ITEM 1. BUSINESS.
DESCRIPTION OF BUSINESS
Research and Development
We are a pharmaceutical company currently engaged in
the research and development of innovative pharmaceutical solutions, including an oral insulin capsule to be used for the treatment
of individuals with diabetes, and the use of orally ingestible capsules or pills for delivery of other polypeptides.
Oral insulin
: We are seeking to revolutionize
the treatment of diabetes through our proprietary flagship product, an orally ingestible insulin capsule (ORMD-0801). We completed
a Phase IIb clinical trial on 180 type 2 diabetic patients that was conducted in 33 sites in the United States. This double-blind,
randomized, 28-day clinical trial was conducted under an Investigational New Drug application, or IND, with the U.S. Food and Drug
Administration, or FDA. The clinical trial, designed to assess the safety and efficacy of ORMD-0801, investigated ORMD-0801 over
a longer treatment period and had statistical power to give us greater insight into the drug’s efficacy. The trial was initiated
in June 2015, was completed during April 2016 and successfully met its primary, secondary and exploratory endpoints. Prior to that
trial, we completed Phase IIa clinical trials in patients with both type 1 and type 2 diabetes. We also conducted a glucose clamp
study of our oral insulin capsule on type
1 diabetic volunteers. The glucose clamp is a method for quantifying insulin
absorption in order to measure a patient’s insulin sensitivity and how well a patient metabolizes glucose. The in-life phase
was completed in October 2016, and we anticipate receiving the results during the first quarter of calendar year 2017. In October
2016, we initiated an additional Phase IIa dose finding clinical trial on approximately 30 adults type 2 diabetic patients. This
trial is being conducted in order to define the optimal dosing of ORMD-0801 moving forward. Our technology allows insulin to travel
from the gastrointestinal tract via the portal vein to the bloodstream, revolutionizing the manner in which insulin is delivered.
It enables its passage in a more physiological manner than current delivery methods of insulin. Our technology is a platform that
has the potential to deliver medications and vaccines orally that today can only be delivered via injection.
Oral Glucagon-like peptide-1
: Glucagon-like
peptide-1, or GLP-1, is an incretin hormone, which is a type of gastrointestinal hormone that stimulates the secretion of insulin
from the pancreas. The incretin concept was hypothesized when it was noted that glucose ingested by mouth (oral) stimulated two
to three times more insulin release than the same amount of glucose administered intravenously. In addition to stimulating insulin
release, GLP-1 was found to suppress glucagon release (hormone involved in regulation of glucose) from the pancreas, slow gastric
emptying to reduce the rate of absorption of nutrients into the blood stream, and increase satiety. Other important beneficial
attributes of GLP-1 are its effects of increasing the number of beta cells (cells that manufacture and release insulin) in the
pancreas and, possibly, protection of the heart. In addition to our flagship product, the insulin capsule, we are using our technology
for an orally ingestible GLP-1 capsule (ORMD-0901). In August 2015, we began a non-FDA approved clinical trial for our oral exenatide
capsule on type 2 diabetic patients. All follow-up visits of this study were completed during the second quarter of calendar year
2016, and we anticipate the results analysis to be completed during the fourth quarter of calendar year 2016. In June 2016, we
also began a pre-clinical toxicology study.
Diabetes
: Diabetes is a disease in which
the body does not produce or properly use insulin. Insulin is a hormone that causes sugar to be absorbed into cells, where the
sugar is converted into energy needed for daily life. The cause of diabetes is attributed both to genetics (type 1 diabetes) and,
most often, to environmental factors such as obesity and lack of exercise (type 2 diabetes). According to the International Diabetes
Federation, or IDF, an estimated 415 million adults worldwide suffered from diabetes in 2015 and the IDF projects this number will
increase to 642 million by 2040. Also, according to the IDF, in 2015, an estimated 5.3 million people died from diabetes. According
to the American Diabetes Association, or ADA, in the United States there were approximately 29.1 million people with diabetes,
or 9.3% of the United States population in 2015. Diabetes is a leading cause of blindness, kidney failure, heart attack, stroke
and amputation.
Intellectual property
: We own a portfolio
of patents and patent applications covering our technologies, and we are aggressively protecting these technology developments
on a worldwide basis.
Management
: We are led by a highly-experienced
management team knowledgeable in the treatment of diabetes. Our Chief Medical and Technology Officer, Miriam Kidron, PhD, is a
world-recognized pharmacologist and a biochemist and the innovator primarily responsible for our oral insulin technology development
and know-how.
Scientific Advisory Board
: Our management
team has access to our internationally recognized Scientific Advisory Board whose members are thought-leaders in their respective
areas. The Scientific Advisory Board is comprised of Dr. Roy Eldor, Professor Ele Ferrannini, Professor Avram Hershko and Dr. Harold
Jacob.
Strategy
Short Term Business Strategy
We plan to conduct further research and development on
the technology covered by the patent application “Methods and Composition for Oral Administration of Proteins,” which
we acquired from Hadasit Medical Research Services and Development Ltd. in 2006, and which is pending in various foreign jurisdictions,
as well as the other patents we have filed in various foreign jurisdictions since then, as discussed below under
“—Patents
and Licenses”
and below under
“Item 1A. Risk Factors”
.
Through our research and development efforts, we are
seeking to develop an oral dosage form that will withstand the harsh chemical environment of the stomach and intestines and will
be effective in delivering active insulin or other proteins, such as exenatide, for the treatment of diabetes. The enzymes and
vehicles that are added to the proteins in the formulation process must not modify the proteins chemically or biologically, and
the dosage form must be safe to ingest. We plan to continue to conduct clinical trials to show the effectiveness of our technology.
We originally filed an IND with the FDA in December 2012 for clearance to begin a Phase II clinical trial of ORMD-0801, in order
to evaluate the safety, tolerability and efficacy of our oral insulin capsule on type 2 diabetic volunteers. Because the identical
formulation of ORMD-0801 had not yet been studied in humans at bedtime, in February 2013, the FDA noted concerns about mitigating
potential risks of severe hypoglycemia and requested that we perform a sub-study in a controlled in-patient setting for a one-week
period prior to beginning the larger multi-centered Phase II trial. As a result, we withdrew the original IND and, in April 2013,
we submitted a new IND for the Phase IIa sub-study. Following the FDA’s clearance to proceed in May 2013, we began the Phase
IIa sub-study in July 2013. As we announced in January 2014, the Phase IIa sub-study met all primary and secondary endpoints. Specifically,
the Phase IIa study evaluated the pharmacodynamic effects of ORMD-0801 on mean nighttime glucose (determined using a continuous
glucose monitor). The results showed that ORMD-0801 exhibited a sound safety profile, led to reduced mean daytime and nighttime
glucose readings and lowered fasting blood glucose concentrations, when compared to placebo. In addition, no serious adverse events
occurred during this study, and the only adverse events that occurred were not drug related. In light of these results, in June
2015, we initiated the Phase IIb clinical trial on 180 type 2 diabetic patients which was completed in April 2016. This double-blind,
randomized, 28-day study clinical trial was designed to assess the safety and efficacy of ORMD-0801, and was conducted in 33 sites
in the United States. The trial indicated a statistically significant lowering of glucose relative to placebo across several endpoints.
The trial’s positive topline data showed that the study successfully met its primary efficacy and safety endpoints. The trial
primarily evaluated the nighttime glucose lowering effect and safety of ORMD-0801 compared to a placebo. The results of the mean
nighttime glucose showed a significant difference in mean change from run-in. ORMD-0801 oral insulin was safe and well-tolerated
for the dosing regimen in this trial. The trial further evaluated the effect of ORMD-0801 on mean 24-hour glucose, fasting glucose,
and daytime glucose and the results showed a statistically significant difference in mean change from run-in. Two examples of the
data gleaned from this study are shown below:
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* Indicates Statistically Significant Difference from
Placebo (p-Value<0.05)
No significant difference was shown in change in morning
fasting serum insulin, C-Peptide, or triglycerides.
Following the significant results of the Phase IIb trial,
we initiated in October 2016 an additional Phase IIa, dose finding clinical trial on approximately 30 adult type 2 diabetic patients.
This randomized, double-blind trial is being conducted in order to define the optimal dosing of ORMD-0801 moving forward.
In February 2014, we submitted a protocol to the FDA
to initiate a Phase IIa trial of our oral insulin capsule for type 1 diabetes volunteers. The protocol was submitted under our
existing IND to include both type 1 and type 2 diabetes indications. Beginning in March 2014, the double-blind, randomized, placebo
controlled, seven-day study design was carried out at an inpatient setting on 25 type 1 diabetic patients. As we announced in October
2014, the results showed that ORMD-0801 oral insulin given before meals appeared to be safe and well-tolerated for the dosing regimen
in this study. Although the study was not powered to show statistical significance, there were internally consistent trends observed.
Consistent with the timing of administration, the data showed a decrease in rapid acting insulin, a decrease in post-prandial glucose,
a decrease in daytime glucose by continual glucose monitoring and an increase in post-prandial hypoglycemia in the active group.
We also conducted a glucose clamp study of our oral insulin
capsule on type 2 diabetic volunteers that was performed at The University of Texas Health Science Center at San Antonio. The glucose
clamp is a method for quantifying insulin absorption in order to measure a patient’s insulin sensitivity and how well a patient
metabolizes glucose. We completed the in-life phase of the study in October 2016, and anticipate to receive the results during
the first quarter of calendar year 2017.
Clinical trials are planned in order to substantiate
our results as well as for purposes of making future filings for drug approval. We also plan to conduct further research and development
by deploying our proprietary drug delivery technology for the delivery of other polypeptides in addition to insulin, and to develop
other innovative pharmaceutical products.
The table below gives an overview of our product pipeline:
Another component of our business strategy is to partner
with other companies or medical institutions in order to further develop our technology and commence pre-commercialization activities.
On November 30, 2015, we, our Israeli subsidiary and HTIT entered into a Technology License Agreement, which was further amended,
according to which we granted HTIT an exclusive commercialization license in the territory of the People's Republic of China, Macau
and Hong Kong, or the Territory, related to our oral insulin capsule, ORMD-0801. Pursuant to this license agreement, HTIT will
conduct, at its own expense, certain pre-commercialization and regulatory activities with respect to our technology related to
the ORMD-0801 capsule, and will pay certain royalties and an aggregate of approximately $37.5 million (see “Out-Licensed
Technology” below). We plan to seek additional partnerships or forms of cooperation with other companies or medical institutions.
While our strategy is to partner with an appropriate party, no assurance can be given that any third party would be interested
in partnering with us. Under certain circumstances, we may determine to develop one or more of our oral dosage form on our own,
either world-wide or in select territories.
Long Term Business Strategy
If our oral insulin capsule or other drug delivery solutions
show significant promise in clinical trials, we plan to ultimately seek a strategic commercial partner, or partners, with extensive
experience in the development, commercialization, and marketing of insulin applications and/or other orally digestible drugs. We
anticipate such partner or partners would be responsible for, or substantially support, late stage clinical trials (Phase III)
to increase the likelihood of obtaining regulatory approvals and registrations in the appropriate markets in a timely manner. We
further anticipate that such partner, or partners, would also be responsible for sales and marketing of our oral insulin capsule
in these markets. Such planned strategic partnership, or partnerships, may provide a marketing and sales infrastructure for our
products as well as financial and operational support for global clinical trials, post marketing studies, label expansions and
other regulatory requirements concerning future clinical development in the United States and elsewhere. Any future strategic partner,
or partners, may also provide capital and expertise that would enable the partnership to develop new oral dosage form for other
polypeptides. While our strategy is to partner with an appropriate party, no assurance can be given that any third party would
be interested in partnering with us. Under certain circumstances, we may determine to develop one or more of our oral dosage form
on our own, either world-wide or in select territories.
Other Planned Strategic Activities
In addition to developing our own oral dosage form drug
portfolio, we are, on an on-going basis, considering in-licensing and other means of obtaining additional technologies to complement
and/or expand our current product portfolio. Our goal is to create a well-balanced product portfolio that will enhance and complement
our existing drug portfolio.
Product Development
Research and Development Summary
We devote the majority of our efforts to research and
development, including clinical studies for our lead clinical product candidates, as described below.
Orally Ingestible Insulin
During fiscal 2007, we conducted several clinical studies
of our orally ingestible insulin that were intended to assess both the safety/tolerability and absorption properties of our proprietary
oral insulin. Based on the pharmacokinetic and pharmacologic outcomes of these trials, we decided to continue the development of
our oral insulin product.
During fiscal 2008, we successfully completed animal
studies and non-FDA approved clinical trials using our oral insulin capsule, including a Phase Ib clinical trial in healthy human
volunteers with the intent of dose optimization; a Phase IIa study to evaluate the safety and efficacy of our oral insulin capsule
in type 2 diabetic volunteers at Hadassah Medical Center in Jerusalem; and a Phase IIa study to evaluate the safety and efficacy
of our oral insulin capsule on type 1 diabetic volunteers.
Our successful non-FDA clinical trials continued in fiscal
2009, with a Phase IIb study in South Africa to evaluate the safety, tolerability and efficacy of our oral insulin capsule on type
2 diabetic volunteers.
In September 2010, we reported the successful results
of an exploratory clinical trial testing the effectiveness of our oral insulin capsule in type 1 diabetes patients suffering from
uncontrolled diabetes. Unstable or labile diabetes is characterized by recurrent, unpredictable and dramatic blood glucose swings
often linked with irregular hyperglycemia and sometimes serious hypoglycemia affecting type 1 diabetes patients. This completed
exploratory study was a proof of concept study for defining a novel indication for ORMD-0801. We believe the encouraging results
justify further clinical development of ORMD-0801 capsule application toward management of uncontrolled diabetes.
In March 2011, we reported that we successfully completed
a comprehensive toxicity study for our oral insulin capsule. The study was completed under conditions prescribed by the FDA Good
Laboratory Practices regulations.
As described above, we began FDA-approved clinical trials
of ORMD-0801 in July 2013, with the Phase IIa sub-study, which evaluated the pharmacodynamic effects of ORMD-0801 on mean
nighttime glucose (determined using a continuous glucose monitor) in volunteers with type 2 diabetes. As we announced in January
2014, the results showed that ORMD-0801 exhibited a sound safety profile, led to reduced mean daytime and nighttime glucose readings
and lowered fasting blood glucose concentrations, when compared to placebo.
In March 2014, we began an FDA-approved Phase IIa trial
of ORMD-0801 in volunteers with type 1 diabetes. As we announced in October 2014, the results showed that ORMD-0801 oral insulin
given before meals appeared to be safe and well-tolerated for the dosing regimen in this study. Although the study was not powered
to show statistical significance, there were internally consistent trends observed. Consistent with the timing of administration,
the data showed a decrease in rapid acting insulin, a decrease in post-prandial glucose, a decrease in daytime glucose by continual
glucose monitoring and an increase in post-prandial hypoglycemia in the active group.
In April 2015, we began a glucose clamp study of our
oral insulin capsule on type 2 diabetic volunteers that was performed at The University of Texas Health Science Center at San Antonio
and University Health System’s Texas Diabetes Institute. The glucose clamp is a method for quantifying insulin absorption
in order to measure a patient’s insulin sensitivity and how well a patient metabolizes glucose. We completed the in-life
phase of the study in October 2016, and anticipate receiving the results during the first quarter of calendar year 2017.
In June 2015, we initiated a Phase IIb clinical trial
on 180 type 2 diabetic patients, which was completed in April 2016. This double-blind, randomized, 28-day study was designed to
assess the safety and efficacy of ORMD-0801 and was conducted in 33 sites in the United States. The trial indicated a statistically
significant lowering of glucose relative to placebo across several endpoints. The trial successfully met its primary efficacy and
safety endpoints and its secondary and exploratory endpoints.
In October 2016, we initiated an additional Phase
IIa dose finding clinical trial on approximately 30 adult type 2 diabetic patients. This randomized, double-blind trial is being
conducted in order to define the optimal dosing of ORMD-0801 moving forward.
We utilize Clinical Research Organizations, or CROs,
to conduct our clinical studies. We currently have an agreement with Integrium LLC to act as CRO for the Phase IIa dose finding
clinical trial of ORMD-0801 in volunteers having type 2 diabetes, described above.
GLP-1 Analog
During fiscal 2009, we completed pre-clinical trials
of ORMD-0901, an analog for GLP-1, which included animal studies that suggested that the GLP-1 analog (exenatide-4), when
combined with Oramed’s absorption promoters, is absorbed through the gastrointestinal tract and retains its biological
activity.
In December 2009, we completed non-FDA approved clinical
trials of an oral GLP-1 analog in healthy, male volunteers conducted at Hadassah University Medical Center in Jerusalem. This study
tested the safety and efficacy of ORMD-0901, an encapsulated oral GLP-1 analog formulation. The results of the study indicated
that ORMD-0901 was well tolerated by all subjects and demonstrated physiological activity, as extrapolated from ensuing subject
insulin levels when compared to those observed after treatment with placebo.
In January 2013, we began a clinical trial for our oral
exenatide capsule on healthy volunteers and type 2 diabetic patients. Based on this study, we decided to make slight adjustments
in the manufacturing of these capsules and have begun pre-toxicology studies on the new capsules.
In September 2013, we submitted a pre-IND package to
the FDA for ORMD-0901, our oral exenatide capsule, for a Phase II clinical trial on healthy volunteers and type 2 diabetic patients.
We began a toxicology study in June 2016 and expect to file an IND and move directly into a large Phase II multi-center trial in
the United States.
In August 2015, we began a non-FDA approved clinical
trial for our oral exenatide capsule on type 2 diabetic patients. All follow-up visits of this study were completed during the
second quarter of calendar year 2016, and we anticipate the results analysis to be completed during the fourth quarter of calendar
year 2016.
Combination Therapy
In June 2012, we presented an abstract, which reported
the impact of our oral insulin capsule ORMD-0801 delivered in combination with our oral exenatide capsule ORMD-0901. The work that
was presented assessed the safety and effectiveness of a combination of oral insulin and oral exenatide treatments delivered to
pigs prior to food intake. The drug combination resulted in significantly improved blood glucose regulation when compared to administration
of each drug separately.
In February 2013, we commenced a first human clinical
trial on type 2 diabetic volunteers with our oral insulin capsule delivered in combination with our oral exenatide capsule. In
the near term, we are focusing our efforts on the development of the Company’s flagship products, oral insulin and oral exenatide.
Once these two products have progressed further in clinical trials, we intend to conduct additional studies with the oral combination
therapy.
Feasibility study
In August 2015, we entered into an agreement with a large
international pharmaceutical company, or the Pharma Company, pursuant to which we conducted a feasibility study, using one of the
Pharma Company's propriety injectable compounds. The study used our proprietary technology in order to deliver the compound orally.
Following the successful completion of the first step of the study in July 2016, we continued to the second step of the study.
The study will provide data required for decision making on whether to enter into a license agreement between the parties.
Raw Materials
Our oral insulin capsule is currently manufactured by
Swiss Caps AG.
One of our oral capsule ingredients is being developed
and produced by an Indian company.
In July 2010, Oramed Ltd. entered into the Manufacturing
and Supply Agreement, or MSA, with Sanofi-Aventis Deutschland GMBH, or Sanofi-Aventis. According to the MSA, Sanofi-Aventis will
supply Oramed Ltd. with specified quantities of recombinant human insulin to be used for clinical trials in the United States.
We purchase, pursuant to separate agreements with third
parties, the raw materials required for the manufacturing of our oral capsule. We generally depend upon a limited number of suppliers
for the raw materials. Although alternative sources of supply for these materials are generally available, we could incur significant
costs and disruptions if we would need to change suppliers. The termination of our relationships with our suppliers or the failure
of these suppliers to meet our requirements for raw materials on a timely and cost-effective basis could have a material adverse
effect on our business, prospects, financial condition and results of operations.
Patents and Licenses
We maintain a proactive intellectual property strategy,
which includes patent filings in multiple jurisdictions, including the United States and other commercially significant markets.
We hold 29 patent applications currently pending, with respect to various compositions, methods of production and oral administration
of proteins and exenatide. Expiration dates for pending patents, if granted, will fall between 2026 and 2034.
We hold 30 patents, three of which were issued in fiscal
2016, including patents issued by the United States, Swiss, German, French, U.K., Italian, Netherland, Spanish, Australian, Israeli,
Japanese, Russian, Canadian, Hong Kong, Chinese, European and Indian patent offices that cover a part of our technology, which
allows for the oral delivery of proteins and patents issued by the Australian, Israeli, New Zealand, South African and Russian
patent offices that cover part of our technology for the oral delivery of exenatide.
Consistent with our strategy to seek protection in key
markets worldwide, we have been and will continue to pursue the patent applications and corresponding foreign counterparts of such
applications. We believe that our success will depend on our ability to obtain patent protection for our intellectual property.
Our patent strategy is as follows:
Aggressively protect all current and future technological
developments to assure strong and broad protection by filing patents and/or continuations in part as appropriate,
Protect technological developments at various levels,
in a complementary manner, including the base technology, as well as specific applications of the technology, and
Establish comprehensive coverage in the United States
and in all relevant foreign markets in anticipation of future commercialization opportunities.
We also rely on trade secrets and unpatentable know-how
that we seek to protect, in part, by confidentiality agreements. Our policy is to require our employees, consultants, contractors,
manufacturers, outside scientific collaborators and sponsored researchers, our board of directors, or our Board, technical review
board and other advisors, to execute confidentiality agreements upon the commencement of employment or consulting relationships
with us. These agreements provide that all confidential information developed or made known to the individual during the course
of the individual’s relationship with us is to be kept confidential and not disclosed to third parties except in specific
limited circumstances. We also require signed confidentiality or material transfer agreements from any company that is to receive
our confidential information. In the case of employees, consultants and contractors, the agreements provide that all inventions
conceived by the individual while rendering services to us shall be assigned to us as the exclusive property of our Company. There
can be no assurance, however, that all persons who we desire to sign such agreements will sign, or if they do, that these agreements
will not be breached, that we would have adequate remedies for any breach, or that our trade secrets or unpatentable know-how will
not otherwise become known or be independently developed by competitors.
Out-Licensed Technology
In June 2010, Oramed Ltd. entered into a joint venture
agreement with D.N.A Biomedical Solutions Ltd., or D.N.A, for the establishment of Entera Bio LTD, or Entera.
Under the terms of a license agreement that was entered
into between Oramed Ltd. and Entera in August 2010, we out-licensed technology to Entera, on an exclusive basis, for the development
of oral delivery drugs for certain indications to be agreed upon between the parties. The out-licensed technology differs from
our main delivery technology that is used for oral insulin and GLP-1 analog and is subject to different patent applications. Entera’s
initial development effort is for an oral formulation for the treatment of osteoporosis. In March 2011, we entered into a patent
transfer agreement to replace the original license agreement upon closing pursuant to which Oramed Ltd. assigned to Entera all
of its right, title and interest in and to the patent application that it had licensed to Entera in August 2010. Under this agreement,
Oramed Ltd. is entitled to receive from Entera royalties of 3% of Entera’s net revenues (as defined in the agreement) and
a license back of that patent application for use in respect of diabetes and influenza.
In March 2011, we also consummated a transaction with
D.N.A, whereby we sold to D.N.A 47% of Entera’s outstanding share capital on an undiluted basis. As consideration for the
Entera shares, we received consideration of cash and ordinary shares of D.N.A, having an aggregate value of approximately $1,032,000
as of March 31, 2011. The promissory note was secured by a personal guarantee of the D.N.A majority shareholders and its term was
extended in August 2011. D.N.A paid off the promissory note in November 2011. The market price for D.N.A’s ordinary shares
is subject to market fluctuations and may, at times, have a price below the value on the date we acquired such shares. The closing
price for D.N.A’s ordinary shares was $0.068 per share on November 22, 2016. In addition, the ordinary shares of D.N.A have
historically experienced low trading volume; as a result there is no guarantee that we will be able to resell the ordinary shares
of D.N.A at the prevailing market prices. In addition, D.N.A invested $250,000 in our private placement investment round, which
closed in March 2011, for which it received 65,105 shares of our common stock and five-year warrants to purchase 22,787 shares
of our common stock at an exercise price of $6.00 per share.
D.N.A consummated a reverse stock split at a ratio of
one-for-two, effective October 4, 2015, and unless otherwise indicated, share amounts of D.N.A included in this Form 10-K have
been adjusted to reflect the effects of the reverse stock split.
In October 2012, as part of a securities purchase agreement
with D.N.A, we received the option to purchase up to 10,818,806 ordinary shares of D.N.A, valued at approximately $629,000 at the
day of the transaction, and we exercised the option in February 2013.
Through August 31, 2016, we sold a total of 4,812,995
shares for total consideration of $364,000, and as of August 31, 2016, we held 10,208,144 shares.
In June 2016, Entera announced that it had obtained
orphan status from the European Medicines Agency, or EMA, for its oral treatment for hypoparathyroidism. EMA approval is in addition
to the orphan status it obtained from the FDA for the same oral treatment in April 2014.
In July 2015, Entera announced it had completed a phase
2a study to assess the safety and efficacy of its oral treatment for hypoparathyroidism and that the goals of the study were achieved.
On November 30, 2015, we, our Israeli subsidiary and
HTIT entered into a Technology License Agreement, and on December 21, 2015 these parties entered into an Amended and Restated Technology
License Agreement that was further amended by the parties on June 3, 2016 and July 24, 2016, or the License Agreement. According
to the License Agreement, we granted HTIT an exclusive commercialization license in the Territory, related to our oral insulin
capsule, ORMD-0801. Pursuant to the License Agreement, HTIT will conduct, at its own expense, certain pre-commercialization and
regulatory activities with respect to our technology and ORMD-0801 capsule, and will pay (i) royalties of 10% on net sales of the
related commercialized products to be sold by HTIT in the Territory, or Royalties, and (ii) an aggregate of approximately $37.5
million, of which $3 million is payable immediately, $8 million will be paid in near term installments subject to our entry into
certain agreements with certain third parties, and $26.5 million will be payable upon achievement of certain milestones and conditions.
In the event that we will not meet certain conditions, the Royalties rate may be reduced to a minimum of 8%. Following the expiration
of our patents covering the technology in the Territory, the Royalties rate may be reduced, under certain circumstances, to 5%.
The initial payment of $3 million was received in January 2016. Following achievement of certain milestones, the second and third
milestone payments of $6.5 million and $4 million, respectively, were received in July 2016 and the fourth milestone payment of
$4 million was received in October 2016.
We also entered into a separate securities purchase
agreement with HTIT, or the SPA, pursuant to which HTIT invested $12 million in us in December 2015 (see – “Liquidity
and capital resources” below). In connection with the License Agreement and the SPA, we received a non-refundable payment
of $500,000 as a no-shop fee.
Government Regulation
The Drug Development Process
Regulatory requirements for the approval of new drugs
vary from one country to another. In order to obtain approval to market our drug portfolio, we need to go through a different regulatory
process in each country in which we apply for such approval. In some cases information gathered during the approval process in
one country can be used as supporting information for the approval process in another country. As a strategic decision, we decided
to first explore the FDA regulatory pathway. The following is a summary of the FDA’s requirements.
The FDA requires that pharmaceutical and certain other
therapeutic products undergo significant clinical experimentation and clinical testing prior to their marketing or introduction
to the general public. Clinical testing, known as clinical trials or clinical studies, is either conducted internally by life science,
pharmaceutical, or biotechnology companies or is conducted on behalf of these companies by CROs.
The process of conducting clinical studies is highly
regulated by the FDA, as well as by other governmental and professional bodies. Below we describe the principal framework in which
clinical studies are conducted, as well as describe a number of the parties involved in these studies.
Protocols. Before commencing human clinical studies,
the sponsor of a new drug or therapeutic product must submit an IND application to the FDA. The application contains, among other
documents, what is known in the industry as a protocol. A protocol is the blueprint for each drug study. The protocol sets forth,
among other things, the following:
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Who must be recruited as qualified participants,
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How often to administer the drug or product,
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What tests to perform on the participants, and
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What dosage of the drug or amount of the product to give to the participants.
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Institutional Review Board. An institutional review board
is an independent committee of professionals and lay persons which reviews clinical research studies involving human beings and
is required to adhere to guidelines issued by the FDA. The institutional review board does not report to the FDA, but its records
are audited by the FDA. Its members are not appointed by the FDA. All clinical studies must be approved by an institutional review
board. The institutional review board’s role is to protect the rights of the participants in the clinical studies. It approves
the protocols to be used, the advertisements which the company or CRO conducting the study proposes to use to recruit participants,
and the form of consent which the participants will be required to sign prior to their participation in the clinical studies.
Clinical Trials. Human clinical studies or testing of
a potential product are generally done in three stages known as Phase I through Phase III testing. The names of the phases are
derived from the regulations of the FDA. Generally, there are multiple studies conducted in each phase.
Phase I. Phase I studies involve testing a drug or product
on a limited number of healthy or patients participants, typically 24 to 100 people at a time. Phase I studies determine a product’s
basic safety and how the product is absorbed by, and eliminated from, the body. This phase lasts an average of six months to a
year.
Phase II. Phase II trials involve testing of no more
than 300 participants at a time who may suffer from the targeted disease or condition. Phase II testing typically lasts an average
of one to two years. In Phase II, the drug is tested to determine its safety and effectiveness for treating a specific illness
or condition. Phase II testing also involves determining acceptable dosage levels of the drug. Phase II studies may be split into
Phase IIa and Phase IIb sub-studies. Phase IIa studies may be conducted with patient volunteers and are exploratory (non-pivotal)
studies, typically designed to evaluate clinical efficacy or biological activity. Phase IIb studies are conducted with patients
defined to evaluate definite dose range and evaluate efficacy. If Phase II studies show that a new drug has an acceptable range
of safety risks and probable effectiveness, a company will generally continue to review the substance in Phase III studies.
Phase III. Phase III studies involve testing large numbers
of participants, typically several hundred to several thousand persons. The purpose is to verify effectiveness and long-term safety
on a large scale. These studies generally last two to three years. Phase III studies are conducted at multiple locations or sites.
Like the other phases, Phase III requires the site to keep detailed records of data collected and procedures performed.
New Drug Approval. The results of the clinical trials
are submitted to the FDA as part of a new drug application, or NDA. Following the completion of Phase III studies, assuming the
sponsor of a potential product in the United States believes it has sufficient information to support the safety and effectiveness
of its product, the sponsor will generally submit an NDA to the FDA requesting that the product be approved for marketing. The
application is a comprehensive, multi-volume filing that includes the results of all clinical studies, information about the drug’s
composition, and the sponsor’s plans for producing, packaging and labeling the product. The FDA’s review of an application
can take a few months to many years, with the average review lasting 18 months. Once approved, drugs and other products may be
marketed in the United States, subject to any conditions imposed by the FDA.
Phase IV. The FDA may require that the sponsor conduct
additional clinical trials following new drug approval. The purpose of these trials, known as Phase IV studies, is to monitor
long-term risks and benefits, study different dosage levels or evaluate safety and effectiveness. In recent years, the FDA has
increased its reliance on these trials. Phase IV studies usually involve thousands of participants. Phase IV studies also may
be initiated by the company sponsoring the new drug to gain broader market value for an approved drug.
The drug approval process is time-consuming, involves
substantial expenditures of resources, and depends upon a number of factors, including the severity of the illness in question,
the availability of alternative treatments, and the risks and benefits demonstrated in the clinical trials.
Other Regulations
Various federal, state and local laws, regulations, and
recommendations relating to safe working conditions, laboratory practices, the experimental use of animals, the environment and
the purchase, storage, movement, import, export, use, and disposal of hazardous or potentially hazardous substances, including
radioactive compounds and infectious disease agents, used in connection with our research are applicable to our activities. They
include, among others, the U.S. Atomic Energy Act, the Clean Air Act, the Clean Water Act, the Occupational Safety and Health Act,
the National Environmental Policy Act, the Toxic Substances Control Act, and Resources Conservation and Recovery Act, national
restrictions on technology transfer, import, export, and customs regulations, and other present and possible future local, state,
or federal regulation. The compliance with these and other laws, regulations and recommendations can be time-consuming and involve
substantial costs. In addition, the extent of governmental regulation which might result from future legislation or administrative
action cannot be accurately predicted and may have a material adverse effect on our business, financial condition, results of operations
and prospects.
Competition
Competition in General
Competition in the area of biomedical and pharmaceutical
research and development is intense and significantly depends on scientific and technological factors. These factors include the
availability of patent and other protection for technology and products, the ability to commercialize technological developments
and the ability to obtain regulatory approval for testing, manufacturing and marketing. Our competitors include major pharmaceutical,
medical products, chemical and specialized biotechnology companies, many of which have financial, technical and marketing resources
significantly greater than ours. In addition, many biotechnology companies have formed collaborations with large, established companies
to support research, development and commercialization of products that may be competitive with ours. Academic institutions, governmental
agencies and other public and private research organizations are also conducting research activities and seeking patent protection
and may commercialize products on their own or through joint ventures. We are aware of certain other products manufactured or under
development by competitors that are used for the treatment of the diseases and health conditions that we have targeted for product
development. We can provide no assurance that developments by others will not render our technology obsolete or noncompetitive,
that we will be able to keep pace with new technological developments or that our technology will be able to supplant established
products and methodologies in the therapeutic areas that are targeted by us. The foregoing factors could have a material adverse
effect on our business, prospects, financial condition and results of operations. These companies, as well as academic institutions,
governmental agencies and private research organizations, also compete with us in recruiting and retaining highly qualified scientific
personnel and consultants.
Competition within our sector is increasing, so we will
encounter competition from existing firms that offer competitive solutions in diabetes treatment solutions. These competitive companies
could develop products that are superior to, or have greater market acceptance, than the products being developed by us. We will
have to compete against other biotechnology and pharmaceutical companies with greater market recognition and greater financial,
marketing and other resources.
Our competition will be determined in part by the potential
indications for which our technology is developed and ultimately approved by regulatory authorities. In addition, the first product
to reach the market in a therapeutic or preventive area is often at a significant competitive advantage relative to later entrants
to the market. Accordingly, the relative speed with which we, or our potential corporate partners, can develop products, complete
the clinical trials and approval processes and supply commercial quantities of the products to the market are expected to be important
competitive factors. Our competitive position will also depend on our ability to attract and retain qualified scientific and other
personnel, develop effective proprietary products, develop and implement production and marketing plans, obtain and maintain patent
protection and secure adequate capital resources. We expect our technology, if approved for sale, to compete primarily on the basis
of product efficacy, safety, patient convenience, reliability, value and patent position.
Competition for Our Oral Insulin Capsule
We anticipate the oral insulin capsule to be a competitive
diabetes drug because of its anticipated efficacy and safety profile. The following are treatment options for type 1 and type 2
diabetic patients:
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A combination of diet, exercise and oral medication which improve the body’s response to insulin or cause the body to produce
more insulin.
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Several entities who are actively developing oral insulin
capsules and/or alternatives to insulin are thought to be: Novo Nordisk (Denmark), Biocon Limited (India) and Midatech (UK).
Scientific Advisory Board
We maintain a Scientific Advisory Board consisting of
internationally recognized scientists who advise us on scientific and technical aspects of our business. The Scientific Advisory
Board meets periodically to review specific projects and to assess the value of new technologies and developments to us. In addition,
individual members of the Scientific Advisory Board meet with us periodically to provide advice in their particular areas of expertise.
The Scientific Advisory Board consists of the following members, information with respect to whom is set forth below: Dr. Roy Eldor,
Professor Ele Ferrannini, Professor Avram Hershko and Dr. Harold Jacob.
Dr. Roy Eldor
,
MD
, joined the Oramed
Scientific Advisory Board in July 2016. He is an endocrinologist, internist and researcher with over twenty years of clinical and
scientific experience. He is currently Director of the Diabetes Unit at the Institute of Endocrinology, Metabolism & Hypertension,
Tel-Aviv Sourasky Medical Center. Prior to that, Dr. Eldor served as Principal Scientist at Merck Research Laboratories, Clinical
Research - Diabetes & Endocrinology, Rahway, New Jersey. He has previously served as a senior physician in internal medicine
at the Diabetes Unit in Hadassah Hebrew University Hospital, Jerusalem, Israel; and the Diabetes Division at the University of
Texas Health Science Center in San Antonio, Texas (under the guidance of Dr. R.A. DeFronzo). Dr. Eldor is a recognized expert,
with over 35 peer reviewed papers and book chapters, and has been a guest speaker to numerous international forums.
Professor Ele Ferrannini
,
MD,
joined
the Oramed Scientific Advisory Board in February 2007. He is a past President to the, European Association for the Study of Diabetes,
which supports scientists, physicians and students from all over the world who are interested in diabetes and related subjects
in Europe, and performs functions similar to that of the ADA in the United States. Professor Ferrannini has worked with various
institutions including the Department of Clinical & Experimental Medicine, University of Pisa School of Medicine, and CNR (National
Research Council) Institute of Clinical Physiology, Pisa, Italy; and the Diabetes Division, Department of Medicine, University
of Texas Health Science Center at San Antonio, Texas. He has also had extensive training in internal medicine and endocrinology,
and has specialized in diabetes studies. Professor Ferrannini has received a Certificate of the Educational Council for Foreign
Medical Graduates from the University of Bologna, and with cum laude honors completed a subspecialty in Diabetes and Metabolic
Diseases at the University of Torino. He has published over 500 original papers and 50 book chapters and he is a “highly
cited researcher,” according to the Institute for Scientific Information.
Professor Avram Hershko, MD, PhD
, joined
the Oramed Scientific Advisory Board in July 2008. He earned his MD degree (1965) and PhD degree (1969) from the Hebrew University-Hadassah
Medical School of Jerusalem. Professor Hershko served as a physician in the Israel Defense Forces from 1965 to 1967. After a post-doctoral
fellowship with Gordon Tomkins at the University of San Francisco (1969
-
72), he joined the faculty of the Haifa Technion
becoming a professor in 1980. He is now Distinguished Professor in the Unit of Biochemistry in the B. Rappaport Faculty of Medicine
of the Technion. Professor Hershko’s main research interests concern the mechanisms by which cellular proteins are degraded,
a formerly neglected field of study. Professor Hershko and his colleagues showed that cellular proteins are degraded by a highly
selective proteolytic system. This system tags proteins for destruction by linkage to a protein called ubiquitin, which had previously
been identified in many tissues, but whose function was previously unknown. Subsequent work by Professor Hershko and many other
laboratories has shown that the ubiquitin system has a vital role in controlling a wide range of cellular processes, such as the
regulation of cell division, signal transduction and DNA repair. Professor Hershko was awarded the Nobel Prize in Chemistry (2004)
jointly with his former PhD student Aaron Ciechanover and their colleague Irwin Rose. His many honors include the Israel Prize
for Biochemistry (1994), the Gairdner Award (1999), the Lasker Prize for Basic Medical Research (2000), the Wolf Prize for Medicine
(2001) and the Louisa Gross Horwitz Award (2001). Professor Hershko is a member of the Israel Academy of Sciences (2000) and a
Foreign Associate of the U.S. Academy of Sciences (2003).
Dr. Harold Jacob, MD
,
joined the Oramed Scientific Advisory Board in November 2016. Since 1998, Dr. Jacob has served as the president of Medical Instrument
Development Inc., a company which provides a range of support and consulting services to start-up and early stage companies as
well as patenting its own proprietary medical devices. Since 2011, Dr. Jacob has also served as an attending physician at Hadassah
University Medical Center, where he has served as the director of the gastrointestinal endoscopy unit since September 2013. Dr.
Jacob has advised a spectrum of companies in the past and he served as a consultant and then as the Director of Medical Affairs
at Given Imaging Ltd., from 1997 to 2003, a company that developed the first swallowable wireless pill camera for inspection of
the intestine. He has licensed patents to a number of companies including Kimberly-Clark Corporation. Since 2014, Dr. Jacob has
served as the Chief Medical Officer and a director of NanoVibronix, Inc., a medical device company using surface acoustics to prevent
catheter acquired infection as well as other applications, where he served as Chief Executive Officer from 2004 to 2014. He practiced
clinical gastroenterology in New York and served as Chief of Gastroenterology at St. John’s Episcopal Hospital and South
Nassau Communities Hospital from 1986 to 1995, and was a Clinical Assistant Professor of Medicine at SUNY from 1983 to 1990. Dr.
Jacob founded and served as Editor in Chief of Endoscopy Review and has authored numerous publications in the field of gastroenterology.
Employees
We have been successful in retaining experienced personnel
involved in our research and development program. In addition, we believe we have successfully recruited the clinical/regulatory,
quality assurance and other personnel needed to advance through clinical studies or have engaged the services of experts in the
field for these requirements. As of August 31, 2016, we have contracted with twelve individuals for employment or consulting arrangements.
Of our staff, four are senior management, three are engaged in research and development work, and the remaining five are involved
in administration work.
Additional Information
Additional information about us is contained on our
Internet website at www.oramed.com. Information on our website is not incorporated by reference into this report. On our website,
under “Investors”, “SEC Filings”, we make available free of charge our Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a)
of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon as reasonably practicable after we electronically
file such material with, or furnish it to, the SEC. Our reports filed with the Securities and Exchange Commission, or SEC,
are also made available to read and copy at the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. You
may obtain information about the Public Reference Room by calling the SEC at 1-800-SEC-0330. Reports filed with the
SEC are also made available on its website at www.sec.gov. The following Corporate Governance documents are also posted on
our website: Code of Ethics and the Charters for each of the Audit Committee and Compensation Committee of our Board.
ITEM 1A. RISK
FACTORS.
An investment in our securities involves a high
degree of risk. You should consider carefully the following information about these risks, together with the other information
contained in this Annual Report on Form 10-K before making an investment decision. Our business, prospects, financial condition,
and results of operations may be materially and adversely affected as a result of any of the following risks. The value of our
securities could decline as a result of any of these risks. You could lose all or part of your investment in our securities. Some
of the statements in “Item 1A. Risk Factors” are forward-looking statements. The following risk factors are not the
only risk factors facing our Company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial
may also affect our business, prospects, financial condition and results of operations.
Risks Related to Our Business
We continue and expect to incur losses in the future
.
Successful completion of our development programs and
our transition to normal operations are dependent upon obtaining necessary regulatory approvals from the FDA prior to selling our
products within the United States, and foreign regulatory approvals must be obtained to sell our products internationally. There
can be no assurance that we will receive regulatory approval of any of our product candidates, and a substantial amount of time
may pass before we achieve a level of revenues adequate to support our operations. We also expect to incur substantial expenditures
in connection with the regulatory approval process for each of our product candidates during their respective developmental periods.
Obtaining marketing approval will be directly dependent on our ability to implement the necessary regulatory steps required to
obtain marketing approval in the United States and in other countries. We cannot predict the outcome of these activities.
Based on our current cash resources and commitments,
we believe we will be able to maintain our current planned development activities and the corresponding level of expenditures for
at least the next 12 months and beyond, although no assurance can be given that we will not need additional funds prior to such
time. If there are unexpected increases in our operating expenses, we may need to seek additional financing during the next 12
months.
We will need substantial additional capital in order
to satisfy our business objectives.
To date, we have financed our operations principally
through offerings of securities exempt from the registration requirements of the Securities Act of 1933, as amended, or the Securities
Act. We believe that our available resources and cash flow will be sufficient to meet our anticipated working capital needs for
at least the next 12 months from the date of this Annual Report on Form 10-K. We will require substantial additional financing
at various intervals in order to continue our research and development programs, including significant requirements for operating
expenses including intellectual property protection and enforcement, for pursuit of regulatory approvals, and for commercialization
of our products. We can provide no assurance that additional funding will be available on a timely basis, on terms acceptable to
us, or at all. In the event that we are unable to obtain such financing, we will not be able to fully develop and commercialize
our technology. Our future capital requirements will depend upon many factors, including:
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Continued scientific progress in our research and development programs,
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Costs and timing of conducting clinical trials and seeking regulatory approvals and patent prosecutions,
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Competing technological and market developments,
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Our ability to establish additional collaborative relationships, and
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Effects of commercialization activities and facility expansions if and as required.
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If we cannot secure adequate financing when needed, we
may be required to delay, scale back or eliminate one or more of our research and development programs or to enter into license
or other arrangements with third parties to commercialize products or technologies that we would otherwise seek to develop ourselves
and commercialize ourselves. In such event, our business, prospects, financial condition, and results of operations may be adversely
affected as we may be required to scale-back, eliminate, or delay development efforts or product introductions or enter into royalty,
sales or other agreements with third parties in order to commercialize our products.
We have a history of losses and can provide no assurance
as to our future operating results.
We do not have sufficient revenues from our research
and development activities to fully support our operations. Consequently, we have incurred net losses and negative cash flows since
inception. We currently have only licensing revenues and no product revenues, and may not succeed in developing or commercializing
any products which could generate product revenues. We do not expect to have any products on the market for several years. In addition,
development of our product candidates requires a process of pre-clinical and clinical testing, during which our products could
fail. We may not be able to enter into agreements with one or more companies experienced in the manufacturing and marketing of
therapeutic drugs and, to the extent that we are unable to do so, we will not be able to market our product candidates. Eventual
profitability will depend on our success in developing, manufacturing, and marketing our product candidates. As of August 31, 2016,
August 31, 2015 and August 31, 2014, we had working capital of $27,609,000, $15,883,000 and $20,805,000, respectively, and stockholders’
equity of $26,190,000, $24,828,000 and $20,793,000, respectively. During the 12 month period ended August 31, 2016, we generated
revenues of $641,000. No revenues were generated in prior periods. For the period from our inception on April 12, 2002 through
August 31, 2016, the year ended August 31, 2016, the year ended August 31, 2015 and the year ended August 31, 2014, we incurred
net losses of $46,016,000, $10,964,000, $7,232,000 and $5,696,000, respectively. We may never achieve profitability and expect
to incur net losses in the foreseeable future. See “Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations.”
We rely upon patents to protect our technology.
The patent position of biopharmaceutical and biotechnology
firms is generally uncertain and involves complex legal and factual questions. We do not know whether any of our current or future
patent applications will result in the issuance of any patents. Even issued patents may be challenged, invalidated or circumvented.
Patents may not provide a competitive advantage or afford protection against competitors with similar technology. Competitors or
potential competitors may have filed applications for, or may have received patents and may obtain additional and proprietary rights
to compounds or processes used by or competitive with ours. In addition, laws of certain foreign countries do not protect intellectual
property rights to the same extent as do the laws of the United States.
Patent litigation is becoming widespread in the biopharmaceutical
and biotechnology industry and we cannot predict how this will affect our efforts to form strategic alliances, conduct clinical
testing or manufacture and market any products under development. If challenged, our patents may not be held valid. We could also
become involved in interference proceedings in connection with one or more of our patents or patent applications to determine priority
of invention. If we become involved in any litigation, interference or other administrative proceedings, we will likely incur substantial
expenses and the efforts of our technical and management personnel will be significantly diverted. In addition, an adverse determination
could subject us to significant liabilities or require us to seek licenses that may not be available on favorable terms, if at
all. We may be restricted or prevented from manufacturing and selling our products in the event of an adverse determination in
a judicial or administrative proceeding or if we fail to obtain necessary licenses.
We may be unable to protect our intellectual property
rights and we may be liable for infringing the intellectual property rights of others.
Our ability to compete effectively will depend on our
ability to maintain the proprietary nature of our technologies. We currently hold several pending patent applications in the United
States for our technologies covering oral administration of insulin and other proteins and oral administration of exenatide and
proteins, corresponding patent applications filed in Canada, Europe, Japan, China, Brazil, Hong Kong and India, 30 patents issued
by the United States, Australian, Canadian, Chinese, Israeli, Japanese, New Zealand, South African, Russian, Hong Kong, Swiss,
German, Spanish, French, United Kingdom, Italy, Indian and the Netherlands (for our technologies covering oral administration of
insulin and other proteins) and New Zealand, South African, Australian, Russian and Israeli (for our technologies covering oral
administration of insulin and other proteins and oral administration of exenatides) patent offices. Further, we intend to rely
on a combination of trade secrets and non-disclosure and other contractual agreements and technical measures to protect our rights
in our technology. We intend to depend upon confidentiality agreements with our officers, directors, employees, consultants, and
subcontractors, as well as collaborative partners, to maintain the proprietary nature of our technology. These measures may not
afford us sufficient or complete protection, and others may independently develop technology similar to ours, otherwise avoid our
confidentiality agreements, or produce patents that would materially and adversely affect our business, prospects, financial condition,
and results of operations. We believe that our technology is not subject to any infringement actions based upon the patents of
any third parties; however, our technology may in the future be found to infringe upon the rights of others. Others may assert
infringement claims against us, and if we should be found to infringe upon their patents, or otherwise impermissibly utilize their
intellectual property, our ability to continue to use our technology could be materially restricted or prohibited. If this event
occurs, we may be required to obtain licenses from the holders of this intellectual property, enter into royalty agreements, or
redesign our products so as not to utilize this intellectual property, each of which may prove to be uneconomical or otherwise
impossible. Licenses or royalty agreements required in order for us to use this technology may not be available on terms acceptable
to us, or at all. These claims could result in litigation, which could materially adversely affect our business, prospects, financial
condition, and results of operations.
Our commercial success will also depend significantly
on our ability to operate without infringing the patents and other proprietary rights of third parties. Patent applications are,
in many cases, maintained in secrecy until patents are issued. The publication of discoveries in the scientific or patent literature
frequently occurs substantially later than the date on which the underlying discoveries were made and patent applications are filed.
In the event of infringement or violation of another party’s patent, we may be prevented from pursuing product development
or commercialization. See “Item 1. Business—Description of Business—Patents and Licenses.”
At present, our success depends primarily on the successful
commercialization of our oral insulin capsule.
The successful commercialization of oral insulin capsule
is crucial for our success. At present, our principal product is the oral insulin capsule. Our oral insulin capsule is in a clinical
development stage and faces a variety of risks and uncertainties. Principally, these risks include the following:
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Future clinical trial results may show that the oral insulin capsule is not well tolerated by recipients at its effective doses
or is not efficacious as compared to placebo,
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Future clinical trial results may be inconsistent with previous preliminary testing results and data from our earlier studies
may be inconsistent with clinical data,
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Even if our oral insulin capsule is shown to be safe and effective for its intended purposes, we may face significant or unforeseen
difficulties in obtaining or manufacturing sufficient quantities or at reasonable prices,
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Our ability to complete the development and commercialization of the oral insulin capsule for our intended use is significantly
dependent upon our ability to obtain and maintain experienced and committed partners to assist us with obtaining clinical and
regulatory approvals for, and the manufacturing, marketing and distribution of, the oral insulin capsule on a worldwide basis,
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Even if our oral insulin capsule is successfully developed, commercially produced and receives all necessary regulatory approvals,
there is no guarantee that there will be market acceptance of our product, and
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Our competitors may develop therapeutics or other treatments which are superior or less costly than our own with the result that
our products, even if they are successfully developed, manufactured and approved, may not generate significant revenues.
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If we are unsuccessful in dealing with any of these risks,
or if we are unable to successfully commercialize our oral insulin capsule for some other reason, it would likely seriously harm
our business.
We have limited experience in conducting clinical
trials.
Clinical trials must meet FDA and foreign regulatory
requirements. We have limited experience in designing, conducting and managing the preclinical studies and clinical trials necessary
to obtain regulatory approval for our product candidates in any country. We have entered into agreements with Integrium LLC to
assist us in designing, conducting and managing our various clinical trials in the United States. Any failure of Integrium or any
other consultant to fulfill their obligations could result in significant additional costs as well as delays in designing, consulting
and completing clinical trials on our products.
Our clinical trials may encounter delays, suspensions
or other problems.
We may encounter problems in clinical trials that may
cause us or the FDA or foreign regulatory agencies to delay, suspend or terminate our clinical trials at any phase. These problems
could include the possibility that we may not be able to conduct clinical trials at our preferred sites, enroll a sufficient number
of patients for our clinical trials at one or more sites or begin or successfully complete clinical trials in a timely fashion,
if at all. Furthermore, we, the FDA or foreign regulatory agencies may suspend clinical trials at any time if we or they believe
the subjects participating in the trials are being exposed to unacceptable health risks or if we or they find deficiencies in the
clinical trial process or conduct of the investigation. If clinical trials of any of the product candidates fail, we will not be
able to market the product candidate which is the subject of the failed clinical trials. The FDA and foreign regulatory agencies
could also require additional clinical trials, which would result in increased costs and significant development delays. Our failure
to adequately demonstrate the safety and effectiveness of a pharmaceutical product candidate under development could delay or prevent
regulatory approval of the product candidate and could have a material adverse effect on our business, prospects, financial condition,
and results of operations.
We can provide no assurance that our products will
obtain regulatory approval or that the results of clinical studies will be favorable.
The testing, marketing and manufacturing of any of our
products will require the approval of the FDA or regulatory agencies of other countries. We have completed certain non-FDA clinical
trials and pre-clinical trials for our products. In addition, we have completed a Phase IIb clinical trial in patients with type
2 diabetes under an IND with the FDA and we have completed Phase IIa clinical trials of ORMD-0801 in patients with type 1 diabetes
under an IND with the FDA. However, success in pre-clinical testing and early clinical trials does not ensure that later clinical
trials will be successful. For example, a number of companies in the pharmaceutical industry have suffered significant setbacks
in advanced clinical trials.
We cannot predict with any certainty the amount of time
necessary to obtain regulatory approvals, including from the FDA or other foreign regulatory authorities, and whether any such
approvals will ultimately be granted. In any event, review and approval by the regulatory bodies is anticipated to take a number
of years. Preclinical and clinical trials may reveal that one or more of our products are ineffective or unsafe, in which event
further development of such products could be seriously delayed or terminated. Moreover, obtaining approval for certain products
may require the testing on human subjects of substances whose effects on humans are not fully understood or documented. Delays
in obtaining necessary regulatory approvals of any proposed product and failure to receive such approvals would have an adverse
effect on the product’s potential commercial success and on our business, prospects, financial condition, and results of
operations. In addition, it is possible that a product may be found to be ineffective or unsafe due to conditions or facts which
arise after development has been completed and regulatory approvals have been obtained. In this event we may be required to withdraw
such product from the market. See “Item 1. Business—Description of Business—Government Regulation.”
We are dependent upon third party suppliers of our
raw materials.
We are dependent on outside vendors for our entire supply
of the oral insulin and GLP-1 capsules and do not currently have any long-term agreements in place for the supply of oral insulin
or GLP-1 capsules. While we believe that there are numerous sources of supply available, if the third party suppliers were to cease
production or otherwise fail to supply us with quality raw materials in sufficient quantities on a timely basis and we were unable
to contract on acceptable terms for these services with alternative suppliers, our ability to produce our products and to conduct
testing and clinical trials would be materially adversely affected.
Our future revenues from HTIT are dependent upon third
party suppliers and Chinese regulatory approvals.
Our future revenues from HTIT are dependent upon the
achievement of certain milestones and conditions, and the success of HTIT to implement our technology and to manufacture the oral
insulin capsule. Our future revenues from HTIT are also dependent upon the ability of third parties to scale-up one of our oral
capsule ingredients and to scale-up the manufacturing process of our capsules. Our future revenues from royalties from HTIT are
further dependent upon the granting of regulatory approvals in the Territory. Accordingly, if any of the foregoing does not occur,
we may not be successful in receiving future revenues from HTIT and may not succeed with our business plans in China.
We are highly dependent upon our ability to enter
into agreements with collaborative partners to develop, commercialize, and market our products.
Our long-term strategy is to ultimately seek a strategic
commercial partner, or partners, such as large pharmaceutical companies, with extensive experience in the development, commercialization,
and marketing of insulin applications and/or other orally digestible drugs. We anticipate such partner or partners would be responsible
for, or substantially support, late stage clinical trials (Phase III) and sales and marketing of our oral insulin capsule and other
products. Such planned strategic partnership, or partnerships, may provide a marketing and sales infrastructure for our products
as well as financial and operational support for global clinical trials, post marketing studies, label expansions and other regulatory
requirements concerning future clinical development in the United States and elsewhere.
While our strategy is to partner with an appropriate
party, no assurance can be given that any third party would be interested in partnering with us. We currently lack the resources
to manufacture any of our product candidates on a large scale and we have no sales, marketing or distribution capabilities. In
the event we are not able to enter into a collaborative agreement with a partner or partners, on commercially reasonable terms,
or at all, we may be unable to commercialize our products, which would have a material adverse effect upon our business, prospects,
financial condition, and results of operations.
The biotechnology and biopharmaceutical industries
are characterized by rapid technological developments and a high degree of competition. We may be unable to compete with more substantial
enterprises.
The biotechnology and biopharmaceutical industries are
characterized by rapid technological developments and a high degree of competition.
As a result, our products could
become obsolete before we recoup any portion of our related research and development and commercialization expenses. These industries
are highly competitive, and this competition comes both from biotechnology firms and from major pharmaceutical and chemical companies.
Many of these companies have substantially greater financial, marketing, and human resources than we do (including, in some cases,
substantially greater experience in clinical testing, manufacturing, and marketing of pharmaceutical products). We also experience
competition in the development of our products from universities and other research institutions and compete with others in acquiring
technology from such universities and institutions. In addition, certain of our products may be subject to competition from products
developed using other technologies. See “Item 1. Business—Description of Business—Competition.”
We have limited senior management resources and may
be required to obtain more resources to manage our growth.
We expect the expansion of our business to place a significant
strain on our limited managerial, operational, and financial resources. We will be required to expand our operational and financial
systems significantly and to expand, train, and manage our work force in order to manage the expansion of our operations. Our failure
to fully integrate our new employees into our operations could have a material adverse effect on our business, prospects, financial
condition, and results of operations. Our ability to attract and retain highly skilled personnel is critical to our operations
and expansion. We face competition for these types of personnel from other technology companies and more established organizations,
many of which have significantly larger operations and greater financial, technical, human, and other resources than we have. We
may not be successful in attracting and retaining qualified personnel on a timely basis, on competitive terms, or at all. If we
are not successful in attracting and retaining these personnel, our business, prospects, financial condition, and results of operations
will be materially adversely affected. See “Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” “Item 1. Business—Description of Business—Strategy” and “—Employees.”
We depend upon our senior management and skilled personnel
and their loss or unavailability could put us at a competitive disadvantage.
We currently depend upon the efforts and abilities of
our senior executives, as well as the services of several key consultants and other key personnel, including Dr. Miriam Kidron,
our Chief Medical and Technology Officer. The loss or unavailability of the services of any of these individuals for any significant
period of time could have a material adverse effect on our business, prospects, financial condition, and results of operations.
We do not maintain “key man” life insurance policies for any of our senior executives. In addition, recruiting and
retaining qualified scientific personnel to perform future research and development work will be critical to our success. There
is currently a shortage of employees with expertise in developing, manufacturing and commercialization of products and related
clinical and regulatory affairs, and this shortage is likely to continue. Competition for skilled personnel is intense and turnover
rates are high. Our ability to attract and retain qualified personnel may be limited. Our inability to attract and retain qualified
skilled personnel would have a material adverse effect on our business, prospects, financial condition, and results of operations.
Healthcare policy changes, including pending legislation
recently adopted and further proposals still pending to reform the U.S. healthcare system, may harm our future business.
Healthcare costs have risen significantly over the past
decade. There have been and continue to be proposals by legislators, regulators and third-party payors to keep these costs down.
Certain proposals, if passed, would impose limitations on the prices we will be able to charge for the products that we are developing,
or the amounts of reimbursement available for these products from governmental agencies or third-party payors. These limitations
could in turn reduce the amount of revenues that we will be able to generate in the future from sales of our products and licenses
of our technology.
In March 2010, the U.S. Congress enacted and President
Obama signed into law healthcare reform legislation that has significantly impacted the pharmaceutical industry. In addition to
requiring most individuals to have health insurance and establishing new regulations on health plans, this legislation requires
discounts under the Medicare drug benefit program and increased rebates on drugs covered by Medicaid. In addition, the legislation
imposes an annual fee, which has increased annually, on sales by branded pharmaceutical manufacturers. There can be no assurance
that our business will not be materially adversely affected by these increased rebates, fees and other provisions. In addition,
it appears likely that these and other ongoing initiatives in the United States will continue the pressure on drug pricing, especially
under the Medicare and Medicaid programs, and may also increase regulatory burdens and operating costs. The announcement or adoption
of any such initiative could have an adverse effect on potential revenues from any product that we may successfully develop.
Various healthcare reform proposals have also emerged
at the state level. We cannot predict what healthcare initiatives, if any, will be implemented at the federal or state level, or
the effect any future legislation or regulation will have on us. However, an expansion in government’s role in the U.S. healthcare
industry may lower the future revenues for the products we are developing and adversely affect our future business, possibly materially.
We are exposed to fluctuations in currency exchange
rates.
A considerable amount of our expenses are generated in
dollars or in dollar-linked currencies, but a significant portion of our expenses such as some clinical studies and payroll costs
are generated in other currencies such as NIS, Euro and British pounds. Most of the time, our non-dollar assets are not totally
offset by non-dollar liabilities. Due to the foregoing and to the fact that our financial results are measured in dollars, our
results could be adversely affected as a result of a strengthening or weakening of the dollar compared to these other currencies.
During fiscal 2013 and 2014, the dollar depreciated in relation to the NIS, which raised the dollar cost of our Israeli based operations
and adversely affected our financial results, while during fiscal 2012, 2015 and 2016 the dollar increased in relation to the NIS,
which reduced the dollar cost of our Israeli based operations costs. In addition, our results could also be adversely affected
if we are unable to guard against currency fluctuations in the future. Although we may in the future decide to undertake foreign
exchange hedging transactions to cover a portion of our foreign currency exchange exposure, we currently do not hedge our exposure
to foreign currency exchange risks. These transactions, however, may not adequately protect us from future currency fluctuations
and, even if they do protect us, may involve operational or financing costs we would not otherwise incur.
Risks Related to our Common Stock
As the market price of our common stock may fluctuate
significantly, this may make it difficult for you to sell your shares of common stock when you want or at prices you find attractive.
The price of our common stock is currently listed on
The Nasdaq Capital Market, or Nasdaq, and constantly changes. In recent years, the stock market in general has experienced extreme
price and volume fluctuations. We expect that the market price of our common stock will continue to fluctuate. These fluctuations
may result from a variety of factors, many of which are beyond our control. These factors include:
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Clinical trial results and the timing of the release of such results,
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The amount of cash resources and our ability to obtain additional funding,
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Announcements of research activities, business developments, technological innovations or new products by us or our competitors,
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Entering into or terminating strategic relationships,
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Changes in government regulation,
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Departure of key personnel,
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Disputes concerning patents or proprietary rights,
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Changes in expense level,
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Future sales of our equity or equity-related securities,
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Public concern regarding the safety, efficacy or other aspects of the products or methodologies being developed,
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Activities of various interest groups or organizations,
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Status of the investment markets.
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Future sales of common stock or the issuance of securities
senior to our common stock or convertible into, or exchangeable or exercisable for, our common stock could materially adversely
affect the trading price of our common stock, and our ability to raise funds in new equity offerings.
Future sales of substantial amounts of our common stock
or other equity-related securities in the public market or privately, or the perception that such sales could occur, could adversely
affect prevailing trading prices of our common stock and could impair our ability to raise capital through future offerings of
equity or other equity-related securities. We anticipate that we will need to raise capital through offerings of equity and equity
related securities. We can make no prediction as to the effect, if any, that future sales of shares of our common stock or equity-related
securities, or the availability of shares of common stock for future sale, will have on the trading price of our common stock.
Our stockholders may experience significant dilution
as a result of any additional financing using our equity securities.
To the extent that we raise additional funds by issuing
equity securities, our stockholders may experience significant dilution.
Our management will have significant flexibility in
using the net proceeds of any offering of securities.
We intend generally to use the net proceeds from any
offerings of our securities for expenses related to our clinical trials, research and product development activities, and for general
corporate purposes, including general working capital purposes. Our management will have significant flexibility in applying the
net proceeds of any such offering. The actual amounts and timing of expenditures will vary significantly depending on a number
of factors, including the amount of cash used in our operations and our research and development efforts. Management’s failure
to use these funds effectively would have an adverse effect on the value of our common stock and could make it more difficult and
costly to raise funds in the future.
Future sales of our common stock by our existing stockholders
could adversely affect our stock price.
The market price of our common stock could decline as
a result of sales of a large number of shares of our common stock in the market, or the perception that these sales could occur.
These sales also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem
appropriate. As of November 22, 2016, we had outstanding 13,264,189 shares of common stock, a large majority of which are freely
tradable. Giving effect to the exercise in full of all of our outstanding warrants, options and restricted stock units, or RSUs,
including those currently unexercisable or unvested, we would have outstanding 15,744,280 shares of common stock.
Our issuance of warrants, options and RSUs to investors,
employees and consultants may have a negative effect on the trading prices of our common stock as well as a dilutive effect.
We have issued and may continue to issue warrants, options,
RSUs and convertible notes at, above or below the current market price. As of November 22, 2016, we had outstanding warrants and
options exercisable for 2,196,626 shares of common stock at a weighted average exercise price of $7.65. We also had outstanding
RSUs exercisable for 165,964 shares of common stock at no cost. In addition to the dilutive effect of a large number of shares
of common stock and a low exercise price for the warrants and options, there is a potential that a large number of underlying shares
of common stock may be sold in the open market at any given time, which could place downward pressure on the trading of our common
stock.
Delaware law could discourage a change in control,
or an acquisition of us by a third party, even if the acquisition would be favorable to you, and thereby adversely affect existing
stockholders.
The Delaware General Corporation Law contains provisions
that may have the effect of making more difficult or delaying attempts by others to obtain control of our Company, even when these
attempts may be in the best interests of stockholders. Delaware law imposes conditions on certain business combination transactions
with “interested stockholders.” These provisions and others that could be adopted in the future could deter unsolicited
takeovers or delay or prevent changes in our control or management, including transactions in which stockholders might otherwise
receive a premium for their shares of common stock over then current market prices. These provisions may also limit the ability
of stockholders to approve transactions that they may deem to be in their best interests.
Because we will not pay cash dividends, investors
may have to sell shares of our common stock in order to realize their investment.
We have not paid any cash dividends on our common stock
and do not intend to pay cash dividends in the foreseeable future. We intend to retain future earnings, if any, for reinvestment
in the development and expansion of our business. Any credit agreements which we may enter into with institutional lenders or otherwise
may restrict our ability to pay dividends. Whether we pay cash dividends in the future will be at the discretion of our Board and
will be dependent upon our financial condition, results of operations, capital requirements, and any other factors that our Board
decides is relevant. See “Item 5. Market Price for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.”
Because certain of our stockholders control a significant
number of shares of our common stock, they may have effective control over actions requiring stockholder approval.
As of November 22, 2016, our directors, executive officers
and principal affiliated stockholders beneficially own approximately 29.2% of our outstanding shares of common stock, excluding
shares issuable upon the exercise of options, warrants and RSUs. As a result, these stockholders, should they act together, may
have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors
and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, should they act
together, may have the ability to control our management and affairs. Accordingly, this concentration of ownership might harm the
market price of our common stock by:
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Delaying, deferring or preventing a change in corporate control,
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Impeding a merger, consolidation, takeover or other business combination involving us, or
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Discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.
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Risks Related to Conducting Business in Israel
We are affected by the political, economic, and military
risks of locating our principal operations in Israel.
Our operations are located in the State of Israel, and
we are directly affected by political, economic, and security conditions in that country. Since the establishment of the State
of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors and a state of hostility,
varying in degree and intensity, has led to security and economic problems for Israel. In addition, acts of terrorism, armed conflicts
or political instability in the region could negatively affect local business conditions and harm our results of operations. We
cannot predict the effect on the region of any diplomatic initiatives or political developments involving Israel or the Palestinians
or other countries and territories in the Middle East. Recent political events, including political uprisings, social unrest and
regime change, in various countries in the Middle East and North Africa have weakened the stability of those countries and territories,
which could result in extremists coming to power. In addition, Iran has threatened to attack Israel and is widely believed to be
developing nuclear weapons. Iran is also believed to have a strong influence among extremist groups in the region, such as Hamas
in Gaza and Hezbollah in Lebanon. This situation has escalated in the past and may potentially escalate in the future to violent
events which may affect Israel and us. Our business, prospects, financial condition, and results of operations could be materially
adversely affected if major hostilities involving Israel should occur or if trade between Israel and its current trading partners
is interrupted or curtailed.
All adult male permanent residents of Israel, unless
exempt, may be required to perform military reserve duty annually. Additionally, all such residents are subject to being called
to active duty at any time under emergency circumstances. Some of our officers, directors, and employees currently are obligated
to perform annual military reserve duty. We can provide no assurance that such requirements will not have a material adverse effect
on our business, prospects, financial condition, and results of operations in the future, particularly if emergency circumstances
occur.
Because we received grants from the Israel Innovation
Authority we are subject to ongoing restrictions.
We received royalty-bearing grants from the Israel Innovation
Authority, or IIA (previously the Office of the Chief Scientist) of the Israeli Ministry of Economy & Industry, Trade and Labor,
for research and development programs that meet specified criteria. We did not recognize any grants in the year ended August 31,
2016, and recognized grants in the amounts of $49,000 and $428,000 in the years ended August 31, 2015 and 2014, respectively. We
do not expect to receive further grants from the IIA in the future. The terms of the IIA grants limit our ability to transfer know-how
developed under an approved research and development program outside of Israel, regardless of whether the royalties were fully
paid.
It may be difficult to enforce a U.S. judgment
against us or our officers and directors and to assert U.S. securities laws claims in Israel.
Almost all of our directors and officers are nationals
and/or residents of countries other than the United States. As a result, service of process upon us, our Israeli subsidiary and
our directors and officers, may be difficult to obtain within the United States. Furthermore, because the majority of our assets
and investments, and most of our directors and officers are located outside the United States, it may be difficult for investors
to enforce within the United States any judgments obtained against us or any such officers or directors. Additionally, it may be
difficult to assert U.S. securities law claims in original actions instituted in Israel. Israeli courts may refuse to hear a claim
based on a violation of U.S. securities laws because Israel is not the most appropriate forum in which to bring such a claim. In
addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to
such claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact, which can be a
time-consuming and costly process. Certain matters of procedure will also be governed by Israeli law.
Subject to specified time limitations and legal procedures,
under the rules of private international law currently prevailing in Israel, Israeli courts may enforce a U.S. judgment in a civil
matter, including a judgment based upon the civil liability provisions of the U.S. securities laws, as well as a monetary
or compensatory judgment in a non-civil matter, provided that the following key conditions are met:
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subject to limited exceptions, the judgment is final and non-appealable;
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the judgment was given by a court competent under the laws of the state in which the court is located and is otherwise enforceable
in such state;
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the judgment was rendered by a court competent under the rules of private international law applicable in Israel;
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the laws of the state in which the judgment was given provides for the enforcement of judgments of Israeli courts;
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adequate service of process has been effected and the defendant has had a reasonable opportunity to present his arguments and
evidence;
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the judgment and its enforcement are not contrary to the law, public policy, security or sovereignty of the State of Israel;
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the judgment was not obtained by fraud and does not conflict with any other valid judgment in the same matter between the same
parties; and
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an action between the same parties in the same matter was not pending in any Israeli court at the time the lawsuit was instituted
in the U.S. court.
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If any of these conditions are not met, Israeli courts will likely
not enforce the applicable U.S. judgment.