The statements set forth under the captions “Business,”
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors,”
and other statements included elsewhere in this Annual Report on Form 10-K, which are not historical, constitute “forward-looking
statements” within the meanings of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section
21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, including statements regarding expectations, beliefs,
intentions or strategies for the future. When used in this report, the terms “anticipate,” “believe,” “estimate,”
“expect,” “can,” “continue,” “could,” “intend,” “may,”
“plan,” “potential,” “predict,” “project,” “should,” “will,”
“would” and words or phrases of similar import, as they relate to our company or our subsidiaries or our management,
are intended to identify forward-looking statements. We intend that all forward-looking statements be subject to the safe-harbor
provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are only predictions and reflect
our views as of the date they are made with respect to future events and financial performance, and we undertake no obligation
to update or revise, nor do we have a policy of updating or revising, any forward-looking statement to reflect events or circumstances
after the date on which the statement is made or to reflect the occurrence of unanticipated events, except as may be required under
applicable law. Forward-looking statements are subject to many risks and uncertainties that could cause our actual results to differ
materially from any future results expressed or implied by the forward-looking statements.
Examples of the risks and uncertainties include, but are not limited
to, the following:
Companies in the pharmaceutical and biotechnology industries have
suffered significant setbacks in advanced or late-stage clinical trials, even after obtaining promising earlier trial results or
preliminary findings for such clinical trials. Even if favorable testing data is generated from clinical trials of a drug product,
the U.S. Food and Drug Administration, or the FDA, or foreign regulatory authorities may not accept or approve a marketing application
filed by a pharmaceutical or biotechnology company for the drug product.
These forward-looking statements reflect our current views with
respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should
not place undue reliance on these forward-looking statements. These and other risks and uncertainties are detailed under the heading
“
Risk Factors” in this Annual Report and are described from time to
time in the reports we file with the U.S. Securities and Exchange Commission, or the Commission.
We are a biopharmaceutical company focused on the development and
commercialization of recombinant therapeutic proteins based on our proprietary ProCellEx
®
protein expression system,
or ProCellEx. We developed our first commercial drug product, Elelyso
®
, using our ProCellEx system and we are now
focused on utilizing the system to develop a pipeline of proprietary, clinically superior versions of recombinant therapeutic
proteins that primarily target large, established pharmaceutical markets and that, in most cases, rely upon known biological mechanisms
of action. With our experience to date, we believe ProCellEx will enable us to develop additional proprietary recombinant proteins
that are therapeutically superior to existing recombinant proteins currently marketed for the same indications. We are now also
applying the unique properties of our ProCellEx system for the oral delivery of therapeutic proteins.
The following table summarizes our current product candidates and
their respective stages of clinical development:
On May 1, 2012, the FDA approved for sale our first commercial
product, taliglucerase alfa for injection, an enzyme replacement therapy, or ERT, for the long-term treatment of adult patients
with a confirmed diagnosis of type 1 Gaucher disease. Subsequently, taliglucerase alfa was approved for marketing by the regulatory
authorities of other countries. Taliglucerase alfa is called alfataliglicerase in Brazil and certain other Latin American countries,
where it is marketed under the name Uplyso
TM
. Taliglucerase alfa is marketed under the name Elelyso in other territories.
Since its
approval by the FDA, taliglucerase alfa has been marketed mainly in the United States by Pfizer, as provided in the exclusive license
and supply agreement by and between Protalix Ltd., our wholly-owned subsidiary, and Pfizer, which we refer to as the Pfizer Agreement.
In
October 2015, we entered into an Amended and Restated Exclusive License and Supply Agreement, or the Amended Pfizer Agreement,
which amends and restates the Pfizer Agreement in its entirety. Pursuant to the Amended Pfizer Agreement, we sold to Pfizer our
share in the collaboration created under the initial Pfizer Agreement for the commercialization of Elelyso in exchange for a cash
payment equal to $36.0 million. As part of the sale, we agreed to transfer our rights to Elelyso in Israel to Pfizer, while gaining
full rights to Elelyso in Brazil. We will continue to manufacture drug substance for Pfizer, subject to certain terms and conditions.
Under the initial Pfizer Agreement, Pfizer shared revenues and expenses for the development and commercialization of Elelyso with
us on a 60%/40% basis globally, excluding Israel and Brazil. Under the Amended Pfizer Agreement, Pfizer is responsible for 100%
of expenses, and entitled to all revenues globally for Elelyso, excluding Brazil, where we are responsible for all expenses and
retain all revenues.
For the first 10-year period after the execution of the Amended
Pfizer Agreement, we have agreed to sell drug substance to Pfizer for the production of Elelyso, and Pfizer maintains the right
to extend the supply period for up to two additional 30-month periods subject to certain terms and conditions. Any failure to comply
with our supply commitments may subject us to substantial financial penalties, which will have a material adverse effect on our
business, results of operations and financial condition. The Amended Pfizer Agreement also includes customary provisions regarding
cooperation for regulatory matters, patent enforcement, termination, indemnification and insurance requirements.
On June
18, 2013, we entered into a Supply and Technology Transfer Agreement, or the Brazil Agreement, with
Fiocruz, an arm of the
Brazilian
Brazilian MoH, for taliglucerase alfa.
In December 2016, we received a letter from Fiocruz regarding an
order from the Brazilian MoH to purchase alfataliglicerase to treat Gaucher patients in Brazil. The Brazilian MoH’s order
consists of a number of shipments during 2017 for a total of approximately $24.3 million. Shipments are to start in mid-2017 and
continue through the end of the year, in increasing volumes. Fiocruz’s purchases of Uplyso to date have been significantly
below certain agreed upon purchase milestones and, accordingly, we have the right to terminate the Brazil Agreement. Notwithstanding
the low purchase amounts, we are, at this time, continuing to supply Uplyso to Fiocruz under the Brazil Agreement, and patients
continue to be treated with Uplyso in Brazil.
Our Strategy
Our operations are focused on our new strategy for accelerated growth,
which was implemented in January 2015. The strategy centers around prioritizing existing and new pipeline candidates to focus on
products that we believe offer a clear competitive advantage over existing treatments. The strategy was the culmination of two
months of intensive review by our management of our internal resources and of the markets in which we expect we can operate. The
following highlights the details of the strategic plan as it relates to our development of an innovative product pipeline using
our ProCellEx protein expression system.
PRX-102 for the Treatment of Fabry disease
.
PRX-102
, or
alpha-GAL-A, is designed to be an improved enzyme replacement
therapy product for the treatment of Fabry disease given its potential for clinically superior outcomes and enhanced safety when
compared to currently marketed enzyme replacement therapies. The product candidate is a key focus for us. We enrolled our first
patient in a phase III clinical trial of PRX-102 in the fourth quarter of 2016, and our
phase
I/II clinical trial is ongoing in an extension period
.
alidornase alfa (PRX-110) for Cystic Fibrosis
.
alidornase alfa, our
proprietary plant cell recombinant human Deoxyribonuclease
1, is under development for the treatment of cystic fibrosis (CF), to be administered by inhalation.
alidornase alfa
has an actin inhibition resistance that is designed to improve lung function and lower the incidence of recurrent infections
by enhancing the enzyme’s efficacy in patients’ sputa. It has demonstrated improved disease parameters in animal models
and human sputum testing when compared to the currently marketed product. We have commenced a phase IIa clinical trial of alidornase
alfa and in January 2017, we announced positive interim results from the phase II clinical trial for the first 13 CF patients enrolled
in the study. Upon review of the final results of the trial, we will consider different collaboration alternatives as part of our
further development plans.
Oral Anti-TNF (OPRX-106) Anti Inflammatory
.
Oral anti-TNF represents a novel mode of administering a recombinant anti-TNF protein. It
is
under development as
an orally-delivered anti-inflammatory treatment using plant cells as a natural capsule for the expressed
protein. The first patient in our phase II
proof of concept efficacy study
of OPRX-106 for the treatment of ulcerative colitis was dosed in November 2016. In August 2015, we announced positive clinical
study results from our phase I clinical trial of OPRX-106. OPRX-106 demonstrated a favorable safety and tolerability profile and
biological activity in the gut in the phase I study. Upon review of the proof of concept data, we intend to identify and collaborate
with a well-suited partner for further development.
Potential Pipeline Candidates
. We aim
to expand our pipeline by leveraging the advantages of our proprietary ProCellEx protein expression technology. The focus is expected
to be on biologics with improved clinical profiles than the currently marketed proteins for these indications. Biosimilars will
not be a market on which we focus, and will only be considered in the case of proteins that are highly difficult to express or
that represent opportunities for early market entry arising from the intellectual property advantages arising from ProCellEx.
Except
for the rights to commercialize taliglucerase alfa worldwide (other than Brazil), which we licensed to Pfizer, we hold the worldwide
commercialization rights to all of our proprietary development
candidates.
We continuously evaluate potential strategic marketing partnerships as well as collaboration programs with biotechnology and pharmaceutical
companies and academic research institutes.
ProCellEx: Our Proprietary Protein Expression System
ProCellEx is our proprietary production system. We have developed
our ProCellEx system based on our plant cell culture technology for the development, expression and manufacture of recombinant
proteins. Our protein expression system does not involve mammalian or animal components or transgenic field-grown, whole plants
at any point in the production process. Our ProCellEx system consists of a comprehensive set of capabilities and proprietary technologies,
including advanced genetic engineering and plant cell culture technology, which enables us to produce complex, proprietary and
biologically equivalent proteins for a variety of human diseases. This protein expression system facilitates the creation and selection
of high expressing, genetically stable cell lines capable of expressing recombinant proteins. The entire protein expression process,
from initial nucleotide cloning to large-scale production of the protein product, occurs under cGMP-compliant, controlled processes.
Our plant cell culture technology uses plant cells, such as carrot and tobacco cells, which undergo advanced genetic engineering
and are grown on an industrial scale in a flexible bioreactor system. Cell growth, from scale up through large-scale production,
takes place in flexible, sterile, polyethylene bioreactors which are confined to a clean-room environment. Our bioreactors are
well-suited for plant cell growth using a simple, inexpensive, chemically-defined growth medium as a catalyst for growth. The reactors
are custom-designed and optimized for plant cell cultures, easy to use, entail low initial capital investment, are rapidly scalable
at a low cost and require less hands-on maintenance between cycles.
Our ProCellEx system is capable of producing proteins with an amino
acid sequence and three dimensional structure practically equivalent to that of the desired human protein, and with a very similar,
although not identical, glycan, or sugar, structure, as demonstrated in our internal research and external laboratory studies.
In collaboration with the Weizmann Institute of Science, we have demonstrated that the three-dimensional structure of a protein
expressed in our proprietary plant cell-based expression system retains the same three-dimensional structure as exhibited by the
mammalian cell-based expressed version of the same protein. In addition, proteins produced by our ProCellEx system maintain the
biological activity that characterize that of the naturally-produced proteins. Based on these results, we believe that proteins
developed using our ProCellEx protein expression system have the intended composition and correct biological activity of their
human equivalent proteins.
We believe that our ProCellEx system will enable us to develop recombinant
therapeutic proteins yielding substantial cost advantages, accelerated development and other competitive benefits when compared
to mammalian cell-based protein expression systems. In addition, our ProCellEx system may enable us, in certain cases, to develop
and commercialize recombinant proteins without infringing upon the method-based patents or other intellectual property rights of
third parties. The major elements of our ProCellEx system are patent protected in most major countries. Moreover, we expect to
enjoy method-based patent protection for the proteins we develop using our proprietary ProCellEx protein expression technology,
although there can be no assurance that any such patents will be granted. In some cases, we may be able to obtain patent protection
for the compositions of the proteins themselves. We have filed for United States and international composition of matter patents
for taliglucerase alfa.
We have successfully demonstrated the feasibility of our ProCellEx
system through: (i) the FDA’s approval of taliglucerase alfa, and its subsequent approval by other regulatory authorities;
(ii) the clinical and preclinical studies we have performed to date, including the positive efficacy and safety data in our clinical
trials for taliglucerase alfa, PRX-102; (iii) alidornase alfa; OPRX-106 for the treatment of ulcerative colitis; (iv) preclinical
results in well-known models in our enzyme for each of Fabry disease, DNase and antiTNF; and (v) by expressing, on an exploratory,
research scale, many additional complex therapeutic proteins belonging to different drug classes, such as enzymes, hormones, monoclonal
antibodies, cytokines and vaccines. The therapeutic proteins we have expressed to date in research models have produced the intended
composition and similar biological activity compared to their respective human-equivalent proteins. Moreover, several of such proteins
demonstrated advantageous biological activity when compared to the biotherapeutics currently available in the market to treat the
applicable disease or disorder. We believe that the FDA’s approval of taliglucerase alfa represents a strong proof-of-concept
of our ProCellEx system and plant cell-based protein expression technology. We also believe that the significant benefits of our
ProCellEx system, if further substantiated in clinical trials and in the successful commercialization of taliglucerase alfa and
our other product candidates, have the potential to transform the industry standard for the development of complex therapeutic
proteins.
Mammalian cell-based expression technology is based on the introduction
of a human gene encoding for a specific therapeutic protein into the genome of a mammalian cell, and such systems have become the
dominant system for the expression of recombinant proteins due to their capacity for sophisticated, proper protein folding (which
is necessary for proteins to carry out their intended biological activity), assembly and post-expression modification, such as
glycosilation (the addition of sugar residues to a protein which is necessary to enable specific biological activity by the protein).
Many of the biotechnology industry’s largest and most successful therapeutic proteins, including Epogen
®
,
Neupogen
®
, Cerezyme
®
, Rituxan
®
, Humira
®
, Enbrel
®
, Neulasta
®
,
Remicade
®
and Herceptin
®
are produced
through mammalian cell-based expression systems.
Mammalian cell-based expression systems can produce proteins with superior quality and efficacy compared to proteins expressed
in bacteria and yeast cell-based systems. As a result, the majority of currently approved therapeutic proteins, as well as those
under development, are produced in mammalian cell-based systems.
While bacterial and yeast cell-based expression systems were the
first protein expression systems developed by the biotechnology industry and remain cost-effective compared to mammalian cell-based
production methodologies, proteins expressed in bacterial and yeast cell-based systems lack the capacity for sophisticated protein
folding, assembly and post-expression modifications, which are key factors of mammalian cell-based systems. Accordingly, such systems
cannot be used to produce glycoproteins or other complex proteins and, therefore, bacterial and yeast cell-based systems are limited
to the expression of the most basic, simple proteins, such as insulin and growth hormones.
Several companies and research institutions have been exploring
the expression of human proteins in genetically-modified organisms, or GMOs, such as transgenic field-grown, whole plants and transgenic
animals. However, these alternate techniques may be restricted by regulatory and environmental risks regarding contamination of
agricultural crops and by the difficulty in applying cGMP standards of the pharmaceutical industry to these expression technologies
and none of these technologies have been approved by the regulatory agencies with jurisdiction over any substantial market.
To date, our manufacturing facility, in which we utilize our ProCellEx
system, was determined to be acceptable by each of the FDA, European Medicines Agency, or the EMA, ANVISA, the Israeli MOH, the
Australian Therapeutic Goods Administration, or the TGA, and Health Canada, after GMP inspections were performed as part of their
respective reviews for marketing approval of taliglucerase alfa.
Competitive Advantages of Our ProCellEx Protein Expression System
We intend to continue to leverage the multiple unique advantages
of our proprietary ProCellEx protein expression system, including our advanced genetic engineering technology and plant cell-based
protein expression methods, to develop our pipeline. Significant advantages of our ProCellEx system over mammalian, bacterial,
yeast and transgenic cell-based expression technologies, include the following:
Biologic Optimization.
ProCellEx
has internal capabilities developed to improve the biologic dynamics of an expressed protein. For example, the proteins produced
through our system have uniform glycosilation patterns and therefore do not require the lengthy and expensive post-expression modifications
that are required for certain proteins produced by mammalian cell-based systems. Such post-expression modifications in mammalian
cell-produced proteins are made in order to expose the terminal mannose sugar residues, which are structures on a protein that
are key elements in allowing the expressed protein to bind to a target cell and subsequently be taken into the target cell for
therapeutic benefit. In addition, these steps do not guarantee the exposure of all of the required terminal mannose sugar residues,
resulting in potentially lower effective yields and inconsistency in potency from batch to batch. We believe this quality increases
the potency and consistency of the expressed proteins, and thus, the effectiveness of the protein which presents an additional
cost advantage of ProCellEx over competing protein expression methodologies.
Ability to Penetrate Certain Patent-Protected
Markets.
ProCellEx has the potential to provide workaround manufacturing that does not infringe the method-based patents
or other intellectual property rights of third parties. Certain biotherapeutic proteins available for commercial sale are not protected
by patents that cover the compound and are available for use in the public domain. Rather, the process of expressing the protein
product in mammalian or bacterial cell systems is protected by method-based patents. Using our plant cell-based protein expression
technology, we are able to express an equivalent protein without infringing upon these method-based patents. Moreover, we expect
to enjoy method-based patent protection for the proteins we develop using our ProCellEx system, although there can be no assurance
that any such patents will be granted. In some cases, we may be able to obtain patent protection for the compositions of the proteins
themselves. We have filed for U.S. and international composition of matter patents for PRX-102 and certain of our other product
candidates.
Broad Range of Expression Capabilities.
ProCellEx is able to produce a broad array of complex glycosilated proteins, which are difficult to produce in other systems, such
as bacterial and yeast cell-based systems, as well as CHO systems. We have successfully demonstrated the feasibility of our ProCellEx
system by producing, on an exploratory, research scale, a variety of therapeutic proteins belonging to different classes of recombinant
drugs, such as enzymes, hormones, monoclonal antibodies, cytokines and vaccines. We have demonstrated that the recombinant proteins
we have expressed
to date have the intended composition and correct biological activity of their human-equivalent protein,
with several of such proteins demonstrating advantageous biological activity compared to the currently available biotherapeutics.
In specific cases, we have been successful in expressing proteins that have not been successfully expressed in other production
systems.
Significantly Lower Capital and Production
Costs.
ProCellEx entails a lower cost of scale-up and of production. Plant cells grow rapidly under a variety of conditions
and are not as sensitive as mammalian cells are to temperature, pH and oxygen levels which generally can only be grown under near
perfect conditions. Our system, therefore, does not require the highly complex, expensive, stainless steel bioreactors typically
used in mammalian cell-based production systems to maintain very specific temperature, pH and oxygen levels. Instead, we use simple
polyethylene bioreactors that can be maintained at the room temperature of the clean-room in which they are placed. This system
also reduces ongoing production and monitoring costs typically associated with mammalian cell-based expression technologies. Furthermore,
while mammalian cell-based systems require very costly growth media at various stages of the production process to achieve target
yields of proteins, plant cells require only simple and much less expensive solutions based on sugar, water and microelements at
infrequent intervals to achieve target yields. Mammalian cell-based expression systems require large quantities of sophisticated
and expensive growth medium to accelerate the expression process.
Elimination of the Risk of Viral Transmission
or Infection by Mammalian Components.
By nature, plant cells do not carry the risk of infection by human or other animal
viruses. Mammalian cells, to the contrary, are susceptible to viral infections, including human viruses, and several cases of viral
contamination have occurred. As a result, the risk of contamination of our products under development and the potential risk of
viral transmission from our product and product candidates to future patients, whether from known or unknown mammalian viruses,
is eliminated. Because our products and product candidates do not bear the risk of mammalian viral transmission, we are not required
by the FDA or other regulatory authorities to perform the constant monitoring procedures for mammalian viruses during the protein
expression process that are required in mammalian cell-based production. In addition, the production process of our ProCellEx system
is void of any mammalian components which are susceptible to the transmission of prions, such as those related to bovine spongiform
encephalopathy (commonly known as “mad-cow disease”). These factors further reduce the risks and operating costs of
ProCellEx compared to mammalian cell-based expression systems.
The FDA and other regulatory authorities require viral inactivation
and other rigorous and detailed procedures for mammalian cell-based manufacturing processes in order to address these potential
hazards, thereby increasing the cost and time demands of such expression systems. Furthermore, the current FDA and other procedures
only ensure screening for scientifically identified, known viruses. Accordingly, compliance with current FDA and other procedures
does not fully guarantee that patients are protected against transmission of unknown or new potentially fatal viruses that may
infect mammalian cells.
Potential ability to administer active
therapeutic enzymes
orally.
We are using ProCellEx to produce active recombinant proteins through oral administration
of plant cells expressing biotherapeutic proteins. In such method, an enzyme is naturally encapsulated within plant cells genetically
engineered to express the targeted enzyme. Plant cells have the unique attribute of a cellulose cell wall which makes them resistant
to enzyme degradation when passing through the digestive tract. The plant cell itself serves as a delivery vehicle, once released
and absorbed, to transport an enzyme in active form to the bloodstream. If proven effective, this would be the first time an enzyme
will be administered orally rather than through intravenous therapy. To date we have completed successful preclinical animal studies
for oral GCD and oral antiTNF, and early clinical trials of oral GCD in Gaucher patients and oral antiTNF in a phase I clinical
trial in healthy volunteers and a currently ongoing phase IIa proof of concept trial. Our oral antiTNF product candidate is currently
the subject of an ongoing phase IIa proof of concept trial and we have completed a phase I clinical trial of oral antiTNF in healthy
volunteers. We have also completed an early clinical trial of oral GCD in Gaucher patients.
Our First Commercial Product – Elelyso for the Treatment
of Gaucher Disease
Elelyso (taliglucerase alfa), our first commercial product, is a
plant cell expressed recombinant glucocerebrosidase enzyme (GCD) for the treatment of Gaucher disease. On May 1, 2012, the FDA
approved Elelyso for injection as an enzyme replacement therapy (ERT) for the long-term treatment of adult patients with a confirmed
diagnosis of type 1 Gaucher disease. It was subsequently approved by the Israeli MOH, ANVISA and the regulatory authorities of
other countries
. In August 2014, the FDA approved Elelyso for injection
for pediatric patients, and other jurisdictions, including Brazil, approved pediatric indications thereafter.
Gaucher disease, a hereditary, genetic disorder with severe and
debilitating symptoms, is the most prevalent lysosomal storage disorder in humans. Lysosomal storage disorders are metabolic disorders
in which a lysosomal enzyme, a protein that degrades cellular substrates in the lysosomes of cells, is mutated or deficient. Lysosomes
are small membrane-bound cellular structures within cells that contain enzymes necessary for intracellular digestion. Gaucher disease
is caused by mutations or deficiencies in the gene encoding GCD, a lysosomal enzyme that catalyzes the degradation of the fatty
substrate, glucosylceramide (GlcCer). Patients with Gaucher disease lack or otherwise have dysfunctional GCD and, accordingly,
are not able to break down GlcCer. The GlcCer accumulates in lysosomes of certain white blood cells called macrophages which consequently
become highly enlarged. The enlarged cells accumulate in the spleen, liver, lungs, bone marrow and brain. Signs and symptoms of
Gaucher disease may include enlarged liver and spleen, abnormally low levels of red blood cells and platelets and skeletal complications.
In some cases, the patient may suffer an impairment of the central nervous system.
The standard of care for Gaucher disease is enzyme replacement therapy
using recombinant GCD to replace the mutated or deficient natural GCD enzyme. Enzyme replacement therapy is a medical treatment
in which recombinant enzymes are injected into patients in whom the enzyme is lacking or dysfunctional. Cerezyme
®
and VPRIV
®
are the only other ERTs currently available for the treatment of Gaucher disease. In addition, Cerdelga
®
(eliglustat) is a substrate reduction therapy for Gaucher disease that was approved for marketing by the FDA in August 2014 and
by the European Commission in January 2015. Finally, Zavesca (miglustat) is a small molecule drug for the treatment of Gaucher
disease. Zavesca has been approved by the FDA for use in the United States as an oral treatment. However, it has many side effects
and the FDA has approved it only for administration to those patients who cannot be treated through ERT, and, accordingly, have
no other treatment alternative. As a result, the use of Zavesca has been limited with respect to the treatment of Gaucher disease.
However, Zavesca is also used to treat other rare disorders.
Our Pipeline Drug Candidates
PRX-102 for the Treatment of Fabry Disease
We are developing PRX-102, our proprietary plant cell expressed
chemically modified version of the recombinant alpha-GAL-A protein, a therapeutic enzyme, for the treatment of Fabry disease, a
rare genetic lysosomal storage disorder. We believe that PRX-102 has the potential to be an improved version of the currently marketed
Fabry disease enzymes, Fabrazyme
®
and Replagal
®
, with improved activity in the Fabry disease target
organs and significantly longer half-life due to higher stability, which together can potentially lead to improved substrate clearance
and significantly lower formation of antibodies, as observed in our phase I/II clinical trial in Fabry patients. We believe that
the treatment of Fabry disease is a specialty clinical niche with the potential for high growth as there is a significant unmet
medical need for Fabry disease treatments.
Fabry Disease Background
Fabry disease is characterized by subnormal or absent enzymatic
activity of alpha-GAL-A, a lysosomal enzyme, which primarily catalyses the hydrolysis of terminal alpha-galactosyl groups of glycolipids,
mainly the glycosphingolipid globotriaosylceramide (Gb3). The accumulation of Gb3 in body tissues results in Fabry disease. The
ultimate consequence of glycosphingolipid deposition in the vasculature and other tissues is end-organ failure, particularly of
the kidney, but also of the heart and cerebrovascular system. In addition, involvement of the central, peripheral and autonomic
nervous systems results in episodes of pain and impaired peripheral sensation. In PRX-102, the prh-alpha-GALA, naturally occurring
as a homodimer, is PEGylated and cross-linked to support and reinforce the homodimeric structure, which is crucial for the enzymatic
activity of this enzyme. In clinical trials, PRX-102 has been shown to be taken up by Fabry patients’ cells where it localizes
to the lysosome, in which Gb3 accumulates. PRX-102 is characterized by higher stability under physiologically relevant conditions,
and extended circulation residence time as compared to current ERTs for Fabry disease.
Current Treatments of Fabry Disease
Currently there are two enzyme replacement therapies drugs available
on the market to treat Fabry disease. Fabrazyme, marketed by Genzyme Corporation (acquired by Sanofi), is approved for the treatment
of Fabry disease in the United States and the European Union. Sanofi reported €674 million (approximately $709 million)
in worldwide sales of Fabrazyme in 2016. The other approved drug for the treatment of Fabry disease in the European Union is Replagal,
which is marketed by Shire. Shire reported $452 million in sales of Replagal in 2016. In addition, there are other, non-ERT
treatments for Fabry disease.
PRX-102 Development Program
In October 2016, the first patient was dosed in our global phase
III clinical trial of PRX-102 for the treatment of Fabry disease. Over 20 sites have been opened to participate in this trial.
The phase III efficacy and safety clinical trial, which we refer to as the BALANCE Study, is a 24-month multi-center, randomized,
double-blind, active control study of PRX-102 in Fabry patients with impaired renal function. The trial is designed to enroll 78
patients previously treated with Fabrazyme (agalsidase beta) with a stable dose for at least six months. Enrolled patients will
be randomized to continue treatment with 1 mg/kg of either Fabrazyme or PRX-102, at a 2:1 ratio of PRX-102 to Fabrazyme, respectively.
Patients are to be treated via intravenous (IV) infusions every two weeks. The sites are recruiting adult symptomatic Fabry patients
with plasma and/or leucocyte alpha galactosidase activity (by activity assay) less than 30% mean normal levels. All patients must
have had treatment with a dose of 1 mg/kg agalsidase beta per infusion every two weeks for at least one year. In addition, to be
included in the trial, patients need to have certain eGFR values and a meaningful decline in annualize eGFR slope.
The primary endpoint for the BALANCE study, which was agreed with
both the FDA and the EMA, is the comparison in the rate of decline of eGFR slope between Fabrazyme and PRX 102. At 12 months, we
intend to conduct an interim analysis to test for non-inferiority to support an anticipated regulatory filing with the EMA. Patients
enrolled in the study will continue to be treated for a total of 24 months, at which point the data will be analyzed to test for
superiority to support an FDA filing.
In addition, we are preparing for a supportive phase III clinical
trial of PRX-102, which shall be run at the same time as the BALANCE Study. This supportive study, which we refer to as the BRIDGE
Study, is designed to be an open-label, single-arm, switchover study to assess the efficacy and safety of PRX-102 in Fabry patients
currently treated with Replagal. We expect to enroll 22 patients in the BRIDGE Study during 2017. The objective of the study is
to generate safety and efficacy data of patients switched from Replagal to PRX-102 over a 12-month period, with interim results
at six months. The endpoints of the study are safety, mean annualized change (slope) in eGFR, pain, plasma lyso GB3, immunogenicity
and Quality of Life.
In February 2015, we announced the completion of enrollment in our
phase I/II clinical trial in adult Fabry patients. The phase I/II clinical trial is a worldwide, multi-center, open label, dose
ranging study to evaluate the safety, tolerability, pharmacokinetics, immunogenicity and efficacy parameters of PRX-102 in adult
Fabry patients. Sixteen adult Fabry patients (9 male and 7 female) completed the trial, each in one of three dosing groups, 0.2
mg/kg, 1mg/kg and 2mg/kg. Each patient received intravenous infusions of PRX-102 every two weeks for 12 weeks, with efficacy follow-up
after six-month and twelve-month periods. All patients that completed the trial have opted to continue to receive 1 mg/kg of PRX-102
in an open-label extension trial, 60-month extension study under which all patients have been switched to receive 1 mg/kg of the
drug, the selected dose for our phase III studies of PRX-102.
Phase I/II Clinical Data; Efficacy Results:
Improvements or stabilization in efficacy parameters were demonstrated
across all disease parameters. Stable kidney function was observed in the trial, as measured by estimated glomerular filtration
rate (eGFR), with mean change from mean eGFR value of 110.78 at base-line to 110.23 after 12 months for all patients, and from
mean eGFR value of 117.37 to 117.36 for Classic Fabry patients. The eGFR slope for all patients (n=16) using CKD-EPI was -2.9 (BL-77.7-156.3).
The eGFR slope for Classic Fabry patients (n=10) was -1.8 (BL 82.4-156.3). According to a published report, an annualized rate
of eGFR change of -3.8 (BL 49-170) was observed in a study of the effect of Fabrazymeon the Classic Fabry patient population using
CKD-EPI analysis with similar base line of eGFR. All patients had stable cardiac function as measured by left ventricular mass
(LVM) and left ventricular mass index (LVMI), via MRI. After one year of treatment, average reduction of plasma Lyso-Gb3 were 48.9%
in all patients and 57.6% in Classic Fabry patients. Similarly, levels after one year of treatment, average reductions in plasma
Gb3 were 22.2% in all patients, and 33.3% in Classic patients.
The detailed results, as a percentage of change from baseline, for
both all patients and for the Classic Fabry disease patient subset are presented in the following chart:
% change ±SE
|
|
eGFR
|
|
LVM
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LVMI
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Plasma Gb3
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|
Plasma lyso-Gb3
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All Patients (n=16)
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-0.5 ±2.1
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-0.0 ±2.5
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0.4 ±2.6
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-22.2 ± 6.1
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-48.9 ± 5.7
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Classic Patients (n=10)
|
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-0.1±2.2
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-2.6 ±3.4
|
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-3.1 ±3.1
|
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-33.3 ± 7.6
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-57.6 ± 6.8
|
Based on an analysis of kidney biopsies with randomized blinded
scoring, PRX-102 demonstrated a major reduction from baseline in renal peritubular capillary Gb3 using the quantitative Barisoni
Lipid Inclusion Scoring System (BLISS). Patients in the 1 mg/kg dosing cohort of the trial showed an 86.5% reduction in Gb3 inclusion
after six months (n=4); this data represents an 89.6% reduction for males (n=3) and a 77.3% reduction for females (n=1).
With respect to safety, PRX-102 was found to be safe and well tolerated,
with a majority of adverse events being mild and moderate in severity with very limited formation of antibodies, which all seroconvert
to be antibody negative after 12 months of treatment.
Phase I/II Pharmacokinetics and Immunogenicity:
The study results showed improved stability and prolonged exposure
to the enzyme, which we believe is the result of the PEGylation and cross linking we made to the enzyme. PRX-102 has been shown
in clinical trials to have a half-life of approximately 80 hours and a substantially higher AUC compared to the other ERTs, demonstrating
enzyme availability throughout the 2-week infusion intervals. This unique enzyme parameter of PRX-102 demonstrated the potential
for reduced immunogenicity and induction of immune tolerance.
The data demonstrated a low incidence of treatment induced anti-drug
antibodies, or ADA. Three of the 16 patients treated developed ADA, which turned to be negative after 12 months of treatment.
In summary, in the phase I/II trial, PRX-102 was found to have a
markedly extended circulatory half-life compared with other ERTs; it demonstrated a low incidence of treatment induced ADA with
reversible and transient effect on pharmacokinetics; ADA response was transient and tolerization was observed; and ADA positivity
had no observed impact on safety and efficacy.
alidornase Alfa (PRX-110) for the Treatment of
Cystic Fibrosis
alidornase alfa is our proprietary plant cell recombinant form of
human deoxyribonuclease I (DNase I) that we are developing for the treatment of CF, to be administered by inhalation. DNase I cleaves
extracellular DNA and thins the thick mucus that accumulates in the lungs of CF patients. Currently, Pulmozyme
®
is the only DNase I commercially available, with annual sales of approximately CHF 685 million (approximately $671 million) in
sales for 2016 according to public reports by F. Hoffman-La Roche Ltd.
In vitro studies with PRX-110 demonstrated improved enzyme kinetics,
significantly reduced sensitivity to inhibition by actin and improved ex vivo efficacy when compared to Pulmozyme. Preclinical
studies of PRX-110 administered by inhalation showed substantial enzymatic activity in lungs.
We designed alidornase alfa, through chemical modification, to be
resistant to inhibition by actin so as to improve lung function and lower the incidence of recurrent infections by enhancing the
enzyme’s efficacy in patients’ sputa. Actin, a potent inhibitor of DNase, is found in high concentration in CF patients’
sputum. As demonstrated in Figure 1, the activity of alidornase alfa, as demonstrated in in vitro studies, remains almost with
no change in the relevant actin concentration found in CF patients while Pulmozyme is degraded significantly.
Figure 1. Actin and DNase concentrations in human sputum tested
in
in vitro
assays; Rheology Data Analysis in in human sputum samples
In addition, alidornase alfa has demonstrated improved disease parameters
in human models sputum testing when compared to the currently marketed product. In particular, alidornase alfa has demonstrated
a reduction in mucus viscosity in human sputum samples when compared to the currently marketed product. See Figure 1.
alidornase alfa Development Program
We completed a phase I clinical trial of alidornase alfa with 18
healthy volunteers in which alidornase alfa was found to be safe and tolerable.
In July 2016 we commenced a phase IIa clinical trial of alidornase
alfa. The trial is a 28-day switch-over study of 15 CF patients previously treated with Pulmozyme to evaluate the efficacy and
safety of alidornase alfa in CF patients. Participation in the trial is preceded by a two-week washout period from Pulmozyme before
treatment with alidornase alfa via inhalation. The main efficacy endpoint is the change of forced expiratory volume (FEV1) and
forced vital capacity (FVC). Additional endpoints include safety and tolerability, immunogenicity and pharmacokinetic data.
In January 2017, we announced positive interim results from the
phase IIa clinical trial for the first 13 CF patients enrolled in the study. At that time, 15 patients had been enrolled in, and
were expected to complete, the study. The initial primary efficacy result shows that alidornase alfa improves lung function as
demonstrated by a mean absolute increase in the percent predicted forced expiratory volume in one second (ppFEV1) of 4.1 points
from baseline and 3.1 points from last treatment of Pulmozyme. A commercially available small molecule CFTR modulator for the treatment
of CF has reported a mean absolute increase in ppFEV1 of 2.5 from baseline in its registration clinical study. This score was achieved
while 74% of the patients participating in the trial of the CFTR modulator were also treated with Pulmozyme on top of the modulator.
While this marketed CFTR addresses a certain mutation applicable to less than 50% of CF patients, we are developing alidornase
alfa to treat all CF patients.
Sputa available DNA samples were analyzed for approximately half
of the patients in the phase II trial. A mean reduction of approximately 60% in DNA content from baseline was observed, and a mean
reduction of approximately 90% from baseline was observed for sputa visco-elasticity. This data provides further supportive evidence
of improved lung function after treatment with alidornase alfa, as demonstrated by the increase in ppFEV1. See Figure 2.
Figure 2. Decrease in sputum DNA content and sputum viscosity
upon alidornase alfa treatment initiation
No serious adverse events were reported, and all adverse events
that occurred during the study were mild and transient in nature.
OPRX-106; Oral antiTNF for the treatment of inflammatory
diseases
OPRX-106, our oral antiTNF product candidate, is a recombinant antiTNF
(Tumor, Necrosis Factor) protein that we are expressing through ProCellEx. Auto-immune-mediated inflammatory disorders are conditions
that are characterized by common pathways that lead to inflammation and are caused or triggered by a compromised or dysregulation
of the normal immune response. Immune-mediated inflammatory disorders can cause organ damage, and are associated with increased
morbidity. Common auto-immune diseases include rheumatoid arthritis, inflammatory bowel disease (IBD) such as ulcerative colitis
and crohn’s disease, psoriasis, and others. Some of the major treatments are antiTNF drugs, administered as subcutaneous
injections or as intravenous infusions. Sales of anti-TNF drugs exceeded $30 billion annually. Well-known antiTNF drugs include
Humira, Remicade and Enbrel.
OPRX-106 is a plant cell-expressed form of the fused protein that
is naturally encapsulated within BY-2 cells genetically engineered to express the enzyme. Plant cells have the unique attribute
of a cellulose cell wall which makes them resistant to enzyme degradation when passing through the digestive tract. The plant cell
itself serves as a delivery vehicle, once released and absorbed, to transport the enzyme in active form to the bloodstream. If
proven effective, our experimental oral antiTNF would be the first protein to be administered orally rather than through injection.
We believe that our oral delivery mechanism could be applied to additional proteins and has the potential to change the method
of protein administration in certain indications.
We are developing oral antiTNF an orally-administered anti-inflammatory
treatment using plant cells as a natural capsule for the expressed protein. In preclinical studies, oral PRX-106 alleviated immune-mediated
hepatitis and reduced interferon gamma levels in a concanavalin A (ConA) inflammatory mouse model. Furthermore, the drug was shown
to alleviate liver damage and reduce liver necrosis and liver enzymes, ALT and AST, thus leading to an improvement in liver biopsies.
In a high fat diet model (NASH), OPRX-106 demonstrated a reduction of liver enzymes, ALT and AST, reduction of serum triglycerides,
along with a trend for reduction of liver fat. Additionally, oral administration of OPRX-106 alleviated immune mediated colitis
in a well-established mouse model, promoting serum levels of anti-inflammatory IL-10 and regulatory T-cells.
pr-antiTNF is a plant cell-expressed recombinant fusion protein
made from the binding domain of the human TNF receptor (TNFR), fused to the Fc component of a human antibody domain. It has an
identical amino acid sequence to Enbrel and our in vitro and preclinical animal studies have demonstrated that pr-antiTNF exhibits
similar or better activity to Enbrel. See Figure 3.
Figure 3. IBD Animal Model
OPRX-106 Development Program
We have concluded a phase I clinical trial of OPRX-106, which demonstrated
that the drug was safe and well tolerated, showing biological activity in the gut. The phase I clinical trial was a randomized,
parallel-design, open-label study designed to evaluate the safety and pharmacokinetics of OPRX-106 in healthy volunteers. The trial
enrolled 14 subjects that were randomized to one of three dosing cohorts receiving OPRX-106 doses equivalent to 2mg, 8mg or 16mg
Tumor Necrosis Factor receptor-Fc fusion protein. Subjects received once daily oral administrations for five consecutive days.
The results demonstrated that oral administration of OPRX-106 is safe and well tolerated. No major side effects were noted, and
no suppression of the immune system was observed. Regulatory T cell activation showing biological activity in the gut was observed.
Fluorescence-activated cell sorting analysis (FACS) was performed using various antibodies for surface markers, and it was observed
that all three dosages of OPRX-106 promoted the induction of various subsets of T cells, some of which are correlated with anti-inflammatory
response.
In November 2016, the first patient was enrolled in our phase IIa
clinical trial of OPRX-106 for the treatment of ulcerative colitis. The phase IIa clinical trial is designed as a randomized, open
label, 2-arm study of OPRX-106 in 20 patients with active mild to moderate ulcerative colitis. Patients will be randomized to receive
2 mg or 8 mg of OPRX-106 administered orally, once daily, for eight weeks. The primary endpoint of the study is safety, including
monitoring for adverse events following daily administration of the drug. Key efficacy endpoints include relevant disease parameters
of the drug, including Mayo score and rectal bleeding.
Technology Transfer Agreement with Fiocruz
We entered into the Brazil Agreement with Fiocruz in June 2013,
which became effective in January 2014. The technology transfer is designed to be completed in four stages and is intended to transfer
to Fiocruz the capacity and skills required for the Brazilian government to construct its own manufacturing facility, at its sole
expense, and to produce a sustainable, high-quality, and cost-effective supply of taliglucerase alfa. The initial term of the technology
transfer is seven years. The agreement contains certain purchase commitments by Fiocruz. If Fiocruz fails to comply with the purchase
commitments, we may terminate the agreement, and all of our rights to the technology will be returned.
In December 2016, we received a letter from Fiocruz regarding an
order from the Brazilian MoH to purchase alfataliglicerase to treat Gaucher patients in Brazil. The Brazilian MoH’s order
consists of a number of shipments during 2017 for a total of approximately $24.3 million. Shipments are to start in mid-2017 and
continue through the end of the year, in increasing volumes. Since the agreement went into effect, Fiocruz’s purchases of
taliglucerase alfa have been significantly below the agreed upon purchase milestones and, accordingly, we have the right to terminate
the Brazil Agreement. Notwithstanding the low purchase amounts, we are, at this time, continuing to supply Uplyso to Fiocruz under
the Brazil Agreement, and patients continue to be treated with Uplyso in Brazil. We are discussing with Fiocruz potential actions
that Fiocruz may take to comply with its purchase obligations and, based on such discussions, we will determine what we believe
to be the course of action that is in the best interest of our company.
The Brazil Agreement may be extended for an additional five-year
term, as needed, to complete the technology transfer. All of the terms of the arrangement, including the minimum annual purchases,
will apply during the additional term. Upon completion of the technology transfer, and subject to Fiocruz receiving approval from
ANVISA to manufacture taliglucerase alfa in its facility in Brazil, the agreement will enter into the final term and will remain
in effect until our last patent in Brazil expires. During such period, Fiocruz will be the sole provider of this important treatment
option for Gaucher patients in Brazil and shall pay us a single-digit royalty on net sales.
Intellectual Property
We maintain a proactive intellectual property strategy which includes
patent filings in multiple jurisdictions, including the United States and other commercially significant markets. As of December
31, 2016, we held, or had license rights to, 61 patents and 58 pending patent applications with respect to various compositions,
methods of production and methods of use relating to our ProCellEx protein expression system and our proprietary product pipeline.
Of the above, one is a joint patent, eight are joint patent applications, and one is a licensed patent application.
Our competitive position and future success depend in part on our
ability, and that of our licensees, to obtain and leverage the intellectual property covering our product candidates, know-how,
methods, processes and other technologies, to protect our trade secrets, to prevent others from using our intellectual property
and to operate without infringing the intellectual property of third parties. We seek to protect our competitive position by filing
United States, European Union, Israeli and other foreign patent applications covering our technology, including both new technology
and improvements to existing technology. Our patent strategy includes obtaining patents, where possible, on methods of production,
compositions of matter and methods of use. We also rely on know-how, continuing technological innovation, licensing and partnership
opportunities to develop and maintain our competitive position.
We issued as series of 7.5% convertible notes in December 2016,
which are guaranteed by our subsidiaries and secured by perfected liens on all of our material assets, primarily consisting of
our intellectual property assets, including a stock pledge of our foreign subsidiaries in favor of the holders of outstanding 7.5%
convertible notes.
As of December 31, 2016, our patent portfolio consisted of several
patent families (consisting of patents and/or patent applications) covering our technology, protein expression methodologies and
system and product candidates, as follows:
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With respect to our ProCellEx protein expression system, we held five issued patents in the United States, Israel and Mexico.
Among other things, the patents cover the methods that we use for culturing and harvesting plant cells and/or tissues in consecutive
cycles. Of the issued patents in this family, four are expected to expire in 2017 and one is expected to expire in 2025.
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·
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With respect to our ProCellEx protein expression system, we held seven issued patents and seven patent applications relating
to the large scale production of proteins in cultured plant cells. The issued patents and any patents to issue in the future based
on pending patent applications in this patent family, if at all, are expected to expire in 2028.
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We held a patent family containing 25 issued patents in India, South Africa, Russian Federation, Australia, China, the United
States, Ukraine, Singapore, Japan, Europe, Hong Kong, Mexico, Korea, Canada, Brazil and Israel and three patent applications relating
to the production of recombinant glycosylated lysosomal proteins in our plant culture platform, including taliglucerase alfa, and
uses of these proteins and cells containing these proteins for the treatment of lysosomal disorders. The issued patents and any
patents to issue in the future based on pending patent applications in this patent family, if at all, are expected to expire in
2024.
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·
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We held a patent family containing three granted patents relating to a system and method for production of antibodies in a
plant cell culture, and antibodies produced in such a system. The issued patents in this patent family are expected to expire in
2025.
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We held a patent family containing three issued patents in South Africa, Australia and Israel, and one pending patent application
relating to a new method for delivering active recombinant proteins systemically through oral administration of transgenic plant
cells. The issued patents and any patents to issue in the future based on patent applications in this patent family, if at all,
are expected to expire in 2026.
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We held a patent family containing three granted patents in the United States, South Africa and Australia, and two pending
patent applications relating to saccharide containing protein conjugates. The issued patents and any patents to issue in the future
based on the patent applications in this patent family, if at all, are expected to expire in 2028.
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We held a patent family containing one granted patent in Japan and eight pending patent applications relating to Nucleic Acid
construct for expression of alpha-galactosidase enzyme in plants and plant cells. The patents to issue in the future based on the
patent applications in this patent family, if at all, are expected to expire in 2031.
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We held a patent family containing 13 granted patents in Europe, United States, Australia, Japan, Russian Federation, China,
Hong Kong, Singapore, New Zealand and South Africa, and nine pending patent applications relating to multimeric protein structures
of α-galactosidase and to uses thereof in treating Fabry disease. The issued patents and any patents to issue in the future
based on the patent applications in this patent family, if at all, are expected to expire in 2031.
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We held one United States patent application relating to the oral delivery of plant cells comprising recombinant glucocerebrosidase
for the treatment of Gaucher disease. The patent to issue in the future based on this patent application, if at all, is expected
to expire in 2035.
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We held three patent families containing eight pending applications relating to plant recombinant human DNase I and uses in
therapy. The patents to issue in the future based on these patent applications, if at all, are expected to expire in 2033.
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We held a PCT application relating to chemically modified plant recombinant human DNase I and uses in therapy. The patents
to issue in the future based on this patent application, if at all, are expected to expire in 2036.
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We held three families containing 10 patent applications relating to plant recombinant TNF alpha inhibitor polypeptides. The
patents to issue in the future based on these patent applications, if at all, are expected to expire in 2034/2035.
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Our patent portfolio includes a patent that we co-own that covers human glycoprotein hormone and chain splice variants, including
isolated nucleic acids encoding these variants. More specifically, this patent covers a new splice variant of human FSH. This patent
was issued in the United States and is expected to expire in 2024.
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We co-own and have an exclusive license to a patent family, containing eight pending applications, that covers use of plant
cells expressing a TNF alpha polypeptide inhibitor in therapy. The patents to issue in the future based on these patent applications,
if at all, are expected to expire in 2034.
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We have licensed the rights to a United States patent application covering oral composition comprising a TNF antagonist. The
patents to issue in the future based on this application, if at all, are expected to expire in 2034.
|
We are aware of U.S. patents, and corresponding international counterparts
of such patents, owned by third parties that contain claims covering methods of producing GCD. We do not believe that, if any claim
of infringement were to be asserted against us based upon such patents, taliglucerase alfa would be found to infringe any valid
claim under such patents. However, there can be no assurance that a court would find in our favor or that, if we choose or are
required to seek a license to any one or more of such patents, a license would be available to us on acceptable terms or at all.
In April 2005, Protalix Ltd. entered into a license agreement with
Icon Genetics AG, or Icon, pursuant to which we received an exclusive worldwide license to develop, test, use and commercialize
Icon’s technology to express certain proteins in our ProCellEx protein expression system. We are also entitled to a non-exclusive
worldwide license to make and have made other proteins expressed by using Icon’s technology in our technology. As consideration
for the license, we are obligated to make royalty payments equal to varying low, single-digit percentages of net sales of products
by us, our affiliates, or any sublicensees under the agreement. In addition, we are obligated to make milestone payments equal
to $350,000, in the aggregate, for each product developed under the license, upon the achievement of certain milestones.
Our license agreement with Icon remains in effect until the earlier
of the expiration of the last patent under the agreement or, if all of the patents under the agreement expire, 20 years after the
first commercial sale of any product under the agreement. Icon may terminate the agreement upon written notice to us that we are
in material breach of our obligations under the agreement and we are unable to remedy such material breach within 30 days after
we receive such notice. Further, Icon may terminate the agreement in connection with certain events relating to a wind up or bankruptcy,
if we make a general assignment for the benefit of our creditors, or if we cease to conduct operations for a certain period. Icon
may also terminate the exclusivity granted to us by written notice if we fail to reach certain milestones within a designated period
of time. Notwithstanding the termination date of the agreement, our obligation to pay royalties to Icon under the agreement may
expire prior to the termination of the agreement, subject to certain conditions.
Manufacturing
We are obligated to manufacture all of the taliglucerase
alfa drug product needed under the Amended Pfizer Agreement, subject to certain terms and conditions. Our drug product candidates,
as well as taliglucerase alfa, must be manufactured in a sterile environment and in compliance with cGMPs set by the FDA and other
relevant foreign regulatory authorities. We use our current facility, which has approximately 20,000 sq/ft of clean rooms built
according to industry standards, to develop, process and manufacture taliglucerase alfa and other recombinant proteins. We intend
to use our current manufacturing space to produce all of the taliglucerase alfa we need in the near future, included the taliglucerase
alfa to be purchased by Pfizer. In addition, we intend to use our manufacturing space to produce all of the drug substance needed
in connection with the clinical trials for our product candidates.
In addition, we are currently producing Fabry
drug substance for our phase III clinical trial as part of the process of converting our current approved manufacturing facility
to an approved multi-product facility, thereby introducing potentially significant operational savings. Our facility’s current
capacity can serve all of our current and expected commercial and clinical needs, and we believe it will be sufficient to serve
our production needs for the anticipated commercialization of PRX-102.
O
ur
manufacturing facilities in Carmiel, Israel, have undergone successful audits by the Israeli MOH, the FDA, ANVISA, and the
European
Union
under the European Union’s centralized marketing authorization
procedure,
the Australian TGA and Health Canada
.
Our current facility in Israel has been granted “Approved
Enterprise” status, and we have elected to participate in the alternative benefits program. Our facility is located in a
Zone A location, and, therefore, our income from the Approved Enterprise will be tax exempt in Israel for a 10-year period commencing
with the year in which we first generate taxable income from the relevant Approved Enterprise and after we use our net operating
loss carryforwards, or “NOLs.” We expect to be entitled to similar tax benefits for a number of years thereafter. To
remain eligible for these tax benefits, we must continue to meet certain conditions, and if we increase our activities outside
of Israel, for example, by future acquisitions, such increased activities generally may not be eligible for inclusion in Israeli
tax benefit programs. In addition, our technology is subject to certain restrictions with respect to the transfer of technology
and manufacturing rights. “See Risk Factors—The manufacture of our products is an exacting and complex process, and
if we or one of our materials suppliers encounter problems manufacturing our products, it will have a material adverse effect on
our business and results of operations.”
Raw Materials and Suppliers
We believe that the raw materials that we require throughout the
manufacturing process of Elelyso, PRX-102, alidornase alfa and OPRX-106 and our other current and potential drug product candidates
are widely available from numerous suppliers and are generally considered to be generic industrial biological supplies. We rely
on a single approved supplier for certain materials relating to the current expression of our proprietary biotherapeutic proteins
through ProCellEx. We have identified additional suppliers for most of the materials required for the production of our product
candidates.
Development and regulatory approval of our pharmaceutical products
are dependent upon our ability to procure active ingredients and certain packaging materials from sources approved by the FDA and
other regulatory authorities. Since the FDA and other regulatory approval processes require manufacturers to specify their proposed
suppliers of active ingredients and certain packaging materials in their applications, FDA approval of a supplemental application
to use a new supplier in connection with any drug candidate or approved product, if any, would be required if active ingredients
or such packaging materials were no longer available from the specified supplier, which could result in manufacturing delays. From
time to time, we intend to continue to identify alternative FDA-approved suppliers to ensure the continued supply of necessary
raw materials.
Competition
The biotechnology and pharmaceutical industries are characterized
by rapidly evolving technology and significant competition. Competition from numerous existing companies and others entering the
fields in which we operate is intense and expected to increase. Most of these companies have substantially greater research and
development, manufacturing, marketing, financial, technological personnel and managerial resources than we do. In addition, many
specialized biotechnology companies have formed collaborations with large, established companies to support research, development
and commercialization of products that may be competitive with our current and future product candidates and technologies. Acquisitions
of competing companies by large pharmaceutical or biotechnology companies could further enhance such competitors’ financial,
marketing and other resources. Academic institutions, governmental agencies and other public and private research organizations
are also conducting research activities and seeking patent protection and may commercialize competitive products or technologies
on their own or through collaborations with pharmaceutical and biotechnology companies.
There are two approved ERTs for the treatment of Fabry disease;
Fabrazyme which is marketed by Genzyme and Replagal, which is marketed by Shire. Fabrazyme is available in the United States and
the European Union. Replagal is available in the European Union. In addition, we are aware of other late clinical stage, early
clinical stage and experimental drugs which are being developed for the treatment of Fabry disease by Amicus Therapeutics, Inc.
and other companies. In addition,
in May 2016, Galafold™
(migalastat), an oral small molecule pharmacological chaperone marketed by Amicus Therapeutics, Inc. was approved as a first line
therapy for long-term treatment of adults and adolescents aged 16 years and older with a confirmed diagnosis of Fabry disease and
who have an amenable mutation.
With respect to alidornase alfa, we face competition from Genentech
Inc., a member of the Roche Group, which markets Pulmozyme.
With respect to PRX-106, we face competition from AbbVie Inc. (Humira
®
),
Johnson & Johnson and Merck & Co. (Remicade) and Pfizer and Amgen Inc. (Enbrel). In addition, we are aware of other clinical
stage, early clinical stage and experimental antiTNF drugs.
We also face competition from companies that are developing other
platforms for the expression of recombinant therapeutic pharmaceuticals. We are aware of companies that are developing alternative
technologies to develop and produce therapeutic proteins in anticipation of the expiration of certain patent claims covering marketed
proteins. Competitors developing alternative expression technologies include Crucell N.V. (which was acquired by Johnson &
Johnson during 2010), Shire and GlycoFi, Inc. (which was acquired by Merck & Co. Inc.). Other companies are developing alternate
plant-based technologies, include, among others, iBio, Inc., Medicago Inc., and Greenovation Biotech GmbH, none of which are cell-based.
Rather, such companies base their product development on transgenic plants or whole plants.
See “Risk Factors—Developments by competitors may render
our products or technologies obsolete or non-competitive which would have a material adverse effect on our business, results of
operations and financial condition.”
Scientific Advisory Board
We have reorganized our scientific advisory board by establishing
a core team of advisors. The scientific advisory board may invite additional experts to attend meetings on a case-by-case basis.
Members of our scientific advisory board consult with our management within their professional areas of expertise; exchange strategic
and business development ideas with our management; attend scientific, medical and business meetings with our management, such
as meetings with the FDA and comparable foreign regulatory authorities, meetings with strategic or potential strategic partners
and other meetings relevant to their areas of expertise; and attend meetings of our scientific advisory board. We expect our scientific
advisory board to convene at least twice annually, and we frequently consult with the individual members of our scientific advisory
board. Our scientific advisory board currently includes the following people:
Name
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Affiliations (selected)
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Roger D. Kornberg, Ph.D. (Chairman)
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Laureate of the Nobel Prize in Chemistry
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Member, U.S. National Academy of Sciences
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Winzer Professor of Medicine, Department of Structural Biology at Stanford University
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2001 Welch Prize (highest award granted in the field of chemistry in the United States)
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2002 Leopold Mayer Prize (the highest award granted in the field of biomedical sciences from the French Academy of Sciences)
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Professor Aaron Ciechanover, M.D., D.Sc.
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Laureate of the Nobel Prize in Chemistry
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Distinguished research Professor at the Cancer and Vascular Biology Research Center of the Rappaport Research Institute and Faculty of Medicine at the Technion, Israel’s Institute of Technology
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American Academy of Arts and Sciences, Member
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Alexander Levitzki, Ph.D.
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Wolfson Family Professor of Biochemistry in the Department of Biological Chemistry of The Alexander Silberman Institute of Life Sciences, Hebrew University of Jerusalem
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American Association for Cancer Research, 2013 Award for Outstanding Achievement in Chemistry in Cancer Research.
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1990 Israel Prize in Biochemistry
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1990 Rothschild Prize in Biology
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2002 Hamilton-Fairley Award, European Society of Medical Oncology
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2005 Wolf Prize for Medicine
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2012 Nauta Award in Pharmacochemistry, The European Federation of Medicinal Chemistry (EFMC) (the highest award from the European Federation for Medicinal Chemistry)
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Charles J. Arntzen, Ph.D.
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Regent’s Profession and Florence Ely Nelson Presidential Chair
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Biodesign Institute, CIDV, Arizona State University
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Member, National Academy of Sciences, USA
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American Society of Plant Biology Leadership in Science Public Service Award (2004)
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Botanical Society of America Centennial Award (2006)
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Fellow of American Society of Plant Biologists (2007)
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Doctor of Science
honoris causa.
, Hebrew University of Jerusalem
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Chair, Section O “Agriculture, Food, and Renewable Resources,” American Association for the Advancement of Science (AAAS) (2011-2012)
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Government Regulation
The testing, manufacture, distribution, advertising and marketing
of drug products are subject to extensive regulation by federal, state and local governmental authorities in the United States,
including the FDA, and by similar authorities in other countries. Any product that we develop must receive all relevant regulatory
approvals or clearances, as the case may be, before it may be marketed in a particular country.
The regulatory process, which includes overseeing preclinical studies
and clinical trials of each pharmaceutical compound to establish its safety and efficacy and confirmation by the FDA that good
laboratory, clinical and manufacturing practices were maintained during testing and manufacturing, can take many years, requires
the expenditure of substantial resources and gives larger companies with greater financial resources a competitive advantage over
us. Delays or terminations of clinical trials that we undertake would likely impair our development of product candidates. Delays
or terminations could result from a number of factors, including stringent enrollment criteria, slow rate of enrollment, size of
patient population, having to compete with other clinical trials for eligible patients, geographical considerations and others.
The FDA review process can be lengthy and unpredictable, and we
may encounter delays or rejections of our applications when submitted. Generally, in order to gain FDA approval, we must first
conduct preclinical studies in a laboratory and in animal models to obtain preliminary information on a compound and to identify
any potential safety problems. The results of these studies are submitted as part of an IND application that the FDA must review
before human clinical trials of an investigational drug can commence. Clinical trials may be terminated by the clinical trial site,
sponsor or the FDA if toxicities appear that are either worse than expected or unexpected.
Clinical trials are normally performed in three sequential phases
and generally take two to five years, or longer, to complete. Phase I consists of testing the drug product in a small number of
humans, normally healthy volunteers, to determine preliminary safety and tolerable dose range. Phase II usually involves studies
in a limited patient population to evaluate the effectiveness of the drug product in humans having the disease or medical condition
for which the product is indicated, determine dosage tolerance and optimal dosage and identify possible common adverse effects
and safety risks. Phase III consists of additional controlled testing at multiple clinical sites to establish clinical safety and
effectiveness in an expanded patient population of geographically dispersed test sites to evaluate the overall benefit-risk relationship
for administering the product and to provide an adequate basis for product labeling. Phase IV clinical trials may be conducted
after approval to gain additional experience from the treatment of patients in the intended therapeutic indication.
After completion of clinical trials of a new drug product, FDA and
foreign regulatory authority marketing approval must be obtained. Assuming that the clinical data support the product’s safety
and effectiveness for its intended use, a new drug application, or NDA, or a BLA is submitted to the FDA for review. Generally,
it takes one to three years to obtain approval. If questions arise during the FDA review process, approval may take a significantly
longer period of time. The testing and approval processes require substantial time and effort and approval on a timely basis, if
at all, or the approval that we receive may be for a narrower indication than we had originally sought, potentially undermining
the commercial viability of the product. Even if regulatory approvals are obtained, approved products are subject to continual
review and holders of an approved product are required, for example, to report certain adverse reactions and production problems,
if any, to the FDA, and to comply with certain requirements concerning advertising and promotional labeling for the product. Also,
quality control and manufacturing procedures relating to a product must continue to conform to cGMP after approval, and the FDA
periodically inspects manufacturing facilities to assess compliance with cGMP. Accordingly, manufacturers must continue to expend
time, money and effort in the area of production and quality control to comply with cGMP and other aspects of regulatory compliance.
The later discovery of previously unknown problems or failure to comply with the applicable regulatory requirements with respect
to any product may result in restrictions on the marketing of the product or withdrawal of the product from the market as well
as possible civil or criminal sanctions. See also “—International Regulation.”
Under the Orphan Drug Act of 1983, the FDA may grant orphan drug
designation to drugs and biological products intended to treat a rare disease or condition, which is generally a disease or condition
that affects fewer than 200,000 individuals in the United States. The FDA grants orphan drug designation to drugs that may provide
a significant therapeutic advantage over existing treatments and target conditions affecting 200,000 or fewer U.S. patients per
year. Orphan drug designation does not convey any advantage in or shorten the duration of the regulatory review and approval process.
Among the other benefits of orphan drug designation are possible funding and tax savings to support clinical trials and for other
financial incentives and a waiver of the marketing application user fee and most likely priority review.
If a significant
therapeutic advantage over existing treatments is shown in the marketing application, the FDA may grant orphan drug approval and
provide a seven-year period of marketing exclusivity.
The FDA has a fast track program that is intended to expedite or
facilitate the process for reviewing new drugs and biological products that meet certain criteria. Specifically, new drugs and
biological products are eligible for fast track designation if they are intended to treat a serious or life-threatening condition
and demonstrate the potential to address unmet medical needs for the condition. Fast track designation applies to the combination
of the product and the specific indication for which it is being studied. For a fast track product, the FDA may consider for review
on a rolling basis sections of the NDA or BLA before the complete application is submitted, if the sponsor provides a schedule
for the submission of the sections of the NDA, the FDA agrees to accept sections of the NDA or BLA as they become available and
determines that the schedule is acceptable, and the sponsor pays any required user fees upon submission of the first section of
the NDA or BLA. We used the rolling submission option for our taliglucerase alfa NDA, which we completed in April 2010.
The United States federal government regulates healthcare through
various agencies, including but not limited to the following: (i) the FDA, which administers the Federal Food, Drug, and Cosmetic
Act (FDCA), as well as other relevant laws; (ii) the Center for Medicare & Medicaid Services (CMS), which administers the Medicare
and Medicaid programs; (iii) the Office of Inspector General (OIG) which enforces various laws aimed at curtailing fraudulent or
abusive practices, including by way of example, the Anti-Kickback Law, the Anti-Physician Referral Law, commonly referred to as
Stark, the Anti-Inducement Law, the Civil Money Penalty Law and the laws that authorize the OIG to exclude healthcare providers
and others from participating in federal healthcare programs; and (iv) the Office of Civil Rights, which administers the privacy
aspects of the Health Insurance Portability and Accountability Act of 1996, or HIPAA. All of the aforementioned are agencies within
the Department of Health and Human Services (HHS). Healthcare is also provided or regulated, as the case may be, by the Department
of Defense through its TriCare program, the Department of Veterans Affairs, especially through the Veterans Health Care Act of
1992, the Public Health Service within HHS under Public Health Service Act § 340B (42 U.S.C. § 256b), the Department
of Justice through the Federal False Claims Act and various criminal statutes, and state governments under the Medicaid and other
state sponsored or funded programs and their internal laws regulating all healthcare activities. Many states also have anti-kickback
and anti-physician referral laws that are similar to the federal laws, but may be applicable in situations where federal laws do
not apply.
Medicare is the federal healthcare program for those who are (i)
over 65 years of age, (ii) disabled, (iii) suffering from end-stage renal disease or (iv) suffering from Lou Gehrig’s disease.
Medicare consists of part A, which covers inpatient costs, part B, which covers services by physicians and laboratories, durable
medical equipment and certain drugs, primarily those administered by physicians, and part D, which provides drug coverage for most
prescription drugs other than those covered under part B. Medicare also offers a managed care option under part C. Medicare is
administered by CMS. In contrast, Medicaid is a state-federal healthcare program for the poor and is administered by the states
pursuant to an agreement with the Secretary of Health and Human Services. Most state Medicaid programs cover most outpatient prescription
drugs.
In March 2010, the Patient Protection and Affordable Care Act, as
amended by the Health Care and Education Affordability Reconciliation Act, or collectively, PPACA, became law in the United States.
PPACA substantially changes the way healthcare is financed by both governmental and private insurers and significantly affects
the pharmaceutical industry. Key provisions of PPACA specific to the pharmaceutical industry, among others, include the following:
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An annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic agents
into the United States, apportioned among these entities according to their market share in certain federal government healthcare
programs (excluding sales of any drug or biologic product marketed for an orphan indication), beginning in 2011;
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An increase in the rebates a manufacturer must pay under the Medicaid Drug Rebate Program, retroactive to January 1, 2010,
to 23.1% and 13% of the average manufacturer price for branded and generic drugs, respectively;
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A new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of sale discounts
off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for
the manufacturer’s outpatient drugs to be covered under Medicare Part D, beginning in 2011;
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Extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid
managed care organizations, effective March 23, 2010;
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Expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage
to additional individuals beginning in April 2010 and by adding new mandatory eligibility categories for certain individuals with
income at or below 133% of the Federal Poverty Level beginning in 2014, thereby potentially increasing both the volume of sales
and manufacturers’ Medicaid rebate liability;
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Expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program, effective
January 2010;
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New requirements to report certain financial arrangements with physicians and others, including reporting any “transfer
of value” made or distributed to prescribers and other healthcare providers and reporting any investment interests held by
physicians and their immediate family members during each calendar year beginning in 2012, with reporting starting in 2013;
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A new requirement to annually report drug samples that manufacturers and distributors provide to physicians, effective April
1, 2012;
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A licensure framework for follow-on biologic products; and
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A new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness
research, along with funding for such research.
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International Regulation
We are subject to regulations and product registration requirements
in many foreign countries in which we may sell our products, including in the areas of product standards, packaging requirements,
labeling requirements, import and export restrictions and tariff regulations, duties and tax requirements. The time required to
obtain clearance required by foreign countries may be longer or shorter than that required for FDA clearance, and requirements
for licensing a product in a foreign country may differ significantly from FDA requirements.
Pharmaceutical products may not be imported into, or manufactured
or marketed in, the State of Israel absent drug registration. The three basic criteria for the registration of pharmaceuticals
in Israel is quality, safety and efficacy of the pharmaceutical product and the Israeli MOH requires pharmaceutical companies to
conform to international developments and standards. Regulatory requirements are constantly changing in accordance with scientific
advances as well as social and ethical values.
The relevant legislation of the European Union requires that medicinal
products, including generic versions of previously approved products, and new strengths, dosage forms and formulations, of previously
approved products, shall have a marketing authorization before they are placed on the market in the European Union. Authorizations
are granted after the assessment of quality, safety and efficacy by the respective health authorities. In order to obtain an authorization,
an application must be made to the competent authority of the member state concerned or in a centralized procedure to the EMA.
Besides various formal requirements, the application must contain the results of pharmaceutical (physico-chemical, biological or
microbiological) tests, of preclinical (toxicological and pharmacological) tests as well as of clinical trials. All of these tests
must have been conducted in accordance with relevant EU regulations and must allow the reviewer to evaluate the quality, safety
and efficacy of the medicinal product. Orphan drug designation in the European Union is granted to medicinal products intended
for the diagnosis, prevention and treatment of life-threatening diseases and very serious conditions that affect not more than
five in 10,000 people in the European Union. Orphan drug designation is generally given to medicinal products that treat conditions
for which no current therapy exists or are expected to bring a significant benefit to patients over existing therapies.
Israeli Government Programs
The following is a summary of the current principal Israeli tax
laws applicable to us and Protalix Ltd., and of the Israeli Government programs from which Protalix Ltd. benefits. Some parts of
this discussion are based on new tax legislation that has not been subject to judicial or administrative interpretation. Therefore,
the views expressed in the discussion may not be accepted by the tax authorities in question. The discussion should not be construed
as legal or professional tax advice and does not cover all possible tax considerations.
General Corporate Tax Structure in Israel
The income of Protalix Ltd., other than income from “Approved
Enterprises,” is taxed in Israel at the regular rates which were 26.5% for fiscal years 2014 through 2015, and 25% in 2016.
In January 2016, the Law for the Amendment of the Income Tax Ordinance
(No. 216) was published, enacting a reduction of corporate tax rate beginning in 2016 and thereafter, from 26.5% to 25%. In December
2016, the Economic Efficiency Law (Legislative Amendments for Implementing the Economic Policy for the 2017 and 2018 Budget Year),
2016 was published, introducing a gradual reduction in corporate tax rate from 25% to 23%. However, the law also included a temporary
provision setting the corporate tax rate in 2017 at 24%. As a result, the corporate tax rate will be 24% in 2017 and 23% in 2018
and thereafter.
Capital gains on the sale of assets are subject to capital gains
tax according to the corporate tax rate in effect in the year which the assets are sold.
Law for the Encouragement of Capital Investments, 1959
The Law for the Encouragement of Capital Investments, 1959, as amended
or the Investment Law, provides certain incentives for capital investments in a production facility (or other eligible assets).
Generally, an investment program that is implemented in accordance with the provisions of the Investment Law, referred to as an
“Approved Enterprise,” is entitled to benefits. These benefits may include cash grants from the Israeli government
and tax benefits, based upon, among other things, the location of the facility in which the investment is made and specific elections
made by the grantee. See also Note 10.
Protalix Ltd. will continue to enjoy the tax benefits under the
pre-revision provisions of the Investment Law. If any new benefits are granted to Protalix Ltd. in the future, Protalix Ltd. will
be subject to the provisions of the amended Investment Law with respect to these new benefits. Therefore, the following discussion
is a summary of the Investment Law prior to its amendment as well as the relevant changes contained in the new legislation.
Under the Investment Law prior to its amendment, a company that
wished to receive benefits had to receive approval from the Authority for the Investment and Development of the Industry and Economy,
or the Authority. Each certificate of approval for an Approved Enterprise relates to a specific investment program in the Approved
Enterprise, delineated both by the financial scope of the investment and by the physical characteristics of the facility or the
asset, e.g., the equipment to be purchased and utilized pursuant to the program.
An Approved Enterprise may elect to forego any entitlement to the
grants otherwise available under the Investment Law and, instead, participate in an alternative benefits program under which the
undistributed income from the Approved Enterprise is fully exempt from corporate tax for a defined period of time. Under the alternative
package of benefits, a company’s undistributed income derived from an Approved Enterprise will be exempt from corporate tax
for a period of between two and 10 years from the first year of taxable income, depending upon the geographic location within Israel
of the Approved Enterprise. Upon expiration of the exemption period, the Approved Enterprise is eligible for the reduced tax rates
otherwise applicable under the Investment Law for any remainder of the otherwise applicable benefits period (up to an aggregate
benefits period of either seven or 10 years, depending on the location of the company or its definition as a foreign investors’
company). If a company has more than one Approved Enterprise program or if only a portion of its capital investments are approved,
its effective tax rate is the result of a weighted combination of the applicable rates. The tax benefits from any certificate of
approval relate only to taxable profits attributable to the specific Approved Enterprise. Income from activity that is derived
from different Approved Enterprises does not enjoy these tax benefits.
A company that has an Approved Enterprise program is eligible for
further tax benefits if it qualifies as a foreign investors’ company. A foreign investors’ company eligible for benefits
is essentially a company in which more than 25% of the share capital (in terms of shares, rights to profit, voting and appointment
of directors) is owned (measured by both share capital and combined share and loan capital) by non-Israeli residents. A company
that qualifies as a foreign investors’ company and has an Approved Enterprise program is eligible for tax benefits for a
10-year benefit period and may enjoy a reduced corporate tax rate of 10% to 25%, depending on the amount of the company’s
shares held by non-Israeli shareholders.
If a company that has an Approved Enterprise program is a wholly
owned subsidiary of another company, the percentage of foreign investments is determined based on the percentage of foreign investment
in the parent company. The tax rates and related levels of foreign investments are set forth in the following table:
Percent of Foreign
Ownership
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Rate of
Reduced
Tax
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0-49%
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25%
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49-74%
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20%
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74-90%
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15%
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90-100%
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10%
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Our original facility in Israel has been granted “Approved
Enterprise” status, and it has elected to participate in the alternative benefits program. Under the terms of its Approved
Enterprise program, the facility is located in a top priority location, or “Zone A,” and, therefore, the income from
that Approved Enterprise will be tax exempt in Israel for a period of 10 years, commencing with the year in which taxable income
is first generated from the relevant Approved Enterprise. The current benefits program may not continue to be available and Protalix
Ltd. may not continue to qualify for its benefits.
A company that has elected to participate in the alternative benefits
program and that subsequently pays a dividend out of the income derived from the Approved Enterprise during the tax exemption period
will be subject to corporate tax in respect of the amount distributed at the rate that would have been applicable had the company
not elected the alternative benefits program (generally 10% to 25%, depending on the extent to which non-Israeli shareholders hold
such company’s shares). If the dividend is distributed within 12 years after the commencement of the benefits period (or,
in the case of a foreign investor’s company, without time limitation), the dividend recipient is taxed at the reduced withholding
tax rate of 15% applicable to dividends from approved enterprises, or at the lower rate under an applicable tax treaty. After this
period, the withholding tax rate is 25%, or at the lower rate under an applicable tax treaty. In the case of a company with a foreign
investment level (as defined by the Investment Law) of 25% or more, the 12-year limitation on reduced withholding tax on dividends
does not apply. The company must withhold this tax at its source, regardless of whether the dividend is converted into foreign
currency.
The Investment Law also provides that an Approved Enterprise is
entitled to accelerated depreciation on its property and equipment that are included in an approved investment program. This benefit
is an incentive granted by the Israeli government regardless of whether the alternative benefits program is elected.
The benefits available to an Approved Enterprise are conditioned
upon terms stipulated in the Investment Law and regulations and the criteria set forth in the applicable certificate of approval.
If Protalix Ltd. does not fulfill these conditions in whole or in part, the benefits can be canceled and Protalix Ltd. may be required
to refund the received benefits, linked to the Israeli consumer price index with the addition of interest or alternatively with
an additional penalty payment. We believe that Protalix Ltd. currently operates in compliance with all applicable conditions and
criteria, but there can be no assurance that Protalix Ltd. will continue to do so. Furthermore, there can be no assurance that
any Approved Enterprise status granted to Protalix Ltd.’s facilities will entitle Protalix Ltd. to the same benefits to which
it is currently entitled.
Under the Investment Law, the approval of the Authority is required
only for Approved Enterprises that receive cash grants. Approved Enterprises that do not receive benefits in the form of governmental
cash grants, but only tax benefits, are no longer required to obtain this approval. Instead, these Approved Enterprises are required
to make certain investments as specified in the Investment Law.
The amended Investment Law specifies certain conditions for an Approved
Enterprise to be entitled to benefits. These conditions include:
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the Approved Enterprise’s revenues from any single country or a separate customs territory may not exceed 75% of the
Approved Enterprise’s total revenues; or
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at least 25% of the Approved Enterprise’s revenues during the benefits period must be derived from sales into a single
country or a separate customs territory with a population of at least 14 million.
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There can be no assurance that Protalix Ltd. will comply with the
above conditions in the future or that Protalix Ltd. will be entitled to any additional benefits under the Investment Law. In addition,
it is possible that Protalix Ltd. may not be able to operate in a manner that maximizes utilization of the potential benefits available
under the Investment Law.
From time to time, the Israeli Government has considered reducing
the benefits available to companies under the Investment Law. The termination or substantial reduction of any of the benefits available
under the Investment Law could materially impact the cost of our future investments.
Encouragement of Industrial Research, Development and Technology
Innovation Law, 1984
To date, Protalix Ltd. has received grants from the Office of the
Chief Scientist, or the OCS, under the Israeli Law for the Encouragement of Industrial Research, Development and Technology Innovation,
1984, and related regulations, or the Research Law. On January 1, 2016, the Israeli government established the National Authority
for Technological Innovation, or NATI. NATI has replaced many of the functions of the OCS. For purposes of clarity, references
to NATI will include the OCS. NATI grants are made available to finance of a portion of Protalix Ltd.’s research and development
expenditures in Israel. As of December 31, 2016, NATI approved grants in respect of Protalix Ltd.’s continuing operations
totaling approximately $46.6 million, measured from inception. Protalix Ltd. is required to repay up to 100% of grants actually
received (plus interest at the LIBOR rate applied to the grants received on or after January 1, 1999) to NATI through payments
of royalties at a rate of 3% to 6% of the revenues generated from NATI-funded project, depending on the period in which revenues
were generated. As of December 31, 2016, Protalix Ltd. either paid or accrued royalties payable of $8.1◦million and Protalix
Ltd.’s contingent liability to NATI with respect to grants received was approximately $38.5◦million.
Under the Research Law, recipients of grants from NATI are prohibited
from manufacturing products developed using these grants outside of the State of Israel without special approvals, although the
Research Law does enable companies to seek prior approval for conducting manufacturing activities outside of Israel without being
subject to increased royalties. If Protalix Ltd. receives approval to manufacture the products developed with government grants
outside of Israel, it will be required to pay an increased total amount of royalties (possibly up to 300% of the grant amounts
plus interest), depending on the manufacturing volume that is performed outside of Israel, as well as at a possibly increased royalty
rate.
Additionally, under the Research Law, Protalix Ltd. is prohibited
from transferring NATI-financed technologies and related intellectual property rights outside of the State of Israel, except under
limited circumstances and only with the approval of NATI Council or the Research Committee. Protalix Ltd. may not receive the required
approvals for any proposed transfer and, if received, Protalix Ltd. may be required to pay NATI a portion of the consideration
that it receives upon any sale of such technology by a non-Israeli entity. The scope of the support received, the royalties that
Protalix Ltd. has already paid to NATI, the amount of time that has elapsed between the date on which the know-how was transferred
and the date on which NATI grants were received and the sale price and the form of transaction will be taken into account in order
to calculate the amount of the payment to NATI. Approval of the transfer of technology to residents of the State of Israel is required,
and may be granted in specific circumstances only if the recipient abides by the provisions of applicable laws, including the restrictions
on the transfer of know-how and the obligation to pay royalties. No assurance can be made that approval to any such transfer, if
requested, will be granted.
Under the Research Law and the regulations promulgated thereunder,
NATI Council may allow the transfer outside of Israel of know-how derived from an approved program and the related manufacturing
rights in limited circumstances which are currently as follows:
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in the event of a sale of know-how itself to a non-affiliated third party, provided that upon such sale the owner of the know-how
pays to NATI an amount, in cash, as set forth in the Research Law (and the regulations promulgated thereunder). In addition, the
amendment provides that if the purchaser of the know-how gives the selling Israeli company the right to exploit the know-how by
way of an exclusive, irrevocable and unlimited license, the research committee may approve such transfer in special cases without
requiring a cash payment.
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in the event of a sale of a company which is the owner of know-how, pursuant to which the company ceases to be an Israeli company,
provided that upon such sale, the owner of the know-how makes a cash payment to NATI as set forth in the Research Law (and the
regulations promulgated thereunder).
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in the event of an exchange of know-how such that in exchange
for the transfer of know-how outside of Israel, the recipient of the know-how transfers other know-how to the company in Israel
in a manner in which NATI is convinced that the Israeli economy realizes a greater, overall benefit from the exchange of know-how.
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The Research Committee may, in special cases, approve the transfer
of manufacture or of manufacturing rights of a product developed within the framework of the approved program or which results
therefrom, outside of Israel.
The State of Israel does not own intellectual property rights in
technology developed with NATI funding and there is no restriction on the export of products manufactured using technology developed
with NATI funding. The technology is, however, subject to transfer of technology and manufacturing rights restrictions as described
above. For a description of such restrictions, please see “Risk Factors—Risks Relating to Our Operations in Israel.
NATI approval is not required for the export of any products resulting from the research or development or for the licensing of
any technology in the ordinary course of business.
Law for the Encouragement of Industry (Taxes), 1969
We believe that Protalix Ltd. currently qualifies as an “Industrial
Company” within the meaning of the Law for the Encouragement of Industry (Taxes), 1969, or the Industry Encouragement Law.
The Industry Encouragement Law defines “Industrial Company” as a company resident in Israel and incorporated in Israel,
that derives 90% or more of its income in any tax year (other than specified kinds of passive income such as capital gains, interest
and dividends) from an “Industrial Enterprise” operating in Israel (including Judea & Samara territories and the
Gaza strip), that it owns. An “Industrial Enterprise” is defined as an enterprise whose major activity in a given tax
year is industrial production.
The following corporate tax benefits, among others, are available
to Industrial Companies:
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amortization of the cost of purchased know-how and patents over an eight-year period for tax purposes;
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accelerated depreciation rates on equipment and buildings;
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under specified conditions, an election to file consolidated tax returns with other related Israeli Industrial Companies; and
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expenses related to a public offering are deductible in equal amounts over three years.
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Eligibility for the benefits under the Industry Encouragement Law
is not subject to receipt of prior approval from any governmental authority. It is possible that Protalix Ltd. may fail to qualify
or may not continue to qualify as an “Industrial Company” or that the benefits described above will not be available
in the future.
Tax Benefits for Research and Development
Under specified conditions, Israeli tax laws allow a tax deduction
by a company for research and development expenditures, including capital expenditures, for the year in which such expenditures
are incurred. These expenditures must relate to scientific research and development projects and must be approved by NATI. Furthermore,
the research and development projects must be for the promotion of the company and carried out by or on behalf of the company
seeking such tax deduction. However, the amount of such deductible expenditures is reduced by the sum of any funds received through
government grants for the finance of such scientific research and development projects. Expenditures not so approved are deductible
over a three-year period.
Employees
As of December 31, 2016, we had 232 employees, of whom 29 have
a Ph.D. or an M.D.in their respective scientific fields. We believe that our relations with these employees are good. We believe
that our success will greatly depend on our ability to identify, attract and retain capable employees. The Israeli Ministry of
Labor and Welfare is authorized to make certain industry-wide collective bargaining agreements, or Expansion Orders, that apply
to types of industries or employees including ours. These agreements affect matters such as cost of living adjustments to salaries,
length of working hours and week, recuperation, travel expenses, and pension rights. Otherwise, our employees are not represented
by a labor union or represented under a collective bargaining agreement. See “Risk Factors—We depend upon key employees
and consultants in a competitive market for skilled personnel. If we are unable to attract and retain key personnel, it could
adversely affect our ability to develop and market our products.”
Company Background
Our principal business address is set forth below. Our executive
offices and our main research manufacturing facility are located at that address. Our telephone number is +972-4-988-9488. We were
originally incorporated in the State of Florida in April 1992, and reincorporated in the State of Delaware in March 2016. Protalix
Ltd., our wholly-owned subsidiary and sole operating unit, is an Israeli company and was originally incorporated in Israel on December
27, 1993. During 1999, Protalix Ltd. changed its focus from plant secondary metabolites to the expression of recombinant therapeutic
proteins in plant cells, and in April 2004 changed its name to Protalix Ltd.
ProCellEx
®
is our registered trademark. Each of the
other trademarks, trade names or service marks appearing in this Annual Report on Form 10-K belongs to its respective holder.
Available Information
Our corporate website is www.protalix.com. We make available on
our website, free of charge, our Commission filings, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and any amendments to these reports, as soon as reasonably practicable after we electronically file
these documents with, or furnish them to, the Commission. Additionally, from time to time, we provide notifications of material
news including press releases and conferences on our website. Webcasts of presentations made by our company at certain conferences
may also be available from time to time on our website, to the extent the webcasts are available. The content of our website is
not intended to be incorporated by reference into this report or in any other report or document we file and any references to
these websites are intended to be inactive textual references only.
We are also listed on the Tel Aviv Stock Exchange, or the TASE,
and, accordingly, we submit copies of all our filings with the Commission to the Israeli Securities Authority and the TASE. Such
copies can be retrieved electronically through the TASE’s internet messaging system (www.maya.tase.co.il) and through the
MAGNA distribution site of the Israeli Securities Authority (www.magna.isa.gov.il).
Our website also includes printable versions of our Code of Business
Conduct and Ethics and the charters for each of the Audit, Compensation and Nominating Committees of our Board of Directors. Each
of these documents is also available in print, free of charge, to any shareholder who requests a copy by addressing a request to:
Protalix BioTherapeutics, Inc.
2 Snunit Street, Science Park
P.O. Box 455
Carmiel 20100, Israel
Attn: Mr. Yossi Maimon, Chief Financial Officer
You should carefully consider the risks described below together
with the other information included in this Annual Report on Form 10-K. Our business, financial condition or results of operations
could be adversely affected by any of these risks. If any of these risks occur, the value of our common stock could decline.
Risks Related to Clinical Trials and Regulatory Matters
Clinical
trials are very expensive, time-consuming and difficult to design and implement and may result in unforeseen costs which may have
a material adverse effect on our business, results of operations and financial condition.
Human
clinical trials are very expensive and difficult to design and implement, in part because they are subject to rigorous regulatory
requirements. The clinical trial process is also time-consuming. Other than taliglucerase alfa, all of our other drug candidates
are in the clinical, preclinical or research stages and will take at least several years to complete. Preliminary and initial results
from a clinical trial do not necessarily predict final results, and failure can occur at any stage of the trial. We may encounter
problems that cause us to abandon or repeat preclinical studies or clinical trials. Companies in the pharmaceutical and biotechnology
industries have suffered significant setbacks in advanced clinical trials, even after obtaining promising results in earlier trials.
Data obtained from tests are susceptible to varying interpretations which may delay, limit or prevent regulatory approval. Failure
or delay in the commencement or completion of our clinical trials may be caused by several factors, including:
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slower than expected rates of patient recruitment, particularly with respect to trials of rare diseases such as Fabry disease;
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determination of dosing issues;
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unforeseen safety issues;
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lack of effectiveness during clinical trials;
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inability to monitor patients adequately during or after treatment;
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inability or unwillingness of medical investigators and institutional review boards to follow our clinical protocols; and
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lack of sufficient funding to finance the clinical trials.
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Any failure or delay in commencement or completion of any clinical
trials may have a material adverse effect on our business, results of operations and financial condition. In addition, we or the
FDA or other regulatory authorities may suspend any clinical trial at any time if it appears that we are exposing participants
in the trial to unacceptable safety or health risks or if the FDA or such other regulatory authorities, as applicable, find deficiencies
in our IND submissions or the conduct of the trial. Any suspension of a clinical trial may have a material adverse effect on our
business, results of operations and financial condition.
If
the results of our clinical trials do not support our claims relating to any drug candidate or if serious side effects are identified,
the completion of development of such drug candidate may be significantly delayed or we may be forced to abandon development altogether,
which will significantly impair our ability to generate product revenues.
The results of our clinical
trials with respect to any drug candidate might not support our claims of superiority, safety or efficacy, the effects of our drug
candidates may not be the desired effects or may include undesirable side effects or the drug candidates may have other unexpected
characteristics. Further, success in preclinical testing and early clinical trials does not ensure that later clinical
trials will be successful, and the results of later clinical trials may not replicate the results of prior clinical trials and
preclinical testing. The clinical trial process may fail to demonstrate that our drug candidates are safe for humans and effective
for indicated uses. In addition, our clinical trials may involve a specific and small patient population. Results of early clinical
trials conducted on a small patient population may not be indicative of future results. Adverse or inconclusive results may cause
us to abandon a drug candidate and may delay development of other drug candidates. Any delay in, or termination of, our clinical
trials will delay the filing of NDAs and BLAs with the FDA, or other filings with other foreign regulatory authorities, and, ultimately,
significantly impair our ability to commercialize our drug candidates and generate product revenues which would have a material
adverse effect on our business, results of operations and financial condition.
We
may find it difficult to enroll patients in our clinical trials, which could cause significant delays in the completion of such
trials or may cause us to abandon one or more clinical trials.
Some
of the diseases or disorders that our drug candidates are intended to treat, such as Fabry disease, are relatively rare and we
expect only a subset of the patients with these diseases to be eligible for our clinical trials. Our clinical trials generally
mandate that a patient cannot be involved in another clinical trial for the same indication. Therefore, subjects that participate
in ongoing clinical trials for products that are competitive with our drug candidates are not available for our clinical trials.
An inability to enroll a sufficient number of patients for our ongoing phase III clinical trial of PRX-102, or for any of our other
current or future clinical trials, would result in significant delays or may require us to abandon one or more clinical trials
altogether, which will have a material adverse effect on our business, results of operations and financial condition.
Patients
may discontinue their participation in our clinical trials which may negatively impact the results of these studies and extend
the timeline for completion of our development programs.
Patients enrolled in our clinical
trials may discontinue their participation at any time during the study as a result of a number of factors, including withdrawing
their consent or experiencing adverse clinical events, which may or may not be judged related to our drug candidates under evaluation.
The discontinuation of patients in any one of our studies may delay the completion of the study or cause the results from the study
not to be positive or to not support a filing for regulatory approval of the applicable drug candidate, which would have a material
adverse effect on our business, results of operations and financial condition.
Because our clinical trials depend upon third-party researchers,
the results of our clinical trials and such research activities are subject to delays and other risks which are, to a certain extent,
beyond our control, which could impair our clinical development programs and our competitive position.
We depend upon independent investigators and collaborators, such
as universities and medical institutions, to conduct our preclinical and clinical trials. These collaborators are not our employees,
and we cannot control the amount or timing of resources that they devote to our clinical development programs. The investigators
may not assign as great a priority to our clinical development programs or pursue them as diligently as we would if we were undertaking
such programs directly. If outside collaborators fail to devote sufficient time and resources to our clinical development programs,
or if their performance is substandard, the approval of anticipated NDAs, BLAs and other marketing applications, and our introduction
of new drugs, if any, may be delayed which could impair our clinical development programs and would have a material adverse effect
on our business and results of operations. The collaborators may also have relationships with other commercial entities, some of
whom may compete with us. If our collaborators also assist our competitors, our competitive position could be harmed.
We
are subject to extensive governmental regulation including the requirements of the FDA and other comparable regulatory authorities
before our drug candidates may be marketed.
Both
before and after marketing approval of our drug candidates, if at all, we, our drug candidates, our suppliers, our contract manufacturers
and our contract testing laboratories are subject to extensive regulation by the FDA and comparable foreign regulatory authorities.
Failure to comply with applicable requirements of the FDA or comparable foreign regulatory authorities could result in, among other
things, any of the following actions:
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fines and other monetary penalties;
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unanticipated expenditures;
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delays in the FDA’s or other foreign regulatory authorities’ approving, or the refusal of any regulatory authority
to approve, any drug candidate;
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product recall or seizure;
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interruption of manufacturing or clinical trials;
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operating restrictions;
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In
addition to the approval requirements, other numerous and pervasive regulatory requirements apply, both before and after approval,
to us, our drug candidates, and our suppliers, contract manufacturers, and contract laboratories. These include requirements related
to:
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reporting to the FDA certain adverse experiences associated with use of the drug candidate; and
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obtaining additional approvals for certain modifications to the drug candidate or its labeling or claims.
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We
also are subject to inspection by the FDA and comparable foreign regulatory authorities, to determine our compliance with regulatory
requirements, as are our suppliers, contract manufacturers, and contract testing laboratories, and there can be no assurance that
the FDA or any other comparable foreign regulatory authority, will not identify compliance issues that may disrupt production or
distribution, or require substantial resources to correct. We may be required to make modifications to our manufacturing operations
in response to these inspections which may require significant resources and may have a material adverse effect upon our business,
results of operations and financial condition.
The
approval process for any drug candidate may also be delayed by changes in government regulation, future legislation or administrative
action or changes in policy of the FDA and comparable foreign authorities that occur prior to or during their respective regulatory
reviews of such drug candidate. Delays in obtaining regulatory approva
ls with respect to any drug candidate may:
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delay commercialization of, and our ability to derive product revenues from, such drug candidate;
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delay any regulatory-related milestone payments payable under outstanding collaboration agreements;
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require us to perform costly procedures with respect to such drug candidate; or
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otherwise diminish any competitive advantages that we may have with respect to such drug candidate.
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Delays
in the approval process for any drug candidate may have a material adverse effect upon our business, results of operations and
financial condition.
We
may not obtain the necessary U.S., EMA or other worldwide regulatory approvals to commercialize our drug candidates in a timely
manner, if at all, which would have a material adverse effect on our business, results of operations and financial condition.
We
need FDA approval to commercialize our drug candidates in the United States, EMA approval to commercialize our drug candidates
in the European Union and approvals from other foreign regulators to commercialize our drug candidates elsewhere. In order to obtain
FDA approval of any of our drug candidates, we must submit to the FDA an NDA or a BLA demonstrating that the drug candidate is
safe for humans and effective for its intended use. This demonstration requires significant research and animal tests, which are
referred to as preclinical studies, as well as human tests, which are referred to as clinical trials. In the European Union, we
must submit an MAA to the EMA. Satisfaction of the regulatory requirements of the FDA, EMA and other foreign regulatory authorities
typically takes many years, depends upon the type, complexity and novelty of the drug candidate and requires substantial resources
for research, development and testing. Even if we comply with all the requests of regulatory authorities, the authorities may ultimately
reject any marketing application that we file for a product candidate in the future, if any, or we might not obtain regulatory
clearance in a timely manner. Companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in
advanced or late-stage clinical trials, even after obtaining promising earlier trial results or in preliminary findings or other
comparable authorities for such clinical trials. Further, even if favorable testing data is generated by the clinical
trials of a drug candidate, the applicable regulatory authority may not accept or approve the marketing application filed by a
pharmaceutical or biotechnology company for the drug candidate. Failure to obtain approval of the FDA, EMA or comparable foreign
authorities of any of our drug candidates in a timely manner, if at all, will severely undermine our business, financial condition
and results of operation by reducing our potential marketable products and our ability to generate corresponding product revenues.
Our
research and clinical efforts may not result in drugs that the FDA, EMA or foreign regulatory authorities consider safe for humans
and effective for indicated uses, which would have a material adverse effect on our business, results of operations and financial
condition. After clinical trials are completed for any drug candidate, if at all, the FDA, EMA and foreign regulatory
authorities have substantial discretion in the drug approval process of the drug candidate in their respective jurisdictions and
may require us to conduct additional clinical testing or perform post-marketing studies which would cause us to incur additional
costs. Incurring such costs may have a material adverse effect on our business, results of operations and financial condition.
We
have only limited experience in regulatory affairs, and some of our drug candidates may be based on new technologies. These factors
may affect our ability or the time we require to obtain necessary regulatory approvals.
We have only limited experience
in filing and prosecuting the applications necessary to gain regulatory approvals for medical devices and drug candidates. Moreover,
some of the drug candidates that are likely to result from our development programs may be based on new technologies that have
not been extensively tested in humans. The regulatory requirements governing these types of drug candidates may be less well defined
or more rigorous than for conventional products. As a result, we may experience a longer regulatory process in connection with
obtaining regulatory approvals of any products that we develop
.
If
any of our other competitors are able to obtain orphan drug exclusivity for any products that are competitive with our products,
we may be precluded from selling or obtaining approval of our competing products by the applicable regulatory authorities for a
significant period of time.
In
the United States, the European Union and other countries, a drug may be designated as having orphan drug status, subject to certain
conditions. There can be no assurance that a drug candidate that receives orphan drug designation will receive orphan drug marketing
exclusivity and more than one drug can have orphan designation for the same indication.
Foreign
regulations regarding orphan drugs are similar to those in the United States but there are several differences. For example, the
exclusivity period in the European Union is generally 10 years.
From time to time, we may apply to the FDA or any comparable foreign regulatory authority
for orphan drug designation for any one or more of our drug candidates. None of our currently developed drug candidates have been
designated as an orphan drug and there is no guarantee that the FDA or any other regulatory authority will grant such designation
in the future. In addition, neither orphan drug designation nor orphan drug exclusivity prevents competitors from developing or
marketing different drugs for the relevant indication. Even if we obtain orphan drug exclusivity for one or more indications for
one of our drug candidates, we may not be able to maintain the exclusivity. For example, if a competitive product that is the same
drug or biologic as one of our drug candidates is shown to be clinically superior to the drug candidate, any orphan drug exclusivity
granted to the drug candidate will not block the approval of the competitive product.
Risks Related to Our Business
We have a limited operating history which may limit the ability
of investors to make an informed investment decision.
Taliglucerase alfa is our only product with commercial approvals.
The successful commercialization of our other drug candidates will require us to perform a variety of functions, including:
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continuing to perform preclinical development and clinical trials;
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participating in regulatory approval processes;
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formulating and manufacturing products; and
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conducting sales and marketing activities.
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Our operations have been limited to organizing and staffing our
company, acquiring, developing and securing our proprietary technology and undertaking, through third parties, preclinical trials
and clinical trials of our principal drug candidates. To date, our phase III clinical trial of taliglucerase alfa is the only phase
III study we have completed, and we have commenced only one other phase III clinical trial. These operations provide a limited
basis for investors to assess our ability to commercialize our drug candidates and whether to invest in our company.
Any failure by us to supply drug substance to Pfizer may have
a material adverse effect on our business, results of operations and financial condition.
Under our
Amended Pfizer Agreement, we have agreed, for the first 10-year period after the execution of the agreement, to sell drug
substance to Pfizer for the production of Elelyso, and Pfizer maintains the right to extend the supply period for up to two additional
30-month periods subject to certain terms and conditions. As part of that obligation, we agreed to substantial financial penalties
in case we fail to comply with the supply commitments, or are delayed in doing so. The amounts of the penalties depend on when
any such failure occurs and for how long it persists, if at all, and other considerations. Any failure to comply with the supply
commitments under the Amended Pfizer Agreement may have a material adverse effect on our business, results of operations and financial
condition.
Our strategy, in certain cases, is to enter into collaboration
agreements with third parties to leverage our ProCellEx system to develop product candidates. If we fail to enter into these agreements
or if we or the third parties do not perform under such agreements or terminate or elect to discontinue the collaboration, it could
have a material adverse effect on our revenues.
Our strategy, in certain cases, is to enter into arrangements with
pharmaceutical companies to leverage our ProCellEx system to develop additional product candidates. Under these arrangements, we
may grant to our partners rights to license and commercialize pharmaceutical products developed under the applicable agreements.
Our partners may control key decisions relating to the development of the products and we may depend on our partners’ expertise
and dedication of sufficient resources to develop and commercialize our product candidates. The rights of our partners limit our
flexibility in considering alternatives for the commercialization of our product candidates. If we or any of our current or future
partners breach or terminate the agreements that make up such arrangements, our partners otherwise fail to conduct their obligations
under such arrangements in a timely manner, there is a dispute about their obligations or if either party terminates the applicable
agreement or elects not to continue the arrangement, we may not enjoy the benefits of the agreements or receive a sufficient amount
of royalty or milestone payments from them, if any, which may have a material adverse effect on our business, results of operations
and financial condition.
If we are unable to develop and commercialize our product candidates,
our business will be adversely affected.
A key element of our strategy is to develop and commercialize a
portfolio of new products in addition to taliglucerase alfa. We seek to do so through our internal research programs and strategic
collaborations for the development of new products. Research programs to identify new product candidates require substantial technical,
financial and human resources, whether or not any product candidates are ultimately identified. Our research programs may initially
show promise in identifying potential product candidates, yet fail to yield product candidates for clinical development for many
reasons, including the following:
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a product candidate is not capable of being produced in commercial quantities at an acceptable cost, or at all;
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a product candidate may not be accepted by patients, the medical community or third-party payors;
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competitors may develop alternatives that render our product candidates obsolete;
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the research methodology used may not be successful in identifying potential product candidates; or
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a product candidate may on further study be shown to have harmful side effects or other characteristics that indicate it is
unlikely to be effective or otherwise does not meet applicable regulatory approval.
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Any failure to develop or commercialize any of our other product
candidates may have a material adverse effect on our business, results of operations and financial condition.
Our ProCellEx protein expression system is based on our proprietary
plant cell-based expression technology which has a limited history and any material problems with the system, which may be unforeseen,
may have a material adverse effect on our business, results of operations and financial condition.
Our ProCellEx protein expression system is based on our proprietary
plant cell-based expression technology. The success of our business is dependent upon the successful development and approval of
our product and product candidates produced through this technology. Although taliglucerase alfa is produced through ProCellEx,
the technology remains novel. Accordingly, the technology remains subject to certain risks. Mammalian cell-based protein expression
systems have been used in connection with recombinant therapeutic protein expression for more than 30 years and are the subject
of a wealth of data; in contrast, there is not a significant amount of data generated regarding plant cell-based protein expression
and, accordingly, plant cell-based protein expression systems may be subject to unknown risks. In addition, the protein glycosilation
pattern created by our protein expression system is not identical to the natural human glycosilation pattern and, although to date
clinical data for up to five years, and commercial data for an additional five years, on taliglucerase alfa has not demonstrated
any sign of any effect, the longer term effect of the protein glycosilation pattern created by our protein expression system on
human patients, if any, is still unknown. Lastly, as our protein expression system is a new technology, we cannot always rely on
existing equipment; rather, there is a need to design custom-made equipment and to generate specific growth media for the plant
cells which may not be available at favorable prices, if at all. Any material problems with the technology underlying our plant
cell-based protein expression system may have a material adverse effect on our business, results of operations and financial condition.
The manufacture of our products is an exacting and complex process,
and if we or one of our materials suppliers encounter problems manufacturing our products, it will have a material adverse effect
on our business and results of operations.
The FDA and foreign regulators require manufacturers to register
manufacturing facilities. The FDA and foreign regulators also inspect these facilities to confirm compliance with cGMP or similar
requirements that the FDA or foreign regulators establish. We or our materials suppliers may face manufacturing or quality control
problems causing product production and shipment delays or a situation where we or the supplier may not be able to maintain compliance
with the FDA’s cGMP requirements, or those of foreign regulators, necessary to continue manufacturing our drug candidates.
Any failure to comply with cGMP requirements or other FDA or foreign regulatory requirements could adversely affect our clinical
research activities and our ability to market and develop our products. To date, our current facility has passed audits by the
FDA and a number of other regulatory authorities but remains subject to audit by other foreign regulatory authorities. There can
be no assurance that we will be able to comply with FDA or foreign regulatory manufacturing requirements for our current facility
or any facility we may establish in the future, and the failure to so comply will have a material adverse effect on our business,
results of operations and financial condition
.
We rely on third parties for final processing of taliglucerase
alfa and our product candidates, which exposes us to a number of risks that may delay development, regulatory approval and commercialization
of taliglucerase alfa and our other product candidates or result in higher product costs.
We have no experience in the final filling and freeze drying steps
of the drug manufacturing process. We have engaged a European contract manufacturer to act as an additional source of fill and
finish activities for taliglucerase alfa and have engaged other parties for our product candidates. We currently rely primarily
on other third-party contractors to perform the final manufacturing steps for taliglucerase alfa on a commercial scale. We may
be unable to identify manufacturers and/or replacement manufacturers on acceptable terms or at all because the number of potential
manufacturers is limited and the FDA and other regulatory authorities, as applicable, must approve any manufacturer and/or replacement
manufacturer, including us, and we or any such third party manufacturer might be unable to formulate and manufacture our drug products
in the volume and of the quality required to meet our clinical and commercial needs. If we engage any contract manufacturers, such
manufacturers may not perform as agreed or may not remain in the contract manufacturing business for the time required to supply
our clinical or commercial needs. In addition, contract manufacturers are subject to the rules and regulations of the FDA and comparable
foreign regulatory authorities and face the risk that any of those authorities may find that they are not in compliance with applicable
regulations. Each of these risks, if realized, could delay our clinical trials, the approval, if any, of taliglucerase alfa and
our other potential drug candidates by the FDA and other regulatory authorities, or the commercialization of taliglucerase alfa
and our other drug candidates or could result in higher product costs or otherwise deprive us of potential product revenues.
Developments by competitors may render our products or technologies
obsolete or non-competitive which would have a material adverse effect on our business, results of operations and financial condition.
We compete against fully integrated pharmaceutical companies and
smaller companies that are collaborating with larger pharmaceutical companies, academic institutions, government agencies and other
public and private research organizations. Our drug candidates will have to compete with existing therapies and therapies under
development by our competitors. In addition, our commercial opportunities may be reduced or eliminated if our competitors develop
and market products that are less expensive, more effective or safer than our drug products. Other companies have drug candidates
in various stages of preclinical or clinical development to treat diseases for which we are also seeking to develop drug products.
Some of these potential competing drugs are further advanced in development than our drug candidates and may be commercialized
earlier. Even if we are successful in developing effective drugs, our products may not compete successfully with products produced
by our competitors. See Business – Competition.
Most of our competitors, either alone or together with their collaborative
partners, operate larger research and development programs, staff and facilities and have substantially greater financial resources
than we do, as well as significantly greater experience in:
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undertaking preclinical testing and human clinical trials;
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obtaining marketing approvals from the FDA and other regulatory authorities;
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formulating and manufacturing drugs; and
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launching, marketing and selling drugs.
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These organizations also compete with us to attract qualified personnel,
acquisitions and joint ventures candidates and for other collaborations. Activities of our competitors may impose unanticipated
costs on our business which would have a material adverse effect on our business, results of operations and financial condition.
If we in-license drug candidates, we may delay or otherwise adversely
affect the development of our existing drug candidates, which may negatively impact our business, results of operations and financial
condition.
In addition to our own internally developed drug candidates, we
proactively seek opportunities to in-license and advance other drug candidates that are strategic and have value-creating potential
to take advantage of our development know-how and technology. If we in-license any additional drug candidate, our capital requirements
may increase significantly. In addition, in-licensing additional drug candidates may place a strain on the time of our existing
personnel, which may delay or otherwise adversely affect the development of our existing drug candidates or cause us to re-prioritize
our drug pipeline if we do not have the necessary capital resources to develop all of our drug candidates, which may delay the
development of our drug candidates and materially and adversely impact our business, results of operations and financial condition.
If we are unable to manage future growth successfully, there
could be a material adverse impact on our business, results of operations and financial condition.
To manage our anticipated future growth, we must continue to implement
and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional
qualified personnel. Due to our limited resources, we may not be able to effectively manage the expansion of our operations or
recruit and train additional qualified personnel. The expansion of our operations may lead to significant costs and may divert
our management and business development resources. Any inability on the part of our management to manage growth could delay the
execution of our business plans or disrupt our operations. If we are unable to manage our growth effectively, we may not use our
resources in an efficient manner, which may delay the development of our drug candidates and materially and adversely impact our
business, results of operations and financial condition.
If we acquire companies, products or technologies, we may face
integration risks and costs associated with those acquisitions that could negatively impact our business, results of operations
and financial condition.
If we are presented with appropriate opportunities, we may acquire
or make investments in complementary companies, products or technologies. We may not realize the anticipated benefit of any acquisition
or investment. If we acquire companies or technologies, we will face risks, uncertainties and disruptions associated with the integration
process, including difficulties in the integration of the operations of an acquired company, integration of acquired technology
with our products, diversion of our management’s attention from other business concerns, the potential loss of key employees
or customers of the acquired business and impairment charges if future acquisitions are not as successful as we originally anticipate.
In addition, our operating results may suffer because of acquisition-related costs or amortization expenses or charges relating
to acquired intangible assets.
Any failure to successfully integrate other companies, products or technologies that we may
acquire may have a material adverse effect on our business and results of operations. Furthermore, we may have to incur debt or
issue equity securities to pay for any additional future acquisitions or investments, the issuance of which could be dilutive to
our existing stockholders.
We depend upon key employees and consultants in a competitive
market for skilled personnel. If we are unable to attract and retain key personnel, it could adversely affect our ability to develop
and market our products.
We are highly dependent upon the principal members of our management
team, especially our President and Chief Executive Officer, Moshe Manor, as well as the Chairman of our Board of Directors, Shlomo
Yanai, our other directors, our scientific advisory board members, consultants and collaborating scientists. Many of these people
have been involved with us for many years and have played integral roles in our progress, and we believe that they will continue
to provide value to us. A loss of any of these personnel may have a material adverse effect on aspects of our business, clinical
development and regulatory programs. We have employment agreements with Moshe Manor and our other executive officers that may be
terminated by us or the applicable officer at any time with varying notice periods of 60 to 90 days. Although these employment
agreements generally include non-competition covenants, the applicable noncompetition provisions can be difficult and costly to
monitor and enforce. The loss of any of these persons’ services may adversely affect our ability to develop and market our
products and obtain necessary regulatory approvals. Further, we do not maintain key-man life insurance.
We also depend in part on the continued service of our key scientific
personnel and our ability to identify, hire and retain additional personnel, including marketing and sales staff. We experience
intense competition for qualified personnel, and the existence of non-competition agreements between prospective employees and
their former employers may prevent us from hiring those individuals or subject us to suit from their former employers. While we
attempt to provide competitive compensation packages to attract and retain key personnel, many of our competitors are likely to
have greater resources and more experience than we have, making it difficult for us to compete successfully for key personnel.
Our collaborations with outside scientists and consultants may
be subject to restriction and change.
We work with medical experts, chemists,
biologists and other scientists at academic and other institutions, and consultants who assist us in our research, development,
regulatory and commercial efforts, including the members of our scientific advisory board. These scientists and consultants have
provided, and we expect that they will continue to provide, valuable advice regarding our programs. These scientists and consultants
are not our employees, may have other commitments that would limit their future availability to us and typically will not enter
into non-compete agreements with us. If a conflict of interest arises between their work for us and their work for another entity,
we may lose their services. In addition, we will be unable to prevent them from establishing competing businesses or developing
competing products. For example, if a key scientist acting as a principal investigator in any of our clinical trials identifies
a potential product or compound that is more scientifically interesting to his or her professional or academic interests, his or
her availability to remain involved in our clinical trials could be restricted or eliminated, which may have a material adverse
effect on our business, results of operations and financial condition.
Under current U.S. and Israeli law, we may not be able to enforce
employees’ covenants not to compete and therefore may be unable to prevent our competitors from benefiting from the expertise
of some of our former employees.
We have entered into non-competition agreements with substantially
all of our employees. These agreements prohibit our employees, if they cease working for us, from competing directly with us or
working for our competitors for a limited period. Under current U.S. and Israeli law, we may be unable to enforce these agreements
against most of our employees and it may be difficult for us to restrict our competitors from gaining the expertise our former
employees gained while working for us.
If we cannot enforce our employees’ non-compete agreements, we may be unable
to prevent our competitors from benefiting from the expertise of our former employees, which may have a material adverse effect
on our business, results of operations and financial condition.
Our internal computer systems, or those used by our third-party
contractors or consultants, may fail or suffer security breaches.
Despite the implementation of security
measures, our internal computer systems and those of our present and future contractors and consultants are vulnerable to damage
from computer viruses and unauthorized access. Although to our knowledge we have not experienced any material system failure or
security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material
disruption of our development programs and our business operations. For example, the loss of clinical trial data from completed
or future clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover
or reproduce the data. Likewise, we rely on our third-party research institution collaborators for research and development of
our product candidates and other third parties for the manufacture of our product candidates and to conduct clinical trials, and
similar events relating to their computer systems could also have a material adverse effect on our business. To the extent that
any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure
of confidential or proprietary information, we could incur liability and the further development and commercialization of our product
candidates could be delayed.
If product liability claims are brought against us, it may result
in reduced demand for our products and product candidates or damages that exceed our insurance coverage.
The clinical testing, marketing and use of our products and product
candidates exposes us to product liability claims if the use or misuse of those products or product candidates cause injury or
disease, or results in adverse effects. Use of our products or product candidates, whether in clinical trials or post approval,
could result in product liability claims. We presently carry clinical trial liability insurance with coverages of up to $10.0 million
per occurrence and $10.0 million in the aggregate, an amount we consider reasonable and customary. However, this insurance coverage
includes various deductibles, limitations and exclusions from coverage, and in any event might not fully cover any potential claims.
We may need to obtain additional clinical trial liability coverage prior to initiating additional clinical trials. We expect to
obtain product liability insurance coverage before commercialization of our product candidates; however, such insurance is expensive
and insurance companies may not issue this type of insurance when we need it. We may not be able to obtain adequate insurance in
the future at an acceptable cost. Any product liability claim, even one that was not in excess of our insurance coverage or one
that is meritless and/or unsuccessful, may adversely affect our cash available for other purposes, such as research and development,
which may have a material adverse effect on our business, results of operations and financial condition. Product liability claims,
even if without merit, may result in reduced demand for our products, if approved, which would have a material adverse effect on
our business, results of operations and financial condition. In addition, the existence of a product liability claim could affect
the market price of our common stock.
Reforms in the healthcare industry and the uncertainty associated
with pharmaceutical pricing, reimbursement and related matters could adversely affect the marketing, pricing and demand for our
products, if approved.
Increasing healthcare expenditures have been the subject of considerable
public attention in the United States. Both private and government entities are seeking ways to reduce or contain healthcare costs.
Numerous proposals that would result in changes in the U.S. healthcare system have been introduced or proposed in the U.S. Congress
and in some state legislatures within the United States, including reductions in the pricing of prescription products and changes
in the levels at which consumers and healthcare providers are reimbursed for purchases of pharmaceutical products. Legislation
passed in recent years has imposed certain changes to the way in which drugs, including our product candidates, are covered and
reimbursed in the United States. For example, federal legislation and regulations have implemented new reimbursement methodologies
for certain drugs, created a voluntary prescription drug benefit, Medicare Part D, and have imposed significant revisions to the
Medicaid Drug Rebate Program. The PPACA imposes yet additional changes to these programs. We believe that legislation that reduces
reimbursement for our product candidates could adversely impact how much or under what circumstances healthcare providers will
prescribe or administer our product candidates, if approved. This could materially and adversely impact our business by reducing
our ability to generate revenue, raise capital, obtain additional collaborators and market our products, if approved. In addition,
we believe the increasing emphasis on managed care in the United States has and will continue to put pressure on the price and
usage of pharmaceutical products, which may adversely impact product sales, upon approval, if at all.
Governments outside the United States tend to impose strict price
controls and reimbursement approval policies, which may adversely affect our prospects for generating revenue.
In some countries, particularly European Union member states, the
pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental
authorities can take considerable time (six to 12 months or longer) after the receipt of marketing approval for a product.
To obtain reimbursement or pricing approval in some countries with respect to any product candidate that achieves regulatory approval,
we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available
therapies. If reimbursement of our products upon approval, if at all, is unavailable or limited in scope or amount, or if pricing
is set at unsatisfactory levels, our prospects for generating revenue, if any, could be adversely affected which would have a material
adverse effect on our business, results of operations and financial condition. Further, if we achieve regulatory approval of any
product, we must successfully negotiate product pricing for such product in individual countries. As a result, the pricing of our
product candidates, if approved, in different countries may vary widely, thus creating the potential for third-party trade in our
products in an attempt to exploit price differences between countries. This third-party trade of our products could undermine our
sales in markets with higher prices
which could have a material adverse
effect on our business, results of operations and financial condition
.
Our ability to utilize net operating loss carryforwards may be
limited.
Our NOLs, as of December 31, 2016, are equal to approximately
$153 million, of which approximately $20 million may be restricted under Section 382 of the Internal Revenue Code of 1986, as
amended, or the “Code.” Section 382 of the Code imposes limitations on a corporation’s ability to utilize
NOLs to offset taxable income if the corporation experiences an “ownership change.” In general terms, an
“ownership change” may result from transactions increasing the ownership of certain stockholders in the stock of
a corporation by more than 50% over a three-year period. In the event that an ownership change has occurred (including as a
result of conversion of our outstanding convertible notes into shares of our common stock), or were to occur, utilization of
our NOLs would be subject to an annual limitation under Section 382, which is generally the fair market value of the
pre-change entity multiplied by the long-term tax exempt rate, which is published monthly by the U.S. Internal Revenue
Service.
Our corporate structure may create U.S. federal income tax
inefficiencies
Protalix Ltd. is our wholly-owned subsidiary and thus a controlled
foreign corporation of our company for U.S. federal income tax purposes. This organizational structure may create inefficiencies,
as certain types of income and investments of Protalix Ltd. that otherwise would not be currently taxable under general U.S. federal
income tax principles may become taxable. These inefficiencies may require us to use more of our NOLs than we otherwise might and
may result in a tax liability without a corresponding distribution from our subsidiary.
We are a holding company with no operations of our own.
We are a holding company with no operations of our own. Accordingly,
our ability to conduct our operations, service any debt that we may incur in the future and pay dividends, if any, is dependent
upon the earnings from the business conducted by Protalix Ltd. The distribution of those earnings or advances or other distributions
of funds by our subsidiary to us, as well as our receipt of such funds, are contingent upon the earnings of Protalix Ltd. and are
subject to various business considerations and U.S. and Israeli law. If Protalix Ltd. is unable to make sufficient distributions
or advances to us, or if there are limitations on our ability to receive such distributions or advances, we may not have the cash
resources necessary to conduct our corporate operations or service our debt which would have a material adverse effect on our business,
results of operations and financial condition.
Risks Related to Our Financial Condition and Capital Requirements
Servicing our debt and settling conversion requests may require
a significant amount of cash, and we may not have sufficient cash flow from our business to pay our debt. Furthermore, restrictive
covenants governing our indebtedness may restrict our ability to raise additional capital.
Our ability
to pay interest on, or to make any scheduled or otherwise required payment of the principal of, and settle conversion requests
on our outstanding convertible notes depends on our future performance, which is subject to economic, financial, competitive and
other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our
debt and make necessary expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives,
such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive.
Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. If we raise
additional debt, it would increase our interest expense, leverage and operating and financial costs. In addition, the terms of
the indentures governing our outstanding convertible notes
,
which
are secured by certain of our material assets, including all of our intellectual property, and the agreements governing future
indebtedness may restrict us from adopting any of these alternatives.
We may be able to obtain amendments and waivers of
such restrictions, subject to such restrictions under the terms of the applicable indenture or any subsequent indebtedness. In
the event of any such default, the holders of the indebtedness could, among other things, elect to declare all amounts owed immediately
due and payable, which could cause all or a large portion of our available cash flow to be used to pay such amounts and thereby
reduce the amount of cash available to pursue our business plans or force us into bankruptcy or liquidation, or, with respect to
our indebtedness that is secured, result in the foreclosure on the assets that secure the debt, which would force us to relinquish
rights to assets that we may believe are critical to our business.
We
may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a
default on our debt obligations. Any default on our debt will have a material adverse effect
on our business, results of
operations and financial condition
.
If any holder of our 7.5% convertible notes converts such notes
prior to our receipt of stockholder approval to issue 20% or more of our total outstanding common stock in connection with our
compliance with the terms of such notes, we may be obligated to settle a significant portion or all of such converted notes in
cash.
Under the terms of the indenture for the 7.5% convertible notes,
we agreed to solicit stockholder approval prior to issuing 20% or more of our outstanding shares of common stock, calculated as
of the date we entered into the note purchase agreement in connection with the issuance of the 7.5% convertible notes, in compliance
with certain listing standards of the NYSE MKT. After giving effect to the shares of common stock issued in connection with the
December 2016 refinancing, we may only issue approximately 7.5 million shares of common stock to satisfy conversions of the 7.5%
convertible notes absent stockholder approval. In addition, absent stockholder approval, we are prohibited from using shares of
common stock to satisfy interest payments and make-whole premiums, if any, in shares of common stock. Unless and until we obtain
such stockholder approval, we may be required to settle all conversions of the 7.5% convertible notes exceeding the 7.5 million
shares available for such conversion, and such other obligations substantially or entirely in cash. We may not have sufficient
financial resources, nor may we be able to arrange financing, to pay the consideration due upon conversion in cash, which would
have a material adverse effect on our business, results of operations and financial condition.
Absent such approval, we are left with limited financial and corporate
flexibility with respect to our ability to satisfy obligations under the indenture with shares of our common stock and could have
a material adverse effect on our financial condition. Without stockholder approval, the terms of our 7.5% convertible notes only
permit a small number of shares of our common stock, approximately 7.5 million, to be available to satisfy the share issuances
that are otherwise permitted by the indenture. As a result, we would likely need to use the net cash proceeds received from the
private placement we conducted in December 2016 and require additional financing to settle conversions and other obligations under
the indenture. We may not have the ability to obtain any additional financing on attractive terms or at all due to restrictive
covenants under the indenture. As a result, a delay in securing, or a failure to secure, stockholder approval would seriously jeopardize
our financial viability.
See also “—Servicing our debt and settling conversion
requests requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our debt.
”
A substantial majority of our authorized shares of common stock
under our certificate of incorporation are either outstanding or reserved for issuance.
Our certificate of incorporation currently authorizes the issuance
of 250,000,000 shares of Common Stock and 100,000,000 shares of preferred stock, par value $0.0001 per share, for a total of 350,000,000
shares of capital stock. As of December 31, 2016, a total of approximately 5.1 million shares of common stock are reserved for
issuance upon the exercise of outstanding stock options under our 2006 Stock Incentive Plan, as amended, and a total of 2,391,481
shares of common stock are reserved for issuance in connection with future grants of stock options and/or future issuances of shares
under the plan. In addition, approximately 115.2 million shares of common stock are reserved for issuance upon the conversion of
our outstanding convertible notes. A significant amount of the shares reserved for issuance upon the conversion of our outstanding
convertible notes includes shares issuable upon conversions that are effected in connection with a fundamental change, as described
in the indentures governing the convertible notes. After taking into account the total number of shares of common stock issued
and outstanding, in addition to the aggregate number of shares of common stock reserved for future issuance as described above,
approximately 1% of our authorized shares of common stock remain available to be issued or reserved for issuance as of the date
of this report, without giving effect to the ability to issue shares as part of the interest payments under the convertible promissory
notes.
We currently intend to solicit the approval of our stockholders
at our upcoming 2017 annual meeting of stockholders to increase the number of authorized shares. Absent the approval, we are left
without sufficient, authorized shares of common stock to pursue a variety of other business and financial objectives without further
action of the stockholders (except when required by applicable law or regulation), and will have extremely limited financial flexibility
with respect to our ability to satisfy conversions and other obligations under the indenture governing our 7.5% convertible notes.
As a result, a delay in securing, or a failure to secure, stockholder approval to amend our certificate of incorporation would
seriously jeopardize the financial viability of the Company. Unless and until we attain the approval of our stockholders to increase
the number of authorized shares, our ability to manage our capital needs is restricted which may have a material adverse effect
on our business, results of operations and financial condition.
Our significant level of indebtedness could adversely affect
our business, results of operations and financial condition and prevent us from fulfilling our obligations under our convertible
notes and our other indebtedness.
Our outstanding convertible notes represent a significant amount
of indebtedness with substantial debt service requirements. We may also incur additional indebtedness to meet future financing
needs. Our substantial indebtedness could have material adverse effects on our business, results of operations and financial condition.
For example, it could:
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make it more difficult for us to satisfy our financial obligations, including with respect to the
convertible
notes
;
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result in an event of default under our outstanding convertible notes if we fail to comply with the financial and other restrictive
covenants contained in agreements governing any future indebtedness, which event of default could result in all of our debt becoming
immediately due and payable;
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increase our vulnerability to general adverse economic, industry and competitive conditions;
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reduce the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate
purposes because we will be required to dedicate a substantial portion of our cash flow from operations to the payment of principal
and interest on our indebtedness;
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limit our flexibility in planning for, or reacting to, and increasing our vulnerability to changes in our business, the industry
in which we operate and the general economy;
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prevent us from raising funds necessary to purchase
convertible notes
surrendered to us by holders upon a fundamental change (as described in the indentures governing the two series of
convertible
notes
), which failure would result in an event of default with respect to the convertible notes;
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place us at a competitive disadvantage compared to our competitors that have less indebtedness or are less highly leveraged
and that, therefore, may be able to take advantage of opportunities that our debt levels or leverage prevent us from exploiting;
and
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limit our ability to obtain additional financing.
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Each of these factors may have a material and adverse effect on
our business, results of operations and financial condition and our ability to meet our payment obligations under the convertible
notes and our other indebtedness. Our ability to make payments with respect to the convertible notes and to satisfy any other debt
obligations depends on our future operating performance and our ability to generate significant cash flow in the future, which
will be affected by prevailing economic conditions and financial, business, competitive, legislative and regulatory factors as
well as other factors affecting our company and industry, many of which are beyond our control.
If we are unable to refinance or otherwise defease the remaining
outstanding 4.5% convertible notes on or prior to June 16, 2018, we may face liquidity constraints.
If we are not able to refinance or otherwise defease all of our
outstanding 4.5% convertible notes by June 16, 2018, the maturity date of the 7.5% convertible notes will be accelerated to June
15, 2018. Our ability to refinance or retire our outstanding 4.5% convertible notes will depend on our cash balance, the capital
markets environment and our financial condition as well as the terms of the indenture governing the 7.5% convertible notes. The
indenture governing the 7.5% convertible notes includes certain payment restrictions that may limit our ability to defease the
4.5% convertible notes. If the maturity of the 7.5% convertible notes is accelerated, we may be unable to obtain financing to pay
the principal amount thereof, which will have a material adverse effect on our business, results of operations and financial condition.
We are required to comply with a number of covenants under the
indenture governing our outstanding 7.5% convertible notes that could hinder our growth.
The indenture
governing our 7.5% convertible notes contains a number of restrictive affirmative and negative covenants, which limit our ability
to incur additional debt; exceed certain limits; pay dividends or distributions; or merge, consolidate or dispose of substantially
all of our assets, including all of our intellectual property assets and other material assets securing such convertible notes.
A breach of these covenants could result in default, and if such default is not cured or waived,
the holders of the indebtedness
could, among other things, elect to declare all amounts owed immediately due and payable, which could cause all or a large portion
of our available cash flow to be used to pay such amounts and thereby reduce the amount of cash available to pursue our business
plans or force us into bankruptcy or liquidation, or, result in the foreclosure on the assets that secure the debt, including all
of our intellectual property assets, which would force us to relinquish rights to such assets that we may believe are critical
to our business.
We may not be able to engage in any of these activities
or engage in these activities on desirable terms, which could result in a default on our debt obligations. Any default on our debt
will have a material adverse effect
on our business, results of operations and financial condition
.
Any conversion of our outstanding convertible notes into common
stock will dilute the ownership interest of our existing stockholders, including holders who had previously converted their notes.
The conversion
of some or all of our convertible notes into shares of our common stock will dilute the ownership interests of our existing stockholders.
Any sales in the public market of our common stock issuable upon such conversion could adversely affect prevailing market prices
of our common stock. In addition, the existence of
our outstanding convertible notes
may encourage short selling by market participants because the conversion of convertible notes could depress the market price of
our common stock.
The fundamental change purchase feature of our outstanding convertible
notes may delay or prevent an otherwise beneficial attempt to take over our company.
The terms of our outstanding convertible notes require us to offer
to purchase the notes for cash in the event of a fundamental change. A non-stock takeover of our company may trigger the requirement
that we purchase the notes. This feature may have the effect of delaying or preventing a takeover of our company that would otherwise
be beneficial to our stockholders.
We may fail to meet the continued market capitalization-based
listing requirement or other continued listing requirements of The NYSE MKT.
The stock market in general, and the market for life sciences companies
in particular, have experienced extreme price and volume fluctuations that may have been unrelated or disproportionate to the operating
performance of the listed companies. There have been dramatic fluctuations in the market prices of securities of biotechnology
companies. These price fluctuations may be rapid and severe and may leave investors little time to react. Broad market and industry
factors may seriously harm the market price of our common stock, regardless of our operating performance. Sharp drops in the market
price of our common stock expose us to securities class-action litigation. The trading price of our common stock has been volatile
and has been subject to wide price fluctuations in response to various factors, many of which are beyond our control. The volatility
of our stock price has from time to time in recent periods affected our market capitalization. Stock price fluctuations that adversely
affect our market capitalization may result in a failure to meet the continued market capitalization-based listing requirement
for The NYSE MKT, which would require us to take steps to gain compliance with alternate listing standards or take remedial steps
to bring us into compliance. A failure to maintain or regain compliance with applicable listing standards could adversely affect
the liquidity of our common stock.
We currently have no significant product revenues and may
need to raise additional capital to operate our business, which may not be available on favorable terms, or at all, and which
will have a dilutive effect on our stockholders.
To date, we have not generated significant revenues from product
sales and only minimal revenues from research and development services and other fees, other than the milestone and other payments
we have received in connection with our license and supply agreement with Pfizer. For the years ended December 31, 2016, 2015
and 2014, we had net losses from continuing operations of $29.2 million, $27.3 million and $33.3 million, respectively, primarily
as a result of expenses incurred through a combination of research and development activities and expenses supporting those activities,
which includes share-based compensation expense. Drug development and commercialization is very capital intensive. We fund all
of our operations and capital expenditures from the revenues we generate from licensing fees and grants, the net proceeds of equity
and debt offerings and other sources. Based on our current plans, expectations and capital resources, we believe that our cash
and cash equivalents will be sufficient to enable us to meet our planned operating needs for at least 12 months. However, changes
may occur that could consume our existing capital at a faster rate than projected, including, among others, the cost and timing
of regulatory approvals, changes in the progress of our research and development efforts and the costs of protecting our intellectual
property rights.
We may seek additional financing to implement and fund product
development, preclinical studies and clinical trials for the drugs in our pipeline, as well as additional drug candidates and
other research and development projects. If we are unable to secure additional financing in the future on acceptable terms, or
at all, we may be unable to commence or complete planned preclinical and clinical trials or obtain approval of our drug candidates
from the FDA and other regulatory authorities. In addition, we may be forced to reduce or discontinue product development or product
licensing, reduce or forego sales and marketing efforts and other commercialization activities or forego attractive business opportunities
in order to improve our liquidity and to enable us to continue operations which would have a material adverse effect on our business
and results of operations. Furthermore, any additional source of financing will likely involve the issuance of our equity securities,
which will have a dilutive effect on our stockholders. See also “—A substantial majority of our authorized shares
of common stock under our certificate of incorporation are either outstanding or reserved for issuance.
”
We are not currently profitable and delays in achieving
profitability, if at all, will have a material adverse effect on our business and results of operations and could negatively impact
the value of our common stock.
We may incur losses for the foreseeable future. We expect to
continue to incur significant operating expenditures, and we anticipate that our expenses will increase in the foreseeable future
as we:
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continue
to undertake preclinical development and clinical trials for our current and new drug
candidates;
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seek regulatory
approvals for our drug candidates; and
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seek to license-in
additional technologies.
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We also may continue to experience negative cash flow for the
foreseeable future as we fund our operating losses and capital expenditures. As a result, we will need to generate significant
revenues in order to achieve and maintain profitability. We may not be able to generate these revenues or achieve profitability
in the foreseeable future, if at all. Delays in achieving profitability, or subsequent failures to maintain profitability, will
have a material adverse effect on our business and results of operations and could negatively impact the value of our common stock.
Risks Related to Investing in our Common Stock
The market price of our common stock may fluctuate significantly.
The market price of our common stock may fluctuate significantly
in response to numerous factors, some of which are beyond our control, such as:
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the results
of our ongoing studies regarding PRX-102 and our other product candidates;
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announcements
regarding partnerships or collaborations by us or our competitors;
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purchases
of Uplyso by Fiocruz;
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developments
concerning intellectual property rights and regulatory approvals;
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the announcement
of new products or product enhancements by us or our competitors;
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variations
in our and our competitors’ results of operations;
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changes in
earnings estimates or recommendations by securities analysts;
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developments
in the biotechnology industry; and
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general market
conditions and other factors, including factors unrelated to our operating performance.
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Further, stock markets in general, and the market for biotechnology
companies in particular, have recently experienced price and volume fluctuations. Continued market fluctuations could result in
extreme volatility in the price of our common stock, which could cause a decline in the value of our common stock. Price volatility
of our common stock may be worse if the trading volume of our common stock is low. We have not paid, and do not expect to pay,
any cash dividends on our common stock as any earnings generated from future operations will be used to finance our operations.
As a result, investors will not realize any income from an investment in our common stock until and unless their shares are sold
at a profit.
Future sales of our common stock could
reduce our stock price.
If our existing stockholders or their distributees sell substantial
amounts of our Common Stock in the public market, the market price of our common stock could decrease significantly. The perception
in the public market that our existing stockholders might sell shares of common stock could also depress the trading price of
our common stock. Any such sales of our common stock in the public market may affect the price of our common stock.
A substantial majority of our outstanding shares of our common
stock are freely tradable without restriction or further registration under the federal securities laws, unless owned by our affiliates.
In addition, we may sell additional shares of our common stock in the future to raise capital and a substantial number of shares
of our common stock are reserved for issuance upon the exercise of stock options and upon conversion of our outstanding convertible
notes. We cannot predict the size of future issuances, if any. At December 31, 2016, there were options to purchase common
stock issued covering 5,092,211 shares of our common stock with a weighted average exercise price of $3.60 per share. Also at
December 31, 2016, there were 2,391,481 shares of common stock remaining available for future for issuance in connection
with future grants of incentives under our amended 2006 stock incentive plan. The issuance and sale of substantial amounts of
common stock, or the perception that such issuances and sales may occur, could adversely affect the market price of our common
stock and impair our ability to raise capital through the sale of additional equity securities.
If securities analysts stop publishing research or reports
about us or our business or if they downgrade our common stock, the market price of our common stock could decline.
The market for our common stock relies in part on the research
and reports that industry or financial analysts publish about us or our business. We do not control these analysts. If any analyst
who covers us downgrades our stock or lowers its future stock price targets or estimates of our operating results, the market
price for our common stock could decline rapidly. Furthermore, if any analyst ceases to cover us, we could lose visibility in
the market, which in turn could cause the market price of our common stock to decline.
Our common stock is listed to trade on more than one stock
exchange, and this may result in price variations.
Our common stock is listed for trade on both the NYSE MKT and
the TASE. Dual-listing may result in price variations between the exchanges due to a number of factors. First, our common stock
is traded in U.S. dollars on the NYSE MKT and in NIS on the TASE. In addition, the exchanges are open for trade at different times
of the day and on different days. For example, the TASE opens generally during Israeli business hours, Sunday through Thursday,
while the NYSE MKT opens generally during U.S. business hours, Monday through Friday. The two exchanges also have differing vacation
schedules. Differences in the trading schedules, as well as volatility in the exchange rate of the two currencies, among other
factors, may result different trading prices for our common stock on the two exchanges. Other external influences may have different
effects on the trading price of our common stock on the two exchanges.
Directors, executive officers, principal stockholders and
affiliated entities own a significant percentage of our capital stock, and they may make decisions that an investor may not consider
to be in the best interests of our stockholders.
Our directors, executive officers, principal stockholders and
affiliated entities beneficially own, in the aggregate, approximately 22.5% of our common stock, as of March 1, 2017, giving effect
to options, convertible notes and other derivative securities that are held by such persons that are exercisable within such 60
days from such date. As a result, if some or all of them acted together, they would have the ability to exert substantial influence
over the election of our Board of Directors and the outcome of issues requiring approval by our stockholders. This concentration
of ownership may have the effect of delaying or preventing a change in control of our company that may be favored by other stockholders.
This could prevent the consummation of transactions favorable to other stockholders, such as a transaction in which stockholders
might otherwise receive a premium for their shares over current market prices.
Failure to maintain effective internal controls in accordance
with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and operating results. In addition,
current and potential stockholders could lose confidence in our financial reporting, which could have a material adverse effect
on the price of our common stock.
Effective internal controls are necessary for us to provide
reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our
results of operation could be harmed.
Section 404 of the Sarbanes-Oxley Act of 2002 requires annual
management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent
registered public accounting firm addressing these assessments. We continuously monitor our existing internal controls over financial
reporting systems to confirm that they are compliant with Section 404, and we may identify deficiencies that we may not be able
to remediate in time to meet the deadlines imposed by the Sarbanes-Oxley Act. This process may divert internal resources and will
take a significant amount of time and effort to complete.
If, at any time, it is determined that we are not in compliance
with Section 404, we may be required to implement new internal control procedures and reevaluate our financial reporting. We may
experience higher than anticipated operating expenses as well as increased independent auditor fees during the implementation
of these changes and thereafter. Further, we may need to hire additional qualified personnel. If we fail to maintain the adequacy
of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to conclude
on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley
Act, which could result in our being unable to obtain an unqualified report on internal controls from our independent auditors.
Failure to maintain an effective internal control environment could also cause investors to lose confidence in our reported financial
information, which could have a material adverse effect on the price of our common stock.
Compliance with changing regulation of corporate governance
and public disclosure may result in additional expenses, divert management’s attention from operating our business which
could have a material adverse effect on our business.
There have been other changing laws, regulations and standards
relating to corporate governance and public disclosure in addition to the Sarbanes-Oxley Act, as well as new regulations promulgated
by the Commission and rules promulgated by the national securities exchanges, including the NYSE MKT and the NASDAQ. These new
or changed laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity,
and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies,
which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to
disclosure and governance practices. As a result, our efforts to comply with evolving laws, regulations and standards are likely
to continue to result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating
activities to compliance activities. Our board members, Chief Executive Officer and Chief Financial Officer could face an increased
risk of personal liability in connection with the performance of their duties. As a result, we may have difficulty attracting
and retaining qualified board members and executive officers, which could have a material adverse effect on our business. If our
efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing
bodies, we may incur additional expenses to comply with standards set by regulatory authorities or governing bodies which would
have a material adverse effect on our business, results of operations and financial condition.
The issuance of preferred stock or additional shares of
common stock could adversely affect the rights of the holders of shares of our common stock.
Our Board of Directors is authorized to issue up to 100,000,000
shares of preferred stock without any further action on the part of our stockholders. Our Board of Directors has the authority
to fix and determine the voting rights, rights of redemption and other rights and preferences of preferred stock. Currently, we
have no shares of preferred stock outstanding.
Our Board of Directors may, at any time, authorize the issuance
of a series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive
dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares,
together with a premium, before the redemption of our common stock, which may have a material adverse effect on the rights of
the holders of our common stock. In addition, our Board of Directors, without further stockholder approval, may, at any time,
issue large blocks of preferred stock. In addition, the ability of our Board of Directors to issue shares of preferred stock without
any further action on the part of our stockholders may impede a takeover of our company and may prevent a transaction that is
favorable to our stockholders.
Under the rules of the TASE, other than incentives under our
amended 2006 stock incentive plan, we were prohibited from issuing any securities of any class or series different than the common
stock that is listed on the TASE for the 12-month period immediately succeeding our initial listing, which occurred on September 6,
2010. As of the date hereof, the rules of the TASE allow us to issue securities with preferential rights with respect to dividends
but such other securities may not include voting rights. The foregoing does not limit our liability to issue and grant options
and warrants for the purchase of shares of our common stock.
Risks Related to the Commercialization of Drug Products
Fiocruz may not comply with the terms and conditions of
the Supply and Technology Transfer Agreement.
We do not control and may not be able to effectively influence
Fiocruz’s ability to distribute Uplyso in Brazil. If Fiocruz fails to comply with the purchase requirements of the Supply
and Technology Transfer Agreement, we may terminate the agreement and market Uplyso in Brazil on our own. Any failure by Fiocruz
to comply with the purchase requirements of the Supply and Technology Transfer Agreement, or any other material breach by Fiocruz
of the agreement, may have a material adverse effect on our business, results of operations and financial condition.
Fiocruz’s purchases of Uplyso to date have been significantly
below certain agreed upon purchase milestones and, accordingly, we have the right to terminate the Brazil Agreement. Notwithstanding
the low purchase amounts, we are, at this time, continuing to supply Uplyso to Fiocruz under the Brazil Agreement, and patients
continue to be treated with Uplyso in Brazil. In December 2016, we received a letter from Fiocruz regarding an order from the
Brazilian MoH to purchase alfataliglicerase to treat Gaucher patients in Brazil. The Brazilian MoH’s order consists of a
number of shipments during 2017 for a total of approximately $24.3 million. Shipments are to start in mid-2017 and continue through
the end of the year, in increasing volumes. We are discussing with Fiocruz potential actions that Fiocruz may take to comply with
its purchase obligations and, based on such discussions, we will determine what we believe to be the course of action that is
in the best interest of our company.
We
face the risk that the Brazilian MoH may ultimately fail to purchase the amounts of Uplyso for which it has already stated its
intentions. In addition, we may fail to supply the intended amounts on time, if at all. We also cannot accurately predict the
amount of revenues we will generate under our Supply and Technology Transfer with Fiocruz in future periods, if any.
Any
failure by the Brazilian MoH to purchase Uplyso, by us, to supply Uplyso for purchase or by Fiocruz to distribute Uplyso in Brazil,
or the experience of significant delays in any of the foregoing, may have a material adverse effect on our business, results of
operations and financial condition.
We have limited experience in selling, marketing or distributing
products and limited internal capability to do so.
We currently have very limited sales, marketing or distribution
capabilities and no experience in building a sales force and distribution capabilities. If we market any of our other products
directly, if any, we must commit significant financial and managerial resources to develop a marketing and sales force with technical
expertise and with supporting distribution capabilities. Factors that may inhibit our efforts to commercialize our products directly
and without strategic partners include:
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the inability
to recruit and retain adequate numbers of effective sales and marketing personnel;
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the inability
of sales personnel to obtain access to an adequate numbers of physicians or to pursuance
them to prescribe our products;
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the lack
of complementary products to be offered by sales personnel, which may put us at a competitive
disadvantage relative to companies with more extensive product lines; and
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unforeseen
costs and expenses associated with creating and sustaining an independent sales and marketing
organization.
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We may not be successful in recruiting or retaining the sales
and marketing personnel necessary to sell any of our products upon approval, if at all, which would have a material adverse effect
on our business, results of operations and financial condition.
We may enter into distribution arrangements and marketing
alliances for certain products and any failure to successfully identify and implement these arrangements on favorable terms, if
at all, may impair our ability to commercialize our product candidates.
We will need to establish a sales force to market our product
candidates, if approved. We do not anticipate having the resources in the foreseeable future to develop global sales and marketing
capabilities for all of the products we are developing. We may pursue arrangements regarding the sales and marketing and distribution
of one or more of our product candidates, and our future revenues may depend, in part, on our ability to enter into and maintain
arrangements with other companies having sales, marketing and distribution capabilities and the ability of such companies to successfully
market and sell any such products. Any failure to enter into such arrangements and marketing alliances on favorable terms, if
at all, could delay or impair our ability to commercialize our product candidates and could increase our costs of commercialization.
Any use of distribution arrangements and marketing alliances to commercialize our product candidates will subject us to a number
of risks, including the following:
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we may be
required to relinquish important rights to our products or product candidates;
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we may not
be able to control the amount and timing of resources that our distributors or collaborators
may devote to the commercialization of our product candidates;
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our distributors
or collaborators may experience financial difficulties;
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our distributors
or collaborators may not devote sufficient time to the marketing and sales of our products;
and
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business
combinations or significant changes in a collaborator’s business strategy may adversely
affect a collaborator’s willingness or ability to complete its obligations under
any arrangement.
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We may need to enter into additional co-promotion arrangements
with third parties where our own sales force is neither well situated nor large enough to achieve maximum penetration in the market.
We may not be successful in entering into any co-promotion arrangements, and the terms of any co-promotion arrangements we enter
into may not be favorable to us.
If physicians, patients, third party payors and others in
the medical community do not accept and use taliglucerase alfa, or any of our other product candidates, if approved, our ability
to generate revenue from product sales will be materially impaired.
Physicians and patients, and other healthcare providers, may
not accept and use any of our products or any product candidates, if approved, for marketing. Future acceptance and use of any
of our products or any product candidates, if approved, will depend upon a number of factors including:
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perceptions
by physicians, patients, third party payors and others in the medical community about
the safety and effectiveness of taliglucerase alfa or our other drug candidates;
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the willingness
of the target patient population to try new therapies and of physicians to prescribe
these therapies;
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the prevalence
and severity of any side effects, including any limitations or warnings contained in
our products’ approved labeling;
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pharmacological
benefits of taliglucerase alfa or our other drug candidates relative to competing products
and products under development;
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the efficacy
and potential advantages relative to competing products and products under development;
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relative
convenience and ease of administration;
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effectiveness
of education, marketing and distribution efforts by us and our licensees and distributors,
if any;
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publicity
concerning taliglucerase alfa or our other drug candidates or competing products and
treatments;
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coverage
and reimbursement of our products by third party payors; and
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the price
for our products and competing products.
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A lack of market acceptance of taliglucerase alfa in Brazil,
or globally for any of our other products candidates, if approved, would have a material adverse effect on our business, results
of operations and financial condition.
If the market opportunities for other product candidates,
and for taliglucerase alfa in Brazil, are smaller than we believe they are, our revenues may be adversely affected and our business
may suffer.
To date, our development efforts have focused mainly on relatively
rare disorders with small patient populations, in particular Gaucher disease and Fabry disease. Currently, most reported estimates
of the prevalence of these diseases are based on studies of small subsets of the population of specific geographic areas, which
are then extrapolated to estimate the prevalence of the diseases in the broader world population. As new studies are performed,
the estimated prevalence of these diseases may change. There can be no assurance that the prevalence of Gaucher disease or Fabry
disease in the study populations, particularly in these newer studies, accurately reflect the prevalence of these diseases in
the broader world population. If the market opportunities for our current product candidates are smaller than we believe they
are, our revenues may be adversely affected and our business may suffer.
Coverage
and reimbursement may not be available for
taliglucerase alfa or any of our other product candidates, if approved
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in all territories which could diminish our sales or affect our ability to sell taliglucerase alfa or any other products profitably.
Market acceptance and sales of taliglucerase alfa in Brazil,
or for any of our other product candidates globally, if approved, will depend on coverage and reimbursement policies in the countries
in which they are approved for sale. Government authorities and third-party payors, such as private health insurers and health
maintenance organizations, decide which drugs they will pay for and establish reimbursement levels. Obtaining reimbursement approval
for an approved product from governments and other third party payors is a time consuming and costly process that requires our
collaborators or us, as the case may be, to provide supporting scientific, clinical and cost-effectiveness data for the use of
our products, if and when approved, to every payor. We may not be able to provide data sufficient to gain acceptance with respect
to coverage and reimbursement or we might need to conduct post-marketing studies in order to demonstrate the cost-effectiveness
of approved products, if any, to such payors’ satisfaction. Such studies might require our collaborators or us to commit
a significant amount of management time and financial and other resources. Even if a payor determines that an approved product
is eligible for reimbursement, the payor may impose coverage limitations that preclude payment for some uses that are approved
by the FDA or other regulatory authorities. In addition, full reimbursement may not be available for high priced products. Moreover,
eligibility for coverage does not imply that any approved product will be reimbursed in all cases or at a rate that allows us
to make a profit or even cover our costs. Also, limited reimbursement amounts may reduce the demand for, or the price of, our
product candidates. Except with respect to taliglucerase alfa, we have not commenced efforts to have our product candidates covered
and reimbursed by government or third-party payors. If coverage and reimbursement are not available or are available only to limited
levels, the sales of our products, if approved may be diminished or we may not be able to sell such products profitably.
We and our collaborating partners may be subject, directly
or indirectly, to federal and state healthcare fraud and abuse and false claims laws and regulations. If we or our collaborating
partners are unable to comply, or have not fully complied, with such laws, we could face substantial penalties.
All marketing activities associated with drug products that
are approved for sale in the United States, if any, will be
, directly
or indirectly through our customers,
subject to numerous federal and state laws governing the marketing and promotion of
pharmaceutical products in the United States
, including, without limitation,
the federal Anti-Kickback Statute, the federal False Claims Act and HIPAA.
These
laws may adversely impact, among other things, our proposed sales, marketing and education programs.
The
federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, receiving, offering or paying remuneration,
directly or indirectly, to induce either the referral of an individual, or the furnishing, recommending, or arranging for a good
or service, for which payment may be made under a federal healthcare program, such as the Medicare and Medicaid programs. The
term “remuneration” has been broadly interpreted to include anything of value, including for example, gifts, discounts,
the furnishing of supplies or equipment, credit arrangements, payments of cash, waivers of co-payments and deductibles, ownership
interests and providing anything at less than its fair market value. The reach of the Anti-Kickback Statute was also broadened
by the
PPACA
which, among other things, amends the intent requirement
of the federal Anti-Kickback Statute and the applicable criminal healthcare fraud statutes contained within 42 U.S.C. § 1320a-7b,
effective March 23, 2010. Pursuant to the statutory amendment, a person or entity no longer needs to have actual knowledge of
this statute or specific intent to violate it in order to have committed a violation. In addition, PPACA provides that the government
may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes
a false or fraudulent claim for purposes of the civil False Claims Act (discussed below) or the civil monetary penalties statute,
which imposes penalties against any person who is determined to have presented or caused to be presented a claim to a federal
health program that the person knows or should know is for an item or service that was not provided as claimed or is false or
fraudulent. The federal Anti-Kickback Statute is broad, and despite a series of narrow safe harbors, prohibits many arrangements
and practices that are lawful in businesses outside of the healthcare industry. Penalties for violations of the federal Anti-Kickback
Statute include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid
and other state or federal healthcare programs. Many states have also adopted laws similar to the federal Anti-Kickback Statute,
some of which apply to the referral of patients for healthcare items or services reimbursed by any source, not only the Medicare
and Medicaid programs, and do not contain identical safe harbors.
The federal False Claims Act imposes liability on any person
who, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment by a federal healthcare
program. The “qui tam” provisions of the False Claims Act allow a private individual to bring civil actions on behalf
of the federal government alleging that the defendant has submitted a false claim to the federal government, and to share in any
monetary recovery. In addition, various states have enacted false claims laws analogous to the False Claims Act. Many of these
state laws apply where a claim is submitted to any third-party payer and not merely a federal healthcare program. When an entity
is determined to have violated the False Claims Act, it may be required to pay up to three times the actual damages sustained
by the government, plus civil penalties of $5,500 to $11,000 for each separate false claim.
HIPAA created several new federal crimes, including health
care fraud, and false statements relating to health care matters. The health care fraud statute prohibits knowingly and willfully
executing a scheme to defraud any health care benefit program, including private third-party payers. The false statements statute
prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious
or fraudulent statement in connection with the delivery of or payment for health care benefits, items or services.
We are unable to predict whether we could be subject to actions
under any of these or other fraud and abuse laws, or the impact of such actions. Moreover, to the extent that taliglucerase alfa,
or any of our products, if approved for marketing, will be sold in a foreign country, we and our future collaborators, may be
subject to similar foreign laws and regulations. If we or any of our future collaborators are found to be in violation of any
of the laws described above and other applicable state and federal fraud and abuse laws, we may be subject to penalties, including
civil and criminal penalties, damages, fines, exclusion from government healthcare reimbursement programs and the curtailment
or restructuring or our operations, any of which could have a material adverse effect on our business, results of operations and
financial condition.
Risks Related to Intellectual Property Matters
The intellectual property and assets owned by our subsidiaries
are subject to security agreements that secure our payment and other obligations under our 7.5% convertible notes, and our subsidiaries
have guaranteed all of those obligations.
In connection with the issuance of
our 7.5% convertible notes, we entered into security agreements pursuant to which our subsidiaries provided first priority security
interests in all of their assets, which consist of all of our intellectual property and other material assets. The security agreements
secure certain payment, indemnification and other obligations under the 7.5% convertible notes. If we were to default on certain
of ours obligations, or in certain other circumstances generally related to a bankruptcy or insolvency, holders of our outstanding
7.5% convertible notes could seek to foreclose on the collateral under the security agreements to obtain satisfaction our obligations,
and our business could be materially and adversely impacted, which would in turn materially and adversely impact our business,
results of operations and financial condition.
Furthermore, in connection with the
issuance of the 7.5% convertible notes, our subsidiaries guaranteed all of our obligations under the indenture governing such
convertible notes. If we were to default on our obligations under the indenture, the holders could require our subsidiaries to
satisfy all of those obligations under the guarantees.
If we fail to adequately protect or enforce our intellectual
property rights or secure rights to third party patents, the value of our intellectual property rights would diminish and our
business, competitive position and results of operations would suffer.
As of December 31, 2016, we had 58 pending patent applications
of which eight are joint pending patent applications with a third party and one is an-in licensed application. However, the filing
of a patent application does not mean that we will be issued a patent, or that any patent eventually issued will be as broad as
requested in the patent application or sufficient to protect our technology. Any modification required to a current patent application
may delay the approval of such patent application which would have a material adverse effect on our business, results of operations
and financial condition. In addition, there are a number of factors that could cause our patents, if granted, to become invalid
or unenforceable or that could cause our patent applications to not be granted, including known or unknown prior art, deficiencies
in the patent application or the lack of originality of the technology. Our competitive position and future revenues will depend
in part on our ability and the ability of our licensors and collaborators to obtain and maintain patent protection for our products,
methods, processes and other technologies, to preserve our trade secrets, to prevent third parties from infringing on our proprietary
rights and to operate without infringing the proprietary rights of third parties. We have filed U.S. and international patent
applications for process patents, as well as composition of matter patents, for taliglucerase alfa and other product candidates.
However, we cannot predict:
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the degree
and range of protection any patents will afford us against competitors and those who
infringe upon our patents, including whether third parties will find ways to invalidate
or otherwise circumvent our licensed patents;
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if and when
patents will issue;
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whether or
not others will obtain patents claiming aspects similar to those covered by our licensed
patents and patent applications; or
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whether we
will need to initiate litigation or administrative proceedings, which may be costly,
and whether we win or lose.
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As of December 31, 2016, we held, or had license rights to,
61 patents. If patent rights covering our products or technologies are not sufficiently broad, they may not provide us with sufficient
proprietary protection or competitive advantages against competitors with similar products and technologies. Furthermore, if the
U.S. Patent and Trademark Office or foreign patent offices issue patents to us or our licensors, others may challenge the patents
or circumvent the patents, or the patent office or the courts may invalidate the patents. Thus, any patents we own or license
from or to third parties may not provide any protection against our competitors and those who infringe upon our patents.
Furthermore, the life of our patents is limited. The patents
we hold, and the patents that may be issued in the future based on patent applications from the patent families, relating to our
ProCellEx protein expression system are expected to expire between 2017 and 2025.
We rely on confidentiality agreements that could be breached
and may be difficult to enforce which could have a material adverse effect on our business and competitive position.
Our policy is to enter agreements relating to the non-disclosure
of confidential information with third parties, including our contractors, consultants, advisors and research collaborators, as
well as agreements that purport to require the disclosure and assignment to us of the rights to the ideas, developments, discoveries
and inventions of our employees and consultants while we employ them. However, these agreements can be difficult and costly to
enforce. Moreover, to the extent that our contractors, consultants, advisors and research collaborators apply or independently
develop intellectual property in connection with any of our projects, disputes may arise as to the proprietary rights to the intellectual
property. If a dispute arises, a court may determine that the right belongs to a third party, and enforcement of our rights can
be costly and unpredictable. In addition, we rely on trade secrets and proprietary know-how that we seek to protect in part by
confidentiality agreements with our employees, contractors, consultants, advisors and others. Despite the protective measures
we employ, we still face the risk that:
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these agreements
may be breached;
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these agreements
may not provide adequate remedies for the applicable type of breach; or
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our trade
secrets or proprietary know-how will otherwise become known.
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Any breach of our confidentiality agreements or our failure
to effectively enforce such agreements may have a material adverse effect on our business and competitive position.
If we infringe the rights of third parties we could be prevented
from selling products, forced to pay damages and required to defend against litigation which could result in substantial costs
and may have a material adverse effect on our business, results of operations and financial condition.
We have not received to date any claims of infringement by
any third parties. However, as our drug candidates progress into clinical trials and commercialization, if at all, our public
profile and that of our drug candidates may be raised and generate such claims. Defending against such claims, and occurrence
of a judgment adverse to us, could result in unanticipated costs and may have a material adverse effect on our business and competitive
position. If our products, methods, processes and other technologies infringe the proprietary rights of other parties, we may
incur substantial costs and we may have to:
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obtain licenses,
which may not be available on commercially reasonable terms, if at all;
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redesign
our products or processes to avoid infringement;
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stop using
the subject matter claimed in the patents held by others, which could cause us to lose
the use of one or more of our drug candidates;
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defend litigation
or administrative proceedings that may be costly whether we win or lose, and which could
result in a substantial diversion of management resources; or
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Any costs incurred in connection with such events or the inability
to sell our products may have a material adverse effect on our business, results of operations and financial condition.
If we cannot meet requirements under our license agreements,
we could lose the rights to our products, which could have a material adverse effect on our business.
We depend on licensing agreements with third parties to maintain
the intellectual property rights to certain of our product candidates. Our license agreements require us to make payments and
satisfy performance obligations in order to maintain our rights under these agreements. All of these agreements last either throughout
the life of the patents that are the subject of the agreements, or with respect to other licensed technology, for a number of
years after the first commercial sale of the relevant product.
In addition, we are responsible for the cost of filing and
prosecuting certain patent applications and maintaining certain issued patents licensed to us. If we do not meet our obligations
under our license agreements in a timely manner, we could lose the rights to our proprietary technology which could have a material
adverse effect on our business, results of operations and financial condition.
Risks Relating to Our Operations in Israel
Potential political, economic and military instability in
the State of Israel, where the majority of our senior management and our research and development facilities are located, may
adversely affect our results of operations.
Our executive office and operations are located in the State
of Israel. Accordingly, political, economic and military conditions in Israel directly affect our business. Since the State of
Israel was established in 1948, a number of armed conflicts have occurred between Israel and its Arab neighbors. Any hostilities
involving Israel or the interruption or curtailment of trade between Israel and its present trading partners, or a significant
downturn in the economic or financial condition of Israel, could affect adversely our operations and product development. Although
Israel has entered into various agreements with Egypt, Jordan and the Palestinian Authority, there have been times since October
2000 when Israel has experienced an increase in unrest and terrorist activity. The establishment in 2006 of a government in the
Gaza Strip by representatives of the Hamas militant group has created additional unrest and uncertainty in the region. Starting
in December 2008, for approximately three weeks, Israel engaged in an armed conflict with Hamas in the Gaza Strip. Armed conflicts
have taken place between Israel and Hamas in the Gaza Strip in 2008, 2012 and 2014. Our facilities in northern Israel are in range
of rockets that were fired from Lebanon into Israel during a 2006 war with the Hizbollah in Lebanon, and suffered minimal damages
during one of the rocket attacks. Our insurance policies do not cover us for the damages incurred in connection with these conflicts
or for any resulting disruption in our operations. The Israeli government, as a matter of law, provides coverage for the reinstatement
value of direct damages that are caused by terrorist attacks or acts of war; however, the government may cease providing such
coverage or the coverage might not be enough to cover potential damages. If our facilities are damaged as a result of hostile
action, our operations may be materially adversely affected.
In addition to the foregoing, since the end of 2010, numerous
acts of protest and civil unrest have taken place in several countries in the Middle East and North Africa, many of which involved
significant violence. Civil unrest in Egypt, which borders Israel, has resulted in significant changes to the country’s
government. There is currently a civil war in Syria, also bordering Israel, and Israel has been hit by rockets and mortars originating
from Syria. The ultimate effect of these developments on the political and security situation in the Middle East and on Israel’s
position within the region is not clear at this time.
Our operations may be disrupted by the obligations of our
personnel to perform military service which could have a material adverse effect on our business.
Many of our male employees in Israel, including members of
senior management, are obligated to perform up to one month (in some cases more) of annual military reserve duty until they reach
the age of 45 and, in the event of a military conflict, could be called to active duty. Our operations could be disrupted by the
absence of a significant number of our employees related to military service or the absence for extended periods of military service
of one or more of our key employees. A disruption could have a material adverse effect on our business.
Because a certain portion of our expenses is incurred in
New Israeli Shekels, our results of operations may be seriously harmed by currency fluctuations and inflation.
We report our financial statements in U.S. dollars, our functional
currency. Although most of our expenses are incurred in U.S. dollars, we pay a portion of our expenses in New Israeli Shekels,
or NIS, and as a result, we are exposed to risk to the extent that the inflation rate in Israel exceeds the rate of devaluation
of the NIS in relation to the U.S. dollar or if the timing of these devaluations lags behind inflation in Israel. In that event,
the U.S. dollar cost of our operations in Israel will increase and our U.S. dollar-measured results of operations will be adversely
affected. To the extent that the value of the NIS increases against the dollar, our expenses on a dollar cost basis increase.
Our operations also could be adversely affected if we are unable to guard against currency fluctuations in the future. To date,
we have not engaged in hedging transactions. In the future, we may enter into currency hedging transactions to decrease the risk
of financial exposure from fluctuations in the exchange rate of the U.S. dollar against the NIS. These measures, however, may
not adequately protect us from material adverse effects.
The tax benefits available to us require that we meet several
conditions and may be terminated or reduced in the future, which would increase our taxes.
We are able to take advantage of tax exemptions and reductions
resulting from the “Approved Enterprise” status of our facilities in Israel. To remain eligible for these tax benefits,
we must continue to meet certain conditions, including making specified investments in property and equipment, and financing at
least 30% of such investments with share capital. If we fail to meet these conditions in the future, the tax benefits would be
canceled and we may be required to refund any tax benefits we already have enjoyed. These tax benefits are subject to investment
policy by the Investment Center and may not be continued in the future at their current levels or at any level. In recent years
the Israeli government has reduced the benefits available and has indicated that it may further reduce or eliminate some of these
benefits in the future. The termination or reduction of these tax benefits or our inability to qualify for additional “Approved
Enterprise” approvals may increase our tax expenses in the future, which would reduce our expected profits and adversely
affect our business and results of operations. Additionally, if we increase our activities outside of Israel, for example, by
future acquisitions, such increased activities generally may not be eligible for inclusion in Israeli tax benefit programs.
The Israeli government grants we have received for certain
research and development expenditures restrict our ability to manufacture products and transfer technologies outside of Israel
and require us to satisfy specified conditions. If we fail to satisfy these conditions, we may be required to refund grants previously
received together with interest and penalties which could have a material adverse effect on our business and results of operations.
Our research and development efforts have been financed, in
part, through grants that we have received from NATI. We, therefore, must comply with the requirements of the Research Law. Under
the Research Law we are prohibited from manufacturing products developed using these grants outside of the State of Israel without
special approvals, although the Research Law does enable companies to seek prior approval for conducting manufacturing activities
outside of Israel without being subject to increased royalties. We may not receive the required approvals for any proposed transfer
of manufacturing activities. Even if we do receive approval to manufacture products developed with government grants outside of
Israel, we may be required to pay an increased total amount of royalties (possibly up to 300% of the grant amounts plus interest),
depending on the manufacturing volume that is performed outside of Israel, as well as at a possibly increased royalty rate. This
restriction may impair our ability to outsource manufacturing or engage in similar arrangements for those products or technologies.
Additionally, under the Research Law, Protalix Ltd. is prohibited
from transferring NATI-financed technologies and related intellectual property rights outside of the State of Israel, except under
limited circumstances and only with the approval of NATI Council or the Research Committee. Protalix Ltd. may not receive the
required approvals for any proposed transfer and, if received, Protalix Ltd. may be required to pay NATI a portion of the consideration
that it receives upon any sale of such technology by a non-Israeli entity. The scope of the support received, the royalties that
Protalix Ltd. has already paid to NATI, the amount of time that has elapsed between the date on which the know-how was transferred
and the date on which NATI grants were received and the sale price and the form of transaction will be taken into account in order
to calculate the amount of the payment to NATI. Approval of the transfer of technology to residents of the State of Israel is
required, and may be granted in specific circumstances only if the recipient abides by the provisions of applicable laws, including
the restrictions on the transfer of know-how and the obligation to pay royalties. No assurance can be made that approval to any
such transfer, if requested, will be granted.
These restrictions may impair our ability to sell our technology
assets or to outsource manufacturing outside of Israel. The restrictions will continue to apply for a certain period of time even
after we have repaid the full amount of royalties payable for the grants. For the years ended December 31, 2015 and 2016, we recorded
grants totaling $4.9 million and $5.8 million from NATI, respectively. The grants represent 19.5% and 19.1%, respectively, of
our gross research and development expenditures for the years ended December 31, 2015 and 2016. If we fail to satisfy the conditions
of the Research Law, we may be required to refund certain grants previously received together with interest and penalties, and
may become subject to criminal charges, any of which could have a material adverse effect on our business, results of operations
and financial condition.
Investors may have difficulties enforcing a U.S. judgment,
including judgments based upon the civil liability provisions of the U.S. federal securities laws against us, our executive officers
and most of our directors or asserting U.S. securities laws claims in Israel.
Most of our directors and all of our officers are residents
of Israel, and accordingly, most of their assets and our assets are located outside the United States. Service of process upon
our non-U.S. resident directors and officers and enforcement of judgments obtained in the United States against us, some of our
directors and executive officers may be difficult to obtain within the United States. We have been informed by our legal counsel
in Israel that investors may find it difficult to assert claims under U.S. securities laws in original actions instituted in Israel
or obtain a judgment based on the civil liability provisions of U.S. federal securities laws against us, our officers and our
directors. Israeli courts may refuse to hear a claim based on a violation of U.S. securities laws against us or our officers and
directors because Israel is not the most appropriate forum 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 the 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. There is little binding case law in Israel addressing the matters described
above.
Israeli courts might not enforce judgments rendered outside
Israel which may make it difficult to collect on judgments rendered against us. Subject to certain time limitations, an Israeli
court may declare a foreign civil judgment enforceable only if it finds that:
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the judgment
was rendered by a court which was, according to the laws of the state of the court, competent
to render the judgment;
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the judgment
may no longer be appealed;
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the obligation
imposed by the judgment is enforceable according to the rules relating to the enforceability
of judgments in Israel and the substance of the judgment is not contrary to public policy;
and
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the judgment
is executory in the state in which it was given.
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Even if these conditions are satisfied, an Israeli court will
not enforce a foreign judgment if it was given in a state whose laws do not provide for the enforcement of judgments of Israeli
courts (subject to exceptional cases) or if its enforcement is likely to prejudice the sovereignty or security of the State of
Israel. An Israeli court also will not declare a foreign judgment enforceable if:
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the judgment
was obtained by fraud;
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there is
a finding of lack of due process;
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the judgment
was rendered by a court not competent to render it according to the laws of private international
law in Israel;
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the judgment
is at variance with another judgment that was given in the same matter between the same
parties and that is still valid; or
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at the time
the action was brought in the foreign court, a suit in the same matter and between the
same parties was pending before a court or tribunal in Israel.
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