GRI Bio, Inc. 10-K

Item 1. BUSINESS Overview We are a biopharmaceutical company primarily focused on the development and commercialization of proprietary biopharmaceutical products. We are developing prescription drugs for central nervous system (“ CNS ”) disorders and our current focus is the development of drugs with lower potential for abuse than currently available drugs. Our clinical-stage product currently under development is A buse- D eterrent A mphetamine I mmediate- R elease (“ ADAIR ”), a proprietary, abuse-deterrent oral formulation of immediate-release (short-acting) dextroamphetamine for the treatment of attention-deficit/hyperactivity disorder (“ ADHD ”), and narcolepsy. It is estimated that over 5 million Americans abuse prescription ADHD stimulants annually. We intend to develop ADAIR for registration through the Section 505(b)(2) approval pathway, which we expect to obviate the need for large Phase 2 and Phase 3 efficacy and safety studies. See the sections entitled “Business — Section 505(b)(2) Pathway” and “Business — Clinical Development” in this Annual Report for more information regarding Section 505(b)(2) of the FDCA. Although the FDA does not approve of a drug using the Section 505(b)(2) pathway until submission and acceptance of a new drug application (“ NDA ”), based on discussions held with FDA at a pre-IND meeting in January 2017 and the minutes from such meeting, we believe the Section 505(b)(2) regulatory pathway is appropriate and will be acceptable to the FDA. We expect to request additional labeling based on studies that demonstrate the abuse-deterrent characteristics of the product as they relate to snorting, and possibly IV injection. While dextroamphetamine is approved by the FDA, our reformulation, ADAIR, is not. Prescription drug abuse is a large and growing problem in the United States and globally. We filed our Investigational New Drug (“ IND ”), application for ADAIR in June 2018 and the IND was cleared in July 2018. Subsequently, we have successfully completed a Phase 1 pivotal bioequivalence study of ADAIR and a Phase 1 food effect study. The bioequivalence study enrolled 24 subjects and the food effect study enrolled 22 subjects. Both studies were conducted by Altasciences, a contract research organization (“ CRO ”). In 2019, we conducted a Phase 1 proof-of-concept intranasal human abuse potential study designed to compare ADAIR when insufflated (snorted) as compared to the reference comparator, crushed immediate release dextroamphetamine sulfate tablets. The study enrolled 16 subjects and was conducted at a single site by BioPharma Services, a CRO with experience conducting similar trials. The study measured the pharmacokinetic levels of dextroamphetamine of the two compounds when snorted, the subjective “drug-liking” of the two drugs, and the willingness of recreational drug users to take each product again. The results of this study demonstrated that as compared to standard dextroamphetamine, ADAIR, when snorted, demonstrated an attenuated pharmacokinetic profile and lower drug liking and other abuse liability scores, using standard measures for human abuse potential studies. We have used the results of this proof of concept abuse study to design a larger intranasal abuse study that we will conduct prior to seeking approval of ADAIR. We designed the study to follow the model used in intranasal abuse studies that have been conducted for abuse deterrent opioids and following guidance issued by the FDA for such studies. We began enrollment of subjects in this pivotal abuse study during the fourth quarter of 2020.We recently completed a preclinical embryofetal study which showed no evidence of developmental effects and no clinical observations other than those associated with the pharmacological effects of dextroamphetamine. We are currently conducting a 13-week preclinical toxicology study on the final formulation of ADAIR. We also plan to conduct additional preclinical studies of unintended routes of administration such as IV and intranasal administration. On January 6, 2020, Vallon entered into a license agreement with Medice, who is affiliated with one of our principal stockholders, Salmon Pharma, and represented by one member of our board of directors, which grants Medice an exclusive license, with the right to grant sublicenses, to develop, use, manufacture, market and sell ADAIR throughout Europe. Medice currently markets several ADHD products in Europe and is the ADHD market leader in Europe based on branded prescription market share. Medice is responsible for obtaining regulatory approval of ADAIR in the licensed territory. Under the license agreement, Medice paid Vallon a minimal upfront payment and will pay milestone payments of up to $6.3 million in the aggregate upon first obtaining regulatory approval to market and sell ADAIR in any country, territory or region in the licensed territory and upon achieving certain annual net sales thresholds. Medice will also pay tiered royalties on annual net sales of ADAIR at rates in the low double-digits. The initial term of the license agreement will expire five years after the date on which Medice first obtains regulatory approval in any country, territory or region in the licensed territory. We plan to develop other abuse-deterrent products that have potential for abuse in their current forms, beginning with the development of an abuse deterrent formulation of Ritalin® (“ ADMIR ”), for which we are conducting formulation development work. 1 The U.S. market for ADHD treatment was estimated to be approximately $9 billion annually, which accounted for over 80% of the global ADHD market in 2019, and the European Union (“ EU ”) market for ADHD treatment was estimated to be approximately $700 million annually. We plan to target the U.S. ADHD market once we receive FDA approval of ADAIR, followed by the EU market for ADHD with our partner, Medice, who is affiliated with one of our principal stockholders, Salmon Pharma, and represented by one member of our board of directors, once regulatory approval has been granted in the EU. The ADAIR assets were acquired by us on June 22, 2018 pursuant to the terms and conditions of the Amended and Restated Asset Purchase Agreement with Arcturus Therapeutics, Ltd. (“ Arcturus ”), and Amiservice Development Ltd., dated as of June 22, 2018 (the “ Asset Purchase Agreement ”). In exchange for the ADAIR assets, we issued 843,750 shares of our common stock to Arcturus, which comprised 30% of our then-outstanding common stock on a fully diluted basis. Reverse Split On February 10, 2021, the Company filed a certificate of amendment to its amended and restated certificate of incorporation with the Secretary of State of the State of Delaware, which effected a one-for-40 reverse stock split (the “ reverse split ”) of its issued and outstanding shares of common stock at 11:59 PM Eastern Time on that date. As a result of the reverse split, every 40 shares of common stock issued and outstanding were reclassified into one share of common stock. No fractional shares were issued in connection with the reverse split and any fractional shares were rounded up to the nearest whole share. The reverse split did not change the par value of the common stock or the authorized number of shares of common stock. The reverse split affected all stockholders uniformly and did not alter any stockholder’s percentage interest in equity. All outstanding options and other securities entitling their holders to purchase or otherwise receive shares of common stock have been adjusted as a result of the reverse split, as required by the terms of each security. The number of shares available to be awarded under the Company’s 2018 Equity Incentive Plan have also been appropriately adjusted. All share and per share amounts contained in this Annual Report on Form 10-K give retroactive effect to the reverse split. Our Strategy and Pipeline Stimulant abuse is a large and growing public health challenge, yet the immediate-release segment of the ADHD market is entirely devoid of any abuse-deterrent products. We intend to address this need by through our abuse-deterrent pharmaceutical products, such as ADAIR and other products we opt to pursue in the future, including ADMIR. The following table summarizes our current product candidate portfolio: 2 Our near-term strategic milestones include: · seeking the necessary regulatory approvals to complete the clinical development of ADAIR for the treatment of ADHD and, if successful, file for marketing approval in the United States and other territories; · preparing to commercialize ADAIR by establishing independent distribution capabilities or in conjunction with other biopharmaceutical companies in the United States and other key markets, such as the license agreement with Medice; · commencing development of other abuse-deterrent products such as ADMIR; and · continuing our business development activities and seek partnering, licensing, merger and acquisition opportunities or other transactions to further develop our pipeline and drug-development capabilities and take advantage of our financial resources for the benefit of increasing stockholder value. Section 505(b)(2) Pathway NDAs for most new drug products are based on two adequate and well-controlled clinical trials which must contain substantial evidence of the safety and efficacy of the proposed new product. These applications are submitted under Section 505(b)(1) of the FDCA. The FDA is, however, authorized to approve an alternative type of NDA under Section 505(b)(2) of the FDCA. This type of application allows the applicant to rely, in part, on the FDA’s previous findings of safety and efficacy for a similar product, or published literature. Specifically, Section 505(b)(2) applies to an NDA for a drug for which the investigations to show whether the drug is safe and effective and relied upon by the applicant for approval of the application “were not conducted by or for the applicant and for which the applicant has not obtained a right of reference or use from the person by or for whom the investigations were conducted.” Thus, Section 505(b)(2) authorizes the FDA to approve an NDA based in part on safety and effectiveness data that were not developed by the applicant. Section 505(b)(2) may provide an alternate and potentially more expeditious pathway to FDA approval for new or improved formulations or new uses of previously approved products. If the Section 505(b)(2) applicant can establish that reliance on the FDA’s previous approval is scientifically appropriate, the applicant may eliminate the need to conduct certain preclinical studies or clinical trials of the new product. The FDA may also require companies to perform additional studies or measurements to support the change from the approved product. The FDA may then approve the new drug candidate for all or some of the label indications for which the referenced product has been approved, as well as for any new indication sought by the Section 505(b)(2) applicant. We expect that our clinical trials described under the section entitled “Business — Clinical Development” will provide sufficient data to support an NDA filing with the FDA. Prescription Stimulant Abuse and Misuse Abuse and Misuse Stimulants are among the most widely abused substances. This class of drugs includes amphetamines and methylphenidate. Both of these substances are placed in Schedule II of the U.S. Controlled Substances Act (“ CSA ”) and the rules and regulation of the U.S. Drug Enforcement Administration (“ DEA ”), which is reserved for drugs that carry the highest risk of abuse and dependence that have been approved for medicinal use. While the most severe public health and societal problems related to stimulants result from abuse of illicitly manufactured stimulants including methamphetamine, and various synthetic stimulants, prescription stimulants are also widely misused and abused for non-medical uses. · Abuse — means the harmful or hazardous use of psychoactive substances, including alcohol and illicit drugs, and may include misusing a prescribed drug, through snorting, smoking or injecting, that is meant to be administered orally, to “get high” or produce “euphoria.” · Misuse — means the use of a substance or drug for a purpose not consistent with legal or medical guidelines. For example, ADHD medication may be misused through taking high dosages of the drug to enhance alertness and counteract fatigue and sleepiness in order to meet occupational demands, increase alertness while driving, or improve academic performance. ​ 3 Misuse and/or abuse can produce severe adverse consequences, and on rare occasions also death, and contributes to diversion of medicines from prescribed users, as well as illicit marketing. Furthermore, nonmedical use of prescription stimulants, even for the intent of occasional enhancement of alertness and performance, can also lead to more harmful patterns of use of stimulants and other addictive substances. Prevalence According to a 2017 report by the National Survey on Drug Use and Health (the “ NSDUH ”) over 5 million individuals ages 12 years or older in the United States misused prescription stimulants in the previous year. This figure has been rising over time and this represents approximately 2% of the U.S. population in that age group. Rates of misuse of prescription stimulants increase from age 12 and peak at age 21, where an estimated 10% of the population reported misuse of prescription stimulants, before declining in older adults. Harmful Effects of Stimulant Abuse Acute Acute stimulant intoxication may result in a number of cardiovascular-related adverse events, including chest pain, myocardial infarction, palpitations, arrhythmias, thromboembolism, tachycardia, sinus bradycardia, ventricular premature depolarization, ventricular tachycardia degeneration (resulting in the need for defibrillation), asystole, peripheral vascular abnormalities, and/or sudden death from respiratory or cardiac arrest, as well as other adverse events such as strokes, seizures, pneumothorax, headaches, and tinnitus. Acute stimulant intoxication is also associated with several psychiatric symptoms, including rambling speech, transient ideas, paranoid thoughts, auditory hallucinations, tactile hallucinations, and psychosis. High dosages of amphetamines and other stimulants can lead to aggressive or violent behavior (which may lead to self-harm or harm to others), intense temporary anxiety resembling panic disorder, or generalized anxiety disorder or mania, as well as paranoid thoughts and psychotic episodes that resemble schizophrenia. Taking extremely high doses of stimulants may also result in dangerously high body temperatures, irregular heartbeat, cardiovascular problems, and seizures. Chronic Extended abuse of stimulants can lead to psychological symptoms, such as hostility or paranoid psychosis. In addition to health status, the consequences of such substance use impact the individuals using drugs, their families and society at large, with severe repercussions possible at both the individual and public health level resulting from the chronic abuse and/or misuse of stimulants, such as teenage pregnancy, domestic violence, motor vehicle accidents, crime, poor work performance, and impaired personal relationships. Stimulant misuse is also correlated with a higher risk for substance use, with some evidence suggesting greater severity relative to controls, although it remains unclear whether the misuse of controlled medications precedes other substance use behaviors. Long-term stimulant abuse can lead to stimulant use disorder, which may be characterized by chaotic behavior, social isolation, aggressive behavior, and sexual dysfunction. Individuals exposed to amphetamine-type stimulants have been reported to develop stimulant use disorder in as rapidly as one week. Furthermore, individuals may increase their stimulant use in an effort to increase the euphoria, energy, and social and vocational interactions that they feel while using the medications. Individuals may crush and snort or inject the stimulants in order to produce even greater effects. Tolerance will develop with repeated use, and individuals often increase the frequency and amount of use in order to achieve a similar sense of euphoria. Once tolerance has developed, individuals may experience withdrawal symptoms (hypersomnia, increased appetite, and dysphoria) if they try to stop using the medication. Stimulant withdrawal can lead to depression, suicidal thoughts, irritability, anhedonia, emotional lability, and disturbances in attention and concentration. There may be temporary depressive symptoms that may meet the criteria for major depressive episode. The effects of withdrawal often lead individuals to abuse the medications again. 4 About ADHD and Existing Treatment Options ADHD Condition and Impact ADHD is defined as a persistent pattern of inattention and/or hyperactivity-impulsivity that interferes with functioning or development. ADHD causes significant impairment during a patient’s childhood, and throughout the patient’s lifespan, as well as increased morbidity, mortality and psychosocial adversity. Once believed to only affect children, ADHD is now known to persist into adolescence and adulthood in a sizeable number of cases. The following table illustrates how the nature of ADHD symptoms changes with age: ​ Children ​ ​ Adolescents ​ ​ Adults ​ ​ Hyperactive ​ ​ Easily distracted ​ ​ Shifts activities ​ Aggressive Inattentive Easily bored Low frustration tolerance Impatient Impulsive Approximately 50-60% of adults who suffered from ADHD as children continue to have symptoms of the disorder as adults, with over 90% experiencing inattention symptoms and about 35% experiencing hyperactivity-impulsivity symptoms. As the majority of sufferers of ADHD age, their symptoms tend toward impatience, restlessness, boredom, and low concentration levels away from the more aggressive hyperactivity and impulsive behavior evident in children. Although the definitive causes of ADHD are still unclear, current research suggests that ADHD is caused by an interaction between environmental factors and genetic predispositions. Biologic factors that reportedly increase the risk of having ADHD include maternal smoking, drug or alcohol abuse during pregnancy, brain injury, and exposure to toxins. ADHD is believed to be one of the most under-diagnosed and under-treated mental health conditions facing children and adults. ADHD increases health risks, adverse social externalities and economic costs as illustrated in the following table. Despite the disorder being highly treatable, most adults with ADHD remain undiagnosed and untreated. The following table illustrates the effects on society when ADHD remains untreated: Healthcare System ​ ​ Patient ​ ​ Family Increased ER visits Increased criminal activity Increased divorce/separation Increased car accidents Increased incarceration More sibling fights School and Occupation ​ ​ Society ​ ​ Employer High rates of expulsion ​ ​ Substance use disorders: ​ ​ Increased parental absenteeism and High drop-out rates Higher risk and earlier onset lower productivity Lower occupational status Less likely to quit in adulthood 5 Existing Treatment Options Current management of ADHD frequently includes a combination of educational support, behavioral interventions, and pharmacotherapy. The current standard of care is the stimulant class of medications including immediate- and extended-release methylphenidate and amphetamine. Amphetamine products comprise the majority of the U.S. ADHD market and immediate-release amphetamines are the fastest growing segment of such market. Stimulant products represent more than 90% of prescriptions of ADHD products in the United States. ​ ​ ​ Methylphenidate ​ ​ Amphetamine ​ (Approx. 30%) (Approx. 60%) Immediate-Release ​ ​ Ritalin® ​ ​ Dexedrine® ​ (Approx. 40%) Adderall® Extended-Release Concerta® Adderall XR® (Approx. 50%) Ritalin LA® Vyvanse® Immediate-release (or short-acting) tablets and capsules release the active ingredient within a short period of time, such as 30 minutes and demonstrate efficacy that lasts for four to six hours. The patents covering most of these formulations have expired and most of these medications are now available in generic forms. Extended-release (or long acting) tablets and capsules release the active ingredient at a sustained and controlled release rate over the course of the day, typically demonstrating efficacy for 10 to 14 hours. Some of these are currently covered by patents and are not available in generic form. The four highest-selling drugs for the treatment of ADHD in 2019 on a worldwide basis are shown below: Brand ​ 2019 Global Sales (in millions) Vyvanse® ​ $ 2,514 Concerta® ​ $ 696 Strattera® ​ $ 243 Adderall XR® ​ $ 223 As of 2019, the two best-selling medications were Vyvanse® and Concerta®, which are both extended-release stimulants. These and other extended-release stimulants are prescribed for both adults and children. For children in particular, the long-acting formulation is preferred because it eliminates the need for the child to take several doses during the school day. Despite the popularity of the long-acting drugs, we believe there is a growing market opportunity for immediate-release treatments among children and adults with ADHD. For instance, some patients taking the extended-release drugs benefit from the addition of a short-acting stimulant taken in the evening to supplement the medication given earlier in the day. This allows the patient to alleviate their ADHD symptoms for an evening meeting or class, without keeping the patient awake all night. In addition, the immediate-release products can be useful when evaluating whether an individual will be able to tolerate a particular stimulant or respond to a dosage titration. Finally, some individuals with ADHD prefer to manage their symptoms with medication only on an as-needed basis, and the immediate-release formulations give the patient more flexibility with the dosing frequency. For instance, many patients experience varying degrees of side effects to stimulant medication, including headaches, jitteriness, irritability, sleep problems, and decreased appetite, and some report that stimulants decrease their creativity and spontaneity. For these reasons, many adults — who now comprise more than 50% of the U.S. prescriptions for ADHD medication — prefer the short-acting formulations. Therefore, although short-acting stimulants are only approved for use in children and adolescents, part of our long-term plan involves seeking approval for use of short-acting stimulants in adults as well. 6 ADHD Market According to IQVIA (formerly, IMS Health), the U.S. market for ADHD treatment was estimated to be approximately $9 billion annually, which accounted for over 80% of the global ADHD market in 2019. The difference in market sizes between the U.S. and other countries is driven by different rates of diagnosis and treatment, different pricing, and the number of available brand name medications (non-U.S. markets are dominated by generic drugs). Global prevalence rates of the disease are estimated to be approximately 8-10% of school-aged children and approximately 4-5% of the adult population. Adult diagnosis and treatment, which has grown at approximately 10% annually over the last few years, is forecasted to grow in the near future due to increased disease awareness and less sociological stigmatization towards the condition. In the United States, the rate of treatment with prescription medications is approximately 70% in children and 45% in adults. In 2019, over 75 million prescriptions were filled in the United States for approved ADHD medications, whereas less than 44 million prescriptions were filled in 2009. The U.S. market is projected to continue to grow in mid-single digits, driven by an increased prescription rate for adult ADHD. The growth of immediate-release amphetamines averaged over 7% annually from 2014-19 and is projected to continue to grow faster than the overall ADHD market in the foreseeable future. In 2019, 28 million prescriptions were filled in the United States for immediate-release stimulants, such as Adderall and Ritalin. Immediate release amphetamine stimulants, the segment which we are primarily targeting, currently represent approximately 30% of the ADHD medications market (prescriptions and patients) and continue to gain market share. The international ADHD market is projected to grow at a faster rate than the U.S. market in part because disease recognition and acceptance is expected to increase in both Japan and Europe. The estimated growth rate for the non-U.S. markets is also higher due to the recent launches of major ADHD drugs that have already been marketed in the United States, such as Vyvanse and Intuniv. Potential for Abuse Stimulant abuse is unique and challenging because the abuse and addiction risks of stimulants are not restricted to those who are prescribed the medications. Published data reports that stimulants are almost twice as likely to be diverted ( i.e. , given away or sold) as other scheduled medications, such as opioid, sleep or anxiety medications. It has been reported that between 25-60% of teenagers and college students with ADHD have been approached at some point to give away or sell their prescription stimulants and over 60% of college students with ADHD admit to having diverted their ADHD prescription medication. Approximately 90% of those who misuse/abuse stimulants do so with prescription amphetamines based on data from the NSDUH. The number of emergency room visits associated with non-medical use of prescription stimulants increased more than four-fold from 2004 to 2011, according to the Drug Abuse Warning Network (“ DAWN ”), and most of this increase was associated with amphetamine-based prescription stimulants. 7 Speed of onset and route of administration has been accepted as being important in evaluating the potential for abuse of certain medications, such as stimulants. In general, the oral route is associated with lower abuse liability because of slower absorption rates and slower onset of effects compared to other routes of administration. Inhalation, snorting, and intravenous (“ IV ”) injection of drugs are associated with far more rapid absorption and faster onset of effects when compared to oral ingestion. In general, oral use of stimulants results in the slowest rate of absorption, while snorting is relatively faster; smoking and IV injection of stimulants evoke even more rapid absorption and more intense and rapid physiological and subjective responses. Published studies report that 40% or more of people who misuse or abuse prescription stimulants, do so by IV injection or snorting. These methods of abuse drive a more rapid increase in dopamine levels that drive the subjective, or re-enforcing effects of these drugs. Consequently, these abuse routes are thought to bring the abuser one step closer to addiction and dependence. In addition, the quick entry of the drug into the bloodstream increases the risk of chest pain, rapid / irregular heartbeat, heart attack, seizures, hallucinations, hostile/aggressive behavior, suicidal thoughts and behaviors, and stroke. 8 Immediate-release stimulants, including amphetamines, are more prone to abuse than extended-release stimulants and are the fastest growing market in the ADHD market in recent years. Amphetamine tablets are easy to crush into a powder suitable for snorting, or mixing with water and injecting. On the other hand, long-acting stimulant capsules are abused less frequently because they contain a combination of immediate-release and extended-release beads with different release profiles that are difficult to crush into a form that can be snorted, smoked, or mixed with water and injected. The rate of amphetamine use disorders doubled between 2010 and 2016: 9 Amphetamine forms molecules that are highly soluble in lipids, which are then rapidly transported to the brain through the blood-brain barrier. Routes of administration that deliver the drug directly into the bloodstream and bypass the digestive system ( i.e ., snorting, smoking, and IV injection) would be expected to cause faster onset of psychoactive effects. Therefore, reducing the risk of abuse via snorting, smoking, and injection is a potential public health goal because the speed of the absorption of stimulants is an important determinant of a product’s abuse potential, as is the case for opioids, and is also related to the overall potential risks of the drug product. Many people who use amphetamines and other stimulants for recreational use prefer routes of administration that provide rapid onset of effects. In order to achieve its maximum pharmacologic effect, the largest quantity of drug must be delivered into the CNS in the shortest possible time. For instance, a published study found that the reinforcing properties of methylphenidate occur when the drug elicits a large and fast dopamine increase but has only therapeutic properties when there is a slow, steady-state increase in dopamine caused by the drug. This leads drug abusers to progress from relatively safe methods of self-administration, such as oral ingestion of marketed doses of stimulants, to increasingly higher dosages and more dangerous routes of administration, such as smoking, snorting, and injecting. Our Solutions ADAIR Stimulant abuse is large and growing public health challenge, yet the immediate-release segment of the ADHD market is entirely devoid of any abuse-deterrent products. This unmet need led to the design of ADAIR as an oral formulation of an immediate-release dextroamphetamine. This included the development and in vitro testing of multiple formulations, followed by the selection of the optimal, proprietary formulation of ADAIR that is intended to introduce certain barriers to abuse of immediate-release dextroamphetamine. ADAIR is an oral, semi-solid, liquid-filled, hard gelatin capsule of dextroamphetamine sulfate, the active ingredient. This formulation resists manipulation and preparation for snorting, and provides meaningful barriers to injection — demonstrated through a set of abuse-deterrence studies conducted in collaboration with M.W. Encap Limited, an affiliate of Lonza Group AG. After subjecting ADAIR to grinding, crushing, or cutting the capsule following thermal pre-treatment, minimal quantities of particles could appreciably pass through a 500 micrometer (“ µm ”) filter (a particle size deemed suitable for snorting). In contrast, 42-47% of the physically manipulated immediate-release dextroamphetamine reference tablet could pass through a 500 µm filter, suggesting that it could be readily crushed and snorted. 10 We also subjected ADAIR to multiple forms of manipulation, but none of those yielded ADAIR particles that could be easily expelled from a syringe. ADAIR mixed in water yielded a viscous, cloudy material, which was usually impossible, and at other times difficult, to syringe. Texture analysis demonstrated that the force required to push the plunger with a manipulated ADAIR-filled syringe is far greater than that with manipulated immediate-release dextroamphetamine reference tablet. In comparison with the immediate-release dextroamphetamine reference tablet, ADAIR demonstrated reduced syringe-ability across a range of volumes of water (2, 5, and 10 milliliters), needle gauges (26, 23, 20, and 18 gauge), in ambient or hot water, and when passed through a cigarette filter. We believe these studies demonstrate that, as compared to the immediate-release dextroamphetamine reference tablet, ADAIR could display deterrence properties against abuse through snorting or IV injection. Our abuse-deterrent formulation may not meaningfully discourage oral ingestion to enhance occupational or academic performance, or misuse; however, depending on the properties of the formulation, an abuse-deterrent formulation could reduce the risks of adverse effects by anyone who would attempt to abuse it by snorting, smoking, or injecting, and reduce the contribution of prescription stimulants to problems associated with stimulant abuse. 11 In addition, the general pharmacologic rationale for abuse-deterrent stimulants is similar to the rationale of abuse-deterrent opioids used to treat and manage pain as described in the FDA 2015 Guidance on Abuse-Deterrent Opioid. The FDA clearly articulated the rationale for the development of abuse-deterrent technologies, as well as cited its limitations, in its 2015 Guidance, pp. 1-2: Prescription opioid products are an important component of modern pain management. However, abuse and misuse of these products have created a serious and growing public health problem. One potentially important step towards the goal of creating safer opioid analgesics has been the development of opioids that are formulated to deter abuse. FDA considers the development of these products a high public health priority. Because opioid products are often manipulated for purposes of abuse by different routes of administration or to defeat extended-release (ER) properties, most abuse-deterrent technologies developed to date are intended to make manipulation more difficult or to make abuse of the manipulated product less attractive or less rewarding. It should be noted that these technologies have not yet proven successful at deterring the most common form of abuse — swallowing a number of intact capsules or tablets to achieve a feeling of euphoria. Moreover, the fact that a product has abuse-deterrent properties does not mean that there is no risk of abuse. It means, rather, that the risk of abuse is lower than it would be without such properties . Because opioid products must in the end be able to deliver the opioid to the patient, there may always be some abuse of these products. Although ADAIR is very difficult to manipulate into a form that can be snorted, it is not impossible to do so. In order to conduct human abuse studies, Vallon hired a third-party drug laboratory that was able to develop a time- consuming and laborious process to convert ADAIR into a form that could be insufflated. The medical literature reports that recreational abusers of prescription medications are typically not willing to spend more than a few minutes preparing a drug for misuse or abuse and our own research with recreational stimulant users documented that they would not be willing to spend more than 10-12 minutes preparing a drug like ADAIR for snorting. In addition, although ADAIR is difficult to solubilize into a form that can be injected, sophisticated drug abusers may be able to develop methods to manipulate ADAIR into a form that can be injected. Regulatory communications regarding the application of abuse-deterrent technologies for prescription stimulants continue to emerge. In 2014, Janet Woodcock, M.D., Director, Center for Drug Evaluation and Research, stated that the FDA encourages the development of abuse-deterrent formulations for controlled substances, while also noting that the science surrounding abuse-deterrent technology is relatively new. In public meetings, FDA officials have made comments related to interest in the application of abuse-deterrent technologies for stimulants, as well as other drugs of abuse. In practice, the FDA engages with sponsors of abuse-deterrent formulations on a product-by-product basis, sometimes requiring an abuse-deterrent assessment as part of the development to inform approval and labeling processes by the FDA. In September 2019, the FDA issued a Federal Register notice to seek public comment on the development and evaluation of abuse deterrent formulations (ADF) of ADHD stimulants and whether such products could play a role in addressing public health concerns related to prescription stimulant misuse and abuse signaling their interest in this field. Lastly, based on market research conducted by us in conjunction with U.S. health insurers, who collectively manage over 100 million covered lives, a strong majority of insurers are receptive of the ADAIR product concept and indicate that they would be willing to have ADAIR, if approved, placed on their prescription drug formulary and to reimburse the costs for ADAIR through their respective health insurance plans. In addition, the continuing and heightened publicity surrounding the national opioid epidemic continues to result in heightened sensitivity by many health care professionals to prescribe, and pharmacies to dispense, medications with the potential for abuse. Development of ADMIR ADMIR is an abuse deterrent formulation of Ritalin for which we are conducting formulation development work. We have developed several prototype formulations that we are continuing to refine. If our formulation development work is successful, we anticipate requesting a pre-IND meeting with the FDA and filing an IND in 2021. ADMIR is designed to have abuse deterrent properties that are similar to ADAIR. Clinical Development We aim to be the first company to introduce a proprietary abuse-deterrent immediate-release dextroamphetamine drug to the market and leverage our agility, flexibility, and know-how to utilize such a position for the benefit of patients, physicians, and our community. 12 We filed our Investigational New Drug (“ IND ”) application for ADAIR in June 2018 and the IND was cleared in July 2018. Subsequently, we have successfully completed three Phase 1 clinical studies. Phase 1 Bioequivalence Study In December 2018, we completed a Phase 1 pivotal bioequivalence study of ADAIR, which was conducted by Altasciences. The study enrolled 24 subjects, who were dosed with 10 mg of ADAIR and reference dextroamphetamine orally on a single occasion for each study drug. There were no serious adverse events (“ SAEs ”) during the study. The primary objective of the study was to evaluate and compare the pharmacokinetics (“ PK ”) of ADAIR capsules to dextroamphetamine tablets under fasting conditions. The secondary objectives of the study were to evaluate the safety and tolerability of the test and reference formulations in healthy subjects. The study met the primary endpoint demonstrating bioequivalence and met the secondary endpoints. Food Effect Study In December 2018, we completed a Phase 1 food effect study of ADAIR, which was conducted by Altasciences. The study enrolled 22 subjects who were dosed with 10 mg of ADAIR orally twice, once when subjects were fasting and once when they had been fed. One SAE (miscarriage) was reported during the study. A 33-year-old African American female subject had an unplanned pregnancy reported one week after the last study drug dose. The miscarriage occurred at pregnancy day 35. The investigator considered the SAE possibly related to drug treatment. However, because of the timing, background incidence, and risk factors (including age and race), we concluded that this SAE was unlikely to be related to the study drug. The primary objective of this study was to evaluate and compare the PK of d-amphetamine from an abuse-deterrent capsule formulation of dextroamphetamine sulfate when dosed under fasting and fed conditions. The secondary objective was to evaluate the safety and tolerability of the investigational product in healthy subjects. The study met both the primary and secondary endpoints. Human Abuse Proof of Concept Study I n November 2019, we completed a Phase 1 proof-of-concept intranasal human abuse potential study designed to compare ADAIR when insufflated (snorted) as compared to the reference comparator, crushed immediate release dextroamphetamine sulfate tablets. The study was conducted by BioPharma Services and enrolled 16 subject who received one dose of ADAIR and reference dextroamphetamine administered intranasally each at a dose of 30 mg. The primary objective was to assess safety and tolerability of manipulated ADAIR and crushed dextroamphetamine sulfate IR (“ DEX ”), when administered intranasally to non-dependent, recreational stimulant users. The secondary objectives were to evaluate and compare the PK profiles of ADAIR and DEX when administered intranasally to non-dependent, recreational stimulant users. The exploratory objectives of this study were to assess and compare abuse liability of ADAIR and DEX when administered intranasally to non- dependent, recreational stimulant to users. There were no SAEs in connection with this trial. The study met the primary, secondary and exploratory endpoints. The results of this study demonstrate that as compared to DEX, ADAIR, when snorted, demonstrated an attenuated pharmacokinetic profile and lower drug liking and other abuse liability scores, using standard measures for human abuse potential studies. We have used the results of this proof of concept abuse study to design a larger intranasal abuse study that we will conduct prior to seeking approval of ADAIR. We designed the study to follow the model used in intranasal abuse studies that have been conducted for abuse deterrent opioids and following guidance issued by the FDA for such studies. Preclinical Studies and Other Clinical Development Plans We recently completed a preclinical embryofetal study which showed no evidence of developmental effects and no clinical observations other than those associated with the pharmacological effects of dextroamphetamine. We are currently conducting a 13-week preclinical toxicology study on the final formulation of ADAIR. We also plan to conduct additional preclinical studies of unintended routes of administration such as IV and intranasal administration. 13 We plan to develop other abuse-deterrent products that have potential for abuse in their current forms, beginning with the development of an abuse deterrent formulation of Ritalin® (“ ADMIR ”), for which we are conducting formulation development work. We expect that our clinical trials described above will provide sufficient data to support an NDA filing with the FDA. Government Regulation and Product Approval Clinical trials, the drug approval process, and the marketing of drugs are intensively regulated in the United States and in all major foreign countries. In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act (“ FDCA ”), and related regulations. Drugs are also subject to other federal, state, and local statutes and regulations. Failure to comply with the applicable U.S. regulatory requirements at any time during the product development process, approval process or after approval may subject an applicant to administrative or judicial sanctions. These sanctions could include the imposition by the FDA Institutional Review Board (“ IRB ”) of a clinical hold on trials, the FDA’s refusal to approve pending applications or supplements, withdrawal of an approval, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, civil penalties or criminal prosecution. Any agency or judicial enforcement action could have a material adverse effect on us. The FDA and comparable regulatory agencies in state and local jurisdictions and in foreign countries impose substantial requirements upon the clinical development, manufacture and marketing of biopharmaceutical products. These agencies and other federal, state, and local entities regulate research and development activities and the testing, manufacture, quality control, safety, effectiveness, labeling, storage, distribution, record keeping, approval, advertising, and promotion of ADAIR or any other product we develop in the future. The FDA’s policies may change, and additional government regulations may be enacted that could prevent or delay regulatory approval of any candidate drug product or approval of new disease indications or label changes. We cannot predict the likelihood, nature or extent of adverse governmental regulation that might arise from future legislative or administrative action, either in the United States or abroad. Marketing Approval The process required by the FDA before new drugs may be marketed in the United States generally involves the following: · nonclinical laboratory and animal tests; · submission of an IND application, which must become effective before clinical trials may begin; · adequate and well-controlled human clinical trials to establish the safety and efficacy of the proposed drug for its intended use or uses; · pre-approval inspection of manufacturing facilities and clinical trial sites; and · FDA approval of an NDA which must occur before a drug can be marketed or sold. The testing and approval process requires substantial time and financial resources, and we cannot be certain that any approvals will be granted on a timely basis if at all. We will need to successfully complete additional clinical trials in order to be in a position to submit an NDA to the FDA. Future trials may not begin or be completed on schedule, if at all. Trials can be delayed for a variety of reasons, including delays in: · obtaining regulatory approval to commence a study; · reaching agreement with third-party clinical trial sites and vendors and their subsequent performance in conducting accurate and reliable studies on a timely basis; 14 · obtaining institutional review board approval to conduct a study at a prospective site; · recruiting subjects to participate in a study; and · supply of the drug. We must reach an agreement with the FDA on the proposed protocols for our future clinical trials in the United States. A separate submission to the FDA must be made for each successive clinical trial to be conducted during product development. Further, an independent IRB for each site proposing to conduct the clinical trial must review and approve the plan for any clinical trial before it commences at that site. Informed consent must also be obtained from each study subject. Regulatory authorities, an IRB, a data safety monitoring board, or the sponsor may suspend or terminate a clinical trial at any time on various grounds, including a finding that the participants are being exposed to an unacceptable health risk. ADAIR ADAIR was specifically designed to limit abuse by snorting or injecting. A pre-IND meeting with the FDA was held on January 26, 2017 to discuss the details of the development program using the Section 505(b)(2) approval pathway. The FDA provided guidance on the necessary steps towards an NDA. The development plan for ADAIR is to conduct clinical trials and if those trials are successful, seek marketing approval from the FDA. To achieve this objective, the following development plan was proposed by Arcturus and reviewed by the FDA: · Filing an IND application; · Conducting a pivotal bioequivalence study in healthy volunteers comparing ADAIR and its reference listed drug; · Conducting a food effect study comparing ADAIR when taken orally after a period of fasting to ADAIR taken after consuming a high fat meal; · Conducting further laboratory studies and Human Abuse Potential (HAP) studies (if feasible) to evaluate ADAIR’s abuse deterrent characteristics in order to establish labeling language regarding abuse deterrence against snorting and injecting; and · Conducting a 13-week preclinical toxicology study and preclinical embryofetal study on the final formulation of ADAIR. An NDA would be filed to the FDA only after achieving success in each of the above milestones and any additional milestones the FDA may request. As with similar products, the ADAIR development program requires special regulatory management and controls, this may raise further risks to the program, including: · Good communication and collaboration with multiple departments within the FDA, e.g., Division of Psychiatry Products, Office of Pharmaceutical Quality, Control Substance Staff, Office of Surveillance and Epidemiology, and also outside the Agency with the DEA since dextroamphetamine is classified as a Schedule II drug product. · Following NDA submission, the FDA may call for an expert Advisory Committee (as seen with recent NDA applications for Abuse-Deterrent Opioids products). Such committees, which are partially open to the public, are called to discuss the overall risk-benefit profile of the product, and whether the applicant has demonstrated abuse-deterrent properties for their product that would support labeling. 15 ​ FDA Post-Approval Requirements Any products manufactured or distributed by us pursuant to FDA approvals are subject to continuing regulation by the FDA, including requirements for record-keeping and reporting of adverse experiences with the drug. Drug manufacturers are required to register their facilities with the FDA and certain state agencies and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMPs, which impose certain quality processes, manufacturing controls, and documentation requirements upon us and our third-party manufacturers in order to ensure that the product is safe, has the identity and strength, and meets the quality and purity characteristics that it purports to have. Under the federal Prescription Drug Marketing Act, the sampling and distribution and tracking of drugs is regulated. It is designed to discourage the sale of counterfeit, adulterated, misbranded, subpotent, and expired prescription drugs. Certain states also impose requirements on manufacturers and distributors to establish the pedigree of product in the chain of distribution, including some states that require manufacturers and others to adopt new technology capable of tracking and tracing product as it moves through the distribution chain. We cannot be certain that we or our present or future suppliers will be able to comply with the cGMP and other FDA regulatory requirements. If our present or future suppliers are not able to comply with these requirements, the FDA may halt our clinical trials, fail to approve any NDA or other application, require us to recall a drug from distribution, shut down manufacturing operations or withdraw approval of the NDA for that drug. Noncompliance with cGMP or other requirements can result in issuance of warning letters, civil and criminal penalties, seizures, and injunctive action. The FDA may request, or we may propose, to implement a risk management program to educate physicians and parents or patients of appropriate use of ADAIR, and to monitor the real-world use and reports of abuse of ADAIR following its approval. Such risk management programs are common with many medications with abuse potential including many approved ADHD products. Labeling, Marketing and Promotion The FDA closely regulates the labeling, marketing, and promotion of drugs. While doctors are free to prescribe any drug approved by the FDA for any use, a company can only make claims relating to the safety and efficacy of a drug that are consistent with FDA approval and may only actively market a drug only for the particular use and treatment approved by the FDA. In addition, any claims we make for our products in advertising or promotion must be appropriately balanced with important safety information and otherwise be adequately substantiated. Failure to comply with these requirements can result in adverse publicity, warning letters, corrective advertising, injunctions, and potential civil and criminal penalties. Government regulators recently have increased their scrutiny of the promotion and marketing of drugs. Pediatric Research Equity Act The Pediatric Research Equity Act (“ PREA ”) amended the FDCA to authorize the FDA to require certain research into drugs used in pediatric patients. The intent of the PREA is to compel sponsors whose drugs have pediatric applicability to study those drugs in pediatric populations, rather than ignoring pediatric indications for adult indications that could be more economically desirable. The Secretary of Health and Human Services may defer or waive these requirements under specified circumstances. The FDA may decide that an NDA will be approved only following completion of additional pediatric studies. Anti-Kickback and False Claims Laws In the United States, the research, manufacturing, distribution, sale and promotion of drug products and medical devices are potentially subject to regulation by various federal, state and local authorities in addition to the FDA, including the Centers for Medicare & Medicaid Services, other divisions of the U.S. Department of Health and Human Services (e.g., the Office of Inspector General), the U.S. Department of Justice, state Attorneys General, and other state and local government agencies. For example, sales, marketing, and scientific/educational grant programs must comply with the Anti-Kickback Statute, the False Claims Act, as amended, the privacy regulations promulgated under HIPAA, and similar state laws. Pricing and rebate programs must comply with the Medicaid Drug Rebate Program requirements of the Omnibus Budget Reconciliation Act of 1990, as amended, and the Veterans Health Care Act of 1992, as amended. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. All of these activities are also potentially subject to federal and state consumer protection and unfair competition laws. In the United States, we are subject to complex laws and regulations pertaining to healthcare “fraud and abuse,” including, but not limited to, the Anti-Kickback Statute, the federal False Claims Act, and other state and federal laws and regulations. The Anti-Kickback Statute makes it illegal for any person, including a prescription drug manufacturer (or a party acting on its behalf) to knowingly and willfully solicit, receive, offer, or pay any remuneration that is intended to induce the referral of business, including the purchase, order, or prescription of a particular drug, for which payment may be made under a federal healthcare program, such as Medicare or Medicaid. 16 The federal civil False Claims Act prohibits, among other things, any person or entity from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment to or approval by the federal government or knowingly making, using or causing to be made or used a false record or statement material to a false or fraudulent claim to the federal government. A claim includes “any request or demand” for money or property presented to the U.S. government. Violations of the False Claims Act can result in very significant monetary penalties and treble damages. The federal government is using the False Claims Act, and the accompanying threat of significant liability, in its investigation and prosecution of pharmaceutical companies throughout the country, for example, in connection with the promotion of products for unapproved uses and other sales and marketing practices. The government has obtained multi-million and multi-billion-dollar settlements under the False Claims Act in addition to individual criminal convictions under applicable criminal statutes. In addition, the federal civil monetary penalties statute imposes penalties against any person or entity that, among other things, is determined to have presented or caused to be presented a claim to a federal health program that the person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent. Given the significant size of actual and potential settlements, it is expected that the government will continue to devote substantial resources to investigating healthcare providers’ and manufacturers’ compliance with applicable fraud and abuse laws. The federal Health Insurance Portability and Accountability Act of 1996 (“ HIPAA ”), also created new federal criminal statutes that prohibit knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party payors and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. Similar to the Anti-Kickback Statute a person or entity does not need to have actual knowledge of these statutes or specific intent to violate them in order to have committed a violation. There are also an increasing number of state laws that require manufacturers to make reports to states on pricing and marketing information. Many of these laws contain ambiguities as to what is required to comply with the laws. In addition, a similar federal requirement Section 6002 of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (the “ Affordable Care Act ”) commonly referred to as the “Physician Payments Sunshine Act” requires manufacturers to track and report to the federal government certain payments and “transfers of value” made to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members, made in the previous calendar year. There are a number of states that have various types of reporting requirements as well. These laws may affect our sales, marketing, and other promotional activities by imposing administrative and compliance burdens on us. In addition, given the lack of clarity with respect to these laws and their implementation, our reporting actions could be subject to the penalty provisions of the pertinent state, and soon federal, authorities. Patient Protection and Affordable Health Care Act In March 2010, the Affordable Care Act was enacted, which includes measures that have or will significantly change the way health care is financed by both governmental and private insurers. The fees, discounts, and other provisions of this law are expected to have a significant negative effect on the profitability of pharmaceuticals. This legislation is expected to impact the scope of healthcare insurance, the insurance refunds from the insurance companies and possibly also on the costs of medical products. Other Regulations We are also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control, and disposal of hazardous or potentially hazardous substances. We may incur significant costs to comply with such laws and regulations now or in the future. Manufacturing We do not currently own or operate any manufacturing facilities and we do not have any experience with commercial-scale manufacturing. We currently rely, and expect to continue to rely for the foreseeable future, on a third-party manufacturer to produce our product candidates for preclinical and clinical testing, as well as for commercial manufacture if our product candidates receive marketing approval. 17 Although we do not have a long-term commercial supply arrangement in place with any of our contract manufacturers, it is our goal to contract with at least one manufacturer in the United States for the commercial supply of ADAIR for the U.S. market. Our third-party manufacturers, their facilities, and all pharmaceutical products used in our clinical trials are required to comply with cGMP. The cGMP regulations include requirements relating to organization of personnel, buildings and facilities, equipment, control of components and drug product containers and closures, production and process controls, packaging and labeling controls, holding and distribution, laboratory controls, records and reports, and returned or salvaged products. The manufacturing facilities for our products must meet, and continue to meet, cGMP requirements and FDA satisfaction before any product is approved and we can manufacture commercial products. Contract manufacturers often encounter difficulties involving production yields, quality control and quality assurance, as well as shortages of qualified personnel. Sales and Marketing We retain advisors and consultants to support our pre-commercialization activities. However, we currently do not have any internal sales or distribution infrastructure. In the event that we receive regulatory approval for ADAIR or any other product we may develop, we intend, where appropriate, to pursue commercialization relationships with biopharmaceutical companies and other strategic partners providing for distribution through their sales and marketing organizations, or to build an internal commercial infrastructure. Medice License Agreement On January 6, 2020, Vallon entered into a license agreement with Medice, who is affiliated with one of our principal stockholders, Salmon Pharma, and represented by one member of our board of directors, which grants Medice an exclusive license, with the right to grant sublicenses, to develop, use, manufacture, market and sell ADAIR throughout Europe. Medice currently markets several ADHD products in Europe and is the ADHD market leader in Europe based on branded prescription market share. Medice is responsible for obtaining regulatory approval of ADAIR in the licensed territory. Under the license agreement, Medice paid Vallon a minimal upfront payment and will pay milestone payments of up to $6.3 million in the aggregate upon first obtaining regulatory approval to market and sell ADAIR in any country, territory or region in the licensed territory and upon achieving certain annual net sales thresholds. For the term of the license agreement, Medice will also pay tiered royalties on annual net sales of ADAIR at rates between 10% and 20%. The initial term of the license agreement will expire five years after the date on which Medice first obtains regulatory approval in any country, territory or region in the licensed territory. Medice has the option to extend the term of the license agreement for additional periods of five years each. Medice has the right to terminate the license agreement at any time upon 12 months’ prior written notice to Vallon. Vallon has the right to terminate the license agreement immediately upon notice if Medice challenges the validity, enforceability or patentability of any patent right comprising the licensed intellectual property. Either party may terminate the license agreement if the other party materially breaches its obligations under the license agreement, provided that the terminating party gives the breaching party notice of the breach and a specified opportunity to cure the breach, or upon the other party’s bankruptcy. Intellectual Property We strive to pursue, maintain and defend patent rights developed internally and to protect the technology, inventions and improvements that are commercially important to the development of our business. We currently have two issued U.S. patents directed to specific ADAIR formulations (i.e., composition of matter) and one pending patent application for ADAIR that is under examination with the U.S. PTO. The U.S. patents will expire in 2037. Our international PCT application has entered national phase is under examination in several foreign countries and territories, including the EU, Canada, Japan and China. We also rely on know-how relating to our proprietary technology and product candidates and continuing innovation to develop, strengthen and maintain our proprietary position. We also plan to rely on data exclusivity, market exclusivity and patent term extensions when available. We cannot be sure that any additional patents will be granted with respect to any of our pending patent applications or with respect to any patent applications we may file in the future. There is also a significant risk that any issued patents will have substantially narrower claims than those that are currently sought. Even with respect to any patents that may be issued to us, we cannot be sure that any such patents will be commercially useful in protecting our technology. Our first two issued patents with respect to ADAIR expire in 2037. Our commercial success will depend in part on our ability to obtain and maintain patent and other proprietary protection for our technology, inventions and improvements; to defend and enforce our proprietary rights, including any patents that we may own in the future; and to operate without infringing the valid and enforceable patents and other proprietary rights of third parties. Intellectual property rights may not address all potential threats to our competitive advantage. For a more comprehensive discussion of the risks related to our intellectual property, please see “Risk Factors — Risks Relating to Intellectual Property.” 18 With respect to our product candidates and processes we intend to develop and commercialize in the normal course of business, we intend to pursue patent protection covering, when possible, compositions, methods of use, dosing and formulations. We or our licensors also may pursue patent protection with respect to manufacturing and drug development processes and technologies. Obtaining and maintaining patent protection depends on compliance with various procedural, document submission, fee payment, and other requirements imposed by governmental patent agencies. We or our licensors may not be able to obtain patent protections for our compositions, methods of use, dosing and formulations, manufacturing and drug development processes and technologies throughout the world. Issued patents can provide protection for varying periods of time, depending upon the date of filing of the patent application, the date of patent issuance and the legal term of patents in the countries in which they are obtained. In general, patents issued for applications filed in the United States can provide exclusionary rights for 20 years from the earliest effective filing date. In addition, in certain instances, the term of an issued U.S. patent that is directed to or claims an FDA-approved product can be extended to recapture a portion of the term effectively lost as a result of the FDA regulatory review period, which is called “patent term extension.” The restoration period cannot be longer than five years and the total patent term, including the restoration period, must not exceed 14 years following FDA approval. The term of patents outside of the United States varies in accordance with the laws of the foreign jurisdiction, but typically is also 20 years from the earliest effective filing date. However, the actual protection afforded by a patent varies on a product-by-product basis, from country-to-country, and depends upon many factors, including the type of patent, the scope of its coverage, the availability of regulatory-related extensions, the availability of legal remedies in a particular country, and the validity and enforceability of the patent. The laws of some foreign countries may not protect intellectual property rights to the same extent as the laws of the U.S. Our success also depends in part on our ability to preserve trade secrets; prevent third parties from infringing upon our proprietary rights; and operate our business without infringing the patents and proprietary rights of third parties, both in the United States and internationally. We also protect our proprietary technology and processes, in part, by confidentiality and invention assignment agreements with our employees, consultants, scientific advisors and other contractors. These agreements may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our employees, consultants, scientific advisors or other contractors use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. The patent positions of companies like ours are generally uncertain and involve complex legal and factual questions. No consistent policy regarding the scope of claims allowable in patents in the field of biopharmaceuticals has emerged in the United States. The relevant patent laws and their interpretation outside of the United States is also uncertain. Changes in either the patent laws or their interpretation in the United States and other countries may diminish our ability to protect our technology or product candidates and could affect the value of such intellectual property. In particular, our ability to stop third parties from making, using, selling, offering to sell or importing products that infringe our intellectual property will depend in part on our success in obtaining and enforcing patent claims that cover our technology, inventions and improvements. Competition No immediate-release prescription stimulant product with abuse-deterrent labeling currently exists on the market in the United States or internationally, however, we face competition from established biopharmaceutical companies that currently market a wide range of drugs to treat ADHD. All of these competitors have far greater marketing and research capabilities than we do. We also face potential competition from academic institutions, government agencies, and private and public research institutions, among others, which may in the future develop products to treat ADHD. Any of these companies and institutions may have products in development that are superior to ADAIR. In addition, the biotechnology and pharmaceutical industries are characterized by rapid technological advancement, significant competition and an emphasis on intellectual property. Any product candidates that we successfully develop and commercialize will compete with current therapies and new therapies that may become available in the future. Our commercial opportunity would be reduced significantly if our competitors develop and commercialize products that are safer, more effective and convenient, have fewer side effects and/or are less expensive than the expected price of ADAIR. Public announcements regarding the development of competing drugs could adversely affect the price of our stock and the commercial potential of ADAIR. 19 Neither the FDA nor any other regulatory agency has approved any abuse-deterrent immediate-release stimulant. One company has submitted an application to the FDA for the approval of an immediate release stimulant designed to resist physical manipulation. An FDA advisory committee recently recommended against the approval of this product because it did not meet the primary endpoint of its human abuse liability study and based on safety concerns that are specific to the formulation in the other product that do not apply to ADAIR. The formulation technology and active ingredient in that product is distinct from that in ADAIR. While we are aware of several abuse-deterrent long-acting stimulants under development, we do not believe that ADAIR will compete directly with those products because they are designed to last longer and compete in a different segment of the ADHD market for a different patient population than ADAIR. Third-Party Reimbursement Sales of biopharmaceutical products depend in significant part on the availability of coverage and adequate reimbursement by third-party payors, such as state and federal governments, including Medicare and Medicaid, managed care providers, and private insurance plans. Decisions regarding the extent of coverage and amount of reimbursement to be provided for ADAIR will be made on a plan by plan basis. Within the Medicare program, as a self-administered drug, ADAIR would be reimbursed under the expanded prescription drug benefit known as Medicare Part D. This program is a voluntary Medicare benefit administered by private plans that operate under contracts with the federal government. These Part D plans negotiate discounts with drug manufacturers, which may be passed on to each of the plan’s enrollees. Historically, Part D beneficiaries have been exposed to significant out-of-pocket costs after they surpass an annual coverage limit and until they reach a catastrophic coverage threshold. However, changes made by recent legislation will reduce this patient coverage gap, known as the donut hole, by reducing patient responsibility in that coverage range. Because the vast majority of patients treated with ADHD medications are under 65 years old, Medicare has a relatively small impact on ADHD medications and this would also be expected for ADAIR. An ongoing trend has been for third-party payors, including the U.S. government, to apply downward pressure on the reimbursement of biopharmaceutical products. Also, the trend towards managed health care in the United States and the concurrent growth of organizations such as health maintenance organizations tend to result in lower reimbursement for biopharmaceutical products. We expect that these trends will continue as these payors implement various proposals or regulatory policies, including various provisions of the recent health reform legislation that affect reimbursement of these products. There are currently, and we expect that there will continue to be, a number of federal and state proposals to implement controls on reimbursement and pricing, directly and indirectly. There is an emerging trend in state legislation requiring the addition of abuse-deterrent formulations of opioid painkillers to be added to managed care formularies. Because there are no stimulants currently approved with similar abuse-deterrent labeling, such legislation has not had an impact on stimulants; however, this could favorably impact the reimbursement of a product like ADAIR in the future. Asset Purchase Agreement As described above, the ADAIR assets were acquired by us pursuant to the terms and conditions of the Asset Purchase Agreement. In exchange for the ADAIR assets, we issued 843,750 shares of our common stock on June 22, 2018 to Arcturus Inc., which comprised approximately 30% of our then-outstanding common stock on a fully diluted basis. The Asset Purchase Agreement also gives Arcturus the right to appoint one director to serve as a member of our board of directors, which was effective immediately upon the closing of the transaction contemplated by the Asset Purchase Agreement. Thereafter, Arcturus is entitled to appoint one director for so long as it owns at least 10% of the company securities on a fully diluted basis. Employees and Human Capital Resources We recognize that attracting, motivating and retaining talent is vital to our continued success. We aim to create an equitable, inclusive and empowering environment in which our employees can grow and advance their careers, with the overall goal of developing, expanding and retaining our workforce to support our current pipeline and future business goals. We value innovation, passion, data-driven decision making, persistence and honesty, and are building a diverse environment where our employees and consultants can thrive and be inspired to make exceptional contributions. 20 Our current management team, board of directors, and scientific advisors have significant experience in development and marketing of pharmaceutical product candidates from early stage discovery to clinical trials, regulatory approval and commercialization. As of March 15, 2021, we had two full-time employees. We also regularly work with several independent consultants and other contract organizations to support our business and we regularly evaluate additional talent to help support our product development, financial, and other capabilities. Our human capital resources objectives include identifying, recruiting, retaining, and incentivizing our existing and new employees. We maintain an equity incentive plan, the principal purposes of which are to attract, retain and reward personnel through the granting of stock-based compensation awards, in order to increase stockholder value and the success of our company by motivating such individuals to perform to the best of their abilities and achieve our objectives. To facilitate talent attraction and retention, we strive to make our company a safe and rewarding workplace, with opportunities for our employees to grow and develop in their careers, supported by competitive compensation, benefits and health and wellness programs, and by programs that build connections between our employees. In addition, as a result of the COVID-19 pandemic, we have taken steps to protect the health and safety of our employees in line with directives from state and the applicable local governments, as well as guidance from the CDC. Facilities Our executive offices are located at 100 N. 18th Street, Suite 300, Philadelphia, PA 19103. We believe that our current office space will be adequate for the next 12 months. We have no plans to lease additional space in the next twelve months. Should we be required to obtain additional space in the future, we believe we can obtain the required facilities at competitive rates. We do not own any real property. Corporate Information Vallon Pharmaceuticals, Inc. was incorporated in Delaware on January 11, 2018, and completed its organization, formation and initial capitalization activities effective as of June 7, 2018. Our telephone number is 267-207-3606, and our email address is info@vallon-pharma.com. Our website address is https://www.vallon-pharma.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, including exhibits, proxy and information statements and amendments to those reports filed or furnished pursuant to Sections 13(a), 14, and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are available through the “Investors” portion of our website after we file such material with the SEC. The information contained on, or that can be accessed through, our website is not part of this Annual Report and is not incorporated by reference. We have included our website address herein solely as an inactive textual reference. Our filings with the SEC may be accessed through the SEC’s Interactive Data Electronic Applications system at https://www.sec.gov. We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended (the “ Securities Act ”), as modified by the Jumpstart Our Business Startups Act of 2012 (the “ JOBS Act ”). Emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. Therefore, we may not be subject to the same new or revised accounting standards as other public companies that are not “emerging growth companies.” For as long as we continue to be an emerging growth company, we also intend to take advantage of certain other exemptions from various reporting requirements that are applicable to other public companies including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding a nonbinding advisory stockholder vote on executive compensation and any golden parachute payments not previously approved, exemption from the requirement of auditor attestation in the assessment of our internal control over financial reporting and exemption from any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis). We will remain an emerging growth company until the earliest of (i) the end of the fiscal year in which the market value of our common stock that is held by non-affiliates exceeds $700 million as of the end of the second fiscal quarter, (ii) the end of the fiscal year in which we have total annual gross revenues of $1.07 billion or more during such fiscal year, (iii) the date on which we issue more than $1 billion in non-convertible debt in a three-year period, or (iv) the end of the fiscal year following the fifth anniversary of the date of the first sale of our Common Stock pursuant to an effective registration statement filed under the Securities Act. 21