ACHN 2017 Annual Report

pathway inhibition. One of these compounds, ACH-5228, is in phase I clinical testing in healthy volunteers, and an additional compound, ACH-5548, is in late-stage preclinical development. We may seek to advance certain of these additional factor D inhibitors for oral systemic administration to treat PNH, C3G, IC-MPGN, or other diseases. All costs associated with internal research and development, and research and development services for which we have externally contracted, are expensed as incurred. The costs of obtaining patents for our drug candidates are expensed as incurred as indirect costs. Our research and development expenses for the years ended December 31, 2017, 2016 and 2015 were as follows: For the Years Ended December 31, 2017 2016 2015 (in thousands) Direct external costs: ACH-4471 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,073 $26,347 $13,320 ACH-5228 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,844 — — ACH-5548 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 474 — — Other next generation factor D inhibitors (oral and intravitreal) . . . . . . . . . . 8,053 6,276 — HCV compounds and combination trials . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 326 20,956 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 — 47 36,541 32,949 34,323 Direct internal personnel costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,746 19,514 17,605 Sub-total direct costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,287 52,463 51,928 Indirect costs and overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,600 7,110 5,265 Connecticut research and development tax credit . . . . . . . . . . . . . . . . . . . . . . . . . . 165 (411) (640) Total research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $65,052 $59,162 $56,553 The State of Connecticut provides companies with the opportunity to exchange certain research and development credit carryforwards for cash in exchange for foregoing the carryforward of the research and development credit. The program provides for such exchange of the research and development credit at a rate of 65% of the annual research and development credit. The benefit for such exchange is recorded as a reduction of research and development expenditures. We expect research and development expenses associated with our complement inhibitor program to be substantial and to increase over time. There are numerous existing factors associated with the development and commercialization, if any, of our complement inhibitor program, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will evolve and therefore are expected to impact the development of our complement inhibitor program and plans over time. Following the termination of the Janssen Agreement on November 8, 2017, we are responsible for all expenses associated with our HCV program. Since we have no plans to advance the HCV program on our own, we expect these expenses will be limited to the intellectual property costs related to our HCV compounds. The successful development of our drug candidates is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the remainder of the development of our drug candidates. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of: • the scope, rate of progress and expense of our clinical trials and other research and development activities; 80