GLMD Galmed Pharmaceuticals Ltd

ITEM 4. Information on the Company.

Historical Background and Corporate Structure

Our Company, Galmed Pharmaceuticals Ltd., was incorporated in Israel on July 31, 2013 as a privately held company and is governed by the Companies Law. However, our business has been operating since 2000 under a different group of companies established in the same year, or the Group. Originally, we operated under the parent company, GHI. GHI held all of the equity rights in and to GTTI. GTTI held all of the equity rights in and to GIL (other than 0.1% of the share capital held by GHI). GIL held all of the equity rights in and to GMR. Our intellectual property was held by GIL. The research and development was conducted by GMR as a service to GIL on a cost plus basis. GIL was responsible for all product development.

On February 2, 2014, we underwent the Reorganization, pursuant to which all of our intangible assets (including our intellectual property) were transferred from GIL to GRD. The Reorganization was effectuated by share transfers and asset transfers, resulting in the Company as the parent company and 100% equity-owner of the following companies: (1) GRD, which holds all the Group’s intellectual property, including the Company’s patent portfolio; (2) GIL, which may provide research and development services to GRD on a cost plus basis; and (3) GTTI, which is an inactive company that we expect to liquidate in 2017. GIL holds GMR, which became an inactive company in 2015. The Reorganization was conducted in order to simplify our capital structure, reduce our operating cost and to improve our ability to raise funds. Immediately prior to the Reorganization, all our shareholders collectively held 9,739 ordinary shares of GHI. In connection with the Reorganization, and in accordance with the Tax Pre-Ruling, we issued to all such shareholders ordinary shares of the Company, such that upon the Reorganization all our shareholders collectively held 7,099,731 ordinary shares of the Company, in the same proportion among all shareholders, which reflected a ratio of 729 ordinary shares of the Company for each ordinary share of GHI.

The following is a diagram of our corporate structure (following GTTI's liquidation):

On March 18, 2014, we completed our initial public offering of 3,263,010 ordinary shares at a public offering price of $13.50 per share, which included 425,610 ordinary shares issued upon the exercise in full of the underwriters’ option to purchase additional ordinary shares to cover over-allotments, for aggregate gross proceeds of approximately $44.1 million. Net of underwriting discounts, commissions and other estimated offering expenses, the offering raised approximately $39.7 million.

On May 31, 2016, we entered into the Sales Agreement with Cantor to issue and sell, from time to time through Cantor, ordinary shares having an aggregate offering price of up to $16 million. Under the ATM Offering, the Company may sell ordinary shares by any method permitted by law and deemed to be an “at-the-market” offering, as defined in Rule 415 promulgated under the Securities Act of 1933, as amended, or the Securities Act. The Company is not obligated to make any sales under the Sales Agreement. The Company intends to use the net proceeds raised through any ATM Offering sales for (i) further clinical and non-clinical development of existing and new programs, (ii) business development related activities and (iii) general corporate purposes. As of March 16, 2017, the latest practicable date for inclusion in this annual report, the Company had sold 933,160 ordinary shares through its ATM Offering for total proceeds of approximately $4.5 million, net of issuance expenses. The offering of ordinary shares pursuant to the ATM Offering will terminate upon the earliest of (i) the sale of all of the ordinary shares subject to the Sales Agreement, (ii) the termination of the Sales Agreement by Cantor or the Company, as permitted therein, or (iii) the third anniversary of the date of the ATM Offering.

Our principal executive offices and registered office in Israel are located at 16 Tiomkin Street, Tel Aviv, Israel, 6578317 and our telephone number is +972-3-693-8448. Our website address is http://www.galmedpharma.com. The information contained on, or that can be accessed through, our website is neither a part of nor incorporated into this annual report. We have included our website address in this annual report solely as an inactive textual reference. Puglisi & Associates, or Puglisi, serves as our authorized representative in the United States for matters concerning our IPO, our registration statement filing on Form S-8, our Form F-3 and the Sales Agreement. Puglisi’s address is 850 Library Avenue, Newark, Delaware 19711.

Other than as described in “Item 5. Operating and Financial Review and Prospects—Contractual Obligations”, we have not had any material commitments for capital expenditures, including any anticipated material acquisition of plant and equipment or interests in other companies, since January 1, 2014. Additionally, we have not had any material capital divestitures since January 1, 2014.

Business Overview

We are a clinical-stage biopharmaceutical company focused on the development of Aramchol a first in class, novel, once-daily, oral therapy for the treatment of NASH for variable populations, as well as other liver associated disorders. We believe that our product candidate, Aramchol, has the potential to be a disease modifying treatment for fatty liver disorders, including NASH, which is a chronic disease that constitutes a large unmet medical need.

Aramchol is a synthetic conjugate of cholic acid, or a type of bile acid, and arachidic acid, or a type of saturated fatty acid, both of which, in their non-synthetic forms, are naturally occurring. The conjugated molecule acts upon important metabolic pathways, reducing fat accumulation in the liver and regulating the transport of cholesterol, which is essential for maintaining cholesterol balance in the body. The ability of Aramchol to decrease liver fat content may also reduce the inflammation in the liver and the risk of cardiovascular complications associated with NASH. We believe that Aramchol’s ability to reduce liver fat and liver fibrosis without observable adverse side effects in our studies to date will enable it to be a safe and effective treatment for all stages of NASH in OD patients and prevent the hepatic and cardiovascular complications associated therewith.

On February 1, 2015, we began our ARREST Study, a multi-center, randomized, double-blind, placebo-controlled, dose-ranging Phase IIB clinical trial of Aramchol, in 248OD patients who have been biopsy-diagnosed as having NASH. We have initiated this study in Israel, Europe, Latin America, China and the United States (pursuant to an IND authorized by FDA). Our ARREST Study for Aramchol in OD NASH patients is in accordance with the study design recommended by the Medicines and Healthcare Products Regulatory Agency, or MHRA, and has been deemed acceptable by Bundesinstitut für Arzneimittel und Medizinprodukte, a German medical agency, or BfArM, and deemed satisfactory by Agence nationale de sécurité du médicament, a French medical agency, or ANSM. The BfArM and ANSM also confirmed, in minutes of each of their respective scientific advisory meetings, that if successful, the ARREST Study may serve as a basis for Phase III pivotal trials of Aramchol. The FDA and MHRA invited us to discuss the next steps in the development of Aramchol after we analyze the results of the ARREST Study. If the Phase III trial(s) are successful, we intend to submit an NDA to the FDA and an MAA to the EMA for the approval of Aramchol for the treatment of NASH in the United States and Europe. More information about the ARREST Study may be found on ClinicalTrials.gov identifier: NCT02279524.

Originally, we intended to perform a ‘futility analysis’ as part of the ‘interim analysis.’ The futility analysis would have reviewed the data both for safety signals and determined whether subjects receiving Aramchol showed an observable reduction in liver fat concentration, as measured by MRS. The independent Drug and Safety Monitoring Board (DSMB) would have then made a “go/no go” decision based on the MRS data at six months. The absence of significant MRS-related results at the six month point could have resulted in the termination of the study based on the absence of clinical benefit in the interim review and was therefore considered a futility analysis.

However, in light of the FDA and AASLD clinical guidance for the development of diagnostic and therapeutic modalities for the treatment of NASH published in early 2015, it has become increasingly clear that histological data (liver biopsy) will be absolutely required to seek regulatory approval for NASH drugs, not merely MRS data. This conclusion was further supported by two recent Phase III protocols (the REGENERATE Study, NCT02548351, and RESOLVE-IT study- NCT 02704403), which also require resolution of NASH as measured by histological data. As such, the entire twelve month dataset will be necessary to judge the viability of Aramchol, and potential further development thereof.

Thus, the scope of the interim analysis we conducted after 120 patients in our ARREST Study completed six months of treatment was limited to analysis of safety related signals only, conducted by the data monitoring committee, or DMC. The interim analysis does not include review of the data with respect to any efficacy endpoints. On February 8, 2017, the DMC met in order to review the accumulated safety data in accordance with a protocol defined safety interim review. Following its review of the data, the DMC recommended continuation of the ARREST Study without changes.

We have completed randomization into the ARREST Study with 248 randomized patients. Top line Data from the ARREST Study are expected to be available during the second quarter of 2018.

Non-Alcoholic Fatty Liver Disease (NAFLD) / Non-Alcoholic Steato-Hepatitis (NASH)

It is currently estimated that Non-Alcoholic Fatty Liver Disease (NAFLD), the precondition to NASH, could affect up to 30% of the adult population in developed countries. This disease is also now recognized as one of the most common liver disorders, and a significant growing public health problem. In the US alone, more than 100 million people are said to be affected by NAFLD, and its prevalence is rapidly growing in parallel with metabolic syndromes, particularly obesity and diabetes.

NAFLD is characterized by the accumulation of fat of 6% or greater in the liver of people who drink alcohol only in moderation, or not at all. There may be numerous causes of NAFLD, however, the disease is mostly associated with a high fat, fructose-rich diet. Although NAFLD is generally asymptomatic, it is a major risk factor for liver inflammation (NASH) and scarring (fibrosis and cirrhosis). In addition, NAFLD is also associated with metabolic syndrome and cardiovascular disease. Currently, NAFLD can only be managed through lifestyle improvements, such as weight reduction and physical activity.

NASH is currently estimated to affect between 4%-6% of the adult population in developed countries, and is associated with increased risk of liver cirrhosis, liver failure, hepatocellular cancer, as well as metabolic and cardiovascular diseases. The major characteristics of NASH are elevated liver fat, inflammation, ballooning and fibrosis.

However, despite the growing need, there are currently no approved therapeutic treatments for NASH. Modification of risk factors, such as obesity and hyperlipidemia, and proper diabetic control is generally recommended for the treatment of NASH, and the standard of care includes lifestyle changes to promote weight loss, including low-calorie, low-fat diets and physical activity. Although weight loss can be potentially significant in delaying the progression of NASH, studies have shown that, for most individuals, it is generally very difficult to maintain over the long-term, even following bariatric surgery.

There are currently no drugs approved by regulatory authorities for the treatment of NASH. Even though certain drugs, such as insulin sensitizers and antihyperlipidemic agents, are prescribed for some NASH patients, they are not approved for the treatment of NASH and their efficacy has not been proven in adequate and well-controlled clinical studies.

Currently, it is impossible to predict which of the NAFLD patients will deteriorate to NASH as it is unclear what causes NASH to develop. Researchers are now focusing on several factors that may contribute to the development of NASH. Therefore lifestyle changes are recommended for all patients with NAFLD.

In 2015, the FDA and AASLD issued clinical guidance for the development of diagnostic and therapeutic modalities for the treatment of NASH based on the joint workshop held on September 5-6, 2013. The guidance serves as a broad framework for discussions with different companies and the requirements for pivotal studies for receiving regulatory approval are decided case-by-case depending on the products profile and previous studies results. The current regulatory path may be inferred from the ongoing pivotal studies. To date, there are two pivotal studies in NASH that are ongoing. These studies include a histology based interim after 72 weeks of treatment which is intended for marketing approval while the study continues to a clinical end-point. The end-points in these studies are either NASH resolution or a composite end-point of NASH resolution or fibrosis improvement.

There is an exceptionally wide range of estimates regarding the size of the commercial market for NASH. This uncertainty stems from (i) the overall size of the patient population, (ii) the percentage of the addressable market that will be diagnosed and, subsequently, seek treatment, and (iii) the ultimate cost of the therapies. None of these factors can be known definitively until NASH drugs begin to hit the market, which based on analysts’ estimates, will likely be 2019 at the earliest. Independent estimates generally estimate a commercial market in excess of $10 billion in developed countries, though we do not endorse any estimates, which are based on a number of different underlying assumptions.

Aramchol for NASH

Overview

Our product candidate, Aramchol, is a first-in-class synthetic FABAC which we are initially developing for the once-daily oral treatment of NASH in OD patients.

Early in its development, Aramchol’s ability to modulate hepatic lipid metabolism was observed and validated in numerous non-clinical trials with different animal species. Mice fed a high fat diet and treated with Aramchol did not develop fatty liver. In contrast, fatty liver was observed in control mice fed a high fat diet but not treated with Aramchol. In such early studies, we also observed that the mechanism of this effect was not a result of malabsorption of fat in the intestines because the FABAC-treated mice gained weight throughout the test periods to a similar degree to the control mice. This led us to conclude that FABAC therapy triggers a beneficial modulation of intra-hepatic lipid metabolism and thus reduces liver fat content. The images below show the reduction of liver fat content in liver cells of rodents after treatment with Aramchol.

In in-vitro and in vivo studies, Aramchol down regulates the Stearoyl-Coenzyme A Desaturase-1, or SCD1, enzyme, an enzyme recognized as playing an important role in the metabolism of fatty acids. The SCD1 enzyme is essentially the gateway that regulates the use and storage of fat in the body by converting saturated fatty acids to monounsaturated fatty acids. Experimental animal studies showed that complete inhibition of the SCD1 enzyme protects against diet-induced obesity, hepatic steatosis, or fatty liver, and insulin resistance by instructing the body to use, rather than store, all fatty acids. However, various animal studies have indicated that such complete SCD1 enzyme inhibition has mechanism based serious side effects, such as atherosclerosis,and eye and skin disorders. As observed by us in our non-clinical and clinical   studies performed to date, and subsequently published in the European Journal of Gastroenterology and Hepatology and Archives of Medical Research in 2008 and 2010 respectively, one of Aramchol’s unique characteristics is that it down regulates the SCD1 enzyme but does not inhibit it completely – a partial effect. To date, we have not observed any significant adverse events in our toxicology and clinical studies.

Aramchol also has the ability to up-regulate ABCA1 and thereby induce “reverse cholesterol transport” in animal models. ABCA1 is an ATP-binding cassette transporter, also known as the cholesterol efflux regulatory protein (CERP), which is a regulator of cellular cholesterol and phospholipid homeostasis. In every cell of the body, the LDL receptor enables entry of cholesterol into the cell and the ABCA1 transporter pumps cholesterol out of the cell, where it is carried by high-density lipoprotein, or HDL, to the liver to be excreted into the intestine. This pathway of cholesterol from the cell to the liver is called reverse cholesterol transport and is essential for maintaining cholesterol balance in the body. Excess LDL, or “bad,” cholesterol is deposited mainly in vascular walls, causing atherosclerosis, a vascular disease in which an artery wall thickens as a result of the accumulation of calcium and fatty materials, such as cholesterol. Activation of reverse cholesterol transport reduces the bad cholesterol deposited in vascular walls and is therefore beneficial. As published in the Biochemical Journal, the Archives of Medical Research and the Current Opinion in Lipidology in 2006, 2010 and 2014, respectively, in several experimental models in animals, Aramchol has been shown in independent studies to increase ABCA1 activity by between 300% and 400%, thereby stimulating reverse cholesterol transport, reducing cholesterol levels and preventing atherosclerosis. An article in the April 2014 issue of Biochimie further supports the importance of the regulation of ABCA1-induced reverse cholesterol transport on the pathogenesis of NASH. Furthermore, in our recent non-clinical trials we identified a unique mechanism of Aramchol by which it up regulates the glutathione levels, thereby facilitating an improved fatty liver oxidation and reduction of ROS to better preserve normal redox homeostasis.

To date, we have successfully completed four clinical trials of Aramchol:

Phase I Single and Multiple-Dose Study of Aramchol in Healthy Male Volunteers (NCT00776841)

Aramchol was evaluated in two Phase I clinical trials (under a single protocol) to study its safety, tolerability and PK profile in healthy volunteers, in both single and multiple dose administrations. The first Phase I clinical trial was an escalating single-dose trial conducted in 16 healthy subjects testing Aramchol doses ranging from 30 mg to 900 mg, performed in one center in Israel. The subsequent Phase I clinical trial was a repeated-dose trial conducted over four days in 25 healthy subjects testing repeated daily doses of Aramchol of 30 mg and 300 mg, performed in one center in Israel. The profiles for the groups were similar and the maximal plasma concentration of Aramchol increased with the higher doses. The PK profile demonstrated that Aramchol is suitable at each dose for once-daily administration and there were neither significant adverse events observed in either Phase I trial nor any notable changes in biochemical, hematologic, cardiovascular or other safety parameters.

Phase IIA Trial: Aramchol Treatment in NAFLD or NASH Patients (NCT01094158)

In January 2012, we completed a 60 patient multi-center, randomized, double-blind, placebo-controlled Phase IIA clinical trial of Aramchol in patients with NAFLD or NASH between the ages of 18 and 75 in 12 centers in Israel. The Phase IIA study results were published in July 2014 in the peer-reviewed Clinical Gastroenterology and Hepatology Journal. In accordance with the AASLD’s guidelines for Phase IIA studies in NAFLD or NASH, the trial was performed in patients with either NAFLD or NASH, rather than only in NASH patients. The trial’s primary efficacy endpoint was a reduction in liver fat content, and did not consider inflammation or fibrosis, which can be diagnosed only by liver biopsy. We believe that the short study duration of three months of treatment followed by a one-month follow-up period did not warrant repeated biopsies. The trial evaluated the effects on liver fat content of 100 mg and 300 mg once-daily doses of Aramchol compared to a placebo. At the end of the three month treatment period, statistically significant reductions in liver fat concentration as measured by MRS were observed in the 300 mg patient group. Specifically, a 12.57% mean liver fat content reduction was observed in the 300 mg group, as compared to a mean reduction of 2.89% in the 100 mg group and a mean increase of 6.39% in the placebo-treated patients. These results indicate that the effects of Aramchol are dose-dependent, as demonstrated in the graph below, which presents the results with respect to the 57 patients who successfully completed the entire treatment period.

Relative Change in MRS from Baseline after Three Months of Treatment

The difference between baseline and liver fat concentration at the end-of-treatment, as measured by MRS, for patients diagnosed with NASH and with NAFLD is presented in the table above, which also presents the results with respect to the 57 patients who successfully completed the entire treatment period (three patients were excluded from data analysis because of one protocol violation and two withdraw consents).

The table above shows that the primary endpoint of the study was attained. The study demonstrated a statistically significant, dose dependent reduction in fat content in the livers of patients treated with Aramchol, with a 19% difference between the 300 mg dose group and the placebo group, while the difference between the 100 mg dose group and the placebo group was not statistically significant. Notably, the minimal effective dose of Aramchol has been defined.

A non-statistically significant change of approximately 1 Kg in body weight was observed between the 300 mg dose group and the placebo group, suggesting that weight-loss did not influence the observed reduction in liver fat content experienced in the Aramchol treated groups.

There were no statistically significant differences among the three treatment groups for any of the secondary end points. There was a nonsignificant trend of mild weight reduction ( P=.1 ) in the high dose Aramchol group. Serum adiponectin levels increased (0.2 ± 1.7 µg/mL) in the high-dose Aramchol group but decreased in the low-dose (-0.3 ± 1.5 µg/mL) and placebo groups (-0.7 ±_1.3 µg/mL) ( P= 0.88 for trend of dose-response relationship by linear regression) . FMD increased nonsignificantly by 1.28% ± 2.92% in the high-dose group, by 0.34% ± 3.54% in the low-dose group, and by 0.46% ± 2.28% in the placebo group.

Adiponectin is a protein that modulates metabolic processes, including the regulation of glucose levels and fatty acid breakdown in the body. Adiponectin has an anti-inflammatory and antifibrotic effect on the liver. Adiponectin deficiency, or low amounts of adiponectin, results in insulin resistance, glucose intolerance, abnormal levels of fat in the blood and vascular injury, all of which are characteristic of metabolic syndrome. The graph below shows the change in serum adiponectin levels from baseline during treatment. At the end of the three month treatment period, a non-statistically significant increase in serum adiponectin levels were observed in the Aramchol treated patient groups, indicating that Aramchol may increases serum adiponectin levels in a dose dependent manner, suggesting that Aramchol may act as a protective factor for the prevention of metabolic syndrome, as increased serum adiponectin is itself such an independent protective factor.

Change in Serum Adiponectin Levels from Baseline during Three Months of Treatment

The arterial endothelium is a target for the atherosclerotic process. Atherosclerosis is associated with endothelial dysfunction in the very early stages of the disease process. Several studies have shown that metabolic syndrome is associated with endothelial dysfunction as an early pathogenic event. Thus, assessing endothelial function serves as an early marker for both metabolic syndrome and atherosclerosis. In the present study, endothelial function was assessed using flow-mediated dilation, a noninvasive ultrasound-based method that measures the ability of a large conduit artery to dilate in response to a shear stress stimulus, or an external force acting on the blood vessel. At the end of the three month treatment period, a non-statistically significant improvement in endothelial function was observed in the 300 mg Aramchol treated patient group. The table and graph below present the change in endothelial function, as measured by flow mediated dilation observed between baseline and the end-of-treatment for the 48 patients who performed two flow mediated dilation examinations.

Change in Endothelial Function between Baseline and the End-of-Treatment

N = number of patients

SD = standard deviation

The improvement in endothelial function suggests a positive effect on metabolic syndrome, specifically on vascular function.

The frequency of adverse events was similar in all treatment groups (as shown in the table below), but no such adverse event was considered to be related to the treatment. All adverse events were mild or moderate and none considered to be serious. None of the patients withdrew as a result of such adverse events.

The results of our Phase IIA clinical trial of Aramchol in the peer-reviewed Clinical Gastroenterology and Hepatology Journal were published in December 2014. The trial manuscript, entitled “The Fatty Acid-Bile Acid Conjugate Aramchol Reduced Liver Fat Content in Patients with Nonalcoholic Fatty Liver Disease,” provides the full report of the Phase IIA trial, which was completed in January 2012 and presented at the 47 ^th Annual Meeting of the European Association for the Study of the Liver in 2012. Based on this Phase IIA proof-of-concept results, we established a development plan that we believe may confirm that Aramchol (i) is safe, (ii) can be administered as a once-daily oral therapy, and (iii) targets NASH through several mechanisms including metabolic and anti-fibrotic.

Pharmacokinetics of Single and Multiple Escalating Doses of Aramchol and Food Effect in Healthy Volunteers (NCT02374437)

On April 28, 2014, we commenced PK and food effect studies of Aramchol. In written correspondence from December 2013 regarding a requested pre- IND meeting, the FDA recommended that we conduct such studies prior to commencing our Phase IIB ARREST Study.

We conducted the food effect and PK study at the Sourasky Medical Center in Tel Aviv, Israel involving 66 healthy volunteers to evaluate the PK of Aramchol following single and multiple escalating doses (200 mg, 400 mg and 600 mg), as well as to evaluate the effect of a high-fat, high-calorie meal on the PK of Aramchol following a single dose in healthy volunteers.

The results showed dose-related, but less than dose-proportional, increases in the mean Aramchol plasma concentrations, or Cmax, area under the curve, or AUC (0-t), and AUC (inf) of 200 mg, 400 mg and 600 mg doses administered under fasting conditions or following a light meal, both at single and repeated dose administration. Cmax and AUC are metrics used to indicate the significance of a drug’s exposure. Steady-state was achieved by 144 hours (day seven). Administration of Aramchol after a high-fat, high-calorie meal afforded a 2.6 fold increase in exposure, as measured by Cmax, AUC(0-t), and AUC(inf) compared to the fasting group.

No serious adverse events or deaths occurred during the study. Adverse events were equally distributed between placebo and Aramchol doses, were mild (with only one moderate adverse event) and the majority defined unrelated to Aramchol. The PK study provides additional safety data to further support existing safety data from our non-clinical studies and our Phase I and Phase IIA clinical trials of Aramchol.

Pharmacokinetics of Single and Multiple Escalating Doses of Aramchol Administered under Fed Conditions in Healthy Chinese Volunteers (NCT 02803996)

In 2016, we performed the Chinese PK Study involving Chinese patients who are domiciled in the United States. We enrolled 64 patients in this study, consisting of two parts. In part A, 32 subjects received a single escalating dose; Part B enrolled 32 subjects which received a multiple escalating dose. Dr. Evelyn Darius served as the Study Investigator. After repeat dosing with 400 mg daily, the mean exposure over the dosing interval at steady state (AUC0-24) in Chinese was about 1.7-fold higher than in non-Chinese and at the 600 mg dose-level the corresponding difference was about 1.5-fold. No safety signal was identified in this study and the Sponsor deemed no changes are required in the enrollment of Chinese patients into the ARREST Study. Moreover, having this Chinese PK Study data will not only give us a head start in future licensing discussions with potential Chinese partners for the development of Aramchol in China but also provide important insights for the design of our future pivotal study.

Additional Non-clinical and Clinical Studies Required for Regulatory Submissions:

Toxicology Studies

Since the completion of the Phase IIA study, non-clinical toxicology studies have been conducted to support our ongoing clinical programs and regulatory submissions. These studies were performed in compliance with the EMA’s ICH M3 (R2) guidelines by WIL Research, a global contract research organization, at its facility in Holland. The toxicity program for Aramchol included repeat dose studies of up to six months in rats and up to nine months in dogs by oral administration, the intended route of administration in the clinical trials and beyond. The dose level of 1000 mg/kg/day in rats and 1500 mg/kg/day in dogs, which is the maximal feasible dose in both species showed no-observed-adverse-effect-level, or NOAEL. There were no observations noted in the rat study. The findings in the dog study were limited to changes in plasma lipids, including decreases in total blood cholesterol levels, LDL, HDL and phospholipids, and a slight increase in the size of the adrenal glands, which were considered to be an extension of the primary pharmacology of Aramchol and non-toxic effects, and skin scales from week 13 onwards in all Aramchol-treated groups, with a dose-related incidence. After six months this was not accompanied by any microscopic alteration of the skin and therefore considered not toxicologically relevant. Results from the study show that after nine months the presence of scales in all Aramchol-treated groups was accompanied by minor test item-related microscopic findings in the skin: Hyperkeratosis of the epidermis, correlating to the scales, and keratin plugs in the hair follicles (in males at 750/500 and 1500 mg/kg). After a 12-week treatment-free recovery period, fewer scales were noted and microscopically there was partial recovery. As these findings were minor and no clinical symptoms like scratching were noted, these findings were considered not adverse.

Aramchol was non-mutagenic in vitro in the Ames test and chromosomal aberrations test, each of which is a test to determine whether the subject chemical can cause mutations in the DNA of an organism. In addition, in bone marrow micronucleus test in male rats at a 2000 mg/kg oral dose (the maximum recommended dose in accordance with ICH S2 (R1)), Aramchol was not clastogenic, meaning it did not give rise to or induce disruption or breakages of chromosomes, nor was it aneugenic, meaning it did not cause the number of chromosomes in the nucleus of a cell to not be an exact multiple of the monoploid number of a particular species.

Embryo-fetal development toxicity was assessed in rats and rabbits. No maternal or fetal development toxicity was observed in either species. The NOAEL for maternal and development toxicity was at least 1000 mg/kg in rats and 750 mg/kg in rabbits (the maximum feasible dose in both species).

No maximum tolerated doses were reached in the studies. Over 50-fold safety margin exposure was achieved in dogs but not in rats. However, for rats, at least three of the four ICH M3(R2) safety margin criteria were met, and for dogs all four criteria were met. Blood tests revealed a decrease in total blood cholesterol levels, including LDL, HDL and phospholipids, and there was a slight increase in the size of the adrenal glands of the dogs, which WIL Research assessed as a physiologic compensatory response to the decrease in blood cholesterol levels. WIL Research did not consider the decrease in blood cholesterol levels or the physiologic response of the adrenal glands as a toxic effect, but rather as a pharmacodynamic effect, which is a biochemical and physiological effect of the drug on the body. Based on the above, WIL Research concluded that the overall safety data for Aramchol is sufficient to support the proposed Phase IIB clinical trial.

Our Phase IIB ARREST Study for Aramchol

We believe that Aramchol will demonstrate the effects previously observed in non-clinical and clinical studies on the three key pathologies of NASH: steatosis, inflammation and fibrosis.

We believe that Aramchol has a robust effect on lipid metabolism and fibrosis. The phase IIa study confirmed an effect on steatosis and the ARREST study is planned to repeat this finding in the targeted population. More important, the ARREST Study includes histology based secondary end-points that are regulatory acceptable. Additionally, the ARREST Study should demonstrate the effect of Aramchol on the different components of NASH as well as fibrosis and allow the planning of a pivotal phase.

In addition, we believe that the minimal dose of Aramchol has been identified and hope the ARREST Study will define the maximal effective dose which should allow a pivotal phase with only one dose.

We submitted an IND application to FDA to initiate the ARREST Study, and hope to expand the scope of the IND in the future to conduct pivotal Phase III clinical trials for NASH in the United States. The FDA cleared our IND application, allowing us to conduct the Phase IIB ARREST Study in the United States. In September 2014, the FDA granted Fast Track designation status to Aramchol for the treatment of NASH. Fast Track designation may accelerate the development process and may expedite the review of drugs that show promise in treating serious, life-threatening medical conditions for which no other drug either exists or is as effective.

We are currently conducting our Phase IIB ARREST Study to evaluate the safety and effectiveness of two different doses of Aramchol for the treatment NASH in OD patients. In order to be eligible to participate in our ARREST Study, patients must be affected by NASH, as diagnosed by a biopsy centrally read (steatosis ≥1 + inflammation ≥1 + ballooning ≥1; Total activity NAS score of 4 or more), be overweight or obese as measured by a Body Mass Indexbetween 25 and 40 or waist circumference between 88cm to 200cm for women, and between 102cm to 200cm for men, and who are pre diabetic or type II diabetic. We target this specific population as it is at the greatest risk of developing NASH and its complications. We have recently generated data from animal models that enable us to believe that Aramchol targets all three pathologies of the disease: steatosis, inflammation and fibrosis. Since we have included patients with advanced fibrosis in the ARREST Study, we hope to be able to identify these effects in the ARREST Study patients. Patients are randomized into one of three trial groups taking either one of two different once-daily oral doses of Aramchol or a placebo. The treatment part of the trial is designed to be 12 months in duration and patients completing this phase will be observed for a three month follow-up period. This trial is designed to enroll 240 patients in a randomization ratio of 2:2:1 across approximately 70 clinical sites in the United States, Europe, Latin America, China and Israel. In February 2017, we completed randomization of the ARREST Study with 248 randomized patients.

The primary endpoint of the 12-month double-blind portion of the trial is a statistically significant reduction in liver fat concentration as measured by MRS, which is a surrogate endpoint that is generally accepted by the FDA with respect to Phase I and Phase II NASH studies.

Secondary endpoints of the trial include: (1) fibrosis improvement without worsening of NASH, defined as a decrease in CRN fibrosis by at least 1 stage; Worsening of NASH defined by an increase of Inflammation or Ballooning grades (2) improvement in NASH activity index, as measured by NAS or SAF, without worsening fibrosis; Improvement in NAS as defined by at least two points improvement contributed by more than one parameter; Improvement in SAF as defined by at least two points improvement in the SAF Activity score. Any stage increase in fibrosis is considered fibrosis worsening; (3) NASH resolution without worsening of fibrosis defined as disappearance of ballooning (score = 0) together with disappearance of inflammation or the persistence of mild inflammation (score= 0 or 1). Any stage increase in fibrosis is considered fibrosis worsening.

In communications received in response to our submission of an update to our IND in 2014, the FDA recommended that future clinical studies should be discussed at an end-of-Phase II meeting, which could take place within three months from the date we complete the analysis of the results of our ARREST Study, and at which time the trial results could be considered. The FDA communication further noted that we must discuss with the FDA a methodology for our drug development. In light of the publication of the FDA and AASLD joint workshop guidance, and based on the Phase III trial designs published to date by other companies drugs for NASH, we currently believe that we will likely be approved based on a design that includes a histology based interim after 72 weeks of treatment which is intended to seek marketing approval while the study continues to a clinical end-point (predefined adverse liver-related clinical events, including progression to cirrhosis). The failure to successfully complete any required post-market study could result in FDA withdrawing approval for Aramchol.

Potential Phase III Program for Aramchol

The development work we have completed to date with regard to Aramchol was deemed appropriate for the initiation of a Phase IIB study by the MHRA, BfArM and ANSM, in addition to FDA as noted above. Our ARREST Study design is in accordance with the study design recommended by the MHRA, deemed acceptable by BfArM and deemed satisfactory by ANSM. BfArM and ANSM also confirmed, in minutes of each of their respective scientific advisory meetings, that, if our ARREST Study is successful in reaching its primary endpoint, we may proceed to pivotal randomized, double-blind, placebo-controlled, Phase III trial. We expect the primary endpoints of such trials to be histology endpoint based on NASH resolution and/or fibrosis improvement. Like FDA, as noted above, the MHRA invited us to discuss the next steps in the development of Aramchol after we complete the analysis of the results of our ARREST Study, at which time the data from the study will be considered.

Aramchol for the Treatment of Other Indications

In addition to the ARREST Study, we are exploring other indications for the use of Aramchol.

On December 1, 2015 we announced that our Investigational New Drug (IND) for the ARRIVE Study, a proof-of-concept clinical trial that will evaluate the safety and efficacy of Aramchol in up to 50 patients with HIV-associated lipodystrophy and NAFLD, was allowed by FDA to proceed. The ARRIVE Study is an investigator-initiated study sponsored by the University of California San Diego, where it will be conducted, and led by Professor Rohit Loomba. The Study is designed as a randomized, double-blinded, allocation-concealed, placebo-controlled, proof-of-concept Phase IIA clinical trial, and will evaluate either Aramchol at 600 mg or placebo for 16 weeks in up to 50 patients with HIV-associated lipodystrophy and NAFLD. Pre- and post-treatment MRI-measured liver fat content and total body fat via dual energy x-ray absorptiometry (DEXA) will be compared. The primary end point of successful therapy will be an improvement in hepatic steatosis as measured by MRI. Secondary endpoints will be an improvement in total body fat, metabolic profile, and liver biochemistry. On March 1, 2016, we announced that we have randomized the first patient in the ARRIVE study. We believe that top line results will be available in proximity to the ARREST Study data.

HIV is a major global health issue, with 35.3 million people living with the disease worldwide, 2-3 million of whom are in the United States and Western and Central Europe. While effective combination antiretroviral therapy (cART) has resulted in a major reduction in acquired immunodeficiency syndrome (AIDS)-related mortality overall, liver disease is now the second leading cause of death in patients with HIV, accounting for nearly 7-14% of all deaths in this population. The prevalence of NAFLD is higher in individuals with HIV infection than in the general population. A recently conducted clinical trial at the University of California San Diego by Professor Rohit Loomba, the largest such study to-date, compared age- and sex-matched patients with primary NAFLD, with patients with HIV-associated NAFLD, and found that patients with HIV-associated NAFLD had significantly higher rates of definite steatohepatitis (63% vs. 37%, P = 0.04), and more features of liver injury.

On November 13, 2014, we announced the first administration of Aramchol in a proof-of-concept Phase IIA clinical trial for the treatment of newly formed cholesterol gallstones following bariatric surgery. However, due to poor patient recruitment and higher-priority clinical programs, we decided to terminate the study on October 1, 2015. At the moment, we believe that it is unlikely that we will revive another study in cholesterol gallstones.

We also currently plan to conduct a Phase IIa, double blind Proof of Concept (PoC) Study to evaluate the safety and efficacy of Aramchol 600 mg versus placebo in patients with Heart Failure with preserved Ejection Fraction (HFpEF), and a Phase I-IIa Study, proof of concept study, with a primary objective of evaluating the safety and PK of Aramchol, followed by the assessment of the safety and efficacy based on hepatic fat content as measured by magnetic resonance imaging-estimated proton density fat fraction (MRI-PDFF) in young patients with NAFLD. On September 22, 2016, we announced we entered into an investigator initiated clinical trial agreement with the Regents of the University of California on behalf of its San Diego campus to perform such study. See “Item 4.B. Information on the Company—Business Overview—Strategic Collaborations, Research Arrangements and Other Material Agreements—NAFLD Juvenile Population.” for more information regarding the UCSD Agreement.

Topical Development

We selected to test Steamchol, a synthetic FABAC, a conjugate of stearic acid (C18:0) and colic acid with similar properties of Aramchol, in proof of concept studies through a cosmeceutical route of development. Accordingly, on October 13, 2015, Steamchol received a CAS (Chemical Abstracts Service Registry) name and number to allow its cosmeceutical development.

On January 1, 2016, Steamchol (formulated as topical cream) was successfully tested for safety assessment in 50 human subjects in a trial initially lasting six weeks with two weeks of follow-up, by the Institute for Skin Research in Tel Aviv, Israel. Subsequently, on October 6, 2016, we initiated a proof-of-concept 20-week, double blind, controlled study to evaluate the efficacy and tolerance of Steamchol in subjects with Acne Vulgaris. The study is being conducted at the IRSI Institute (International Research Services Inc.) in Port Chester, New York, US. A total of 68 subjects are participating in the study. Top line results are expected by June 2017.

Based on the results of this proof-of-concept study, we will evaluate and decide whether to also advance Aramchol for topical clinical studies.

Our Competitive Strengths

We believe our competitive strengths include our propriety family of molecules (FABACs) and our skilled, experienced, professional personnel, which enables product development in an efficient and cost effective manner.

The competitive strengths of Aramchol – our lead product for NASH.

We recently discovered that Aramchol has a dual mode of action and it targets both steatosis and fibrosis. We previously demonstrated that Aramchol down regulates SCD1 and therefor target steatosis. Using animal models for NASH and fibrosis, we discovered that Aramchol targets also fatty acid oxidation and fibrosis. We have good reasons to believe that Aramchol up regulates glutathione which is well known antioxidants that mediates better oxidation of fatty acid in the mitochondria and cause significant reduction of ROS. This results in reducing liver damage.

Our Strategy

Our strategy is to build a specialized biopharmaceutical company that develops, in a cost-effective manner, novel molecules from clinical stage to Phase III readiness. We seek to create global partnerships with academic institutions and biotechnology or pharmaceutical companies to effectively collaborate in developing a portfolio and ultimately out-license our products. Through this approach, we have successfully advanced Aramchol into various stages of clinical development. Key elements of our strategy include:

We believe that our strategy will increase the likelihood of advancing clinical development and potential commercialization of Aramchol in multiple indications. By activating our pipeline expansion strategy, we believe we could extrapolate additional commercial potential, as well as de-risk our company through reducing our reliance on the success of any one given trial or indication.

Strategic Collaborations, Research Arrangements and other Material Agreements

NAFLD Juvenile Population

On September 22, 2016, we entered into an investigator initiated clinical trial agreement, or the UCSD Agreement, with the Regents of the University of California on behalf of its San Diego campus, or UCSD, to conduct a Phase I/IIA study, or the ARTISAN Study, entitled: “ A Phase I-IIa Study to Assess Safety, Tolerability, Efficacy, and Pharmacokinetics of Aramchol in a NAFLD Juvenile Population” (the “ Protocol ” ). The ARTISAN Study ( AR amchol T rial to I mprove S teatosis in A dolescent N AFLD) will be led by Jeffrey Schwimmer, MD, professor of pediatrics, UC San Diego School of Medicine and Director, Fatty Liver Clinic, Rady Children’s Hospital, San Diego. The performance of the ARTISAN Study is subject to submission of the Protocol to the U.S. FDA and receipt of FDA IND approval. There is no certainty that the FDA IND approval will be obtained. The ARTISAN Study is currently expected to be initiated in the second half of 2017.

Pursuant to the terms of the UCSD Agreement, we shall provide our proprietary drug product candidate Aramchol, without cost, to conduct the study as required pursuant to the Protocol and shall provide funds to conduct the ARTISAN Study over the duration of the study.

Under the UCSD Agreement, UCSD has granted us a non-exclusive, royalty-free license to use any UCSD or joint invention and ARTISAN Study data for our internal research and development purposes. Further, UCSD grants us a time-limited first right to negotiate a commercial, royalty-bearing, exclusive license, to make, use, and sell any patentable UCSD or joint invention conceived and reduced to practice in the performance of the research, for the term of any patent thereon.

All rights, title and interest in ARTISAN Study data shall be the sole and exclusive property of UCSD; however, we shall be entitled to make use of such ARTISAN Study data for legal purpose consistent with the informed consent, including publication and regulatory filings, after the earlier of the publication of the ARTISAN Study data by UCSD or upon the expiration of a period of eighteen (18) months from the completion of the ARTISAN Study. The Protocol and research design of the ARTISAN Study are the property of UCSD.

Either party may terminate the UCSD Agreement (i) upon thirty (30) days prior written notice to the other Party, in its sole discretion; (ii) upon written notice to the other Party, if the terminating Party determines that termination of the ARTISAN Study is necessary for the safety of the ARTISAN Study subjects; or (iii) upon the other party’s material breach if such party fails to cure such breach within thirty days after receiving written notice thereof. Upon receipt of notice of early termination, UCSD will stop screening subjects for and enrolling subjects in the Study and will discuss in good faith a plan to continue monitoring ARTISAN Study subjects as appropriate and determine an orderly winding down of the ARTISAN Study. Upon termination or expiration of the UCSD Agreement, all CRFs outstanding must be completed and copies returned to us together with completed ARTISAN Study Drug inventory and records, and all our confidential information. If the UCSD Agreement is terminated before completion of the ARTISAN Study, the parties shall negotiate in good faith on the phase-out for ARTISAN Study subjects and subsequent treatment of ARTISAN Study subjects.

The UCSD Agreement also includes customary indemnification provisions.

Samil Pharma. Co., Ltd.

On July 28, 2016, we entered into a license agreement, referred to herein as the Samil Agreement, with Samil Pharma. Co., Ltd., or Samil, for the commercialization of Aramchol (with the option to manufacture) in the Republic of Korea, or the Territory.

Under the terms of the Samil Agreement, the Company has granted Samil an exclusive licence, or the Samil License, for fatty liver indications including NASH (the “Field of Use”) in the Republic of Korea (the “Territory”) to such information concerning Aramchol as may be required to support Samil's applications for regulatory approvals (the “Licensed Information”) and the patents for the import, marketing, use, sale, offer for sale, commercialisation and distribution (and, if the option is exercised, manufacture) of Aramchol in tablet form, or any other physical form as may be produced or manufactured by or on behalf of Galmed or by a third party for Galmed and, if the option set out below is exercised, any products within the Field of Use, the development, manufacture or sale of which is based, in whole or in part, on, or involves the use of, the Licensed Information or covered under any patent (the “Product”).

The Samil License shall remain in force with respect to each Product (if the Samil Agreement is not early terminated) until the later of: (i) the date of expiry in the Territory of the last of any patent covering such Product or any formulation, dosing or administration form thereof; and (ii) the date of expiry of a period of 20 years commencing on the date of first commercial sale by Samil or a sublicensee of such Product in the Territory.

Upon the signing of the Samil Agreement, Samil paid the Company a gross upfront fee of approximately $2.1 million. Samil has also agreed to pay additional clinical and regulatory-based milestone payments, which may aggregate to additional $6.0 million, as well as tiered, double-digit royalties payable on sales (lower if sales of a generic equivalent commences in the Territory).

Pursuant to the terms of the Samil Agreement, following the first achievement of US$25 million of net sales in any calendar year following the first commercial sale of the Product in the Territory, Samil shall have the option to request that the Licensed Information include methods for the formulation of Aramchol from its active pharmaceutical ingredient, or API, to allow for the manufacture of Aramchol by Samil; provided, however, that we shall have the option, to widen the definition of the Licensed Information as aforesaid at any time.

We shall be entitled, at our option: (i) to modify the Samil License with respect to any Product so that it is non-exclusive only; or (ii) to terminate the Samil License hereunder, with respect to any Product if: (a) a first purchasing order from Samil for at least one Product shall not have been placed by 6 months following the grant of the Korean Ministry of Food and Drug Safety new drug approval; or (b) commercial sale of such Product having commenced and either (i) there shall be a period of 1 year during which no sales of any Product shall take place, or (ii) within 1 year of such commencement, aggregate sales of Products shall not have reached a reasonable level, as determined by the joint development committee, in each case, except as a result of force majeure or other factors beyond the control of Samil. Further, we shall be entitled to terminate the Samil Agreement if Samil challenges the validity of any of the patents. If any such challenge is unsuccessful, Samil shall (in addition to our right to terminate) pay us liquidated damages in the amounts of US $8,000,000. Either party may terminate the Samil Agreement (i) upon the other party’s material breach if such party fails to cure such breach within 30 days, or, in the case of failure by Samil to pay any amount due from Samil to us pursuant to or in connection with the Samil Agreement 14 days after receiving written notice thereof, or (ii) upon customary events such as the granting of a winding-up order if such order or act is not cancelled within 60 days.

In the event that we do not achieve the primary endpoint as defined in the study protocol (the “Successful Completion”) of the ARREST Study, we shall as soon as practicable notify Samil of the non-achievement of such Successful Completion, and within 60 days thereof, notify Samil in writing either: (i) that we have decided not to develop the Licensed Information further for the Field of Use (“Cessation Notice”), or (ii) that we intend to continue with such development notwithstanding the non-achievement of such Successful Completion (“Licensor Continuation Notice”). Also, in the event that we do not achieve the Successful Completion of the potential Phase III Study, we shall, as soon as practicable, notify Samil accordingly (“Notice of Non-Success”). Samil shall thereafter have the option, by notice in writing served to us within 45 days of Samil's receipt of either a Cessation Notice, a Licensor Continuation Notice or a Notice of Non-Success, as applicable, to indicate its intention either: (i) to terminate the Samil License, or (ii) to continue research and development of the Licensed Information in the Field of Use in the Territory. In the event Samil shall serve a Licensee Continuation Notice following the service of a Cessation Notice or a Notice of Non-Success, any such continuation by Samil shall be subject to the entry by Samil into a written agreement with us as to the terms and conditions which would govern such continued research and development, which would be carried out according to Samil's own development plan and at its sole expense. In the event Samil serves a Licensee Continuation Notice following the service of a Licensor Continuation Notice (“Agreed Continuation”), the Samil Agreement shall continue in accordance with its terms.

Additionally, in the event of an Agreed Continuation following non-achievement of Successful Completion of the ARREST Study, Samil shall, for a period of 90 days following the date of written notification to it by us of such Successful Completion or following the date of Agreed Continuation following non-achievement of Successful Completion, have the option to require that the Territory be extended to include Vietnam, or the Extension Option. In the event that Samil exercises its Extension Option, the parties shall conduct negotiations in good faith for up to 30 days thereafter in order to agree on milestone payments which would replace those set out in the Samil Agreement. In the event that agreement is not reached in such regard within such period, the Extension Option shall terminate.

Microbiome

On June 30, 2016, we entered into a research and option agreement, referred to herein as the Yeda Agreement, with Yeda Research and Development Co. Ltd, or Yeda, the commercial arm of the Weizmann Institute of Science, to assess the effects of our proprietary molecule, Aramchol, on the human gut microbiome for the treatment of fatty liver disease (the “Research”). The Research is to be performed in collaboration with Prof. Eran Segal and Dr. Eran Elinav from the Weizmann Institute of Science (together, the “ Scientists”).

Under the terms of the Yeda Agreement, at any time until the expiration of a period of 120 days from the our receipt of the final Research report, or the Notification Period, we have the right to notify Yeda that we wish to enter into exclusive negotiations with Yeda to complete a license agreement to commercialize (i) a diagnostic and/or prognostic tool for Aramchol and/or (ii) a diagnostic and/or prognostic tool in the field of liver disease (the “Option”). The negotiation period will not exceed 120 days, or the Negotiation Period.

All data generated in the course of the performance of the Research that relates to the effects of Aramchol on the microbiome, or the Data, shall be our property. Yeda, Weitzman Institute of Science and the Scientists shall have the right to further research and analyze the Data, and we grant to Yeda a fully-paid up, irrevocable, perpetual, non-exclusive license to make use of the Data for such purpose. Results in respect of such research and analysis in and as relating to a diagnostic and/or prognostic tool in the field of fatty liver disease and cholestatic diseases as well as any tool identifying responders/non-responders to Aramchol (“Additional Results”), shall be subject to the Option. In connection to the Additional Results, the Option shall be in force until the later of (i) the expiry of the Notification Period; and (if applicable): (ii) the expiry of the Negotiation Period (the “Additional Result Period”); provided that, if an Additional Result shall be disclosed by the Scientists to Yeda at any time prior to the expiry of the Additional Result Period the corresponding terms of the Option (including the provision for a full 120 day negotiation period and as relating to termination) shall apply.

Additionally, subject to the Option, all results discovered in the course of, or arising from, the performance of the Research, excluding the Data (except to the extent covered or claimed in any of our patents or patent applications in effect or existence as June 30, 2016) (the “Research Results”) and all patent applications or applications for certificates of invention covering the Research Results or which may be granted thereon, including inventive discovery resulting from the Data, shall be the property of Yeda.

The Yeda Agreement shall terminate upon the occurrence of the earlier of the following: (i) the date of expiry of the Notification Period, or earlier if the date we notify Yeda that we do not wish to receive a License; (ii) if a notice has been given by us to Yeda, then upon the earlier of: (a) the date of execution of a License Agreement; (b) 12 months after the date of expiry of the Negotiation Period, in the event that the parties fail to agree upon and execute a License Agreement. Either party may terminate the Yeda Agreement (i) upon the other party’s breach if such party fails to cure such breach within 45 days after receiving written notice thereof, or (ii) upon customary events such as insolvency or bankruptcy if such order or act is not cancelled within 60 days.

We shall be entitled to effect publication of the Data at our discretion. Any publications that Yeda or the Scientists shall wish to make relating to the Research Results shall be coordinated in advance with us.

To date, we decided to postpone the initiation of the microbiome Research as a standalone research. One of the options we are currently considering is to combine this short one month study as an exploratory endpoint into one of our planned clinical studies.

Vitamin D

On May 3, 2016, we signed an investigator initiated clinical trial agreement, referred to herein as the MS Agreement, with the Icahn School of Medicine at Mount Sinai, or Mount Sinai, to conduct a Phase IIA Study entitled: “A Placebo-controlled Single-blinded Study of Aramchol with Supplemental Vitamin D in Patients with Vitamin D Deficiency and Nonalcoholic Fatty Liver Disease (NAFLD) and Fibrosis”, or the Vitamin D Study.

Pursuant to the terms of the MS Agreement, we shall provide our proprietary drug product candidate Aramchol and shall provide funds to conduct the Vitamin D Study over the duration of the Vitamin D Study. Under the MS Agreement, Mount Sinai grants us a worldwide, perpetual, irrevocable, fully paid up, royalty-free, non-exclusive, non-sublicensable (except to affiliates) license to use any intellectual property generated or first conceived and reduced to practice in performance of the Vitamin D Study using Aramchol during the term of the MS Agreement, whether jointly or solely by employees, agents, and/or independent contractors of Mount Sinai (the “Invention”), for our internal research and development purposes, excluding patent applications (and any patents resulting therefrom) claiming Inventions that we have not requested that Mount Sinai defend on our behalf. In addition, Mount Sinai further grants us a worldwide, perpetual, irrevocable, fully paid up, royalty-free, non-exclusive, non-sublicensable (except to affiliates) license to make, use, sell, offer for sale and import any Inventions that are new formulations or improvements or derivatives of Aramchol, provided that such license shall be subject to minimum licensing terms, including provisions concerning use of name, indemnification, insurance, patent infringement and limited warranty. Further, in consideration for the payment for intellectual property expenses as details above, Mount Sinai grants us an exclusive option to negotiate a fee, milestone, and/or royalty bearing an exclusive license to practice Mount Sinai’s rights in Inventions, including the right to make, use, sell, offer for sale and import any such Inventions claimed or otherwise included therein, with respect to patent applications filed at our request. If the parties fail to execute such license agreement within eight months (extendable upon mutual agreement of the parties) after our provision of notice of exercise of the option, or if we fail to make payment for intellectual property expenses as provided for therein, then Mount Sinai may license such intellectual property to any party upon terms that Mount Sinai deems appropriate , without any further obligation to us.

All data and results from the Vitamin D Study, or the Study Data, shall be the property of Mount Sinai; however, we shall be entitled to make use of such Study Data for any legal purpose after the earlier of the publication of the Study Data by Mount Sinai or twelve months after disclosure of the Study Data by Mount Sinai; provided, however, that in the event any Study Data materially contributes to any regulatory approval of any of our products combined with Supplemental Vitamin D3, we agree to negotiate a reasonable compensation appropriate for Mount Sinai's contribution, such amount not to exceed two hundred and fifty thousand U.S. Dollars ($250,000).

Either party may terminate the MS Agreement (i) upon the other party’s breach if such party fails to cure such breach within thirty days after receiving written notice thereof, or (ii) if the authorization and approval to perform the Vitamin D Study in the United States is withdrawn by the FDA or, if the emergence of any adverse reaction or side effect with the drug administered or the device employed in the Vitamin D Study is of such magnitude or incidence in the opinion of either the Company or Mount Sinai to support termination. We may terminate the MS Agreement for convenience upon thirty days’ prior written notice. Further, either party may terminate the MS Agreement upon customary events such as insolvency or bankruptcy. Upon any termination, (i) Mount Sinai will stop screening and enrolling subjects and will reasonably cooperate with us to continue monitoring Vitamin D Study subjects and shall reasonably cooperate with us to provide for an orderly winding down of the services provided under the MS Agreement, and (ii) all case report forms outstanding must be completed and returned to us together with completed product inventory and records.

We shall indemnify Mount Sinai from and against all liabilities Mount Sinai may suffer to the extent directly arising from (i) our negligence or misconduct in the manufacture of any study drugs or devices provided by us to Mount Sinai for use in the Vitamin D Study; (ii) the exercise of the license rights granted to us, subject to customary exclusions.

Recently published data from other short term fibrosis clinical studies and certain internal drug related studies we performed led us to reconsider the design of the Vitamin D Study. Consequently, we decided to put the initiation of this Vitamin D Study on hold until we have further histological results, which will be available when the ARREST Study data is published.

OWL

On July 8, 2015, we entered into a Research, Option and License Agreement, or the OWL License Agreement, with OWL, for the development of a non-invasive, blood-based complimentary diagnostic tool, which we believe could increase the likelihood of success of our Phase III trials and facilitate the market adoption of Aramchol. Pursuant to the terms of the OWL License Agreement, we have partially funded the research and development of the diagnostic tool in the amount of Euro 437,000. Subject to development under the OWL License Agreement, we have an option to exclusively license from OWL a complimentary diagnostic tool for NASH using Aramchol, or the OWL License Agreement Option, in consideration for the payment of a 10% royalty to OWL on annual net sales of the complimentary diagnostic product, exercisable by written notice to OWL at any time during the period commencing on July 8, 2015 and ending on the earlier of (I) December 31, 2016; or (II) the completion of the ARREST Study (the “Option Period”). In addition, if OWL develops any other complimentary diagnostic tool for NASH not using Aramchol, it will pay us a royalty from revenues. Concurrently with the OWL License Agreement, we have entered into a Share Purchase Agreement, or the OWL SPA, pursuant to which we undertook to invest Euro 175,000 in OWL, subject to certain specified milestones, in exchange for the issuance by OWL of such number of common shares that result from dividing our investment amount by the price per share (the “Investment”). In addition, under the OWL SPA, OWL has granted us an option which will allow us to invest up to €1,000,000 (the “First Option”) at the higher of (i) the OWL company valuation in an equity financing (or series of related financings) of at least €1,000,000 that takes place at the same time as the exercise of the First Option; or (ii) a 15% premium to OWL's valuation in the most recent equity investments of at least €1,000,000 (the “Baseline Valuation”). The First Option will expire at the earlier of (i) an investment by a third party in OWL in excess of €1,000,000, or (ii) the completion of the ARREST Study in our reasonable opinion. Furthermore, we have the option to purchase additional shares up to 19.9% of OWL (the “Second Option”) at the higher of (x) the OWL company valuation in an equity financing (or series of related financings) of at least €2,500,000 that takes place at the same time as the exercise of the Second Option; (y) at a 15% premium to OWL's valuation in the most recent equity investment of at least €2,500,000; or (z) the Baseline Valuation. The Second Option will expire at the earlier of (A) the completion of a third party investment in OWL in excess of €2,500,000, or (B) one year following the successful completion of the ARREST Study in our reasonable opinion. Moreover, pursuant to the OWL SPA, in the event OWL issues new common shares or securities convertible into common shares, except in the event of customary curve outs (the “New Securities”), we have an option to purchase up to our pro-rata share of the New Securities for the price and on the same terms as the most senior class of participating shareholders, upon our notification to OWL within 21 days of OWL's notification of their intention to issue New Securities (the “Preemptive Right”). This Preemptive Right shall survive termination of the OWL SPA, provided that either the Investment or the exercise of the First option or the Second Option has taken place. On December 31, 2016, the Option Period expired and the parties are actively negotiating an extension to the Option Period.

Upon exercise of the OWL License Agreement Option, we will own all rights, title and interest in and to (i) the complimentary diagnostic tool for NASH using Aramchol, excluding serum and plasma markers developed by OWL using proprietary methods and any of the OWL patents, OWL's know-how, and any other results of whatsoever nature, which are discovered, developed or invented in the course of, or directly arising from, the performance of the Research, excluding our technology (“Research Results”) which is owned by OWL; (ii) the complimentary diagnostic tool for NASH using Aramchol intellectual property; (iii) all results and intellectual property pertaining to (a) our technology, (b) markers or other diagnostics for use in connection with liver diseases and/or cholesterol gallstones and/or any other indications utilizing Aramchol and/or any other synthetic fatty-acid/bile conjugates or FABACs owned by us, (c) metabolomics markers predicting therapeutics or safety response of Aramchol; or (iv) any additional markers improving NASH patient selection for treatment with Aramchol that are generated, discovered, reduced to practice and/or arising in the course of and/or from the performance of any research, services and/or development activities by or on behalf of or for us (including by OWL hereunder), excluding research results, and including any regulatory filing or approval (if any) filed or obtained by us or any of our affiliates in respect of the OWLiverGAL kit and any other product, kit, device, material, process, method, activities or service that incorporates, uses, or is reliant upon the licensed technology (the “Licensed Technology Product”), and all communications with regulatory authorities, and any data, information or document covered by data protection or data exclusivity, production processes, standard operating procedures, subcontractors’ information and other technical information required for the sale and/or commercialization of the Licensed Technology Products, test protocols and final reports of any testing or studies with respect to the Licensed Technology Products.

Either party may terminate the OWL License Agreement (i) upon the other party’s breach if such party fails to cure such breach within 60 days after receiving written notice thereof; or (ii) upon customary events such as the granting of a winding up order or upon the appointment of a temporary or permanent liquidator or receiver if such order or act is not cancelled within 60 days. We may terminate the OWL License Agreement for any reason upon 30 days’ prior written notice. Further, OWL may terminate the OWL License Agreement upon 30 days' prior written notice, in the event that within 18 months of receipt of the required regulatory approval to market and sell the first Licensed Technology Product in the U.S, there has not been a first commercial sale, unless such failure or delay is caused by (i) force majeure; or (ii) the requirements of a regulatory or other governmental authority, any contract manufacturer, or due to any market shortage; or (iii) a significant technological and/or scientific barrier.

University of California, San Diego

In February 2015, we entered into an Investigator Initiated Trial Agreement with the University of California, San Diego to conduct a Phase IIA Study for the treatment of HIV-associated with Lipodystrophy and NAFLD, or the ARRIVE Study. The ARRIVE Study principal investigator is Dr. Rohit Loomba, a member of our scientific advisory board. The ARRIVE Study is a randomized, double-blinded, allocation-concealed, placebo-controlled, proof-of-concept Phase IIA clinical trial. The study will evaluate up to 50 patients with HIV-associated lipodystrophy and NAFLD, with either Aramchol at 600 mg or placebo for 16 weeks. Pre- and post-treatment MRI-measured liver fat content and total body fat via DEXA will be compared. The primary end point of successful therapy will be an improvement in hepatic steatosis as measured by MRI. Secondary endpoints will include an improvement in total body fat, metabolic profile, and liver biochemistry. On December 1, 2015, we announced that the FDA has cleared our IND application for the ARRIVE Study. Top line results are expected in proximity to the ARREST Study data.

Perrigo API Ltd.

On January 28, 2015, the Company entered into a Manufacturing Services Agreement, or the Perrigo Agreement, with Perrigo API Ltd., or Perrigo, a subsidiary of Perrigo Company plc, for, among other things, the large-scale production of Aramchol API and the scale-up and manufacturing process optimization for large-scale production of the Aramchol API. Pursuant to the Perrigo Agreement, Perrigo will provide manufacturing process, optimization services for large-scale production of the Aramchol API, manufacture the Aramchol API pursuant to cGMPs and perform additional development services regarding scale-up and manufacturing optimization for the Aramchol API. In consideration for the services to be provided by Perrigo, the Company agreed to pay in accordance with the Perrigo Agreement a maximum aggregate amount of approximately $3.6 million U.S. dollars to Perrigo. The Perrigo Agreement also provides Perrigo, under certain circumstances, with the option to manufacture commercial supplies of the Aramchol API in the future. To date, Perrigo has manufactured 3 pilot batches of approximately 70 kg of Aramchol API. However, while the material obtained was of appropriate quality and produced under GMP, it resulted in higher manufacturing costs than originally anticipated. Therefore, additional research and development work pertaining to the scale-up and optimization of the process is currently being done by two other CRO's under cGMP and cGLP, in order, inter alia, to simplify, increase yields and improve the volume capacity of the manufacturing process in attempt to achieve the target price. Based on the results of the additional research and development work, we will decide how to progress with the future manufacture of Aramchol API.

Itamar Medical Ltd.

On September 29, 2014, we purchased 60 EndoPAT™ devices and accessories from, and entered into a collaboration with, Itamar to include an assessment of endothelial, or arterial, function in our ARREST Study. The purchase price for the EndoPAT™ devices and accessories was approximately $750,000.

Aventis Pharma Deutschland GmbH

In September 2002, we entered into an agreement, which we refer to as the Aventis Agreement, with Aventis, which merged with and into Sanofi S.A., in connection with the settlement of court proceedings regarding an invention covered by Israeli patent application 123998 and PCT/IL99/00173. The invention relates to certain FABACs, pharmaceutical compositions containing FABACs and the use of FABACs for dissolving cholesterol gallstones in bile and preventing the formation thereof, as well as for the prevention and reduction of atherosclerosis, or the hardening of the arteries. Such court proceedings resulted from a claim filed by us and Prof. Tuvia Gilat, our founder, in the Tel Aviv District Court seeking a declaratory judgment that Prof. Gilat was the sole inventor of the invention and the owner of all rights in and to the invention and the patent application with respect thereto, and that neither Aventis nor anyone on its behalf has any rights in or to the invention or such patent application. We filed the claim with Prof. Gilat based on assertions by Aventis that it had certain rights to the invention as a result of the participation of one of its employees in the discovery of the same. Under the Aventis Agreement, Aventis agreed that we had the exclusive worldwide right to commercialize the invention and we agreed to pay Aventis a royalty of 10% in respect of all income that we or our affiliates may receive from the commercialization of such invention for the prevention and treatment of cholesterol gallstones (less certain standard deductions, including taxes, credits, allowances, rebates, freight and insurance costs), for as long as there is a valid patent or pending patent application covering such invention. Once all our valid patents covering the invention expire, which will occur in 2018, and provided that one of Aventis’ other patents that covers an aspect of the invention is still valid and has received marketing approval prior to the expiration of all our patents covering the invention, the royalty will be reduced to 5%.

The Aventis Agreement does not contain any diligence obligations that require us to exert any special efforts to develop a product for the prevention and treatment of cholesterol gallstones, nor are we contractually required to meet any milestones in respect of the development or commercialization of the invention. We have not yet paid, nor do we currently owe, any amounts to Aventis under the Aventis Agreement. Additionally, after experiencing poor patient recruitment and due to higher-priority clinical programs, at this point in time we have decided not to pursue the indications of cholesterol gallstones and we believe that it is unlikely that we will revive another study in cholesterol gallstones.

Unipharm

On October 7, 2000, in connection with a certain share subscription agreement, we sent a letter to Unipharm Ltd., or Unipharm, pursuant to which we agreed to negotiate the grant of an exclusive license to Unipharm with respect to the use of patents within our first patent family covering the composition of matter of Aramchol within Israel on to-be-agreed upon terms and conditions. The letter stated that, if granted, such license would at all times be subject to our best interests, as determined in our sole discretion, and all approvals and proceedings required by agreement or by law. As of the date hereof, no such definitive agreement has been executed with regard to this matter and at this stage we have no intention to pursue such an agreement. The letter is silent as to term, termination and whether or not it is binding.

Competition

The pharmaceutical industry is characterized by rapidly evolving technology, intense competition and a highly risky, costly and lengthy research and development process. Adequate protection of intellectual property, successful product development, adequate funding and retention of skilled, experienced and professional personnel are among the many factors critical to success in the pharmaceutical industry.

Other companies, including, Intercept Pharmaceuticals, Inc. Gilead Sciences, Inc., and Genfit S.A., have molecules currently in Phase III clinical development; Allergan (through its acquisition of Tobira Therapeutics Inc.), Shire, and Novartis (through the acquisition of Conatus Pharmaceuticals Inc.) have molecules in Phase IIB clinical development for the treatment of NASH and the fibrosis associated therewith. There are a host of other potential competitors in earlier stages of development relative to us for the treatment of NASH including, but not limited to, Galectin Therapeutics Inc., AstraZeneca, Bristol-Myers Squibb, and Novartis.

We believe that Aramchol offers important potential advantages over other drugs in development that could enable Aramchol, if approved for these indications, to capture meaningful market share. We believe that Aramchol’s ability (as observed in our non-clinical and clinical studies to date) to reduce liver fat content without observable adverse side effects, which we believe may prove to have an anti-fibrotic effects, as well as a direct effect on fibrosis (via collagen production from human stellate cells) as shown in our non-clinical studies, and convenient once-daily oral administration, position Aramchol well against the potential competition in the NASH market and make it a potentially valuable drug for the treatment of liver diseases.

Notwithstanding the foregoing, see “Item 3. Key Information—Risk Factors—Risks Related to Our Business, Industry and Regulatory Requirements—Our market is subject to intense competition. If we are unable to compete effectively, Aramchol or any other product candidate that we develop may be rendered noncompetitive or obsolete.”

Intellectual Property and Patent Strategy

The proprietary nature of, and protection for, our product candidates and our discovery programs for new indications, processes and know-how are important to our business. We own patent rights to Aramchol in various jurisdictions worldwide, including within and outside of Israel. We have sought patent protection in the United States and internationally for Aramchol and our discovery programs, and any other inventions to which we have rights, where available and when appropriate. The term of U.S. Patent No. 7,501,403, covering the use of Aramchol for the treatment of fatty liver, has been extended due to patent term adjustments of 567 days, resulting in an effective expiration date of November 3, 2023.

Our policy is to pursue, maintain and defend patent rights, whether developed internally or licensed from third parties, and to protect the technology, inventions and improvements that are commercially important to the development of our business. We also rely on trade secrets that may be important to the development of our business.

Patent Portfolio for Aramchol (First-in-Class Synthetic FABAC)

The patent portfolio for Aramchol contains patents and pending patent applications directed to composition of matter, manufacturing methods and methods of use. As of March 16, 2017, the latest practicable date for inclusion in this annual report, we own six U.S. patents, and corresponding foreign patents and pending patent applications, as detailed below. We have also recently filed a PCT patent application for second generation FABAC compounds.

The first patent family discloses and claims FABACs, including Aramchol, as well as methods for preventing or dissolving cholesterol gallstones in bile and reducing or preventing arteriosclerosis using FABACs. This patent family includes three issued U.S. patents and an issued European patent that was validated in Austria, Belgium, Cyprus, Denmark, Finland, France, Germany Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Monaco, Netherlands, Portugal, Romania, Slovenia, Spain, Sweden, Switzerland and the United Kingdom. Corresponding patents have been granted in Australia, Brazil, Canada, China, Czech Republic, Eurasia, Hungary, Indonesia, Israel, Japan, Korea, Mexico, New Zealand, Norway, Poland, Turkey and the Ukraine. If the appropriate maintenance, renewal, annuity or other governmental fees are paid, the non-extended patent term for this patent family is due to expire on March 25, 2019, with the exception of the Israeli patent, which is due to expire on April 8, 2018.

The second patent family discloses and claims additional FABACs with different conjugation moieties, as well as the use of these and the compounds disclosed in the first patent family above, including Aramchol, in the treatment of fatty liver, reduction of serum cholesterol and treatment of hyperglycemia and diabetes. This patent family includes a U.S. patent directed to the treatment of fatty liver a U.S. patent directed to reduction of serum cholesterol by administering additional forms of FABACs, and a U.S. patent (Continuation-in-Part) directed to the treatment of hyperglycemia and diabetes. This patent family also includes two European patents, one patent which was validated in Austria, Belgium, Cyprus, Denmark, Finland, France, Germany Ireland, Italy, Luxembourg, Monaco, Netherlands, Portugal, Spain, Sweden, Switzerland, Turkey and the United Kingdom, and the second patent which was validated in Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Spain, Sweden, Switzerland, Turkey and the United Kingdom. The family also includes patents in Australia, Canada, China, Czech Republic, Eurasia, Indonesia, Japan, Korea, Israel, Mexico, New Zealand, Norway, Poland, Hungary and the Ukraine. A foreign patent application is pending in the Czech Republic. If the appropriate maintenance, renewal, annuity or other governmental fees are paid, the non-extended patent term for this patent family is due to expire on April 15, 2022, with the exception of the Israeli patent, which is due to expire on April 17, 2021. The terms of the U.S. patents in this family have been extended due to patent term adjustments of 567 days for U.S. Patent 7,501,403, which is directed to the treatment of fatty liver, and 24 days for U.S. Patent 8,110,564, which is directed to reduction of serum cholesterol, and 356 days for U.S. Patent 8,975,246, which is directed to disorders associated with altered glucose metabolism or insulin action.

A third patent family that is due to expire on February 1, 2030, discloses the use of FABACs in the treatment, prevention and inhibition of progression of Alzheimer’s Disease, cerebral amyloid angiopathy and other brain diseases characterized by amyloid plaque deposits. This patent family includes an issued European patent that was validated in France, Germany, Switzerland and the United Kingdom.

A fourth patent family discloses and claims second generation FABAC compounds. This patent family includes a pending U.S. patent application as well as foreign patent applications in Australia, Brazil, Canada, China, Europe, Hong Kong, India, Israel, Japan and Korea.

A fifth patent family, including one PCT patent application, discloses and claims compositions comprising second generation FABAC compounds.

A sixth patent family covers the use of Aramchol for the treatment of lipodystrophy. This patent family includes a pending U.S. patent application and applications in Australia, Canada, China, Europe, India, Israel and Japan.

The seventh and an eighth patent families, each including one Israeli patent application and one PCT patent application, and patent families nine to twelve, each including one U.S. Provisional patent application, cover additional therapeutic uses of Aramchol.

Patent families thirteen and fourteen, each including pending U.S. and foreign patent applications, are directed to topical uses of FABAC compounds.

It is possible that the term of the patents issued in the United States within our first patent family, which includes the composition of matter patents, may be extended up to five additional years under the provisions of the Drug Price Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman Act (the longest possible extended patent term being five years from November 3, 20123). Patent term extension or supplementary protection certificates may be available in certain foreign countries upon regulatory approval. Independent of patent term extensions, five years of data exclusivity will be provided for this patent in the United States automatically from the day Aramchol receives regulatory approval, if it is approved, in the United States. The data exclusivity is solely for the indication tested, in this case presumably NASH. If the Company pursues commercialization of Aramchol in other jurisdictions, longer periods of data exclusivity may pertain.

Our commercial success will depend in part on obtaining and maintaining patent protection and trade secret protection of our current and future product candidates and the methods used to develop and manufacture them, as well as successfully defending these patents against third-party challenges. Our ability to stop third parties from making, using, selling, offering to sell or importing our products depends on the extent to which we have rights under valid and enforceable patents or trade secrets that cover these activities. We believe that our patents provide broad and comprehensive coverage for the use of Aramchol for the treatment of certain liver diseases. However, the patent positions of biopharmaceutical companies, such as ourselves, are generally uncertain and involve complex legal and factual questions. Our ability to maintain and solidify our proprietary position for the technology will depend on our success in obtaining effective claims and enforcing those claims once granted. There is no certainty that any of the Company’s pending patent applications will result in the issuance of any patents. The issued patents and those that may be issued in the future, may be challenged, narrowed, circumvented or found to be invalid or unenforceable, which could limit our ability to stop competitors from marketing related products or the length of term of patent protection that we may have for our products. In addition, our competitors may independently develop similar technologies or duplicate any technology developed by us, and the rights granted under any issued or future patents may not provide us with any meaningful competitive advantages against these competitors. Furthermore, because of the extensive time required for development, testing and regulatory review of a potential product, before any of our products can be commercialized, any related patent may expire or remain in force for only a short period following commercialization, thereby reducing any advantage of such patent. For more risks associated with the protection of our licensed intellectual property, see “Item 3. Key Information—Risk Factors—Risks Related to Our Intellectual Property.”

Trade Secrets

In addition to patents, we rely on trade secrets and know-how to develop and maintain our competitive position. Trade secrets and know-how can be difficult to protect. We seek to protect our proprietary processes, in part, by confidentiality agreements and invention assignment agreements with our employees, consultants, scientific advisors, contractors and commercial partners. These agreements are designed to protect our proprietary information. We also seek to preserve the integrity and confidentiality of our data, trade secrets and know-how by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in these individuals, organizations and systems, such agreements or security measures may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors or others.

Seasonality

Our business and operations are generally not affected by seasonal fluctuations or factors.

Raw Materials and Suppliers

We believe that the raw materials that we require to manufacture Aramchol are readily available commodities commonly used in the pharmaceutical industry.

Manufacturing

We do not own or operate manufacturing facilities for the production of our product candidates, nor do we have plans to develop our own manufacturing operations in the foreseeable future. We currently rely on third-party contract manufacturers for all of our required raw materials, API and finished product for our non-clinical research and clinical trials, including our ARREST Study. We do not have long term agreements with any of these third parties. We also do not have any current contractual relationships for the manufacture of commercial supplies of our product candidate if it is approved; however, the Perrigo Agreement (as described herein) provides Perrigo with the option to negotiate an exclusive commercial contract for the manufacture of commercial supplies of the Aramchol API in the future for a minimum term of five years. If our product candidate or future product candidates are approved by any regulatory agency, we intend to enter into agreements with a third-party contract manufacturer or collaboration partner and one or more back-up manufacturers for the commercial production of those products. Development and commercial quantities of any products that we develop will need to be manufactured in facilities, and by processes, that comply with the requirements of the FDA and the regulatory agencies of other jurisdictions in which we are seeking approval. We currently employ internal resources to manage our manufacturing contractors. The relevant manufacturers of our drug products for our current non-clinical and clinical trials have advised us that they are compliant with both cGMP and current Good Laboratory Practices, or cGLP.

There can be no assurance that our product candidate, if approved, can be manufactured in sufficient commercial quantities, in compliance with regulatory requirements and at an acceptable cost. We and our contract manufacturers are, and will be, subject to extensive governmental regulation in connection with the manufacture of any pharmaceutical products or medical devices. We and our contract manufacturers must ensure that all of the processes, methods and equipment are compliant with cGMP and cGLP for drugs on an ongoing basis, as mandated by the FDA and other regulatory authorities, and conduct extensive audits of vendors, contract laboratories and suppliers.

On January 28, 2015, we entered into the Perrigo Agreement with Perrigo, a subsidiary of Perrigo Company plc, for, among other things, the large-scale production of Aramchol’s API and the scale-up and manufacturing process optimization for large-scale production of the Aramchol API. To date, Perrigo has manufactured three pilot batches of Aramchol API. The material obtained is of appropriate quality and was produced under GLP, but has resulted in significant high manufacturing costs. Therefore, additional research and development work pertaining to the scale-up and optimization of the process is currently being done by two other CRO's under cGMP and cGLP, in order, inter alia, to simplify, increase yields and improve the volume capacity of the manufacturing process. Based on the results of the additional research and development work, we will decide how to proceed with the future manufacture of Aramchol API. See “Item 4.B. Information on the Company—Business Overview—Strategic Collaborations, Research Arrangements and Other Material Agreements—Perrigo API Ltd.” for more information regarding the Perrigo Agreement.

Contract Research Organizations

We outsource certain clinical trial activities to CROs. Our clinical CROs comply with guidelines from the International Conference on Harmonisation of Technical Requirements for Registration of Pharmaceuticals for Human Use, which attempt to harmonize the FDA, the EMA, and the Pharmaceuticals and Medical Devices Agency of Japan regulations and guidelines. We create and implement the drug development plans and manage the CROs according to the specific requirements of the drug candidate under development. To the extent clinical research is overseen by the CROs (or directly by us), compliance with certain federal regulations, including but not limited to 21 C.F.R. parts 50, 54, 56, 58 and 312, which pertain to, among other things, IRBs, informed consent, financial conflicts of interest by investigators, correct administration of treatment, follow up of adverse events, good laboratory practices and submitting IND applications, may be required.

Marketing, Sales and Commercialization

Given our stage of development, we do not have any internal sales, marketing or distribution infrastructure or capabilities. In the event we receive regulatory approval for Aramchol, we intend, where appropriate, to pursue commercialization relationships, including strategic alliances and licensing, with pharmaceutical companies and other strategic partners, which are equipped to market and/or sell our products, if any, through their well-developed sales, marketing and distribution organizations in order to gain access to global markets. In addition, we may out-license some or all of our worldwide patent rights to more than one party to achieve the fullest development, marketing and distribution of any products we develop. Over the longer term, we may consider ultimately building an internal marketing, sales and commercial infrastructure. See “Item 4.B. Information on the Company—Business Overview—Strategic Collaborations, Research Arrangements and other Material Agreements—Samil Pharm Co.” for information regarding the license Agreement we entered with Samil for the commercialization of Aramchol (with an option to manufacture) for the treatment of fatty liver indications including NASH, in the Republic of Korea.

Environmental Matters

We, our agents and our service providers, including our manufacturers, may be subject to various environmental, health and safety laws and regulations, including those governing air emissions, water and wastewater discharges, noise emissions, the use, management and disposal of hazardous, radioactive and biological materials and wastes and the cleanup of contaminated sites. We believe that our business, operations and facilities, including, to our knowledge, those of our agents and service providers, are being operated in compliance in all material respects with applicable environmental and health and safety laws and regulations. All information with respect to any chemical substance is filed and stored as a Material Safety Data Sheet, as required by applicable environmental regulations. Based on information currently available to us, we do not expect environmental costs and contingencies to have a material adverse effect on us. However, significant expenditures could be required in the future if we, our agents or our service providers are required to comply with new or more stringent environmental or health and safety laws, regulations or requirements.

Government Regulation and Product Approval

Governmental authorities in the United States and in other countries extensively regulate, among other things, the research, development, testing, manufacture, labeling, packaging, promotion, storage, advertising, distribution, marketing and export and import of products such as those we are developing. Our product candidates must be approved by the FDA through the NDA process before they may be legally marketed in the United States and by the Committee on Human Medicinal Products, or CHMP, via the EMA and European Commission through the MAA process before they may be legally marketed in Europe. Our product candidate and future product candidates will be subject to similar requirements in other countries prior to marketing in those countries. The process of obtaining regulatory approvals and the subsequent compliance with applicable federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources.

We are conducting a global development program for Aramchol for the treatment of NASH in OD patients, and we may make our submissions for regulatory approval in parallel; initially in Europe and in the United States. Typically, approval time in the United States with the FDA for an NDA is faster than that within Europe with the EMA and the European Commission for an MMA, especially when the novelty of the submission is considered. First in class, high medical need and rare disease drugs can experience faster review. Nevertheless, marketing and pricing approval presents a further delay in many countries that should be considered in addition to the regulatory approvals noted above.

United States Government Regulation

NDA Approval Processes

In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or the FDCA, and implementing regulations and guidance documents. Failure to comply with the applicable U.S. requirements at any time during the product development process or approval process, or after approval, may subject an applicant to administrative or judicial sanctions, any of which could have a material adverse effect on us. These sanctions could include refusal to approve pending applications, withdrawal of an approval, imposition of a clinical hold, issuance of warning letters, product seizures, total or partial suspension of production or distribution, injunctions, fines, disgorgement, and civil or criminal penalties.

The process required by the FDA before a drug may be marketed in the United States generally involves the following:

The testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that any approvals for our product candidates will be granted on a timely basis, if at all.

Once a product candidate is identified for development, it enters the non-clinical or non-clinical testing stage. Non-clinical tests include laboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies. An IND sponsor must submit the results of the non-clinical tests, together with manufacturing information and analytical data, to the FDA as part of the IND. Some non-clinical testing may continue after the IND is submitted. In addition to including the results of the non-clinical studies, the IND will also include a clinical trial protocol detailing, among other things, the objectives of the clinical trial, the parameters to be used in monitoring safety and, depending on the phase of the study, the effectiveness criteria to be evaluated. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, places the IND on clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can begin. A clinical hold may occur at any time during the life of an IND, due to safety concerns or non-compliance, and may affect one or more specific studies or all studies conducted under the IND.

All clinical trials must be conducted under the supervision of one or more qualified investigators in accordance with the FDA’s GCP regulations. These regulations include the requirement that all research subjects provide informed consent. Further, an IRB must review and approve the plan for any clinical trial, including the informed consent document, before it commences at any institution. An IRB considers, among other things, whether the risks to individuals participating in the trials are minimized and are reasonable in relation to anticipated benefits. The IRB also approves the investigator brochure and other information about the trial distributed by the sponsor and the consent form that must be provided to each trial subject or his or her legal representative and must monitor the study until completed. All clinical trials must be conducted under protocols detailing the objectives of the trial, dosing procedures, research subject inclusion and exclusion criteria and the safety and effectiveness criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND, and progress reports detailing the status of the clinical trials must be submitted to the FDA annually. Sponsors must also report within set timeframes to FDA serious and unexpected adverse reactions, any clinically important increase in the rate of a serious suspected adverse reaction over that listed in the protocol or investigation brochure, or any findings from other studies or animal or in-vitro testing that suggest a significant risk in humans exposed to the drug. Sponsors must also report to FDA certain amendments to the protocol and other essential information concerning the IND that does not fall within the scope of other required reports.

Human clinical trials are typically conducted in three sequential phases that may overlap or be combined:

Human clinical trials are inherently uncertain and Phase I, Phase II and Phase III testing may not be successfully completed. The FDA or the sponsor may suspend a clinical trial at any time for a variety of reasons, including a finding that the research subjects or patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the drug has been associated with unexpected serious harm to patients.

During the development of a new drug, sponsors are given opportunities to meet with the FDA at certain points. These points are typically prior to the submission of an IND, at the end of Phase II and before an NDA is submitted. Meetings at other times may also be requested. These meetings can provide an opportunity for the sponsor to share information about the data gathered to date and for the FDA to provide advice on the next phase of development. Sponsors typically use the meeting at the end of Phase II to discuss their Phase II clinical results and present their plans for the pivotal Phase III clinical trial that they believe will support the approval of the NDA. If a Phase II clinical trial is the subject of discussion at the end of Phase II meeting with the FDA, a sponsor may be able to request a Special Protocol Assessment, or SPA, the purpose of which is to reach agreement with the FDA on the Phase III clinical trial protocol design and size that will form the primary basis for the demonstration of effectiveness in a marketing application.

According to published guidance on the SPA process, a sponsor which meets the prerequisites may make a specific request for an SPA and provide information regarding the design and size of the proposed clinical trial. The FDA has a goal of completing the majority of SPA reviews within 45 days, although certain circumstances may result in a delay in FDA’s decision. An SPA request must be made before the proposed trial begins, and all open issues must be resolved before the trial begins. If a written agreement is reached, it will be documented and made part of the record. The agreement will be binding on the FDA and may not be changed by the sponsor or the FDA after the trial begins except with the written agreement of the sponsor and the FDA or if the FDA determines that a substantial scientific issue essential to determining the safety or efficacy of the drug was identified after the testing began. There is no indication that we will be able to meet the requirements necessary for an SPA.

Concurrent with clinical trials, sponsors usually complete any remaining animal safety studies and also develop additional information about the chemistry and physical characteristics of the drug and finalize a process for manufacturing commercial quantities of the product in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the drug and the manufacturer must develop methods for testing the quality, purity and potency of the drug. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the drug candidate does not undergo unacceptable deterioration over its proposed shelf-life.

The results of product development, non-clinical studies and clinical trials, along with descriptions of the manufacturing process, analytical tests and other control mechanisms, proposed labeling and other relevant information are submitted to the FDA as part of an NDA requesting approval to market the product for one or more specified indications. The submission of an NDA is subject to the payment of an application fee, but a waiver of such fees may be obtained under specified circumstances. We will seek a waiver of these fees as a small business submitting its first human drug application to the FDA. If the waiver is granted it would not extend to establishment or product fees. The FDA reviews all NDAs submitted to ensure that they are sufficiently complete for substantive review before it accepts them for filing. It may request additional information rather than accept an NDA for filing. In this event, the NDA must be resubmitted with the additional information. The resubmitted application also is subject to review before the FDA accepts it for filing.

Once the submission is accepted for filing, the FDA begins an in-depth review. The FDA may refuse to approve an NDA if the applicable statutory and regulatory criteria are not satisfied or may require additional clinical or other data. Even if such data are submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. The FDA reviews an NDA to determine, among other things, whether a product is safe and effective for its intended use and whether its manufacturing is cGMP-compliant. The FDA may refer the NDA to an advisory committee for review and recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations. Before approving an NDA, the FDA will typically inspect the facility or facilities where the product is manufactured and tested. The FDA will also inspect selected clinical sites that participated in the clinical studies and may inspect the testing facilities that performed the GLP toxicology studies cited in the NDA.

Expedited Review and Approval

NDAs receive either standard or expedited review. A drug representing a significant improvement in treatment, prevention or diagnosis of disease may receive expedited review. The FDA has various specific programs, including Fast Track, Breakthrough Therapy, Priority Review, and Accelerated Approval, which, in different ways, are each intended to expedite the process for reviewing and approving drugs. Even if a drug qualifies for one or more of these programs, the FDA may later decide that the drug no longer meets the conditions for qualification or that the time period for FDA review or approval will be shortened. Generally, drugs that are eligible for these programs are those for serious or life-threatening conditions, those with the potential to address unmet medical needs and those that offer meaningful benefits over existing treatments. For example, Fast Track is a process designed to facilitate the development and expedite the review of drugs to treat serious or life-threatening diseases or conditions and fill unmet medical needs, and Breakthrough Therapy designation is designed to expedite the development and review of drugs that are intended to treat a serious condition where preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over available therapy on a clinically significant endpoint(s). Priority review is designed to give drugs that offer major advances in treatment or provide a treatment where no adequate therapy exists an initial review within six months as compared to a standard review time of ten months. Although Fast Track, Breakthrough Therapy designation and priority review do not affect the standards for approval, the FDA will attempt to facilitate early and frequent meetings with a sponsor of a Fast Track or Breakthrough Therapy designated drug and expedite review of the application for a drug designated for priority review. The FDA will also provide Breakthrough Therapy designated drugs intensive guidance on an efficient drug development program and provide these drug developers with an organizational commitment from the FDA involving senior managers. Since sponsors can design clinical trials in a number of ways, in providing its guidance for drugs designated as breakthrough therapies, the FDA will seek to ensure that the sponsor of the product designated as a breakthrough therapy receives timely advice and interactive communications in order to help the sponsor design and conduct a development program as efficiently as possible. During these interactions, the FDA may suggest, or a sponsor can propose, alternative clinical trial designs (e.g., adaptive designs, an enrichment strategy, use of historical controls) that may result in smaller trials or more efficient trials that require less time to complete. Such trial designs could also help minimize the number of patients exposed to a potentially less efficacious treatment (i.e., the control group treated with available therapy). On September 23, 2014, the FDA granted Fast Track designation status to Aramchol for the treatment of OD patients with NASH.

Accelerated Approval, which is described in 21 C.F.R. § 314.500 et seq ., provides for approval of a new drug that is intended to treat a serious or life-threatening disease or condition and that fills an unmet medical need based on a surrogate endpoint. A surrogate endpoint is a laboratory measurement or physical sign used as an indirect or substitute measurement representing a clinically meaningful outcome. To be used in accelerated approval, a surrogate endpoint must be “reasonably likely, based on epidemiologic, therapeutic, pathophysiologic, or other evidence to predict benefit on irreversible morbidity or mortality.” The term “reasonable likely” implies that some uncertainty remains about the relationship of the surrogate to the clinical benefit to the patient. Therefore, accelerated approval is typically contingent on a sponsor’s agreement to conduct additional post-approval studies to verify and describe the drug’s clinical benefit. Accelerated Approval does not change the standards for approval, but by allowing a demonstration of efficacy based on a surrogate endpoint may expedite the approval process.

Liver histology currently offers the best short-term method for tracking the progression of NASH. Certain features on histopathology provide some prognostic information regarding risk for progression. Steatohepatitis, not isolated fatty liver, is associated with a substantial increase in the long-term risk of developing cirrhosis and liver-related outcomes (15, 35). This is believed to be related to the underlying inflammation and activation of pro-fibrogenic pathways in NASH. Based on this current understanding of the pathogenesis of NASH, one would expect that reversal of steatohepatitis would reduce the risk of developing cirrhosis. However, steatosis and inflammation can decrease as fibrosis advances (37). Therefore, the reversal of steatohepatitis with no evidence of progression to advanced fibrosis (stage 3 or 4), may be an acceptable surrogate endpoint suitable both for phase IIB and III trials that enroll patients with NASH and evidence of early fibrosis.

In 2016, the U.S. Congress enacted the 21 ^st Century Cures Act. The law contains several provisions aimed at accelerating drug approval. In particular, it directs FDA to implement a formal review pathway to qualify biomarkers and other drug development tools. It is unclear when this new pathway will be implemented or whether using this pathway would have any impact on our clinical program.

Patent Term Restoration and Marketing Exclusivity

Depending upon the timing, duration and specifics of FDA approval of the use of our product candidates, U.S. patents may be eligible for limited patent term extension under the Hatch-Waxman Act. The Hatch-Waxman Act permits a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However, patent term restoration cannot extend the remaining term of a patent beyond a total of 14 years from the product’s approval date. The patent term restoration period is generally one-half the time between the effective date of an IND, and the submission date of an NDA, plus the time between the submission date of an NDA and the approval of that application. Only one patent applicable to an approved drug is eligible for the extension and the application for extension must be made prior to expiration of the patent. The USPTO, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration. In the future, we intend to apply for restorations of patent term for some of our currently owned patents to add patent life beyond their current expiration date, depending on the expected length of clinical trials and other factors involved in the submission of the relevant NDA.

Market exclusivity provisions under the FDCA also can delay the submission or the approval of certain applications. The FDCA provides a five year period of non-patent marketing exclusivity within the United States to the first applicant to gain approval of an NDA for a new chemical entity. A drug is a new chemical entity if the FDA has not previously approved any other new drug containing the same active moiety, which is the molecule or ion responsible for the action of the drug substance. During the exclusivity period, the FDA may not accept for review an abbreviated new drug application, or ANDA, or a 505(b)(2) NDA submitted by another company for another version of such drug where the applicant does not own or have a legal right of reference to all the data required for approval. However, an application may be submitted after four years if it contains a certification of patent invalidity or non-infringement. The FDCA also provides three years of marketing exclusivity for an NDA, 505(b)(2) NDA or supplement to an approved NDA if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the application, for example, for new indications, dosages or strengths of an existing drug. This three year exclusivity covers only the conditions associated with the new clinical investigations and does not prohibit the FDA from approving ANDAs for drugs containing the original active agent. Five year and three year exclusivity will not delay the submission or approval of a full NDA; however, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the non-clinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness.

Post-approval Requirements

Once an approval is granted, the FDA, European authorities and other regulatory authorities may withdraw the approval if compliance with regulatory requirements is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market. After approval, some types of changes to the approved product, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further regulatory authority review and approval. Some of these modifications, especially adding indications, would likely require additional clinical studies. In addition, the FDA may require testing and surveillance programs to monitor the effect of approved products that have been commercialized, and the FDA has the power to prevent or limit further marketing of a product based on the results of these post-marketing programs.

Any drug product manufactured or distributed by us pursuant to FDA approvals are subject to continuing regulation by the FDA, including, among other things record-keeping requirements; GMPs; reporting of adverse experiences with the drug; providing the FDA with updated safety and efficacy information; drug sampling and distribution requirements; notifying the FDA and gaining its approval of specified manufacturing or labeling changes; and complying with FDA promotion and advertising requirements.

Drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and some state agencies for compliance with cGMP and other laws.

We rely, and expect to continue to rely, on third parties for the production of clinical and commercial quantities of our products. Future FDA and state inspections may identify compliance issues at the facilities of our contract manufacturers that may disrupt production or distribution, or require substantial resources to correct.

From time to time, legislation is drafted, introduced and passed in Congress that could significantly change the statutory provisions governing the approval, manufacturing and marketing of products regulated by the FDA. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted, or FDA regulations, guidance or interpretations changed or what the impact of such changes, if any, may be. In particular, it is unknown whether any of the provisions of the 2016 21 ^st Century Cures Act that are intended to accelerate drug approval will result in any change in the current approval pathway for Aramchol.

Pursuant to the Affordable Care Act (discussed in greater detail below), the Centers for Medicare & Medicaid Services (CMS) is required to collect and publish information reported by applicable manufacturers about payments and other transfers of value manufacturers have made to physicians and teaching hospitals. Such a law, when applicable to our products, could increase the company’s regulatory liability through the imposition of additional reporting and regulatory requirements. There are also an increasing number of state laws that require manufacturers to make similar reports to states on pricing and marketing information.

Reimbursement

We face uncertainties over the pricing of pharmaceutical products. Sales of our products will depend, in part, on the extent to which the costs of our products will be covered by third-party payors, such as federal health programs, commercial insurance and managed care organizations. These third-party payors are increasingly challenging the prices charged for medical products and services. Additionally, the containment of healthcare costs has become a priority of federal and state governments and the prices of drugs have been a focus in this effort. The U.S. government, state legislatures, foreign governments and third party payors have shown significant interest in implementing cost-containment programs, including price controls, restrictions on reimbursement and requirements for substitution of generic products. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could further limit our net revenue and results. If these third-party payors do not consider our products to be cost-effective compared to other therapies, they may not cover our products after approved as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our products on a profitable basis.

The Medicare Modernization Act imposed new requirements for the distribution and pricing of prescription drugs for Medicare beneficiaries under Part D. Under Part D, Medicare beneficiaries may enroll in prescription drug plans offered by private entities that provide coverage of outpatient prescription drugs. Part D prescription drug plan sponsors are not required to pay for all covered Part D drugs, and each drug plan can develop its own drug formulary that identifies which drugs it will cover and at what tier or level. However, Part D prescription drug formularies must include drugs within each therapeutic category and class of covered Part D drugs, though not necessarily all the drugs in each category or class. The Centers for Medicare & Medicaid Services published a final rule in 2014 implementing the Medicare Modernization Act. Contrary to the proposed rule, which would have enabled Part D plans to offer fewer drugs, the final rule maintained the existing six protected classes of drug categories, but stated that some of the proposals not included in the final rule could still be finalized in the future, which would impact payor formulary and coverage decisions.

The American Recovery and Reinvestment Act of 2009 provides funding for the federal government to compare the effectiveness of different treatments for the same illness. A plan for the research will be developed by the Department of Health and Human Services, the Agency for Healthcare Research and Quality and the National Institutes for Health, and periodic reports on the status of the research and related expenditures will be made to Congress. Although the results of the comparative effectiveness studies are not intended to mandate coverage policies for public or private payors, it is not clear what effect, if any, the research will have on the sales of any product, if any such product or the condition that it is intended to treat is the subject of a study. It is also possible that comparative effectiveness research demonstrating benefits in a competitor’s product could adversely affect the sales of our product candidates. If third-party payors do not consider our products to be cost-effective compared to other available therapies, they may not cover our products as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our products on a profitable basis.

The Affordable Care Act, enacted in March 2010, has had a significant impact on the health care industry. Some of the key changes made to date pursuant to the Affordable Care Act include an expansion of coverage for the uninsured, the creation of insurance marketplaces and increased protection of insureds with new benefits, rights and protections. With regard to pharmaceutical products, among other things, the Affordable Care Act made major changes to the Medicare prescription drug program, which helped reduce drug costs for seniors and increased rebates and other costs for the pharmaceutical industry.

On January 20, 2016, President Donald J. Trump was inaugurated as the President of the United States. President Trump has stated that he intends to “repeal and replace” the Affordable Care Act, and Congress has taken initial steps to repeal the law. We cannot predict the impact of the change in administration on the Affordable Care Act and the subsequent effect on the pharmaceutical industry at this time.

In addition, in some non-U.S. jurisdictions, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing vary widely from country to country. For example, the EU provides options for its member states to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. A member state may approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our products. Historically, products launched in the EU do not follow price structures of the United States and generally tend to be significantly lower.

Healthcare Fraud and Abuse Laws

In the U.S., the research, development, testing, manufacturing, handling, storage, distribution, sale and promotion of drug products and medical devices are potentially subject to regulation by various federal, state and local authorities in addition to the FDA, including the Centers for Medicare & Medicaid Services, other divisions of the U.S. Department of Health and Human Services (e.g., the Office of Inspector General), the U.S. Department of Justice, state Attorneys General, and other state and local government agencies. For example, sales, marketing and scientific/educational grant programs must comply with the fraud and abuse provisions applicable to pharmaceutical manufacturers, including the federal “Anti-Kickback Statute”, the Civil Monetary Penalty Statute, the Stark Law, the federal False Claims Act, as amended, the privacy regulations promulgated under the Health Insurance Portability and Accountability Act, or HIPAA, and similar state laws. Pricing and rebate programs must comply with the Medicaid Drug Rebate Program requirements of the Omnibus Budget Reconciliation Act of 1990, as amended, and the Veterans Health Care Act of 1992, as amended. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. All of these activities are also potentially subject to federal and state consumer protection and unfair competition laws.

The Anti- Kickback Statute makes it illegal for any person, including a prescription drug manufacturer (or a party acting on its behalf) to knowingly and willfully solicit, receive, offer, or pay any remuneration that is intended to induce the referral of business, including the purchase, order, or prescription of a particular drug, for which payment may be made under a federal healthcare program, such as Medicare or Medicaid.

The federal False Claims Act prohibits anyone from knowingly presenting, or causing to be presented, for payment to federal programs (including Medicare and Medicaid) claims for items or services, including drugs, that are false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services. Increasingly, U.S. federal agencies are requiring nonmonetary remedial measures, such as corporate integrity agreements in False Claims Act settlements. The U.S. Department of Justice announced in 2016 its intent to follow the “Yates Memo,” taking a far more aggressive approach in pursuing individuals as False Claims Act defendants in addition to the corporations.

The Physician Payment Sunshine Act, enacted in 2010 as part of the Affordable Care Act, requires manufacturers of pharmaceuticals and medical devices to annually report certain payments and other transfers of value to physicians and teaching hospitals, as well as investment interests held by physicians and their immediate family members. In recent years, several states in the United States have also enacted legislation requiring pharmaceutical companies to file periodic reports with the state, make periodic public disclosures on sales, marketing, pricing, clinical trials and other activities, and/or register their sales representatives, as well as establish marketing compliance programs. These laws may affect our sales, marketing, and other promotional activities by imposing administrative and compliance burdens on us. Failure to meet these requirements, to the extent they are applicable to our activities, also could result in a variety of governmental sanctions that could have a material adverse effect on our business.

European Economic Area

In addition to approval in the United States, we currently intend to seek regulatory approval of Aramchol in the EU. As such, a summary of the EU regulatory processes follows below.

A medicinal product may only be placed on the market in the European Economic Area, or EEA, composed of the 28 EU member states, plus Norway, Iceland and Lichtenstein, when a marketing authorization has been issued by the competent authority of a member state pursuant to Directive 2001/83/EC (as recently amended by Directive 2004/27/EC), or an authorization has been granted under the centralized procedure in accordance with Regulation (EC) No. 726/2004 or its predecessor, Regulation 2309/93. There are essentially three community procedures created under prevailing European pharmaceutical legislation that, if successfully completed, allow an applicant to place a medicinal product on the market in the EEA.

Centralized Procedure

Regulation 726/2004/EC now governs the centralized procedure when a marketing authorization is granted by the European Commission, acting in its capacity as the European Licensing Authority on the advice of the EMA. That authorization is valid throughout the entire community and directly or (as to Norway, Iceland and Liechtenstein) indirectly allows the applicant to place the product on the market in all member states of the EEA. The EMA is the administrative body responsible for coordinating the existing scientific resources available in the member states for evaluation, supervision and pharmacovigilance of medicinal products. Certain medicinal products, as described in the Annex to Regulation 726/2004, must be authorized centrally. These are products that are developed by means of a biotechnological process in accordance with Paragraph 1 to the Annex to the Regulation. Medicinal products for human use containing a new active substance for which the therapeutic indication is the treatment of acquired immune deficiency syndrome, or AIDS, cancer, neurodegenerative disorder or diabetes must also be authorized centrally. Starting on May 20, 2008, the mandatory centralized procedure was extended to autoimmune diseases and other immune dysfunctions and viral diseases. Finally, all medicinal products that are designated as orphan medicinal products pursuant to Regulation 141/2000 must be authorized under the centralized procedure. An applicant may also opt for assessment through the centralized procedure if it can show that the medicinal product constitutes a significant therapeutic, scientific or technical innovation or that the granting of authorization centrally is in the interests of patients at the community level. For each application submitted to the EMA for scientific assessment, the EMA is required to ensure that the opinion of the Committee for Medicinal Products for Human Use, or CHMP, is given within 210 days after receipt of a valid application. This 210 days period does not include the time that the applicant to answer any questions raised during the application procedure, the so-called ‘clock stop’ period. If the opinion is positive, the EMA is required to send the opinion to the European Commission, which is responsible for preparing the draft decision granting a marketing authorization. This draft decision may differ from the CHMP opinion, stating reasons for diverging for the CHMP opinion. The draft decision is sent to the applicant and the member states, after which the European Commission takes a final decision. If the initial opinion of the CHMP is negative, the applicant is afforded an opportunity to seek a re-examination of the opinion. The CHMP is required to re-examine its opinion within 60 days following receipt of the request by the applicant. All CHMP refusals and the reasons for refusal are made public on the EMA website. Without a centralized marketing authorization it is prohibited to place a medicinal product that must be authorized centrally on the market in the EU.

Mutual Recognition and Decentralized Procedures

With the exception of products that are authorized centrally, the competent authorities of the member states are responsible for granting marketing authorizations for medicinal products placed on their national markets. If the applicant for a marketing authorization intends to market the same medicinal product in more than one member state, the applicant may seek an authorization progressively in the community under the mutual recognition or decentralized procedure. Mutual recognition is used if the medicinal product has already been authorized in a member state. In this case, the holder of this marketing authorization requests the member state where the authorization has been granted to act as reference member state by preparing an updated assessment report that is then used to facilitate mutual recognition of the existing authorization in the other member states in which approval is sought (the so-called concerned member state(s)). The reference member state must prepare an updated assessment report within 90 days of receipt of a valid application. This report together with the approved Summary of Product Characteristics, or SmPC (which sets out the conditions of use of the product), and a labeling and package leaflet are sent to the concerned member states for their consideration. The concerned member states are required to approve the assessment report, the SmPC and the labeling and package leaflet within 90 days of receipt of these documents. The total procedural time is 180 days.

The decentralized procedure is used in cases where the medicinal product has not received a marketing authorization in the EU at the time of application. The applicant requests a member state of its choice to act as reference member state to prepare an assessment report that is then used to facilitate agreement with the concerned member states and the grant of a national marketing authorization in all of these member states. In this procedure, the reference member state must prepare, for consideration by the concerned member states, the draft assessment report, a draft SmPC and a draft of the labeling and package leaflet within 120 days after receipt of a valid application. As in the case of mutual recognition, the concerned member states are required to approve these documents within 90 days of their receipt.

For both mutual recognition and decentralized procedures, if a concerned member state objects to the grant of a marketing authorization on the grounds of a potential serious risk to public health, it may raise a reasoned objection with the reference member state. The points of disagreement are in the first instance referred to the Co-ordination Group on Mutual Recognition and Decentralized Procedures, or CMD, to reach an agreement within 60 days of the communication of the points of disagreement. If member states fail to reach an agreement, then the matter is referred to the EMA and CHMP for arbitration. The CHMP is required to deliver a reasoned opinion within 60 days of the date on which the matter is referred. The scientific opinion adopted by the CHMP forms the basis for a binding European Commission decision.

Irrespective of whether the medicinal product is assessed centrally, de-centrally or through a process of mutual recognition, the medicinal product must be manufactured in accordance with the principles of GMP as set out in Directive.

2003/94/EC and Volume 4 of the rules governing medicinal products in the European community. Moreover, community law requires the clinical results in support of clinical safety and efficacy based upon clinical trials conducted in the European community to be in compliance with the requirements of Directive 2001/20/EC, which implements good clinical practice in the conduct of clinical trials on medicinal products for human use. Clinical trials conducted outside the European community and used to support applications for marketing within the EU must have been conducted in a way consistent with the principles set out in Directive 2001/20/EC. The conduct of a clinical trial in the EU requires, pursuant to Directive 2001/20/EC, authorization by the relevant national competent authority where a trial takes place, and an ethics committee to have issued a favorable opinion in relation to the arrangements for the trial. It also requires that the sponsor of the trial, or a person authorized to act on his behalf in relation to the trial, be established in the community.

National Procedure

This procedure is available for medicinal products that do not fall within the scope of mandatory centralized authorization. Specific procedures and timelines differ between member states, but the duration of the procedure is generally 210 days and based on a risk/efficacy assessment by the competent authority of the member state concerned, followed by determination of SmPC, package leaflet and label text/layout and subsequently grant of the marketing authorization. Marketing authorizations granted on this basis are not mutually recognized by other member states.

There are various types of applications for marketing authorizations:

Cross-referral to Innovator’s Data

Articles 10(1) and 10(2)(b) of Directive 2001/83/EC provide the legal basis for an applicant to seek a marketing authorization on the basis that its product is a generic medicinal product (a copy) of a reference medicinal product that has already been authorized, in accordance with community provisions. A reference product is, in principle, an original product granted an authorization on the basis of a full dossier of particulars and information. This is the main exemption used by generic manufacturers for obtaining a marketing authorization for a copy product. The generic applicant is not required to provide the results of non-clinical studies and of clinical trials if its product meets the definition of a generic medicinal product and the applicable regulatory results protection period for the results submitted by the innovator has expired. A generic medicinal product is defined as a medicinal product:

Applications in respect of a generic medicinal product cannot be made before the expiry of the protection period. Where the reference product was granted a national marketing authorization pursuant to an application made before October 30, 2005, the protection period is either six years or 10 years, depending upon the election of the particular member state concerned. Where the reference product was granted a marketing authorization centrally, pursuant to an application made before November 20, 2005, the protection period is 10 years. For applications made after these dates, Regulation 726/2004 and amendments to Directive 2001/83/EC provide for a harmonized protection period regardless of the approval route utilized. The harmonized protection period is in total 10 years, including eight years of research data protection and two years of marketing protection. The effect is that the originator’s results can be the subject of a cross-referral application after eight years, but any resulting authorization cannot be exploited for a further two years. The rationale of this procedure is not that the competent authority does not have before it relevant tests and trials upon which to assess the efficacy and safety of the generic product, but that the relevant particulars can, if the research data protection period has expired, be found on the originator’s file and used for assessment of the generic medicinal product. The 10 year protection period can be extended to 11 years where, in the first eight years post-authorization, the holder of the authorization obtains approval for a new indication assessed as offering a significant clinical benefit in comparison with existing products.

If the copy product does not meet the definition of a generic medicinal product or if certain types of changes occur in the active substance(s) or in the therapeutic indications, strength, pharmaceutical form or route of administration in relation to the reference medicinal product, Article 10(3) of Directive 2001/83/EC provides that the results of the appropriate non-clinical studies or clinical trials must be provided by the applicant.

Well-established Medicinal Use

Under Article 10a of Directive 2001/83/EC, an applicant may, in substitution for the results of its own non-clinical and clinical research, present detailed references to published literature demonstrating that the active substance(s) of a product have a well- established medicinal use within the community with recognized efficacy and an acceptable level of safety. The applicant is entitled to refer to a variety of different types of literature, including reports of clinical trials with the same active substance(s) and epidemiological studies that indicate that the constituent or constituents of the product have an acceptable safety/efficacy profile for a particular indication. However, use of the published literature exemption is restricted by stating that in no circumstances will constituents be treated as having a well- established use if they have been used for less than 10 years from the first systematic and documented use of the substance as a medicinal product in the EU. Even after 10 years’ systematic use, the threshold for well-established medicinal use might not be met. European pharmaceutical law requires the competent authorities to consider among other factors the period over which a substance has been used, the amount of patient use of the substance, the degree of scientific interest in the use of the substance (as reflected in the scientific literature) and the coherence (consistency) of all the scientific assessments made in the literature. For this reason, different substances may reach the threshold for well-established use after different periods, but the minimum period is 10 years. If the applicant seeks approval of an entirely new therapeutic use compared with that to which the published literature refers, additional non-clinical and/or clinical results would have to be provided.

Informed Consent

Under Article 10c of Directive 2001/83/EC, following the grant of a marketing authorization the holder of such authorization may consent to a competent authority utilizing the pharmaceutical, non-clinical and clinical documentation that it submitted to obtain approval for a medicinal product to assess a subsequent application relating to a medicinal product possessing the same qualitative and quantitative composition with respect to the active substances and the same pharmaceutical form.

Law Relating to Pediatric Research

Regulation (EC) 1901/2006 (as amended by Regulation (EC) 1902/2006) was adopted on December 12, 2006. This Regulation governs the development of medicinal products for human use in order to meet the specific therapeutic needs of the pediatric population. It requires any application for marketing authorization made after July 26, 2008 in respect of a product not authorized in the European Community on January 26, 2007 (the time the Regulation entered into force), to include the results of all studies performed and details of all information collected in compliance with a pediatric investigation plan agreed by the Pediatric Committee of the EMA, unless the product is subject to an agreed waiver or deferral or unless the product is excluded from the scope of Regulation 1902/2006 (generics, hybrid medicinal products, biosimilars, homeopathic and traditional (herbal) medicinal products and medicinal products containing one or more active substances of well-established medicinal use). Waivers can be granted in certain circumstances where pediatric studies are not required or desirable. Deferrals can be granted in certain circumstances where the initiation or completion of pediatric studies should be deferred until appropriate studies in adults have been performed. The EMA does not evaluate an application for market authorization if there is no agreed PIP, deferral or waiver. Moreover, this regulation imposes the same obligation from January 26, 2009 on an applicant seeking approval of a new indication, pharmaceutical form or route of administration for a product already authorized and still protected by a supplementary protection certificate granted under Regulation EC 469/2009 and its precursor (EEC) 1768/92 or by a patent that qualifies for the granting of such a supplementary protection certificate. The pediatric Regulation 1901/2006 also provides, subject to certain conditions, a reward for performing such pediatric studies, regardless of whether the pediatric results provided resulted in the grant of a pediatric indication. This reward comes in the form of an extension of six months to the supplementary protection certificate granted in respect of the product, unless the product is subject to orphan drug designation, in which case the 10 year market exclusivity period for such orphan products is extended to 12 years. If any of the non-centralized procedures for marketing authorization have been used, the six month extension of the supplementary protection certificate is only granted if the medicinal product is authorized in all member states.

Post-authorization Obligations

In the pre-authorization phase the applicant must provide a detailed pharmacovigilance plan that it intends to implement post- authorization. An authorization to market a medicinal product in the EU carries with it an obligation to comply with many post- authorization organizational and behavioral regulations relating to the marketing and other activities of authorization holders. These include requirements relating to post-authorization efficacy studies, post-authorization safety studies, adverse event reporting and other pharmacovigilance requirements, advertising, packaging and labeling, patient package leaflets, distribution and wholesale dealing. The regulations frequently operate within a criminal law framework and failure to comply with the requirements may not only affect the authorization, but also can lead to financial and other sanctions levied on the company in question and responsible officers. As a result of the currently on-going overhaul of EU pharmacovigilance legislation the financial and organizational burden on market authorization holders will increase significantly, such as the obligation to maintain a pharmacovigilance system master file that applies to all holders of marketing authorizations granted in accordance with Directive 2001/83/EC or Regulation (EC) No 726/2004. Marketing authorization holders must furthermore collect data on adverse events associated with use of the authorized product outside the scope of the authorization. Pharmacovigilance for biological products and medicines with a new active substance will be strengthened by subjecting their authorization to additional monitoring activities. The EU is currently in the process of issuing implementing regulations for the new pharmacovigilance framework.

Any authorization granted by member state authorities, which within three years of its granting is not followed by the actual placing on the market of the authorized product in the authorizing member state ceases to be valid. When an authorized product previously placed on the market in the authorizing member state is no longer actually present on the market for a period of three consecutive years, the authorization for that product shall cease to be valid. The same two three year periods apply to authorizations granted by the European Commission based on the centralized procedure.

Israel

Clinical Testing in Israel

In order to conduct clinical testing on humans in Israel, special authorization must first be obtained from the ethics committee and Chief Executive Officer and Director of the institution in which the clinical studies are scheduled to be conducted, or in certain cases, the Head of Clinical Trials Department of the Ministry of Health, as required under the Guidelines for Clinical Trials in Human Subjects implemented pursuant to the Israeli Public Health Regulations (Clinical Trials in Human Subjects), as amended from time to time, and other applicable legislation. In addition, these regulations also require authorization from the Israeli Ministry of Health, in the case of genetic trials, certain fertility trials and in such other matters as set forth by the Ministry of Health, which also include our ARREST Study. The institutional ethics committee must, among other things, evaluate the anticipated benefits that are likely to be derived from the project to determine if it justifies the risks and inconvenience to be inflicted on the human subjects, and the committee must ensure that adequate protection exists for the rights and safety of the participants as well as the accuracy of the information gathered in the course of the clinical testing. Because we perform a portion of the ARREST Study on therapeutic candidates in Israel, we obtained authorization from the Chief Executive Officer and Director of ethics committee of each institution in which we conduct our ARREST Trial, and from the Israeli Ministry of Health. We will also seek such authorizations from the ethics committee and the Israeli Ministry of Health concerning any of our other or future clinical trials to be conducted in Israel.

Israeli Ministry of Health

Israel’s Ministry of Health, which regulates medical testing, has adopted guidelines that correspond, generally, to those of the FDA and the EMA, making it comparatively straightforward for studies conducted in Israel to satisfy FDA and the EMA requirements, thereby enabling medical technologies subjected to clinical trials in Israel to reach U.S. and EU commercial markets in an expedited fashion. Many members of Israel’s medical community have earned international prestige in their chosen fields of expertise and routinely collaborate, teach and lecture at leading medical centers throughout the world.

Other Countries

In addition to regulations in the United States, the EU and Israel, we are subject to a variety of other regulations governing clinical trials and commercial sales and distribution of drugs in other countries. Whether or not our product candidate or future product candidates receive approval from the FDA, approval of such product candidates must be obtained by the comparable regulatory authorities of countries other than the United States before we can commence clinical trials or marketing of the product in those countries. The approval process varies from jurisdiction to jurisdiction, and the time may be longer or shorter than that required for FDA approval. The requirements governing the conduct of clinical trials and product licensing vary greatly from country to country.

The requirements that we and our collaborators must satisfy to obtain regulatory approval by government agencies in other countries prior to commercialization of our products in such countries can be rigorous, costly and uncertain. In the European countries, Canada and Australia, regulatory requirements and approval processes are similar in principle to those in the United States. Additionally, depending on the type of drug for which approval is sought, there are currently two potential tracks for marketing approval in the European countries: Mutual recognition and the centralized procedure. These review mechanisms may ultimately lead to approval in all EU countries, but each method grants all participating countries some decision-making authority in product approval. Foreign governments also have stringent post-approval requirements including those relating to manufacture, labeling, reporting, record keeping and marketing. Failure to substantially comply with these on-going requirements could lead to government action against the product, us and/or our representatives.

Related Matters

From time to time, legislation is drafted, introduced and passed in governmental bodies that could significantly change the statutory provisions governing the approval, manufacturing and marketing of products regulated by the FDA or EMA and other applicable regulatory bodies to which we are subject. In addition, regulations and guidance are often revised or reinterpreted by the national agency in ways that may significantly affect our business and our therapeutic candidates. It is impossible to predict whether such legislative changes will be enacted, whether FDA or EMA regulations, guidance or interpretations will change, or what the impact of such changes, if any, may be. We may need to adapt our business and therapeutic candidates and products to changes that occur in the future.

Description of Property and Facilities

Our corporate headquarters are located at 16 Tiomkin Street, Tel Aviv, Israel, 6578317 pursuant to a lease to occupy approximately 356 square meters of space. GRD entered into the lease agreement on March 22, 2015 with Mintz K. Construction Company (the “Lease Agreement”), following the termination of GRD’s previous lease agreement at 8 Shaul Hamelech Blvd., Amot Mishpat Bldg., Tel Aviv, Israel, 6473307. The term of the lease is for four years with an option, at the election of GRD, for two additional years. The aggregate quarterly rental payment for four years, together with adjustments and the maintenance fees, is approximately NIS33,055 plus VAT. On February 27, 2017, GRD entered into an addendum to the Lease Agreement pursuant to which GRD leased an additional 90 square meters for a space adjacent to the current premises, totaling in 446 square meters. The fees for the additional space are payable quarterly in an aggregate amount of NIS 17,700 plus VAT.