to protect the proprietary nature of the intellectual property related to our technologies are not adequate, we may not be able to compete effectively in our market,” “Risk Factors—Risks Related to Our Intellectual Property—Third-party claims of intellectual property infringement may prevent or delay our product discovery and development efforts” and “Risk Factors—Risks Related to Our Intellectual Property—Issued patents covering our product candidates could be found unpatentable, invalid or unenforceable if challenged in court or the USPTO.”
Item 1A.  Risk Factors
An investment in shares of our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this report, before deciding whether to purchase, hold or sell shares of our common stock. The occurrence of any of the following risks could harm our business, financial condition, results of operations and growth prospects or cause our actual results to differ materially from those contained in forward-looking statements we have made in this report and those we may make from time to time. You should consider all of the risk factors described when evaluating our business. The risk factors set forth below that are marked with an asterisk (*) contain changes to the similarly titled risk factors included in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015 , or Annual Report, which has been filed with the Securities and Exchange Commission, or SEC.
Risks Related to Our Business and Industry
We have incurred net losses in every year since our inception and anticipate that we will continue to incur net losses in the future.*
We are a clinical-stage biopharmaceutical company with a limited operating history. Investment in biopharmaceutical product development is highly speculative because it entails substantial upfront capital expenditures and significant risk that any potential product candidate will fail to demonstrate adequate effect or an acceptable safety profile, gain regulatory approval 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 are not profitable and have incurred losses in each period since our inception in June 2009. For the years ended December 31, 2015 and 2014 , we reported a net loss of $101.7 million and $42.6 million , respectively. For the nine months ended September 30, 2016 and 2015 , we reported a net loss of $182.1 million and $63.4 million , respectively. As of September 30, 2016 , we had an accumulated deficit of $341.8 million . We expect to continue to incur significant expenditures for the foreseeable future, and we expect these expenditures to increase as we continue our research and development of, and seek regulatory approvals for, product candidates based on our engineered autologous cell therapy, or eACT. Even if we succeed in commercializing one or more of our product candidates, we will continue to incur substantial research and development and other expenditures to develop and market additional product candidates. We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. The size of our future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenue. Our prior losses and expected future losses have had and will continue to have an adverse effect on our stockholders’ equity and working capital.
eACT represents a novel approach to cancer treatment that creates significant challenges for us.*
eACT involves (1) harvesting T cells from the patient’s blood, (2) genetically engineering T cells to express cancer-specific receptors, (3) increasing the number of engineered T cells and (4) infusing the functional cancer-specific T cells back into the patient. Advancing this novel and personalized therapy creates significant challenges for us, including:
Educating medical personnel regarding the potential side effect profile of eACT, such as the potential adverse side effects related to cytokine release and neurotoxicity;
Using medicines to manage adverse side effects of eACT, such as tocilizumab and corticosteroids, which may not adequately control the side effects and/or may have a detrimental impact on the efficacy of the treatment;

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Sourcing clinical and, if approved, commercial supplies for the materials used to manufacture and process our eACT-based product candidates;
Developing a robust and reliable process, while limiting contamination risks, for engineering a patient’s T cells ex vivo and infusing the engineered T cells back into the patient;
Conditioning patients with chemotherapy in conjunction with delivering eACT, which may increase the risk of adverse side effects;
Obtaining regulatory approval, as the U.S. Food and Drug Administration, or FDA, and other regulatory authorities have limited experience with commercial development of T cell therapies for cancer; and
Establishing sales and marketing capabilities upon obtaining any regulatory approval to gain market acceptance of a novel therapy.
In addition, we expect to use manufacturing and processing approaches to produce engineered T cells that are based on the original approach used by our collaborator, the National Cancer Institute, or NCI. While the NCI has and is expected to use CAR- and TCR-based therapies in clinical trials that we are funding under Cooperative Research and Development Agreements, or CRADAs, we cannot be sure that our engineered T cell therapy will obtain the same safety and efficacy results as those obtained or may be obtained by the NCI using its own original production methods.
Our business is highly dependent on the success of KTE-C19, our lead product candidate. KTE-C19 and our other product candidates will require significant additional clinical testing before we can seek regulatory approval and potentially launch commercial sales.*
Our business and future success depends on our ability to obtain regulatory approval of and then successfully commercialize our lead product candidate, KTE-C19. All of our product candidates, including KTE-C19, will require additional clinical and non-clinical development, regulatory review and approval in multiple jurisdictions, substantial investment, access to sufficient commercial manufacturing capacity and significant marketing efforts before we can generate any revenue from product sales. In addition, because KTE-C19 is our most advanced product candidate, and because our other product candidates are based on similar technology, if our clinical trials of KTE-C19 encounter safety, efficacy or manufacturing problems, developmental delays or regulatory issues or other problems, our development plans and business would be significantly harmed. Similarly, adverse events in other immuno-oncology or CAR and TCR trials being conducted by our competitors may have a negative impact on our product candidates and development plans.
We are partly reliant on the National Cancer Institute for research and development and early clinical testing of certain of our product candidates.*
A substantial portion of our research and development has been conducted by the NCI under the CRADA entered into in August 2012. In January 2016 and June 2016, we entered into additional CRADAs for the research and clinical development of additional engineered T cell therapy, including a fully human CAR-based therapy directed against the CD19 antigen for the treatment of B cell lymphomas and leukemias and TCR-based therapies directed against the HPV-16 E7 oncoprotein and in combination with a checkpoint inhibitor in HPV-16 associated solid tumors.
The NCI, with Dr. Steven A. Rosenberg as the principal investigator, is responsible for conducting multiple clinical trials of engineered T cell therapy targeting various antigens in small numbers of patients under the 2012 CRADA. In April 2016, the National Institutes of Health, or NIH, announced that it had initiated an evaluation of all of its facilities producing sterile or infused products for administration to research participants. Preliminary findings identified the NCI cell therapy laboratory that makes products for the clinical trials under the 2012 CRADA as not in compliance with quality and safety standards, and not suitable for the production of sterile or infused products.  According to the NIH, there is no evidence that any patients have been harmed, but a rigorous clinical review is being undertaken. While the NCI has begun enrollment of new patients in affected trials, we are unable to estimate the timing of any complete resolution.
While we expect to have the NCI, with Dr. James N. Kochenderfer as principal investigator, conduct additional clinical trials under the 2016 CRADAs that are unaffected by the NIH facility evaluation, we have limited control over the nature or timing of the NCI’s clinical trials and limited visibility into their day-to-day activities, including with respect to how they are providing and administering T cell therapy. For example, the research we are funding constitutes only a small portion of the NCI’s overall research. Additionally, other research being conducted by Dr. Rosenberg or Dr. Kochenderfer may at times receive higher priority than research on our programs.

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We are dependent on the NIH for licensing intellectual property rights to certain future product candidates.*
Under each CRADA, we have an exclusive option to negotiate commercial licenses from the NIH, to intellectual property relating to CAR- and TCR-based product candidates developed in the course of the CRADA research plan. However, we would have to negotiate with the NIH for such a license. There can be no assurance that we would be able to successfully complete such negotiations and ultimately acquire the rights to the intellectual property surrounding the additional product candidates that we may seek to acquire. Further, to the extent we would like to negotiate a license to a patent filed before the relevant CRADA was entered into, another party may object to the NIH granting us a license during a 30-day public notification period, and the NIH may decide not to grant us the license.
Though each CRADA has a five-year term, the NIH review of NCI manufacturing facilities has not reached a final resolution and the NCI may unilaterally terminate any of the CRADAs at any time for any reason or for no reason upon at least 60 days prior written notice. If the NCI unilaterally terminates one or both CRADAs, part or all of the research and development of eACT would be suspended, and we may be unable to research, develop and license future product candidates.  
We may not be able to file investigational new drug applications, or INDs, to commence additional clinical trials on the timelines we expect, and even if we are able to, the FDA may not permit us to proceed.*
We expect that with the early clinical work performed by the NCI pursuant to the CRADAs and the additional research we are performing in-house, including pursuant to the Amgen Agreement, we may pursue the filing with the FDA of a number of INDs over the next several years. We expect to submit an IND for a second product candidate, a TCR-based product candidate, by the end of 2016, for an additional CAR-based product candidate in 2017 and for a TCR-based product candidate and CAR-based product candidate in 2018. However, our timing of filing on the product candidates is dependent on further research. We cannot be sure that submission of an IND will result in the FDA allowing further clinical trials to begin, or that, once begun, issues will not arise that suspend or terminate such clinical trials. For instance, the FDA may not allow us to use the NCI clinical trial data to support our INDs. Additionally, even if such regulatory authorities agree with the design and implementation of the clinical trials set forth in an IND or clinical trial application, we cannot guarantee that such regulatory authorities will not change their requirements in the future.
Our clinical trials may fail to demonstrate adequately the safety and efficacy of any of our product candidates, which would prevent or delay regulatory approval and commercialization.*
Before obtaining regulatory approvals for the commercial sale of our product candidates, including KTE-C19, we must demonstrate through lengthy, complex and expensive preclinical testing and clinical trials that our product candidates are both safe and effective for use in each target indication. Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. The results of preclinical studies and early clinical trials of our product candidates may not be predictive of the results of later-stage clinical trials. We expect there may be greater variability in results for products processed and administered on a patient-by-patient basis, like eACT, than for “off-the-shelf” products, like many drugs. There is typically an extremely high rate of attrition from the failure of product candidates proceeding through clinical trials. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy profile despite having progressed through preclinical studies and initial clinical trials. A number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy, insufficient durability of efficacy or unacceptable safety issues, notwithstanding promising results in earlier trials. Most product candidates that commence clinical trials are never approved as products.
Data from the NCI preclinical studies and clinical trials of anti-CD19 CAR T cell therapy should not be relied upon as evidence that later or larger-scale clinical trials will succeed. We have designed our ongoing Phase 1-2 single-arm multicenter clinical trial of KTE-C19 primarily to assess safety and efficacy in patients with refractory diffuse large B cell lymphoma, or DLBCL, primary mediastinal B cell lymphoma, or PMBCL, and transformed follicular lymphoma, or TFL. The NCI clinical trials of anti-CD19 CAR T cell therapy involved a limited number of patients, and only a subset of these patients have been diagnosed with refractory DLBCL, PMBCL and TFL. Our clinical trials may also evaluate different CAR T cell doses and chemotherapy conditioning regimens based on emerging safety and efficacy data. The results of the NCI trials to date may not predict results for our ongoing trial or any future studies. In addition, our manufacturing process for KTE-C19 includes what we believe are process improvements that are not part of the anti-CD19 CAR T cell production process that the NCI originally used in its clinical trials. While the NCI began using the same manufacturing process that is being used for KTE-C19, the NCI only treated a limited number of patients using this manufacturing process. Our clinical trials of KTE-C19 may be halted prior to completion if there is an unacceptable safety risk for patients.  

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In addition, even if the trials are successfully completed, we cannot guarantee that the FDA or foreign regulatory authorities will interpret the results as we do, and more trials could be required before we submit our product candidates for approval. To the extent that the results of the trials are not satisfactory to the FDA or foreign regulatory authorities for support of a marketing application, approval of our product candidates may be significantly delayed, or we may be required to expend significant additional resources, which may not be available to us, to conduct additional trials in support of potential approval of our product candidates.
We have limited experience as a company conducting clinical trials.
While we are currently conducting clinical trials of KTE-C19, all of the other preclinical and clinical trials relating to our product candidates have been and are being conducted by the NCI. Although we have recruited a team that has significant experience with clinical trials, we have limited experience as a company in conducting clinical trials. In part because of this lack of experience, we cannot be certain that our ongoing clinical trials will be completed on time or if the planned clinical trials will begin or be completed on time, if at all. Large-scale trials require significant financial and management resources, and reliance on third-party clinical investigators, contract research organizations, or CROs, or consultants. Relying on third-party clinical investigators or CROs may force us to encounter delays that are outside of our control.
Monitoring of patient safety in our ongoing and planned clinical trials will be more challenging than the monitoring currently being done by the NCI, which could adversely affect our ability to obtain regulatory approval.*
The NCI is a center of excellence for clinical trials in cancer patients, with a large group of experienced staff and a clinical trial support system. Patients enrolled in the NCI clinical trials are generally hospitalized for extended periods of time for dedicated observation, and there is a ready availability of specialized health care professionals and intensive care unit beds if necessary. For our ongoing clinical trials of KTE-C19 and in our planned sponsored multicenter clinical trials of KTE-C19 and other product candidates, we have and expect to contract with academic medical centers and hospitals experienced in the assessment and management of toxicities arising during clinical trials. Nonetheless, the NCI may have greater ability and experience to observe patients and treat toxicities, whether due to personnel changes, inexperience, shift changes, house staff coverage or related issues. This could lead to more severe or prolonged toxicities or even patient deaths, which could result in us or the FDA delaying, suspending or terminating one or more of our clinical trials, and which could jeopardize regulatory approval. Medicines used at sites to help manage adverse side effects of KTE-C19, such as tocilizumab and corticosteroids, may not adequately control the side effects and/or may have a detrimental impact on the efficacy of the treatment. Use of these medicines may increase as we initiate new trial sites. All patients in the Phase 1 portion of ZUMA-1 received tocilizumab and most received corticosteroids. These medicines were infrequently used in the NCI Phase 1-2a clinical trial of anti-CD19 CAR T cell therapy.
Our product candidates may cause undesirable side effects or have other properties that could halt their clinical development, prevent their regulatory approval, limit their commercial potential or result in significant negative consequences.*
Undesirable or unacceptable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other comparable foreign regulatory authorities. Results of our trials could reveal a high and unacceptable severity and prevalence of side effects or unexpected characteristics.
In the NCI Phase 1-2a clinical trial of anti-CD19 CAR T cell therapy, when the patients received the CAR T cells, all of them had low blood counts due to the chemotherapy conditioning regimen. Most prominent acute toxicities included symptoms thought to be associated with the release of cytokines, such as fever, low blood pressure, hypoxia, heart dysfunction and kidney dysfunction. Most patients also experienced neurotoxicity, such as ataxia, confusion, somnolence and speech impairment. There have been life threatening events related to cytokine release syndrome and neurotoxicity. Some of these events required intense medical intervention such as intubation or pressor support. Several patients have died, but the deaths were not attributed to the CAR T cells. In addition, in the NCI Phase 1 clinical trial of pediatric or young adult patients with relapsed/refractory acute lymphoblastic leukemia, or ALL, infusion of anti-CD19 CAR T cells was associated with significant, acute toxicities, including febrile neutropenia, cytokine release syndrome, chemical laboratory abnormalities, low blood counts and neurotoxicity.
As an anti-CD19 CAR T cell therapy, KTE-C19 has caused similar toxicities as the therapy in the NCI clinical trials as seen in the ZUMA-1 trial. Across the combined 62 patients in ZUMA-1 Phase 2, the most common grade 3 or higher adverse events included neutropenia (66%), anemia (40%), febrile neutropenia (29%), thrombocytopenia (29%), and encephalopathy (26%). Grade 3 or higher cytokine release syndrome, or CRS, and neurological toxicity was observed in 18% and 34% of patients,

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respectively. Two patients died from KTE-C19 related adverse events (hemophagocytic lymphohistiocytosis and cardiac arrest in the setting of CRS).
Patients in the NCI clinical trials of the CAR-based product candidate targeting the EGFRvIII antigen and the TCR-based product candidates are expected to receive high dose Interleukin-2, which is associated with toxicities such as capillary leak syndrome, hypotension, impaired kidney and liver function, and mental status changes.
If unacceptable toxicities arise in the development of our product candidates, we or the NCI could suspend or terminate our trials or the FDA or comparable foreign regulatory authorities could order us to cease clinical trials or deny approval of our product candidates for any or all targeted indications. Treatment-related side effects could also affect patient recruitment or the ability of enrolled subjects to complete the trial or result in potential product liability claims. In addition, these side effects may not be appropriately recognized or managed by the treating medical staff, particularly outside of the NCI as toxicities resulting from personalized T cell therapy are not normally encountered in the general patient population and by medical personnel. We have trained and expect to have to train medical personnel using eACT to understand the side effect profile of eACT for both our clinical trials and upon any commercialization of any eACT-based product candidates. Inadequate training in recognizing or managing the potential side effects of eACT could result in patient deaths. Any of these occurrences may harm our business, financial condition and prospects significantly.
If we encounter difficulties enrolling patients in our clinical trials, our clinical development activities could be delayed or otherwise adversely affected.
We may experience difficulties in patient enrollment in our clinical trials for a variety of reasons. The timely completion of clinical trials in accordance with their protocols depends, among other things, on our ability to enroll a sufficient number of patients who remain in the study until its conclusion. The enrollment of patients depends on many factors, including:
the patient eligibility criteria defined in the protocol;
the size of the patient population required for analysis of the trial’s primary endpoints;
the proximity of patients to study sites;
the design of the trial;
our ability to recruit clinical trial investigators with the appropriate competencies and experience;
our ability to obtain and maintain patient consents; and
the risk that patients enrolled in clinical trials will drop out of the trials before the manufacturing and infusion of KTE-C19 or trial completion.
In addition, our clinical trials will compete with other clinical trials for product candidates that are in the same therapeutic areas as our product candidates, and this competition will reduce the number and types of patients available to us, because some patients who might have opted to enroll in our trials may instead opt to enroll in a trial being conducted by one of our competitors. Since the number of qualified clinical investigators is limited, some of our clinical trial sites are also being used by some of our competitors, which may reduce the number of patients who are available for our clinical trials in such clinical trial site. Moreover, because our product candidates represent a departure from more commonly used methods for cancer treatment, potential patients and their doctors may be inclined to use conventional therapies, such as chemotherapy and hematopoietic cell transplantation, rather than enroll patients in any future clinical trial.
Delays in patient enrollment may result in increased costs or may affect the timing or outcome of our ongoing clinical trial and planned clinical trials, which could prevent completion of these trials and adversely affect our ability to advance the development of our product candidates.
Clinical trials are expensive, time-consuming and difficult to design and implement.
Human clinical trials are expensive and difficult to design and implement, in part because they are subject to rigorous regulatory requirements. Because our product candidates are based on new technology and engineered on a patient-by-patient basis, we expect that they will require extensive research and development and have substantial manufacturing and processing costs. In addition, costs to treat patients with relapsed/refractory cancer and to treat potential side effects that may result from eACT can be significant. Accordingly, our clinical trial costs are likely to be significantly higher than for more conventional therapeutic technologies or drug products. In addition, our proposed personalized product candidates involve several complex and costly manufacturing and processing steps, the costs of which will be borne by us.  

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The market opportunities for our product candidates may be limited to those patients who are ineligible for or have failed prior treatments and may be small.
The FDA often approves new therapies initially only for use in patients with relapsed or refractory metastatic disease. We expect to initially seek approval of our product candidates in this setting. Subsequently, for those products that prove to be sufficiently beneficial, if any, we would expect to seek approval in earlier lines of treatment and potentially as a first line therapy, but there is no guarantee that our product candidates, even if approved, would be approved for earlier lines of therapy, and, prior to any such approvals, we will have to conduct additional clinical trials.
Our projections of both the number of people who have the cancers we are targeting, as well as the subset of people with these cancers in a position to receive second or later lines of therapy, and who have the potential to benefit from treatment with our product candidates, are based on our beliefs and estimates. These estimates have been derived from a variety of sources, including scientific literature, surveys of clinics, patient foundations, or market research, and may prove to be incorrect. Further, new studies may change the estimated incidence or prevalence of these cancers. The number of patients may turn out to be lower than expected. Additionally, the potentially addressable patient population for our product candidates may be limited or may not be amenable to treatment with our product candidates. For instance, we expect our lead product candidate, KTE-C19, to initially target a small patient population that suffers from aggressive non-Hodgkin lymphomas, or NHL, and ALL. Even if we obtain significant market share for our product candidates, because the potential target populations are small, we may never achieve profitability without obtaining regulatory approval for additional indications.
KTE-C19 has received orphan drug status, but we may be unable to maintain or receive the benefits associated with orphan drug status, including market exclusivity.*
Under the Orphan Drug Act, the FDA may grant orphan designation to a drug or biologic intended to treat a rare disease or condition or for which there is no reasonable expectation that the cost of developing and making available in the United States a drug or biologic for a disease or condition will be recovered from sales in the United States for that drug or biologic. If a product that has orphan drug designation subsequently receives the first FDA approval for the disease for which it has such designation, the product is entitled to orphan product exclusivity, which means that the FDA may not approve any other applications, including a full Biologics License Application, or BLA, to market the same biologic for the same indication for seven years, except in limited circumstances, such as a showing of clinical superiority to the product with orphan drug exclusivity.
We have received orphan drug status for KTE-C19 for the treatment of DLBCL, PMBCL, ALL, mantle cell lymphoma, or MCL, chronic lymphocytic leukemia, or CLL, and follicular lymphoma, or FL, but exclusive marketing rights in the United States may be limited if we seek approval for an indication broader than the orphan designated indication and may be lost if the FDA later determines that the request for designation was materially defective or if we are unable to assure the availability of sufficient quantities of the product to meet the needs of patients with the rare disease or condition. The European Commission has also granted KTE-C19 orphan drug designation for the treatment of DLBCL, PMBCL, ALL, MCL, CLL/small lymphocytic lymphoma, and FL. The designation may provide 10 years of market exclusivity in Europe, but is subject to certain limited exceptions. Even though we have obtained orphan drug designation for KTE-C19 for certain indications, we may be unable to obtain orphan drug designation for our future product candidates and we may not be the first to obtain marketing approval for any particular orphan indication.
KTE-C19 has received breakthrough therapy designation in the United States for the treatment of refractory DLBCL, PMBCL and TFL and was granted access to Priority Medicines regulatory support in the European Union for the treatment of refractory DLBCL, but there can be no assurance that such designations will result in expedited review or approval.*
Breakthrough therapy designation is granted by the FDA and is intended to expedite the development and review of products that treat serious or life-threatening conditions. Access to the Priority Medicines, or PRIME, initiative is granted by the European Medicines Agency, or EMA, to support the development and accelerate the review of new therapies to treat patients with unmet medical need.
We have received breakthrough therapy designation for KTE-C19 for the treatment of refractory DLBCL, PMBCL and TFL and received access to PRIME for the treatment of refractory DLBCL, but there can be no assurance that such designations will result in expedited review or approval. The FDA may also rescind the breakthrough therapy designation for KTE-C19 if subsequent data no longer support the designation. Breakthrough therapy designation and access to PRIME does not change the standards for product approval. While we intend to seek breakthrough therapy designation and access to PRIME for other product candidates, we may never receive such designations.  

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Our product candidates may not achieve commercialization and our commercial opportunity may be limited.*
We expect to initially develop our lead product candidate, KTE-C19. However, one of our strategies is to pursue clinical development of additional product candidates. While we have developed a broad pipeline of additional product candidates, including additional TCR- and CAR-based product candidates, further development and obtaining regulatory approval for and commercializing additional product candidates will require substantial additional funding and is prone to the risks of failure inherent in medical product development. We cannot provide you any assurance that we will be able to successfully advance any of these additional product candidates through the development process.
Even if we receive FDA approval to market additional product candidates for the treatment of cancer, we cannot assure you that any such product candidates will be successfully commercialized, widely accepted in the marketplace or more effective than other commercially available alternatives. If we are unable to successfully develop and commercialize additional product candidates, our commercial opportunity will be limited. Moreover, a failure in obtaining regulatory approval of additional product candidates may have a negative effect on the approval process of any other, or result in losing approval of any approved, product candidate.
We operate our own clinical manufacturing facility and intend to operate our own commercial manufacturing facility, which will require significant resources and we may fail to successfully operate either or both facilities, which could adversely affect our clinical trials and the commercial viability of our product candidates.*
We currently operate our own clinical manufacturing facility and also rely on outside vendors to manufacture clinical supplies and process intermediates, such as viral vectors, to support our clinical trials.  Our product candidates are currently and will continue to be manufactured on a patient-by-patient basis. We have not yet manufactured our product candidates on a commercial scale, and may not be able to achieve commercial manufacturing and processing on our own, including on a patient-by-patient basis, to satisfy demands for any of our product candidates. While we believe the manufacturing and processing approaches are appropriate to support clinical product development, we have limited experience in managing the T cell engineering process, and our processes may be more difficult or more expensive than the approaches taken by our competitors. We cannot be sure that the manufacturing processes employed by us will result in T cells that will be safe and effective, or have the same clinical properties as those used in any NCI-based T cell therapy.
We have leased approximately 18,000 square feet near our headquarters in Santa Monica, California, which we use as our clinical manufacturing facility and have also leased approximately 43,500 square feet in El Segundo, California to develop our commercial manufacturing facility. We are currently operating our clinical manufacturing facility, but our operations remain subject to review and oversight by the FDA and the FDA could object to our use of our clinical manufacturing facility. While we have completed construction of our commercial manufacturing facility, we have to complete facility validation, and we must receive approval from the FDA prior to licensure to manufacture our product candidates, which we may never obtain. Even if approved, we would be subject to ongoing periodic unannounced inspection by the FDA, the Drug Enforcement Administration and corresponding state agencies to ensure strict compliance with current good manufacturing practices, or cGMPs, and other government regulations.  Our license to manufacture product candidates will be subject to continued regulatory review.
We do not yet have sufficient information to reliably estimate the cost of commercial manufacturing and processing of our product candidates, and the actual cost to manufacture and process our product candidates could materially and adversely affect the commercial viability of our product candidates. As a result, we may never be able to develop a commercially viable product.
The manufacture of medical products is complex and requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of cell therapy products often encounter difficulties in production, particularly in scaling out and validating initial production and ensuring the absence of contamination. These problems include difficulties with production costs and yields, quality control, including stability of the product, quality assurance testing, operator error, shortages of qualified personnel, as well as compliance with strictly enforced federal, state and foreign regulations. Furthermore, if contaminants are discovered in our supply of product candidates or in the manufacturing facilities, such manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the contamination. We cannot assure you that any stability or other issues relating to the manufacture of our product candidates will not occur in the future.
We may also fail to manage the logistics of collecting and shipping patient material to the manufacturing site and shipping the product candidate back to the patient. Logistical and shipment delays and problems, whether or not caused by us or our vendors, could prevent or delay the delivery of product candidates to patients. Additionally, we have to maintain a complex

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chain of identity with respect to patient material as it moves to the manufacturing facility, through the manufacturing process, and back to the patient. Failure to maintain chain of identity could result in patient death, loss of product or regulatory action. 
We may also experience manufacturing difficulties due to resource constraints or as a result of labor disputes. If we were to encounter any of these difficulties, our ability to provide our product candidates to patients would be jeopardized.
We are currently building our marketing and sales organization and are preparing to market products, if approved. If we are unsuccessful in establishing marketing and sales capabilities or enter into agreements with third parties to market and sell our product candidates, we may not be able to generate product revenue.
We currently have no sales or distribution capabilities and have no experience in marketing products. We are developing an in-house marketing organization and sales force, which will require significant capital expenditures, management resources and time. We will have to compete with other pharmaceutical and biotechnology companies to recruit, hire, train and retain marketing and sales personnel. If we are unable or decide not to establish internal sales, marketing and distribution capabilities, we will pursue collaborative arrangements regarding the sales and marketing of our products, however, there can be no assurance that we will be able to establish or maintain such collaborative arrangements, or if we are able to do so, that they will have effective sales forces. Any revenue we receive will depend upon the efforts of such third parties, which may not be successful. We may have little or no control over the marketing and sales efforts of such third parties and our revenue from product sales may be lower than if we had commercialized our product candidates ourselves. We also face competition in our search for third parties to assist us with the sales and marketing efforts of our product candidates.
There can be no assurance that we will be able to develop in-house sales and distribution capabilities or establish or maintain relationships with third-party collaborators to commercialize any product in the United States or overseas.
A variety of risks associated with conducting research and clinical trials abroad and marketing our product candidates internationally could materially adversely affect our business.*
We plan to initiate a clinical program for KTE-C19 in Europe in the first quarter of 2017 and ultimately seek regulatory approval of our product candidates outside of the United States. Accordingly, we expect that we will be subject to additional risks related to operating in foreign countries, including:
differing regulatory requirements in foreign countries;
unexpected changes in tariffs, trade barriers, price and exchange controls and other regulatory requirements;
increased difficulties in managing the logistics of collecting and shipping patient material to a manufacturing site in the United States and shipping the product candidate back to the patient abroad;
economic weakness, including inflation, or political instability in particular foreign economies and markets;
compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;
foreign taxes, including withholding of payroll taxes;
foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations incident to doing business in another country;
difficulties staffing and managing foreign operations;
workforce uncertainty in countries where labor unrest is more common than in the United States;
differing payor reimbursement regimes, governmental payors or patient self-pay systems, and price controls;
potential liability under the Foreign Corrupt Practices Act of 1977 or comparable foreign regulations;
challenges enforcing our contractual and intellectual property rights, especially in those foreign countries that do not respect and protect intellectual property rights to the same extent as the United States;
production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and
business interruptions resulting from geo-political actions, including war and terrorism.
These and other risks associated with our international operations, including the operations of our European subsidiary, Kite Pharma EU B.V., may materially adversely affect our ability to attain or maintain profitable operations.

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We face significant competition from other biotechnology and pharmaceutical companies, and our operating results will suffer if we fail to compete effectively.*
The biopharmaceutical industry is characterized by intense competition and rapid innovation. Our competitors may be able to develop other compounds or drugs that are able to achieve similar or better results. Our potential competitors include major multinational pharmaceutical companies, established biotechnology companies, specialty pharmaceutical companies and universities and other research institutions. Many of our competitors have substantially greater financial, technical and other resources, such as larger research and development staff and experienced marketing and manufacturing organizations and well-established sales forces. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies. Mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated in our competitors. Competition may increase further as a result of advances in the commercial applicability of technologies and greater availability of capital for investment in these industries. Our competitors, either alone or with collaborative partners, may succeed in developing, acquiring or licensing on an exclusive basis drug or biologic products that are more effective, safer, more easily commercialized or less costly than our product candidates or may develop proprietary technologies or secure patent protection that we may need for the development of our technologies and products. We believe the key competitive factors that will affect the development and commercial success of our product candidates are efficacy, safety, tolerability, reliability, convenience of use, price and reimbursement.
Specifically, genetically engineering T cells faces significant competition in both the CAR and TCR technology space from multiple companies. Even if we obtain regulatory approval of our product candidates, the availability and price of our competitors’ products could limit the demand and the price we are able to charge for our product candidates. We may not be able to implement our business plan if the acceptance of our product candidates is inhibited by price competition or the reluctance of physicians to switch from existing methods of treatment to our product candidates, or if physicians switch to other new drug or biologic products or choose to reserve our product candidates for use in limited circumstances. For additional information regarding our competition, see “Item 1. Business—Competition” in our Annual Report.
We are highly dependent on our key personnel, and if we are not successful in attracting and retaining highly qualified personnel, we may not be able to successfully implement our business strategy.*
Our ability to compete in the highly competitive biotechnology and pharmaceutical industries depends upon our ability to attract and retain highly qualified managerial, scientific and medical personnel. We are highly dependent on our management, scientific and medical personnel, including our President and Chief Executive Officer, our Executive Vice President of Research & Development and Chief Medical Officer, our Chief Scientific Officer, our Chief Operating Officer, our Chief Commercial Officer, our Executive Vice President of Technical Operations and our Chief Financial Officer. The loss of the services of any of our executive officers, other key employees, and other scientific and medical advisors, and our inability to find suitable replacements could result in delays in product development and harm our business. Our strong relationship with the NCI is bolstered by our President and Chief Executive Officer’s relationship with Dr. Rosenberg of the NCI. If we lose our President and Chief Executive Officer or if Dr. Rosenberg leaves the NCI, our relationship with the NCI may deteriorate and our business could be harmed. We conduct substantially all of our operations at our facilities in Southern California. This region is headquarters to many other biopharmaceutical companies and many academic and research institutions. Competition for skilled personnel in our market is intense and may limit our ability to hire and retain highly qualified personnel on acceptable terms or at all.
To induce valuable employees to remain at our company, in addition to salary and cash incentives, we have provided stock options and restricted stock units, or RSUs, that vest over time. The value to employees of stock options or RSUs that vest over time may be significantly affected by movements in our stock price that are beyond our control, and may at any time be insufficient to counteract more lucrative offers from other companies. Despite our efforts to retain valuable employees, members of our management, scientific and development teams may terminate their employment with us on short notice. Although we have employment agreements with our key employees, these employment agreements provide for at-will employment, which means that any of our employees could leave our employment at any time, with or without notice. We do not maintain “key man” insurance policies on the lives of these individuals or the lives of any of our other employees. Our success also depends on our ability to continue to attract, retain and motivate highly skilled junior, mid-level and senior managers as well as junior, mid-level and senior scientific and medical personnel.

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We have grown rapidly and will need to continue to grow the size of our organization, and we may experience difficulties in managing this growth.
As our development and commercialization plans and strategies develop, and as we continue to transition into operating as a public company, we have rapidly expanded our employee base and expect to continue to add managerial, operational, sales, research and development, marketing, financial and other personnel. Current and future growth imposes significant added responsibilities on members of management, including:
identifying, recruiting, integrating, maintaining and motivating additional employees;
managing our internal development efforts effectively, including the clinical and FDA review process for our product candidates, while complying with our contractual obligations to contractors and other third parties; and
improving our operational, financial and management controls, reporting systems and procedures.
Our future financial performance and our ability to commercialize our product candidates will depend, in part, on our ability to effectively manage our growth, and our management may also have to divert a disproportionate amount of its attention away from day-to-day activities in order to devote a substantial amount of time to managing these growth activities.
We currently rely, and for the foreseeable future will continue to rely, in substantial part on certain independent organizations, advisors and consultants to provide certain services, including substantial aspects of regulatory approval, clinical management and clinical manufacturing. There can be no assurance that the services of independent organizations, advisors and consultants will continue to be available to us on a timely basis when needed, or that we can find qualified replacements. In addition, if we are unable to effectively manage our outsourced activities or if the quality or accuracy of the services provided by consultants is compromised for any reason, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval of our product candidates or otherwise advance our business. There can be no assurance that we will be able to manage our existing consultants or find other competent outside contractors and consultants on economically reasonable terms, or at all.
If we are not able to effectively expand our organization by hiring new employees and expanding our groups of consultants and contractors, we may not be able to successfully implement the tasks necessary to further develop and commercialize our product candidates and, accordingly, may not achieve our research, development and commercialization goals.
We may form or seek strategic alliances or enter into additional licensing arrangements in the future, and we may not realize the benefits of such alliances or licensing arrangements.*
We may form or seek strategic alliances, create joint ventures or collaborations or enter into additional licensing arrangements with third parties that we believe will complement or augment our development and commercialization efforts with respect to our product candidates and any future product candidates that we may develop. Any of these relationships may require us to incur non-recurring and other charges, increase our near and long-term expenditures, issue securities that dilute our existing stockholders or disrupt our management and business. In addition, we face significant competition in seeking appropriate strategic partners and the negotiation process is time-consuming and complex. Moreover, we may not be successful in our efforts to establish a strategic partnership or other alternative arrangements for our product candidates because they may be deemed to be at too early of a stage of development for collaborative effort and third parties may not view our product candidates as having the requisite potential to demonstrate safety and efficacy. Any delays in entering into new strategic partnership agreements related to our product candidates could delay the development and commercialization of our product candidates in certain geographies for certain indications, which would harm our business prospects, financial condition and results of operations.
If we license products or businesses, we may not be able to realize the benefit of such transactions if we are unable to successfully integrate them with our existing operations and company culture. For instance, our research collaboration with Amgen Inc., our collaboration with bluebird bio, Inc., our license and research agreement with Alpine Immune Sciences, Inc. and our research collaboration and license agreement with Cell Design Labs, Inc. all require significant research and development commitments that may not result in the development and commercialization of additional product candidates. In addition, our collaboration with GE Global Research may not result in automation technologies that improve engineered T cell manufacturing. We cannot be certain that, following a strategic transaction or license, we will achieve the results, revenue or specific net income that justifies such transaction.

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We may not realize the benefits of acquisitions, including our acquisition of T-Cell Factory B.V., or other strategic transactions.
We acquired T-Cell Factory B.V., or TCF, on March 17, 2015 and renamed the acquired company Kite Pharma EU B.V. We actively evaluate various strategic transactions on an ongoing basis. We may acquire other businesses, products or technologies as well as pursue joint ventures or investments in complementary businesses. The success of acquisitions, including our acquisition of TCF, and any future strategic transactions depends on the risks and uncertainties involved including:
unanticipated liabilities related to acquired companies;
difficulties integrating acquired personnel, technologies and operations into our existing business;
retention of key employees;
diversion of management time and focus from operating our business to management of strategic alliances or joint ventures or acquisition integration challenges;
increases in our expenses and reductions in our cash available for operations and other uses;
disruption in our relationships with collaborators or suppliers as a result of such a transaction; and
possible write-offs or impairment charges relating to acquired businesses.
If any of these risks or uncertainties occur, we may not realize the anticipated benefit of any acquisition or strategic transaction. For example, TCF’s TCR-GENErator technology platform may fail to identify TCR-based product candidates that are safe and effective, or at all. Additionally, foreign acquisitions, including our acquisition of TCF, a Dutch company, are subject to additional risks, including those related to integration of operations across different cultures and languages, currency risks, potentially adverse tax consequences of overseas operations and the particular economic, political and regulatory risks associated with specific countries. For instance, we owe significant milestone payments to the sellers of TCF in euros, rather than dollars, and we have not hedged these payments.
Future acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or amortization expenses or write-offs of goodwill, any of which could harm our financial condition.
If we fail to obtain additional financing, we may be unable to complete the development and commercialization of our product candidates.
Our operations have consumed substantial amounts of cash since inception. We expect to continue to spend substantial amounts to continue the clinical development of our product candidates, including KTE-C19. If approved, we will require significant additional amounts in order to launch and commercialize our product candidates.
Changing circumstances may cause us to consume capital significantly faster than we currently anticipate, and we may need to spend more money than currently expected because of circumstances beyond our control. We may require additional capital for the further development and commercialization of our product candidates, including funding our internal manufacturing capabilities and Kite Pharma EU B.V. and may need to raise additional funds sooner if we choose to expand more rapidly than we presently anticipate.
We cannot be certain that additional funding will be available on acceptable terms, or at all. We have no committed source of additional capital and if we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of our product candidates or other research and development initiatives. Our license agreements and CRADAs may also be terminated if we are unable to meet the payment obligations under the agreements. We could be required to seek collaborators for our product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available or relinquish or license on unfavorable terms our rights to our product candidates in markets where we otherwise would seek to pursue development or commercialization ourselves.
Any of the above events could significantly harm our business, prospects, financial condition and results of operations and cause the price of our common stock to decline.  
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.
We may seek additional capital through a combination of public and private equity offerings, debt financings, strategic partnerships and alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity

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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. The incurrence of indebtedness would result in increased fixed payment obligations and could involve certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. If we raise additional funds through strategic partnerships and alliances and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies or product candidates, or grant licenses on terms unfavorable to us.
Our internal computer systems, or those used by our CROs or other contractors or consultants, may fail or suffer security breaches.
Despite the implementation of security measures, our internal computer systems and those of our future CROs and other contractors and consultants are vulnerable to damage from computer viruses and unauthorized access. While we have not experienced any such material system failure 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 regulatory approval efforts and significantly increase our costs to recover or reproduce the data. Likewise, we rely on NCI for research and development of our product candidates and other third parties for the manufacture of our product candidates and to 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 data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the further development and commercialization of our product candidates could be delayed.
Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.*
Our operations, and those of our CROs and other contractors and consultants, could be subject to earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and other natural or man-made 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. In addition, we are reliant on the NCI for conducting research and development of certain of our product candidates. The NCI has been affected by the NIH evaluation of its manufacturing facilities, which is delaying clinical trials of early-stage product candidates under our 2012 CRADA, and the NCI may be further affected by government shutdowns or withdrawn funding.
We partly rely on third-party manufacturers to produce and process our product candidates on a patient by patient basis. Our ability to obtain clinical supplies of our product candidates could be disrupted if the operations of these suppliers or our manufacturing operations are affected by a man-made or natural disaster or other business interruption. Our corporate headquarters, the location of our manufacturer of the CAR gene, and processing location are in California near major earthquake faults and fire zones. The ultimate impact on us, our significant suppliers and our general infrastructure of being located near major earthquake faults and fire zones and being consolidated in certain geographical areas is unknown, but our operations and financial condition could suffer in the event of a major earthquake, fire or other natural disaster.
Our employees, independent contractors, consultants, commercial partners and vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, or our business may be found to be not compliant with regulatory standards requirements.  
We are exposed to the risk of employee fraud or other illegal activity by our employees, independent contractors, consultants, commercial partners and vendors. Misconduct by these parties could include intentional, reckless and/or negligent conduct that fails to: comply with the laws of the FDA and other similar foreign regulatory bodies, provide true, complete and accurate information to the FDA and other similar foreign regulatory bodies, comply with manufacturing standards we have established, comply with healthcare fraud and abuse laws in the United States and similar foreign fraudulent misconduct laws, or report financial information or data accurately or to disclose unauthorized activities to us. Similarly, our business could be found to be noncompliant with healthcare regulatory requirements.  If we obtain FDA approval of any of our product candidates and begin commercializing those products in the United States, our potential exposure under such laws will increase significantly, and our costs associated with compliance with such laws are also likely to increase. These laws may impact, among other things, our current activities with principal investigators and research patients, as well as proposed and future sales, marketing and education programs. In particular, the promotion, sales and marketing of healthcare items and services, as well as certain business arrangements in the healthcare industry, are subject to extensive laws designed to prevent fraud, kickbacks, self-

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dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, structuring and commission(s), certain customer incentive programs and other business arrangements generally. Activities subject to these laws also involve the improper use of information obtained in the course of patient recruitment for clinical trials. The healthcare laws and regulations that may affect our ability to operate include, but are not limited to:
the federal Anti-Kickback Statute, which prohibits, among other things, knowingly and willfully soliciting, receiving, offering or paying any remuneration (including any kickback, bribe, or rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce, or in return for, either the referral of an individual, 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 a federal healthcare program, such as the Medicare and Medicaid programs;
federal civil and criminal false claims laws and civil monetary penalty laws, including the federal civil False Claims Act, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment or approval from Medicare, Medicaid, or other third-party payors that are false or fraudulent or knowingly making a false statement to improperly avoid, decrease or conceal an obligation to pay money to the federal government;
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) 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 requirements on certain covered healthcare providers, health plans, and healthcare clearinghouses as well as their respective business associates that perform services for them that involve the use, or disclosure of, individually identifiable health information, relating to the privacy, security and transmission of individually identifiable health information without appropriate authorization;
the federal Physician Payment Sunshine Act, created under the Patient Protection and Affordable Care Act, as amended by the Health Care Education Reconciliation Act, which we refer to collectively as the Affordable Care Act, and its implementing regulations, which require certain manufacturers of drugs, devices, biologicals and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to the United States Department of Health and Human Services’ Centers for Medicare & Medicaid Services, or CMS, information related to payments or other transfers of value made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members; and
federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm consumers.
Additionally, we may be subject to state and foreign equivalents of each of the healthcare laws described above, among others, some of which may be broader in scope. For example, we may be subject to: state anti-kickback and false claims laws that 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 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; state 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 governing the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
We have adopted a code of business conduct and ethics, but it is not always possible to identify and deter employee misconduct or business noncompliance, and the precautions we take to detect and prevent inappropriate conduct may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. Efforts to ensure that our business arrangements will comply with applicable healthcare laws may involve substantial costs. It is possible that governmental and enforcement authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law interpreting applicable fraud and abuse or other healthcare laws and regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, damages, disgorgement,

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monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our operations, any of which could adversely affect our ability to operate our business and our results of operations. In addition, the approval and commercialization of any of our product candidates outside the United States will also likely subject us to foreign equivalents of the healthcare laws mentioned above, among other foreign laws.
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 our product candidates cause or are perceived to cause injury or are found to be otherwise unsuitable during clinical 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 or 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 successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:
decreased demand for our product candidates;
injury to our reputation;
withdrawal of clinical trial participants;
initiation of investigations by regulators;
costs to defend the related litigation;
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;
exhaustion of any available insurance and our capital resources;
the inability to commercialize any product candidate; and
a decline in our share price.
Our inability to obtain 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, alone or with corporate collaborators. Our insurance policies may also have various exclusions, and we may be subject to a product liability claim for which we have no coverage. While we have obtained clinical trial insurance for our clinical trials of KTE-C19, we may have to pay 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. Even if our agreements with any future corporate collaborators entitle us to indemnification against losses, such indemnification may not be available or adequate should any claim arise.
Our ability to utilize our net operating loss carryforwards and certain other tax attributes will be limited.*
Under Sections 382 and 383 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. As of December 31, 2015 , we have U.S. and state net operating loss carryforwards of approximately $78.7 million and $141.8 million , respectively. As a result of our private placements and our initial public offering, we triggered two “ownership changes,” which resulted in a limitation in utilization of pre-change attributes. We may also experience ownership changes in the future as a result of subsequent shifts in our stock ownership. Accordingly, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards to offset U.S. federal and state taxable income may be subject to limitations, which will result in increased future tax liability to us .
Unstable market and economic conditions may have serious adverse consequences on our business, financial condition and stock price.*
As widely reported, global credit and financial markets have experienced extreme volatility and disruptions in the past several years, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic

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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 adversely affected by any such economic downturn, volatile business environment or continued unpredictable and unstable market conditions. If the current equity and credit markets deteriorate, or do not improve, it may make any necessary debt or equity financing more difficult, more costly, and more dilutive. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could require us to delay or abandon clinical development plans. In addition, there is a risk that one or more of our current service providers, manufacturers and other partners may not survive these difficult economic times, which could directly affect our ability to attain our operating goals on schedule and on budget.
At September 30, 2016 , we had approximately $128.8 million of cash and cash equivalents and $348.4 million of marketable securities. While we are not aware of any downgrades, material losses or other significant deterioration in the fair value of our cash equivalents and marketable securities since September 30, 2016 , no assurance can be given that further deterioration of the global credit and financial markets would not negatively impact our current portfolio of cash equivalents and marketable securities or our ability to meet our financing objectives. Furthermore, our stock price may decline due in part to the volatility of the stock market and the general economic downturn.
Risks Related to Our Reliance on Third Parties
We rely and will rely on third parties to conduct our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval of or commercialize our product candidates.
We depend and will depend upon independent investigators and collaborators, such as universities, medical institutions, CROs and strategic partners to conduct our preclinical and clinical trials under agreements with us, including without limitation the NCI. We negotiate budgets and contracts with CROs and study sites, which may result in delays to our development timelines and increased costs. We will rely heavily on these third parties over the course of our clinical trials, and we control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that each of our studies is conducted in accordance with applicable protocol, legal, regulatory and scientific standards, and our reliance on third parties does not relieve us of our regulatory responsibilities. We and these third parties are required to comply with current good clinical practices, or cGCPs, which are regulations and guidelines enforced by the FDA and comparable foreign regulatory authorities for product candidates in clinical development. Regulatory authorities enforce these cGCPs through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any of these third parties fail to comply with applicable cGCP regulations, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that, upon inspection, such regulatory authorities will determine that any of our clinical trials comply with the cGCP regulations. In addition, our clinical trials must be conducted with biologic product produced under cGMPs and will require a large number of test patients. Our failure or any failure by these third parties to comply with these regulations or to recruit a sufficient number of patients may require us to repeat clinical trials, which would delay the regulatory approval process. Moreover, our business may be implicated if any of these third parties violates federal or state fraud and abuse or false claims laws and regulations or healthcare privacy and security laws.
Any third parties conducting our clinical trials are and will not be our employees and, except for remedies available to us under our agreements with such third parties, we cannot control whether or not they devote sufficient time and resources to our ongoing preclinical, clinical and nonclinical programs. These third parties may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical studies or other drug development activities, which could affect their performance on our behalf. If these third parties do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated and we may not be able to complete development of, obtain regulatory approval of or successfully commercialize our product candidates. As a result, our financial results and the commercial prospects for our product candidates would be harmed, our costs could increase and our ability to generate revenue could be delayed.
Switching or adding third parties to conduct our clinical trials involves substantial cost and requires extensive management time and focus. In addition, there is a natural transition period when a new third party commences work. As a result, delays occur, which can materially impact our ability to meet our desired clinical development timelines.

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We partly rely on third parties to manufacture our clinical product supplies, and we may have to rely on third parties to produce and process our product candidates, if approved.
We partly rely on outside vendors to manufacture supplies and process our product candidates. Our reliance on a limited number of third-party manufacturers for clinical product supplies, and if we are unable to develop our own commercial manufacturing facility, for any commercial product supplies, exposes us to the following risks:
We may be unable to identify manufacturers on acceptable terms or at all because the number of potential manufacturers is limited and the FDA may have questions regarding any replacement contractor. This may require new testing and regulatory interactions. In addition, a new manufacturer would have to be educated in, or develop substantially equivalent processes for, production of our products after receipt of FDA questions, if any.
Our third-party manufacturers might be unable to timely formulate and manufacture our product or produce the quantity and quality required to meet our clinical and commercial needs, if any.
Contract manufacturers may not be able to execute our manufacturing procedures appropriately.
Our future contract manufacturers may not perform as agreed or may not remain in the contract manufacturing business for the time required to supply our clinical trials or to successfully produce, store and distribute our products.
Manufacturers are subject to ongoing periodic unannounced inspection by the FDA, the Drug Enforcement Administration and corresponding state agencies to ensure strict compliance with cGMP and other government regulations and corresponding foreign standards. We do not have control over third-party manufacturers’ compliance with these regulations and standards.