Arcturus Therapeutics (ARCT) Risk Analysis

Rare diseases, by definition, have a relatively small population of patients, thereby limiting the potential market size and increasing pressure on the pricing of drug products in order to have a profitable market opportunity. Further, our rare disease therapeutic candidates require dosing of drug substance in far greater quantities than in our vaccine candidates, which significantly increases the costs of manufacture. Such factors, along with political and societal pressure to minimize pricing, could impact the ability of our products to have sustainable and profitable commercial markets. Therefore, even if we can get through the extremely costly, long and risky process of developing and obtaining regulatory approval to market a drug candidate, it may not be commercially successful.

As a result of our limited financial and human resources, we will have to make strategic decisions as to which targets and product candidates to pursue and may forego or delay pursuit of opportunities with other product candidates or for other indications that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through strategic alliance, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such product candidate, or we may allocate internal resources to a product candidate in a therapeutic area in which it would have been more advantageous to enter into a partnering arrangement.

Other than the approval of KOSTAIVE in Japan and Europe, we have no products approved for commercial marketing and all of our product candidates are in preclinical or clinical development. Before obtaining regulatory approval for the commercial distribution of our product candidates, we or an existing or future collaborator must conduct extensive preclinical studies and clinical trials to demonstrate the safety and efficacy of our product candidates. The success of our product candidates will depend on several factors, including the following: - successfully designing preclinical studies which may be predictive of clinical outcomes;- successful enrollment in clinical trials and completion of preclinical and clinical studies with favorable results;- receipt of marketing approvals from applicable regulatory authorities;- obtaining and maintaining patent and trade secret protection for future product candidates;- establishing and maintaining manufacturing relationships with third parties or establishing our own manufacturing capability; and - successfully commercializing our products, if approved, including successfully establishing a sales force, marketing and distribution infrastructure, whether alone or in collaboration with others. If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to successfully complete the development or commercialization of our product candidates, which would materially harm our business.

We have concentrated our therapeutic product research and development efforts on nucleic acid technology, and mRNA in particular, and our future success depends on the successful development and acceptance of this technology for drug products. The development and commercialization of drug products based on nucleic acid technologies, including mRNA, are relatively new. The scientific evidence to support the feasibility of developing product candidates based on these discoveries is both preliminary and limited. If nucleic acid or mRNA approaches to drug products encounter setbacks based on the safety, efficacy, distribution, costs or other factors, it will significantly hurt our prospects and the value of our common stock. Our focus on nucleic acid technology for developing drugs as opposed to more proven technologies for drug development increases the risks associated with our business. If we are not successful in developing any product candidates using nucleic acid technology, we may be required to change the scope and direction of our product development activities. In that case, we may not be able to identify and successfully implement an alternative product development strategy.

Each of our products, including KOSTAIVE, has a certain drug product presentation. We evaluate and implement the product presentation attributes based on our considerations of regulatory and commercial potential, along with scientific feasibility. There can be no assurance that the product presentation or characteristics of any of our products will be sufficient to achieve regulatory approval or commercialization per planned timelines. For example, the stability of our products and the vial presentations could impact the commercial attractiveness of a product, and different markets may favor different characteristics. Any changes to drug product formats will likely add additional cost and may delay approvals.

The success of our business depends primarily upon our ability to identify, develop and commercialize messenger RNA medicines. Our research programs may initially show promise in identifying potential product candidates, yet fail to yield product candidates for clinical development for a number of reasons, including: - our research methodology or that of our strategic alliance partners may be unsuccessful in identifying potential product candidates;- potential product candidates may be shown to have harmful side effects or may have other characteristics that may make the products unmarketable or unlikely to receive marketing approval; or - our strategic alliance partners may change their development profiles for potential product candidates or abandon a therapeutic area. If any of these events occur, we may be forced to abandon our development efforts for a program or programs, which would have a material adverse effect on our business and could potentially cause us to cease operations. Research programs to identify new product candidates require substantial technical, financial and human resources. We may focus our efforts and resources on potential programs or product candidates that ultimately prove to be unsuccessful.

Before obtaining marketing approval from regulatory authorities for the sale of product candidates, we or our strategic alliance partners must conduct extensive clinical trials to demonstrate the safety and efficacy of the product candidates in humans. Clinical trials are expensive, difficult to design and implement, can take many years to complete and are uncertain as to the outcome. A failure of one or more clinical trials can occur at any stage of testing. The outcome of preclinical studies and early clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval for their products. Furthermore, even if prior animal studies have demonstrated the potential safety and efficacy of our product candidates, there can be no guarantee that such results will be reproducible in preclinical studies and clinical trials involving human subjects. Events which may result in a delay or unsuccessful completion of clinical development include: - delays in reaching an agreement with the FDA or other regulatory authorities on final trial design;- delays in submitting or acceptance of, an application for authorization to administer an investigational new drug product to humans through the submission or acceptance of an IND application to the FDA, or foreign regulatory authority;- imposition of a clinical hold of our clinical trial operations or trial sites by the FDA or other regulatory authorities;- delays in reaching agreement on acceptable terms with prospective contract research organizations ("CROs") and clinical trial sites;- our inability to adhere to clinical trial requirements directly or with third parties such as CROs;- clinical trial site or CRO non-compliance with GCPs, GLPs, or other regulatory requirements;- inability or failure of clinical trial sites to adhere to the clinical trial protocol;- delays in obtaining required IRB approval at each clinical trial site, or an IRB suspending or terminating a trial;- delays in recruiting suitable patients to participate in a trial;- delays in the testing, validation, manufacturing and delivery of the product candidates to the clinical sites;- delays in having patients complete participation in a trial or return for post-treatment follow-up;- delays caused by patients dropping out of a trial due to protocol procedures or requirements, product side effects or disease progression;- clinical sites dropping out of a trial to the detriment of enrollment;- time required to add new clinical sites; or - delays by our contract manufacturers to produce and deliver sufficient supply of clinical trial materials. If we or our strategic alliance partners are required to conduct additional clinical trials or other testing of any product candidates beyond those that are currently contemplated, are unable to successfully complete clinical trials of any such product candidates or other testing, or if the results of these trials or tests are not positive, are only modestly positive or if there are safety concerns, we or our strategic alliance partners may: - be delayed in obtaining marketing approval for our future product candidates;- not obtain marketing approval at all;- obtain approval for indications or patient populations that are not as broad as originally intended or desired;- obtain approval with labeling that includes significant use or distribution restrictions or safety warnings;- be subject to additional post-marketing testing requirements; or - have the product removed from the market after obtaining marketing approval. Our product development costs will also increase if we experience delays in testing or marketing approvals. We face risks that clinical trials may not begin as planned, may need to be restructured or may not be completed on schedule, or at all. Significant clinical trial delays also could shorten any periods during which we may have the exclusive right to commercialize our product candidates or could allow our competitors to bring products to market before we do, which would impair our ability to successfully commercialize our product candidates. Any inability to timely and successfully complete preclinical and clinical development, whether independently or with our strategic alliance partners, could result in additional costs to us or impair our ability to generate revenues from product sales, regulatory and commercialization milestones and royalties.

Identifying and qualifying patients to participate in clinical studies of our product candidates is critical to our success. The timing of our clinical studies depends in part on the speed at which we can recruit patients to participate in testing our product candidates, and we may experience delays in our clinical studies if we encounter difficulties in enrollment. In addition, certain conditions for which we plan to evaluate our current product candidates are rare genetic diseases, and have limited patient pools from which to draw for clinical studies. For example, we estimate that approximately 8,000 patients in the developed world suffer from late-onset OTC deficiency, for which LUNAR-OTC is being studied. In addition to the rarity of these diseases, the eligibility criteria of our clinical studies will further limit the pool of available study participants as we will require patients to have specific characteristics that we can measure or to assure their disease is either severe enough or not too advanced to include them in a study. The process of finding and diagnosing patients may prove costly, especially since the rare diseases we are studying are commonly underdiagnosed. We also may not be able to identify, recruit, and enroll a sufficient number of appropriate patients to complete our clinical studies because of demographic criteria for prospective patients, the perceived risks and benefits of the product candidate under study, the proximity and availability of clinical study sites for prospective patients, and the patient referral practices of physicians. The availability and efficacy of competing therapies and clinical studies can also adversely impact enrollment. If we are unable to promptly enroll an adequate number of patients in our studies for the foregoing or other reasons, the timeline for conducting studies and obtaining regulatory approval of potential products will be delayed, the commercial prospects of our product candidates will be harmed, and our ability to generate product revenue from any of these product candidates could be delayed or prevented. Furthermore, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical studies may also ultimately lead to the denial of regulatory approval of our product candidates. Delays in achieving approval to conduct and in completing our clinical studies will increase our costs, slow down our product candidate development and approval process, and jeopardize our ability to commence product sales and generate revenue. Any of these occurrences may harm our business, financial condition, and prospects significantly.