We believe many pharmaceutical companies are experiencing, and will continue to experience, critical R&D productivity issues, as measured by their lack of, or very low number of, FDA-approved products each year during the past decade. For example, in 2013, the U.S. pharmaceutical industry invested over $51 billion in R&D and the Center for Drug Evaluation and Research (CDER) of the FDA approved a total of only thirty-nine (39) novel drugs, known as New Molecular Entities (NMEs). In 2013, CDER approved only twenty-seven (27) NMEs, thirteen (13) of which NME approvals (48%) were received by only five (5) pharmaceutical companies, including Bayer (2), GlaxoSmithKline (4), Johnson & Johnson (3), Roche (2) and Takeda (2). Despite remarkable levels of R&D investment by the global pharmaceutical industry as a whole, since 2003, the FDA has only approved an average of approximately twenty-six (26) NMEs per year. In addition, we believe many pharmaceutical companies with established products that are no longer patent protected are also experiencing substantial market pressure from generic competition.

As a result of R&D productivity issues, diminishing product pipelines and generic competition, we believe there is and will continue to be a critical need among pharmaceutical companies to license the new, safer Drug Rescue Variants we are focused on developing, including companies that originally discovered, developed and ultimately discontinued the Drug Rescue Candidates we select for our drug rescue programs.

It is estimated that about one-third of all potential new drugs candidates fail in preclinical or clinical development due to unexpected safety concerns. After spending millions of dollars over nearly a decade to discover, optimize and validate the potential efficacy of a promising new drug candidate and advance it into preclinical development, a biotechnology or pharmaceutical company can see their drug candidate fail to progress due to unexpected heart or liver safety issues. The company then often discontinues the development program for their once-promising drug candidate and simply “puts it on the shelf” despite the positive data indicating potential therapeutic and commercial benefits. As a result, the company’s significant prior investment in discovery and development may be lost.

Through our CardioSafe 3D and LiverSafe 3D drug rescue programs, we believe we can recapture substantial value from the prior investment by pharmaceutical companies and others in promising new drug candidates that have been terminated prior to FDA approval due to heart or liver safety concerns. Our goal is to use our hPSC technology, together with modern medicinal chemistry, to generate a diverse drug pipeline consisting of new, proprietary, small molecule variants (Drug Rescue Variants) of these once-promising drug candidates. These are drug candidates discontinued by pharmaceutical and biotechnology companies, the NIH or academic laboratories, after substantial investment in discovery and development, due to heart or liver safety issues. We believe focusing on drug rescue candidates previously optimized for efficacy may give us a valuable “head start advantage” in our efforts to produce new, proprietary Drug Rescue Variants faster and less expensively than the drug rescue candidates discovered and developed previously using only conventional live animal models and in vitro cellular assays. We believe each lead Drug Rescue Variant will have the potential to be an FDA-approved NME in our pipeline.

The initial goal of each drug rescue program will be to produce, with our medicinal chemistry collaborator, a portfolio of Drug Rescue Variants of the once-promising but discontinued drug candidate. We will then use our CardioSafe 3D and, when validated, our LiverSafe 3D, biological assay systems to identify the lead Drug Rescue Variant in the portfolio that demonstrates an improved therapeutic index compared to the original drug candidate (that is, equal or improved efficacy with reduced toxicity or metabolism issues). We will then validate that the lead Drug Rescue Variant demonstrates reduced toxicity and/or metabolism issues in both our proprietary biological assay systems and in the same in vitro and in vivo preclinical testing model(s) that the biotechnology or pharmaceutical company used to determine efficacy and safety for the original blocked drug candidate.

Drug Rescue Business Model

We believe the results of confirmatory in vitro and in vivo safety and efficacy studies to be valuable drug rescue milestones demonstrating the improvement of our lead Drug Rescue Variant compared to the discontinued drug candidate.