ITEM
1. BUSINESS.
DESCRIPTION
OF BUSINESS
Research
and Development
We
are a pharmaceutical company currently engaged in the research and development of innovative pharmaceutical solutions, including
an oral insulin capsule to be used for the treatment of individuals with diabetes, and the use of orally ingestible capsules or
pills for delivery of other polypeptides.
Oral
insulin
: We are seeking to revolutionize the treatment of diabetes through our proprietary flagship product, an orally
ingestible insulin capsule, or ORMD-0801. In August 2017, we had a call with the U.S. Food and Drug Administration, or FDA, regarding
ORMD-0801. During the call, the FDA advised that the regulatory pathway for the submission of ORMD-0801 would be a Biologics License
Application, or BLA. Such a pathway would grant us 12 years of marketing exclusivity for ORMD-0801, if approved, and an additional
six months of exclusivity may be granted to us if the product also receives approval for use in pediatric patients. We plan to
initiate in the first quarter of calendar year 2018, a clamp study on six type 1 diabetic patients and a three-month dose-ranging
clinical trial on approximately 240 type 2 diabetic patients to assess the safety and evaluate the effect of ORMD-0801 on HbA1c,
the main FDA registrational endpoint. In February 2017, we completed a Phase IIa dose finding clinical trial which was initiated
in October 2016 in order to better define the optimal dosing of ORMD-0801. In April 2016, we completed a Phase IIb clinical trial
on 180 type 2 adult diabetic patients that was initiated in June 2015 and conducted in 33 sites in the United States. This
double-blind, randomized, 28-day dosing clinical trial was conducted under an Investigational New Drug application, or IND, with
the FDA. The clinical trial, designed to assess the safety and efficacy of ORMD-0801, investigated ORMD-0801 over a 28 day treatment
period and had statistical power to give us greater insight into the drug’s efficacy. The trial indicated a statistically
significant lowering of blood glucose levels versus placebo across several endpoints, with no serious or severe adverse issues
related to the drug. The trial successfully met all of its primary and most of its secondary and exploratory endpoints for both
safety and efficacy. Prior to that trial, we completed Phase IIa clinical trials in patients with both type 1 and type 2 diabetes.
Our technology allows insulin to travel from the gastrointestinal tract via the portal vein to the bloodstream, revolutionizing
the manner in which insulin is delivered. It enables its passage in a more physiological manner than current delivery methods
of insulin. Our technology is a platform that has the potential to deliver medications and vaccines orally that today can only
be delivered via injection.
Oral
Glucagon-like peptide-1
: Glucagon-like peptide-1, or GLP-1, is an incretin hormone, which is a type of gastrointestinal
hormone that stimulates the secretion of insulin from the pancreas. The incretin concept was hypothesized when it was noted that
glucose ingested by mouth (oral) stimulated two to three times more insulin release than the same amount of glucose administered
intravenously. In addition to stimulating insulin release, GLP-1 was found to suppress glucagon release (a hormone involved in
the regulation of glucose) from the pancreas, slow gastric emptying to reduce the rate of absorption of nutrients into the blood
stream, and increase satiety. Other important beneficial attributes of GLP-1 are its effects of increasing the number of beta
cells (cells that manufacture and release insulin) in the pancreas and, possibly, protection of the heart. In addition to our
flagship product, the ORMD-0801 insulin capsule, we are using our technology for an orally ingestible GLP-1 capsule, or ORMD-0901.
In August 2015, we began a non-FDA clinical trial outside of the United States for our oral exenatide capsule on type 2 diabetic
patients. The trial was completed during the second quarter of calendar year 2016 and indicated positive results as it showed
ORMD-0901 to be safe and well tolerated and also demonstrated encouraging efficacy data. We completed a three-month pre-clinical
toxicology study in March 2017, anticipate receiving the final report during the fourth quarter of calendar year 2017 and expect
to file an IND and move directly into a pharmacokinetics study, followed by a large Phase II trial in the United States under
an FDA IND.
Diabetes
:
Diabetes is a disease in which the body does not produce or properly use insulin. Insulin is a hormone that causes sugar to be
absorbed into cells, where the sugar is converted into energy needed for daily life. The cause of diabetes is attributed both
to genetics (type 1 diabetes) and, most often, to environmental factors such as obesity and lack of exercise (type 2 diabetes).
According to the International Diabetes Federation, or IDF, an estimated 415 million adults worldwide suffered from diabetes in
2015 and the IDF projects this number will increase to 642 million by 2040. Also, according to the IDF, in 2015, an estimated
5.3 million people died from diabetes. According to the American Diabetes Association, or ADA, in the United States there were
approximately 30.3 million people with diabetes, or 9.4% of the United States population in 2015. Diabetes is a leading cause
of blindness, kidney failure, heart attack, stroke and amputation.
Intellectual
property
: We own a portfolio of patents and patent applications covering our technologies, and we are aggressively protecting
these technology developments on a worldwide basis.
Management
:
We are led by a highly-experienced management team knowledgeable in the treatment of diabetes. Our Chief Scientific Officer, Miriam
Kidron, PhD, is a world-recognized pharmacologist and a biochemist and the innovator primarily responsible for our oral insulin
technology development and know-how.
Scientific
Advisory Board
: Our management team has access to our internationally recognized Scientific Advisory Board whose members
are thought-leaders in their respective areas. The Scientific Advisory Board is comprised of Dr. Roy Eldor, Professor Ele Ferrannini,
Professor Avram Hershko, Dr. Harold Jacob and Dr. Harvey L. Katzeff.
Strategy
Short
Term Business Strategy
We
plan to conduct further research and development on the technology covered by the patent application “Methods and Composition
for Oral Administration of Proteins,” which we acquired from Hadasit Medical Research Services and Development Ltd. in 2006,
and which is granted in various foreign jurisdictions, as well as the other patents we have filed in various foreign jurisdictions
since then, as discussed below under
“—Patents and Licenses”
and below under
“Item 1A. Risk
Factors”
.
Through
our research and development efforts, we have successfully developed an oral dosage form that will withstand the harsh environment
of the stomach and intestines and will be effective in delivering active insulin or other proteins, such as exenatide, for the
treatment of diabetes. The excipients that are added to the proteins in the formulation process must not modify the proteins chemically
or biologically, and the dosage form must be safe to ingest. We plan to continue to conduct clinical trials to show the effectiveness
of our technology. We originally filed an IND with the FDA in December 2012 for clearance to begin a Phase II clinical trial of
our oral insulin capsule, ORMD-0801, in order to evaluate the safety, tolerability and efficacy in type 2 diabetic volunteers.
Because the identical formulation of ORMD-0801 had not yet been studied in humans at bedtime, in February 2013, the FDA noted
concerns about mitigating potential risks of severe hypoglycemia and requested that we perform a sub-study in a controlled in-patient
setting for a one-week period prior to beginning the larger multi-centered Phase II trial. As a result, we withdrew the original
IND and, in April 2013, we submitted a new IND for the Phase IIa study. Following the FDA’s clearance to proceed in May
2013, we began the Phase IIa study in July 2013. As we announced in January 2014, the Phase IIa study met all primary and secondary
endpoints. Specifically, the Phase IIa study evaluated the pharmacodynamic effects of ORMD-0801 on mean nighttime glucose (determined
using a continuous glucose monitor). The results showed that ORMD-0801 exhibited a sound safety profile, led to reduced mean daytime
and nighttime glucose readings and lowered fasting blood glucose concentrations, when compared to placebo. In addition, no serious
adverse events occurred during this study, and the only adverse events that occurred were not drug related.
In
light of these results, in June 2015, we initiated the Phase IIb clinical trial on 180 type 2 adult diabetic patients which
was completed in April 2016. This double-blind, randomized, 28-day dosing clinical trial was designed to assess the safety and
efficacy of ORMD-0801, and was conducted in 33 sites in the United States. The trial indicated a statistically significant lowering
of blood glucose levels versus placebo across several endpoints, with no serious or severe adverse issues related to the drug.
The trial successfully met all of its primary and most of its secondary and exploratory endpoints. The trial primarily evaluated
the nighttime glucose lowering effect and safety of ORMD-0801 compared to a placebo. The results of the mean nighttime glucose
showed a significant difference in mean change from run-in versus placebo. ORMD-0801 oral insulin was safe and well-tolerated
for the dosing regimen in this trial. The trial further evaluated the effect of ORMD-0801 on mean 24-hour glucose, fasting glucose,
and daytime glucose and the results showed a statistically significant difference in mean change from run-in versus placebo. Two
examples of the data gleaned from this study are shown below:
*
Indicates Statistically Significant Difference from Placebo (p-Value<0.05)
No
significant difference was shown in change in morning fasting serum insulin, C-Peptide, or triglycerides.
Following
the significant results of the Phase IIb trial, we initiated in October 2016 an additional Phase IIa dose finding clinical trial
which was completed in February 2017. This randomized, double-blind trial was conducted on 32 type 2 adult diabetic patients in
order to better define the optimal dosing of ORMD-0801 moving forward. The results of the trial indicated a positive safety profile
and potentially meaningful efficacy of ORMD-0801, as the efficacy data suggest ORMD-0801 improves glucose control.
In
March 2017, we initiated a six-month toxicology study to allow for the use of our oral insulin capsule for a longer period than
previously performed, in preparation for our proposed upcoming three-month clinical trial for type 2. We anticipate receiving
the final report of this study in the first quarter of calendar year 2018.
In
August 2017, we had a call with the FDA regarding ORMD-0801. During the call, the FDA advised that the regulatory pathway for
submission of ORMD-0801 would be a BLA. Such a pathway would grant a full 12 years of marketing exclusivity for ORMD-0801, if
approved. On top of this, an additional six months of exclusivity may be granted if the product also receives approval for use
in pediatric patients. The FDA confirmed that the approach to nonclinical toxicology, chemistry manufacturing controls and qualification
of excipients would be driven by their published guidance documents. We plan to initiate in the first quarter of calendar year
2018 a three-month dose-ranging clinical trial on approximately 240 type 2 diabetes patients to assess the safety and evaluate
the effect of ORMD-0801 on HbA1c, the main FDA registrational endpoint. In addition, the FDA confirmed our ability to use insulin
from different suppliers in a Phase III study.
In
February 2014, we submitted a protocol to the FDA to initiate a Phase IIa trial of our oral insulin capsule for type 1 diabetes
volunteers. The protocol was submitted under our existing IND to include both type 1 and type 2 diabetes indications. Beginning
in March 2014, the double-blind, randomized, placebo controlled, seven-day treatment study design was carried out at an inpatient
setting on 25 type 1 diabetic patients. As we announced in October 2014, the results showed that ORMD-0801 oral insulin given
before meals appeared to be safe and well-tolerated for the dosing regimen in this study. Although the study was not powered to
show statistical significance, there were internally consistent trends observed. Consistent with the timing of administration,
the data showed a decrease in bolus insulin, a decrease in post-prandial glucose, a decrease in daytime glucose by continual glucose
monitoring and an increase in post-prandial hypoglycemia in the active group, demonstrating the efficacy of ORMD-0801.
We
also plan to conduct a glucose clamp study of our oral insulin capsule on six type 1 diabetic patients in the first quarter of
calendar year 2018. The glucose clamp is a method for quantifying insulin absorption in order to measure a patient’s insulin
sensitivity and how well a patient metabolizes glucose.
Should
our Phase IIb three-month dosing clinical trial successfully meet its primary endpoints, we anticipate initiating two six-month
Phase III clinical trials on both type 1 and type 2 diabetic patients, following which we expect to file a New Drug Application
with a potential approval by the third quarter of calendar year 2023.
In
September 2013, we submitted a pre-IND package to the FDA for ORMD-0901. In August 2015, we began a non-FDA clinical trial outside
of the United States on type 2 diabetic patients. The trial was completed during the second quarter of calendar year 2016 and
indicated positive results as it showed ORMD-0901 to be safe and well tolerated and demonstrated encouraging efficacy data. We
completed a three-month pre-clinical toxicology study in March 2017 and anticipate receiving the final report during the fourth
quarter of calendar year 2017. We expect to file an IND during the first quarter of calendar year 2018 and move directly into
a small pharmacokinetics study followed by a large Phase II trial in the United States under an FDA IND.
Clinical
trials are planned in order to substantiate our results as well as for purposes of making future filings for drug approval. We
also plan to conduct further research and development by deploying our proprietary drug delivery technology for the delivery of
other polypeptides in addition to insulin, and to develop other innovative pharmaceutical products.
The table below gives an overview of our primary
product pipeline (calendar quarters):
|
|
Phase
I
|
Phase
II
|
Phase
III
|
Timeline
|
ORMD-0801
oral
insulin
|
Type
2 diabetes
|
|
Q1
’14: Phase IIa completed
Q2
’16: Phase IIb multi-center study completed
Q1
’17: Phase IIa - dose finding study completed
Q1
’18: Phase IIb 90-day multi-center study projected initiation (projected completion Q2 ’19)
Q4
’19: Phase III study projected initiation (projected completion Q2 ’21)
|
Type
1 diabetes
|
|
|
Q3
’14: Phase IIa study completed
Q1
’18: Clamp study projected initiation (projected completion Q3 ’18)
Q4
’19: Phase III projected initiation (projected completion Q2 ’21)
|
ORMD-0901
oral
GLP-1
|
Type
2 diabetes
|
|
|
|
Q2
’16: Phase Ib non-US study completed
Q1
’18: Pharmacokinetics clinical study projected initiation (projected completion Q3 ’18)
H2
’18: Phase II projected initiation (projected completion Q4 ’19)
|
Another
component of our business strategy is to partner with other companies or medical institutions in order to further develop our
technology and commence pre-commercialization activities. On November 30, 2015, we, our Israeli subsidiary and HTIT entered into
a Technology License Agreement, which was further amended, according to which we granted HTIT an exclusive commercialization license
in the territory of the People's Republic of China, Macau and Hong Kong, or the Territory, related to our oral insulin capsule,
ORMD-0801. Pursuant to this license agreement, HTIT will conduct, at its own expense, certain pre-commercialization and regulatory
activities with respect to our technology related to the ORMD-0801 capsule, and will pay certain royalties and an aggregate of
approximately $37.5 million (see “Out-Licensed Technology” below). We plan to seek additional partnerships or forms
of cooperation with other companies or medical institutions. While our strategy is to partner with an appropriate party, no assurance
can be given that we will in fact be able to reach an agreeable partnership with any third party. Under certain circumstances,
we may determine to develop one or more of our oral dosage forms on our own, either world-wide or in select territories.
Long
Term Business Strategy
If
our oral insulin capsule or other drug delivery solutions show significant promise in clinical trials, we plan to ultimately seek
a strategic commercial partner, or partners, with extensive experience in the development, commercialization, and marketing of
insulin applications and/or other orally digestible drugs. We anticipate such partner or partners would be responsible for, or
substantially support, late stage clinical trials (Phase III) to increase the likelihood of obtaining regulatory approvals and
registrations in the appropriate markets in a timely manner. We further anticipate that such partner, or partners, would also
be responsible for sales, marketing and support of our oral insulin capsule in these markets. Such planned strategic partnership,
or partnerships, may provide a marketing and sales infrastructure for our products as well as financial and operational support
for global clinical trials, post marketing studies, label expansions and other regulatory requirements concerning future clinical
development in the United States and elsewhere. Any future strategic partner, or partners, may also provide capital and expertise
that would enable the partnership to develop new oral dosage forms for other polypeptides. While our strategy is to partner with
an appropriate party, no assurance can be given that we will in fact be able to reach an agreeable partnership with any third
party. Under certain circumstances, we may determine to develop one or more of our oral dosage forms on our own, either world-wide
or in select territories.
Other
Planned Strategic Activities
In
addition to developing our own oral dosage form drug portfolio, we are, on an on-going basis, considering in-licensing and other
means of obtaining additional technologies to complement and/or expand our current product portfolio. Our goal is to create a
well-balanced product portfolio that will enhance and complement our existing drug portfolio.
Product
Development
Research
and Development Summary
We
devote the majority of our efforts to research and development, including clinical studies for our lead clinical product candidates,
as described below.
Orally
Ingestible Insulin
During
the fiscal year ended August 31, 2007, we conducted several clinical studies of our orally ingestible insulin that were intended
to assess both the safety/tolerability and absorption properties of our proprietary oral insulin. Based on the pharmacokinetic
and pharmacologic outcomes of these trials, we decided to continue the development of our oral insulin product.
During
the fiscal year ended August 31, 2008, we successfully completed animal studies and non-FDA approved clinical trials using our
oral insulin capsule, including a Phase Ib clinical trial in healthy human volunteers with the intent of dose optimization; a
Phase IIa study to evaluate the safety and efficacy of our oral insulin capsule in type 2 diabetic volunteers at Hadassah Medical
Center in Jerusalem; and a Phase IIa study to evaluate the safety and efficacy of our oral insulin capsule on type 1 diabetic
volunteers.
Our
successful non-FDA clinical trials continued in the fiscal year ended August 31, 2009, or fiscal 2009, with a Phase IIb study
in South Africa to evaluate the safety, tolerability and efficacy of our oral insulin capsule on type 2 diabetic volunteers.
In
September 2010, we reported the successful results of an exploratory clinical trial testing the effectiveness of our oral insulin
capsule in type 1 diabetes patients suffering from uncontrolled diabetes. Unstable or labile diabetes is characterized by recurrent,
unpredictable and dramatic blood glucose swings often linked with irregular hyperglycemia and sometimes serious hypoglycemia affecting
type 1 diabetes patients. This successfully completed exploratory study was a proof of concept study for defining a novel indication
for ORMD-0801. We believe the encouraging results justify further clinical development of ORMD-0801 capsule application toward
management of uncontrolled diabetes.
In
March 2011, we reported that we successfully completed a comprehensive toxicity study for our oral insulin capsule. The study
was completed under conditions prescribed by the FDA Good Laboratory Practices regulations.
We
began FDA-approved clinical trials of ORMD-0801 in July 2013, with the Phase IIa study, which evaluated the pharmacodynamic
effects of ORMD-0801 on mean nighttime glucose (determined using a continuous glucose monitor) on 30 volunteers with type 2 diabetes.
As we announced in January 2014, the results showed that ORMD-0801 exhibited a sound safety profile, led to reduced mean daytime
and nighttime glucose readings and lowered fasting blood glucose concentrations, when compared to placebo.
In
March 2014, we began an FDA-approved Phase IIa trial of ORMD-0801 in volunteers with type 1 diabetes. As we announced in October
2014, the results showed that ORMD-0801 oral insulin given before meals appeared to be safe and well-tolerated for the dosing
regimen in this study. Although the study was not powered to show statistical significance, there were internally consistent trends
observed. Consistent with the timing of administration, the data showed a decrease in bolus insulin, a decrease in post-prandial
glucose, a decrease in daytime glucose by continual glucose monitoring and an increase in post-prandial hypoglycemia in the active
group, demonstrating the efficacy of ORMD-0801.
In
June 2015, we initiated a Phase IIb clinical trial on 180 type 2 adult diabetic patients, which was completed in April 2016. This
double-blind, randomized, 28-day dosing clinical trial was designed to assess the safety and efficacy of ORMD-0801 and was conducted
in 33 sites in the United States. The trial indicated a statistically significant lowering of blood glucose levels versus placebo
across several endpoints, with no serious or severe adverse issues related to the drug. The trial successfully met all of its
primary and most of its secondary and exploratory endpoints for both safety and efficacy.
In
October 2016, we initiated an additional Phase IIa, dose finding clinical trial which was completed in February 2017. This randomized,
double-blind trial was conducted on 32 type 2 adult diabetic patients in order to better define the optimal dosing of ORMD-0801
moving forward. The results of the trial indicated a positive safety profile and potentially meaningful efficacy of ORMD-0801,
as the efficacy data suggest ORMD-0801 improves glucose control.
In
March 2017, we initiated a six-month toxicology study to allow for the use of our oral insulin capsule for a longer period than
previously performed, in preparation for our proposed upcoming three-month clinical trial for type 2 diabetes. We anticipate receiving
the final report of this study in the first quarter of calendar year 2018.
In
August 2017, we had a call with the FDA regarding ORMD-0801. During the call, the FDA advised that the regulatory pathway for
submission of ORMD-0801 would be a BLA. Such a pathway would grant a full 12 years of marketing exclusivity for ORMD-0801, if
approved, and an additional six months of exclusivity may be granted to us if the product also receives approval for use in pediatric
patients. We plan to initiate in the first quarter of calendar year 2018 a three-month dose-ranging clinical trial on approximately
240 type 2 diabetes patients to assess the safety and evaluate the effect of ORMD-0801 on HbA1c, the main FDA registrational endpoint.
We
utilize Clinical Research Organizations, or CROs, to conduct our clinical studies.
GLP-1
Analog
During
fiscal 2009, we completed pre-clinical trials of ORMD-0901, an analog for GLP-1, which suggested that the GLP-1 analog (exenatide-4),
when combined with Oramed’s capsule technology, is absorbed through the gastrointestinal tract and retains its biological
activity.
In
December 2009, we completed non-FDA approved clinical trial in healthy, male volunteers conducted at Hadassah University Medical
Center in Jerusalem. This study evaluated the safety and efficacy of ORMD-0901. The results of the study indicated that ORMD-0901
was well tolerated by all subjects and demonstrated physiological activity, as extrapolated from ensuing subject insulin levels
when compared to those observed after treatment with placebo.
In
January 2013, we began a clinical trial for our oral exenatide capsule on healthy volunteers and type 2 diabetic patients. Based
on this study, we decided to make slight adjustments in the manufacturing of these capsules and have begun pre-toxicology studies
on the new capsules.
In
September 2013, we submitted a pre-IND package to the FDA for ORMD-0901.
In
August 2015, we began a non-FDA clinical trial outside of the United States for ORMD-0901 on type 2 diabetic patients. The trial
was completed during the second quarter of calendar year 2016 and indicated positive results as it showed ORMD-0901 to be safe
and well tolerated and also demonstrated encouraging efficacy data.
We
completed a three-month toxicology study in March 2017 and anticipate receiving the final report during the fourth quarter of
calendar year 2017 and expect to file an IND and move directly into a pharmacokinetics study followed by a large Phase II trial
in the United States under an FDA IND.
Combination
Therapy
In
June 2012, we presented an abstract, which reported the impact of our oral insulin capsule, ORMD-0801, delivered in combination
with our oral exenatide capsule ORMD-0901. The work assessed the safety and effectiveness of a combination of oral insulin and
oral exenatide treatments delivered to pigs prior to food intake. The drug combination resulted in significantly improved blood
glucose regulation when compared to administration of each drug separately.
In
the near term, we are focusing our efforts on the development of our flagship products, oral insulin and oral exenatide. Once
these two products have progressed further in clinical trials, we intend to conduct additional studies with the oral combination
therapy.
Feasibility
study
In
August 2015, we entered into an agreement with a large international pharmaceutical company, or the Pharma Company, pursuant to
which we conducted a feasibility study, using one of the Pharma Company's propriety injectable compounds. The study used our proprietary
technology in order to deliver the compound orally. Following the successful completion of the first stage of the study in July
2016, we continued to the second step of the study. The study will provide data required for decision making on whether to enter
into a license agreement between the parties.
Other
products
During
the first quarter of calendar 2017, we began developing a new drug candidate, a weight loss treatment in the form of an oral leptin
capsule, and in April 2017, Israel’s Ministry of Health approved our commencement of a proof of concept single dose study
for our oral leptin drug candidate to evaluate its pharmacokinetic and pharmacodynamics (glucagon reduction) in 10 type 1 adult
diabetic patients. The study is projected to initiate in calendar year 2018 and be completed during calendar year 2019.
In
November 2017, Israel’s Ministry of Health approved us to initiate an exploratory clinical study of our oral insulin capsule,
ORMD-0801, in patients with nonalcoholic steatohepatitis (NASH). The proposed three-month treatment study will assess the effectiveness
of ORMD-0801 in reducing liver fat content, inflammation and fibrosis in patients with NASH. We expect to initiate the study during
the end of calendar year 2017 and complete it during calendar year 2019.
Raw
Materials
Our
oral insulin capsule is currently manufactured by Swiss Caps AG.
One
of our oral capsule ingredients is being developed and produced by an Indian company.
In
July 2010, Oramed Ltd. entered into the Manufacturing and Supply Agreement, or MSA, with Sanofi-Aventis Deutschland GMBH, or Sanofi-Aventis.
According to the MSA, Sanofi-Aventis will supply Oramed Ltd. with specified quantities of recombinant human insulin to be used
for clinical trials.
We
purchase, pursuant to separate agreements with third parties, the raw materials required for the manufacturing of our oral capsule.
We generally depend upon a limited number of suppliers for the raw materials. Although alternative sources of supply for these
materials are generally available, we could incur significant costs and disruptions if we would need to change suppliers. The
termination of our relationships with our suppliers or the failure of these suppliers to meet our requirements for raw materials
on a timely and cost-effective basis could have a material adverse effect on our business, prospects, financial condition and
results of operations.
Patents
and Licenses
We
maintain a proactive intellectual property strategy, which includes patent filings in multiple jurisdictions, including the United
States and other commercially significant markets. We hold 26 patent applications currently pending, with respect to various compositions,
methods of production and oral administration of proteins and exenatide. Expiration dates for pending patents, if granted,
will fall between 2026 and 2034.
We
hold 64 patents, seventeen of which were issued in fiscal 2017, fifteen of which were issued in September 2017 and two of which
were allowed in Europe and Canada, including patents issued by the United States, Swiss, German, French, U.K., Italian, Dutch,
Spanish, Australian, Israeli, Japanese, New Zealand, South African, Russian, Canadian, Hong Kong, Chinese, European and Indian
patent offices that cover a part of our technology, which allows for the oral delivery of proteins; patents issued by the Australian,
European, Austrian, Belgian, French, German, Irish, Italian, Luxembourg , Monaco, Dutch, Norwegian, Spanish, Swedish, Swiss, U.K.,
Israeli, New Zealand, South African and Russian patent offices that cover part of our technology for the oral delivery of exenatide;
and patents issued by the European, Austrian, Belgian, Danish, French, German, Irish, Italian, Luxembourg , Monaco, Netherland,
Norway, Spanish, Swedish, Swiss, U.K. and Japanese patent offices for treating diabetes.
Consistent
with our strategy to seek protection in key markets worldwide, we have been and will continue to pursue the patent applications
and corresponding foreign counterparts of such applications. We believe that our success will depend on our ability to obtain
patent protection for our intellectual property.
Our
patent strategy is as follows:
|
●
|
Aggressively
protect all current and future technological developments to assure strong and broad protection by filing patents and/or continuations
in part as appropriate,
|
|
●
|
Protect
technological developments at various levels, in a complementary manner, including the base technology, as well as specific applications
of the technology, and
|
|
●
|
Establish
comprehensive coverage in the United States and in all relevant foreign markets in anticipation of future commercialization opportunities.
|
We
also rely on trade secrets and unpatentable know-how that we seek to protect, in part, by confidentiality agreements. Our policy
is to require our employees, consultants, contractors, manufacturers, outside scientific collaborators and sponsored researchers,
our board of directors, or our Board, technical review board and other advisors, to execute confidentiality agreements upon the
commencement of employment or consulting relationships with us. These agreements provide that all confidential information developed
or made known to the individual during the course of the individual’s relationship with us is to be kept confidential and
not disclosed to third parties except in specific limited circumstances. We also require signed confidentiality or material transfer
agreements from any company that is to receive our confidential information. In the case of employees, consultants and contractors,
the agreements provide that all inventions conceived by the individual while rendering services to us shall be assigned to us
as the exclusive property of our Company. There can be no assurance, however, that all persons who we desire to sign such agreements
will sign, or if they do, that these agreements will not be breached, that we would have adequate remedies for any breach, or
that our trade secrets or unpatentable know-how will not otherwise become known or be independently developed by competitors.
Out-Licensed
Technology
In
June 2010, Oramed Ltd. entered into a joint venture agreement with D.N.A Biomedical Solutions Ltd., or D.N.A, for the establishment
of Entera Bio LTD, or Entera.
Under
the terms of a license agreement that was entered into between Oramed Ltd. and Entera in August 2010, we out-licensed technology
to Entera, on an exclusive basis, for the development of oral delivery drugs for certain indications to be agreed upon between
the parties. The out-licensed technology differs from our main delivery technology that is used for oral insulin and GLP-1 analog
and is subject to different patent applications. Entera’s initial development effort is for an oral formulation for the
treatment of osteoporosis. In March 2011, we entered into a patent transfer agreement to replace the original license agreement
upon closing pursuant to which Oramed Ltd. assigned to Entera all of its right, title and interest in and to the patent application
that it had licensed to Entera in August 2010. Under this agreement, Oramed Ltd. is entitled to receive from Entera royalties
of 3% of Entera’s net revenues (as defined in the agreement) and a license back of that patent application for use in respect
of diabetes and influenza.
In
March 2011, we also consummated a transaction with D.N.A, whereby we sold to D.N.A 47% of Entera’s outstanding share capital
on an undiluted basis, retaining a 3% interest as of March 2011. In consideration for the shares sold to D.N.A, the Company received,
among other payments, 4,202,334 ordinary shares of D.N.A
The
D.N.A ordinary shares are traded on the Tel Aviv Stock Exchange and have a quoted price, which is subject to market fluctuations,
and may, at times, have a price below the value on the date we acquired such shares. In addition, the ordinary shares of D.N.A
have historically experienced low trading volume; as a result, there is no guarantee that we will be able to resell the ordinary
shares of D.N.A at the prevailing market prices. During the years ended August 31, 2017, 2016 and 2015, we did not sell any of
the D.N.A ordinary shares. As of August 31, 2017, we held approximately 7.9% of D.N.A’s outstanding ordinary shares.
In
November 2017, Entera filed with the SEC a draft registration statement on Form F-1 for the initial public offering by Entera,
a listing of its shares on the Nasdaq and for potential resale by certain selling stockholders of Entera's ordinary shares previously
issued.
In
June 2016, Entera announced that it had obtained orphan status from the European Medicines Agency, or EMA, for its oral treatment
for hypoparathyroidism. EMA approval is in addition to the orphan status it obtained from the FDA for the same oral treatment
in April 2014.
In
July 2015, Entera announced it had completed a phase IIa study to assess the safety and efficacy of its oral treatment for hypoparathyroidism
and that the goals of the study were achieved.
On
November 30, 2015, we, our Israeli subsidiary and HTIT entered into a Technology License Agreement, and on December 21, 2015 these
parties entered into an Amended and Restated Technology License Agreement that was further amended by the parties on June 3, 2016
and July 24, 2016, or the License Agreement. According to the License Agreement, we granted HTIT an exclusive commercialization
license in the Territory, related to our oral insulin capsule, ORMD-0801, or the Product. Pursuant to the License Agreement, HTIT
will conduct, at its own expense, certain pre-commercialization and regulatory activities with respect to our technology and ORMD-0801
capsule, and will pay (i) royalties of 10% on net sales of the related commercialized products to be sold by HTIT in the Territory,
or Royalties, and (ii) an aggregate of $37.5 million, of which $3 million is payable immediately, $8 million will be paid subject
to our entry into certain agreements with certain third parties, and $26.5 million will be payable upon achievement of certain
milestones and conditions. In the event that we will not meet certain conditions, the Royalties rate may be reduced to a minimum
of 8%. Following the final expiration of our patents covering the technology in the Territory in 2033, the Royalties rate may
be reduced, under certain circumstances, to 5%.
The
royalty payment obligation shall apply during the period of time beginning upon the first commercial sale of the Product in the
Territory, and ending upon the later of (i) the expiration of the last-to-expire licensed patents in the Territory; and (ii) 15
years after the first commercial sale of the Product in the Territory, or the Royalty Term.
The
License Agreement shall remain in effect until the expiration of the Royalty Term. The License Agreement contains customary termination
provisions.
The
initial payment of $3 million was received in January 2016. Following the achievement of certain milestones, the second and third
milestone payments of $6.5 million and $4 million, respectively, were received in July 2016 and the fourth milestone payment of
$4 million was received in October 2016.
We
also entered into a separate securities purchase agreement with HTIT, or the SPA, pursuant to which HTIT invested $12 million
in us in December 2015 (see – “Liquidity and capital resources” below). In connection with the License Agreement
and the SPA, we received a non-refundable payment of $500,000 as a no-shop fee.
Government
Regulation
The
Drug Development Process
Regulatory
requirements for the approval of new drugs vary from one country to another. In order to obtain approval to market our drug portfolio,
we need to go through a different regulatory process in each country in which we apply for such approval. In some cases information
gathered during the approval process in one country can be used as supporting information for the approval process in another
country. As a strategic decision, we decided to first explore the FDA regulatory pathway. The following is a summary of the FDA’s
requirements.
The
FDA requires that pharmaceutical and certain other therapeutic products undergo significant clinical experimentation and clinical
testing prior to their marketing or introduction to the general public. Clinical testing, known as clinical trials or clinical
studies, is either conducted internally by life science, pharmaceutical, or biotechnology companies or is conducted on behalf
of these companies by CROs.
The
process of conducting clinical studies is highly regulated by the FDA, as well as by other governmental and professional bodies.
Below we describe the principal framework in which clinical studies are conducted, as well as describe a number of the parties
involved in these studies.
Protocols.
Before commencing human clinical studies, the sponsor of a new drug or therapeutic product must submit an IND application to the
FDA. The application contains, among other documents, what is known in the industry as a protocol. A protocol is the blueprint
for each drug study. The protocol sets forth, among other things, the following:
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Who
must be recruited as qualified participants,
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How
often to administer the drug or product,
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What
tests to perform on the participants, and
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What
dosage of the drug or amount of the product to give to the participants.
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Institutional
Review Board. An institutional review board is an independent committee of professionals and lay persons which reviews clinical
research studies involving human beings and is required to adhere to guidelines issued by the FDA. The institutional review board
does not report to the FDA, but its records are audited by the FDA. Its members are not appointed by the FDA. All clinical studies
must be approved by an institutional review board. The institutional review board’s role is to protect the rights of the
participants in the clinical studies. It approves the protocols to be used, the advertisements which the company or CRO conducting
the study proposes to use to recruit participants, and the form of consent which the participants will be required to sign prior
to their participation in the clinical studies.
Clinical
Trials. Human clinical studies or testing of a potential product are generally done in three stages known as Phase I through Phase
III testing. The names of the phases are derived from the regulations of the FDA. Generally, there are multiple studies conducted
in each phase.
Phase
I. Phase I studies involve testing a drug or product on a limited number of healthy or patient participants, typically 24 to 100
people at a time. Phase I studies determine a product’s basic safety and how the product is absorbed by, and eliminated
from, the body. This phase lasts an average of six months to a year.
Phase
II. Phase II trials involve testing of no more than 300 participants at a time who may suffer from the targeted disease or condition.
Phase II testing typically lasts an average of one to two years. In Phase II, the drug is tested to determine its safety and effectiveness
for treating a specific illness or condition. Phase II testing also involves determining acceptable dosage levels of the drug.
Phase II studies may be split into Phase IIa and Phase IIb sub-studies. Phase IIa studies may be conducted with patient volunteers
and are exploratory (non-pivotal) studies, typically designed to evaluate clinical efficacy or biological activity. Phase IIb
studies are conducted with patients defined to evaluate definite dose range and evaluate efficacy. If Phase II studies show that
a new drug has an acceptable range of safety risks and probable effectiveness, a company will generally continue to review the
substance in Phase III studies.
Phase
III. Phase III studies involve testing large numbers of participants, typically several hundred to several thousand persons. The
purpose is to verify effectiveness and long-term safety on a large scale. These studies generally last two to three years. Phase
III studies are conducted at multiple locations or sites. Like the other phases, Phase III requires the site to keep detailed
records of data collected and procedures performed.
Biological
License Application. The results of the clinical trials for a biological product are submitted to the FDA as part of a BLA. Following
the completion of Phase III studies, assuming the sponsor of a potential product in the United States believes it has sufficient
information to support the safety and effectiveness of its product, the sponsor will generally submit a BLA to the FDA requesting
that the product be approved for marketing. The application is a comprehensive, multi-volume filing that includes the results
of all clinical studies, information about the drug’s composition, and the sponsor’s plans for producing, packaging
and labeling the product. The FDA’s review of an application can take a few months to many years, with the average review
lasting 18 months. Once approved, drugs and other products may be marketed in the United States, subject to any conditions imposed
by the FDA. Approval of a BLA provides 12 years of exclusivity in the U.S. market.
Phase
IV. The FDA may require that the sponsor conduct additional clinical trials following new drug approval. The purpose of these
trials, known as Phase IV studies, is to monitor long-term risks and benefits, study different dosage levels or evaluate safety
and effectiveness. In recent years, the FDA has increased its reliance on these trials. Phase IV studies usually involve thousands
of participants. Phase IV studies also may be initiated by the company sponsoring the new drug to gain broader market value for
an approved drug.
Similar
to the U.S., a European sponsor of a biological product may submit a Marketing Approval Application to the EMA for the registration
of the product. The approval process in Europe consists of several stages, which together are summed up to 210 days from the time
of submission of the application (net, without periods in which the sponsor provides answers to questions raised by the agency)
following which, a Marketing Approval may be granted. During the approval process, the sponsor's manufacturing facilities will
be audited in order to assess Good Manufacturing Practice compliance.
The
drug approval process is time-consuming, involves substantial expenditures of resources, and depends upon a number of factors,
including the severity of the illness in question, the availability of alternative treatments, and the risks and benefits demonstrated
in the clinical trials.
Other
Regulations
Various
federal, state and local laws, regulations, and recommendations relating to safe working conditions, laboratory practices, the
experimental use of animals, the environment and the purchase, storage, movement, import, export, use, and disposal of hazardous
or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with our
research are applicable to our activities. They include, among others, the U.S. Atomic Energy Act, the Clean Air Act, the Clean
Water Act, the Occupational Safety and Health Act, the National Environmental Policy Act, the Toxic Substances Control Act, and
Resources Conservation and Recovery Act, national restrictions on technology transfer, import, export, and customs regulations,
and other present and possible future local, state, or federal regulation. The compliance with these and other laws, regulations
and recommendations can be time-consuming and involve substantial costs. In addition, the extent of governmental regulation which
might result from future legislation or administrative action cannot be accurately predicted and may have a material adverse effect
on our business, financial condition, results of operations and prospects.
Competition
Competition
in General
Competition
in the area of biomedical and pharmaceutical research and development is intense and significantly depends on scientific and technological
factors. These factors include the availability of patent and other protection for technology and products, the ability to commercialize
technological developments and the ability to obtain regulatory approval for testing, manufacturing and marketing. Our competitors
include major pharmaceutical, medical products, chemical and specialized biotechnology companies, many of which have financial,
technical and marketing resources significantly greater than ours. In addition, many biotechnology companies have formed collaborations
with large, established companies to support research, development and commercialization of products that may be competitive with
ours. Academic institutions, governmental agencies and other public and private research organizations are also conducting research
activities and seeking patent protection and may commercialize products on their own or through joint ventures. We are aware of
certain other products manufactured or under development by competitors that are used for the treatment of the diseases and health
conditions that we have targeted for product development. We can provide no assurance that developments by others will not render
our technology obsolete or noncompetitive, that we will be able to keep pace with new technological developments or that our technology
will be able to supplant established products and methodologies in the therapeutic areas that are targeted by us. The foregoing
factors could have a material adverse effect on our business, prospects, financial condition and results of operations. These
companies, as well as academic institutions, governmental agencies and private research organizations, also compete with us in
recruiting and retaining highly qualified scientific personnel and consultants.
Competition
within our sector is increasing, so we will encounter competition from existing firms that offer competitive solutions in diabetes
treatment solutions. These competitive companies could develop products that are superior to, or have greater market acceptance,
than the products being developed by us. We will have to compete against other biotechnology and pharmaceutical companies with
greater market recognition and greater financial, marketing and other resources.
Our
competition will be determined in part by the potential indications for which our technology is developed and ultimately approved
by regulatory authorities. In addition, the first product to reach the market in a therapeutic or preventive area is often at
a significant competitive advantage relative to later entrants to the market. Accordingly, the relative speed with which we, or
our potential corporate partners, can develop products, complete the clinical trials and approval processes and supply commercial
quantities of the products to the market are expected to be important competitive factors. Our competitive position will also
depend on our ability to attract and retain qualified scientific and other personnel, develop effective proprietary products,
develop and implement production and marketing plans, obtain and maintain patent protection and secure adequate capital resources.
We expect our technology, if approved for sale, to compete primarily on the basis of product efficacy, safety, patient convenience,
reliability, value and patent position.
Competition
for Our Oral Insulin Capsule
We
anticipate the oral insulin capsule to be a competitive diabetes drug because of its anticipated efficacy and safety profile.
The following are treatment options for type 1 and type 2 diabetic patients:
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A
combination of diet, exercise and oral medication which improve the body’s response to insulin or cause the body to produce
more insulin.
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Several
entities who are actively developing oral insulin capsules and/or alternatives to insulin are thought to be: Diabetology (UK),
Biocon Limited (India) and Midatech (UK).
Scientific
Advisory Board
We
maintain a Scientific Advisory Board consisting of internationally recognized scientists who advise us on scientific and technical
aspects of our business. The Scientific Advisory Board meets periodically to review specific projects and to assess the value
of new technologies and developments to us. In addition, individual members of the Scientific Advisory Board meet with us periodically
to provide advice in their particular areas of expertise. The Scientific Advisory Board consists of the following members, information
with respect to whom is set forth below: Dr. Roy Eldor, Professor Ele Ferrannini, Professor Avram Hershko, Dr. Harold Jacob and
Dr. Harvey L. Katzeff.
Dr.
Roy Eldor
,
MD
, joined the Oramed Scientific Advisory Board in July 2016. He is an endocrinologist, internist and
researcher with over twenty years of clinical and scientific experience. He is currently Director of the Diabetes Unit at the
Institute of Endocrinology, Metabolism & Hypertension, Tel-Aviv Sourasky Medical Center. Prior to that, Dr. Eldor served as
Principal Scientist at Merck Research Laboratories, Clinical Research - Diabetes & Endocrinology, Rahway, New Jersey. He has
previously served as a senior physician in internal medicine at the Diabetes Unit in Hadassah Hebrew University Hospital, Jerusalem,
Israel; and the Diabetes Division at the University of Texas Health Science Center in San Antonio, Texas (under the guidance of
Dr. R.A. DeFronzo). Dr. Eldor is a recognized expert, with over 35 peer reviewed papers and book chapters, and has been a guest
speaker at numerous international forums.
Professor
Ele Ferrannini
,
MD,
joined the Oramed Scientific Advisory Board in February 2007. He is a past President to the
European Association for the Study of Diabetes, which supports scientists, physicians and students from all over the world who
are interested in diabetes and related subjects in Europe, and performs functions similar to that of the ADA in the United States.
Professor Ferrannini has worked with various institutions including the Department of Clinical & Experimental Medicine, University
of Pisa School of Medicine, and CNR (National Research Council) Institute of Clinical Physiology, Pisa, Italy; and the Diabetes
Division, Department of Medicine, University of Texas Health Science Center at San Antonio, Texas. He has also had extensive training
in internal medicine and endocrinology, and has specialized in diabetes studies. Professor Ferrannini has received a Certificate
of the Educational Council for Foreign Medical Graduates from the University of Bologna, and with cum laude honors completed a
subspecialty in Diabetes and Metabolic Diseases at the University of Torino. He has published over 500 original papers and 50
book chapters and he is a “highly cited researcher,” according to the Institute for Scientific Information.
Professor
Avram Hershko, MD, PhD
, joined the Oramed Scientific Advisory Board in July 2008. He earned his MD degree (1965) and PhD
degree (1969) from the Hebrew University-Hadassah Medical School of Jerusalem. Professor Hershko served as a physician in the
Israel Defense Forces from 1965 to 1967. After a post-doctoral fellowship with Gordon Tomkins at the University of San Francisco
(1969
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72), he joined the faculty of the Haifa Technion becoming a professor in 1980. He is now Distinguished Professor
in the Unit of Biochemistry in the B. Rappaport Faculty of Medicine of the Technion. Professor Hershko’s main research interests
concern the mechanisms by which cellular proteins are degraded, a formerly neglected field of study. Professor Hershko and his
colleagues showed that cellular proteins are degraded by a highly selective proteolytic system. This system tags proteins for
destruction by linkage to a protein called ubiquitin, which had previously been identified in many tissues, but whose function
was previously unknown. Subsequent work by Professor Hershko and many other laboratories has shown that the ubiquitin system has
a vital role in controlling a wide range of cellular processes, such as the regulation of cell division, signal transduction and
DNA repair. Professor Hershko was awarded the Nobel Prize in Chemistry (2004) jointly with his former PhD student Aaron Ciechanover
and their colleague Irwin Rose. His many honors include the Israel Prize for Biochemistry (1994), the Gairdner Award (1999), the
Lasker Prize for Basic Medical Research (2000), the Wolf Prize for Medicine (2001) and the Louisa Gross Horwitz Award (2001).
Professor Hershko is a member of the Israel Academy of Sciences (2000) and a Foreign Associate of the U.S. Academy of Sciences
(2003).
Dr.
Harold Jacob, MD
, joined the Oramed Scientific Advisory Board in November 2016. Since 1998, Dr. Jacob has served as the
president of Medical Instrument Development Inc., a company which provides a range of support and consulting services to start-up
and early stage companies as well as patenting its own proprietary medical devices. Since 2011, Dr. Jacob has also served as an
attending physician at Hadassah University Medical Center, where he has served as the director of the gastrointestinal endoscopy
unit since September 2013. Dr. Jacob has advised a spectrum of companies in the past and he served as a consultant and then as
the Director of Medical Affairs at Given Imaging Ltd., from 1997 to 2003, a company that developed the first swallowable wireless
pill camera for inspection of the intestine. He has licensed patents to a number of companies including Kimberly-Clark Corporation.
Since 2014, Dr. Jacob has served as the Chief Medical Officer and a director of NanoVibronix, Inc., a medical device company using
surface acoustics to prevent catheter acquired infection as well as other applications, where he served as Chief Executive Officer
from 2004 to 2014. He practiced clinical gastroenterology in New York and served as Chief of Gastroenterology at St. John’s
Episcopal Hospital and South Nassau Communities Hospital from 1986 to 1995, and was a Clinical Assistant Professor of Medicine
at SUNY from 1983 to 1990. Dr. Jacob founded and served as Editor in Chief of Endoscopy Review and has authored numerous publications
in the field of gastroenterology.
Dr.
Harvey L. Katzeff, MD
, joined the Oramed Scientific Advisory Board in November 2016. Dr. Katzeff is an internationally
recognized authority on diabetes with over 30 years’ experience in academic medicine and clinical and basic research. He
currently serves as Senior Director in the Cardiovascular, Metabolic, Endocrinology and Renal Division of Covance Inc. He previously
was Executive Director and Global Director for Scientific Affairs for Diabetes at Merck, and former Chief of Endocrinology and
Metabolism at LIJ/North Shore Health System. He was on the faculties of Cornell Medical College and Rockefeller University, was
President of the Eastern region of the American Diabetes Association and has received numerous honors including a National Institutes
of Health new investigator award. Dr. Katzeff has published over 40 original reports, book chapters and reviews.
Employees
We
have been successful in retaining experienced personnel involved in our research and development program. In addition, we believe
we have successfully recruited the clinical/regulatory, quality assurance and other personnel needed to advance through clinical
studies or have engaged the services of experts in the field for these requirements. As of August 31, 2017, we have contracted
with fourteen individuals for employment or consulting arrangements. Of our staff, six are senior management, three are engaged
in research and development work, and the remaining five are involved in administration work.
Additional
Information
Additional
information about us is contained on our Internet website at www.oramed.com. Information on our website is not incorporated by
reference into this report. On our website, under “Investors”, “SEC Filings”, we make available free of
charge our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports
filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon
as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our reports filed with
the SEC are also made available to read and copy at the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. You
may obtain information about the Public Reference Room by calling the SEC at 1-800-SEC-0330. Reports filed with the
SEC are also made available on its website at www.sec.gov. The following Corporate Governance documents are also posted on
our website: Code of Ethics, Whistleblowing Policy and the Charters for each of the Audit Committee, Compensation Committee and
Nominating Committee of our Board.
ITEM
1A. RISK FACTORS.
An
investment in our securities involves a high degree of risk. You should consider carefully the following information about these
risks, together with the other information contained in this Annual Report on Form 10-K before making an investment decision.
Our business, prospects, financial condition, and results of operations may be materially and adversely affected as a result of
any of the following risks. The value of our securities could decline as a result of any of these risks. You could lose all or
part of your investment in our securities. Some of the statements in “Item 1A. Risk Factors” are forward-looking statements.
The following risk factors are not the only risk factors facing our Company. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also affect our business, prospects, financial condition and results of operations.
Risks
Related to Our Business
We
continue, and in the future expect, to incur losses
.
Successful
completion of our development programs and our transition to normal operations are dependent upon obtaining necessary regulatory
approvals from the FDA prior to selling our products within the United States, and foreign regulatory approvals must be obtained
to sell our products internationally. There can be no assurance that we will receive regulatory approval of any of our product
candidates, and a substantial amount of time may pass before we achieve a level of revenues adequate to support our operations.
We also expect to incur substantial expenditures in connection with the regulatory approval process for each of our product candidates
during their respective developmental periods. Obtaining marketing approval will be directly dependent on our ability to implement
the necessary regulatory steps required to obtain marketing approval in the United States and in other countries. We cannot predict
the outcome of these activities.
Based
on our current cash resources and commitments, we believe we will be able to maintain our current planned development activities
and the corresponding level of expenditures for at least the next 12 months and beyond, although no assurance can be given that
we will not need additional funds prior to such time. If there are unexpected increases in our operating expenses, we may need
to seek additional financing during the next 12 months.
We
will need substantial additional capital in order to satisfy our business objectives.
To
date, we have financed our operations principally through offerings of securities and we will require substantial additional financing
at various intervals in order to continue our research and development programs, including significant requirements for operating
expenses including intellectual property protection and enforcement, for pursuit of regulatory approvals, and for commercialization
of our products. We can provide no assurance that additional funding will be available on a timely basis, on terms acceptable
to us, or at all. In the event that we are unable to obtain such financing, we will not be able to fully develop and commercialize
our technology. Our future capital requirements will depend upon many factors, including:
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Continued
scientific progress in our research and development programs,
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Costs
and timing of conducting clinical trials and seeking regulatory approvals and patent
prosecutions,
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Competing
technological and market developments,
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Our
ability to establish additional collaborative relationships, and
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Effects
of commercialization activities and facility expansions if and as required.
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If
we cannot secure adequate financing when needed, we may be required to delay, scale back or eliminate one or more of our research
and development programs or to enter into license or other arrangements with third parties to commercialize products or technologies
that we would otherwise seek to develop ourselves and commercialize ourselves. In such event, our business, prospects, financial
condition, and results of operations may be adversely affected as we may be required to scale-back, eliminate, or delay development
efforts or product introductions or enter into royalty, sales or other agreements with third parties in order to commercialize
our products.
We
have a history of losses and can provide no assurance as to our future operating results.
We
do not have sufficient revenues from our research and development activities to fully support our operations. Consequently, we
have incurred net losses and negative cash flows since inception. We currently have only licensing revenues and no product revenues,
and may not succeed in developing or commercializing any products which could generate product revenues. We do not expect to have
any products on the market for several years. In addition, development of our product candidates requires a process of pre-clinical
and clinical testing, during which our products could fail. We may not be able to enter into agreements with one or more companies
experienced in the manufacturing and marketing of therapeutic drugs and, to the extent that we are unable to do so, we will not
be able to market our product candidates. Eventual profitability will depend on our success in developing, manufacturing, and
marketing our product candidates. As of August 31, 2017, August 31, 2016 and August 31, 2015, we had working capital of $15,132,000,
$27,609,000 and $15,883,000, respectively, and stockholders’ equity of $19,238,000, $26,190,000 and $24,828,000, respectively.
During the 12 month periods ended August 31, 2017, or fiscal 2017, and 2016, or fiscal 2016, we generated revenues of $2,456,000
and $641,000, respectively. No revenues were generated in prior periods. For the period from our inception on April 12, 2002 through
August 31, 2017, fiscal 2017, fiscal 2016, and the year ended August 31, 2015, or fiscal 2015, we incurred net losses of $56,496,000,
$10,480,000, $10,964,000 and $7,232,000, respectively. We may never achieve profitability and expect to incur net losses in the
foreseeable future. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
We
rely upon patents to protect our technology.
The
patent position of biopharmaceutical and biotechnology firms is generally uncertain and involves complex legal and factual questions.
We do not know whether any of our current or future patent applications will result in the issuance of any patents. Even issued
patents may be challenged, invalidated or circumvented. Patents may not provide a competitive advantage or afford protection against
competitors with similar technology. Competitors or potential competitors may have filed applications for, or may have received
patents and may obtain additional and proprietary rights to compounds or processes used by or competitive with ours. In addition,
laws of certain foreign countries do not protect intellectual property rights to the same extent as do the laws of the United
States.
Patent
litigation is becoming widespread in the biopharmaceutical and biotechnology industry and we cannot predict how this will affect
our efforts to form strategic alliances, conduct clinical testing or manufacture and market any products under development. If
challenged, our patents may not be held valid. We could also become involved in interference proceedings in connection with one
or more of our patents or patent applications to determine priority of invention. If we become involved in any litigation, interference
or other administrative proceedings, we will likely incur substantial expenses and the efforts of our technical and management
personnel will be significantly diverted. In addition, an adverse determination could subject us to significant liabilities or
require us to seek licenses that may not be available on favorable terms, if at all. We may be restricted or prevented from manufacturing
and selling our products in the event of an adverse determination in a judicial or administrative proceeding or if we fail to
obtain necessary licenses.
We
may be unable to protect our intellectual property rights and we may be liable for infringing the intellectual property rights
of others.
Our
ability to compete effectively will depend on our ability to maintain the proprietary nature of our technologies. We currently
hold several pending patent applications in the United States, Canada, Brazil, Europe, India, Hong Kong, Japan and China for our
technologies covering oral administration of insulin and other proteins and oral administration of exenatide and proteins, two
allowed patents in Europe and Canada and 62 patents issued by the United States, Australian, Canadian, Chinese, Israeli, Japanese,
New Zealand, South African, Russian, European, Hong Kong, Swiss, German, Spanish, French, United Kingdom, Italian, Indian, Austrian,
Belgian, Irish, Swedish, Danish, Luxembourg , Monaco, Norway and Dutch patent offices for our technologies covering oral administration
of insulin and other proteins, or for our technologies covering oral administration of exenatide, or for methods and compositions
for treating diabetes. Further, we intend to rely on a combination of trade secrets and non-disclosure and other contractual agreements
and technical measures to protect our rights in our technology. We intend to depend upon confidentiality agreements with our officers,
directors, employees, consultants, and subcontractors, as well as collaborative partners, to maintain the proprietary nature of
our technology. These measures may not afford us sufficient or complete protection, and others may independently develop technology
similar to ours, otherwise avoid our confidentiality agreements, or produce patents that would materially and adversely affect
our business, prospects, financial condition, and results of operations. We believe that our technology is not subject to any
infringement actions based upon the patents of any third parties; however, our technology may in the future be found to infringe
upon the rights of others. Others may assert infringement claims against us or against companies to which we have licensed our
technology, and if we should be found to infringe upon their patents, or otherwise impermissibly utilize their intellectual property,
our ability to continue to use our technology could be materially restricted or prohibited. If this event occurs, we may be required
to obtain licenses from the holders of this intellectual property, enter into royalty agreements, or redesign our products so
as not to utilize this intellectual property, each of which may prove to be uneconomical or otherwise impossible. Licenses or
royalty agreements required in order for us to use this technology may not be available on terms acceptable to us, or at all.
These claims could result in litigation, which could materially adversely affect our business, prospects, financial condition,
and results of operations. Further, we may need to indemnify companies to which we licensed our technology in the event that such
technology is found to infringe upon the rights of others.
Our
commercial success will also depend significantly on our ability to operate without infringing the patents and other proprietary
rights of third parties. Patent applications are, in many cases, maintained in secrecy until patents are issued. The publication
of discoveries in the scientific or patent literature frequently occurs substantially later than the date on which the underlying
discoveries were made and patent applications are filed. In the event of infringement or violation of another party’s patent,
we may be prevented from pursuing product development or commercialization. See “Item 1. Business—Description of Business—Patents
and Licenses.”
At
present, our success depends primarily on the successful commercialization of our oral insulin capsule.
The
successful commercialization of oral insulin capsule is crucial for our success. At present, our principal product is the oral
insulin capsule. Our oral insulin capsule is in a clinical development stage and faces a variety of risks and uncertainties. Principally,
these risks include the following:
● Future
clinical trial results may show that the oral insulin capsule is not well tolerated by recipients at its effective doses or is
not efficacious as compared to placebo,
● Future
clinical trial results may be inconsistent with previous preliminary testing results and data from our earlier studies may be
inconsistent with clinical data,
● Even
if our oral insulin capsule is shown to be safe and effective for its intended purposes, we may face significant or unforeseen
difficulties in obtaining or manufacturing sufficient quantities or at reasonable prices,
● Our
ability to complete the development and commercialization of the oral insulin capsule for our intended use is significantly dependent
upon our ability to obtain and maintain experienced and committed partners to assist us with obtaining clinical and regulatory
approvals for, and the manufacturing, marketing and distribution of, the oral insulin capsule on a worldwide basis,
● Even
if our oral insulin capsule is successfully developed, commercially produced and receives all necessary regulatory approvals,
there is no guarantee that there will be market acceptance of our product, and
● Our
competitors may develop therapeutics or other treatments which are superior or less costly than our own with the result that our
products, even if they are successfully developed, manufactured and approved, may not generate significant revenues.
If
we are unsuccessful in dealing with any of these risks, or if we are unable to successfully commercialize our oral insulin capsule
for some other reason, it would likely seriously harm our business.
We
have limited experience in conducting clinical trials.
Clinical
trials must meet FDA and foreign regulatory requirements. We have limited experience in designing, conducting and managing the
preclinical studies and clinical trials necessary to obtain regulatory approval for our product candidates in any country. We
have entered into agreements with Integrium LLC to assist us in designing, conducting and managing our various clinical trials
in the United States. Any failure of Integrium LLC or any other consultant to fulfill their obligations could result in significant
additional costs as well as delays in designing, consulting and completing clinical trials on our products.
Our
clinical trials may encounter delays, suspensions or other problems.
We
may encounter problems in clinical trials that may cause us or the FDA or foreign regulatory agencies to delay, suspend or terminate
our clinical trials at any phase. These problems could include the possibility that we may not be able to conduct clinical trials
at our preferred sites, enroll a sufficient number of patients for our clinical trials at one or more sites or begin or successfully
complete clinical trials in a timely fashion, if at all. Furthermore, we, the FDA or foreign regulatory agencies may suspend clinical
trials at any time if we or they believe the subjects participating in the trials are being exposed to unacceptable health risks
or if we or they find deficiencies in the clinical trial process or conduct of the investigation. If clinical trials of any of
the product candidates fail, we will not be able to market the product candidate which is the subject of the failed clinical trials.
The FDA and foreign regulatory agencies could also require additional clinical trials, which would result in increased costs and
significant development delays. Our failure to adequately demonstrate the safety and effectiveness of a pharmaceutical product
candidate under development could delay or prevent regulatory approval of the product candidate and could have a material adverse
effect on our business, prospects, financial condition, and results of operations.
We
can provide no assurance that our products will obtain regulatory approval or that the results of clinical studies will be favorable.
The
testing, marketing and manufacturing of any of our products will require the approval of the FDA or regulatory agencies of other
countries. We have completed certain non-FDA clinical trials and pre-clinical trials for our products. In addition, we have completed
a Phase IIb clinical trial in patients with type 2 diabetes under an IND with the FDA and we have completed Phase IIa clinical
trials of ORMD-0801 in patients with type 1 diabetes under an IND with the FDA. However, success in pre-clinical testing and early
clinical trials does not ensure that later clinical trials will be successful. For example, a number of companies in the pharmaceutical
industry have suffered significant setbacks in advanced clinical trials.
We
cannot predict with any certainty the amount of time necessary to obtain regulatory approvals, including from the FDA or other
foreign regulatory authorities, and whether any such approvals will ultimately be granted. In any event, review and approval by
the regulatory bodies is anticipated to take a number of years. Preclinical and clinical trials may reveal that one or more of
our products are ineffective or unsafe, in which event further development of such products could be seriously delayed or terminated.
Moreover, obtaining approval for certain products may require the testing on human subjects of substances whose effects on humans
are not fully understood or documented. Delays in obtaining necessary regulatory approvals of any proposed product and failure
to receive such approvals would have an adverse effect on the product’s potential commercial success and on our business,
prospects, financial condition, and results of operations. In addition, it is possible that a product may be found to be ineffective
or unsafe due to conditions or facts which arise after development has been completed and regulatory approvals have been obtained.
In this event we may be required to withdraw such product from the market. See “Item 1. Business—Description of Business—Government
Regulation.”
We
are dependent upon third party suppliers of our raw materials.
We
are dependent on outside vendors for our entire supply of the oral insulin and GLP-1 capsules and do not currently have any long-term
agreements in place for the supply of oral insulin or GLP-1 capsules. While we believe that there are numerous sources of supply
available, if the third party suppliers were to cease production or otherwise fail to supply us with quality raw materials in
sufficient quantities on a timely basis and we were unable to contract on acceptable terms for these services with alternative
suppliers, our ability to produce our products and to conduct testing and clinical trials would be materially adversely affected.
Our
future revenues from HTIT are dependent upon third party suppliers and Chinese regulatory approvals.
Our
future revenues from HTIT are dependent upon the achievement of certain milestones and conditions, and the success of HTIT to
implement our technology and to manufacture the oral insulin capsule. Our future revenues from HTIT are also dependent upon the
ability of third parties to scale-up one of our oral capsule ingredients and to scale-up the manufacturing process of our capsules.
Our future revenues from royalties from HTIT are further dependent upon the granting of regulatory approvals in the Territory.
Accordingly, if any of the foregoing does not occur, we may not be successful in receiving future revenues from HTIT and may not
succeed with our business plans in China.
We
are highly dependent upon our ability to enter into agreements with collaborative partners to develop, commercialize, and market
our products.
Our
long-term strategy is to ultimately seek a strategic commercial partner, or partners, such as large pharmaceutical companies,
with extensive experience in the development, commercialization, and marketing of insulin applications and/or other orally digestible
drugs. We anticipate such partner or partners would be responsible for, or substantially support, late stage clinical trials (Phase
III) and sales and marketing of our oral insulin capsule and other products. Such planned strategic partnership, or partnerships,
may provide a marketing and sales infrastructure for our products as well as financial and operational support for global clinical
trials, post marketing studies, label expansions and other regulatory requirements concerning future clinical development in the
United States and elsewhere.
While
our strategy is to partner with an appropriate party, no assurance can be given that any third party would be interested in partnering
with us. We currently lack the resources to manufacture any of our product candidates on a large scale and we have no sales, marketing
or distribution capabilities. In the event we are not able to enter into a collaborative agreement with a partner or partners,
on commercially reasonable terms, or at all, we may be unable to commercialize our products, which would have a material adverse
effect upon our business, prospects, financial condition, and results of operations.
The
biotechnology and biopharmaceutical industries are characterized by rapid technological developments and a high degree of competition.
We may be unable to compete with more substantial enterprises.
The
biotechnology and biopharmaceutical industries are characterized by rapid technological developments and a high degree of competition.
As
a result, our products could become obsolete before we recoup any portion of our related research and development and commercialization
expenses. These industries are highly competitive, and this competition comes both from biotechnology firms and from major pharmaceutical
and chemical companies. Many of these companies have substantially greater financial, marketing, and human resources than we do
(including, in some cases, substantially greater experience in clinical testing, manufacturing, and marketing of pharmaceutical
products). We also experience competition in the development of our products from universities and other research institutions
and compete with others in acquiring technology from such universities and institutions. In addition, certain of our products
may be subject to competition from products developed using other technologies. See “Item 1. Business—Description
of Business—Competition.”
We
have limited senior management resources and may be required to obtain more resources to manage our growth.
We
expect the expansion of our business to place a significant strain on our limited managerial, operational, and financial resources.
We will be required to expand our operational and financial systems significantly and to expand, train, and manage our work force
in order to manage the expansion of our operations. Our failure to fully integrate our new employees into our operations could
have a material adverse effect on our business, prospects, financial condition, and results of operations. Our ability to attract
and retain highly skilled personnel is critical to our operations and expansion. We face competition for these types of personnel
from other technology companies and more established organizations, many of which have significantly larger operations and greater
financial, technical, human, and other resources than we have. We may not be successful in attracting and retaining qualified
personnel on a timely basis, on competitive terms, or at all. If we are not successful in attracting and retaining these personnel,
our business, prospects, financial condition, and results of operations will be materially adversely affected. See “Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Item 1. Business—Description
of Business—Strategy” and “—Employees.”
We
depend upon our senior management and skilled personnel and their loss or unavailability could put us at a competitive disadvantage.
We
currently depend upon the efforts and abilities of our senior executives, as well as the services of several key consultants and
other key personnel, including Dr. Miriam Kidron, our Chief Scientific Officer. The loss or unavailability of the services of
any of these individuals for any significant period of time could have a material adverse effect on our business, prospects, financial
condition, and results of operations. We do not maintain “key man” life insurance policies for any of our senior executives.
In addition, recruiting and retaining qualified scientific personnel to perform future research and development work will be critical
to our success. There is currently a shortage of employees with expertise in developing, manufacturing and commercialization of
products and related clinical and regulatory affairs, and this shortage is likely to continue. Competition for skilled personnel
is intense and turnover rates are high. Our ability to attract and retain qualified personnel may be limited. Our inability to
attract and retain qualified skilled personnel would have a material adverse effect on our business, prospects, financial condition,
and results of operations.
Healthcare
policy changes, including pending legislation recently adopted and further proposals still pending to reform the U.S. healthcare
system, may harm our future business.
Healthcare
costs have risen significantly over the past decade. There have been and continue to be proposals by legislators, regulators and
third-party payors to keep these costs down. Certain proposals, if passed, would impose limitations on the prices we will be able
to charge for the products that we are developing, or the amounts of reimbursement available for these products from governmental
agencies or third-party payors. These limitations could in turn reduce the amount of revenues that we will be able to generate
in the future from sales of our products and licenses of our technology.
In
2010, the federal government enacted healthcare reform legislation that has significantly impacted the pharmaceutical industry.
In addition to requiring most individuals to have health insurance and establishing new regulations on health plans, this legislation
requires discounts under the Medicare drug benefit program and increased rebates on drugs covered by Medicaid. In addition, the
legislation imposes an annual fee, which has increased annually, on sales by branded pharmaceutical manufacturers. There
can be no assurance that our business will not be materially adversely affected by these increased rebates, fees and other provisions.
In addition, these and other initiatives in the United States may continue the pressure on drug pricing, especially under the
Medicare and Medicaid programs, and may also increase regulatory burdens and operating costs. The announcement or adoption of
any such initiative could have an adverse effect on potential revenues from any product that we may successfully develop. An expansion
in government’s role in the U.S. healthcare industry may lower the future revenues for the products we are developing and
adversely affect our future business, possibly materially.
In
September 2017, members of the U.S. Congress introduced legislation with the announced intention to repeal and replace major provisions
of the Patient Protection and Affordable Care Act, or the ACA. Although it is unclear whether such legislation will ultimately
become law, attempts to repeal or to repeal and replace the ACA will likely continue. In addition, various other healthcare reform
proposals have also emerged at the federal and state level. We cannot predict what healthcare initiatives, if any, will be implemented
at the federal or state level, or the effect any future legislation or regulation will have on us.
We
are exposed to fluctuations in currency exchange rates.
A
considerable amount of our expenses are generated in dollars or in dollar-linked currencies, but a significant portion of our
expenses such as some clinical studies and payroll costs are generated in other currencies such as NIS, Euro and British pounds.
Most of the time, our non-dollar assets are not totally offset by non-dollar liabilities. Due to the foregoing and to the fact
that our financial results are measured in dollars, our results could be adversely affected as a result of a strengthening or
weakening of the dollar compared to these other currencies. During the fiscal years ended August 31, 2013, 2014 and 2017, the
dollar depreciated in relation to the NIS, which raised the dollar cost of our Israeli based operations and adversely affected
our financial results, while during fiscals 2015 and 2016, the dollar increased in relation to the NIS, which reduced the dollar
cost of our Israeli based operations costs. In addition, our results could also be adversely affected if we are unable to guard
against currency fluctuations in the future. Although we may in the future decide to undertake foreign exchange hedging transactions
to cover a portion of our foreign currency exchange exposure, we currently do not hedge our exposure to foreign currency exchange
risks. These transactions, however, may not adequately protect us from future currency fluctuations and, even if they do protect
us, may involve operational or financing costs we would not otherwise incur.
Risks
Related to our Common Stock
As
the market price of our common stock may fluctuate significantly, this may make it difficult for you to sell your shares of common
stock when you want or at prices you find attractive.
The
price of our common stock is currently listed on The Nasdaq Capital Market, or Nasdaq, and on the Tel Aviv Stock Exchange and
constantly changes. In recent years, the stock market in general has experienced extreme price and volume fluctuations. We expect
that the market price of our common stock will continue to fluctuate. These fluctuations may result from a variety of factors,
many of which are beyond our control. These factors include:
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Clinical
trial results and the timing of the release of such results,
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The
amount of cash resources and our ability to obtain additional funding,
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Announcements
of research activities, business developments, technological innovations or new products
by us or our competitors,
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Entering
into or terminating strategic relationships,
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Changes
in government regulation,
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Departure
of key personnel,
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Disputes
concerning patents or proprietary rights,
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Changes
in expense level,
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Future
sales of our equity or equity-related securities,
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Public
concern regarding the safety, efficacy or other aspects of the products or methodologies
being developed,
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Activities
of various interest groups or organizations,
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Status
of the investment markets.
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Future
sales of common stock or the issuance of securities senior to our common stock or convertible into, or exchangeable or exercisable
for, our common stock could materially adversely affect the trading price of our common stock, and our ability to raise funds
in new equity offerings.
Future
sales of substantial amounts of our common stock or other equity-related securities in the public market or privately, or the
perception that such sales could occur, could adversely affect prevailing trading prices of our common stock and could impair
our ability to raise capital through future offerings of equity or other equity-related securities. We anticipate that we will
need to raise capital through offerings of equity and equity related securities. We can make no prediction as to the effect, if
any, that future sales of shares of our common stock or equity-related securities, or the availability of shares of common stock
for future sale, will have on the trading price of our common stock.
Our
stockholders may experience significant dilution as a result of any additional financing using our equity securities.
To
the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution.
Our
management will have significant flexibility in using the net proceeds of any offering of securities.
We
intend generally to use the net proceeds from any offerings of our securities for expenses related to our clinical trials, research
and product development activities, and for general corporate purposes, including general working capital purposes. Our management
will have significant flexibility in applying the net proceeds of any such offering. The actual amounts and timing of expenditures
will vary significantly depending on a number of factors, including the amount of cash used in our operations and our research
and development efforts. Management’s failure to use these funds effectively would have an adverse effect on the value of
our common stock and could make it more difficult and costly to raise funds in the future.
Future
sales of our common stock by our existing stockholders could adversely affect our stock price.
The
market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market,
or the perception that these sales could occur. These sales also might make it more difficult for us to sell equity securities
in the future at a time and at a price that we deem appropriate. As of November 28, 2017, we had outstanding 14,306,100 shares
of common stock, a large majority of which are freely tradable. Giving effect to the exercise in full of all of our outstanding
warrants, options and restricted stock units, or RSUs, including those currently unexercisable or unvested, we would have outstanding
15,722,651 shares of common stock.
Our
issuance of warrants, options and RSUs to investors, employees and consultants may have a negative effect on the trading prices
of our common stock as well as a dilutive effect.
We
have issued and may continue to issue warrants, options, RSUs and convertible notes at, above or below the current market price.
As of November 28, 2017, we had outstanding warrants and options exercisable for 1,221,855 shares of common stock at a weighted
average exercise price of $7.11. We also had outstanding RSUs exercisable for 164,636 shares of common stock at a total exercise
price of $900. In addition to the dilutive effect of a large number of shares of common stock and a low exercise price for the
warrants and options, there is a potential that a large number of underlying shares of common stock may be sold in the open market
at any given time, which could place downward pressure on the trading of our common stock.
Delaware
law could discourage a change in control, or an acquisition of us by a third party, even if the acquisition would be favorable
to you, and thereby adversely affect existing stockholders.
The
Delaware General Corporation Law contains provisions that may have the effect of making more difficult or delaying attempts by
others to obtain control of our Company, even when these attempts may be in the best interests of stockholders. Delaware law imposes
conditions on certain business combination transactions with “interested stockholders.” These provisions and others
that could be adopted in the future could deter unsolicited takeovers or delay or prevent changes in our control or management,
including transactions in which stockholders might otherwise receive a premium for their shares of common stock over then current
market prices. These provisions may also limit the ability of stockholders to approve transactions that they may deem to be in
their best interests.
Because
we will not pay cash dividends, investors may have to sell shares of our common stock in order to realize their investment.
We
have not paid any cash dividends on our common stock and do not intend to pay cash dividends in the foreseeable future. We intend
to retain future earnings, if any, for reinvestment in the development and expansion of our business. Any credit agreements which
we may enter into with institutional lenders or otherwise may restrict our ability to pay dividends. Whether we pay cash dividends
in the future will be at the discretion of our Board and will be dependent upon our financial condition, results of operations,
capital requirements, and any other factors that our Board decides is relevant. See “Item 5. Market Price for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.”
Because
certain of our stockholders control a significant number of shares of our common stock, they may have effective control over actions
requiring stockholder approval.
As
of November 28, 2017, our directors, executive officers and principal affiliated stockholders beneficially own approximately 33.6%
of our outstanding shares of common stock, excluding shares issuable upon the exercise of options, warrants and RSUs. As a result,
these stockholders, should they act together, may have the ability to control the outcome of matters submitted to our stockholders
for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets.
In addition, these stockholders, should they act together, may have the ability to control our management and affairs. Accordingly,
this concentration of ownership might harm the market price of our common stock by:
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Delaying,
deferring or preventing a change in corporate control,
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Impeding
a merger, consolidation, takeover or other business combination involving us, or
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Discouraging
a potential acquirer from making a tender offer or otherwise attempting to obtain control
of us.
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Risks
Related to Conducting Business in Israel
We
are affected by the political, economic, and military risks of locating our principal operations in Israel.
Our
operations are located in the State of Israel, and we are directly affected by political, economic, and security conditions in
that country. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel
and its Arab neighbors and a state of hostility, varying in degree and intensity, has led to security and economic problems for
Israel. In addition, acts of terrorism, armed conflicts or political instability in the region could negatively affect local business
conditions and harm our results of operations. We cannot predict the effect on the region of any diplomatic initiatives or political
developments involving Israel or the Palestinians or other countries and territories in the Middle East. Recent political events,
including political uprisings, social unrest and regime change, in various countries in the Middle East and North Africa have
weakened the stability of those countries and territories, which could result in extremists coming to power. In addition, Iran
has threatened to attack Israel and is widely believed to be developing nuclear weapons. Iran is also believed to have a strong
influence among extremist groups in the region, such as Hamas in Gaza and Hezbollah in Lebanon. This situation has escalated in
the past and may potentially escalate in the future to violent events which may affect Israel and us. Our business, prospects,
financial condition, and results of operations could be materially adversely affected if major hostilities involving Israel should
occur or if trade between Israel and its current trading partners is interrupted or curtailed.
All
adult male permanent residents of Israel, unless exempt, may be required to perform military reserve duty annually. Additionally,
all such residents are subject to being called to active duty at any time under emergency circumstances. Some of our officers,
directors, and employees currently are obligated to perform annual military reserve duty. We can provide no assurance that such
requirements will not have a material adverse effect on our business, prospects, financial condition, and results of operations
in the future, particularly if emergency circumstances occur.
Because
we received grants from the Israel Innovation Authority we are subject to ongoing restrictions.
We
received royalty-bearing grants from the Israel Innovation Authority, or IIA, of the Israeli Ministry of Economy & Industry,
Trade and Labor, for research and development programs that meet specified criteria. We did not recognize any grants in fiscals
2017 and 2016, and recognized a grant in the amount of $49,000 in fiscal 2015. We do not expect to receive further grants from
the IIA in the future. The terms of the IIA grants limit our ability to transfer know-how developed under an approved research
and development program outside of Israel, regardless of whether the royalties were fully paid.
It
may be difficult to enforce a U.S. judgment against us or our officers and directors and to assert U.S. securities laws
claims in Israel.
Almost
all of our directors and officers are nationals and/or residents of countries other than the United States. As a result, service
of process upon us, our Israeli subsidiary and our directors and officers, may be difficult to obtain within the United States.
Furthermore, because the majority of our assets and investments, and most of our directors and officers are located outside the
United States, it may be difficult for investors to enforce within the United States any judgments obtained against us or any
such officers or directors. Additionally, it may be difficult to assert U.S. securities law claims in original actions instituted
in Israel. Israeli courts may refuse to hear a claim based on a violation of U.S. securities laws because Israel is not the most
appropriate forum in which to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine
that Israeli law and not U.S. law is applicable to such claim. If U.S. law is found to be applicable, the content of applicable
U.S. law must be proved as a fact, which can be a time-consuming and costly process. Certain matters of procedure will also be
governed by Israeli law.
Subject
to specified time limitations and legal procedures, under the rules of private international law currently prevailing in Israel,
Israeli courts may enforce a U.S. judgment in a civil matter, including a judgment based upon the civil liability provisions of
the U.S. securities laws, as well as a monetary or compensatory judgment in a non-civil matter, provided that the following
key conditions are met:
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subject
to limited exceptions, the judgment is final and non-appealable;
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the
judgment was given by a court competent under the laws of the state in which the court
is located and is otherwise enforceable in such state;
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the
judgment was rendered by a court competent under the rules of private international law
applicable in Israel;
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the
laws of the state in which the judgment was given provides for the enforcement of judgments
of Israeli courts;
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adequate
service of process has been effected and the defendant has had a reasonable opportunity
to present his arguments and evidence;
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the
judgment and its enforcement are not contrary to the law, public policy, security or
sovereignty of the State of Israel;
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the
judgment was not obtained by fraud and does not conflict with any other valid judgment
in the same matter between the same parties; and
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an
action between the same parties in the same matter was not pending in any Israeli court
at the time the lawsuit was instituted in the U.S. court.
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If
any of these conditions are not met, Israeli courts will likely not enforce the applicable U.S. judgment.