Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
¨
No
x
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
¨
No
x
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes
x
No
¨
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files). Yes
x
No
¨
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K (§229.405
of this chapter) is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
x
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company.
See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company,"
and "emerging growth company" in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate
by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
¨
No
x
The aggregate market value of the voting
common equity held by non-affiliates of the Registrant, as of June 30, 2018 was approximately $62.2 million, based upon
a per share price equal to $0.43, the closing price for shares of the Registrant’s common stock reported by the NYSE American
for such date.
On March 1, 2019, approximately 148,382,299
shares of the Registrant’s common stock, par value $0.001 per share, were outstanding.
PART I
Except where the context otherwise requires, the terms, “we,”
“us,” “our” or “the Company,” refer to the business of Protalix BioTherapeutics, Inc. and its
consolidated subsidiaries, and “Protalix” or “Protalix Ltd.” refers to the business of Protalix Ltd., our
wholly-owned subsidiary and sole operating unit.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
STATEMENTS
The statements set forth under the captions “Business,”
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors,”
and other statements included elsewhere in this Annual Report on Form 10-K, which are not historical, constitute “forward-looking
statements” within the meanings of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section
21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, including statements regarding expectations, beliefs,
intentions or strategies for the future. When used in this report, the terms “anticipate,” “believe,” “estimate,”
“expect,” “can,” “continue,” “could,” “intend,” “may,”
“plan,” “potential,” “predict,” “project,” “should,” “will,”
“would” and other words or phrases of similar import, as they relate to our company or our subsidiaries or our management,
are intended to identify forward-looking statements. We intend that all forward-looking statements be subject to the safe-harbor
provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are only predictions and reflect
our views as of the date they are made with respect to future events and financial performance, and we undertake no obligation
to update or revise, nor do we have a policy of updating or revising, any forward-looking statement to reflect events or circumstances
after the date on which the statement is made or to reflect the occurrence of unanticipated events, except as may be required under
applicable law. Forward-looking statements are subject to many risks and uncertainties that could cause our actual results to differ
materially from any future results expressed or implied by the forward-looking statements.
Examples of the risks and uncertainties include, but are not
limited to, the following:
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failure or delay in the commencement or completion of
our preclinical studies and clinical trials, which may be caused by several factors, including: slower than expected rates of
patient recruitment; unforeseen safety issues; determination of dosing issues; lack of effectiveness during clinical trials; inability
or unwillingness of medical investigators and institutional review boards to follow our clinical protocols; inability to monitor
patients adequately during or after treatment; and or lack of sufficient funding to finance our clinical trials;
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the risk that the results of our clinical trials will
not support the applicable claims of superiority, safety or efficacy and that our product candidates will not have the desired
effects or will have undesirable side effects or other unexpected characteristics;
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the risk that the FDA or foreign regulatory authorities
may not accept or approve a marketing application we file for any of our product candidates;
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our ability to remediate the material weakness in internal
control over financial reporting and to maintain effective internal control over financial reporting;
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risks relating to our ability to manage our relationship
with Chiesi Farmaceutici S.p.A., or Chiesi, and any other collaborator, distributor or partner;
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risks relating to our ability to make scheduled payments
of the principal of, to pay interest on or to refinance or satisfy conversions of our outstanding convertible notes or any other
indebtedness;
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risks relating to the compliance by Fundação
Oswaldo Cruz, or Fiocruz, an arm of the Brazilian Ministry of Health, or the Brazilian MoH, with its purchase obligations under
our supply and technology transfer agreement, which may have a material adverse effect on us and may also result in the termination
of such agreement;
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risks related to our ability to maintain compliance with
the continued listing standards of the NYSE American;
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our dependence on performance by third-party providers
of services and supplies, including without limitation, clinical trial services;
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risks relating to our ability to finance our activities
and research programs;
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delays in preparing and filing applications for regulatory
approval of our product candidates in the United States, the European Union and elsewhere;
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the impact of development of competing therapies and/or
technologies by other companies;
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the risk that products that are competitive to our product
candidates may be granted orphan drug status in certain territories and, therefore, one or more of our product candidates may
become be subject to potential marketing and commercialization restrictions;
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risks related to our supply of drug product to Pfizer
Inc., or Pfizer, pursuant to our amended and restated exclusive license and supply agreement with Pfizer;
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risks related to the commercialization efforts for taliglucerase
alfa in Brazil;
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risks related to our expectations with respect to the
potential commercial value of our product and product candidates;
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the inherent risks and uncertainties in developing the
types of drug platforms and products we are developing;
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potential product liability risks, and risks of securing
adequate levels of product liability and clinical trial insurance coverage;
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the possibility of infringing a third-party’s patents
or other intellectual property rights;
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the uncertainty of obtaining patents covering our products
and processes and in successfully enforcing our intellectual property rights against third-parties;
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risks relating to changes in healthcare laws, rules and
regulations in the United States or elsewhere; and
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the possible disruption of our operations due to terrorist
activities and armed conflict, including as a result of the disruption of the operations of regulatory authorities, our subsidiaries,
our manufacturing facilities and our customers, suppliers, distributors, collaborative partners, licensees and clinical trial
sites.
|
Companies in the pharmaceutical and biotechnology industries
have suffered significant setbacks in advanced or late-stage clinical trials, even after obtaining promising earlier trial results
or preliminary findings for such clinical trials. Even if favorable testing data is generated from clinical trials of a drug product,
the FDA or foreign regulatory authorities may not accept or approve a marketing application filed by a pharmaceutical or biotechnology
company for the drug product.
These forward-looking statements reflect our current views with
respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should
not place undue reliance on these forward-looking statements. These and other risks and uncertainties are detailed under the heading
“
Risk Factors” in this Annual Report and are described from time to
time in the reports we file with the U.S. Securities and Exchange Commission, or the Commission.
We are a biopharmaceutical company focused on the development
and commercialization of recombinant therapeutic proteins based on our proprietary ProCellEx
®
protein expression
system. We developed our first commercial drug product, Elelyso
®
, using our ProCellEx system and we are now focused
on utilizing the system to develop a pipeline of proprietary, clinically superior versions of recombinant therapeutic proteins
that primarily target large, established pharmaceutical markets and that in most cases rely upon known biological mechanisms of
action. With our experience to date, we believe ProCellEx will enable us to develop additional proprietary recombinant proteins
that are therapeutically superior to existing recombinant proteins currently marketed for the same indications, including applying
the unique properties of our ProCellEx system for the oral delivery of therapeutic proteins.
The following table summarizes our current product candidates
and their respective stages of clinical development:
On
October
19, 2017, Protalix Ltd., our wholly-owned
subsidiary, and Chiesi entered into an Exclusive License and Supply Agreement, or the Chiesi Ex-US Agreement, pursuant to
which Chiesi was granted an exclusive license for all markets outside of the United States to commercialize pegunigalsidase
alfa.
Pegunigalsidase alfa, or PRX-102, is our chemically modified version of the recombinant protein
alpha-Galactosidase-A protein that is currently being evaluated in phase III clinical trials for the treatment of Fabry
disease
. Under the terms and conditions of the Chiesi Ex-US
Agreement, Protalix Ltd. retained the right to commercialize pegunigalsidase alfa in the United States. Under the Chiesi
Ex-US Agreement, Chiesi made an upfront payment to Protalix Ltd. of $25.0
million
in connection with the execution of the agreement and Protalix Ltd. is entitled to additional payments of up to
$25.0
million in development costs, capped at
$10.0
million per year. Protalix Ltd. is also eligible
to receive an additional up to $320.0
million, in the
aggregate, in regulatory and commercial milestone payments. Protalix Ltd. agreed to manufacture all of the PRX-102 needed for
all purposes under the agreement, subject to certain exceptions, and Chiesi will purchase pegunigalsidase alfa from
Protalix, subject to certain terms and conditions. Chiesi is required to make tiered payments of 15% to 35% of its net sales
under the Chiesi Ex-US Agreement, depending on the amount of annual sales, as consideration for the supply of pegunigalsidase alfa.
On
July
23, 2018, Protalix Ltd. entered into an Exclusive License
and Supply Agreement with Chiesi, or the Chiesi U.S. Agreement, with respect to the development and commercialization of pegunigalsidase
alfa in the United States. Under the terms of the Chiesi U.S. Agreement, Protalix Ltd. granted to Chiesi exclusive licensing rights
for the commercialization of PRX-102 in the United States. Protalix Ltd. is entitled to an upfront, non-refundable, non-creditable
payment of $25.0 million from Chiesi and additional payments of up to a maximum of $20.0 million to cover development costs for
PRX-102, subject to a maximum of $7.5 million per year. Protalix Ltd. is also eligible to receive an additional up to a maximum
of $760.0
million, in the aggregate, in regulatory and commercial
milestone payments. Chiesi will also make tiered payments of 15% to 40% of its net sales under the Chiesi U.S. Agreement to Protalix
Ltd., depending on the amount of annual sales, subject to certain terms and conditions, as consideration for product supply.
In December 2017, the European Commission granted Orphan Drug
Designation for pegunigalsidase alfa for the treatment of Fabry disease. The designation was granted after the European Medicine
Agency’s Committee for Orphan Medicinal Products, or the COMP, issued a positive opinion supporting the designation noting
that we had established that there was medically plausible evidence that pegunigalsidase alfa will provide a significant benefit
over existing approved therapies in the European Union for the treatment of Fabry disease. The COMP cited clinical and non-clinical
justifications we provided to establish the significant benefit of pegunigalsidase alfa, noting that the COMP considered the justifications
to constitute a clinically relevant advantage. Orphan Drug Designation for pegunigalsidase alfa qualifies Protalix Ltd. for access
to a centralized marketing authorization procedure, including applications for inspections and for protocol assistance. If the
orphan drug designation is maintained at the time pegunigalsidase alfa is approved for marketing in the European Union, if at all,
we expect that PRX-102 will benefit from 10 years of market exclusivity within the European Union. The market exclusivity will
not have any effect on Fabry disease treatments already approved at that time.
In January 2018, the FDA granted Fast Track designation to PRX-102.
Fast Track designation is a process designed to facilitate the development and expedite the review of drugs and vaccines for serious
conditions that fill an unmet medical need.
On
May
1, 2012, the FDA approved for sale our first
commercial product, taliglucerase alfa for injection, an enzyme replacement therapy, or ERT, for the long-term treatment of
adult patients with a confirmed diagnosis of type 1 Gaucher disease. Subsequently, taliglucerase alfa was approved for
marketing by the regulatory authorities of other countries. Taliglucerase alfa is marketed under the name alfataliglicerase
in Brazil and certain other Latin American countries, and under the name Elelyso in other territories.
Since
its approval by the FDA, taliglucerase alfa has been marketed by Pfizer, as provided in the Pfizer Agreement. In
October
2015, we entered into the Amended Pfizer Agreement which amends and restates the Pfizer Agreement in its entirety. Pursuant to
the Amended Pfizer Agreement, we sold to Pfizer our share in the collaboration created under the initial Pfizer Agreement for the
commercialization of Elelyso in exchange for a cash payment equal to $36.0 million. As part of the sale, we agreed to transfer
our rights to Elelyso in Israel to Pfizer, while gaining full rights to Elelyso in Brazil. We will continue to manufacture drug
substance for Pfizer, subject to certain terms and conditions. Under the Amended Pfizer Agreement, Pfizer is responsible for 100%
of expenses, and entitled to all revenues globally for Elelyso, excluding Brazil, where we are responsible for all expenses and
retain all revenues.
For the first 10-year period after the execution of the Amended
Pfizer Agreement, we have agreed to sell drug substance to Pfizer for the production of Elelyso, and Pfizer maintains the right
to extend the supply period for up to two additional 30-month periods subject to certain terms and conditions. Any failure to comply
with our supply commitments may subject us to substantial financial penalties, which will have a material adverse effect on our
business, results of operations and financial condition. The Amended Pfizer Agreement also includes customary provisions regarding
cooperation for regulatory matters, patent enforcement, termination, indemnification and insurance requirements.
On
June
18, 2013, we entered into a Supply and Technology
Transfer Agreement, or the Brazil Agreement, with
Fiocruz, an arm of the Brazilian MoH,
for
taliglucerase alfa.
Fiocruz’s purchases of
alfataliglicerase
to date have been significantly below certain agreed upon purchase milestones and, accordingly, we have the right
to terminate the Brazil Agreement. Notwithstanding our termination right, we are, at this time, continuing to supply
alfataliglicerase
to Fiocruz under the Brazil Agreement, and patients continue to be treated with
alfataliglicerase
in Brazil. We are discussing with Fiocruz potential actions that Fiocruz may take to comply with its purchase
obligations and, based on such discussions, we will determine what we believe to be the course of action that is in our
best interest.
Our Strategy
Our strategy centers around prioritizing existing and new pipeline
candidates to focus on products that we believe offer a clear competitive advantage over existing treatments. The strategy was
the culmination of an intensive review by our management of our internal resources and of the markets in which we expect we can
operate. The following highlights the details of the strategic plan as it relates to our development of an innovative product pipeline
using our ProCellEx protein expression system.
Pegunigalsidase alfa (PRX-102) for
the Treatment of Fabry Disease
. pegunigalsidase alfa, or PRX-102
,
is designed to be an improved enzyme replacement therapy product for the treatment of Fabry disease given its potential
for clinically superior outcomes and enhanced safety when compared to currently marketed enzyme replacement therapies. This product
candidate is a key focus for our Company. It is currently the subject of three phase III clinical trials. We have completed enrollment
for one of the trials and are continuing to enroll patients and recruit clinical sites for the other two. Our
phase
I/II clinical trial of
PRX-102
remains ongoing in an extension
period
.
Oral Anti-TNF (OPRX-106) Anti Inflammatory
.
Oral anti-TNF represents a novel mode of administering a recombinant anti-TNF protein. It
is
under development as
an orally-delivered anti-inflammatory treatment using plant cells as a natural capsule for the expressed
protein. Results from our phase II
proof of concept efficacy study
of OPRX-106 for the treatment of ulcerative colitis were announced in March 2018. We intend to identify and collaborate with a
well-suited partner for further development. We are also exploring the option of conducting a controlled phase IIb study of OPRX-106
for the treatment of ulcerative colitis.
alidornase alfa (PRX-110) for the Treatment
of Cystic Fibrosis
. alidornase alfa, our
proprietary plant cell recombinant
human Deoxyribonuclease 1, is under development for the treatment of cystic fibrosis (CF), to be administered by inhalation.
alidornase
alfa has an actin inhibition resistance that is designed to improve lung function and lower the incidence of recurrent infections
by enhancing the enzyme’s efficacy in patients’ sputa. We have completed a phase II clinical trial of alidornase alfa
for the treatment of CF and are currently considering different collaboration alternatives as part of our further development plans.
Potential Pipeline Candidates
.
We aim to expand our pipeline by leveraging the advantages of our proprietary ProCellEx protein expression technology. The focus
is expected to be on biologics with significantly improved clinical profiles than the currently marketed proteins for these indications.
Biosimilars will not be a market on which we focus, and will only be considered in the case of proteins that are highly difficult
to express or that represent opportunities for early market entry arising from the intellectual property advantages arising from
ProCellEx.
We have licensed the rights to commercialize taliglucerase alfa
worldwide (other than Brazil) to Pfizer, and to commercialize PRX-102 to Chiesi. Otherwise, we hold the worldwide commercialization
rights to all of our proprietary development candidates. We continuously evaluate potential strategic marketing partnerships as
well as collaboration programs with biotechnology and pharmaceutical companies and academic research institutes.
ProCellEx: Our Proprietary Protein Expression System
ProCellEx is our proprietary production system. We have developed
our ProCellEx system based on our plant cell culture technology for the development, expression and manufacture of recombinant
proteins. Our protein expression system does not involve mammalian or animal components or transgenic field-grown, whole plants
at any point in the production process. Our ProCellEx system consists of a comprehensive set of capabilities and proprietary technologies,
including advanced genetic engineering and plant cell culture technology, which enables us to produce complex, proprietary and
biologically equivalent proteins for a variety of human diseases. This protein expression system facilitates the creation and selection
of high expressing, genetically stable cell lines capable of expressing recombinant proteins. The entire protein expression process,
from initial nucleotide cloning to large-scale production of the protein product, occurs under cGMP-compliant, controlled processes.
Our plant cell culture technology uses plant cells, such as carrot and tobacco cells, which undergo advanced genetic engineering
and are grown on an industrial scale in a flexible bioreactor system. Cell growth, from scale up through large-scale production,
takes place in flexible, sterile, polyethylene bioreactors which are confined to a clean-room environment. Our bioreactors are
well-suited for plant cell growth using a simple, inexpensive, chemically-defined growth medium as a catalyst for growth. The reactors
are custom-designed and optimized for plant cell cultures, easy to use, entail low initial capital investment, are rapidly scalable
at a low cost and require less hands-on maintenance between cycles.
Our ProCellEx system is capable of producing proteins with an
amino acid sequence and three dimensional structure practically equivalent to that of the desired human protein, and with a very
similar, although not identical, glycan, or sugar, structure, as demonstrated in our internal research and external laboratory
studies. In collaboration with the Weizmann Institute of Science, we have demonstrated that the three-dimensional structure of
a protein expressed in our proprietary plant cell-based expression system retains the same three-dimensional structure as exhibited
by the mammalian cell-based expressed version of the same protein. In addition, proteins produced by our ProCellEx system maintain
the biological activity that characterize that of the naturally-produced proteins. Based on these results, we believe that proteins
developed using our ProCellEx protein expression system have the intended composition and correct biological activity of their
human equivalent proteins.
We believe that our ProCellEx system will enable us to develop
recombinant therapeutic proteins yielding substantial cost advantages, accelerated development and other competitive benefits when
compared to mammalian cell-based protein expression systems. In addition, our ProCellEx system may enable us, in certain cases,
to develop and commercialize recombinant proteins without infringing upon the method-based patents or other intellectual property
rights of third parties. The major elements of our ProCellEx system are patent protected in most major countries. Moreover, we
expect to enjoy method-based patent protection for the proteins we develop using our proprietary ProCellEx protein expression technology,
although there can be no assurance that any such patents will be granted. In some cases, we may be able to obtain patent protection
for the compositions of the proteins themselves. We have filed for United States and international composition of matter patents
for taliglucerase alfa, pegunigalsidase alfa and other product candidates.
We have successfully demonstrated the feasibility of our ProCellEx
system through: (i) the FDA’s approval of taliglucerase alfa, and its subsequent approval by other regulatory authorities;
(ii) the clinical and preclinical studies we have performed to date, including the positive efficacy and safety data in our clinical
trials for taliglucerase alfa, pegunigalsidase alfa, alidornase alfa and OPRX-106 for the treatment of ulcerative colitis; (iii)
preclinical results in well-known models in our enzyme for each of Fabry disease, DNase and antiTNF; and (iv) by expressing, on
an exploratory, research scale, many additional complex therapeutic proteins belonging to different drug classes, such as enzymes,
hormones, monoclonal antibodies, cytokines and vaccines. The therapeutic proteins we have expressed to date in research models
have produced the intended composition and similar or superior biological activity compared to their respective human-equivalent
proteins. Moreover, several of such proteins demonstrated advantageous biological activity when compared to the biotherapeutics
currently available in the market to treat the applicable disease or disorder. We believe that the FDA’s approval of taliglucerase
alfa represents a strong proof-of-concept of our ProCellEx system and plant cell-based protein expression technology. We also believe
that the significant benefits of our ProCellEx system, if further substantiated in clinical trials and in the successful commercialization
of taliglucerase alfa and our other product candidates, have the potential to transform the industry standard for the development
of complex therapeutic proteins.
Mammalian cell-based expression technology is based on the introduction
of a human gene encoding for a specific therapeutic protein into the genome of a mammalian cell, and such systems have become the
dominant system for the expression of recombinant proteins due to their capacity for sophisticated, proper protein folding (which
is necessary for proteins to carry out their intended biological activity), assembly and post-expression modification, such as
glycosilation (the addition of sugar residues to a protein which is necessary to enable specific biological activity by the protein).
Many of the biotechnology industry’s largest and most successful therapeutic proteins, including Epogen
®
,
Neupogen
®
, Cerezyme
®
, Rituxan
®
, Humira
®
, Enbrel
®
, Neulasta
®
,
Remicade
®
and Herceptin
®
are produced through mammalian cell-based expression systems. Mammalian
cell-based expression systems can produce proteins with superior quality and efficacy compared to proteins expressed in bacteria
and yeast cell-based systems. As a result, the majority of currently approved therapeutic proteins, as well as those under development,
are produced in mammalian cell-based systems.
While bacterial and yeast cell-based expression systems were
the first protein expression systems developed by the biotechnology industry and remain cost-effective compared to mammalian cell-based
production methodologies, proteins expressed in bacterial and yeast cell-based systems lack the capacity for sophisticated protein
folding, assembly and post-expression modifications, which are key factors of mammalian cell-based systems. Accordingly, such systems
cannot be used to produce glycoproteins or other complex proteins and, therefore, bacterial and yeast cell-based systems are limited
to the expression of the most basic, simple proteins, such as insulin and growth hormones.
Several companies and research institutions have been exploring
the expression of human proteins in genetically-modified organisms, or GMOs, such as transgenic field-grown, whole plants and transgenic
animals. However, these alternate techniques may be restricted by regulatory and environmental risks regarding contamination of
agricultural crops and by the difficulty in applying cGMP standards of the pharmaceutical industry to these expression technologies
and none of these technologies have been approved by the regulatory agencies with jurisdiction over any substantial market.
To date, our manufacturing facility, in which we utilize our
ProCellEx system, was determined to be acceptable by each of the FDA, the Irish Medicinal Board, ANVISA, the Israeli MOH, the Australian
Therapeutic Goods Administration, or the TGA, Health Canada and the Turkish Ministry of Health, after GMP inspections were performed
as part of their respective reviews for marketing approval of taliglucerase alfa.
Competitive Advantages of Our ProCellEx Protein Expression
System
We intend to continue to leverage the multiple unique advantages
of our proprietary ProCellEx protein expression system, including our advanced genetic engineering technology and plant cell-based
protein expression methods, to develop our pipeline. Significant advantages of our ProCellEx system over mammalian, bacterial,
yeast and transgenic cell-based expression technologies, include the following:
Biologic Optimization.
ProCellEx
has internal capabilities developed to improve the biologic dynamics of an expressed protein. For example, the proteins produced
through our system have uniform glycosilation patterns and therefore do not require the lengthy and expensive post-expression modifications
that are required for certain proteins produced by mammalian cell-based systems. Such post-expression modifications in mammalian
cell-produced proteins are made in order to expose the terminal mannose sugar residues, which are structures on a protein that
are key elements in allowing the expressed protein to bind to a target cell and subsequently be taken into the target cell for
therapeutic benefit. In addition, these steps do not guarantee the exposure of all of the required terminal mannose sugar residues,
resulting in potentially lower effective yields and inconsistency in potency from batch to batch. We believe this quality increases
the potency and consistency of the expressed proteins, and thus, the effectiveness of the protein which presents an additional
cost advantage of ProCellEx over competing protein expression methodologies.
Ability to Penetrate Certain Patent-Protected
Markets.
ProCellEx has the potential to provide workaround manufacturing that does not infringe the method-based patents
or other intellectual property rights of third parties. Certain biotherapeutic proteins available for commercial sale are not protected
by patents that cover the compound and are available for use in the public domain. Rather, the process of expressing the protein
product in mammalian or bacterial cell systems is protected by method-based patents. Using our plant cell-based protein expression
technology, we are able to express an equivalent protein without infringing upon these method-based patents. Moreover, we expect
to enjoy method-based patent protection for the proteins we develop using our ProCellEx system, although there can be no assurance
that any such patents will be granted. In some cases, we may be able to obtain patent protection for the compositions of the proteins
themselves. We have filed for U.S. and international composition of matter patents for PRX-102 and certain of our other product
candidates.
Broad Range of Expression Capabilities.
ProCellEx is able to produce a broad array of complex glycosilated proteins, which are difficult to produce in other systems, such
as bacterial and yeast cell-based systems, as well as CHO systems. We have successfully demonstrated the feasibility of our ProCellEx
system by producing, on an exploratory, research scale, a variety of therapeutic proteins belonging to different classes of recombinant
drugs, such as enzymes, hormones, monoclonal antibodies, cytokines and vaccines. We have demonstrated that the recombinant proteins
we have expressed to date have the intended composition and correct biological activity of their human-equivalent protein, with
several of such proteins demonstrating advantageous biological activity compared to the currently available biotherapeutics. In
specific cases, we have been successful in expressing proteins that have not been successfully expressed in other production systems.
Significantly Lower Capital and Production
Costs.
ProCellEx entails a lower cost of scale-up and of production. Plant cells grow rapidly under a variety of conditions
and are not as sensitive as mammalian cells are to temperature, pH and oxygen levels which generally can only be grown under near
perfect conditions. Our system, therefore, does not require the highly complex, expensive, stainless steel bioreactors typically
used in mammalian cell-based production systems to maintain very specific temperature, pH and oxygen levels. Instead, we use simple
polyethylene bioreactors that can be maintained at the room temperature of the clean-room in which they are placed. This system
also reduces ongoing production and monitoring costs typically associated with mammalian cell-based expression technologies. Furthermore,
while mammalian cell-based systems require very costly growth media at various stages of the production process to achieve target
yields of proteins, plant cells require only simple and much less expensive solutions based on sugar, water and microelements at
infrequent intervals to achieve target yields. Mammalian cell-based expression systems require large quantities of sophisticated
and expensive growth medium to accelerate the expression process.
Elimination of the Risk of Viral Transmission
or Infection by Mammalian Components.
By nature, plant cells do not carry the risk of infection by human or other animal
viruses. Mammalian cells, to the contrary, are susceptible to viral infections, including human viruses, and several cases of viral
contamination have occurred. As a result, the risk of contamination of our products under development and the potential risk of
viral transmission from our product and product candidates to future patients, whether from known or unknown mammalian viruses,
is eliminated. Because our products and product candidates do not bear the risk of mammalian viral transmission, we are not required
by the FDA or other regulatory authorities to perform the constant monitoring procedures for mammalian viruses during the protein
expression process that are required in mammalian cell-based production. In addition, the production process of our ProCellEx system
is void of any mammalian components which are susceptible to the transmission of prions, such as those related to bovine spongiform
encephalopathy (commonly known as “mad-cow disease”). These factors further reduce the risks and operating costs of
ProCellEx compared to mammalian cell-based expression systems.
The FDA and other regulatory authorities require viral inactivation
and other rigorous and detailed procedures for mammalian cell-based manufacturing processes in order to address these potential
hazards, thereby increasing the cost and time demands of such expression systems. Furthermore, the current FDA and other procedures
only ensure screening for scientifically identified, known viruses. Accordingly, compliance with current FDA and other procedures
does not fully guarantee that patients are protected against transmission of unknown or new potentially fatal viruses that may
infect mammalian cells.
Potential ability to administer
active therapeutic proteins orally.
We are using ProCellEx to produce active recombinant proteins through oral administration
of plant cells expressing biotherapeutic proteins. In such method, an enzyme is naturally encapsulated within plant cells genetically
engineered to express the targeted enzyme. Plant cells have the unique attribute of a cellulose cell wall which makes them resistant
to enzyme degradation when passing through the digestive tract. The plant cell itself serves as a delivery vehicle, once released
and absorbed, to transport an enzyme in active form to the bloodstream. If proven effective, this would be the first time an enzyme
will be administered orally rather than through intravenous therapy. To date we have completed successful preclinical animal studies
for oral GCD and oral antiTNF, and early clinical trials of oral GCD in Gaucher patients. In addition, we have completed a phase
IIa proof of concept trial of oral antiTNF as well as a phase I clinical trial of oral antiTNF in healthy volunteers.
Our First Commercial Product – Elelyso for the Treatment
of Gaucher Disease
Elelyso (taliglucerase alfa), our first commercial product,
is a plant cell expressed recombinant glucocerebrosidase enzyme (GCD) for the treatment of Gaucher disease. On May 1, 2012, the
FDA approved Elelyso for injection as an enzyme replacement therapy (ERT) for the long-term treatment of adult patients with a
confirmed diagnosis of type 1 Gaucher disease. It was subsequently approved by the Israeli MOH, ANVISA and the regulatory authorities
of other countries
. In August 2014, the FDA approved Elelyso for injection
for pediatric patients, and other jurisdictions, including Brazil, approved pediatric indications thereafter.
Gaucher disease, a hereditary, genetic disorder with severe
and debilitating symptoms, is the most prevalent lysosomal storage disorder in humans. Lysosomal storage disorders are metabolic
disorders in which a lysosomal enzyme, a protein that degrades cellular substrates in the lysosomes of cells, is mutated or deficient.
Lysosomes are small membrane-bound cellular structures within cells that contain enzymes necessary for intracellular digestion.
Gaucher disease is caused by mutations or deficiencies in the gene encoding GCD, a lysosomal enzyme that catalyzes the degradation
of the fatty substrate, glucosylceramide (GlcCer). Patients with Gaucher disease lack or otherwise have dysfunctional GCD and,
accordingly, are not able to break down GlcCer. The GlcCer accumulates in lysosomes of certain white blood cells called macrophages
which consequently become highly enlarged. The enlarged cells accumulate in the spleen, liver, lungs, bone marrow and brain. Signs
and symptoms of Gaucher disease may include enlarged liver and spleen, abnormally low levels of red blood cells and platelets and
skeletal complications. In some cases, the patient may suffer an impairment of the central nervous system.
The standard of care for Gaucher disease is enzyme replacement
therapy using recombinant GCD to replace the mutated or deficient natural GCD enzyme. Enzyme replacement therapy is a medical treatment
in which recombinant enzymes are injected into patients in whom the enzyme is lacking or dysfunctional. Cerezyme
®
and VPRIV
®
are the only other ERTs currently available for the treatment of Gaucher disease. In addition, Cerdelga
®
(eliglustat) is a substrate reduction therapy for Gaucher disease that was approved for marketing by the FDA in August 2014 and
by the European Commission in January 2015. Finally, Zavesca
®
(miglustat) is a small molecule drug for the treatment
of Gaucher disease. Zavesca has been approved by the FDA for use in the United States as an oral treatment. However, it has many
side effects and the FDA has approved it only for administration to those patients who cannot be treated through ERT, and, accordingly,
have no other treatment alternative. As a result, the use of Zavesca has been limited with respect to the treatment of Gaucher
disease. However, Zavesca is also used to treat other rare disorders.
We have licensed to Pfizer the worldwide rights to Elelyso with
the exception of Brazil, a market where we have retained full rights.
Our Pipeline Drug Candidates
PRX-102 for the Treatment of Fabry Disease
We are developing PRX-102, our proprietary plant cell expressed
chemically modified version of the recombinant alpha-GAL-A protein, a therapeutic enzyme, for the treatment of Fabry disease, a
rare genetic lysosomal storage disorder. We believe that PRX-102 has the potential to be a significantly improved version of the
currently marketed Fabry disease enzymes, Fabrazyme
®
and Replagal
®
, with improved activity in the
Fabry disease target organs and significantly longer half-life due to higher stability, which together can potentially lead to
improved substrate clearance and significantly lower formation of antibodies, as observed in our phase I/II clinical trial in Fabry
patients. We believe that the initial data generated in our BRIDGE and BRIGHT phase III clinical trials provide additional support
for the potential of PRX-102 to be a significantly improved version of the currently marketed Fabry disease enzymes. We believe
that the treatment of Fabry disease is a specialty clinical niche with the potential for high growth as there is a significant
unmet medical need for Fabry disease treatments.
Fabry Disease Background
Fabry disease is a serious, life-threatening condition. It is
a disease or condition associated with morbidity that has a substantial impact on survival, day-to-day function, and the likelihood
that the disease, if left untreated, will progress from a less severe condition to a more serious one. Fabry disease is an X-linked
multisystem lysosomal storage disorder caused by the absence or reduction of α-galactosidase-A (α-Gal-A) activity,
which is a lysosomal enzyme that catalyzes the hydrolysis of globotriaosylceramide (Gb3) from oligosaccharides, glycoproteins and
glycolipids. The absence or reduction of this enzymatic activity leads to the progressive accumulation of glycolipids, especially
Gb3, in capillary endothelial cells, podocytes, tubular cells, glomerular endothelial cells, mesangial cells, interstitial cells,
cardiomyocytes, fibroblasts, and neurons. The accumulation of glycosphingolipids (e.g., Gb3) leads to chronic pain, skin lesions,
cardiac, deficiencies, and, in particular, renal involvement. End-stage renal failure and cardiomyopathy often lead to early death
in Fabry patients. Fabry disease causes substantial reduction in life-expectancy, by an average of 15 years in female patients
and 20 years in male patients, compared to the general population.
Current Treatments of Fabry Disease
Currently there are two enzyme replacement therapies drugs available
on the market to treat Fabry disease. Fabrazyme, marketed by Genzyme Corporation (acquired by Sanofi), is approved for the treatment
of Fabry disease in the United States and the European Union. Sanofi reported €755 million (approximately $865 million)
in worldwide sales of Fabrazyme in 2018. The other approved enzyme replacement therapy for the treatment of Fabry disease in the
European Union is Replagal, which is marketed by Shire plc, or Shire (acquired by Takeda Pharmaceutical Company Limited, or Takeda,
in 2019). Takeda reported $490.3 million in sales of Replagal by Shire in 2018. In April 2016, Galafold
TM
, a chaperone
therapy manufactured by Amicus Therapeutics, Inc., or Amicus, was approved in the European Union as a monotherapy for Fabry disease
in patients with amenable mutations. Galafold has also been accepted for marketing in a number of other countries. Amicus reported
revenues of approximately $91.2 million in sales of Galafold in 2018.
PRX-102 Development Program
Our phase III development program for PRX-102 for the treatment
of Fabry disease includes three individual studies; the BALANCE, BRIDGE and BRIGHT studies.
The BALANCE Study
In October 2016, the first patient was dosed in our global phase
III clinical trial to study the efficacy and safety of PRX-102 for the treatment of Fabry disease. Over 40 sites are currently
participating in this trial. The phase III clinical trial, which we refer to as the BALANCE Study, is a multi-center, randomized,
double-blind, active control study of PRX-102 in Fabry patients with impaired renal function. The trial is designed to enroll up
to 78 patients previously treated with Fabrazyme (agalsidase beta) with a stable dose for at least six months. Enrolled patients
are randomized to continue treatment with 1 mg/kg of either Fabrazyme or PRX-102, at a 2:1 ratio of PRX-102 to Fabrazyme, respectively.
Patients are treated via intravenous (IV) infusions every two weeks. The sites are recruiting adult symptomatic Fabry patients
with plasma and/or leucocyte alpha galactosidase activity (by activity assay) less than 30% mean normal levels. All patients must
have had treatment with a dose of 1 mg/kg agalsidase beta via infusion every two weeks for at least one year. In addition, to be
included in the trial, patients need to have certain eGFR values and a meaningful decline in annualized eGFR slope. At the end
of 2018, the BALANCE study was approximately 70% enrolled.
The primary endpoint for the BALANCE study, which was agreed
with both the FDA and the EMA, is the comparison in the rate of decline of eGFR slope between Fabrazyme and PRX-102. At 12 months,
we intend to conduct an interim analysis to test for non-inferiority to support an anticipated regulatory filing with the EMA.
At the same time, we intend to approach the FDA to request its review of the then totality of data. Notwithstanding, patients enrolled
in the study will continue to be treated for a total of 24 months, at which point the data will be analyzed to test for superiority,
which is the original guidance we received from the FDA.
The BRIDGE Study
The BRIDGE study, a supportive phase III clinical trial of PRX-102,
is an open-label, single-arm, switchover study to assess the efficacy and safety of PRX-102 in Fabry patients currently treated
with Replagal. The objective of the study is to generate safety and efficacy data of patients switched from Replagal to PRX-102
over a 12-month period. The endpoints of the study are safety, mean annualized change (slope) in eGFR, pain, plasma lyso GB3, immunogenicity
and Quality of Life. Enrollment of the 22 patients required for the study was completed in December 2018.
Preliminary data from the first 16 patients enrolled in the
BRIDGE study were announced in October 2018. The data demonstrates an improvement in kidney function, in both male and female Fabry
patients, when switched from agalsidase alfa to pegunigalsidase alfa. Based on available historical serum creatinine and study
3-month screening period values for approximately two years while treated with agalsidase alfa before switching to pegunigalsidase
alfa treatment, the annualized estimated glomerular filtration rate (eGFR) slope for patients on Replagal was (negative) –
-6.8ml/min/1.73m2. The mean eGFR slope for the same patients following six months of treatment with PRX-102 was changed to be (positive)
– +3.7ml/min/1.73m2. These results are statistically significant with a p-value of 0.015. Baseline characteristics of these
patients were: mean estimated glomerular filtration rate (eGFR) 75.40 and 86.03 mL/min/1.73m2 for males and females, with annualized
eGFR slope of -8.0 and -5.1 mL/min/1.73m2/year, respectively. This improvement in kidney function (e.g., eGFR) over time may
potentially result in the delay or prevention of kidney failure in these populations.
In addition, in vitro analysis of PRX-102 in both human plasma
and in lysosomal-like conditions shows significantly longer stability of enzyme activity compared to both commercially-available
ERTs. In lysosomal-like conditions, approximately 84% of PRX-102’s activity was shown to have been preserved after 10 days
compared to approximately 1% remaining enzyme activity in each of the commercially available ERTs. These results were statistically
significant with a p-value of 0.01.
The enzyme has been well tolerated in the study, with all adverse
events being transient in nature without sequelae. Most of the patients who are eligible for home care therapy per country regulation
are being treated under a home care arrangement in which certain of the scheduled infusions are performed at the patients’
home. At the conclusion of the BRIDGE study, participating patients are offered the opportunity to enroll in a long-term extension
study and continue treatment with PRX-102.
The BRIGHT Study
In addition to the BALANCE and BRIDGE studies, we are performing
a third clinical trial to evaluate the safety and efficacy of administering 2 mg/kg of PRX-102 once monthly in Fabry patients.
We refer to this study as the BRIGHT study. PRX-102 with a 2 mg/kg dose was found to be safe and well tolerated with no formation
of antibodies in our phase I/II clinical trial of PRX-102 for the treatment of Fabry disease. Additionally, in our phase I/II clinical
trial, 2 mg/kg of PRX-102 demonstrated approximately a 40 times higher circulatory half-life compared with other enzyme replacement
therapies, and, as demonstrated in a Fabry mice model, with materially higher active enzyme reaching target organs affected by
Fabry disease. Pharmacokinetic (PK) analysis and modeling from the phase I/II clinical trial indicate that PRX-102 levels at the
second week after infusion remain 10 times higher than published Fabrazyme levels at the day of infusion. Moreover, the amount
of PRX-102 in the circulation at weeks three and four, are higher than those of Fabrazyme during the two-week treatments. These
results provide strong rationale for the clinical evaluation of a once-monthly dosing.
We plan to enroll up to 30 Fabry patients currently treated
with an approved enzyme replacement therapy in the BRIGHT study. A safety and efficacy evaluation will occur at 12 months with
additional long term follow-up. At the end of 2018, the BALANCE study was approximately 90% enrolled.
In February 2019, we announced preliminary pharmacokinetic (PK)
data from the BRIGHT study. The results of the BRIGHT study demonstrate that PRX-102 was present and remained active in the plasma
over the 4-week infusion intervals. The mean concentration of PRX-102 at day 28 was 138 ng/mL. In comparison, published data on
Fabrazyme (1mg/kg every 2 weeks) shows a mean concentration of 20 ng/mL at 10 hours post infusion. In addition, the area under
the curve (AUC) for PRX-102 was measured to be approximately 2,000,000 ng·hr/mL over 28 days. Based on published data, the
AUC of Fabrazyme is approximately 10,000 ng·hr/mL. Pre-existing anti-drug antibodies (ADA) generated in patients prior to
switching to PRX-102 had substantially little effect on the circulation of PRX-102 for the 4-week period evaluated, and PRX-102
concentration in circulation was higher than agalsidase beta, even in the presence of ADAs. A preliminary safety analysis of 19
patients enrolled in the BRIGHT study was also conducted, and indicated that PRX-102 is safe and well tolerated.
Phase I/II Clinical Data
Our phase I/II clinical trial of PRX-102, which we completed
in 2015, was a worldwide, multi-center, open label, dose ranging study to evaluate the safety, tolerability, pharmacokinetics,
immunogenicity and efficacy parameters of PRX-102 in adult Fabry patients. Sixteen adult naive Fabry patients (9 male and 7 female)
completed the trial, each in one of three dosing groups, 0.2 mg/kg, 1mg/kg and 2mg/kg. Each patient received intravenous infusions
of PRX-102 every two weeks for 12 weeks, with efficacy follow-up after six-month and twelve-month periods. All patients that completed
the trial opted to continue to receive 1 mg/kg of PRX-102 in an open-label, 60-month extension study under which all patients have
been switched to receive 1 mg/kg of the drug, the selected dose for our phase III studies of PRX-102.
The data set forth below was recorded at 24 months from 11 patients
enrolled and treated in the long-term open-label extension trial. Patients who did not continue in the extension trial included
female patients who became or planned to become pregnant, and therefore were unable to continue in accordance with the study protocol,
and patients that relocated to a location where treatment was not available under the clinical study.
Efficacy
·
Lyso
Gb3 levels decreased approximately 90% from baseline (see Figure 1);
·
Renal
function remained stable with mean eGRF levels of 108.02 and 107.20 at baseline and 24 months, respectively with a modest annual
eGFR slope of -2.1 (see Figure 2);
·
An
improvement across all the gastrointestinal symptoms evaluated, including severity and frequency of abdominal pain and frequency
of diarrhea, were noted (see Figure 1);
·
Cardiac
parameters, including LVM, LVMI and EF, remained stable with no cardiac fibrosis development detected;
·
In
conclusion, an improvement of over 40% in disease severity was shown as measured by the Mainz Severity Score Index (MSSI), a score
compiling the different elements of the disease severity including neurological, renal and cardiovascular parameters; and
·
An
improvement was noted in each of the individual parameters of the MSSI.
Figure 1. Continuous reductions observed over 24 months
Figure 2. Continuous clinical stability observed over 24
months
Safety
|
·
|
The majority of adverse events were mild to moderate in severity, and transient in nature;
|
|
·
|
During the first 12 months of treatment, only three of 16 patients (less than 19%) formed anti-drug antibodies (ADA), of which
two of these patients (less than 13%) had neutralizing antibodies;
|
|
·
|
Importantly, however, the ADAs turned negative for all three of these patients following 12 months of treatment; and
|
|
·
|
The ADA positivity effect had no observed impact on the safety, efficacy or continuous biomarker reduction of PRX-102.
|
OPRX-106; Oral antiTNF for the treatment of inflammatory
diseases
OPRX-106, our oral antiTNF product candidate, is a recombinant
antiTNF (Tumor, Necrosis Factor) protein that we are expressing through ProCellEx. Auto-immune-mediated inflammatory disorders
are conditions that are characterized by common pathways that lead to inflammation and are caused or triggered by a compromised
or dysregulation of the normal immune response. Immune-mediated inflammatory disorders can cause organ damage, and are associated
with increased morbidity. Common auto-immune diseases include rheumatoid arthritis, inflammatory bowel disease (IBD) such as ulcerative
colitis and crohn’s disease, psoriasis, and others. Some of the major treatments are antiTNF drugs, administered as subcutaneous
injections or as intravenous infusions. Sales of anti-TNF drugs exceeded $30 billion annually. Well-known antiTNF drugs include
Humira, Remicade and Enbrel.
OPRX-106 is a plant cell-expressed form of the fused protein
that is naturally encapsulated within BY-2 cells genetically engineered to express the enzyme. Plant cells have the unique attribute
of a cellulose cell wall which makes them resistant to enzyme degradation when passing through the digestive tract. The plant cell
itself serves as a delivery vehicle, once released and absorbed, to transport the enzyme in active form to the bloodstream. If
proven effective, our experimental oral antiTNF would be the first protein to be administered orally rather than through injection.
We believe that our oral delivery mechanism could be applied to additional proteins and has the potential to change the method
of protein administration in certain indications.
OPRX-106 Development Program
OPRX-102 for the treatment of ulcerative colitis was the subject
of a phase IIa clinical trial, a randomized, open label, 2-arm study of OPRX-106 in patients with active mild to moderate ulcerative
colitis. The trial evaluated key efficacy endpoints including clinical response and remission utilizing the Mayo score, as well
as safety and pharmacokinetics.
Positive results from the trial were announced in March and
June 2018. A total of 24 patients were enrolled in the study; 18 patients completed the study with six patients who did not complete
the study. The dropout rate is consistent with other trials in similar patient populations, and none of the patients dropped out
due to a side effect or serious adverse event. Patients were randomized to receive 2 mg or 8 mg of OPRX-106, administered orally,
once daily, for 8 weeks. The average baseline Mayo score was 7.1 (from a scale of 0-12) and the average baseline mucosal endoscopy
sub score was 2.1 (from a scale of 0-3). For the 18 patients who completed the study, 89% had a baseline Mayo score between 6 and
9, which meets the criteria of moderate disease activity, and 84% had a baseline mucosal endoscopy sub score of 2 and above indicating
moderate to severe disease based on mucosal appearance.
The key efficacy endpoints of the study were met at week 8:
|
·
|
67%
of patients experienced a clinical response in each of the 2mg dose and 8mg dose cohorts; and
|
|
·
|
44%
of patients experienced a clinical remission in the 8mg dose and 11% in the 2mg dose for an overall average of 28%.
|
Clinical response at week 8 is defined as a decrease in the
Mayo score of at least 3 points and either a decrease in the sub-score for rectal bleeding of at least 1 point from baseline, or
rectal bleeding sub-score of 0 or 1. Clinical remission at week 8 is defined as clinically symptom free, a Mayo score ≤ 2, with
no individual sub-score exceeding 1 point after treatment.
In addition to clinical response and remission, efficacy was
also observed in mucosal healing, an important prognostic parameter in ulcerative colitis and other inflammatory bowel diseases,
measured by endoscopy:
|
·
|
61%
of patients experienced mucosal improvement; and
|
|
·
|
33%
of patients experienced mucosal healing.
|
Mucosal improvement is defined as a decrease in endoscopy sub-score
at week 8. Mucosal healing is defined as a reduction in, and achievement of, endoscopy sub-score ≤1 at week 8.
Other key efficacy endpoints were also achieved, as follows:
|
·
|
72%
of patients showed an improvement in rectal bleeding scores;
|
|
·
|
72%
of patients demonstrated an improvement in fecal calprotectin; and
|
|
·
|
61%
of patients showed improved Geboes score (a histopathological scoring for the assessment of disease activity in ulcerative colitis).
|
The positive trend in efficacy is consistent in substantially
all patients. This trend is demonstrated by 89% of the patients having showed an improvement in Mayo score in both doses, with
an average decrease in Mayo score of 46% at week 8 in the 8mg dose and 40% in the 2mg dose. In addition, all of the patients also
showed an improvement in at least one of the other efficacy parameters.
No anti-drug antibodies were detected. In addition, no systemic
absorption was observed. OPRX-106 was safe and well tolerated with only mild to moderate adverse events, which were transient in
nature. Headaches were the most common adverse event reported.
The results from our phase I clinical trial of OPRX-106 demonstrated
that the drug was safe and well tolerated, and showed biological activity in the gut. The phase I clinical trial was a randomized,
parallel-design, open-label study designed to evaluate the safety and pharmacokinetics of OPRX-106 in healthy volunteers. The trial
enrolled 14 subjects that were randomized to one of three dosing cohorts receiving OPRX-106 doses equivalent to 2mg, 8mg or 16mg
Tumor Necrosis Factor receptor-Fc fusion protein. Subjects received once daily oral administrations for five consecutive days.
The results demonstrated that oral administration of OPRX-106 is safe and well tolerated. No major side effects were noted, and
no suppression of the immune system was observed. Regulatory T cell activation showing biological activity in the gut was observed.
Fluorescence-activated cell sorting analysis (FACS) was performed using various antibodies for surface markers, and it was observed
that all three dosages of OPRX-106 promoted the induction of various subsets of T cells, some of which are correlated with anti-inflammatory
response.
alidornase alfa (PRX-110) for the Treatment
of Cystic Fibrosis
alidornase alfa is our proprietary plant cell recombinant form
of human deoxyribonuclease I (DNase I) that we are developing for the treatment of CF, to be administered by inhalation. DNase
I cleaves extracellular DNA and thins the thick mucus that accumulates in the lungs of CF patients. Currently, Pulmozyme
®
is the only DNase I commercially available, with annual sales of approximately CHF 739 million (approximately $751 million)
in sales for 2018 according to public reports by F. Hoffman-La Roche Ltd.
In vitro studies with PRX-110 demonstrated improved enzyme kinetics,
significantly reduced sensitivity to inhibition by actin and improved ex vivo efficacy when compared to Pulmozyme. Preclinical
studies of alidornase alfa administered by inhalation showed substantial enzymatic activity in lungs.
We designed alidornase alfa, through chemical modification,
to be resistant to inhibition by actin so as to improve lung function and lower the incidence of recurrent infections by enhancing
the enzyme’s efficacy in patients’ sputa. Actin, a potent inhibitor of DNase, is found in high concentration in CF
patients’ sputum. As demonstrated in Figure 3, the activity of alidornase alfa, as demonstrated in in vitro studies, remains
almost with no change in the relevant actin concentration found in CF patients while Pulmozyme is degraded significantly.
Figure 3. Actin and DNase concentrations in human sputum
tested in
in vitro
assays; Rheology Data Analysis in in human sputum samples
In addition, alidornase alfa has demonstrated improved disease
parameters in human models sputum testing when compared to the currently marketed product. In particular, alidornase alfa has demonstrated
a reduction in mucus viscosity in human sputum samples when compared to the currently marketed product. See Figure 3.
alidornase alfa Development Program
We completed a phase I clinical trial of alidornase alfa with
18 healthy volunteers in which alidornase alfa was found to be safe and tolerable. We have also completed a phase IIa clinical
trial of alidornase alfa for the treatment of CF. Sixteen patients were enrolled in the study, all of whom completed the study.
The phase II trial was a 28-day switchover study to evaluate the safety and efficacy of alidornase alfa in CF patients previously
treated with Pulmozyme (currently the only commercially available DNase therapy). Participation in the trial was preceded by a
two-week washout period from Pulmozyme before treatment with alidornase alfa via inhalation.
The primary efficacy results show that treatment with alidornase
alfa resulted in clinically meaningful lung function improvement, as demonstrated by a mean absolute increase in the percent predicted
forced expiratory volume in one second (ppFEV1) of 3.4 points from baseline. Moreover, a mean absolute increase in ppFEV1 of 2.8
points was also observed in patients participating in the trial when compared to measurements taken from patients at initiation
before the switch from Pulmozyme to alidornase alfa. See Figure 4.
Figure 4. Phase II trial demonstrates clinically meaningful
lung function improvement
A commercially available small molecule CFTR modulator for the
treatment of CF has reported a mean absolute increase in ppFEV1 of 2.5 from baseline in its registration clinical study. This score
was achieved while 74% of the patients participating in the trial of the CFTR modulator were also treated with the modulator on
top of Pulmozyme. While this marketed CFTR addresses a certain mutation applicable to less than 50% of CF patients, alidornase
alfa is being developed to treat all CF patients.
Sputa available DNA samples were analyzed for approximately
half of the patients. A mean reduction of over 70% in DNA content from baseline was observed, and a mean reduction of over 90%
from baseline was observed for sputa visco-elasticity. Correlation between improvement in sputa parameters and pulmonary function
was observed. See Figure 5.
Figure 5. Decrease in sputum DNA content and sputum viscosity
upon alidornase alfa treatment initiation
In addition, an in vitro study of alidornase alfa demonstrated
a significant inhibition of Pseudomonas Aeruginosa, with alidornase alfa treated colonies reduced by over 50%, compared to baseline.
Pseudomonas, strains of bacteria that are widely found in the environment, are a major cause of lung infections in CF patients.
Chronic pulmonary infection is a leading cause of morbidity and mortality in CF patients, despite the aggressive use of antibiotics,
and Pseudomonas is the most prevalent organism in the airway colonization of CF patients.
PK analysis performed indicated alidornase alfa is not absorbed
into a patient’s circulatory system, suggesting higher levels of alidornase alfa remains available in the patient’s
lungs. This provides further support for the potential that alidornase alfa may offer additional efficacy to CF patients.
The above-mentioned material decrease in visco-elasticity and
DNA presence in CF patients’ sputa, coupled with the significant inhibition of Pseudomonas and higher levels of alidornase
alfa available in the patients’ lungs, provides further supportive evidence of improved lung function after treatment with
alidornase alfa, as demonstrated by the increase in FEV1.
alidornase alfa was well tolerated with no serious adverse events
reported.
Commercialization Agreements with Chiesi Farmaceutici
On
October
19, 2017, Protalix Ltd. and Chiesi entered into the
Chiesi Ex-US Agreement pursuant to which we granted to Chiesi an exclusive license for all markets outside of the United States
to develop and commercialize pegunigalsidase alfa. Subsequently, on July
23,
2018, Protalix Ltd. and Chiesi entered into the Chiesi U.S. Agreement pursuant to which we granted to Chiesi an exclusive license
for the United States to develop and commercialize pegunigalsidase alfa. Under the Chiesi Ex-US Agreement, Chiesi made an upfront
payment to Protalix Ltd. of $25.0
million
in consideration
for and as reimbursement of the costs sustained by Protalix Ltd. up to the effective date of the agreement,
and
Protalix Ltd. is entitled to additional payments of up to $25.0
million
in development costs, capped at $10.0
million per year. Protalix
Ltd. is also eligible to receive an additional up to $320.0
million,
in the aggregate, in regulatory and commercial milestone payments. Chiesi is required to make tiered payments of 15% to 35% of
its net sales under the Chiesi Ex-US Agreement, depending on the amount of annual sales, as consideration for the supply of pegunigalsidase
alfa.
Under
the Chiesi U.S. Agreement, Chiesi made an upfront payment to Protalix Ltd. of $25.0
million
in consideration for and as reimbursement of the costs sustained by Protalix Ltd. up to the effective date of the agreement
,
and Protalix Ltd. is entitled to additional payments of up to a maximum of $20.0
million
to cover development costs for PRX-102, subject to a maximum of $7.5
million
per year. Protalix Ltd. is also eligible to receive an additional up to a maximum of $760.0
million,
in the aggregate, in regulatory and commercial milestone payments. Chiesi will also make tiered payments of 15% to 40% of its net
sales to Protalix Ltd., depending on the amount of annual sales, subject to certain terms and conditions, as consideration for
product supply.
Protalix Ltd. and Chiesi have agreed to a specific allocation
of the responsibilities under the two agreements for the continued development efforts for pegunigalsidase alfa. Protalix Ltd.
agreed to manufacture all of the PRX-102 needed for all purposes under the agreements, subject to certain exceptions, and Chiesi
will purchase pegunigalsidase alfa from Protalix Ltd, subject to certain terms and conditions.
We
are required to pay a royalty equal to 3% of the PRX-102-related revenues under the Chiesi Agreement to
Israel’s National
Authority for Technological Innovation, or NATI
.
Technology Transfer Agreement with Fiocruz
Our Brazil Agreement became effective in January 2014. The technology
transfer is designed to be completed in four stages and is intended to transfer to Fiocruz the capacity and skills required for
the Brazilian government to construct its own manufacturing facility, at its sole expense, and to produce a sustainable, high-quality,
and cost-effective supply of taliglucerase alfa. The initial term of the technology transfer is seven years. The agreement contains
certain purchase commitments by Fiocruz. If Fiocruz fails to comply with the purchase commitments, we may terminate the agreement,
and all of our rights to the technology will be returned.
In 2017, we received a purchase order from the Brazilian MoH
for the purchase of approximately $24.3 million of alfataliglicerase for the treatment of Gaucher patients in Brazil. The
purchase order consists of a number of shipments in increasing volumes. Shipments started in June 2017. Fiocruz’s purchases
of
alfataliglicerase
to date have been significantly below certain
agreed upon purchase milestones and, accordingly, we have the right to terminate the Brazil Agreement. Notwithstanding, we are,
at this time, continuing to supply
alfataliglicerase
to Fiocruz
under the Brazil Agreement, and patients continue to be treated with
alfataliglicerase
in Brazil. We are discussing with Fiocruz potential actions that Fiocruz may take to comply with its purchase obligations and,
based on such discussions, we will determine what we believe to be the course of action that is in the best interest of our company.
The Brazil Agreement may be extended for an additional five-year
term, as needed, to complete the technology transfer. All of the terms of the arrangement, including the minimum annual purchases,
will apply during the additional term. Upon completion of the technology transfer, and subject to Fiocruz receiving approval from
ANVISA to manufacture taliglucerase alfa in its facility in Brazil, the agreement will enter into the final term and will remain
in effect until our last patent in Brazil expires. During such period, Fiocruz will be the sole provider of this important treatment
option for Gaucher patients in Brazil and shall pay us a single-digit royalty on net sales.
Intellectual Property
We
maintain a proactive intellectual property strategy which includes patent filings in multiple jurisdictions, including the United
States and other commercially significant markets. As of December
31,
2018, we held, or had license rights to, 79 patents and 41 pending patent applications with respect to various compositions, methods
of production and methods of use relating to our ProCellEx protein expression system and our proprietary product pipeline. Of the
above, three are joint patents, five are joint patent applications and one is a licensed patent application.
Our competitive position and future success depend in part on
our ability, and that of our licensees, to obtain and leverage the intellectual property covering our product candidates, know-how,
methods, processes and other technologies, to protect our trade secrets, to prevent others from using our intellectual property
and to operate without infringing the intellectual property of third parties. We seek to protect our competitive position by filing
United States, Europe, Israeli and other foreign patent applications covering our technology, including both new technology and
improvements to existing technology. Our patent strategy includes obtaining patents, where possible, on methods of production,
compositions of matter and methods of use. We also rely on know-how, continuing technological innovation, licensing and partnership
opportunities to develop and maintain our competitive position.
We issued a series of 7.5% convertible notes in December 2016
and July 2017, which we refer to as the 2021 Notes, which are guaranteed by our subsidiaries and secured by perfected liens on
all of our material assets, primarily consisting of our intellectual property assets, including a stock pledge of our foreign subsidiaries
in favor of the holders of outstanding 2021 Notes.
As
of December
31, 2018, our patent portfolio consisted of several
patent families (consisting of patents and/or patent applications) covering our technology, protein expression methodologies and
system and product candidates, as follows:
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With respect to our ProCellEx protein expression system,
we held 11 issued patents and five patent applications relating to the large scale production of proteins in cultured plant cells.
The issued patents and any patents to issue in the future based on pending patent applications in this patent family, if at all,
are expected to expire in 2028. One patent relating to a separate family, covering methods for culturing and harvesting plant
cells and/or tissues in consecutive cycles is expected to expire in 2025.
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We held a patent family containing 24 issued patents
and one patent application in India, South Africa, Russian Federation, Australia, China, the United States, Ukraine, Singapore,
Japan, Europe, Hong Kong, Mexico, Korea, Canada, Brazil and Israel relating to the production of recombinant glycosylated lysosomal
proteins in our plant culture platform, including taliglucerase alfa, and uses of these proteins and cells containing these proteins
for the treatment of lysosomal disorders. The issued patents and any patents to issue in the future based on pending patent applications
in this patent family, if at all, are expected to expire in 2024.
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We held a patent family containing two granted patents
relating to a system and method for production of antibodies in a plant cell culture, and antibodies produced in such a system.
The issued patents in this patent family are expected to expire in 2025.
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We held a patent family containing four issued patents
in Europe, South Africa, Australia and Israel, and one pending patent application relating to a new method for delivering active
recombinant proteins systemically through oral administration of transgenic plant cells. The issued patents and any patents to
issue in the future based on patent applications in this patent family, if at all, are expected to expire in 2026.
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We held a patent family containing two granted patents
in the United States and Europe relating to saccharide containing protein conjugates. The issued patents and any patents to issue
in the future based on the patent applications in this patent family, if at all, are expected to expire in 2028.
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We held a patent family containing seven granted patents
in Japan, United States, Europe, Israel, Korea, Hong Kong and China, and three pending patent applications relating to Nucleic
Acid construct for expression of alpha-galactosidase enzyme in plants and plant cells. The patents to issue in the future based
on the patent applications in this patent family, if at all, are expected to expire in 2031.
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We held a patent family containing 18 granted patents
in Europe, United States, Australia, Japan, Russian Federation, China, Hong Kong, Singapore, New Zealand, Korea and South Africa,
and six pending patent applications relating to multimeric protein structures of α-galactosidase and to uses thereof in
treating Fabry disease. The issued patents and any patents to issue in the future based on the patent applications in this patent
family, if at all, are expected to expire in 2031.
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We held three patent families containing three granted
patents in the United States and Europe, and five pending applications relating to plant recombinant human DNase I and uses in
therapy. The patents to issue in the future based on these patent applications, if at all, are expected to expire in 2033.
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We held a patent family containing 10 patent applications
relating to chemically modified plant recombinant human DNase I and uses in therapy. The patents to issue in the future based
on this patent application, if at all, are expected to expire in 2036.
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We held three families containing three granted patents
in Japan, Australia and United States, and seven patent applications relating to plant recombinant TNF alpha inhibitor polypeptides.
The patents to issue in the future based on these patent applications, if at all, are expected to expire in 2034/2035.
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Our patent portfolio includes a patent that we co-own
that covers human glycoprotein hormone and chain splice variants, including isolated nucleic acids encoding these variants. More
specifically, this patent covers a new splice variant of human FSH. This patent was issued in the United States and is expected
to expire in 2024.
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We co-own and have an exclusive license to a patent family,
containing three granted patents in Europe, United States and Australia, and five pending applications that cover use of plant
cells expressing a TNF alpha polypeptide inhibitor in therapy. The patents to issue in the future based on these patent applications,
if at all, are expected to expire in 2034.
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We have licensed the rights to a United States patent
application covering oral composition comprising a TNF antagonist. The patents to issue in the future based on this application,
if at all, are expected to expire in 2034.
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We are aware of U.S. patents, and corresponding international
counterparts of such patents, owned by third parties that contain claims covering methods of producing GCD. We do not believe that,
if any claim of infringement were to be asserted against us based upon such patents, taliglucerase alfa would be found to infringe
any valid claim under such patents. However, there can be no assurance that a court would find in our favor or that, if we choose
or are required to seek a license to any one or more of such patents, a license would be available to us on acceptable terms or
at all.
In April 2005, Protalix Ltd. entered into a license agreement
with Icon Genetics AG, or Icon, pursuant to which we received an exclusive worldwide license to develop, test, use and commercialize
Icon’s technology to express certain proteins in our ProCellEx protein expression system. We are also entitled to a non-exclusive
worldwide license to make and have made other proteins expressed by using Icon’s technology in our technology. As consideration
for the license, we are obligated to make royalty payments equal to varying low, single-digit percentages of net sales of products
by us, our affiliates, or any sublicensees under the agreement. In addition, we are obligated to make milestone payments equal
to $350,000, in the aggregate, for each product developed under the license, upon the achievement of certain milestones.
Our license agreement with Icon remains in effect until the
earlier of the expiration of the last patent under the agreement or, if all of the patents under the agreement expire, 20 years
after the first commercial sale of any product under the agreement. Icon may terminate the agreement upon written notice to us
that we are in material breach of our obligations under the agreement and we are unable to remedy such material breach within 30
days after we receive such notice. Further, Icon may terminate the agreement in connection with certain events relating to a wind
up or bankruptcy, if we make a general assignment for the benefit of our creditors, or if we cease to conduct operations for a
certain period. Icon may also terminate the exclusivity granted to us by written notice if we fail to reach certain milestones
within a designated period of time. Notwithstanding the termination date of the agreement, our obligation to pay royalties to Icon
under the agreement may expire prior to the termination of the agreement, subject to certain conditions.
Manufacturing
We use our current facility, which has approximately
20,000 sq/ft of clean rooms built according to industry standards, to develop, process and manufacture pegunigalsidase alfa, taliglucerase
alfa and other recombinant proteins. Pegunigalsidase alfa and our other drug product candidates, as well as taliglucerase alfa,
must be manufactured in a sterile environment and in compliance with cGMPs set by the FDA and other relevant foreign regulatory
authorities. We are currently producing Fabry drug substance for our phase III and other clinical trials, as well as the manufacture
of the taliglucerase alfa we need in the near future, included the taliglucerase alfa to be purchased by Pfizer under the Pfizer
Agreement. In addition, we intend to use our manufacturing space to produce all of the drug substance needed in connection with
the clinical trials for our product candidates.
In 2017, the FDA approved the Supplemental
New Drug Application (sNDA) we submitted to allow us to convert our manufacturing facility from a single dedicated product facility
to a multi-product facility. We expect that the conversion will allow us to realize potentially significant operational savings.
Our facility’s current capacity can serve all of our current and expected commercial and clinical needs, and we believe it
will be sufficient to serve our production needs for the anticipated commercialization of PRX-102.
O
ur
manufacturing facilities in Carmiel, Israel, have undergone successful audits by the
FDA, the Irish Medicinal Board, ANVISA,
the Israeli MOH, the TGA, Health Canada and the Turkish Ministry of Health.
Our current facility in Israel has been granted “Approved
Enterprise” status, and we have elected to participate in the alternative benefits program. Our facility is located in a
Zone A location, and, therefore, our income from the Approved Enterprise will be tax exempt in Israel for a 10-year period commencing
with the year in which we first generate taxable income from the relevant Approved Enterprise and after we use our net operating
loss carryforwards, or “NOLs.” We expect to be entitled to similar tax benefits for a number of years thereafter. To
remain eligible for these tax benefits, we must continue to meet certain conditions, and if we increase our activities outside
of Israel, for example, by future acquisitions, such increased activities generally may not be eligible for inclusion in Israeli
tax benefit programs. In addition, our technology is subject to certain restrictions with respect to the transfer of technology
and manufacturing rights. “See Risk Factors—The manufacture of our products is an exacting and complex process, and
if we or one of our materials suppliers encounter problems manufacturing our products, it will have a material adverse effect on
our business and results of operations.”
Raw Materials and Suppliers
We believe that the raw materials that we require throughout
the manufacturing process of Elelyso, PRX-102, alidornase alfa and OPRX-106 and our other current and potential drug product candidates
are widely available from numerous suppliers and are generally considered to be generic industrial biological supplies. We rely
on a single approved supplier for certain materials relating to the current expression of our proprietary biotherapeutic proteins
through ProCellEx. We have identified additional suppliers for most of the materials required for the production of our product
candidates.
Development and regulatory approval of our pharmaceutical products
are dependent upon our ability to procure active ingredients and certain packaging materials from sources approved by the FDA and
other regulatory authorities. Since the FDA and other regulatory approval processes require manufacturers to specify their proposed
suppliers of active ingredients and certain packaging materials in their applications, FDA approval of a supplemental application
to use a new supplier in connection with any drug candidate or approved product, if any, would be required if active ingredients
or such packaging materials were no longer available from the specified supplier, which could result in manufacturing delays. From
time to time, we intend to continue to identify alternative FDA-approved suppliers to ensure the continued supply of necessary
raw materials.
Competition
The biotechnology and pharmaceutical industries are characterized
by rapidly evolving technology and significant competition. Competition from numerous existing companies and others entering the
fields in which we operate is intense and expected to increase. Most of these companies have substantially greater research and
development, manufacturing, marketing, financial, technological personnel and managerial resources than we do. In addition, many
specialized biotechnology companies have formed collaborations with large, established companies to support research, development
and commercialization of products that may be competitive with our current and future product candidates and technologies. Acquisitions
of competing companies by large pharmaceutical or biotechnology companies could further enhance such competitors’ financial,
marketing and other resources. Academic institutions, governmental agencies and other public and private research organizations
are also conducting research activities and seeking patent protection and may commercialize competitive products or technologies
on their own or through collaborations with pharmaceutical and biotechnology companies.
There are two approved ERTs for the treatment of Fabry disease;
Fabrazyme which is marketed by Genzyme and Replagal, which is marketed by Shire. Fabrazyme is available in the United States and
the European Union. Replagal is available in the European Union and certain other territories outside the United States. In addition,
we are aware of other late clinical stage, early clinical stage and experimental drugs which are being developed for the treatment
of Fabry disease by other companies. In addition, in May 2016, Galafold™ (migalastat), an oral small molecule pharmacological
chaperone marketed by Amicus was approved in the European Union and other countries as a first line therapy for long-term treatment
of adults and adolescents aged 16 years and older with a confirmed diagnosis of Fabry disease and who have an amenable mutation.
In August 2018, the FDA granted accelerated approval of Galafold.
With respect to alidornase alfa, we face competition from Genentech
Inc., a member of the Roche Group, which markets Pulmozyme.
With respect to PRX-106, we face competition from AbbVie Inc.
(Humira), Johnson & Johnson and Merck & Co. (Remicade) and Pfizer and Amgen Inc. (Enbrel). In addition, we are aware of
other clinical stage, early clinical stage and experimental antiTNF drugs.
We also face competition from companies that are developing
other platforms for the expression of recombinant therapeutic pharmaceuticals. We are aware of companies that are developing alternative
technologies to develop and produce therapeutic proteins in anticipation of the expiration of certain patent claims covering marketed
proteins. Competitors developing alternative expression technologies include Crucell N.V. (which was acquired by Johnson &
Johnson during 2010), Shire and GlycoFi, Inc. (which was acquired by Merck & Co. Inc.). Other companies are developing alternate
plant-based technologies, include, among others, iBio, Inc., Medicago Inc., and Greenovation Biotech GmbH, none of which are cell-based.
Rather, such companies base their product development on transgenic plants or whole plants. See “Risk Factors—Developments
by competitors may render our products or technologies obsolete or non-competitive which would have a material adverse effect on
our business, results of operations and financial condition.”
Scientific Advisory Board
We have reorganized our scientific advisory board by establishing
a core team of advisors. The scientific advisory board may invite additional experts to attend meetings on a case-by-case basis.
Members of our scientific advisory board consult with our management within their professional areas of expertise; exchange strategic
and business development ideas with our management; attend scientific, medical and business meetings with our management, such
as meetings with the FDA and comparable foreign regulatory authorities, meetings with strategic or potential strategic partners
and other meetings relevant to their areas of expertise; and attend meetings of our scientific advisory board. We expect our scientific
advisory board to convene at least twice annually, and we frequently consult with the individual members of our scientific advisory
board. Our scientific advisory board currently includes the following people:
Name
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Affiliations
(selected)
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Roger D. Kornberg, Ph.D. (Chairman)
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Laureate of the Nobel Prize in Chemistry
Member, U.S. National Academy of Sciences
Winzer Professor of Medicine, Department of Structural Biology
at Stanford University
2001 Welch Prize (highest award granted in the field of chemistry
in the United States)
2002 Leopold Mayer Prize (the highest award granted in the field
of biomedical sciences from the French Academy of Sciences)
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Professor Aaron Ciechanover, M.D., D.Sc.
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Laureate of the Nobel Prize in Chemistry
Distinguished research Professor at the Cancer and Vascular
Biology Research Center of the Rappaport Research Institute and Faculty of Medicine at the Technion, Israel’s Institute of
Technology
American Academy of Arts and Sciences, Member
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Alexander Levitzki, Ph.D.
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Wolfson Family Professor of Biochemistry in the Department of
Biological Chemistry of The Alexander Silberman Institute of Life Sciences, Hebrew University of Jerusalem
American Association for Cancer Research, 2013 Award for Outstanding
Achievement in Chemistry in Cancer Research.
1990 Israel Prize in Biochemistry
1990 Rothschild Prize in Biology
2002 Hamilton-Fairley Award, European Society of Medical
Oncology
2005 Wolf Prize for Medicine
2012 Nauta Award in Pharmacochemistry, The European Federation
of Medicinal Chemistry (EFMC) (the highest award from the European Federation for Medicinal Chemistry)
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Charles J. Arntzen, Ph.D.
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Regent’s Profession and Florence Ely Nelson Presidential
Chair
Biodesign Institute, CIDV, Arizona State University
Member, National Academy of Sciences, USA
American Society of Plant Biology Leadership in Science Public
Service Award (2004)
Botanical Society of America Centennial Award (2006)
Fellow of American Society of Plant Biologists (2007)
Doctor of Science
honoris causa.
, Hebrew University of
Jerusalem
Chair, Section O “Agriculture, Food, and Renewable Resources,”
American Association for the Advancement of Science (AAAS) (2011-2012)
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Government Regulation
The testing, manufacture, distribution, advertising and marketing
of drug products are subject to extensive regulation by federal, state and local governmental authorities in the United States,
including the FDA, and by similar authorities in other countries. Any product that we develop must receive all relevant regulatory
approvals or clearances, as the case may be, before it may be marketed in a particular country.
The regulatory process, which includes overseeing preclinical
studies and clinical trials of each pharmaceutical compound to establish its safety and efficacy and confirmation by the FDA that
good laboratory, clinical and manufacturing practices were maintained during testing and manufacturing, can take many years, requires
the expenditure of substantial resources and gives larger companies with greater financial resources a competitive advantage over
us. Delays or terminations of clinical trials that we undertake would likely impair our development of product candidates. Delays
or terminations could result from a number of factors, including stringent enrollment criteria, slow rate of enrollment, size of
patient population, having to compete with other clinical trials for eligible patients, geographical considerations and others.
The FDA review process can be lengthy and unpredictable, and
we may encounter delays or rejections of our applications when submitted. Generally, in order to gain FDA approval, we must first
conduct preclinical studies in a laboratory and in animal models to obtain preliminary information on a compound and to identify
any potential safety problems. The results of these studies are submitted as part of an IND application that the FDA must review
before human clinical trials of an investigational drug can commence. Clinical trials may be terminated by the clinical trial site,
sponsor or the FDA if toxicities appear that are either worse than expected or unexpected.
Clinical trials are normally performed in three sequential phases
and generally take two to five years, or longer, to complete. Phase I consists of testing the drug product in a small number of
humans, normally healthy volunteers, to determine preliminary safety and tolerable dose range. Phase II usually involves studies
in a limited patient population to evaluate the effectiveness of the drug product in humans having the disease or medical condition
for which the product is indicated, determine dosage tolerance and optimal dosage and identify possible common adverse effects
and safety risks. Phase III consists of additional controlled testing at multiple clinical sites to establish clinical safety and
effectiveness in an expanded patient population of geographically dispersed test sites to evaluate the overall benefit-risk relationship
for administering the product and to provide an adequate basis for product labeling. Phase IV clinical trials may be conducted
after approval to gain additional experience from the treatment of patients in the intended therapeutic indication.
After completion of clinical trials of a new drug product, FDA
and foreign regulatory authority marketing approval must be obtained. Assuming that the clinical data support the product’s
safety and effectiveness for its intended use, a new drug application, or NDA, or a BLA is submitted to the FDA for review. Generally,
it takes one to three years to obtain approval. If questions arise during the FDA review process, approval may take a significantly
longer period of time. The testing and approval processes require substantial time and effort and approval on a timely basis, if
at all, or the approval that we receive may be for a narrower indication than we had originally sought, potentially undermining
the commercial viability of the product. Even if regulatory approvals are obtained, approved products are subject to continual
review and holders of an approved product are required, for example, to report certain adverse reactions and production problems,
if any, to the FDA, and to comply with certain requirements concerning advertising and promotional labeling for the product. Also,
quality control and manufacturing procedures relating to a product must continue to conform to cGMP after approval, and the FDA
periodically inspects manufacturing facilities to assess compliance with cGMP. Accordingly, manufacturers must continue to expend
time, money and effort in the area of production and quality control to comply with cGMP and other aspects of regulatory compliance.
The later discovery of previously unknown problems or failure to comply with the applicable regulatory requirements with respect
to any product may result in restrictions on the marketing of the product or withdrawal of the product from the market as well
as possible civil or criminal sanctions. See also “—International Regulation.”
Under the Orphan Drug Act of 1983, the FDA may grant orphan
drug designation to drugs and biological products intended to treat a rare disease or condition, which is generally a disease or
condition that affects fewer than 200,000 individuals in the United States. The FDA grants orphan drug designation to drugs that
may provide a significant therapeutic advantage over existing treatments and target conditions affecting 200,000 or fewer U.S.
patients per year. Orphan drug designation does not convey any advantage in or shorten the duration of the regulatory review and
approval process. Among the other benefits of orphan drug designation are possible funding and tax savings to support clinical
trials and for other financial incentives and a waiver of the marketing application user fee and most likely priority review. If
a significant therapeutic advantage over existing treatments is shown in the marketing application, the FDA may grant orphan drug
approval and provide a seven-year period of marketing exclusivity.
The FDA has a fast track program that is designed to facilitate
the development and expedite the review of drugs to treat serious conditions and fill an unmet medical need, the purpose being
to make important new drugs available to patients earlier. A drug candidate that receives Fast Track designation from the FDA is
eligible for some or all of the following: more frequent meetings with the FDA to discuss the drug’s development plan and
ensure collection of appropriate data needed to support drug approval; more frequent written communication from the FDA about such
things as the design of the proposed clinical trials; eligibility for the FDA’s Accelerated Approval and Priority Review,
if relevant criteria are met; and eligibility for Rolling Review, which allows a drug company to submit completed sections of its
BLA or NDA for review by the FDA, rather than waiting until every section of the BLA or NDA is completed before the entire application
can be reviewed. BLA or NDA review usually does not begin until the drug company has submitted the entire application to the FDA.
We used the Rolling Review option for our taliglucerase alfa NDA, which we completed in April 2010.
In 2012, the U.S. Congress passed the Food and Drug Administration
Safety Innovations Act (FDASIA). Section 901 of the FDASIA amends the Federal Food, Drug, and Cosmetic Act (FDCA) to allow the
FDA to base Accelerated Approval for drugs for serious conditions that fill an unmet medical need on whether the drug has an effect
on a surrogate or an intermediate clinical endpoint. A surrogate endpoint used for Accelerated Approval is a marker, that is, a
laboratory measurement, radiographic image, physical sign or other measure, that is thought to predict clinical benefit, but is
not itself a measure of clinical benefit. An intermediate clinical endpoint is a measure of a therapeutic effect that is considered
reasonably likely to predict the clinical benefit of a drug, such as an effect on irreversible morbidity and mortality. The FDA
bases its decision on whether to accept the proposed surrogate or intermediate clinical endpoint on the scientific support for
that endpoint. Studies that demonstrate a drug’s effect on a surrogate or intermediate clinical endpoint must be “adequate
and well controlled” as required by the FDCA.
The Accelerated Approval pathway is most often used in settings
in which the course of a disease is long and an extended period of time is required to measure the intended clinical benefit of
a drug, even if the effect on the surrogate or intermediate clinical endpoint occurs rapidly. Under subpart H of the Accelerated
Approval pathway, the FDA may grant marketing approval for a new drug product on the basis of adequate and well-controlled clinical
trials establishing that the drug product has an effect on a surrogate endpoint that is reasonably likely, based on epidemiologic,
therapeutic, pathophysiologic, or other evidence, to predict clinical benefit or on the basis of an effect on a clinical endpoint
other than survival or irreversible morbidity. The Accelerated Approval pathway is usually contingent on a sponsor’s agreement
to conduct, in a diligent manner, additional post-approval confirmatory studies to verify and describe the drug’s clinical
benefit. As a result, a drug candidate approved on this basis is subject to rigorous post-marketing compliance requirements, including
the completion of Phase 4 or post-approval clinical trials to confirm the effect on the clinical endpoint. Failure to conduct required
post-approval studies, or confirm a clinical benefit during post-marketing studies, would allow the FDA to withdraw the drug from
the market on an expedited basis. All promotional materials for drug candidates approved under accelerated regulations are subject
to prior review by the FDA.
The United States federal government regulates healthcare through
various agencies, including but not limited to the following: (i) the FDA, which administers the FDCA, as well as other relevant
laws; (ii) the Center for Medicare & Medicaid Services (CMS), which administers the Medicare and Medicaid programs; (iii) the
Office of Inspector General (OIG) which enforces various laws aimed at curtailing fraudulent or abusive practices, including by
way of example, the Anti-Kickback Law, the Anti-Physician Referral Law, commonly referred to as Stark, the Anti-Inducement Law,
the Civil Money Penalty Law and the laws that authorize the OIG to exclude healthcare providers and others from participating in
federal healthcare programs; and (iv) the Office of Civil Rights, which administers the privacy aspects of the Health Insurance
Portability and Accountability Act of 1996, or HIPAA. All of the aforementioned are agencies within the Department of Health and
Human Services (HHS). Healthcare is also provided or regulated, as the case may be, by the Department of Defense through its TriCare
program, the Department of Veterans Affairs, especially through the Veterans Health Care Act of 1992, the Public Health Service
within HHS under Public Health Service Act § 340B (42 U.S.C. § 256b), the Department of Justice through the Federal False
Claims Act and various criminal statutes, and state governments under the Medicaid and other state sponsored or funded programs
and their internal laws regulating all healthcare activities. Many states also have anti-kickback and anti-physician referral laws
that are similar to the federal laws, but may be applicable in situations where federal laws do not apply.
Medicare is the federal healthcare program for those who are
(i) over 65 years of age, (ii) disabled, (iii) suffering from end-stage renal disease or (iv) suffering from Lou Gehrig’s
disease. Medicare consists of part A, which covers inpatient costs, part B, which covers services by physicians and laboratories,
durable medical equipment and certain drugs, primarily those administered by physicians, and part D, which provides drug coverage
for most prescription drugs other than those covered under part B. Medicare also offers a managed care option under part C. Medicare
is administered by CMS. In contrast, Medicaid is a state-federal healthcare program for the poor and is administered by the states
pursuant to an agreement with the Secretary of Health and Human Services. Most state Medicaid programs cover most outpatient prescription
drugs.
In March 2010, the Patient Protection and Affordable Care Act,
as amended by the Health Care and Education Affordability Reconciliation Act, or collectively, PPACA, became law in the United
States. PPACA substantially changes the way healthcare is financed by both governmental and private insurers and significantly
affects the pharmaceutical industry. Key provisions of PPACA specific to the pharmaceutical industry, among others, include the
following:
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An annual, nondeductible fee on any entity that manufactures
or imports certain branded prescription drugs and biologic agents into the United States, apportioned among these entities according
to their market share in certain federal government healthcare programs (excluding sales of any drug or biologic product marketed
for an orphan indication), beginning in 2011;
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An increase in the rebates a manufacturer must pay under
the Medicaid Drug Rebate Program, retroactive to January 1, 2010, to 23.1% and 13% of the average manufacturer price for branded
and generic drugs, respectively;
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A new Medicare Part D coverage gap discount program,
in which manufacturers must agree to offer 50% point-of sale discounts off negotiated prices of applicable brand drugs to eligible
beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under
Medicare Part D, beginning in 2011;
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Extension of manufacturers’ Medicaid rebate liability
to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations, effective March 23, 2010;
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Expansion of eligibility criteria for Medicaid programs
by, among other things, allowing states to offer Medicaid coverage to additional individuals beginning in April 2010 and by adding
new mandatory eligibility categories for certain individuals with income at or below 133% of the Federal Poverty Level beginning
in 2014, thereby potentially increasing both the volume of sales and manufacturers’ Medicaid rebate liability;
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Expansion of the entities eligible for discounts under
the Public Health Service pharmaceutical pricing program, effective January 2010;
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New requirements to report certain financial arrangements
with physicians and others, including reporting any “transfer of value” made or distributed to prescribers and other
healthcare providers and reporting any investment interests held by physicians and their immediate family members during each
calendar year beginning in 2012, with reporting starting in 2013;
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A new requirement to annually report drug samples that
manufacturers and distributors provide to physicians, effective April 1, 2012;
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A licensure framework for follow-on biologic products;
and
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A new Patient-Centered Outcomes Research Institute to
oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research.
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International Regulation
We are subject to regulations and product registration requirements
in many foreign countries in which we may sell our products, including in the areas of product standards, packaging requirements,
labeling requirements, import and export restrictions and tariff regulations, duties and tax requirements. The time required to
obtain clearance required by foreign countries may be longer or shorter than that required for FDA clearance, and requirements
for licensing a product in a foreign country may differ significantly from FDA requirements.
Pharmaceutical products may not be imported into, or manufactured
or marketed in, the State of Israel absent drug registration. The three basic criteria for the registration of pharmaceuticals
in Israel is quality, safety and efficacy of the pharmaceutical product and the Israeli MOH requires pharmaceutical companies to
conform to international developments and standards. Regulatory requirements are constantly changing in accordance with scientific
advances as well as social and ethical values.
The relevant legislation of the European Union requires that
medicinal products, including generic versions of previously approved products, and new strengths, dosage forms and formulations,
of previously approved products, shall have a marketing authorization before they are placed on the market in the European Union.
Authorizations are granted after the assessment of quality, safety and efficacy by the respective health authorities. In order
to obtain an authorization, an application must be made to the competent authority of the member state concerned or in a centralized
procedure to the EMA. Besides various formal requirements, the application must contain the results of pharmaceutical (physico-chemical,
biological or microbiological) tests, of preclinical (toxicological and pharmacological) tests as well as of clinical trials. All
of these tests must have been conducted in accordance with relevant EU regulations and must allow the reviewer to evaluate the
quality, safety and efficacy of the medicinal product. Orphan drug designation in the European Union is granted to medicinal products
intended for the diagnosis, prevention and treatment of life-threatening diseases and very serious conditions that affect not more
than five in 10,000 people in the European Union. Orphan drug designation is generally given to medicinal products that treat conditions
for which no current therapy exists or are expected to bring a significant benefit to patients over existing therapies.
Israeli Government Programs
The following is a summary of the current principal
Israeli tax laws applicable to us and Protalix Ltd., and of the Israeli Government programs from which Protalix Ltd.
benefits. Some parts of this discussion are based on new tax legislation that has not been subject to judicial or
administrative interpretation. Therefore, the views expressed in the discussion may not be accepted by the tax authorities in
question. This summary is based on laws and regulations in effect as of the date hereof, should not be construed as legal
or professional tax advice and does not cover all possible tax considerations.
General Corporate Tax Structure in Israel
The income of Protalix Ltd., other than income from “Approved
Enterprises,” is taxed in Israel at the regular rate (currently 23%).
In January 2016, the Law for the Amendment of the Income Tax
Ordinance (No. 216) was published, enacting a reduction of corporate tax rate beginning in 2016 and thereafter, from 26.5% to 25%.
In December 2016, the Economic Efficiency Law (Legislative
Amendments for Implementing the Economic Policy for the 2017 and 2018 Budget Year), 2016 was published, introducing a gradual
reduction in corporate tax rate from 25% to 23%. However, the law also included a temporary provision setting the corporate
tax rate in 2017 at 24%. According to the above, the corporate tax rate in 2018 and thereafter is 23%.
Real capital gains on the sale of assets are subject to
capital gains tax according to the corporate tax rate in effect in the year which the assets are sold.
Law for the Encouragement of Capital Investments, 1959
The Law for the Encouragement of Capital Investments, 1959,
as amended, or the Investment Law, provides certain incentives for capital investments in a production facility (or other eligible
assets). Generally, an investment program that is implemented in accordance with the provisions of the Investment Law, referred
to as an “Approved Enterprise,” is entitled to benefits. These benefits may include cash grants from the Israeli government
and tax benefits, based upon, among other things, the location within Israel of the facility in which the investment is made and
specific elections made by the grantee. In order to qualify for these incentives, an Approved Enterprise is required to comply
with the requirements of the Investment Law, and Letter of approval received by Protalix Ltd.
Protalix Ltd. will continue to enjoy the tax benefits under
the pre-revision provisions of the Investment Law. If any new benefits are granted to Protalix Ltd. in the future, Protalix Ltd.
will be subject to the provisions of the amended Investment Law with respect to these new benefits. Therefore, the following discussion
is a summary of the Investment Law prior to its amendment as well as the relevant changes contained in the new legislation.
Under the Investment Law prior to its amendment, a
company that wished to receive benefits had to receive an approval from the Authority for the Investment and Development of
the Industry and Economy, or the Investment Center. Each certificate of approval for an Approved Enterprise relates to a
specific investment program in the Approved Enterprise, delineated both by the financial scope of the investment and by the
physical characteristics of the facility or the asset, e.g., the equipment to be purchased and utilized pursuant to the
program.
An Approved Enterprise may elect to forego any entitlement
to the grants otherwise available under the Investment Law and, instead, participate in an alternative benefits program under
which the undistributed income (after deductions and offsets) from the Approved Enterprise is exempt from corporate tax for a
defined period of time. Under the alternative package of benefits, a company’s undistributed income derived from an Approved
Enterprise will be exempt from corporate tax for a period of between two and 10 years from the first year of taxable income, depending
upon the geographic location within Israel of the Approved Enterprise. Upon expiration of the exemption period, the Approved Enterprise
is eligible for the reduced tax rates under the Investment Law for any remainder of the otherwise applicable benefits period (up
to an aggregate benefits period of either seven or 10 years, depending on the location of the company or its definition as a foreign
investors’ company). If a company has more than one Approved Enterprise program or if only a portion of its capital investments
are approved, its effective tax rate is the result of a weighted combination of the applicable rates. The tax benefits from any
certificate of approval relate only to taxable profits attributable to the specific Approved Enterprise and are contingent upon
meeting the criteria set out in the certificate of approval. Income derived from activity that is not integral to the activity
of the Approved Enterprises (including capital gain) does not enjoy these tax benefits.
A company that has an Approved Enterprise program
is eligible for further tax benefits, as an alternative to exemption, if it qualifies as a foreign investors’ company.
A foreign investors’ company eligible for benefits is essentially a company in which more than 25% of the share capital
(in terms of shares, rights to profit, voting and appointment of directors) is owned (measured by both share capital and
combined share and loan capital) by non-Israeli residents. A company that qualifies as a foreign investors’ company and
has an Approved Enterprise program is eligible for tax benefits for a 10-year benefit period and may enjoy a reduced
corporate tax rate of 10% to 23%, depending on the amount of the company’s shares held by non-Israeli shareholders.
If a company that has an Approved Enterprise program is
a wholly owned subsidiary of another company, the percentage of foreign investments is determined based on the percentage
of foreign investment in the parent company. The tax rates and related levels of foreign investments with respect to a
foreign investor’s company that has an Approved Enterprise program are set forth in the following table:
Percent of Foreign Ownership
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Rate of Reduced Tax
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Over 25% but less than 49%
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23%
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49% or more but less than 74%
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20%
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74% or more but less than 90%
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15%
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90% or more
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10%
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Our original facility in Israel has been granted “Approved
Enterprise” status, and it has elected to participate in the alternative benefits program. Under the terms of its Approved
Enterprise program, the facility is located in a top priority location, or “Zone A,” and, therefore, the income from
that Approved Enterprise will be tax exempt in Israel for a period of 10 years, commencing with the year in which taxable income
is first generated from the relevant Approved Enterprise. The current benefits program may not continue to be available and Protalix
Ltd. may not continue to qualify for its benefits.
A company that has elected to participate in
the alternative benefits program and that subsequently pays a dividend out of the income derived from the portion of its
facilities that have been granted Approved Enterprise status during the tax exemption period will be subject to corporate tax
in respect of the amount of dividend distributed at the rate that would have been applicable had the company not elected the
alternative benefits program (generally 10% to 23%, depending on the extent to which non-Israeli shareholders hold such
company’s shares). If the dividend is distributed within 12 years after the commencement of the benefits period (or, in
the case of a foreign investor’s company, without time limitation), the dividend recipient is taxed at the reduced
withholding tax rate of 15% applicable to dividends from approved enterprises, or at the lower rate under an applicable tax
treaty. After this period, the withholding tax rate is 25%, or at the lower rate under an applicable tax treaty. In the case
of a company with a foreign investment level (as defined by the Investment Law) of 25% or more, the 12-year limitation on
reduced withholding tax on dividends does not apply. The company must withhold this tax at its source, regardless of whether
the dividend is converted into foreign currency.
The Investment Law also provides that an Approved Enterprise
is entitled to accelerated depreciation on its property and equipment that are included in an approved investment program. This
benefit is an incentive granted by the Israeli government regardless of whether the alternative benefits program is elected.
The benefits available to an Approved Enterprise are
conditioned upon terms stipulated in the Investment Law and its regulations and the criteria set forth in the applicable
certificate of approval. If Protalix Ltd. does not fulfill these conditions in whole or in part, the benefits can be canceled
and Protalix Ltd. may be required to refund the received benefits, linked to the Israeli consumer price index with the
addition of interest or alternatively with an additional penalty payment. We believe that Protalix Ltd. currently operates in
compliance with all applicable conditions and criteria, but there can be no assurance that Protalix Ltd. will continue to do
so. Furthermore, there can be no assurance that any Approved Enterprise status granted to Protalix Ltd.’s facilities
will entitle Protalix Ltd. to the same benefits to which it is currently entitled.
Under the Investment Law, the approval of the Investment
Center is required only for Approved Enterprises that receive cash grants. Approved Enterprises that do not receive
benefits in the form of governmental cash grants, but only tax benefits, are no longer required to obtain this approval.
Instead, these Approved Enterprises are required to make certain investments as specified in the Investment Law.
The amended Investment Law specifies certain conditions for
an Approved Enterprise to be entitled to benefits. These conditions include; inter alia, the following:
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the Approved Enterprise’s revenues from any single
country or a separate customs territory may not exceed 75% of the Approved Enterprise’s total revenues; or
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at least 25% of the Approved Enterprise’s revenues
during the benefits period must be derived from sales into a single country or a separate customs territory with a population
of at least 14 million (starting from January 1, 2012, 1.4%
must be added for each year).
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There can be no assurance that Protalix Ltd. will comply with
the above conditions in the future or that Protalix Ltd. will be entitled to any additional benefits under the Investment Law.
In addition, it is possible that Protalix Ltd. may not be able to operate in a manner that maximizes utilization of the potential
benefits available under the Investment Law.
In the future there may be changes in the law, subject to the
preservation of benefits, which may affect the benefits available to companies under the Investment Law. The termination or substantial
reduction of any of the benefits available under the Investment Law could materially impact the cost of our future investments.
Encouragement of Industrial Research, Development and Technology
Innovation Law, 1984
To date, Protalix Ltd. has received grants from the OCS under
the Israeli Law for the Encouragement of Industrial Research, Development and Technology Innovation, 1984, and related regulations,
or the Research Law. On January 1, 2016, the Israeli government established NATI which replaced many of the functions of the Office
of the Chief Scientist of the Israeli Department of Labor, or the OCS. For purposes of clarity, references to NATI will include
the OCS. NATI grants are made available to finance of a portion of Protalix Ltd.’s research and development expenditures
in Israel. As of December 31, 2018, NATI approved grants in respect of Protalix Ltd.’s continuing operations totaling
approximately $53.0
million
, measured from inception. Protalix
Ltd. is required to repay up to 100% of grants actually received (plus interest at the LIBOR rate applied to the grants received
on or after January 1, 1999) to NATI through payments of royalties at a rate of 3% to 6% of the revenues generated from NATI-funded
project, depending on the period in which revenues were generated. As of December 31, 2018, Protalix Ltd. either paid or accrued
royalties payable of $11.1
million
and Protalix Ltd.’s
contingent liability to NATI with respect to grants received was approximately $41.9
million
.
Under the Research Law, recipients of grants from NATI are prohibited
from manufacturing products developed using these grants outside of the State of Israel without special approvals, although the
Research Law does enable companies to seek prior approval for conducting manufacturing activities outside of Israel without being
subject to increased royalties. If Protalix Ltd. receives approval to manufacture the products developed with government grants
outside of Israel, it will be required to pay an increased total amount of royalties (possibly up to 300% of the grant amounts
plus interest), depending on the manufacturing volume that is performed outside of Israel, as well as at a possibly increased royalty
rate.
Additionally, under the Research Law, Protalix Ltd. is prohibited
from transferring NATI-financed technologies and related intellectual property rights outside of the State of Israel, except under
limited circumstances and only with the approval of NATI Council or the Research Committee. Protalix Ltd. may not receive the required
approvals for any proposed transfer and, if received, Protalix Ltd. may be required to pay NATI a portion of the consideration
that it receives upon any sale of such technology by a non-Israeli entity. The scope of the support received, the royalties that
Protalix Ltd. has already paid to NATI, the amount of time that has elapsed between the date on which the know-how was transferred
and the date on which NATI grants were received and the sale price and the form of transaction will be taken into account in order
to calculate the amount of the payment to NATI. Approval of the transfer of technology to residents of the State of Israel is required,
and may be granted in specific circumstances only if the recipient abides by the provisions of applicable laws, including the restrictions
on the transfer of know-how and the obligation to pay royalties. No assurance can be made that approval to any such transfer, if
requested, will be granted.
Under the Research Law and the regulations promulgated thereunder,
NATI Council may allow the transfer outside of Israel of know-how derived from an approved program and the related manufacturing
rights in limited circumstances which are currently as follows:
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in the event of a sale of know-how itself to a non-affiliated
third party, provided that upon such sale the owner of the know-how pays to NATI an amount, in cash, as set forth in the Research
Law (and the regulations promulgated thereunder). In addition, the amendment provides that if the purchaser of the know-how gives
the selling Israeli company the right to exploit the know-how by way of an exclusive, irrevocable and unlimited license, the research
committee may approve such transfer in special cases without requiring a cash payment.
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in the event of a sale of a company which is the owner
of know-how, pursuant to which the company ceases to be an Israeli company, provided that upon such sale, the owner of the know-how
makes a cash payment to NATI as set forth in the Research Law (and the regulations promulgated thereunder).
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in the event of an exchange of know-how such that in exchange for the transfer of know-how outside of Israel, the recipient
of the know-how transfers other know-how to the company in Israel in a manner in which NATI is convinced that the Israeli economy
realizes a greater, overall benefit from the exchange of know-how.
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The Research Committee may, in special cases, approve the transfer
of manufacture or of manufacturing rights of a product developed within the framework of the approved program or which results
therefrom, outside of Israel.
The State of Israel does not own intellectual property rights
in technology developed with NATI funding and there is no restriction on the export of products manufactured using technology developed
with NATI funding. The technology is, however, subject to transfer of technology and manufacturing rights restrictions as described
above. For a description of such restrictions, please see “Risk Factors—Risks Relating to Our Operations in Israel.”
NATI approval is not required for the export of any products resulting from the research or development or for the licensing of
any technology in the ordinary course of business.
Law for the Encouragement of Industry (Taxes), 1969
We believe that Protalix Ltd. currently qualifies as an “Industrial
Company” within the meaning of the Law for the Encouragement of Industry (Taxes), 1969, or the Industry Encouragement Law.
The Industry Encouragement Law defines “Industrial Company” as a company resident in Israel and incorporated in Israel,
that derives 90% or more of its income in any tax year (other than specified kinds of passive income such as capital gains, interest
and dividends) from an “Industrial Enterprise” operating in Israel (including Judea & Samaria territories and the
Gaza strip), that it owns. An “Industrial Enterprise” is defined as an enterprise whose major activity in a given tax
year is industrial production.
The following corporate tax benefits, among others, are available
to Industrial Companies:
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amortization of the cost of purchased know-how and patents
over an eight-year period for tax purposes;
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accelerated depreciation rates on equipment and buildings;
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under specified conditions, an election to file consolidated tax returns with other related Israeli Industrial Companies; and
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expenses related to a public offering are deductible in equal amounts over three years.
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Eligibility for the benefits under the Industry Encouragement
Law is not subject to receipt of prior approval from any governmental authority. It is possible that Protalix Ltd. may fail to
qualify or may not continue to qualify as an “Industrial Company” or that the benefits described above will not be
available in the future.
Tax Benefits for Research and Development
Under specified conditions, Israeli tax laws allow a tax
deduction by a company for research and development expenditures, including capital expenditures, for the year in which such
expenditures are incurred. These expenditures must relate to scientific research and development projects and must be
approved by NATI. Furthermore, the research and development projects must be for the promotion of the company and carried out
by or on behalf of the company seeking such tax deduction. However, the amount of such deductible expenditures is reduced by
the sum of any funds received through government grants for the finance of such scientific research and development projects.
Research and development expenses which were not approved shall be deductible over a period of three years.
Employees
As of December 31, 2018, we had 184 employees, of whom
17 have a Ph.D. or an M.D.in their respective scientific fields. We believe that our relations with these employees are good. We
believe that our success will greatly depend on our ability to identify, attract and retain capable employees. The Israeli Ministry
of Labor and Welfare is authorized to make certain industry-wide collective bargaining agreements, or Expansion Orders, that apply
to types of industries or employees including ours. These agreements affect matters such as cost of living adjustments to salaries,
length of working hours and week, recuperation, travel expenses, and pension rights. Otherwise, our employees are not represented
by a labor union or represented under a collective bargaining agreement. See “Risk Factors—We depend upon key employees
and consultants in a competitive market for skilled personnel. If we are unable to attract and retain key personnel, it could adversely
affect our ability to develop and market our products.”
Company Background
Our principal business address is set forth below. Our executive
offices and our main research manufacturing facility are located at that address. Our telephone number is +972-4-988-9488. We were
originally incorporated in the State of Florida in April 1992, and reincorporated in the State of Delaware in March 2016. Protalix
Ltd., our wholly-owned subsidiary and sole operating unit, is an Israeli company and was originally incorporated in Israel on December 27,
1993. During 1999, Protalix Ltd. changed its focus from plant secondary metabolites to the expression of recombinant therapeutic
proteins in plant cells, and in April 2004 changed its name to Protalix Ltd.
ProCellEx
®
is our registered trademark. Each
of the other trademarks, trade names or service marks appearing in this Annual Report on Form 10-K belongs to its respective holder.
Available Information
Our corporate website is www.protalix.com. We make available
on our website, free of charge, our Commission filings, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and any amendments to these reports, as soon as reasonably practicable after we electronically file
these documents with, or furnish them to, the Commission. Additionally, from time to time, we provide notifications of material
news including press releases and conferences on our website. Webcasts of presentations made by our company at certain conferences
may also be available from time to time on our website, to the extent the webcasts are available. The content of our website is
not intended to be incorporated by reference into this report or in any other report or document we file and any references to
these websites are intended to be inactive textual references only.
We are also listed on the Tel Aviv Stock Exchange, or the TASE,
and, accordingly, we submit copies of all our filings with the Commission to the Israeli Securities Authority and the TASE. Such
copies can be retrieved electronically through the TASE’s internet messaging system (www.maya.tase.co.il) and through the
MAGNA distribution site of the Israeli Securities Authority (www.magna.isa.gov.il).
Our website also includes printable versions of our Code of
Business Conduct and Ethics and the charters for each of the Audit, Compensation and Nominating Committees of our Board of Directors.
Each of these documents is also available in print, free of charge, to any shareholder who requests a copy by addressing a request
to:
Protalix BioTherapeutics, Inc.
2 Snunit Street, Science Park
P.O. Box 455
Carmiel 20100, Israel
Attn: Mr. Yossi Maimon, Chief Financial
Officer
You should carefully consider the risks described below together
with the other information included in this Annual Report on Form 10-K. Our business, financial condition or results of operations
could be adversely affected by any of these risks. If any of these risks occur, the value of our common stock could decline.
Risks Related to Clinical Trials and Regulatory Matters
Clinical
trials are very expensive, time-consuming and difficult to design and implement and may result in unforeseen costs which may have
a material adverse effect on our business, results of operations and financial condition.
Human
clinical trials are very expensive and difficult to design and implement, in part because they are subject to rigorous regulatory
requirements. The clinical trial process is also time-consuming. Other than taliglucerase alfa, all of our other drug candidates,
including pegunigalsidase alfa, are in the clinical, preclinical or research stages and will take at least several years to complete.
Preliminary and initial results from a clinical trial do not necessarily predict final results, and failure can occur at any stage
of the trial. We may encounter problems that cause us to abandon or repeat preclinical studies or clinical trials. Failure or delay
in the commencement or completion of our clinical trials may be caused by several factors, including:
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slower than expected rates of patient recruitment, particularly
with respect to trials of rare diseases such as Fabry disease;
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determination of dosing issues;
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unforeseen safety issues;
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lack of effectiveness during clinical trials;
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disagreement by applicable regulatory bodies over our trial protocols, our the interpretation of data from preclinical studies
or clinical trials or conduct and control of clinical trials;
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determination that the patient population participating in a clinical trial may not be sufficiently broad or representative
to assess efficacy and safety for our target population;
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inability to monitor patients adequately during or after treatment;
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inability or unwillingness of medical investigators and institutional review boards to follow our clinical protocols; and
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lack of sufficient funding to finance the clinical trials.
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Any failure or delay in commencement or completion of any clinical
trials of
pegunigalsidase alfa
or our other product candidates will have a material
adverse effect on our business, results of operations and financial condition. In addition, we or the FDA or other regulatory authorities
may suspend any clinical trial at any time if it appears that we are exposing participants in the trial to unacceptable safety
or health risks or if the FDA or such other regulatory authorities, as applicable, find deficiencies in our IND submissions or
the conduct of the trial. Any suspension of a clinical trial may have a material adverse effect on our business, results of operations
and financial condition.
We
may find it difficult to enroll patients in our clinical trials, which could cause significant delays in the completion of such
trials or may cause us to abandon one or more clinical trials.
Some
of the diseases or disorders that our drug candidates are intended to treat, such as Fabry disease, are relatively rare and we
expect only a subset of the patients with these diseases to be eligible for our clinical trials. Our clinical trials generally
mandate that a patient cannot be involved in another clinical trial for the same indication. Therefore, subjects that participate
in ongoing clinical trials for products that are competitive with our drug candidates are not available for our clinical trials.
An inability to enroll a sufficient number of patients for our ongoing phase III clinical trials of pegunigalsidase alfa, or for
any of our other current or future clinical trials, would result in significant delays or may require us to abandon one or more
clinical trials altogether, which will have a material adverse effect on our business, results of operations and financial condition.
If the results of our
clinical trials do not support our claims relating to a drug candidate, or if serious side effects are identified, the completion
of development of such drug candidate may be significantly delayed or we may be forced to abandon development altogether, which
will significantly impair our ability to generate product revenues.
The results of our clinical
trials with respect to any drug candidate might not support our claims of superiority, safety or efficacy, the effects of our drug
candidates may not be the desired effects or may include undesirable side effects or the drug candidates may have other unexpected
characteristics. Further, success in preclinical testing and early clinical trials does not ensure that later clinical trials will
be successful, and the results of later clinical trials may not replicate the results of prior clinical trials and preclinical
testing. Data obtained from tests are susceptible to varying interpretations which may delay, limit or prevent regulatory approval.
The clinical trial process may fail to demonstrate that our drug candidates are safe for humans and effective for indicated uses.
In addition, our clinical trials, particularly with respect to pegunigalsidase alfa, may involve specific and small patient populations.
Results of early clinical trials conducted on a small patient population may not be indicative of future results. Adverse or inconclusive
results may cause us to abandon a drug candidate and may delay development of other drug candidates. Any delay in, or termination
of, our clinical trials will delay the filing of NDAs and BLAs with the FDA, or other filings with other foreign regulatory authorities,
and, ultimately, significantly impair our ability to commercialize our drug candidates and generate product revenues which would
have a material adverse effect on our business, results of operations and financial condition.
Patients
may discontinue their participation in our clinical trials which may negatively impact the results of these studies and extend
the timeline for completion of our development programs.
Patients enrolled in our
clinical trials may discontinue their participation at any time during the study as a result of a number of factors, including
withdrawing their consent, experiencing adverse clinical events, which may or may not be judged related to our drug candidates
under evaluation, or due to planned or actual pregnancies. The discontinuation of patients in any one of our studies may delay
the completion of the study or cause the results from the study not to be positive or to not support a filing for regulatory approval
of the applicable drug candidate, which would have a material adverse effect on our business, results of operations and financial
condition.
Because
our clinical trials depend upon third-party researchers, the results of our clinical trials and such research activities are subject
to delays and other risks which are, to a certain extent, beyond our control, which could impair our clinical development programs
and our competitive position.
We depend upon independent investigators and collaborators,
such as universities and medical institutions, to conduct our preclinical and clinical trials. These collaborators are not our
employees, and we cannot control the amount or timing of resources that they devote to our clinical development programs. The investigators
may not assign as great a priority to our clinical development programs or pursue them as diligently as we would if we were undertaking
such programs directly. If outside collaborators fail to devote sufficient time and resources to our clinical development programs,
or if their performance is substandard, the approval of anticipated NDAs, BLAs and other marketing applications, and our introduction
of new drugs, if any, may be delayed which could impair our clinical development programs and would have a material adverse effect
on our business, results of operations and
financial condition
. The collaborators
may also have relationships with other commercial entities, some of whom may compete with us. If our collaborators also assist
our competitors, our competitive position could be harmed.
We
are subject to extensive governmental regulation including the requirements of the FDA and other comparable regulatory authorities
before our drug candidates may be marketed.
Both
before and after marketing approval of our drug candidates, if at all, we, our drug candidates, our suppliers, our contract manufacturers
and our contract testing laboratories are subject to extensive regulation by the FDA and comparable foreign regulatory authorities.
Failure to comply with applicable requirements of the FDA or comparable foreign regulatory authorities could result in, among other
things, any of the following actions:
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fines and other monetary penalties;
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unanticipated expenditures;
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delays in the FDA’s or other foreign regulatory authorities’ approving, or the refusal of any regulatory authority
to approve, any drug candidate;
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product recall or seizure;
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interruption of manufacturing or clinical trials;
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operating restrictions;
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In
addition to the approval requirements, other numerous and pervasive regulatory requirements apply, both before and after approval,
to us, our drug candidates, and our suppliers, contract manufacturers, and contract laboratories. These include requirements related
to:
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reporting to the FDA certain adverse experiences associated with use of the drug candidate; and
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obtaining additional approvals for certain modifications to the drug candidate or its labeling or claims.
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We
also are subject to inspection by the FDA and comparable foreign regulatory authorities, to determine our compliance with regulatory
requirements, as are our suppliers, contract manufacturers, and contract testing laboratories, and there can be no assurance that
the FDA or any other comparable foreign regulatory authority, will not identify compliance issues that may disrupt production or
distribution, or require substantial resources to correct. We may be required to make modifications to our manufacturing operations
in response to these inspections which may require significant resources and may have a material adverse effect upon our business,
results of operations and financial condition.
The
approval process for any drug candidate may also be delayed by changes in government regulation, future legislation or administrative
action or changes in policy of the FDA and comparable foreign authorities that occur prior to or during their respective regulatory
reviews of such drug candidate. Delays in obtaining regulatory approva
ls with respect to any drug candidate may:
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delay commercialization of, and our ability to derive product revenues from, such drug candidate;
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delay any regulatory-related milestone payments payable under outstanding collaboration agreements;
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require us to perform costly procedures with respect to such drug candidate; or
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otherwise diminish any competitive advantages that we may have with respect to such drug candidate.
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Delays
in the approval process for any drug candidate may have a material adverse effect upon our business, results of operations and
financial condition.
We may not obtain the necessary
U.S., EMA or other worldwide regulatory approvals to commercialize our drug candidates in a timely manner, if at all, which would
have a material adverse effect on our business, results of operations and financial condition.
We
need FDA approval to commercialize our drug candidates in the United States, EMA approval to commercialize our drug candidates
in the European Union and approvals from other foreign regulators to commercialize our drug candidates elsewhere. In order to obtain
FDA approval of any of our drug candidates, we must submit to the FDA an NDA or a BLA demonstrating that the drug candidate is
safe for humans and effective for its intended use. This demonstration requires significant research and animal tests, which are
referred to as preclinical studies, as well as human tests, which are referred to as clinical trials. In the European Union, we
must submit an MAA to the EMA. Satisfaction of the regulatory requirements of the FDA, EMA and other foreign regulatory authorities
typically takes many years, depends upon the type, complexity and novelty of the drug candidate and requires substantial resources
for research, development and testing. Even if we comply with all the requests of regulatory authorities, the authorities may ultimately
reject any marketing application that we file for a product candidate in the future, if any, or we might not obtain regulatory
clearance in a timely manner. Companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in
advanced or late-stage clinical trials, even after obtaining promising earlier trial results or in preliminary findings or other
comparable authorities for such clinical trials. Further, even if favorable testing data is generated by the clinical trials of
a drug candidate, the applicable regulatory authority may not accept or approve the marketing application filed by a pharmaceutical
or biotechnology company for the drug candidate. Failure to obtain approval of the FDA, EMA or comparable foreign authorities of
any of our drug candidates in a timely manner, if at all, will severely undermine our business, financial condition and results
of operation by reducing our potential marketable products and our ability to generate corresponding product revenues.
Our
research and clinical efforts may not result in drugs that the FDA, EMA or foreign regulatory authorities consider safe for humans
and effective for indicated uses, which would have a material adverse effect on our business, results of operations and financial
condition. After clinical trials are completed for any drug candidate, if at all, the FDA, EMA and foreign regulatory authorities
have substantial discretion in the drug approval process of the drug candidate in their respective jurisdictions and may require
us to conduct additional clinical testing or perform post-marketing studies which would cause us to incur additional costs. Incurring
such costs may have a material adverse effect on our business, results of operations and financial condition.
We
have only limited experience in regulatory affairs, and some of our drug candidates may be based on new technologies. These factors
may affect our ability or the time we require to obtain necessary regulatory approvals.
We have only limited experience
in filing and prosecuting the applications necessary to gain regulatory approvals for medical devices and drug candidates. Moreover,
some of the drug candidates that are likely to result from our development programs may be based on new technologies that have
not been extensively tested in humans. The regulatory requirements governing these types of drug candidates may be less well defined
or more rigorous than for conventional products. As a result, we may experience a longer regulatory process in connection with
obtaining regulatory approvals of any products that we develop, which may have a material adverse effect on our business, results
of operations and financial condition
.
Orphan
drug designation may not ensure that we will enjoy market exclusivity in any jurisdiction. If any of our other competitors are
able to obtain orphan drug exclusivity for any products that are competitive with our products, we may be precluded from selling
or obtaining approval of our competing products by the applicable regulatory authorities for a significant period of time.
In
the United States, the European Union and other countries, a drug may be designated as having orphan drug status, subject to certain
conditions. There can be no assurance that a drug candidate that receives orphan drug designation will receive orphan drug marketing
exclusivity and more than one drug can have orphan designation for the same indication. In addition, the orphan drug designation
granted to pegunigalsidase alfa by the EMA does not affect Fabry disease treatments that preexist the approval of pegunigalsidase
alfa, if at all.
Foreign
regulations regarding orphan drugs are similar to those in the United States but there are several differences. For example, the
exclusivity period in the European Union is generally 10 years. From time to time, we may apply to the FDA or any comparable foreign
regulatory authority for orphan drug designation for any one or more of our drug candidates. Other than pegunigalsidase alfa which
was granted orphan drug designation by the EMA, none of our drug candidates have been designated as an orphan drug and there is
no guarantee that the FDA or any other regulatory authority will grant such designation in the future. In addition, neither orphan
drug designation nor orphan drug exclusivity prevents competitors from developing or marketing different drugs for the relevant
indication. Even if we obtain orphan drug exclusivity for one or more indications for one of our drug candidates, we may not be
able to maintain the exclusivity. For example, if a competitive product that is the same drug or biologic as one of our drug candidates
is shown to be clinically superior to the drug candidate, any orphan drug exclusivity granted to the drug candidate will not block
the approval of the competitive product.
If any drug receives orphan
drug exclusivity in any jurisdiction for the same indication of any of our drug candidates, we may be prevented from attaining
a similar designation with respect to our drug candidate or from marketing the drug candidate in the jurisdiction during the applicable
exclusivity period, which will have a material adverse effect on our business, results of operations and financial condition
.
The
fast track designation for pegunigalsidase alfa for the treatment of Fabry disease may not lead to a faster development or regulatory
review or approval process or increase the likelihood that pegunigalsidase alfa will receive regulatory approval for the treatment
of Fabry disease.
In January 2018, the FDA
granted Fast Track designation to pegunigalsidase alfa for the treatment of Fabry disease. A drug that receives Fast Track designation
from the FDA is eligible for certain benefits. However, fast track designation does not increase the likelihood that pegunigalsidase
alfa will receive regulatory approval for the treatment of Fabry disease. Further, despite the designation, we may not experience
a faster development process, review or approval compared to applications considered for approval under conventional FDA procedures.
In addition, the FDA is entitled to withdraw the Fast Track designation of a drug candidate at any time. Any failure to realize
the benefits of fast track designation may have a material adverse effect
on
our business, results of operations and financial condition
.
Risks
Related to Our Business
We
have a limited operating history which may limit the ability of investors to make an informed investment decision.
Taliglucerase alfa is our only product with commercial approvals.
The successful commercialization of our other drug candidates will require us to perform a variety of functions, including:
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continuing to perform preclinical development and clinical
trials;
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participating in regulatory approval processes;
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formulating and manufacturing products; and
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conducting sales and marketing activities.
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Our operations have been limited to organizing and staffing
our company, acquiring, developing and securing our proprietary technology and undertaking, through third parties, preclinical
trials and clinical trials of our principal drug candidates. To date, our phase III clinical trial of taliglucerase alfa is the
only phase III study we have completed. These operations provide a limited basis for investors to assess our ability to commercialize
our drug candidates and whether to invest in our company.
We
currently depend heavily on the success of pegunigalsidase alfa. Any failure to commercialize pegunigalsidase alfa, or the experience
of significant delays in doing so, will have a material adverse effect on our business, results of operations and financial condition.
We are investing a significant portion of our efforts and financial
resources in the development of pegunigalsidase alfa and our ability to generate significant product revenues in the future, will
depend heavily on the successful development and commercialization of pegunigalsidase alfa. The successful commercialization of
pegunigalsidase alfa will depend on several factors, including the following:
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successful completion of our ongoing studies of pegunigalsidase alfa;
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Chiesi’s efforts under the Chiesi Agreement;
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obtaining marketing approvals from the FDA, the EMA and other foreign regulatory authorities;
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maintaining the cGMP compliance of our manufacturing facility or establishing manufacturing arrangements with third parties;
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the successful audit of our facilities by the FDA and other foreign regulatory authorities;
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our development of a successful sales and marketing organization for pegunigalsidase in the United States;
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the availability of reimbursement to patients from healthcare payors for pegunigalsidase alfa, if approved;
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a continued acceptable safety and efficacy profile of pegunigalsidase alfa following approval; and
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other risks described in these Risk Factors.
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Any failure to commercialize pegunigalsidase alfa or the experience
of significant delays in doing so will have a material adverse effect on our business, results of operations and financial condition.
Any failure by us to
supply drug substance to Pfizer may have a material adverse effect on our business, results of operations and financial condition.
Under
the
Amended Pfizer Agreement, we have agreed, for the first 10-year period after the execution of the agreement, to sell
drug substance to Pfizer for the production of Elelyso, and Pfizer maintains the right to extend the supply period for up to two
additional 30-month periods subject to certain terms and conditions. As part of that obligation, we agreed to substantial financial
penalties in case we fail to comply with the supply commitments, or are delayed in doing so. The amounts of the penalties depend
on when any such failure occurs and for how long it persists, if at all, and other considerations. Any failure to comply with the
supply commitments under the Amended Pfizer Agreement may have a material adverse effect on our business, results of operations
and financial condition.
Our strategy, in certain
cases, is to enter into collaboration agreements with third parties to leverage our ProCellEx system to develop product candidates.
If we fail to enter into these agreements or if we or the third parties do not perform under such agreements or terminate or elect
to discontinue the collaboration, it could have a material adverse effect on our revenues.
Our strategy, in certain cases, is to enter into arrangements
with pharmaceutical companies to leverage our ProCellEx system to develop additional product candidates. Under these arrangements,
we may grant to our partners rights to license and commercialize pharmaceutical products developed under the applicable agreements,
as we have done with pegunigalsidase alfa. Our partners may control key decisions relating to the development of the products and
we may depend on our partners’ expertise and dedication of sufficient resources to develop and commercialize our product
candidates. The rights of our partners limit our flexibility in considering alternatives for the commercialization of our product
candidates. If we or any of our current or future partners breach or terminate the agreements that make up such arrangements, our
partners otherwise fail to conduct their obligations under such arrangements in a timely manner, there is a dispute about their
obligations or if either party terminates the applicable agreement or elects not to continue the arrangement, we may not enjoy
the benefits of the agreements or receive a sufficient amount of royalty or milestone payments from them, if any, which may have
a material adverse effect on our business, results of operations and financial condition.
If we are unable to
develop and commercialize our product candidates, our business will be adversely affected.
A key element of our strategy is to develop and commercialize
a portfolio of new products in addition to taliglucerase alfa. We seek to do so through our internal research programs and strategic
collaborations for the development of new products. Research programs to identify new product candidates require substantial technical,
financial and human resources, whether or not any product candidates are ultimately identified. Our research programs may initially
show promise in identifying potential product candidates, yet fail to yield product candidates for clinical development for many
reasons, including the following:
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a product candidate is not capable of being produced in commercial quantities at an acceptable cost, or at all;
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a product candidate may not be accepted by patients, the medical community or third-party payors;
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competitors may develop alternatives that render our product candidates obsolete;
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the research methodology used may not be successful in identifying potential product candidates; or
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a product candidate may on further study be shown to have harmful side effects or other characteristics that indicate it is
unlikely to be effective or otherwise does not meet applicable regulatory approval.
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Any failure to develop or commercialize any of our other product
candidates may have a material adverse effect on our business, results of operations and financial condition.
Our ProCellEx protein expression
system is based on our proprietary plant cell-based expression technology which has a limited history and any material problems
with the system, which may be unforeseen, may have a material adverse effect on our business, results of operations and financial
condition.
Our ProCellEx protein expression system is based on our proprietary
plant cell-based expression technology. The success of our business is dependent upon the successful development and approval of
our product and product candidates produced through this technology. Although taliglucerase alfa and all of our product candidates
are produced through ProCellEx, the technology remains novel. Accordingly, the technology remains subject to certain risks. Mammalian
cell-based protein expression systems have been used in connection with recombinant therapeutic protein expression for more than
30 years and are the subject of a wealth of data; in contrast, there is not a significant amount of data generated regarding plant
cell-based protein expression and, accordingly, plant cell-based protein expression systems may be subject to unknown risks. In
addition, the protein glycosilation pattern created by our protein expression system is not identical to the natural human glycosilation
pattern and, although to date clinical data for up to five years, and commercial data for an additional five years, on taliglucerase
alfa has not demonstrated any sign of any effect, the longer term effect of the protein glycosilation pattern created by our protein
expression system on human patients, if any, is still unknown. Lastly, as our protein expression system is a new technology, we
cannot always rely on existing equipment; rather, there is a need to design custom-made equipment and to generate specific growth
media for the plant cells which may not be available at favorable prices, if at all. Any material problems with the technology
underlying our plant cell-based protein expression system may have a material adverse effect on our business, results of operations
and financial condition.
The manufacture of
our products is an exacting and complex process, and if we or one of our materials suppliers encounter problems manufacturing our
products, it will have a material adverse effect on our business and results of operations.
The FDA and foreign regulators require manufacturers to register
manufacturing facilities. The FDA and foreign regulators also inspect these facilities to confirm compliance with cGMP or similar
requirements that the FDA or foreign regulators establish. We or our materials suppliers may face manufacturing or quality control
problems causing product production and shipment delays or a situation where we or the supplier may not be able to maintain compliance
with the FDA’s cGMP requirements, or those of foreign regulators, necessary to continue manufacturing our drug candidates.
Any failure to comply with cGMP requirements or other FDA or foreign regulatory requirements could adversely affect our clinical
research activities and our ability to market and develop our products. To date, our current facility has passed audits by the
FDA and a number of other regulatory authorities but remains subject to audit by other foreign regulatory authorities. There can
be no assurance that we will be able to comply with FDA or foreign regulatory manufacturing requirements for our current facility
or any facility we may establish in the future, and the failure to so comply will have a material adverse effect on our business,
results of operations and financial condition
.
We rely on third parties
for final processing of taliglucerase alfa, pegunigalsidase alfa and our product candidates, which exposes us to a number of risks
that may delay development, regulatory approval and commercialization of taliglucerase alfa and our other product candidates or
result in higher product costs.
We have no experience in the final filling and freeze drying
steps of the drug manufacturing process. We have engaged a European contract manufacturer to act as an additional source of fill
and finish activities for taliglucerase alfa and pegunigalsidase alfa, and have engaged other parties for our product candidates.
We currently rely primarily on other third-party contractors to perform the final manufacturing steps for taliglucerase alfa on
a commercial scale. We may be unable to identify manufacturers and/or replacement manufacturers on acceptable terms or at all because
the number of potential manufacturers is limited and the FDA and other regulatory authorities, as applicable, must approve any
manufacturer and/or replacement manufacturer, including us, and we or any such third party manufacturer might be unable to formulate
and manufacture our drug products in the volume and of the quality required to meet our clinical and commercial needs. If we engage
any contract manufacturers, such manufacturers may not perform as agreed or may not remain in the contract manufacturing business
for the time required to supply our clinical or commercial needs. In addition, contract manufacturers are subject to the rules
and regulations of the FDA and comparable foreign regulatory authorities and face the risk that any of those authorities may find
that they are not in compliance with applicable regulations. Each of these risks, if realized, could delay our clinical trials,
the approval, if any, of taliglucerase alfa and our other potential drug candidates by the FDA and other regulatory authorities,
or the commercialization of taliglucerase alfa and our other drug candidates or could result in higher product costs or otherwise
deprive us of potential product revenues.
Developments by competitors may render our products or technologies
obsolete or non-competitive which would have a material adverse effect on our business, results of operations and financial condition.
We compete against fully integrated pharmaceutical companies
and smaller companies that are collaborating with larger pharmaceutical companies, academic institutions, government agencies and
other public and private research organizations. Our drug candidates will have to compete with existing therapies and therapies
under development by our competitors. In addition, our commercial opportunities may be reduced or eliminated if our competitors
develop and market products that are less expensive, more effective or safer than our drug products. Other companies have drug
candidates in various stages of preclinical or clinical development to treat diseases for which we are also seeking to develop
drug products. Some of these potential competing drugs are further advanced in development than our drug candidates and may be
commercialized earlier. Even if we are successful in developing effective drugs, our products may not compete successfully with
products produced by our competitors. See Business – Competition.
Most of our competitors, either alone or together with their
collaborative partners, operate larger research and development programs, staff and facilities and have substantially greater financial
resources than we do, as well as significantly greater experience in:
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undertaking preclinical testing and human clinical trials;
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obtaining marketing approvals from the FDA and other regulatory authorities;
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formulating and manufacturing drugs; and
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launching, marketing and selling drugs.
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These organizations also compete with us to attract qualified
personnel, acquisitions and joint ventures candidates and for other collaborations. Activities of our competitors may impose unanticipated
costs on our business which would have a material adverse effect on our business, results of operations and financial condition.
If we in-license drug candidates, we may delay or otherwise
adversely affect the development of our existing drug candidates, which may negatively impact our business, results of operations
and financial condition.
In addition to our own internally developed drug candidates,
we proactively seek opportunities to in-license and advance other drug candidates that are strategic and have value-creating potential
to take advantage of our development know-how and technology. If we in-license any additional drug candidate, our capital requirements
may increase significantly. In addition, in-licensing additional drug candidates may place a strain on the time of our existing
personnel, which may delay or otherwise adversely affect the development of our existing drug candidates or cause us to re-prioritize
our drug pipeline if we do not have the necessary capital resources to develop all of our drug candidates, which may delay the
development of our drug candidates and materially and adversely impact our business, results of operations and financial condition.
If we are unable to
manage future growth successfully, there could be a material adverse impact on our business, results of operations and financial
condition.
To manage our anticipated future growth, we must continue to
implement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train
additional qualified personnel. Due to our limited resources, we may not be able to effectively manage the expansion of our operations
or recruit and train additional qualified personnel. The expansion of our operations may lead to significant costs and may divert
our management and business development resources. Any inability on the part of our management to manage growth could delay the
execution of our business plans or disrupt our operations. If we are unable to manage our growth effectively, we may not use our
resources in an efficient manner, which may delay the development of our drug candidates and materially and adversely impact our
business, results of operations and financial condition.
If we acquire companies,
products or technologies, we may face integration risks and costs associated with those acquisitions that could negatively impact
our business, results of operations and financial condition.
If we are presented with appropriate opportunities, we may acquire
or make investments in complementary companies, products or technologies. We may not realize the anticipated benefit of any acquisition
or investment. If we acquire companies or technologies, we will face risks, uncertainties and disruptions associated with the integration
process, including difficulties in the integration of the operations of an acquired company, integration of acquired technology
with our products, diversion of our management’s attention from other business concerns, the potential loss of key employees
or customers of the acquired business and impairment charges if future acquisitions are not as successful as we originally anticipate.
In addition, our operating results may suffer because of acquisition-related costs or amortization expenses or charges relating
to acquired intangible assets. Any failure to successfully integrate other companies, products or technologies that we may acquire
may have a material adverse effect on our business and results of operations. Furthermore, we may have to incur debt or issue equity
securities to pay for any additional future acquisitions or investments, the issuance of which could be dilutive to our existing
stockholders.
We depend upon key
employees and consultants in a competitive market for skilled personnel. If we are unable to attract and retain key personnel,
it could adversely affect our ability to develop and market our products.
We are highly dependent upon the principal members of our management
team, especially our President and Chief Executive Officer, Moshe Manor, as well as the Chairman of our Board of Directors, Shlomo
Yanai, our other directors, our scientific advisory board members, consultants and collaborating scientists. Many of these people
have been involved with us for many years and have played integral roles in our progress, and we believe that they will continue
to provide value to us. A loss of any of these personnel may have a material adverse effect on aspects of our business, clinical
development and regulatory programs. We have employment agreements with Moshe Manor and our other executive officers that may be
terminated by us or the applicable officer at any time with varying notice periods of 60 to 90 days. Although these employment
agreements generally include non-competition covenants, the applicable noncompetition provisions can be difficult and costly to
monitor and enforce. The loss of any of these persons’ services may adversely affect our ability to develop and market our
products and obtain necessary regulatory approvals. Further, we do not maintain key-man life insurance.
We also depend in part on the continued service of our key scientific
personnel and our ability to identify, hire and retain additional personnel, including marketing and sales staff. We experience
intense competition for qualified personnel, and the existence of non-competition agreements between prospective employees and
their former employers may prevent us from hiring those individuals or subject us to suit from their former employers. While we
attempt to provide competitive compensation packages to attract and retain key personnel, many of our competitors are likely to
have greater resources and more experience than we have, making it difficult for us to compete successfully for key personnel.
Our collaborations
with outside scientists and consultants may be subject to restriction and change.
We work with medical experts, biologists, chemists and other
scientists at academic and other institutions, and consultants who assist us in our research, development, regulatory and commercial
efforts, including the members of our scientific advisory board. These scientists and consultants have provided, and we expect
that they will continue to provide, valuable advice regarding our programs. These scientists and consultants are not our employees,
may have other commitments that would limit their future availability to us and typically will not enter into non-compete agreements
with us. If a conflict of interest arises between their work for us and their work for another entity, we may lose their services.
In addition, we will be unable to prevent them from establishing competing businesses or developing competing products. For example,
if a key scientist acting as a principal investigator in any of our clinical trials identifies a potential product or compound
that is more scientifically interesting to his or her professional or academic interests, his or her availability to remain involved
in our clinical trials could be restricted or eliminated, which may have a material adverse effect on our business, results of
operations and financial condition.
Under current U.S.
and Israeli law, we may not be able to enforce employees’ covenants not to compete and therefore may be unable to prevent
our competitors from benefiting from the expertise of some of our former employees.
We have entered into non-competition agreements with substantially
all of our employees. These agreements prohibit our employees, if they cease working for us, from competing directly with us or
working for our competitors for a limited period. Under current U.S. and Israeli law, we may be unable to enforce these agreements
against most of our employees and it may be difficult for us to restrict our competitors from gaining the expertise our former
employees gained while working for us. If we cannot enforce our employees’ non-compete agreements, we may be unable to prevent
our competitors from benefiting from the expertise of our former employees, which may have a material adverse effect on our business,
results of operations and financial condition.
Our internal computer
systems, or those used by our third-party contractors or consultants, may fail or suffer security breaches.
Despite the implementation of security
measures, our internal computer systems and those of our present and future contractors and consultants are vulnerable to damage
from computer viruses and unauthorized access. Although to our knowledge we have not experienced any material system failure or
security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material
disruption of our development programs and our business operations. For example, the loss of clinical trial data from completed
or future clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover
or reproduce the data. Likewise, we rely on our third-party research institution collaborators for research and development of
our product candidates and other third parties for the manufacture of our product candidates and to conduct clinical trials, and
similar events relating to their computer systems could also have a material adverse effect on our business. To the extent that
any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure
of confidential or proprietary information, we could incur liability and the further development and commercialization of our product
candidates could be delayed.
If product liability
claims are brought against us, it may result in reduced demand for our products and product candidates or damages that exceed our
insurance coverage.
The clinical testing, marketing and use of our products and
product candidates exposes us to product liability claims if the use or misuse of those products or product candidates cause injury
or disease, or results in adverse effects. Use of our products or product candidates, whether in clinical trials or post approval,
could result in product liability claims. We presently carry clinical trial liability insurance with coverages of up to $10.0 million
per occurrence and $10.0 million in the aggregate, an amount we consider reasonable and customary. However, this insurance
coverage includes various deductibles, limitations and exclusions from coverage, and in any event might not fully cover any potential
claims. We may need to obtain additional clinical trial liability coverage prior to initiating additional clinical trials. We expect
to obtain product liability insurance coverage before commercialization of our product candidates; however, such insurance is expensive
and insurance companies may not issue this type of insurance when we need it. We may not be able to obtain adequate insurance in
the future at an acceptable cost. Any product liability claim, even one that was not in excess of our insurance coverage or one
that is meritless and/or unsuccessful, may adversely affect our cash available for other purposes, such as research and development,
which may have a material adverse effect on our business, results of operations and financial condition. Product liability claims,
even if without merit, may result in reduced demand for our products, if approved, which would have a material adverse effect on
our business, results of operations and financial condition. In addition, the existence of a product liability claim could adversely
affect the market price of our common stock.
Reforms in the healthcare
industry and the uncertainty associated with pharmaceutical pricing, reimbursement and related matters could adversely affect the
marketing, pricing and demand for our products, if approved.
Increasing healthcare expenditures have been the subject of
considerable public attention in the United States. Both private and government entities are seeking ways to reduce or contain
healthcare costs. Numerous proposals that would result in changes in the U.S. healthcare system have been introduced or proposed
in the U.S. Congress and in some state legislatures within the United States, including reductions in the pricing of prescription
products and changes in the levels at which consumers and healthcare providers are reimbursed for purchases of pharmaceutical products.
Legislation passed in recent years has imposed certain changes to the way in which drugs, including our product candidates, are
covered and reimbursed in the United States. For example, federal legislation and regulations have implemented new reimbursement
methodologies for certain drugs, created a voluntary prescription drug benefit, Medicare Part D, and have imposed significant revisions
to the Medicaid Drug Rebate Program. The PPACA imposes yet additional changes to these programs. We believe that legislation that
reduces reimbursement for our product candidates could adversely impact how much or under what circumstances healthcare providers
will prescribe or administer our product candidates, if approved. This could materially and adversely impact our business by reducing
our ability to generate revenue, raise capital, obtain additional collaborators and market our products, if approved. In addition,
we believe the increasing emphasis on managed care in the United States has and will continue to put pressure on the price and
usage of pharmaceutical products, which may adversely impact product sales, upon approval, if at all.
Governments outside
the United States tend to impose strict price controls and reimbursement approval policies, which may adversely affect our prospects
for generating revenue.
In some countries, particularly European Union member states,
the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental
authorities can take considerable time (six to 12 months or longer) after the receipt of marketing approval for a product.
To obtain reimbursement or pricing approval in some countries with respect to any product candidate that achieves regulatory approval,
we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available
therapies. If reimbursement of our products upon approval, if at all, is unavailable or limited in scope or amount, or if pricing
is set at unsatisfactory levels, our prospects for generating revenue, if any, could be adversely affected which would have a material
adverse effect on our business, results of operations and financial condition. Further, if we achieve regulatory approval of any
product, we must successfully negotiate product pricing for such product in individual countries. As a result, the pricing of our
product candidates, if approved, in different countries may vary widely, thus creating the potential for third-party trade in our
products in an attempt to exploit price differences between countries. This third-party trade of our products could undermine our
sales in markets with higher prices
which could have a material adverse
effect on our business, results of operations and financial condition
.
Our ability to utilize
net operating loss carryforwards may be limited.
Our NOLs, as of December 31, 2018, are equal to approximately
$211 million, of which approximately $26 million may be restricted under Section 382 of the Internal Revenue Code
(“IRC”). IRC Section 382 applies whenever a corporation with NOLs experiences an ownership change. As a result
of IRC Section 382, the taxable income for any post-change year that may be offset by a pre-change NOL may not exceed the
general IRC Section 382 limitation, which is the fair market value of the pre-change entity multiplied by the IRC long-term
tax exempt rate. Significant judgment is required in determining any valuation allowance recorded against deferred tax assets.
In assessing the need for a valuation allowance, we considered all available evidence, including past operating results, the most
recent projections for taxable income and prudent and feasible tax planning strategies. We reassess our valuation allowance periodically
and if future evidence allows for a partial or full release of the valuation allowance, a tax benefit will be recorded accordingly.
Any ownership change (including as a result of conversion of our outstanding convertible notes into shares of our common stock),
or any other limitation on our utilization of NOLs,
could have a material
adverse effect on our business, results of operations and financial condition
.
Our corporate structure may create U.S. federal income tax
inefficiencies
Protalix Ltd. is our wholly-owned subsidiary and thus a controlled
foreign corporation of our company for U.S. federal income tax purposes. This organizational structure may create inefficiencies,
as certain types of income and investments of Protalix Ltd. that otherwise would not be currently taxable under general U.S. federal
income tax principles may become taxable. These inefficiencies may require us to use more of our NOLs than we otherwise might and
may result in a tax liability without a corresponding distribution from our subsidiary which
could
have a material adverse effect on our business, results of operations and financial condition
.
We are a holding company
with no operations of our own.
We are a holding company with no operations of our own. Accordingly,
our ability to conduct our operations, service any debt that we may incur in the future and pay dividends, if any, is dependent
upon the earnings from the business conducted by Protalix Ltd. The distribution of those earnings or advances or other distributions
of funds by our subsidiary to us, as well as our receipt of such funds, are contingent upon the earnings of Protalix Ltd. and are
subject to various business considerations and U.S. and Israeli law. If Protalix Ltd. is unable to make sufficient distributions
or advances to us, or if there are limitations on our ability to receive such distributions or advances, we may not have the cash
resources necessary to conduct our corporate operations or service our debt which would have a material adverse effect on our business,
results of operations and financial condition.
Risks Related to Our Financial Condition and Capital Requirements
Servicing our debt and settling conversion requests may require
a significant amount of cash, and we may not have sufficient cash flow from our business to pay our debt. Furthermore, restrictive
covenants governing our indebtedness may restrict our ability to raise additional capital.
Our
ability to pay interest on, or to make any scheduled or otherwise required payment of the principal of, and settle conversion requests
on our outstanding convertible notes depends on our future performance, which is subject to economic, financial, competitive and
other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our
debt and make necessary expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives,
such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive.
Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. If we raise
additional debt, it would increase our interest expense, leverage and operating and financial costs. In addition, the terms of
the indentures governing our outstanding convertible notes
,
which
are secured by certain of our material assets, including all of our intellectual property, and the agreements governing future
indebtedness may restrict us from adopting any of these alternatives.
We may be able to obtain amendments and waivers of
such restrictions, subject to such restrictions under the terms of the applicable indenture or any subsequent indebtedness. In
the event of any such default, the holders of the indebtedness could, among other things, elect to declare all amounts owed immediately
due and payable, which could cause all or a large portion of our available cash flow to be used to pay such amounts and thereby
reduce the amount of cash available to pursue our business plans or force us into bankruptcy or liquidation, or, with respect to
our indebtedness that is secured, result in the foreclosure on the assets that secure the debt, which would force us to relinquish
rights to assets that we may believe are critical to our business.
We
may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a
default on our debt obligations. Any default on our debt will have a material adverse effect
on our business, results of
operations and financial condition
.
Our significant level of indebtedness could adversely affect
our business, results of operations and financial condition and prevent us from fulfilling our obligations under our convertible
notes and our other indebtedness.
Our outstanding convertible notes represent a significant amount
of indebtedness with substantial debt service requirements. We may also incur additional indebtedness to meet future financing
needs. Our substantial indebtedness could have material adverse effects on our business, results of operations and financial condition.
For example, it could:
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make it more difficult for us to satisfy our financial obligations, including with respect to the
convertible
notes
;
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result in an event of default under our outstanding convertible notes if we fail to comply with the financial and other restrictive
covenants contained in agreements governing any future indebtedness, which event of default could result in all of our debt becoming
immediately due and payable;
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increase our vulnerability to general adverse economic, industry and competitive conditions;
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reduce the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate
purposes because we will be required to dedicate a substantial portion of our cash flow from operations to the payment of principal
and interest on our indebtedness;
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limit our flexibility in planning for, or reacting to, and increasing our vulnerability to changes in our business, the industry
in which we operate and the general economy;
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prevent us from raising funds necessary to purchase
convertible notes
surrendered to us by holders upon a fundamental change (as described in the indentures governing the two series of
convertible
notes
), which failure would result in an event of default with respect to the convertible notes;
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place us at a competitive disadvantage compared to our competitors that have less indebtedness or are less highly leveraged
and that, therefore, may be able to take advantage of opportunities that our debt levels or leverage prevent us from exploiting;
and
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limit our ability to obtain additional financing.
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Each of these factors may have a material and adverse effect
on our business, results of operations and financial condition and our ability to meet our payment obligations under the convertible
notes and our other indebtedness. Our ability to make payments with respect to the convertible notes and to satisfy any other debt
obligations depends on our future operating performance and our ability to generate significant cash flow in the future, which
will be affected by prevailing economic conditions and financial, business, competitive, legislative and regulatory factors as
well as other factors affecting our company and industry, many of which are beyond our control.
We are required to comply with a number of covenants under
the indenture governing our outstanding 2021 Notes that could hinder our growth.
The
indenture governing our 2021 Notes contains a number of restrictive affirmative and negative covenants, which limit our ability
to incur additional debt; exceed certain limits; pay dividends or distributions; or merge, consolidate or dispose of substantially
all of our assets, including all of our intellectual property assets and other material assets securing such convertible notes.
A breach of these covenants could result in default, and if such default is not cured or waived,
the holders of the indebtedness
could, among other things, elect to declare all amounts owed immediately due and payable, which could cause all or a large portion
of our available cash flow to be used to pay such amounts and thereby reduce the amount of cash available to pursue our business
plans or force us into bankruptcy or liquidation, or, result in the foreclosure on the assets that secure the debt, including all
of our intellectual property assets, which would force us to relinquish rights to such assets that we may believe are critical
to our business.
We may not be able to engage in any of these activities
or engage in these activities on desirable terms, which could result in a default on our debt obligations. Any default on our debt
will have a material adverse effect
on our business, results of operations and financial condition
.
Any conversion of our outstanding convertible notes into
common stock will dilute the ownership interest of our existing stockholders, including holders who had previously converted their
notes.
The
conversion of some or all of our convertible notes into shares of our common stock will dilute the ownership interests of our existing
stockholders. Any sales in the public market of our common stock issuable upon such conversion could adversely affect prevailing
market prices of our common stock. In addition, the existence of
our outstanding convertible notes
may
encourage short selling by market participants because the conversion of convertible notes could depress the market price of our
common stock.
The fundamental change purchase feature of our outstanding
convertible notes may delay or prevent an otherwise beneficial attempt to take over our company.
The terms of our outstanding convertible notes require us to
offer to purchase the notes for cash in the event of a fundamental change. A non-stock takeover of our company may trigger the
requirement that we purchase the notes. This feature may have the effect of delaying or preventing a takeover of our company that
would otherwise be beneficial to our stockholders.
We may fail to meet
the continued market capitalization-based listing requirement or other continued listing requirements of The NYSE American.
The stock market in general, and the market for life sciences
companies in particular, have experienced extreme price and volume fluctuations that may have been unrelated or disproportionate
to the operating performance of the listed companies. There have been dramatic fluctuations in the market prices of securities
of biotechnology companies. These price fluctuations may be rapid and severe and may leave investors little time to react. Broad
market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. The
trading price of our common stock has been volatile and has been subject to wide price fluctuations in response to various factors,
many of which are beyond our control. The volatility of our stock price has from time to time in recent periods affected our market
capitalization. Stock price fluctuations that adversely affect our market capitalization may result in our failure to meet the
continued market capitalization-based listing requirement for The NYSE American, which would require us to take steps to gain compliance
with alternate listing standards or take remedial steps to bring us into compliance. A failure to maintain or regain compliance
with applicable listing standards could adversely affect the liquidity of our common stock and could result in an event of default
under the indenture governing our 2021 notes which
would have a material
adverse effect on our business, results of operations and financial condition
.
We currently have no
significant product revenues and may need to raise additional capital to operate our business, which may not be available on favorable
terms, or at all, and which will have a dilutive effect on our stockholders.
To date, we have not generated significant revenues from product
sales and only minimal revenues from research and development services and other fees, other than the milestone and other payments
we have received in connection with our agreements with Pfizer and Chiesi. For the years ended December 31, 2018, 2017 and
2016, we had net losses from continuing operations of $26.5 million, $83.4 million and $29.2 million, respectively,
primarily as a result of expenses incurred through a combination of research and development activities and expenses supporting
those activities, which includes share-based compensation expense. Drug development and commercialization is very capital intensive.
We fund all of our operations and capital expenditures from the revenues we generate from licensing fees and grants, the net proceeds
of equity and debt offerings and other sources. Based on our current plans, expectations and capital resources, we believe that
our cash and cash equivalents will be sufficient to enable us to meet our planned operating needs for at least 12 months. However,
changes may occur that could consume our existing capital at a faster rate than projected, including, among others, the cost and
timing of regulatory approvals, changes in the progress of our research and development efforts and the costs of protecting our
intellectual property rights.
We may need to finance our future cash needs through corporate
collaboration, licensing or similar arrangements, public or private equity offerings or debt financings. If we are unable to secure
additional financing in the future on acceptable terms, or at all, we may be unable to commence or complete planned preclinical
and clinical trials or obtain approval of our drug candidates from the FDA and other regulatory authorities. In addition, we may
be forced to reduce or discontinue product development or product licensing, reduce or forego sales and marketing efforts and other
commercialization activities or forego attractive business opportunities in order to improve our liquidity and to enable us to
continue operations which would have a material adverse effect on our business and results of operations. Furthermore, any additional
source of financing will likely involve the issuance of our equity securities, which will have a dilutive effect on our stockholders.
We are not currently
profitable and delays in achieving profitability, if at all, will have a material adverse effect on our business and results of
operations and could negatively impact the value of our common stock.
We may incur losses for the foreseeable future. We expect to
continue to incur significant operating expenditures, and we anticipate that our expenses will increase in the foreseeable future
as we:
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continue to undertake preclinical development and clinical trials for our current and new drug candidates;
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seek regulatory approvals for our drug candidates; and
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seek to in-license additional technologies.
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We also may continue to experience negative cash flow for the
foreseeable future as we fund our operating losses and capital expenditures. As a result, we will need to generate significant
revenues in order to achieve and maintain profitability. We may not be able to generate these revenues or achieve profitability
in the foreseeable future, if at all. Delays in achieving profitability, or subsequent failures to maintain profitability, will
have a material adverse effect on our business and results of operations and could negatively impact the value of our common stock.
Risks Related to Investing
in our Common Stock
The market price of
our common stock may fluctuate significantly.
The market price of our common stock may fluctuate significantly
in response to numerous factors, some of which are beyond our control, such as:
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the progress and results of our ongoing studies regarding pegunigalsidase alfa and our other product candidates;
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announcements regarding partnerships or collaborations by us or our competitors;
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restatements of historical financial results and changes in financial forecasts;
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purchases of
alfataliglicerase
in Brazil;
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developments concerning intellectual property rights and regulatory approvals;
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the announcement of new products or product enhancements by us or our competitors;
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variations in our and our competitors’ results of operations;
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changes in earnings estimates or recommendations by securities analysts;
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developments in the biotechnology industry; and
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general market conditions and other factors, including factors unrelated to our operating performance.
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Further, stock markets in general, and the market for biotechnology
companies in particular, have recently experienced price and volume fluctuations. Continued market fluctuations could result in
extreme volatility in the price of our common stock, which could cause a decline in the value of our common stock. Price volatility
of our common stock may be worse if the trading volume of our common stock is low. We have not paid, and do not expect to pay,
any cash dividends on our common stock as any earnings generated from future operations will be used to finance our operations.
As a result, investors will not realize any income from an investment in our common stock until and unless their shares are sold
at a profit.
Future sales of our common stock could
reduce our stock price.
If our existing stockholders or their distributees sell substantial
amounts of our common stock, including shares of our common stock issuable upon conversion of our outstanding convertible notes,
the market price of our common stock could decrease significantly. The perception in the public market that our existing stockholders
might sell shares of common stock could also depress the trading price of our common stock. Any such sales of our common stock
in the public market may affect the price of our common stock.
A substantial majority of our outstanding shares of our common
stock are freely tradable without restriction or further registration under the federal securities laws, unless owned by our affiliates.
In addition, we may sell additional shares of our common stock in the future to raise capital and a substantial number of shares
of our common stock are reserved for issuance upon the exercise of stock options and upon conversion of our outstanding convertible
notes. We cannot predict the size of future issuances, if any. At December 31, 2018, there were outstanding options to purchase
common stock issued covering approximately 10.2 million shares of our common stock with a weighted average exercise price
of $1.57 per share. Also at December 31, 2018, there were approximately 7.3 million shares of common stock available
for future for issuance in connection with future grants of incentives under our amended 2006 stock incentive plan and approximately
76.7 million shares of common stock reserved for issuance upon conversion of our outstanding convertible notes. The issuance
and sale of substantial amounts of common stock, or the perception that such issuances and sales may occur, could adversely affect
the market price of our common stock and impair our ability to raise capital through the sale of additional equity securities.
If securities analysts stop publishing research or reports
about us or our business or if they downgrade our common stock, the market price of our common stock could decline.
The market for our common stock relies in part on the research
and reports that industry or financial analysts publish about us or our business. We do not control these analysts. If any analyst
who covers us downgrades our stock or lowers its future stock price targets or estimates of our operating results, the market price
for our common stock could decline rapidly. Furthermore, if any analyst ceases to cover us, we could lose visibility in the market,
which in turn could cause the market price of our common stock to decline.
Our common stock is listed to trade on more than one stock
exchange, and this may result in price variations.
Our common stock is listed for trade on both the NYSE American
and the TASE. Dual-listing may result in price variations between the exchanges due to a number of factors. First, our common stock
is traded in U.S. dollars on the NYSE American and in NIS on the TASE. In addition, the exchanges are open for trade at different
times of the day and on different days. For example, the TASE opens generally during Israeli business hours, Sunday through Thursday,
while the NYSE American opens generally during U.S. business hours, Monday through Friday. The two exchanges also have differing
vacation schedules. Differences in the trading schedules, as well as volatility in the exchange rate of the two currencies, among
other factors, may result different trading prices for our common stock on the two exchanges. Other external influences may have
different effects on the trading price of our common stock on the two exchanges.
Directors and executive
officers own a significant percentage of our capital stock, and they may make decisions that an investor may not consider to be
in the best interests of our stockholders.
Our directors and executive officers, principal stockholders
and affiliated entities beneficially own, in the aggregate, approximately 4.3% of our common stock, as of March 1, 2019, giving
effect to stock options that are held by such persons that are exercisable within such 60 days from such date. As a result, if
some or all of them acted together, they would have the ability to exert substantial influence over the election of our Board of
Directors and the outcome of issues requiring approval by our stockholders. This concentration of ownership may have the effect
of delaying or preventing a change in control of our company that may be favored by other stockholders. This could prevent the
consummation of transactions favorable to other stockholders, such as a transaction in which stockholders might otherwise receive
a premium for their shares over current market prices.
We have identified
a material weakness in our internal control over financial reporting and subsequently restated certain of our financial statements
as a result of factors related to that weakness. This may adversely affect the accuracy and reliability of our financial statements
and impact our reputation, business and the price of our common stock, as well as lead to a loss of investor confidence in us.
We identified a material weakness in our internal control over
financial reporting existed in that we did not maintain effective internal controls related to accounting for complex revenue contracts.
Specifically, we did not properly assess the performance obligations we had with regard to certain of our out-licensing arrangements
which became material to our company in 2018. Our management previously concluded that this material weakness exists in our internal
control over financial reporting as of March 31, 2018 and in subsequent periods. A material weakness is a deficiency, or a
combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
On March 14, 2019, we concluded that we would restate our
previously issued consolidated financial statements as of and for the fiscal quarters ended March 31, 2018, June 30,
2018 and September 30, 2018 to correct for errors in our revenue recognition procedures.
While we have developed and are in the process of implementing
a plan to remediate this material weakness, the material weakness will not be considered remediated until management designs and
implements effective controls that operate for a sufficient period of time and management concludes, through testing, that these
controls are effective. We will monitor the effectiveness of our remediation plan and will refine its remediation plan, as needed,
and we may identify additional material weaknesses in our internal control over financial reporting in the future. We can give
no assurance that the measures we take will remediate the material weakness or that additional material weaknesses will not arise
in the future. If we are unable to remediate this material weakness or we identify additional material weaknesses in our internal
control over financial reporting in the future, our ability to analyze, record and report financial information accurately, to
prepare our financial statements within the time periods specified by the rules and forms of the Commission and to otherwise comply
with our reporting obligations under the federal securities laws, and in relation to covenants under the indenture governing our
outstanding convertible note, will likely be adversely affected.
Failure to maintain
effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our
business and operating results. In addition, current and potential stockholders could lose confidence in our financial reporting,
which could have a material adverse effect on the price of our common stock.
Effective internal controls are necessary for us to
provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports or prevent
fraud, our results of operation could be harmed. As disclosed, we have identified a material weakness in our internal control
over financial reporting relating to complex accounting for complex revenue contracts.
Section 404 of the Sarbanes-Oxley Act of 2002 requires
annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our
independent registered public accounting firm addressing these assessments. We continuously monitor our existing internal
controls over financial reporting systems to confirm that they are compliant with Section 404, and we may identify other
deficiencies that we may not be able to remediate in time to meet the deadlines imposed by the Sarbanes-Oxley Act. This
process may divert internal resources and will take a significant amount of time and effort to complete.
If, at any time, it is determined that we are not in compliance
with Section 404, we may be required to implement new internal control procedures and reevaluate our financial reporting. We may
experience higher than anticipated operating expenses as well as increased independent auditor fees during the implementation of
these changes and thereafter. Further, we may need to hire additional qualified personnel. If we fail to maintain the adequacy
of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to conclude
on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley
Act, which could result in our being unable to obtain an unqualified report on internal controls from our independent auditors.
Failure to maintain an effective internal control environment could also cause investors to lose confidence in our reported financial
information, which could have a material adverse effect on the price of our common stock.
Compliance with changing
regulation of corporate governance and public disclosure may result in additional expenses, divert management’s attention
from operating our business which could have a material adverse effect on our business.
There have been other changing laws, regulations and standards
relating to corporate governance and public disclosure in addition to the Sarbanes-Oxley Act, as well as new regulations promulgated
by the Commission and rules promulgated by the national securities exchanges, including the NYSE American and the NASDAQ. These
new or changed laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity,
and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies,
which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to
disclosure and governance practices. As a result, our efforts to comply with evolving laws, regulations and standards are likely
to continue to result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating
activities to compliance activities. Our board members, Chief Executive Officer and Chief Financial Officer could face an increased
risk of personal liability in connection with the performance of their duties. As a result, we may have difficulty attracting and
retaining qualified board members and executive officers, which could have a material adverse effect on our business. If our efforts
to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies,
we may incur additional expenses to comply with standards set by regulatory authorities or governing bodies which would have a
material adverse effect on our business, results of operations and financial condition.
The issuance of preferred stock or additional shares of common
stock could adversely affect the rights of the holders of shares of our common stock.
Our Board of Directors is authorized to issue up to 100,000,000
shares of preferred stock without any further action on the part of our stockholders. Our Board of Directors has the authority
to fix and determine the voting rights, rights of redemption and other rights and preferences of preferred stock. Currently, we
have no shares of preferred stock outstanding.
Our Board of Directors may, at any time, authorize the issuance
of a series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive
dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares,
together with a premium, before the redemption of our common stock, which may have a material adverse effect on the rights of the
holders of our common stock. In addition, our Board of Directors, without further stockholder approval, may, at any time, issue
large blocks of preferred stock. In addition, the ability of our Board of Directors to issue shares of preferred stock without
any further action on the part of our stockholders may impede a takeover of our company and may prevent a transaction that is favorable
to our stockholders.
Under the rules of the TASE, other than incentives under our
amended 2006 stock incentive plan, we were prohibited from issuing any securities of any class or series different than the common
stock that is listed on the TASE for the 12-month period immediately succeeding our initial listing, which occurred on September 6,
2010. As of the date hereof, the rules of the TASE allow us to issue securities with preferential rights with respect to dividends
but such other securities may not include voting rights. The foregoing does not limit our liability to issue and grant options
and warrants for the purchase of shares of our common stock.
Risks Related to the Commercialization of Drug Products
Fiocruz may not comply
with the terms and conditions of the Supply and Technology Transfer Agreement.
We do not control and may not be able to effectively influence
Fiocruz’s ability to distribute
alfataliglicerase
in Brazil.
If Fiocruz fails to comply with the purchase requirements of the Supply and Technology Transfer Agreement, we may terminate the
agreement and market
alfataliglicerase
in Brazil on our own. Any
failure by Fiocruz to comply with the purchase requirements of the Supply and Technology Transfer Agreement, or any other material
breach by Fiocruz of the agreement, may have a material adverse effect on our business, results of operations and financial condition.
In 2017, we received a purchase order from the Brazilian MoH
for the purchase of approximately $24.3 million of alfataliglicerase for the treatment of Gaucher patients in Brazil. The
purchase order consists of a number of shipments in increasing volumes. Shipments started in June 2017. Fiocruz’s purchases
of
alfataliglicerase
to date have been significantly below certain
agreed upon purchase milestones and as set forth in the purchase order. Accordingly, we have the right to terminate the Brazil
Agreement. Notwithstanding, we are, at this time, continuing to supply
alfataliglicerase
to Fiocruz under the Brazil Agreement, and patients continue to be treated with
alfataliglicerase
in Brazil. We continue to discuss with Fiocruz potential actions that Fiocruz may take to comply with its purchase obligations
and, based on such discussions, we will determine what we believe to be the course of action that is in the best interest of our
company.
We
face the risk that the Brazilian MoH may ultimately fail to purchase the amounts of alfataliglicerase for which it has already
stated its intentions. In addition, we may fail to supply the intended amounts on time, if at all. We also cannot accurately predict
the amount of revenues we will generate under our Supply and Technology Transfer with Fiocruz in future periods, if any.
Any
failure by the Brazilian MoH to purchase
alfataliglicerase
, by
us, to supply
alfataliglicerase
for purchase or by Fiocruz to distribute
alfataliglicerase
in Brazil, or the experience of significant delays
in any of the foregoing, may have a material adverse effect on our business, results of operations and financial condition.
We have limited experience
in selling, marketing or distributing products and limited internal capability to do so.
We currently have very limited sales, marketing or distribution
capabilities and no experience in building a sales force and distribution capabilities. Under our arrangements with Pfizer and
Chiesi, we have outlicensed the marketing rights to Elelyso and pegunigalsidase alfa except that we retained the marketing rights
to
alfataliglicerase
in Brazil. We have not licensed the marketing
or commercialization rights to any of our other product candidates to any party. The commercialization of a drug product requires
that we commit significant financial and managerial resources to develop a marketing and sales force with technical expertise and
with supporting distribution capabilities. Factors that may inhibit our efforts to commercialize our products directly and without
strategic partners include:
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the inability to recruit and retain adequate numbers of effective sales and marketing personnel;
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the inability of sales personnel to obtain access to an adequate numbers of physicians or to pursuance them to prescribe our
products;
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the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative
to companies with more extensive product lines; and
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unforeseen costs and expenses associated with creating and sustaining an independent sales and marketing organization.
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We may not be successful in recruiting or retaining the sales
and marketing personnel necessary to sell
alfataliglicerase
or
any of our products upon approval, if at all, which would have a material adverse effect on our business, results of operations
and financial condition.
We may enter into distribution
arrangements and marketing alliances for certain products and any failure to successfully identify and implement these arrangements
on favorable terms, if at all, may impair our ability to commercialize our product candidates.
We may need to establish a sales force to market
alfataliglicerase
or our other product candidates, if approved. We do not anticipate having the resources in the foreseeable future to develop global
sales and marketing capabilities for all of the products we are developing. We may elect to pursue arrangements regarding the sales
and marketing and distribution of
alfataliglicerase
or one or more
of our product candidates, and our future revenues may depend, in part, on our ability to enter into and maintain arrangements
with other companies having sales, marketing and distribution capabilities and the ability of such companies to successfully market
and sell any such products. Any failure to enter into such arrangements and marketing alliances on favorable terms, if at all,
could delay or impair our ability to commercialize our product candidates and could increase our costs of commercialization. Any
use of distribution arrangements and marketing alliances to commercialize our product candidates will subject us to a number of
risks, including the following:
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we may be required to relinquish important rights to our products or product candidates;
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we may not be able to control the amount and timing of resources that our distributors or collaborators may devote to the commercialization
of our product candidates;
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our distributors or collaborators may experience financial difficulties;
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our distributors or collaborators may not devote sufficient time to the marketing and sales of our products; and
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business combinations or significant changes in a collaborator’s business strategy may adversely affect a collaborator’s
willingness or ability to complete its obligations under any arrangement.
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We may need to enter into additional co-promotion arrangements
with third parties where our own sales force is neither well situated nor large enough to achieve maximum penetration in the market.
We may not be successful in entering into any co-promotion arrangements, and the terms of any co-promotion arrangements we enter
into may not be favorable to us.
If physicians, patients,
third party payors and others in the medical community do not accept and use taliglucerase alfa, or any of our other product candidates,
if approved, our ability to generate revenue from product sales will be materially impaired.
Physicians and patients, and other healthcare providers, may
not accept and use any of our products or any product candidates, if approved, for marketing. Future acceptance and use of any
of our products or any product candidates, if approved, will depend upon a number of factors including:
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perceptions by physicians, patients, third party payors and others in the medical community about the safety and effectiveness
of taliglucerase alfa or our other drug candidates;
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the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;
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the prevalence and severity of any side effects, including any limitations or warnings contained in our products’ approved
labeling;
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pharmacological benefits of taliglucerase alfa or our other drug candidates relative to competing products and products under
development;
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the efficacy and potential advantages relative to competing products and products under development;
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relative convenience and ease of administration;
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effectiveness of education, marketing and distribution efforts by us and our licensees and distributors, if any;
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publicity concerning taliglucerase alfa or our other drug candidates or competing products and treatments;
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coverage and reimbursement of our products by third party payors; and
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the price for our products and competing products.
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A lack of market acceptance of alfataliglicerase in Brazil,
or globally for any of our other products candidates, if approved, would have a material adverse effect on our business, results
of operations and financial condition.
If the market opportunities
for other product candidates, and for taliglucerase alfa in Brazil, are smaller than we believe they are, our revenues may be adversely
affected and our business may suffer.
To date, our development efforts have focused mainly on relatively
rare disorders with small patient populations, in particular Gaucher disease and Fabry disease. Currently, most reported estimates
of the prevalence of these diseases are based on studies of small subsets of the population of specific geographic areas, which
are then extrapolated to estimate the prevalence of the diseases in the broader world population. As new studies are performed,
the estimated prevalence of these diseases may change. There can be no assurance that the prevalence of Gaucher disease or Fabry
disease in the study populations, particularly in these newer studies, accurately reflect the prevalence of these diseases in the
broader world population. If the market opportunities for our current product candidates are smaller than we believe they are,
our revenues may be adversely affected and our business may suffer.
Coverage and reimbursement
may not be available for alfataliglicerase or any of our other product candidates, if approved, in all territories which could
diminish our sales or affect our ability to sell alfataliglicerase or any other products profitably.
Market acceptance and sales of
alfataliglicerase
in Brazil, or for any of our other product candidates globally, if approved, will depend on coverage and reimbursement policies
in the countries in which they are approved for sale. Government authorities and third-party payors, such as private health insurers
and health maintenance organizations, decide which drugs they will pay for and establish reimbursement levels. Obtaining reimbursement
approval for an approved product from governments and other third party payors is a time consuming and costly process that requires
our collaborators or us, as the case may be, to provide supporting scientific, clinical and cost-effectiveness data for the use
of our products, if and when approved, to every payor. We may not be able to provide data sufficient to gain acceptance with respect
to coverage and reimbursement or we might need to conduct post-marketing studies in order to demonstrate the cost-effectiveness
of approved products, if any, to such payors’ satisfaction. Such studies might require our collaborators or us to commit
a significant amount of management time and financial and other resources. Even if a payor determines that an approved product
is eligible for reimbursement, the payor may impose coverage limitations that preclude payment for some uses that are approved
by the FDA or other regulatory authorities. In addition, full reimbursement may not be available for high priced products. Moreover,
eligibility for coverage does not imply that any approved product will be reimbursed in all cases or at a rate that allows us to
make a profit or even cover our costs. Also, limited reimbursement amounts may reduce the demand for, or the price of, our product
candidates. Except with respect to taliglucerase alfa, we have not commenced efforts to have our product candidates covered and
reimbursed by government or third-party payors. If coverage and reimbursement are not available or are available only to limited
levels, the sales of our products, if approved may be diminished or we may not be able to sell such products profitably.
We and our collaborating partners may be subject, directly
or indirectly, to federal and state healthcare fraud and abuse and false claims laws and regulations. If we or our collaborating
partners are unable to comply, or have not fully complied, with such laws, we could face substantial penalties.
All marketing activities associated with drug products that
are approved for sale in the United States, if any, will be
, directly
or indirectly through our customers,
subject to numerous federal and state laws governing the marketing and promotion of
pharmaceutical products in the United States
, including, without limitation,
the federal Anti-Kickback Statute, the federal False Claims Act and HIPAA. These laws may adversely impact, among other things,
our proposed sales, marketing and education programs.
The
federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, receiving, offering or paying remuneration,
directly or indirectly, to induce either the referral of an individual, or the furnishing, recommending, or arranging for a good
or service, for which payment may be made under a federal healthcare program, such as the Medicare and Medicaid programs. The term
“remuneration” has been broadly interpreted to include anything of value, including for example, gifts, discounts,
the furnishing of supplies or equipment, credit arrangements, payments of cash, waivers of co-payments and deductibles, ownership
interests and providing anything at less than its fair market value. The reach of the Anti-Kickback Statute was also broadened
by the
PPACA
which, among other things, amends the intent requirement
of the federal Anti-Kickback Statute and the applicable criminal healthcare fraud statutes contained within 42 U.S.C. § 1320a-7b,
effective March 23, 2010. Pursuant to the statutory amendment, a person or entity no longer needs to have actual knowledge of this
statute or specific intent to violate it in order to have committed a violation. In addition, PPACA provides that the government
may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes
a false or fraudulent claim for purposes of the civil False Claims Act (discussed below) or the civil monetary penalties statute,
which imposes penalties against any person who is determined to have presented or caused to be presented a claim to a federal health
program that the person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent.
The federal Anti-Kickback Statute is broad, and despite a series of narrow safe harbors, prohibits many arrangements and practices
that are lawful in businesses outside of the healthcare industry. Penalties for violations of the federal Anti-Kickback Statute
include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other
state or federal healthcare programs. Many states have also adopted laws similar to the federal Anti-Kickback Statute, some of
which apply to the referral of patients for healthcare items or services reimbursed by any source, not only the Medicare and Medicaid
programs, and do not contain identical safe harbors.
The federal False Claims Act imposes liability on any person
who, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment by a federal healthcare
program. The “qui tam” provisions of the False Claims Act allow a private individual to bring civil actions on behalf
of the federal government alleging that the defendant has submitted a false claim to the federal government, and to share in any
monetary recovery. In addition, various states have enacted false claims laws analogous to the False Claims Act. Many of these
state laws apply where a claim is submitted to any third-party payer and not merely a federal healthcare program. When an entity
is determined to have violated the False Claims Act, it may be required to pay up to three times the actual damages sustained by
the government, plus civil penalties of $5,500 to $11,000 for each separate false claim.
HIPAA created several new federal crimes, including health care
fraud, and false statements relating to health care matters. The health care fraud statute prohibits knowingly and willfully executing
a scheme to defraud any health care benefit program, including private third-party payers. The false statements statute prohibits
knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent
statement in connection with the delivery of or payment for health care benefits, items or services.
We are unable to predict whether we could be subject to actions
under any of these or other fraud and abuse laws, or the impact of such actions. Moreover, to the extent that taliglucerase alfa,
pegunigalsidase alfa or any of our products, if approved for marketing, will be sold in a foreign country, we and our future collaborators,
may be subject to similar foreign laws and regulations. If we or any of our future collaborators are found to be in violation of
any of the laws described above and other applicable state and federal fraud and abuse laws, we may be subject to penalties, including
civil and criminal penalties, damages, fines, exclusion from government healthcare reimbursement programs and the curtailment or
restructuring or our operations, any of which could have a material adverse effect on our business, results of operations and financial
condition.
Risks Related to Intellectual Property Matters
The intellectual property and assets owned by our subsidiaries
are subject to security agreements that secure our payment and other obligations under our 2021 Notes, and our subsidiaries have
guaranteed all of those obligations.
In connection with the issuance of
our 2021 Notes, we entered into security agreements pursuant to which our subsidiaries provided first priority security interests
in all of their assets, which consist of all of our intellectual property and other material assets. The security agreements secure
certain payment, indemnification and other obligations under the 2021 Notes. If we were to default on certain of our obligations,
or in certain other circumstances generally related to a bankruptcy or insolvency, holders of our outstanding 2021 Notes could
seek to foreclose on the collateral under the security agreements to obtain satisfaction our obligations, and our business could
be materially and adversely impacted, which would in turn have a material adverse effect on our results of operations and financial
condition.
Furthermore, in connection with the
issuance of the 2021 Notes, our subsidiaries guaranteed all of our obligations under the indenture governing such convertible notes.
If we were to default on our obligations under the indenture, the holders could require our subsidiaries to satisfy all of those
obligations under the guarantees.
If we fail to adequately protect or enforce our intellectual
property rights or secure rights to third party patents, the value of our intellectual property rights would diminish and our business,
competitive position and results of operations would suffer.
As of December 31, 2018, we had 41 pending patent applications
of which five are joint pending patent applications with a third party and one is an-in licensed application. However, the filing
of a patent application does not mean that we will be issued a patent, or that any patent eventually issued will be as broad as
requested in the patent application or sufficient to protect our technology. Any modification required to a current patent application
may delay the approval of such patent application which would have a material adverse effect on our business, results of operations
and financial condition. In addition, there are a number of factors that could cause our patents, if granted, to become invalid
or unenforceable or that could cause our patent applications to not be granted, including known or unknown prior art, deficiencies
in the patent application or the lack of originality of the technology. Our competitive position and future revenues will depend
in part on our ability and the ability of our licensors and collaborators to obtain and maintain patent protection for our products,
methods, processes and other technologies, to preserve our trade secrets, to prevent third parties from infringing on our proprietary
rights and to operate without infringing the proprietary rights of third parties. We have filed U.S. and international patent applications
for process patents, as well as composition of matter patents, for taliglucerase alfa and other product candidates. However, we
cannot predict:
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the degree and range of protection any patents will afford us against competitors and those who infringe upon our patents,
including whether third parties will find ways to invalidate or otherwise circumvent our licensed patents;
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if and when patents will issue;
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whether or not others will obtain patents claiming aspects similar to those covered by our licensed patents and patent applications;
or
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whether we will need to initiate litigation or administrative proceedings, which may be costly, and whether we win or lose.
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As of December 31, 2018, we held, or had license rights
to, 79 patents. If patent rights covering our products or technologies are not sufficiently broad, they may not provide us with
sufficient proprietary protection or competitive advantages against competitors with similar products and technologies. Furthermore,
if the U.S. Patent and Trademark Office or foreign patent offices issue patents to us or our licensors, others may challenge the
patents or circumvent the patents, or the patent office or the courts may invalidate the patents. Thus, any patents we own or license
from or to third parties may not provide any protection against our competitors and those who infringe upon our patents.
Furthermore, the life of our patents is limited. The patents
we hold, and the patents that may be issued in the future based on patent applications from the patent families, relating to our
ProCellEx protein expression system are expected to expire by 2025.
We rely on confidentiality agreements that could be breached
and may be difficult to enforce which could have a material adverse effect on our business and competitive position.
Our policy is to enter agreements relating to the non-disclosure
of confidential information with third parties, including our contractors, consultants, advisors and research collaborators, as
well as agreements that purport to require the disclosure and assignment to us of the rights to the ideas, developments, discoveries
and inventions of our employees and consultants while we employ them. However, these agreements can be difficult and costly to
enforce. Moreover, to the extent that our contractors, consultants, advisors and research collaborators apply or independently
develop intellectual property in connection with any of our projects, disputes may arise as to the proprietary rights to the intellectual
property. If a dispute arises, a court may determine that the right belongs to a third party, and enforcement of our rights can
be costly and unpredictable. In addition, we rely on trade secrets and proprietary know-how that we seek to protect in part by
confidentiality agreements with our employees, contractors, consultants, advisors and others. Despite the protective measures we
employ, we still face the risk that:
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these agreements may be breached;
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these agreements may not provide adequate remedies for the applicable type of breach; or
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our trade secrets or proprietary know-how will otherwise become known.
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Any breach of our confidentiality agreements or our failure
to effectively enforce such agreements may have a material adverse effect on our business and competitive position.
If we infringe the rights of third parties we could be prevented
from selling products, forced to pay damages and required to defend against litigation which could result in substantial costs
and may have a material adverse effect on our business, results of operations and financial condition.
We have not received to date any claims of infringement by any
third parties. However, as our drug candidates progress into clinical trials and commercialization, if at all, our public profile
and that of our drug candidates may be raised and generate such claims. Defending against such claims, and occurrence of a judgment
adverse to us, could result in unanticipated costs and may have a material adverse effect on our business and competitive position.
If our products, methods, processes and other technologies infringe the proprietary rights of other parties, we may incur substantial
costs and we may have to:
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obtain licenses, which may not be available on commercially reasonable terms, if at all;
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redesign our products or processes to avoid infringement;
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stop using the subject matter claimed in the patents held by others, which could cause us to lose the use of one or more of
our drug candidates;
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defend litigation or administrative proceedings that may be costly whether we win or lose, and which could result in a substantial
diversion of management resources; or
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Any costs incurred in connection with such events or the inability
to sell our products may have a material adverse effect on our business, results of operations and financial condition.
If we cannot meet requirements under our license agreements,
we could lose the rights to our products, which could have a material adverse effect on our business.
We depend on licensing agreements with third parties to maintain
the intellectual property rights to certain of our product candidates. Our license agreements require us to make payments and satisfy
performance obligations in order to maintain our rights under these agreements. All of these agreements last either throughout
the life of the patents that are the subject of the agreements, or with respect to other licensed technology, for a number of years
after the first commercial sale of the relevant product.
In addition, we are responsible for the cost of filing and prosecuting
certain patent applications and maintaining certain issued patents licensed to us. If we do not meet our obligations under our
license agreements in a timely manner, we could lose the rights to our proprietary technology which could have a material adverse
effect on our business, results of operations and financial condition.
Risks Relating to Our Operations in Israel
Potential political, economic and military instability in
the State of Israel, where the majority of our senior management and our research and development facilities are located, may adversely
affect our results of operations.
Our executive office and operations are located in the State
of Israel. Accordingly, political, economic and military conditions in Israel directly affect our business. Since the State of
Israel was established in 1948, a number of armed conflicts have occurred between Israel and its Arab neighbors. Any hostilities
involving Israel or the interruption or curtailment of trade between Israel and its present trading partners, or a significant
downturn in the economic or financial condition of Israel, could affect adversely our operations and product development. Although
Israel has entered into various agreements with Egypt, Jordan and the Palestinian Authority, there have been times since October
2000 when Israel has experienced an increase in unrest and terrorist activity. The establishment in 2006 of a government in the
Gaza Strip by representatives of the Hamas militant group has created additional unrest and uncertainty in the region. Starting
in December 2008, for approximately three weeks, Israel engaged in an armed conflict with Hamas in the Gaza Strip. Armed conflicts
have taken place between Israel and Hamas in the Gaza Strip in 2008, 2012 and 2014. Our facilities in northern Israel are in range
of rockets that were fired from Lebanon into Israel during a 2006 war with the Hizbollah in Lebanon, and suffered minimal damages
during one of the rocket attacks. Our insurance policies do not cover us for the damages incurred in connection with these conflicts
or for any resulting disruption in our operations. The Israeli government, as a matter of law, provides coverage for the reinstatement
value of direct damages that are caused by terrorist attacks or acts of war; however, the government may cease providing such coverage
or the coverage might not be enough to cover potential damages. If our facilities are damaged as a result of hostile action, our
operations may be materially adversely affected.
In addition to the foregoing, since the end of 2010, numerous
acts of protest and civil unrest have taken place in several countries in the Middle East and North Africa, many of which involved
significant violence. Civil unrest in Egypt, which borders Israel, has resulted in significant changes to the country’s government.
There is currently a civil war in Syria, also bordering Israel, and Israel has been hit by rockets and mortars originating from
Syria. The ultimate effect of these developments on the political and security situation in the Middle East and on Israel’s
position within the region is not clear at this time.
Our operations may be disrupted by the obligations of our
personnel to perform military service which could have a material adverse effect on our business.
Many of our male employees in Israel, including members of senior
management, are obligated to perform up to one month (in some cases more) of annual military reserve duty until they reach the
age of 45 and, in the event of a military conflict, could be called to active duty. Our operations could be disrupted by the absence
of a significant number of our employees related to military service or the absence for extended periods of military service of
one or more of our key employees. A disruption could have a material adverse effect on our business, results of operations and
financial condition.
Because a certain portion of our expenses is incurred in
New Israeli Shekels, our results of operations may be seriously harmed by currency fluctuations and inflation.
We report our financial statements in U.S. dollars, our functional
currency. Although most of our expenses are incurred in U.S. dollars, we pay a portion of our expenses in New Israeli Shekels,
or NIS, and as a result, we are exposed to risk to the extent that the inflation rate in Israel exceeds the rate of devaluation
of the NIS in relation to the U.S. dollar or if the timing of these devaluations lags behind inflation in Israel. In that event,
the U.S. dollar cost of our operations in Israel will increase and our U.S. dollar-measured results of operations will be adversely
affected. To the extent that the value of the NIS increases against the dollar, our expenses on a dollar cost basis increase. Our
operations also could be adversely affected if we are unable to guard against currency fluctuations in the future. To date, we
have not engaged in hedging transactions. In the future, we may enter into currency hedging transactions to decrease the risk of
financial exposure from fluctuations in the exchange rate of the U.S. dollar against the NIS. These measures, however, may not
adequately protect us from material adverse effects.
The tax benefits available to us require that we meet several
conditions and may be terminated or reduced in the future, which would increase our taxes.
We are able to take advantage of tax exemptions and reductions
resulting from the “Approved Enterprise” status of our facilities in Israel. To remain eligible for these tax benefits,
we must continue to meet certain conditions, including making specified investments in property and equipment, and financing at
least 30% of such investments with share capital. If we fail to meet these conditions in the future, the tax benefits would be
canceled and we may be required to refund any tax benefits we already have enjoyed. These tax benefits are subject to investment
policy by the Investment Center and may not be continued in the future at their current levels or at any level. In recent years
the Israeli government has reduced the benefits available and has indicated that it may further reduce or eliminate some of these
benefits in the future. The termination or reduction of these tax benefits or our inability to qualify for additional “Approved
Enterprise” approvals may increase our tax expenses in the future, which would reduce our expected profits and adversely
affect our business and results of operations. Additionally, if we increase our activities outside of Israel, for example, by future
acquisitions, such increased activities generally may not be eligible for inclusion in Israeli tax benefit programs.
The Israeli government grants we have received for certain
research and development expenditures restrict our ability to manufacture products and transfer technologies outside of Israel
and require us to satisfy specified conditions. If we fail to satisfy these conditions, we may be required to refund grants previously
received together with interest and penalties which could have a material adverse effect on our business and results of operations.
Our research and development efforts have been financed, in
part, through grants that we have received from NATI. We, therefore, must comply with the requirements of the Research Law. Under
the Research Law we are prohibited from manufacturing products developed using these grants outside of the State of Israel without
special approvals, although the Research Law does enable companies to seek prior approval for conducting manufacturing activities
outside of Israel without being subject to increased royalties. We may not receive the required approvals for any proposed transfer
of manufacturing activities. Even if we do receive approval to manufacture products developed with government grants outside of
Israel, we may be required to pay an increased total amount of royalties (possibly up to 300% of the grant amounts plus interest),
depending on the manufacturing volume that is performed outside of Israel, as well as at a possibly increased royalty rate. This
restriction may impair our ability to outsource manufacturing or engage in similar arrangements for those products or technologies.
Additionally, under the Research Law, Protalix Ltd. is prohibited
from transferring NATI-financed technologies and related intellectual property rights outside of the State of Israel, except under
limited circumstances and only with the approval of NATI Council or the Research Committee. Protalix Ltd. may not receive the required
approvals for any proposed transfer and, if received, Protalix Ltd. may be required to pay NATI a portion of the consideration
that it receives upon any sale of such technology by a non-Israeli entity. The scope of the support received, the royalties that
Protalix Ltd. has already paid to NATI, the amount of time that has elapsed between the date on which the know-how was transferred
and the date on which NATI grants were received and the sale price and the form of transaction will be taken into account in order
to calculate the amount of the payment to NATI. Approval of the transfer of technology to residents of the State of Israel is required,
and may be granted in specific circumstances only if the recipient abides by the provisions of applicable laws, including the restrictions
on the transfer of know-how and the obligation to pay royalties. No assurance can be made that approval to any such transfer, if
requested, will be granted.
These restrictions may impair our ability to sell our technology
assets or to outsource manufacturing outside of Israel. The restrictions will continue to apply for a certain period of time even
after we have repaid the full amount of royalties payable for the grants. For the years ended December 31, 2016, 2017 and
2018, we recorded grants totaling $5.8 million, $3.3 million and $2.2 million from NATI, respectively. The grants
represent 19.1%, 10.4% and 6%, respectively, of our gross research and development expenditures for the years ended December 31,
2016, 2017 and 2018. If we fail to satisfy the conditions of the Research Law, we may be required to refund certain grants previously
received together with interest and penalties, and may become subject to criminal charges, any of which could have a material adverse
effect on our business, results of operations and financial condition.
Investors may have difficulties enforcing a U.S. judgment,
including judgments based upon the civil liability provisions of the U.S. federal securities laws against us, our executive officers
and most of our directors or asserting U.S. securities laws claims in Israel.
All of our directors and executive officers are residents of
Israel, and accordingly, most of their assets and our assets are located outside the United States. Service of process upon our
non-U.S. resident directors and officers and enforcement of judgments obtained in the United States against us, some of our directors
and executive officers may be difficult to obtain within the United States. We have been informed by our legal counsel in Israel
that investors may find it difficult to assert claims under U.S. securities laws in original actions instituted in Israel or obtain
a judgment based on the civil liability provisions of U.S. federal securities laws against us, our officers and our directors.
Israeli courts may refuse to hear a claim based on a violation of U.S. securities laws against us or our officers and directors
because Israel is not the most appropriate forum to bring such a claim. In addition, even if an Israeli court agrees to hear a
claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the
content of applicable U.S. law must be proved as a fact which can be a time-consuming and costly process. Certain matters of procedure
will also be governed by Israeli law. There is little binding case law in Israel addressing the matters described above.
Israeli courts might not enforce judgments rendered outside
Israel which may make it difficult to collect on judgments rendered against us. Subject to certain time limitations, an Israeli
court may declare a foreign civil judgment enforceable only if it finds that:
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the judgment was rendered by a court which was, according to the laws of the state of the court, competent to render the judgment;
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the judgment may no longer be appealed;
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the obligation imposed by the judgment is enforceable according to the rules relating to the enforceability of judgments in
Israel and the substance of the judgment is not contrary to public policy; and
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the judgment is executory in the state in which it was given.
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Even if these conditions are satisfied, an Israeli court will
not enforce a foreign judgment if it was given in a state whose laws do not provide for the enforcement of judgments of Israeli
courts (subject to exceptional cases) or if its enforcement is likely to prejudice the sovereignty or security of the State of
Israel. An Israeli court also will not declare a foreign judgment enforceable if:
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the judgment was obtained by fraud;
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there is a finding of lack of due process;
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the judgment was rendered by a court not competent to render it according to the laws of private international law in Israel;
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the judgment is at variance with another judgment that was given in the same matter between the same parties and that is still
valid; or
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at the time the action was brought in the foreign court, a suit in the same matter and between the same parties was pending
before a court or tribunal in Israel.
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Item 1B.
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Unresolved Staff Comments
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None.
Our manufacturing facility and executive offices are located
in Carmiel, Israel. The facilities currently contain approximately 20,000 sq/ft of manufacturing space and additional 48,000 sq/ft
of laboratory, warehouse and office space and are leased at a rate of approximately $63,000 per month. In addition, we are entitled
to use an additional 13,000 sq/ft in the same facility, which we intend to utilize in connection with an anticipated expansion
of our manufacturing facilities. Our facilities are equipped with the requisite laboratory services required to conduct our business,
and we believe that the existing facilities are adequate to meet our needs for the foreseeable future. Our original lease for the
facility was in effect until 2016, at which time we extended the term until 2021. We retain two addition options to extend the
term for a five-year period, for an aggregate of 10 additional years. Upon the exercise of each remaining option to extend the
term of the lease, if any, the then current base rent shall be increased by 10%.
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Item 3.
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Legal Proceedings
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We are not involved in any material legal
proceedings.
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Item 4.
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Mine Safety Disclosures
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Not applicable.
PART II
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Item 5.
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Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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Our common stock is traded on the NYSE American
under the symbol “PLX.”
As of March 1, 2019, there were
approximately 80 holders of record of our common stock. A substantially greater number of holders of our
common stock are “street name” or beneficial holders, whose shares are held of record by banks, brokers and other financial
institutions.
STOCK PERFORMANCE GRAPH
The following
graph compares the cumulative total shareholder return data for our common stock from December
31,
2013 through December
31, 2018 to the cumulative return over such time period of (i)
The NYSE American Index and (ii) The Nasdaq Biotechnology Index. The graph assumes an investment of $100 on December
31,
2013 in each of our common stock, the stocks comprising the NYSE American Index and the stocks comprising the Nasdaq Biotechnology
Index, including dividend reinvestment, if any.
The stock price performance shown on
the graph below represents historical price performance and is not necessarily indicative of any future stock price performance.
Notwithstanding anything to the contrary set forth in any of our previous filings under the Securities Act or the Exchange Act,
which might incorporate future filings made by us under those statutes, this Stock Performance Graph will not be incorporated by
reference into any of those prior filings, nor will such report or graph be incorporated by reference into any future filings made
by us under those Acts.
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Item 6.
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Selected Financial Data
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The selected consolidated financial data below
should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
and our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. The selected
consolidated statements of operations data for the years ended December 31, 2018, 2017 and 2016 and the selected consolidated
balance sheet data as of December 31, 2018 and 2017, are derived from the audited consolidated financial statements included
elsewhere in this Annual Report. The statement of operations data for the years ended December 31, 2015 and 2014 and the balance
sheet data as of December 31, 2016, 2015 and 2014 are derived from audited financial statements not included in this Annual
Report. We adopted, retrospectively, ASU 2014-08 during 2015 regarding discontinued operations which resulted in the reclassification
of prior year amounts. The historical results presented below are not necessarily indicative of future results..
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Year Ended December 31,
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2014
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2015
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2016
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2017
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2018
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(in thousands, except share and per share amounts)
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Consolidated Statement of Operations Data:
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Revenues from selling goods
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$
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3,523
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$
|
4,364
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$
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9,199
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$
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19,242
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$
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8,978
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Revenues from license and R&D services
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1,836
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25,262
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Cost of goods sold
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630
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730
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8,398
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15,231
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9,302
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Research and development expenses, net
|
|
|
22,224
|
|
|
|
20,025
|
|
|
|
24,608
|
|
|
|
28,834
|
|
|
|
33,330
|
|
Selling, general and administrative expenses
|
|
|
9,228
|
|
|
|
7,279
|
|
|
|
9,356
|
|
|
|
11,530
|
|
|
|
10,916
|
|
Financial income (expenses), net
|
|
|
(4,739
|
)
|
|
|
(3,612
|
)
|
|
|
3,987
|
|
|
|
(48,923
|
)
|
|
|
(7,149
|
)
|
Loss from continuing operations
|
|
$
|
33,298
|
|
|
$
|
27,282
|
|
|
$
|
29,176
|
|
|
$
|
83,440
|
|
|
$
|
26,457
|
|
(Loss) income from discontinued operations
|
|
|
3,355
|
|
|
|
85,319
|
|
|
|
(189
|
)
|
|
|
|
|
|
|
|
|
Net (loss) income for the year
|
|
|
(29,943
|
)
|
|
|
58,037
|
|
|
|
(29,365
|
)
|
|
|
(83,440
|
)
|
|
|
(26,457
|
)
|
Net (loss) income per share of common stock, basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.36
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(0.64
|
)
|
|
$
|
(0.18
|
)
|
(Loss) income from discontinued operations
|
|
|
0.04
|
|
|
|
0.90
|
|
|
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
Net (loss) income per share of common stock
|
|
|
(0.32
|
)
|
|
|
0.61
|
|
|
|
(0.29
|
)
|
|
|
(0.64
|
)
|
|
|
(0.18
|
)
|
Weighted average number of shares of common stock used in computing net loss per share of common stock
|
|
|
92,891,846
|
|
|
|
94,922,390
|
|
|
|
101,387,704
|
|
|
|
131,085,958
|
|
|
|
147,135,182
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
54,767
|
|
|
$
|
76,374
|
|
|
$
|
63,281
|
|
|
$
|
51,163
|
|
|
$
|
37,808
|
|
All other assets
|
|
|
23,590
|
|
|
|
20,879
|
|
|
|
18,966
|
|
|
|
21,051
|
|
|
|
23,323
|
|
Total assets
|
|
|
78,357
|
|
|
|
97,253
|
|
|
|
82,247
|
|
|
|
72,214
|
|
|
|
61,131
|
|
Current liabilities
|
|
|
64,354
|
|
|
|
11,235
|
|
|
|
66,212
|
|
|
|
22,752
|
|
|
|
25,353
|
|
Long term convertible notes
|
|
|
67,351
|
|
|
|
67,796
|
|
|
|
19,343
|
|
|
|
46,267
|
|
|
|
47,966
|
|
Total liabilities
|
|
|
133,958
|
|
|
|
86,380
|
|
|
|
92,204
|
|
|
|
101,671
|
|
|
|
114,012
|
|
Total stockholders’ equity (capital deficiency)
|
|
|
(55,601
|
)
|
|
|
10,873
|
|
|
|
(9,957
|
)
|
|
|
(29,457
|
)
|
|
|
(52,881
|
)
|
|
Item 7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
|
You should read the following discussion
and analysis of our financial condition and results of operations together with our consolidated financial statements and the related
notes included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis,
particularly with respect to our plans and strategy for our business and related financing, includes forward-looking statements
that involve risks and uncertainties. You should read “Risk Factors” in Item 1A of this Annual Report on Form 10-K
for a discussion of important factors that could cause actual results to differ materially from the results described in or implied
by the forward-looking statements contained in the following discussion and analysis.
Overview
We are a biopharmaceutical company focused on the development
and commercialization of recombinant therapeutic proteins based on our proprietary ProCellEx
®
protein expression
system. We developed our first commercial drug product, Elelyso
®
, using our ProCellEx system and we are now focused
on utilizing the system to develop a pipeline of proprietary, clinically superior versions of recombinant therapeutic proteins
that primarily target large, established pharmaceutical markets and that in most cases rely upon known biological mechanisms of
action. With our experience to date, we believe ProCellEx will enable us to develop additional proprietary recombinant proteins
that are therapeutically superior to existing recombinant proteins currently marketed for the same indications, including applying
the unique properties of our ProCellEx system for the oral delivery of therapeutic proteins.
On
October
19, 2017, Protalix Ltd., our wholly-owned subsidiary,
and Chiesi entered into the Chiesi Ex-US Agreement pursuant to which Chiesi was granted an exclusive license for all markets outside
of the United States to commercialize pegunigalsidase alfa.
Pegunigalsidase alfa is our chemically modified version of the
recombinant protein alpha-Galactosidase-A protein that is currently being evaluated in phase III clinical trials for the treatment
of Fabry disease
. Under the terms and conditions of the Chiesi Ex-US Agreement,
Protalix Ltd. retained the right to commercialize pegunigalsidase alfa in the United States. Under the Chiesi Ex-US Agreement,
Chiesi made an upfront payment to Protalix Ltd. of $25.0
million
in connection with the execution of the agreement and Protalix Ltd. is entitled to additional payments of up to $25.0
million
in development costs, capped at $10.0
million per year. Protalix
Ltd. is also eligible to receive an additional up to $320.0
million,
in the aggregate, in regulatory and commercial milestone payments. Protalix Ltd. agreed to manufacture all of the PRX-102 needed
for all purposes under the agreement, subject to certain exceptions, and Chiesi will purchase pegunigalsidase alfa from Protalix,
subject to certain terms and conditions. Chiesi is required to make tiered payments of 15% to 35% of its net sales, depending on
the amount of annual sales, as consideration for the supply of pegunigalsidase alfa.
On
July
23, 2018, Protalix Ltd. entered into the Chiesi U.S.
Agreement with respect to the development and commercialization of pegunigalsidase alfa in the United States. Under the terms of
the Chiesi U.S. Agreement, Protalix Ltd. granted to Chiesi exclusive licensing rights for the commercialization of PRX-102 in the
United States. Protalix Ltd. is entitled to an upfront, non-refundable, non-creditable payment of $25.0
million
from Chiesi and additional payments of up to a maximum of $20.0
million
to cover development costs for PRX-102, subject to a maximum of $7.5
million
per year. Protalix Ltd. is also eligible to receive an additional up to a maximum of $760.0
million,
in the aggregate, in regulatory and commercial milestone payments. Chiesi will also make tiered payments of 15% to 40% of its net
sales under the Chiesi U.S. Agreement to Protalix Ltd., depending on the amount of annual sales, subject to certain terms and conditions,
as consideration for product supply.
In December 2017, the European Commission granted Orphan Drug
Designation for pegunigalsidase alfa for the treatment of Fabry disease. The designation was granted after the European Medicine
Agency’s Committee for Orphan Medicinal Products, or the COMP, issued a positive opinion supporting the designation noting
that we had established that there was medically plausible evidence that pegunigalsidase alfa will provide a significant benefit
over existing approved therapies in the European Union for the treatment of Fabry disease. The COMP cited clinical and non-clinical
justifications we provided to establish the significant benefit of pegunigalsidase alfa, noting that the COMP considered the justifications
to constitute a clinically relevant advantage. Orphan Drug Designation for pegunigalsidase alfa qualifies Protalix Ltd. for access
to a centralized marketing authorization procedure, including applications for inspections and for protocol assistance. If the
orphan drug designation is maintained at the time pegunigalsidase alfa is approved for marketing in the European Union, if at all,
we expect that PRX-102 will benefit from 10 years of market exclusivity within the European Union. The market exclusivity will
not have any effect on Fabry disease treatments already approved at that time.
In January 2018, the FDA granted Fast Track designation to PRX-102.
Fast Track designation is a process designed to facilitate the development and expedite the review of drugs and vaccines for serious
conditions that fill an unmet medical need.
On
May
1, 2012, the FDA approved for sale our first commercial
product, taliglucerase alfa for injection, an ERT for the long-term treatment of adult patients with a confirmed diagnosis of type
1 Gaucher disease. Subsequently, taliglucerase alfa was approved for marketing by the regulatory authorities of other countries.
Taliglucerase alfa is marketed under the name alfataliglicerase in Brazil and certain other Latin American countries, and under
the name Elelyso in other territories.
Since
its approval by the FDA, taliglucerase alfa has been marketed by Pfizer, as provided in the Pfizer Agreement. In
October
2015, we entered into the Amended Pfizer Agreement which amends and restates the Pfizer Agreement in its entirety. Pursuant to
the Amended Pfizer Agreement, we sold to Pfizer our share in the collaboration created under the initial Pfizer Agreement for the
commercialization of Elelyso in exchange for a cash payment equal to $36.0 million. As part of the sale, we agreed to transfer
our rights to Elelyso in Israel to Pfizer, while gaining full rights to Elelyso in Brazil. We will continue to manufacture drug
substance for Pfizer, subject to certain terms and conditions. Under the Amended Pfizer Agreement, Pfizer is responsible for 100%
of expenses, and entitled to all revenues globally for Elelyso, excluding Brazil, where we are responsible for all expenses and
retain all revenues.
For the first 10-year period after the execution of the Amended
Pfizer Agreement, we have agreed to sell drug substance to Pfizer for the production of Elelyso, and Pfizer maintains the right
to extend the supply period for up to two additional 30-month periods subject to certain terms and conditions. Any failure to comply
with our supply commitments may subject us to substantial financial penalties, which will have a material adverse effect on our
business, results of operations and financial condition. The Amended Pfizer Agreement also includes customary provisions regarding
cooperation for regulatory matters, patent enforcement, termination, indemnification and insurance requirements.
On
June
18, 2013, we entered into the Brazil Agreement with
Fiocruz,
an arm of the Brazilian MoH,
for taliglucerase alfa.
Fiocruz’s
purchases of
alfataliglicerase
to date have been significantly
below certain agreed upon purchase milestones and, accordingly, we have the right to terminate the Brazil Agreement. Notwithstanding
our termination right, we are, at this time, continuing to supply
alfataliglicerase
to Fiocruz under the Brazil Agreement, and patients continue to be treated with
alfataliglicerase
in Brazil. We are discussing with Fiocruz potential actions that Fiocruz may take to comply with its purchase obligations and,
based on such discussions, we will determine what we believe to be the course of action that is in our best interest.
We are developing an innovative product pipeline using our ProCellEx
protein expression system. Our product pipeline currently includes, among other candidates:
(1) pegunigalsidase alfa, or PRX-102, a therapeutic protein
candidate for the treatment of Fabry disease, a rare, genetic lysosomal disorder in humans, currently in an ongoing phase III clinical
trial.
(2) alidornase alfa, or PRX-110, a proprietary plant cell recombinant
human Deoxyribonuclease 1 under development for the treatment of Cystic Fibrosis, or CF, to be administered by inhalation. We recently
completed a phase IIa efficacy and safety study of alidornase alfa for the treatment of CF.
(3)
OPRX-106,
our oral antiTNF product candidate
which is being developed
as
an orally-delivered anti-inflammatory treatment using plant cells as a natural capsule for the expressed protein. We
released final data generated in our phase II clinical trial of OPRX-106 for the treatment of ulcerative colitis in March 2018
.
Additional data was released in June 2018.
We have licensed the rights to commercialize taliglucerase alfa
worldwide (other than Brazil) to Pfizer, and the rights to commercialize pegunigalsidase alfa worldwide to Chiesi. Otherwise, we
hold the worldwide commercialization rights to our other proprietary development candidates. In addition, we continuously evaluate
potential strategic marketing partnerships as well as collaboration programs with biotechnology and pharmaceutical companies and
academic research institutes.
Critical Accounting Policies
Our significant accounting policies are more fully described
in Note 1 to our consolidated financial statements appearing at the end of this Annual Report on Form 10-K. We believe that
the accounting policies below are critical for one to fully understand and evaluate our financial condition and results of operations.
The discussion and analysis of our financial condition and results
of operations is based on our financial statements, which we prepared in accordance with U.S. generally accepted accounting principles.
The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well
as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate such estimates and judgments,
including those described in greater detail below. We base our estimates on historical experience and on various other factors
that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying
value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
Functional Currency
The currency of the primary economic environment in which our
operations are conducted is the U.S. dollar. All of our revenues are derived in dollars. In addition, most of our expenses and
capital expenditures are incurred in dollars, and the major source of our financing has been provided in dollars.
Revenues
Our primary sources of revenues include our sales of taliglucerase
alfa in Brazil and of drug substance to Pfizer under our Amended Pfizer Agreement. We recognize revenue from the Amended Pfizer
at a point in time when control over the product is transferred to customers (upon delivery).
We also generate revenues from the Chiesi agreements. According
to Accounting Standard Codification Topic 606, Revenue from contracts with customers, or ASC 606, a
performance
obligation is a promise to provide a distinct good or service or a series of distinct goods or services. Goods and services that
are not distinct are bundled with other goods or services in the contract until a bundle of goods or services that is distinct
is created. A good or service promised to a customer is distinct if the customer can benefit from the good or service either on
its own or together with other resources that are readily available to the customer and the entity’s promise to transfer
the good or service to the customer is separately identifiable from other promises in the contract.
We have identified two performance obligations in each of the
Chiesi agreements as follows: (1) the license and research and development services and (2)
a
contingent performance obligation regarding future
manufacturing.
We determined that the licenses granted to Chiesi together with
the research and development services should be combined into a single performance obligation under each agreement since
Chiesi
cannot benefit from a license without the
research and development services.
The research
and development services are highly specialized and are dependent on the supply of the drug.
The future manufacturing
is
contingent on regulatory approvals of the drug and
we deem these services to be separately identifiable from other performance
obligations in the contract. Manufacturing services post-regulatory approval are not interdependent or interrelated with the license
and research and development services.
The transaction price was comprised of fixed consideration and
variable consideration (capped research and development reimbursements). Under ASC 606, the consideration to which we would be
entitled upon the achievement of contractual milestones, which are contingent upon the occurrence of future events, are a form
of variable consideration. We estimate variable consideration using the most likely method.
Amounts
included in the transaction price are recognized only when it is probable that a significant reversal of cumulative revenues will
not occur, usually upon achievement of a specific milestone.
We used significant judgment when it determined variable consideration.
Since the customer benefits from the research and development
services as the entity performs, revenue from granting the license and the research and development services is recognized over
time using the cost-to-cost method. We used significant judgment when it determined the costs expected to be incurred upon satisfying
the identified performance obligation.
Revenue
from additional
research and development
services ordered by Chiesi
is recognized over time using the cost-to-cost method.
We accounted for the Chiesi U.S. agreement as a modification
of the Chiesi Ex-U.S. Agreement. As such, we recorded revenue through a cumulative catch-up adjustment in the amount in the third
quarter of 2018 of $6.2
million.
Our revenue recognition accounting policy prior to January 1, 2018, was materially the same
Research and Development Expense
We expect our research and development expense to remain our
primary expense in the near future as we continue to develop our product candidates. Research and development expense consists
of:
|
·
|
internal costs associated with research and development activities;
|
|
·
|
payments made to third party contract research organizations, investigative/clinical sites and consultants;
|
|
·
|
manufacturing development costs;
|
|
·
|
personnel-related expenses, including salaries, benefits, travel, and related costs for the personnel involved in research
and development;
|
|
·
|
activities relating to the advancement of product candidates through preclinical studies and clinical trials; and
|
|
·
|
facilities and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities,
as well as laboratory and other supplies.
|
The following table identifies our current major research and
development projects:
|
|
Status
|
|
Expected
Near Term Milestones
|
PRX-102 – pegunigalsidase alfa
|
|
Phase III clinical trial, ongoing
|
|
Finalize enrollment in the remaining two clinical trials
|
|
|
|
|
|
OPRX-106 – Oral antiTNF
|
|
Phase IIa completed
|
|
Evaluate potential partnership or proceed with phase IIb clinical trial
|
|
|
|
|
|
PRX-110 – alidornase alfa
|
|
Phase IIa completed
|
|
Evaluate potential partnership
|
We anticipate incurring increasing costs in connection with
the continued development of all of the product candidates in our pipeline. Our internal resources, employees and infrastructure
are not tied to any individual research project and are typically deployed across all of our projects. We currently do not record
and maintain research and development costs per project.
The costs and expenses of our projects are partially funded
by grants we have received from NATI. Each grant is deducted from the related research and development expenses as the costs are
incurred. For additional information regarding the grant process, see “Business—Israeli Government Programs—
Encouragement of Industrial Research, Development and Technology Innovation, 1984” in Item 1 of this Annual Report.
There can be no assurance that we will continue to receive grants from NATI in amounts sufficient for our operations, if at all.
In addition,
under the two Chiesi Agreements, Protalix Ltd. is entitled
to payments of up to $45.0
million in the aggregate to cover
development costs for pegunigalsidase alfa, capped at $17.5
million
per year.
At this time, due to the inherently unpredictable nature of
preclinical and clinical development processes and given the early stage of our preclinical product development programs, we are
unable to estimate with any certainty the costs we will incur in the continued development of the product candidates in our pipeline
for potential commercialization. Clinical development timelines, the probability of success and development costs can differ materially
from expectations. The current focus of our product development efforts are on pegunigalsidase alfa. Our future research and development
expenses for pegunigalsidase alfa and the other product candidates will depend on the clinical success of each product candidate,
as well as ongoing assessments of each product candidate’s commercial potential. In addition, we cannot forecast with any
degree of certainty which product candidates may be subject to future collaborations, when such arrangements will be secured, if
at all, and to what degree such arrangements would affect our development plans and capital requirements. See “Risk Factors—If
we are unable to develop and commercialize our product candidates, our business will be adversely affected” and “—We
may not obtain the necessary U.S., EMA or other worldwide regulatory approvals to commercialize our drug candidates in a timely
manner, if at all, which would have a material adverse effect on our business, results of operations and financial condition.”
We expect our research and development expenses to continue
to be our primary expense in the future as we continue the advancement of our clinical trials and preclinical product development
programs for our product candidates, particularly with respect to the development of pegunigalsidase alfa. The lengthy process
of completing clinical trials and seeking regulatory approvals for our product candidates requires expenditure of substantial resources.
Any failure or delay in completing clinical trials, or in obtaining regulatory approvals, could cause a delay in generating product
revenue and cause our research and development expense to increase and, in turn, have a material adverse effect on our operations.
Due to the factors set forth above, we are not able to estimate with any certainty when we would recognize any net cash inflows
from our projects. See “Risk Factors—Clinical trials are very expensive, time-consuming and difficult to design and
implement and may result in unforeseen costs which may have a material adverse effect on our business, results of operations and
financial condition.”
Share-Based Compensation
The discussion below regarding share-based
compensation relates to our share-based compensation.
In accordance with the guidance, we record
the benefit of any grant to a non-employee and remeasure the benefit in any future vesting period for the unvested portion of the
grants, as applicable. In addition, we use the straight-line accounting method for recording the benefit of the entire grant, unlike
the graded method we use to record grants made to employees.
We measure share-based compensation cost for
all share-based awards at the fair value on the grant date and recognition of share-based compensation over the service period
for awards that we expect will vest. The fair value of stock options is determined based on the number of shares granted and the
price of our ordinary shares, and calculated based on the Black-Scholes valuation model. We recognize such value as expense over
the service period, net of estimated forfeitures, using the accelerated method.
The guidance requires companies to estimate
the expected term of the option rather than simply using the contractual term of an option. Because of lack of data on past option
exercises by employees, the expected term of the options could not be based on historic exercise patterns. Accordingly, we adopted
the simplified method, according to which companies may calculate the expected term as the average between the vesting date and
the expiration date, assuming the option was granted as a “plain vanilla” option.
In performing the valuation, we assumed an
expected 0% dividend yield in the previous years and in the next years. We do not have a dividend policy and given the lack of
profitability, dividends are not expected in the foreseeable future, if at all. The guidance stipulates a number of factors that
should be considered when estimating the expected volatility, including the implied volatility of traded options, historical volatility
and the period that the shares of the company are being publicly traded.
The
risk-free interest rate used in the valuation of the options is based on the implied yield of U.S. federal reserve zero–coupon
government bonds. The remaining
term of the bonds used for each valuation was equal to the expected term of the grant. This
methodology has been applied to all grants valued by us. The guidance requires the use of a risk–free interest rate based
on the implied yield currently available on zero–coupon government issues of the country in whose currency the exercise price
is expressed, with a remaining term equal to the expected life of the option being valued. This requirement has been applied for
all grants valued as part of this report.
Convertible Notes
All outstanding convertible notes are accounted for using the
guidance set forth in the Financial Accounting Standards Board, or FASB, Accounting Standards Codification (ASC) 815 requiring
that we determine whether the embedded conversion option must be separated and accounted for separately. ASC 470-20 regarding debt
with conversion and other options requires the issuer of a convertible debt instrument that may be settled in cash upon conversion
to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects
the issuer’s nonconvertible debt borrowing rate. We accounted for the 4.5% convertible notes
,
which we refer to as the 2018 Notes,
as liability, on an aggregated basis, in their entirety.
Our
2021 Notes
were accounted for partially as liability and equity
components of the instrument and partially as a debt host contract with an embedded derivative resulting from the conversion feature.
During the year ended December
31, 2017, the embedded derivative
was reclassified to additional paid in capital.
Issuance costs regarding the issuance of the 2021 Notes are
amortized using the effective interest rate.
During the year ended December 31, 2018, note holders converted
$1.15 million aggregate principal amount of the 2021 Notes into a total of 1,537,415 shares of common stock, and cash payments
of approximately $15,887, in the aggregate. In addition, in June 2018, we exchanged $3.42 million aggregate principal amount
of our outstanding 4.50% convertible promissory notes due 2018, which we refer to as the 2018 Notes, for 2,613,636 shares of common
stock and approximately $2.23 million in cash and delivered the necessary funds under the indenture governing the 2018 Notes,
which was $2.53 million. On September 15, 2018, the 2018 Notes matured and have been paid in full.
As of December 31, 2018, a total of $57.9 million
aggregate principal amount of the 2021 Notes were outstanding. In addition, as of December 31, 2018, none of the 2018 Notes
were outstanding.
Year ended December 31, 2018 Compared to the Year
Ended December 31, 2017
Revenues from Selling Goods
We recorded revenues of $9 million for
the year ended December 31, 2018, a decrease of approximately $10.2 million, or 53%, compared to revenues of $19.2 million
for the year ended December 31, 2017. Revenues include $3.7 million of products sold in Brazil and $5.3 million
of drug substance sold to Pfizer. The decrease resulted from a decrease of $6.9 million in sales of drug substance to Pfizer
and $3.4 million in sales of drug product to Brazil.
Revenues from License and R&D Services
We recorded revenues of $25.3 million for the year
ended December 31, 2018 an increase of $23.5 million compared to revenues of $1.8 million for the year ended
December 31, 2017. Revenues from the license agreements represent the revenues we recognized in connection with the
Chiesi agreement including a cumulative catch-up adjustment in the third quarter in the amount of $6.2 million.
Cost of Goods Sold
Cost of goods sold was $9.3 million for the year ended
December 31, 2018, a decrease of $5.9 million or 39%, compared to the cost of revenues of $15.2 million for the
year ended December 31, 2017.
Research and Development Expenses
Research and development expenses were $35.5 million for
the year ended December 31, 2018, an increase of $3.3 million, or 10% from $32.2 million for the year ended December 31,
2017. The increase resulted primarily from an increase in clinical trial activity during 2018.
We expect research and development expenses
to continue to be our primary expense as we enter into a more advanced stage of preclinical and clinical trials for certain of
our product candidates, primarily with respect to pegunigalsidase alfa
.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $10.9 million
for the year ended December 31, 2018, a decrease of $0.6 million, or 5%, from $11.5 million for the year ended December 31,
2017. The decrease resulted primarily from a decrease in sales expenses.
Financial Expenses and Income
Financial expense was $7.1 million for the year ended December 31,
2018, compared to financial expenses of $48.9 million for the year ended December 31, 2017. Financial expenses for the
year ended December 31, 2017 included a charge of $38.1 million as a result of the re-measurement of the fair value of
the 2021 Notes embedded derivative. In addition, financial expenses are comprised primarily from interest expense on our outstanding
convertible notes.
Year Ended December 31, 2017 Compared to the Year
Ended December 31, 2016
Revenues from Selling Goods
We recorded revenues of $19.2 million
for the year ended December 31, 2017, an increase of approximately $10.0 million, or 109%, compared to revenues of $9.2 million
for the year ended December 31, 2016. Revenues include $7.1 million of products sold in Brazil and $12.1 million
of drug substance sold to Pfizer. The increase resulted from an increase in the amount of $3.1 million of product sold to
Brazil and $7.0 million of drug substance sold to Pfizer.
Revenues from License and R&D Services
We recorded revenues of $1.8 million for the year ended
December 31, 2017. Revenues from the license agreement represent the revenues we recognized in connection with the Chiesi
Ex-US Agreement.
Cost of Goods Sold
Cost of goods sold was $15.2 million for the year
ended December 31, 2017, an increase of $6.8 million or 81%, compared to the cost of revenues of $8.4 million
for the year ended December 31, 2016. The increase resulted primarily from costs related to the production of drug
substance for sale to Pfizer, and of drug product for sale to Brazil.
Research and Development Expenses
Research and development expenses were $32.2 million for
the year ended December 31, 2017, an increase of $1.8 million, or 6%, from $30.4 million for the year ended December 31,
2016. The increase resulted primarily from an increase of $2.4 million in clinical trial related costs, which was partially
offset by a decrease of $0.7 million in materials.
We expect research and development expenses
to continue to be our primary expense as we enter into a more advanced stage of preclinical and clinical trials for certain of
our product candidates, primarily with respect to pegunigalsidase alfa
.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $11.5 million
for the year ended December 31, 2017, an increase of $2.2 million, or 23%, from $9.4 million for the year ended
December 31, 2016. The increase resulted primarily from an increase in sales and marketing activities in connection with the
sale of alfataliglicerase in Brazil.
Financial Expenses and Income
Financial expense was $48.9 million for the year ended
December 31, 2017, compared to financial income of $4.0 million for the year ended December 31, 2016. Financial
expenses included a charge of $38.1 million as a result of the re-measurement of the fair value of the 2021 Notes embedded
derivative. In addition, financial expenses is comprised primarily from interest expense on convertible notes.
Liquidity and Capital Resources
Sources of Liquidity
As a result of our significant research and
development expenditures and the lack of significant revenue from sales of taliglucerase alfa, we have generated operating losses
from our continuing operations since our inception. To date, we have funded our operations primarily with proceeds equal to $31.3 million
from the sale of shares of convertible preferred and ordinary shares of Protalix Ltd., and an additional $14.1 million in
connection with the exercise of warrants issued in connection with the sale of such shares, through December 31, 2008. In
addition, on October 25, 2007, we generated gross proceeds of $50.0 million in connection with an underwritten public
offering of our common stock and on each of March 23, 2011 and February 22, 2012, we generated gross proceeds of $22.0 million
and $27.2 million, respectively, in connection with underwritten public offerings of our common stock. We believe that the
funds currently available to us as are sufficient to satisfy our capital needs for at least 12 months.
The following table summarizes our public
funding sources since 2007:
Security
|
|
Year
|
|
|
Number
of Shares
|
|
|
Amount
|
|
Common Stock
|
|
|
2007
|
|
|
|
10,000,000
|
|
|
$
|
50,000,000
|
|
Common Stock
|
|
|
2011
|
|
|
|
4,000,000
|
|
|
$
|
22,000,000
|
|
Common Stock
|
|
|
2012
|
|
|
|
5,175,000
|
|
|
$
|
27,168,750
|
|
In addition to the foregoing, on September 18, 2013, we
completed a private placement of $69.0 million in aggregate principal amount of our 2018 Notes, including $9.0 million
aggregate principal amount of 2018 Notes related to the offering’s initial purchaser’s over-allotment option, which
was exercised in full. In December 2016, we completed a private placement of $22.5 million in aggregate principal amount
of 2021 Notes. Finally, on July 25, 2017, we completed a private placement of an additional $10.0 million in aggregate
principal amount of 2021 Notes.
Pfizer
paid Protalix Ltd. $60.0
million as an upfront payment in
connection with the execution of the Pfizer Agreement and subsequently paid to Protalix Ltd. an additional $5.0
million
upon Protalix Ltd.’s meeting a certain milestone. Protalix Ltd. also received a milestone payment of $25.0
million
in connection with the FDA’s approval of taliglucerase alfa in
May 2012.
Pfizer has also paid Protalix Ltd. $8.3 million in connection with the successful achievement of certain
milestones under a clinical development agreement between Pfizer and Protalix Ltd. In connection with the execution of the Amended
Pfizer Agreement, we received a $36.0 million payment from Pfizer, and Pfizer purchased 5,649,079 shares of our common stock
for $10.0 million.
In
the fourth quarter of 2017, Chiesi made a payment to Protalix Ltd. of $25.0
million
in connection with the execution of the Chiesi Ex-US Agreement and in third quarter of 2018, Chiesi made a payment to Protalix
Ltd. of $25.0
million in connection with the execution of
the Chiesi U.S. Agreement.
Cash Flows
Net cash used in operations was $7.7 million
for the year ended December 31, 2018. The net loss from continuing operations for the year ended December 31, 2018 was
$26.5 million. Net cash used in investing activities for the year ended December 31, 2018 was $0.6 million and
consisted primarily of purchase of property and equipment. Net cash used in financing activities was $4.8 million which consisted
of cash settlement for certain conversions of our convertible notes.
Net cash used in operations was
$10.0 million for the year ended December 31, 2017. The net loss from continuing operations for the year ended
December 31, 2017 of $83.4 million was partially offset by a change of $38.1 million in the fair value of
convertible notes embedded derivative and an increase of $24.2 million in contract liability. Net cash used in
investing activities for the year ended December 31, 2017 was $1.1 million and consisted primarily of purchase of
property and equipment. Net cash used in financing activities was $1.4 million which consisted of cash settlement of
$11.0 million for certain conversions of our convertible notes which was partially offset by $9.5 million of net
proceeds from the issuance of our 2021 Notes.
Future Funding Requirements
We expect to continue to incur significant expenditures in
the near future, including significant research and development expenses related primarily to the clinical trials of PRX-102.
We believe that our existing cash and cash equivalents will be sufficient for at least 12 months. We have based this estimate
on assumptions that are subject to change and may prove to be wrong, and we may be required to use our available capital resources
sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization
of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated
with our current and anticipated clinical trials.
Our future capital requirements will depend
on many other factors, including our progress in commercializing
alfataliglicerase
in Brazil, the progress and results of our clinical trials, the duration and cost of discovery and preclinical development
and laboratory testing and clinical trials for our product candidates, conversions of our convertible notes from time to time,
the timing and outcome of regulatory review of our product candidates, the costs involved in preparing, filing, prosecuting, maintaining,
defending and enforcing patent claims and other intellectual property rights, the number and development requirements of other
product candidates that we pursue and the costs of commercialization activities, including product marketing, sales and distribution.
We may need to finance our future cash needs
through corporate collaboration, licensing or similar arrangements, public or private equity offerings or debt financings. We
currently do not have any commitments for future external funding, except with respect to the development-related payments and
milestone payments that may become payable under the Chiesi Agreement. We may need to raise additional funds more quickly if one
or more of our assumptions prove to be incorrect or if we choose to expand our product development efforts more rapidly than we
presently anticipate. We may also decide to raise additional funds even before we need them if the conditions for raising capital
are favorable. Any sale of additional equity or debt securities will likely result in dilution to our shareholders. The incurrence
of indebtedness would result in increased fixed obligations and could also result in covenants that would restrict our operations.
Additional equity or debt financing, grants or corporate collaboration and licensing arrangements may not be available on acceptable
terms, if at all. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate our research
and development programs, reduce our planned commercialization efforts or obtain funds through arrangements with collaborators
or others that may require us to relinquish rights to certain product candidates that we might otherwise seek to develop or commercialize
independently.
Effects of Inflation and Currency Fluctuations
Inflation generally affects us by increasing
our cost of labor and clinical trial costs. We do not believe that inflation has had a material effect on our results of operations
during the years ended December 31, 2016, 2017 or 2018.
Currency fluctuations could affect us by
increased or decreased costs mainly for goods and services acquired outside of Israel. We do not believe currency fluctuations
have had a material effect on our results of operations during the years ended December 31, 2016, 2017 or 2018.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements
as of December 31, 2017 and 2018.
Recently Issued Accounting Pronouncements
Certain recently issued accounting pronouncements
are discussed in Note 1(q) of the financial statements included in Item 8 of this Annual Report on Form 10-K.
Contractual Obligations
The following table summarizes our significant
contractual obligations at December 31, 2018:
(U.S. dollars in thousands)
|
|
Total
|
|
|
Less than 1
year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than 5 years
|
|
Convertible notes - interest
|
|
$
|
13,032
|
|
|
$
|
4,344
|
|
|
$
|
8,688
|
|
|
|
|
|
|
|
|
|
Convertible notes - principal amount
|
|
$
|
57,918
|
|
|
|
|
|
|
$
|
57,918
|
|
|
|
|
|
|
|
|
|
Operating lease obligations
|
|
$
|
3,028
|
|
|
$
|
1,233
|
|
|
$
|
1,795
|
|
|
|
|
|
|
|
|
|
Purchase obligations (1)
|
|
$
|
3,157
|
|
|
$
|
3,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain clinical contract
|
|
$
|
18,809
|
|
|
$
|
11,115
|
|
|
$
|
7,579
|
|
|
$
|
115
|
|
|
|
|
|
Liability for employee rights
upon retirement
|
|
$
|
2,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,374
|
|
Total
|
|
$
|
98,318
|
|
|
$
|
19,849
|
|
|
$
|
75,980
|
|
|
$
|
115
|
|
|
$
|
2,374
|
|
(1) Represents open purchase orders issued
to certain suppliers and other vendors mainly in connection with our research and development activities that were outstanding
as of December 31, 2018.
The foregoing table does not include (i)
annual license fees, which are immaterial, (ii) payments we may be required to make to certain of our licensors in the time periods
set forth above upon the achievement of agreed-upon milestones and (iii) royalty payments payable by us to certain of our licensors
in connection with the commercial sale of our product candidates, if any. If all of the contingencies with respect to milestone
payments under our research and license agreements are met, the aggregate milestone payments payable would be approximately $14.3 million,
and would be payable, if at all, as our projects progress over the course of a number of years. The royalty payments payable by
our company in connection with sales of each of our product candidates, if any, shall not exceed low, single-digit percentages
of net sales of the product.
Selected Quarterly Financial Data (unaudited)
|
|
Three Months Ended
|
|
|
|
2017
|
|
|
2018
|
|
|
|
(U.S. dollars in thousands,
except per share data)
|
|
|
|
March 31
|
|
|
June 30
|
|
|
Sept. 30
|
|
|
Dec. 31
|
|
|
March 31
|
|
|
June 30
|
|
|
Sept. 30
|
|
|
Dec. 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(as restated)
|
|
|
(as restated)
|
|
|
(as restated)
|
|
|
|
|
Revenues from selling goods
|
|
$
|
2,889
|
|
|
$
|
6,358
|
|
|
$
|
7,526
|
|
|
$
|
2,469
|
|
|
$
|
4,553
|
|
|
$
|
2,006
|
|
|
$
|
663
|
|
|
$
|
1,756
|
|
Revenues from license agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,836
|
|
|
|
2,161
|
|
|
|
2,832
|
|
|
|
11,672
|
|
|
|
8,597
|
|
Operating loss
|
|
|
6,365
|
|
|
|
10,805
|
|
|
|
7,765
|
|
|
|
9,582
|
|
|
|
5,151
|
|
|
|
6,744
|
|
|
|
3,741
|
|
|
|
3,672
|
|
Net (loss) profit for the period
|
|
$
|
(59,148
|
)
|
|
$
|
450
|
|
|
$
|
(11,437
|
)
|
|
$
|
(13,305
|
)
|
|
$
|
(7,239
|
)
|
|
$
|
(8,462
|
)
|
|
$
|
(5,322
|
)
|
|
$
|
(5,434
|
)
|
Earnings (loss) per share of common stock, basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net basic income (loss) per share of common stock
|
|
$
|
(0.48
|
)
|
|
$
|
0.00
|
|
|
$
|
(0.09
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.04
|
)
|
Net diluted income (loss) per share of common stock
|
|
$
|
(0.48
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.04
|
)
|
|
Item 7A.
|
Quantitative and Qualitative Disclosures about
Market Risk
|
Currency Exchange Risk
The currency of the primary economic environment
in which our operations are conducted is the dollar. Most of our revenues and approximately 50% of our expenses and capital expenditures
are incurred in dollars, and a significant source of our financing has been provided in U.S. dollars. Since the dollar is the
functional currency, monetary items maintained in currencies other than the dollar are remeasured using the rate of exchange in
effect at the balance sheet dates and non-monetary items are remeasured at historical exchange rates. Revenue and expense items
are remeasured at the average rate of exchange in effect during the period in which they occur. Foreign currency translation gains
or losses are recognized in the statement of operations.
Approximately 35% of our costs, including salaries, expenses
and office expenses, are incurred in NIS. Inflation in Israel may have the effect of increasing the U.S. dollar cost of our operations
in Israel. If the U.S. dollar declines in value in relation to the NIS, it will become more expensive for us to fund our operations
in Israel. A revaluation of 1% of the NIS will affect our loss before tax by less than 1%. The exchange rate of the U.S. dollar
to the NIS, based on exchange rates published by the Bank of Israel, was as follows:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Average rate for period
|
|
|
3.841
|
|
|
|
3.600
|
|
|
|
3.595
|
|
Rate at year-end
|
|
|
3.845
|
|
|
|
3.467
|
|
|
|
3.748
|
|
To date, we have not engaged in hedging transactions. In the
future, we may enter into currency hedging transactions to decrease the risk of financial exposure from fluctuations in the exchange
rate of the U.S. dollar against the NIS. These measures, however, may not adequately protect us from material adverse effects
due to the impact of inflation in Israel.
Interest Rate Risk
Our exposure to market risk is confined to
our cash and cash equivalents. We consider all short term, highly liquid investments, which include short-term deposits with original
maturities of three months or less from the date of purchase, that are not restricted as to withdrawal or use and are readily
convertible to known amounts of cash, to be cash equivalents. The primary objective of our investment activities is to preserve
principal while maximizing the interest income we receive from our investments, without increasing risk. We invest any cash balances
primarily in bank deposits and investment grade interest-bearing instruments. We are exposed to market risks resulting from changes
in interest rates. We do not use derivative financial instruments to limit exposure to interest rate risk. Our interest gains
may decline in the future as a result of changes in the financial markets.
|
Item 8.
|
Financial Statements and Supplementary Data
|
See the Index to Consolidated Financial Statements
on Page F-1 attached hereto.
|
Item 9.
|
Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
|
None.
|
Item 9A.
|
Controls and Procedures
|
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation of the
effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this
Form 10-K. The controls evaluation was conducted under the supervision and with the participation of management, including our
Chief Executive Officer and Chief Financial Officer. Disclosure controls and procedures are controls and procedures designed to
reasonably assure that information required to be disclosed in our reports filed under the Exchange Act, such as this Form 10-K,
is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. Disclosure
controls and procedures are also designed to reasonably assure that such information is accumulated and communicated to our management,
including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
The evaluation of our disclosure controls
and procedures included a review of the controls’ objectives and design, our implementation of the controls and their effect
on the information generated for use in this Annual Report on Form 10-K. This type of evaluation will be performed on a quarterly basis so that the conclusions
of management, including the Chief Executive Officer and Chief Financial Officer, concerning the effectiveness of the disclosure
controls and procedures can be reported in our periodic reports on Form 10-Q and Form 10-K. The overall goals of these various
evaluation activities are to monitor our disclosure controls and procedures, and to modify them as necessary. Our intent is to
maintain the disclosure controls and procedures as dynamic systems that change as conditions warrant.
Based on the controls evaluation, our Chief Executive Officer
and Chief Financial Officer have concluded that, as of the end of the period covered by this Form 10-K, our disclosure controls
and procedures were not effective as of December 31, 2018 due to the material weakness in internal control over financial reporting
described below.
Our Chief Executive Officer and Chief Financial Officer have
concluded that notwithstanding the existence of the material weakness, the consolidated financial statements included in this
Annual Report on Form 10-K present fairly, in all material respects, our financial position, results of operations and cash flows
for the periods presented in conformity with U.S. generally accepted accounting principles. Additional corrective actions continue
to address the internal control material weakness as described below under the section “Remediation Plan.”
Management’s Report on Internal Control over Financial
Reporting
Our management is responsible for
establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the
reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S.
generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions
of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of our company
are being made only in accordance with authorizations of management and our directors; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material
effect on our financial statements.
Management assessed our internal control
over financial reporting as of December 31, 2018, the end of our fiscal year. Management based its assessment on criteria
established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Management’s assessment included evaluation of elements such as the design and operating effectiveness
of key financial reporting controls, process documentation, accounting policies and our overall control environment.
Based on our assessment, management
has concluded that our internal control over financial reporting was not effective as of the end of the fiscal year to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
reporting purposes in accordance with U.S. generally accepted accounting principles. We determined that a material weakness in
our internal control over financial reporting existed as of December 31, 2018 in that we did not maintain effective internal
controls related to accounting for complex revenue contracts. Specifically, we did not properly assess the performance obligations
we had with regard to certain out-licensing arrangements which became material to our company during 2018. We reviewed the results of
management’s assessment with the Audit Committee of our Board of Directors.
The effectiveness of our internal
control over financial reporting as of December 31, 2018 has been audited by Kesselman & Kesselman, an independent registered
public accounting firm, as stated in their report included herein.
Remediation Plan
In response to the identified material weakness,
our management, with the oversight of the Audit Committee of the Board of Directors, has updated our revenue
recognition processes and controls with respect to out-licensing arrangements, and intends to continue to update our revenue
recognition processes and controls and to implement additional control procedures, including retaining a globally recognized
business and accounting advisory firm to assist us in improving our internal processes in connection with revenue recognition. While
certain remedial actions have been completed in the first quarter of 2019, we intend to continue to update our revenue
recognition processes and controls and to implement additional control procedures as the need to do so is identified by our
management. The remediation efforts are intended both to address the identified material weakness and to enhance our overall
financial control environment.
The material weakness will not be considered remediated until
our management designs and implements effective controls that operate for a sufficient period of time and management has concluded,
through testing, that these controls are effective. We will monitor the effectiveness of our remediation plan and will refine
its remediation plan as appropriated.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief
Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control
over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated,
can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control
system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to
their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute
assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within
a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty
and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of
some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls
is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness
to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration
in the degree of compliance with policies or procedures.
Changes in internal controls
There were no changes in our internal control over financial
reporting (as defined in Rules 13a-15f and 15d-15f under the Exchange Act) that occurred during the year ended December 31,
2018 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
|
Item 9B.
|
Other Information
|
None.
PART III
|
Item 10.
|
Directors, Executive Officers and Corporate
Governance
|
Our directors and executive officers, their ages and positions
as of March 1, 2019 are as follows:
Name
|
|
Age
|
|
Position
|
Directors
|
|
|
|
|
Shlomo Yanai
|
|
66
|
|
Chairman of the Board
|
Moshe Manor
|
|
62
|
|
President and Chief Executive Officer, Director
|
Amos Bar Shalev
|
|
66
|
|
Director
|
Zeev Bronfeld
|
|
67
|
|
Director
|
David Granot
|
|
72
|
|
Director
|
Aharon Schwartz, Ph.D.
|
|
76
|
|
Director
|
Executive Officers
|
|
|
|
|
Yoseph Shaaltiel, Ph.D.
|
|
65
|
|
Executive VP, Research and Development
|
Einat Brill Almon, Ph.D.
|
|
59
|
|
Senior Vice President, Product Development
|
Yossi Maimon, CPA
|
|
48
|
|
Vice President, Chief Financial Officer, Treasurer and Secretary
|
Yaron Naos
|
|
55
|
|
Senior Vice President, Operations
|
Shlomo Yanai.
Shlomo Yanai has served
as the Chairman of our Board of Directors since July 2014. Mr. Yanai is currently the Chairman of the Board of Cambrex Corporation
(NYSE:CBM) and has served on its board of directors since November 2012. He also serves as a director of PDL BioPharma, Inc. (NASDAQ:
PDLI), since June 2018, as a non-employee member of the board of managers of Q Holdco LLC, and as a senior advisor to Moelis &
Company. Mr. Yanai served as a director of Lumenis Ltd. from 2012 through 2015; of Sagent Pharmaceuticals, Inc. from April 2015
through August 2016; of Perrigo Co. plc (NASDAQ:PRGO) from November 2015 through January 2017; and of Quinpario Acquisition Corp.
2 (NASDAQ:QPACU) from November 2014 through July 2017. Mr. Yanai served as President and Chief Executive Officer of Teva Pharmaceutical
Industries Ltd., or Teva (NASDAQ:TEVA, TASE:TEVA), from March 2007 until May 2012 and, prior to joining Teva, Mr. Yanai was President
and Chief Executive Officer of Makhteshim-Agan Industries Ltd. from 2003 until 2006. Before that, he was a Major General in the
Israel Defense Forces, where he served for 32 years in various positions, the last two positions being Commanding Officer of the
Southern Command and Head of the Division of Strategic Planning. Mr. Yanai was the head of the Israeli security delegation to
the peace talks at Camp David, Shepherdstown and Wye River. He currently serves as a member of the Board of Governors of the Technion
— Israel Institute of Technology of Haifa, Israel, and of the Board of Trustees of Bar-Ilan University — Israel, as
well as an honorary member of the Board of the Institute for Policy and Strategy of the Interdisciplinary Center (IDC), Herzliya,
Israel. Mr. Yanai holds a bachelor’s degree in political science and economics from Tel Aviv University, a master’s
degree in national resources management from George Washington University, and is a graduate of the Advanced Management Program
of Harvard Business School and U.S. National War College (NDU). Mr. Yanai was the recipient of the Max Perlman Award for Excellence
in Global Business Management from Tel Aviv University, Israel in 2005 and was awarded an honorary doctorate by Bar-Ilan University,
Israel in 2012. We believe Mr. Yanai’s qualifications to serve as Chairman of our Board of Directors include his vast global
operating experience in the life-science and pharmaceutical and agro-chemicals industry. He also brings a global perspective to
the Board, incorporating his industry and Board leadership experience and his distinguished military service.
Moshe Manor.
Mr. Manor has served
as our President and Chief Executive Officer and as a director of our Company since November 2014. Mr. Manor served in a number
of senior executive positions at Teva (NASDAQ:TEVA, TASE:TEVA) from 1984 through 2012. Most recently, he served as President,
Teva Asia & Pacific where he led the strategy and development of a high growth region for Teva. Prior to that, he was Group
Vice President, Global Branded Products, leading the Innovative Commercial and Research & Development franchises. From 2006
through 2008, Mr. Manor was Senior Vice President, Global Innovative Resources, and was responsible for generating over $3 billion
in sales with Copaxone
®
and Azilect
®
. Previously, he served as director of Teva Israel. Most recently,
Mr. Manor serves on the Board of Directors of Coronis Partners, and as Chairman of the Board of Directors of a startup company,
MEway Pharma. He holds a BA in Economics from the Hebrew University in Jerusalem, and an MBA from the Tel-Aviv University. We
believe Mr. Manor’s qualifications to serve on our Board of Directors include his extensive experience in the life-science
and pharmaceutical industry on a global scale.
Amos Bar Shalev.
Mr. Bar Shalev
has served as our director since July 2008. Previously, Mr. Bar Shalev served as a director of Protalix Ltd. from 2005 through
January 2008, and as our director from 2006 through 2008. Mr. Bar Shalev brings to us extensive experience in managing technology
companies. Currently, Mr. Bar Shalev serves on the boards of directors of Aposense Ltd. (TASE: APOS), an Israeli publicly-traded
company listed on the TASE, since 2011, as well as Twine Solutions Ltd., a privately-held technology company, since 2015, and
of Steam CC Ltd., since 2017, both privately-held Israeli companies. From 2004 through 2012, Mr. Bar Shalev served as a director
of Technorov Holdings (1993) Ltd. and managed its portfolio. In addition, he served on the board of directors of Highcon Systems
Ltd., a privately-held Israeli company, from 2010 through 2012. From 1997 through 2004, he was a Managing Director of TDA Capital
Partners, a management company of the TGF (Templeton Tadiran) Fund. From 2004 through 2007, he was the President of Win Buyer
Ltd. He has served on the board of directors of a number of Israeli publicly traded and privately-held Israeli companies including,
among others, Velox Ltd., NESS Ltd. (acquired by BioNess Inc.), Idanit (acquired by Scitex Corporation Ltd.), Objet Geometrix
(merged with Stratasys, Inc. (NASDAQ:SSYS)), Verisity, Scitex Vision (acquired by Hewlett Packard), Golden Wings Investment Company
Ltd., the venture capital fund of the Israeli Air Force Veterans Business Club, Win Buyer Ltd. and Sun Light Ltd. He received
his B.Sc. in Electrical Engineering from the Technion, Israel in 1978 and M.B.A. from the Tel Aviv University in 1981. He holds
the highest award from the Israeli Air Force for technological achievements. We believe Mr. Bar Shalev’s qualifications
to serve on our Board of Directors include his years of experience in the management of Israeli businesses.
Zeev Bronfeld.
Mr. Bronfeld has
served as a director of Protalix Ltd. since 1996 and as our director since December 2006. Mr. Bronfeld brings to us vast experience
in management and value building of biotechnology companies. He is an experienced businessman who is involved in a number of biotechnology
companies. He was a co-founder of Bio-cell Ltd., a former Israeli publicly-traded holding company that specialized in biotechnology
companies and served as its Chief Executive Officer from 1986 through 2015. Mr. Bronfeld currently serves as a director of Entera
Bio Ltd. (NASDAQ: ENTX), as well as The Trendlines Group (SGX:42T), D.N.A. Biomedical Solutions Ltd. (TASE:DNA) and Electreon
Wireless Ltd. (TASE:ELWS) (formerly, Biomedix Incubator Ltd.), all of which are public companies. Mr. Bronfeld is also a director
of a number of privately-held companies, most of which are involved in the life sciences, such as Contipi Medical Ltd and TransBiodiesel
Ltd. From 2008 through January 2017, Mr. Bronfeld served as a director of Macrocure Ltd., a Nasdaq-listed company that merged
into Leap Therapeutics, Inc. (NASDAQ:LPTX). Mr. Bronfeld received a B.A. in Economics from the Hebrew University in 1975. We believe
Mr. Bronfeld’s qualifications to serve on our Board of Directors include his years of experience in the management of private
and public Israeli companies, including life science companies.
David Granot.
Mr. Granot has served
as our director since August 2018. Mr. Granot currently serves on the Board of Directors of Ormat Technologies, Inc. (NYSE:ORA,
TASE:ORA), and of Bezeq Israeli Telecommunication, Co. Ltd. (TASE:BEZQ) since May 22, 2012, where he served as temporary Acting
Chairman, July 2017 through May 2018. He also serves on the Board of Directors of Alrov Properties & Lodgings Ltd. (TASE:ALRPR);
and Jerusalem Economy Ltd. (TASE:ECJM), each of which is an Israeli public company. He also serves on the board of directors of
Tempo Beverages Ltd. and Geregu Power PLC, each of which is a privately-held company. From 2009 through 2017,
he was a director of Harel Insurance Investments and Financial Ltd. and Chairman of the Nostro investment committee of Harel Insurance.
In addition, from 2001 through 2007, he served as the Chief Executive Officer of the First International Bank of Israel Ltd, from
1998 through 2000 he served as the Chief Executive Officer of the Israel Discount Bank and from 1995 through 1998 he served as
the Chief Executive Officer of the Israel Union Bank. He holds a B.A. in Economics and an MBA, both from the Hebrew University
of Jerusalem. We believe Mr. Granot’s qualifications to serve on our Board of Directors include his extensive financial
and banking knowledge, as well as vast management and business experience.
Aharon Schwartz, Ph.D.
Dr. Schwartz
has served as our director since November 2014. He retired from Teva in 2011 where he served in a number of positions from 1975
through 2011, the most recent being Vice President, Head of Teva Innovative Ventures from 2008. Dr. Schwartz is currently chairman
of the board of directors of BiolineRx Ltd. (NASDAQ:BLRX, TASE:BLRX) and a member of the board of directors of Barcode Ltd and
Foamix Pharmaceuticals Ltd. (NASDAQ:FOMX). He also works as an independent consultant. From January 2013 through November 2017,
he served as a member of the board of directors of Alcobra Ltd. (NASDAQ:ADHD), which is now called Arcturus Therapeutics Ltd.
Dr. Schwartz received his Ph.D. in organic chemistry in 1978 from the Weizmann Institute of Science, his M.Sc. in organic chemistry
from the Technion and a B.Sc. in chemistry and physics from the Hebrew University of Jerusalem. Dr. Schwartz received a second
Ph.D. in 2014 from the Hebrew University of Jerusalem in the history and philosophy of science. We believe Dr. Schwartz’s
qualifications to serve on our Board of Directors include his years of experience in life science companies.
Yoseph Shaaltiel, Ph.D.
Dr. Shaaltiel
founded Protalix Ltd. in 1993 and has served as our Executive Vice President, Research and Development since December 2006. From
2006 through 2014, he served on our Board of Directors. Prior to establishing Protalix Ltd., from 1988 to 1993, Dr. Shaaltiel
was a Research Associate at the MIGAL Technological Center. He also served as Deputy Head of the Biology Department of the Biological
and Chemical Center of the Israeli Defense Forces and as a Biochemist at Makor Chemicals Ltd. Dr. Shaaltiel was a Postdoctoral
Fellow at the University of California at Berkeley and at Rutgers University in New Jersey. He has co-authored over 40 articles
and abstracts on plant biochemistry and holds several patents. Dr. Shaaltiel received his Ph.D. in Plant Biochemistry from the
Weizmann Institute of Science, an M.Sc. in Biochemistry from the Hebrew University and a B.Sc. in Biology from the Ben Gurion
University.
Einat Brill Almon, Ph.D.
Dr. Almon
joined Protalix Ltd. in December 2004, originally as a Senior Director and later as a Vice President and became our Senior Vice
President, Product Development in 2006. Dr. Almon has many years of experience in the management of life science projects and
companies, including biotechnology and agrobiotech, with direct experience in clinical, device and scientific software development,
as well as a strong background and work experience in intellectual property. Prior to joining Protalix Ltd., from 2001 to 2004,
she served as Director of R&D and IP of Medgenics Medical (Israel) Ltd. (formerly, Biogenics Ltd.), a company that developed
an autologous platform for tissue-based protein drug delivery. Medgenics Medical, based in Israel, is a wholly-owned subsidiary
of Aevi Genomic Medicine, Inc. (NASDAQ:GNMX) (formerly, Medgenics Inc.). Dr. Almon has trained as a biotechnology patent agent
at leading IP firms in Israel. Dr. Almon holds a Ph.D. and an M.Sc. in molecular biology of cancer research from the Weizmann
Institute of Science, a B.Sc. from the Hebrew University and has carried out Post-Doctoral research at the Hebrew University in
the area of plant molecular biology.
Yossi Maimon, CPA.
Mr. Maimon
joined Protalix Ltd. in October 2006 as its Chief Financial Officer and became our Vice President and Chief Financial Officer
in 2006. Prior to joining Protalix, from 2002 to 2006, he served as the Chief Financial Officer of Colbar LifeScience Ltd.,
or Colbar, a biomaterial company focusing on aesthetics, where he led all of the corporate finance activities, fund raisings
and legal aspects of Colbar including the sale of Colbar to Johnson and Johnson (NYSE:JNJ). In March 2019, Mr. Maimon assumed
a similar position in a privately held biotech startup company on a temporary basis. Mr. Maimon has a B.A. in accounting from
the City University of New York and an MBA from Tel Aviv University, and he is a Certified Public Accountant in the United
States (New York State) and Israel.
Yaron Naos.
Mr. Yaron Naos joined
Protalix in 2004, originally as a Senior Director for Operations and later as Vice President for Production, and became our Senior
Vice President, Operations in 2018. Mr. Naos has a wealth of hands-on experience and knowledge in the field of pharmaceutical
development. Prior to joining Protalix, he served for a decade as R&D Product Manager at Dexxon Pharmaceutical Co., one of
Israel's largest pharmaceutical companies, where he was responsible for technology transfer from R&D to production, and in
charge of R&D activities that led to the commercialization of many products. Later, Mr. Naos was plant manager of Medibrands
Pharmaceutical Company, as well as logistics manager of Mediline for period of four years, where he was responsible for all operational
activities, from procurement to distribution. Mr. Naos holds a B.Sc. in Food Engineering and Biotechnology from the Technion-Israel
Technology Institute and an MBA from Haifa University.
Section 16(a) Beneficial Ownership Reporting
Compliance
Section 16(a) of the Exchange Act requires
our directors, executive officers and holders of more than 10% of our common stock to file with the Commission reports regarding
their ownership and changes in ownership of our equity securities. We believe that all Section 16 filings requirements were
met by our officers and directors during 2018. In making this statement, we have relied solely upon examination of the copies
of Forms 3, 4 and 5, Schedule 13s and written representations of our former and current directors, officers and 10% stockholders.
Audit Committee
The Audit Committee is currently comprised
of Mr. Bar Shalev, Mr. Bronfeld, Dr. Schwartz and Mr. Granot. We require that all Audit Committee members possess the required
level of financial literacy and at least one member of the Audit Committee meet the current standard of requisite financial management
expertise as required by the NYSE American and applicable rules and regulations of the Commission.
Our Audit Committee operates under a formal
charter that governs its duties and conduct. A current copy of the Audit Committee Charter is available on our website at
http://www.protalix.com
.
All members of the Audit Committee are
independent from our executive officers and management.
Our independent registered public accounting
firm reports directly to the Audit Committee.
Our Audit Committee meets with management
and representatives of our registered public accounting firm prior to the filing of officers’ certifications with the Commission
to receive information concerning, among other things, effectiveness of the design or operation of our internal controls over
financial reporting, as required by Section 404 of SOX.
Our Audit Committee has adopted a Policy
for Reporting Questionable Accounting and Auditing Practices and Policy Prohibiting Retaliation against Reporting employees to
enable confidential and anonymous reporting of improper activities to the Audit Committee.
Mr. Bar Shalev, Mr. Bronfeld, Dr. Schwartz
and Mr. Granot each qualify as “audit committee financial experts” under the applicable rules of the Commission. In
making the determination as to these individuals’ status as audit committee financial experts, our Board of Directors determined
they have accounting and related financial management expertise within the meaning of the aforementioned rules, as well as the
listing standards of the NYSE American.
Code of Business Conduct and Ethics
We have adopted a Code of Business Conduct
and Ethics that includes provisions ranging from restrictions on gifts to conflicts of interest. All of our employees and directors
are bound by this Code of Business Conduct and Ethics. Violations of our Code of Business Conduct and Ethics may be reported to
the Audit Committee.
The Code of Business Conduct and Ethics
includes provisions applicable to all of our employees, including senior financial officers and members of our Board of Directors
and is posted on our website (www.protalix.com). We intend to post amendments to or waivers from any such Code of Business Conduct
and Ethics.
|
Item 11.
|
Executive Compensation
|
Compensation Discussion and Analysis
The primary goals of the Compensation Committee
of our Board of Directors with respect to executive compensation are to attract and retain the most talented and dedicated executives
possible, to tie annual and long-term cash and stock incentives to achievement of specified performance objectives, and to align
executives’ incentives with stockholder value creation. To achieve these goals, the Compensation Committee implements and
maintains compensation plans that tie a portion of executives’ overall compensation to key strategic goals such as developments
in our clinical path, the establishment of key strategic collaborations, the build-up of our pipeline and the strengthening of
our financial position. The Compensation Committee evaluates individual executive performance with a goal of setting compensation
at levels the committee believes are comparable with executives in other companies of similar size and stage of development operating
in the biotechnology industry while taking into account our relative performance and our own strategic goals.
Elements of Compensation
Executive compensation consists of following
elements:
Base Salary.
Base salaries
for our executives are established based on the scope of their responsibilities taking into account competitive market compensation
paid by other companies for similar positions. Generally, we believe that executive base salaries should be targeted near the
median of the range of salaries for executives in similar positions with similar responsibilities at comparable companies. The
Compensation Committee convenes, from time to time to evaluate present and future executive compensation, which evaluation generally
includes an evaluation of the peer group considered in analyzing executive compensation. The Compensation Committee intends to
continue reviewing and revising the peer group periodically to ensure that it continues to reflect companies similar to our Company
in size and development stage. The Compensation Committee also reviews executive compensation reports and an analysis of publicly-traded
biotechnology companies prepared by third party experts from a well-known consulting firm for additional data and other information
regarding executive compensation for comparative purposes.
Base salaries are usually reviewed annually,
and adjusted from time to time to realign salaries with market levels after taking into account individual responsibilities, performance
and experience. The base salaries of each of our President and Chief Executive Officer, our Executive Vice President, Research
and Development, our Senior Vice President, Product Development, our Vice President and Chief Financial Officer and our Senior
Vice President, Operations, who we refer to collectively as the “Named Executive Officers,” are discussed herein.
In March 2016, our Board of Directors adopted certain recommendations of the Compensation Committee regarding the compensation
of our Named Executive Officers at that time with no change in the base salary component, as discussed below.
Annual Bonus
.
The Compensation
Committee has the authority to award discretionary annual bonuses to our executive officers. The discretionary annual bonus awards
were intended to compensate officers for achieving financial, clinical, regulatory and operational goals and for achieving individual
annual performance objectives. For any given year, the compensation objectives vary, but relate generally to strategic factors
such as developments in our clinical path, the execution of a license agreement for the commercialization of product candidates,
the establishment of key strategic collaborations, the build-up of our pipeline and financial factors such as capital raising.
Bonuses are awarded generally based on corporate performance, with adjustments made within a range for individual performance,
at the discretion of the Compensation Committee. The Compensation Committee determines, on a discretionary basis, the size of
the entire bonus pool and the amount of the actual award to each Named Executive Officer.
The Compensation Committee selects, in
its discretion, the executive officers of our Company or our subsidiary who are eligible to receive bonuses for any given year.
Any bonus granted by the Compensation Committee will generally be paid upon the achievement of a specific milestone, subject to
certain terms and conditions. The Compensation Committee has not fixed a minimum or maximum award for any executive officer’s
annual discretionary bonus. Each of our executive officers is eligible for a discretionary annual bonus under his or her employment
agreement.
Performance
Bonus
.
In March 2016, the Compensation Committee adopted a new performance-based bonus plan for the Named Executive Officers
and other members of our management. The new bonus plan is designed to provide cash bonuses over a three-year period based on
our Company’s achievement of what we consider to be major milestones. The amounts payable to each person for each milestone
were determined after consideration of both personal and Company objectives and are based on a multiple of the person’s
monthly salary. Such multiples range from a maximum of 12 months to a minimum of one-half a month. Each bonus is payable upon
the achievement of the applicable milestone, subject to certain terms and conditions. The bonus plan is summarized as follows:
Milestone
|
|
Chief
Executive
Officer
|
|
|
Exec.
VP, R&D
|
|
|
Sr.
VP,
Product
Development
|
|
|
VP
and
Chief
Financial
Officer
|
|
|
Chief
Operating
Officer
|
|
Clinical Development Milestone for Certain Product Candidate
|
|
$
|
108,000
|
|
|
$
|
42,000
|
|
|
$
|
72,000
to $108,000
|
|
|
$
|
36,000
|
|
|
$
|
34,000
|
|
Regulatory Development Milestone for Same Product Candidate
|
|
$
|
108,000
to $216,000
|
|
|
$
|
84,000
to $168,000
|
|
|
$
|
108,000
to $216,000
|
|
|
$
|
36,000
to $54,000
|
|
|
$
|
34,000
to $68,000
|
|
Clinical Development Milestone for Certain Product Candidate
|
|
$
|
54,000
|
|
|
$
|
10,500
|
|
|
$
|
27,000
to $54,000
|
|
|
$
|
9,000
|
|
|
$
|
8,500
|
|
Clinical Development Milestone for Certain other Product Candidate
|
|
$
|
54,000
|
|
|
$
|
10,500
|
|
|
$
|
27,000
to $54,000
|
|
|
$
|
9,000
|
|
|
$
|
8,500
|
|
General Regulatory Milestone
|
|
$
|
102,000
|
|
|
$
|
42,000
|
|
|
$
|
36,000
|
|
|
$
|
18,000
|
|
|
$
|
102,000
|
|
Substantial Transaction involving a Certain Product Candidate
|
|
$
|
128,000
|
|
|
$
|
21,000
|
|
|
$
|
18,000
|
|
|
$
|
115,000
to $141,000
|
|
|
$
|
17,000
|
|
Substantial Transaction involving other Product Candidate
|
|
$
|
112,000
|
|
|
$
|
10,500
|
|
|
$
|
9,000
|
|
|
$
|
49,000
to $60,000
|
|
|
$
|
8,500
|
|
Corporate Finance Milestones
|
|
$
|
216,000
|
|
|
|
|
|
|
|
|
|
|
$
|
197,000
to $242,000
|
|
|
|
|
|
Early-Stage Clinical Milestones
|
|
$
|
72,000
|
|
|
$
|
252,000
|
|
|
$
|
72,000
|
|
|
$
|
36,000
|
|
|
$
|
68,000
|
|
Options and Share-Based Compensation.
Our amended 2006 Stock Incentive Plan authorizes us to grant options to purchase shares of common stock, restricted stock
and other securities to our employees, directors and consultants. Our Compensation Committee is the administrator of the stock
incentive plan. Stock option or other grants are generally made at the commencement of employment and following a significant
change in job responsibilities or to meet other special retention or performance objectives. The Compensation Committee reviews
and approves stock option and other awards to executive officers based upon a review of competitive compensation data, its assessment
of individual performance, a review of each executive’s existing long-term incentives, and retention considerations. The
exercise price of stock options granted under our amended 2006 Stock Incentive Plan must be equal to at least 100% of the fair
market value of our common stock on the date of grant; however, in certain circumstances, grants may be made at a lower price
to Israeli grantees who are residents of the State of Israel.
Severance and Change in Control Benefits.
The Compensation Committee granted the following payments that would be payable in connection with a change of control:
$1 million to the President and Chief Executive Officer and $400,000 to each of the other executive Vice Presidents. Such payments
are subject to certain terms and conditions. In addition to the foregoing, pursuant to the employment agreements entered into
with each of our executive officers, the executive officer is entitled to be insured by Protalix Ltd. under a Manager’s
Policy in lieu of severance. The intention of such Manager’s Policies is to provide the Israel-based officers with severance
protection of one month’s salary for each year of employment. In addition, the stock options and restricted stock granted
to each of our Named Executive Officers provide that all of such instruments are subject to accelerated vesting immediately upon
a change in control of our Company.
Other Compensation.
Consistent
with our compensation philosophy, we intend to continue to maintain our current benefits for our executive officers; however,
the Compensation Committee in its discretion may revise, amend, or add to the officer’s executive benefits if it deems it
advisable. As an additional benefit to all of our Israel-based Named Executive Officers and for most of our employees, we generally
contribute to certain funds amounts equaling a total of approximately 15% of their gross salaries for certain pension and other
savings plans for the benefit of the Named Executive Officers. In addition, in accordance with customary practice in Israel, our
Israel-based executives’ agreements require us to contribute towards their vocational studies, and to provide annual recreational
allowances, a Company car and a Company phone. We believe these benefits are currently equivalent with median competitive levels
for comparable companies.
Executive Compensation.
We
refer to the “Summary Compensation Table” set forth below for information regarding the compensation earned during
the fiscal year ended December 31, 2018 by our President and Chief Executive Officer, our Executive Vice President, Research
and Development, our Senior Vice President, Product Development, our Vice President and Chief Financial Officer and our Senior
Vice President, Operations.
Compensation Committee Report
The above report of the Compensation
Committee does not constitute soliciting material and shall not be deemed filed or incorporated by reference into any other filing
by us under the Securities Act of 1933 or the Exchange Act.
The Compensation Committee has reviewed
and discussed the Compensation Discussion and Analysis set forth below with our management. Based on this review and discussion,
the Compensation Committee has recommended to our Board of Directors that the Compensation Discussion and Analysis be included
in our Annual Report on Form 10–K and our annual proxy statement on Schedule 14A.
Respectfully submitted on March 14, 2019,
by the members of the Compensation Committee of the Board of Directors
.
Amos Bar Shalev
Zeev Bronfeld
Aharon Schwartz, Ph.D.
David Granot
Summary Compensation Table
The following table sets forth a summary
for the fiscal years ended December 31, 2018, 2017 and 2016, respectively, of the cash and non-cash compensation awarded,
paid or accrued by us or Protalix Ltd. to our President and Chief Executive Officer, our Executive Vice President, Research and
Development, our Senior Vice President, Product Development, our Vice President and Chief Financial Officer and our Senior Vice
President, Operations, who we refer to collectively as the “Named Executive Officers.” There were no restricted stock
awards, long-term incentive plan payouts or other compensation paid during fiscal years 2018, 2017 and 2016 by us or Protalix
Ltd. to the Named Executive Officers, except as set forth below. All of the Named Executive Officers are employees of our subsidiary,
Protalix Ltd. All currency amounts are expressed in U.S. dollars.
Name and Principal Position
|
|
Year
|
|
|
Salary($)
|
|
|
Bonus ($)
|
|
|
Stock
Award(s)
($)
|
|
|
Option Award(s)
($)
|
|
|
All Other
Compensation
($)(1)
|
|
|
Total ($)
|
|
Moshe Manor
|
|
|
2018
|
|
|
|
356,551
|
|
|
|
150,000
|
|
|
|
|
|
|
|
106,820
|
|
|
|
104,283
|
|
|
|
717,654
|
|
President and
|
|
|
2017
|
|
|
|
355,290
|
|
|
|
374,000
|
|
|
|
-
|
|
|
|
103,354
|
|
|
|
105,056
|
|
|
|
937,700
|
|
Chief Executive Officer
|
|
|
2016
|
|
|
|
333,058
|
|
|
|
-
|
|
|
|
-
|
|
|
|
250,299
|
|
|
|
98,925
|
|
|
|
682,282
|
|
Yoseph Shaaltiel, Ph.D.
|
|
|
2018
|
|
|
|
288,719
|
|
|
|
|
|
|
|
|
|
|
|
60,575
|
|
|
|
84,148
|
|
|
|
433,442
|
|
Executive Vice President,
|
|
|
2017
|
|
|
|
288,326
|
|
|
|
62,176
|
|
|
|
|
|
|
|
41,454
|
|
|
|
80,786
|
|
|
|
472,742
|
|
Research and Development
|
|
|
2016
|
|
|
|
270,248
|
|
|
|
-
|
|
|
|
18,211
|
|
|
|
103,279
|
|
|
|
73,325
|
|
|
|
465,063
|
|
Einat Brill Almon, Ph.D.
|
|
|
2018
|
|
|
|
249,583
|
|
|
|
120,000
|
|
|
|
|
|
|
|
59,089
|
|
|
|
75,369
|
|
|
|
504,041
|
|
Senior Vice President,
|
|
|
2017
|
|
|
|
249,243
|
|
|
|
157,508
|
|
|
|
|
|
|
|
37,686
|
|
|
|
74,798
|
|
|
|
519,235
|
|
Product Development
|
|
|
2016
|
|
|
|
233,486
|
|
|
|
-
|
|
|
|
16,043
|
|
|
|
93,890
|
|
|
|
66,822
|
|
|
|
410,241
|
|
Yossi Maimon, CPA
|
|
|
2018
|
|
|
|
282,649
|
|
|
|
140,000
|
|
|
|
|
|
|
|
59,089
|
|
|
|
75,813
|
|
|
|
557,551
|
|
Vice President,
|
|
|
2017
|
|
|
|
282,197
|
|
|
|
363,647
|
|
|
|
|
|
|
|
37,686
|
|
|
|
75,448
|
|
|
|
758,978
|
|
Chief Financial Officer
|
|
|
2016
|
|
|
|
264,696
|
|
|
|
-
|
|
|
|
16,043
|
|
|
|
93,890
|
|
|
|
70,153
|
|
|
|
444,782
|
|
Yaron Naos (2)
|
|
|
2018
|
|
|
|
218,058
|
|
|
|
|
|
|
|
|
|
|
|
40,878
|
|
|
|
80,338
|
|
|
|
339,274
|
|
Senior Vice President,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes employer
contributions to pension and/or insurance plans and other miscellaneous payments.
|
|
(2)
|
Mr. Naos was promoted
to Senior Vice President, Operations in May 2018.
|
Grants of Plan-Based Awards
The following table summarizes the grant of awards made to
the Named Executive Officers during 2018 as of December 31, 2018.
Name
|
|
Grant date
|
|
All other
option awards:
Number of
securities
underlying
options (#)
|
|
|
Exercise or
base price of option
awards ($/Sh)
|
|
|
Grant date
fair value
of stock and
option awards ($)
|
|
(a)
|
|
(b)
|
|
(j)
|
|
|
(k)
|
|
|
(l)
|
|
Moshe Manor
|
|
August 13, 2018
|
|
|
1,300,000
|
|
|
|
0.56
|
|
|
|
388,688
|
|
Yoseph Shaaltiel
|
|
August 13, 2018
|
|
|
700,000
|
|
|
|
0.56
|
|
|
|
209,294
|
|
Einat Brill Almon
|
|
August 13, 2018
|
|
|
700,000
|
|
|
|
0.56
|
|
|
|
209,294
|
|
Yossi Maimon
|
|
August 13, 2018
|
|
|
700,000
|
|
|
|
0.56
|
|
|
|
209,294
|
|
Yaron Naos
|
|
August 13, 2018
|
|
|
600,000
|
|
|
|
0.56
|
|
|
|
179,395
|
|
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth information
with respect to the Named Executive Officers concerning equity awards as of December 31, 2018.
|
|
|
Option
Awards
|
|
Name
|
|
|
Number
of Securities
Underlying
Unexercised
Options
Exercisable (#)
|
|
|
|
Number
of Securities
Underlying
Unexercised
Options
Unexercisable (#)
|
|
|
|
Option Exercise
Price ($)
|
|
|
|
Option
Expiration Date
|
|
Moshe Manor
|
|
|
900,000
|
|
|
|
-
|
|
|
|
2.37
|
|
|
|
9/29/2024
|
|
|
|
|
81,250
|
|
|
|
1,218,750
|
|
|
|
0.56
|
|
|
|
9/13/2028
|
|
Yoseph Shaaltiel
|
|
|
50,000
|
|
|
|
|
|
|
|
2.65
|
|
|
|
2/25/2019
|
|
|
|
|
145,000
|
|
|
|
-
|
|
|
|
6.90
|
|
|
|
2/25/2020
|
|
|
|
|
257,812
|
|
|
|
17,188
|
|
|
|
1.72
|
|
|
|
3/23/2025
|
|
|
|
|
43,750
|
|
|
|
656,250
|
|
|
|
0.56
|
|
|
|
9/13/2028
|
|
Einat Brill Almon
|
|
|
130,000
|
|
|
|
-
|
|
|
|
6.90
|
|
|
|
2/25/2020
|
|
|
|
|
234,375
|
|
|
|
15,625
|
|
|
|
1.72
|
|
|
|
3/23/2025
|
|
|
|
|
43,750
|
|
|
|
656,250
|
|
|
|
0.56
|
|
|
|
9/13/2028
|
|
Yossi Maimon
|
|
|
130,000
|
|
|
|
|
|
|
|
6.90
|
|
|
|
2/25/2020
|
|
|
|
|
234,375
|
|
|
|
15,625
|
|
|
|
1.72
|
|
|
|
3/23/2025
|
|
|
|
|
43,750
|
|
|
|
656,250
|
|
|
|
0.56
|
|
|
|
9/13/2028
|
|
Yaron Naos
|
|
|
50,000
|
|
|
|
|
|
|
|
2.65
|
|
|
|
2/25/2019
|
|
|
|
|
115,000
|
|
|
|
|
|
|
|
6.90
|
|
|
|
2/25/2020
|
|
|
|
|
46,875
|
|
|
|
3,125
|
|
|
|
1.72
|
|
|
|
3/23/2025
|
|
|
|
|
37,500
|
|
|
|
562,500
|
|
|
|
0.56
|
|
|
|
9/13/2028
|
|
Potential Payments upon Termination or
Change-in-Control/Corporate Transaction
Each of our Named Executive Officers (while
they remain employed by our Company) is entitled to be insured by Protalix Ltd. under a Manager’s Policy in lieu of severance
upon termination. The intention of such Manager’s Policies is to provide our officers with severance protection of one month’s
salary for each year of employment. The following payments would be payable in connection with a change of control of our Company:
$1 million to the President and Chief Executive Officer and $400,000 to each of the other executive Vice Presidents, subject
to certain terms and conditions. In addition to the foregoing, the vesting periods of outstanding options and restricted stock
held by our Named Executive Officers are accelerated upon a change of control. Had we experienced a change in control/corporate
transaction on December 31, 2018, the value of the acceleration of the vesting period of our Named Executive Officers were above
the market value of our common stock and, accordingly, the value of the acceleration of the stock options held by each of them
as of such date would be zero. In addition, all of the restricted stock held by the Named Executive Officers had vested by their
terms prior to said date.
Employment Arrangements
Moshe Manor.
Pursuant to Mr. Manor’s
employment agreement, his current monthly base salary is NIS 95,000 and Mr. Manor is entitled to an annual discretionary bonus
subject to the sole discretion of our Board of Directors. The Board of Directors shall determine the bonus on the basis of agreed-upon
annual objectives which shall include both measurable and strategic parameters. The monthly salary is subject to cost of living
adjustments from time to time as may be required by law. The Board of Directors also granted to Mr. Manor options to purchase
900,000 shares of our common stock at an exercise price equal to $2.37 per share, the closing sales price of the common stock
on the NYSE American for the last trading day immediately preceding the effective date of the grant. The options vest over four
years on a quarterly basis in 16 equal increments, subject to certain conditions. Vesting of the options will be accelerated in
full upon a Corporate Transaction or a Change in Control, as those terms are defined in our 2006 Stock Incentive Plan, as amended.
Mr. Manor’s employment agreement is terminable by our Company on 90 days written notice for any reason during the first
year of the agreement’s term and on 180 days written notice thereafter. Mr. Manor may terminate the agreement on 90 days
written notice for any reason during its term. We may terminate the Agreement for cause without notice. Mr. Manor is entitled
to be insured by the Company under a Manager’s Policy in lieu of severance, Company contributions towards vocational studies,
annual recreational allowances, a Company car, a Company laptop and a Company phone. Mr. Manor is entitled to 25 working days
of vacation.
Yoseph Shaaltiel, Ph.D.
Pursuant
to Dr. Shaaltiel’s employment agreement, his current monthly base salary is NIS 80,750 per month. The employment agreement
is terminable by our Company on 90 days’ written notice for any reason and we may terminate the agreement for cause without
notice. In addition, vesting of all of Dr. Shaaltiel’s options and restricted shares will be accelerated in full upon a
Corporate Transaction or a Change in Control, as those terms are defined in our 2006 Stock Incentive Plan, as amended. Dr. Shaaltiel
is entitled to be insured by Protalix Ltd. under a Manager’s Policy in lieu of severance, Company contributions towards
vocational studies, annual recreational allowances, a Company car, a Company laptop and a Company phone. Dr. Shaaltiel is entitled
to 29 working days of vacation.
Einat Brill Almon, Ph.D.
Pursuant
to Dr. Almon’s employment agreement, her current monthly base salary is NIS 69,825 per month. She is also entitled to certain
specified bonuses in the event that Protalix achieves certain specified clinical development milestones within specified timelines.
In addition, vesting of all of Dr. Brill Almon’s options and restricted shares will be accelerated in full upon a Corporate
Transaction or a Change in Control, as those terms are defined in our 2006 Stock Incentive Plan, as amended. The employment agreement
is terminable by either party on 60 days’ written notice for any reason and we may terminate the agreement for cause without
notice. Dr. Brill Almon is entitled to be insured by Protalix Ltd. under a Manager’s Policy in lieu of severance, Company
contributions towards vocational studies, annual recreational allowances, a Company car, a Company laptop and a Company phone
at up to NIS 1,000 per month. Dr. Brill Almon is entitled to 29 working days of vacation.
Yossi Maimon, CPA.
Pursuant to Mr.
Maimon’s employment agreement, his current monthly base salary is NIS 69,825 and Mr. Maimon is entitled to an annual discretionary
bonus and additional discretionary bonuses in the event Protalix achieves significant financial milestones, subject to the Board’s
sole discretion. The monthly salary is subject to cost of living adjustments from time to time. In addition, vesting of all of
Mr. Maimon’s options and restricted shares will be accelerated in full upon a Corporate Transaction or a Change in Control,
as those terms are defined in our 2006 Stock Incentive Plan, as amended. The employment agreement is terminable by either party
on 60 days’ written notice for any reason and we may terminate the agreement for cause without notice. Mr. Maimon is entitled
to be insured by Protalix Ltd. under a Manager’s Policy in lieu of severance, Company contributions towards vocational studies,
annual recreational allowances, a Company car, a Company laptop and a Company phone. Mr. Maimon is entitled to 29 working days
of vacation.
Yaron Naos.
Mr. Naos’ current
monthly base salary is NIS 65,550 and he is entitled to an annual discretionary bonus for performance subject to the sole discretion
of our compensation committee. The monthly salary is subject to cost of living adjustments from time to time as may be required
by law. In addition, vesting of all of Mr. Naos’ options and restricted shares will be accelerated in full upon a Corporate
Transaction or a Change in Control, as those terms are defined in our 2006 Stock Incentive Plan, as amended. Mr. Naos’ employment
is terminable by either party on 60 days’ written notice for any reason and we may terminate the agreement for cause without
notice. Mr. Naos is entitled to be insured by Protalix Ltd. under a Manager’s Policy in lieu of severance, Company contributions
towards vocational studies, annual recreational allowances, a Company car, a Company phone, and a Company laptop. Mr. Naos is
entitled to 29 working days of vacation.
Pay Ratio Disclosure
In August 2015 pursuant to a mandate of
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, the Commission adopted a rule requiring
annual disclosure of the ratio of the median employee’s annual total compensation to the total annual compensation of the
principal executive officer, or PEO. Mr. Manor is our PEO. The purpose of the new required disclosure is to provide a measure
of the equitability of pay within our Company. We believe our compensation philosophy and process yield an equitable result and
is presenting such information in advance of the required disclosure date as follows:
Median Employee total annual compensation
|
|
$
|
48,507
|
|
PEO total annual compensation
|
|
$
|
717,654
|
|
Ratio of PEO to Median Employee Compensation
|
|
|
14.79
|
|
In determining the median employee for
fiscal year 2017, we prepared a list of all our employees as of December 31, 2017. Employees on leave of absence were excluded
from the list and wages and salaries were annualized for those employees that were not employed for the full year ended December 31,
2017. The median amount was selected from the annualized list. At December 31, 2018, the median employee for fiscal year 2017
was no longer our employee. Accordingly, for purposes of the foregoing calculations, we chose a new median employee
whose
compensation for the year ended December 31, 2017 was substantially similar to the median employee identified for fiscal year
2017
. As of December 31, 2018, we employed 184 persons.
Amended 2006 Stock Incentive Plan
Our Board of Directors and our stockholders
approved our 2006 Stock Incentive Plan on December 14, 2006. Our stockholders have approved amendments to the plan on June 17,
2012, November 10, 2014 and May 13, 2018. Of the 23,841,655 shares reserved for issuance under the plan, as amended,
as of December 31, 2018, there are outstanding options to purchase 10,150,675 shares of our common stock in the aggregate,
subject to adjustment for a stock split or any future stock dividend or other similar change in our common stock or our capital
structure. As of December 31, 2018, options to acquire 7,303,119 shares of common stock remain available for grant under
the amended 2006 Stock Incentive Plan.
Our amended 2006 Stock Incentive Plan provides
for the grant of stock options, restricted stock, restricted stock units, stock appreciation rights and dividend equivalent rights,
collectively referred to as “awards.” Stock options granted under the amended 2006 Stock Incentive Plan may be either
incentive stock options under the provisions of Section 422 of the IRC, or non-qualified stock options. Incentive
stock options may be granted only to employees. Awards other than incentive stock options may be granted to employees, directors
and consultants. Shares issued in connection with awards other than options or stock appreciation rights shall count as one and
one-half (1.5) shares for each share issued for purposes of the number of shares authorized for issuance under the plan.
The amended 2006 Stock Incentive Plan is
also designed to comply with the provisions of the Israeli Income Tax Ordinance New Version, 1961 (including as amended pursuant
to Amendment 132 thereto), or the Tax Ordinance, and is intended to enable us to grant awards to grantees who are Israeli residents
as follows: (i) awards to employees pursuant to Section 102 of the Tax Ordinance; and (ii) awards to non-employees pursuant to
Section 3(I) of the Tax Ordinance. For this purpose, “employee” refers only to employees, office holders and directors
of our Company or a related entity excluding those who are considered “Controlling Stockholders” pursuant to, or otherwise
excluded by, the Tax Ordinance. In accordance with the terms and conditions imposed by the Tax Ordinance, grantees who receive
awards under the amended 2006 Stock Incentive Plan may be afforded certain tax benefits in Israel as described below.
Our Board of Directors or the Compensation
Committee, referred to as the “plan administrator,” will administer our amended 2006 Stock Incentive Plan, including
selecting the grantees, determining the number of shares to be subject to each award, determining the exercise or purchase price
of each award, and determining the vesting and exercise periods of each award.
The exercise price of stock options granted
under the 2006 Stock Incentive Plan must be equal to at least 100% of the fair market value of our common stock on the date of
grant; however, in certain circumstances, grants may be made at a lower price to Israeli grantees who are residents of the State
of Israel. If, however, incentive stock options are granted to an employee who owns stock possessing more than 10% of the voting
power of all classes of our stock or the stock of any parent or subsidiary of our Company, the exercise price of any incentive
stock option granted must equal at least 110% of the fair market value on the grant date and the maximum term of these incentive
stock options must not exceed five years. The maximum term of all other awards must not exceed 10 years (or five years in the case
of an incentive stock option granted to any participant who owns stock representing more than 10% of the voting power of all classes
of our stock or the stock of any parent or subsidiary of our Company). The plan administrator will determine the exercise or purchase
price (if any) of all other awards granted under the amended 2006 Stock Incentive Plan.
Under the amended 2006 Stock Incentive Plan,
incentive stock options and options to Israeli grantees may not be sold, pledged, assigned, hypothecated, transferred or disposed
of in any manner other than by will or by the laws of descent or distribution and may be exercised during the lifetime of the participant
only by the participant. Other awards shall be transferable by will or by the laws of descent or distribution and to the extent
and in the manner authorized by the plan administrator by gift or pursuant to a domestic relations order to members of the participant’s
immediate family. The amended 2006 Stock Incentive Plan permits the designation of beneficiaries by holders of awards, including
incentive stock options.
If the service of a participant in the amended
2006 Stock Incentive Plan is terminated for any reason other than cause, the participant may exercise awards that were vested as
of the termination date for a period ending upon the earlier of 12 months from the date of termination (or such shorter or longer
period set forth in the award agreement) or the expiration date of the awards unless otherwise determined by the plan administrator.
If the service of a participant in the amended 2006 Stock Incentive Plan is terminated for cause, the participant may exercise
awards that were vested as of the termination date for a period ending upon the earlier of 14 days from the date of termination
(or such shorter or longer period set forth in the award agreement) or the expiration date of the awards unless otherwise determined
by the plan administrator.
In the event of a corporate transaction,
all awards will terminate unless assumed by the successor corporation. Unless otherwise provided in a participant’s award
agreement, in the event of a corporate transaction and with respect to the portion of each award that is assumed or replaced, then
such portion will automatically become fully vested and exercisable immediately upon termination of a participant’s service
if the participant is terminated by the successor company or us without cause within 12 months after the corporate transaction.
With respect to the portion of each award that is not assumed or replaced, such portion will automatically become fully vested
and exercisable immediately prior to the effective date of the corporate transaction so long as the participant’s service
has not been terminated prior to such date.
In the event of a change in control, except
as otherwise provided in a participant’s award agreement, following a change in control (other than a change in control that
also is a corporate transaction) and upon the termination of a participant’s service without cause within 12 months after
a change in control, each award of such participant that is outstanding at such time will automatically become fully vested and
exercisable immediately upon the participant’s termination. In addition, the stock options and shares of restricted stock
issued to each of our Named Executive Officers are subject to accelerated vesting immediately upon a corporate transaction or a
change in control of our Company, as defined in our amended 2006 Stock Incentive Plan.
Under our amended 2006 Stock Incentive Plan,
a corporate transaction is generally defined as:
|
·
|
a merger or consolidation in which we are not the surviving entity, except for the principal purpose of changing our Company’s
state of incorporation;
|
|
·
|
the sale, transfer or other disposition of all or substantially all of our assets;
|
|
·
|
the complete liquidation or dissolution of our Company;
|
|
·
|
any reverse merger in which we are the surviving entity but our shares of common stock outstanding immediately prior to such
merger are converted or exchanged by virtue of the merger into other property, whether in the form of securities, cash or otherwise,
or in which securities possessing more than forty percent (40%) of the total combined voting power of our outstanding securities
are transferred to a person or persons different from those who held such securities immediately prior to such merger; or
|
|
·
|
acquisition in a single or series of related transactions by any person or related group of persons of beneficial ownership
of securities possessing more than fifty percent (50%) of the total combined voting power of our outstanding securities but excluding
any such transaction or series of related transactions that the plan administrator determines not to be a corporate transaction
(provided however that the plan administrator shall have no discretion in connection with a corporate transaction for the purchase
of all or substantially all of our shares unless the principal purpose of such transaction is changing our Company’s state
of incorporation).
|
Under our amended 2006 Stock Incentive Plan,
a change of control is defined as:
|
·
|
the direct or indirect acquisition by any person or related group of persons of beneficial ownership of securities possessing
more than fifty percent (50%) of the total combined voting power of our outstanding securities pursuant to a tender or exchange
offer made directly to our stockholders and which a majority of the members of our board (who have generally been on our board
for at least 12 months) who are not affiliates or associates of the offeror do not recommend stockholders accept the offer;
or
|
|
·
|
a change in the composition of our board over a period of 12 months or less, such that a majority of our board members ceases,
by reason of one or more contested elections for board membership, to be comprised of individuals who were previously directors
of our Company.
|
Unless terminated sooner, the amended 2006
Stock Incentive Plan will automatically terminate on December 31, 2028. Our Board of Directors has the authority to amend,
suspend or terminate our amended 2006 Stock Incentive Plan. No amendment, suspension or termination of the amended 2006 Stock Incentive
Plan shall adversely affect any rights under awards already granted to a participant. To the extent necessary to comply with applicable
provisions of federal securities laws, state corporate and securities laws, the IRC, the rules of any applicable
stock exchange or national market system, and the rules of any non-U.S. jurisdiction applicable to awards granted to residents
therein (including the Tax Ordinance), we shall obtain stockholder approval of any such amendment to the 2006 Stock Incentive Plan
in such a manner and to such a degree as required.
Impact of Israeli Tax Law
The awards granted to employees pursuant
to Section 102 of the Tax Ordinance under the amended 2006 Stock Incentive Plan may be designated by us as approved options under
the capital gains alternative, or as approved options under the ordinary income tax alternative.
To qualify for these benefits, certain requirements
must be met, including registration of the options in the name of a trustee. Each option, and any shares of common stock acquired
upon the exercise of the option, must be held by the trustee for a period commencing on the date of grant and deposit into trust
with the trustee and ending 24 months thereafter.
Under the terms of the capital gains alternative,
we may not deduct expenses pertaining to the options for tax purposes.
Under the amended 2006 Stock Incentive Plan,
we may also grant to employees options pursuant to Section 102(c) of the Tax Ordinance that are not required to be held in trust
by a trustee. This alternative, while facilitating immediate exercise of vested options and sale of the underlying shares, will
subject the optionee to the marginal income tax rate of up to 50% as well as payments to the National Insurance Institute and health
tax on the date of the sale of the shares or options. Under the 2006 Stock Incentive Plan, we may also grant to non-employees options
pursuant to Section 3(I) of the Tax Ordinance. Under that section, the income tax on the benefit arising to the optionee upon the
exercise of options and the issuance of common stock is generally due at the time of exercise of the options.
These options shall be further subject to
the terms of the tax ruling that has been obtained by Protalix Ltd. from the Israeli tax authorities in connection with the merger.
Under the tax ruling, the options issued by us in connection with the assumption of Section 102 options previously issued
by Protalix Ltd. under the capital gains alternative shall be issued to a trustee, shall be designated under the capital gains
alternative and the issuance date of the original options shall be deemed the issuance date for the assumed options for the calculation
of the respective holding period.
Compensation of Directors
The following table sets forth information
with respect to compensation of our non-employee directors during fiscal year 2018. The fees to our current directors were paid
by Protalix Ltd.
Name
|
|
Fees Earned or
Paid in Cash ($)
|
|
|
Option
Award(s) ($)
|
|
|
Total ($)
|
|
Shlomo Yanai
|
|
|
200,000
|
|
|
|
-
|
|
|
|
200,000
|
|
Zeev Bronfeld
|
|
|
80,000
|
|
|
|
|
|
|
|
80,000
|
|
Amos Bar Shalev
|
|
|
80,000
|
|
|
|
|
|
|
|
80,000
|
|
Aharon Schwartz, Ph.D.
|
|
|
65,556
|
|
|
|
|
|
|
|
65,556
|
|
David Granot (1)
|
|
|
19,758
|
|
|
|
|
|
|
|
19,758
|
|
Yodfat Harel Buchris (2)
|
|
|
20,000
|
|
|
|
|
|
|
|
20,000
|
|
|
(1)
|
Mr. Granot joined the Board of Directors on August 9,
2018.
|
|
(2)
|
Ms. Harel Buchris’ tenure on the Board ended on May 13,
2018.
|
Directors’ fees paid to each of Zeev
Bronfeld and Yodfat Harel Buchris are paid to the applicable director’s employer in accordance with arrangements between
the director and the employer.
Compensation Committee Interlocks and Insider
Participation
Our Compensation Committee currently consists
of Amos Bar Shalev, Zeev Bronfeld, Aharon Schwartz, Ph.D. and David Granot. No member of our Compensation Committee or any executive
officer of our Company or of Protalix Ltd. has a relationship that would constitute an interlocking relationship with executive
officers or directors of another entity. No Compensation Committee member is or was an officer or employee of ours or of Protalix
Ltd. Further, none of our executive officers serves on the board of directors or compensation committee of any entity that has
one or more executive officers serving as a member of our Board of Directors or Compensation Committee.
|
Item 12.
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|
The following table sets forth information,
as of March 1, 2019, regarding beneficial ownership of our common stock:
|
·
|
each person who is known by us to own beneficially more than 5% of our common stock;
|
|
·
|
each of our Chief Executive Officer, our Executive Vice President, Research and Development, our Senior Vice President, Product
Development, our Vice President and Chief Financial Officer and our Senior Vice President, Operations; and
|
|
·
|
all of our directors and executive officers collectively.
|
Unless otherwise noted, we believe that
all persons named in the table have sole voting and investment power with respect to all shares of our common stock beneficially
owned by each of them. For purposes of this table, a person is deemed to be the beneficial owner of securities that can be acquired
by such person within 60 days from March 1, 2019 upon exercise of options, warrants and convertible securities. Each beneficial
owner’s percentage ownership is determined by assuming that options, warrants and convertible securities that are held by
such person (but not those held by any other person) and that are exercisable within such 60 days from such date have been exercised.
The information set forth below is based upon information obtained from the beneficial owners, upon information in our possession
regarding their respective holdings and upon information filed by the holders with the Commission. The percentages of beneficial
ownership are based on 148,382,299 shares of our common stock outstanding as of March 1, 2019.
The address for all directors and officers
is c/o Protalix BioTherapeutics, Inc., 2 Snunit Street, Science Park, P.O. Box 455, Carmiel, Israel, 20100.
Name and Address of Beneficial Owner
|
|
Amount and Nature of
Beneficial Ownership
|
|
|
Percentage of
Class (%)
|
|
Board of Directors and Executive Officers
|
|
|
|
|
|
|
Shlomo Yanai (1)
|
|
|
150,000
|
|
|
|
*
|
|
Moshe Manor (2)
|
|
|
1,112,500
|
|
|
|
*
|
|
Amos Bar Shalev
|
|
|
1,680
|
|
|
|
*
|
|
Zeev Bronfeld (3)
|
|
|
2,162,481
|
|
|
|
1.5
|
|
David Granot
|
|
|
—
|
|
|
|
—
|
|
Aharon Schwartz, Ph.D.
|
|
|
—
|
|
|
|
—
|
|
Einat Brill Almon, Ph.D. (4)
|
|
|
652,500
|
|
|
|
*
|
|
Yossi Maimon (5)
|
|
|
662,500
|
|
|
|
*
|
|
Yaron Naos (6)
|
|
|
439,563
|
|
|
|
*
|
|
Yoseph Shaaltiel, Ph.D. (7)
|
|
|
1,303,416
|
|
|
|
*
|
|
All executive officers and directors as a group (10 persons) (8)
|
|
|
6,484,640
|
|
|
|
4.3
|
|
5% Holders
|
|
|
|
|
|
|
|
|
Citigroup Global Markets Inc. (9)
|
|
|
9,214,117
|
|
|
|
5.8
|
|
Highbridge Capital Management LLC (10)
|
|
|
16,468,605
|
|
|
|
9.99
|
|
UBS O’Connor LLC (11)
|
|
|
9,411,764
|
|
|
|
6.0
|
|
* less than 1%.
|
(1)
|
Consists of 150,000 shares of our common stock issuable upon exercise of outstanding options within 60 days of March 1,
2019.
|
|
(2)
|
Consists of 50,000 outstanding shares of our common stock and 1,062,500 shares of our common stock issuable upon exercise of
outstanding options within 60 days of March 1, 2019. Does not include 1,137,500 shares of our common stock underlying options
that will not vest within 60 days of March 1, 2019.
|
|
(3)
|
Consists of shares of our common stock held by EBC Holdings Ltd., an investment company wholly-owned by Mr. Bronfeld.
|
|
(4)
|
Consists of 185,000 outstanding shares of our common stock and 467,500 shares of our common stock issuable upon exercise of
outstanding options within 60 days of March 1, 2019. Does not include 612,500 shares of our common stock underlying options
that will not vest within 60 days of March 1, 2019.
|
|
(5)
|
Consists of 195,000 outstanding shares of our common stock and 467,500 shares of our common stock issuable upon exercise of
outstanding options within 60 days of March 1, 2019. Does not include 612,500 shares of our common stock underlying options
that will not vest within 60 days of March 1, 2019.
|
|
(6)
|
Consists of 199,563 outstanding shares of our common stock held and 240,000 shares of our common stock issuable upon exercise
of outstanding options within 60 days of March 1, 2019. Does not include 525,000 shares of our common stock underlying options
that will not vest within 60 days of March 1, 2019.
|
|
(7)
|
Consists of 795,916 outstanding shares of our common stock and 507,500 shares of our common stock issuable upon exercise of
outstanding options within 60 days of March 1, 2019. Does not include 612,500 shares of our common stock underlying options
that will not vest within 60 days of March 1, 2019.
|
|
(8)
|
Consists of 3,589,640 outstanding shares of our common stock and 2,895,000 shares of our common stock issuable upon exercise
of outstanding options within 60 days of March 1, 2019. Does not include 3,500,000 shares of our common stock underlying options
that will not vest within 60 days of March 1, 2019.
|
|
(9)
|
Based solely on a Schedule 13G/A on February 8, 2019 for December 31, 2018 by Citigroup Global Markets Inc., Citigroup
Financial Products Inc., Citigroup Global Markets Holdings Inc. and Citigroup Inc., or collectively, Citigroup, and on a Schedule
13F-HR filed by Citigroup Inc. on February 12, 2019 for December 31, 2018. Consists of 9,214,177 shares of our common
stock issuable upon conversion of a convertible note. The address for Citigroup is 388 Greenwich Street, New York, NY 10013.
|
|
(10)
|
The principal business office of Highbridge Capital Management LLC, or Highbridge is 40 West 57th Street, 32nd Floor, New York,
New York 10019. Holdings are based on a Form 13F-HR filed by Highbridge on February 14, 2019 for December 31, 2018. Consists
of 16,468,605 shares of common stock issuable upon conversion of convertible notes held by funds managed by Highbridge. Each such
note is subject to a blocker provision of such notes pursuant to which the holder of each such note does not have the right to
convert the note to the extent that such conversion would result in beneficial ownership by the holder thereof, together with any
persons whose beneficial ownership of the common stock would be aggregated with such holder’s for purposes of Section 13(d)
or Section 16 of the Exchange Act, for more than 9.99% of the common stock, and, accordingly, the disclosed amounts do not
include shares that exceed the blocker provision.
|
|
(11)
|
The address of UBS O’Connor LLC, or UBS O’Connor, is One North Wacker Drive, 32
nd
Floor, Chicago, Illinois 60606. Based solely on a Schedule 13G/A filed on February 12, 2019 for December 31, 2018 by
UBS O’Connor, Kevin Russell, or Mr. Russell, and Andrew Martin, or Mr. Martin and on a Schedule 13F-HR filed by UBS O’Connor
on February 15, 2019 for December 31, 2018. UBS O’Connor serves as the investment manager to Nineteen77 Global
Multi-Strategy Alpha Master Limited, or GLEA. In such capacity, UBS O’Connor exercises voting and investment power over the
shares of common stock held for the account of GLEA. Mr. Russell is the Chief Investment Officer of UBS O’Connor and
Mr. Martin is a Portfolio Manager for O’Connor, and each also exercises voting and investment power over the shares
of common stock held for the account of GLEA. As a result, each of UBS O’Connor, Mr. Russell and Mr. Martin may
be deemed to have beneficial ownership of the shares of common stock held for the account of GLEA. Includes 9,411,764 shares of
common stock issuable upon conversion of a convertible note held by GLEA.
|
Equity Compensation Plan Information
The following table provides information as
of December 31, 2018 with respect to the shares of our common stock that may be issued under our existing equity compensation
plan.
|
|
A
|
|
|
B
|
|
|
C
|
|
Plan Category
|
|
Number of Securities
to be Issued
Upon Exercise of
Outstanding Options
|
|
|
Weighted Average
Exercise Price of
Outstanding Options
|
|
|
Number of Securities Remaining
Available for Future Issuance
Under Equity Compensation Plans
(Excluding Securities Reflected in
Column A)
|
|
Equity Compensation Plans Approved by Stockholders
|
|
|
10,150,675
|
|
|
|
1.57
|
|
|
|
7,303,119
|
|
Equity Compensation Plans Not Approved by Stockholders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
10,150,675
|
|
|
|
1.57
|
|
|
|
7,303,119
|
|
|
Item 13.
|
Certain Relationships
and Related Transactions, and Director Independence
|
Certain Relationships and Related Transactions
All related party
transactions are reviewed and approved by the Audit Committee, as required by the Audit Committee Charter.
Family Relationships
There are no family relationships among
directors or executive officers of our Company.
Corporate Governance and Independent Directors
In compliance with the listing requirements
of the NYSE American, we have a comprehensive plan of corporate governance for the purpose of defining responsibilities, setting
high standards of professional and personal conduct and assuring compliance with such responsibilities and standards. We currently
regularly monitor developments in the area of corporate governance to ensure we are in compliance with the standards and regulations
required by the NYSE American. A summary of our corporate governance measures follows.
Independent Directors
We believe a majority of the members of
our Board of Directors are independent from management. When making determinations from time to time regarding independence, the
Board of Directors will reference the listing standards adopted by the NYSE American as well as the independence standards set
forth in the Sarbanes-Oxley Act of 2002, or the SOX, and the rules and regulations promulgated by the Commission under that Act.
We anticipate our Board of Directors will analyze whether a director is independent by evaluating, among other factors, the following:
|
·
|
Whether the member of the Board of Directors has any material relationship with us, either directly, or as a partner, stockholder
or officer of an organization that has a relationship with us;
|
|
·
|
Whether the member of the Board of Directors is a current employee of our Company or any of our subsidiaries, or was an employee
of our Company or any of our subsidiaries within three years preceding the date of determination;
|
|
·
|
Whether the member of the Board of Directors is, or in the three years preceding the date of determination has been, affiliated
with or employed by (i) a present internal or external auditor of our Company or any affiliate of such auditor or (ii) any former
internal or external auditor of our Company or any affiliate of such auditor, which performed services for us within three years
preceding the date of determination;
|
|
·
|
Whether the member of the Board of Directors is, or in the three years preceding the date of determination has been, part of
an interlocking directorate, in which any of our executive officers serve on the Compensation Committee of another company that
concurrently employs the member as an executive officer;
|
|
·
|
Whether the member of the Board of Directors receives any compensation from us, other than fees or compensation for service
as a member of the Board of Directors and any committee of the Board of Directors and reimbursement for reasonable expenses incurred
in connection with such service and for reasonable educational expenses associated with Board of Directors or committee membership
matters;
|
|
·
|
Whether an immediate family member of the member of the Board of Directors is a current executive officer of our Company or
was an executive officer of our Company within three years preceding the date of determination;
|
|
·
|
Whether an immediate family member of the member of the Board of Directors is, or in the three years preceding the date of
determination has been, affiliated with or employed in a professional capacity by (i) a present internal or external auditor of
ours or any of our affiliates or (ii) any former internal or external auditor of our Company or any affiliate of ours which performed
services for us within three years preceding the date of determination; and
|
|
·
|
Whether an immediate family member of the member of the Board of Directors is, or in the three years preceding the date of
determination has been, part of an interlocking directorate, in which any of our executive officers serve on the Compensation Committee
of another company that concurrently employs the immediate family member of the member of the Board of Directors as an executive
officer.
|
The above list is not exhaustive and we
anticipate that the Audit Committee will consider all other factors which could assist it in its determination that a director
will have no material relationship with us that could compromise that director’s independence.
Under these standards, our Board of Directors
has determined that Mr. Bar Shalev, Mr. Bronfeld, Dr. Schwartz and Mr. Granot are considered “independent” pursuant
to the rules of the NYSE American and Section 10A(m)(3) of the Exchange Act. In addition, our Board of Directors has determined
that these directors are able to read and understand fundamental financial statements and have substantial business experience
that results in their financial sophistication, qualifying them for membership on our audit committee. Our Board of Directors has
also determined that Mr. Yanai, Mr. Bar Shalev, Mr. Bronfeld, Mr. Granot and Dr. Schwartz are “independent” pursuant
to the rules of the NYSE American.
The position of chairman of the board is
not held by our chief executive officer at this time. The Board of Directors does not have a policy mandating the separation of
these functions. We believe it is in our best interest that Mr. Yanai serve as the chairman of our board. This decision was based
on Mr. Yanai’s vast global operating experience in the life-science and pharmaceutical and agro-chemicals industry as well
as the global perspective he brings to our Board of Directors, incorporating his industry and board leadership experience and his
distinguished military service. Our non-management directors hold formal meetings, separate from management, at least twice per
year.
The Board’s Role in Risk Oversight
Our Board of Directors oversees an enterprise-wide approach
to risk management, designed to support the achievement of business objectives, including organizational and strategic objectives,
to improve long-term organizational performance and enhance stockholder value. The involvement of our Board of Directors in setting
our business strategy is a key part of its assessment of management’s plans for risk management and its determination of
what constitutes an appropriate level of risk for the Company. The participation of our Board of Directors in our risk oversight
process includes receiving regular reports from members of senior management on areas of material risk to our Company, including
operational, financial, legal and regulatory, and strategic and reputational risks. While the full board has the ultimate oversight
responsibility for the risk management process, various committees of the board also have responsibility for risk management. For
example, financial risks, including internal controls, are overseen by the audit committee and risks that may be implicated by
our executive compensation programs are overseen by the compensation committee. Upon identification of a risk, the assigned board
committee or our full Board of Directors discuss or review risk management and risk mitigation strategies. Additional review or
reporting on enterprise risks is conducted as needed or as requested by our Board of Directors or a committee thereof.
|
Item 14.
|
Principal Accountant
Fees and Services
|
The following table sets forth fees billed
to us by our independent registered public accounting firm during the fiscal years ended December 31, 2018 and 2017 for: (i)
services rendered for the audit of our annual financial statements and the review of our quarterly financial statements; (ii) services
by our independent registered public accounting firm that are reasonably related to the performance of the audit or review of our
financial statements and that are not reported as Audit Fees; (iii) services rendered in connection with tax compliance, tax advice
and tax planning; and (iv) all other fees for services rendered.
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Audit Fees
|
|
$
|
207,343
|
|
|
$
|
231,000
|
|
Audit Related Fees
|
|
$
|
|
|
|
$
|
25,300
|
|
Tax Fees
|
|
$
|
37,463
|
|
|
$
|
33,179
|
|
All Other Fees
|
|
$
|
-
|
|
|
$
|
-
|
|
Policy on Audit Committee Pre-Approval of Audit and Permissible
Non-Audit Services of Independent Auditors
Our Audit Committee has the sole authority
to approve the scope of the audit and any audit-related services, as well as all audit fees and terms. The Audit Committee must
pre-approve any audit and non-audit services provided by our independent registered public accounting firm. The Audit Committee
will not approve the engagement of the independent registered public accounting firm to perform any services that the independent
registered public accounting firm would be prohibited from providing under applicable laws, rules and regulations, including those
of self-regulating organizations. The Audit Committee will approve permitted non-audit services by our independent registered public
accounting firm only if it determines that using a different firm to perform such services will be more effective or economical.
The Audit Committee annually reviews and pre-approves the statutory audit fees that can be provided by the independent registered
public accounting firm.
PROTALIX BIOTHERAPEUTICS, INC.
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share and per share amounts)
|
|
December 31,
|
|
|
|
2017
|
|
|
2018
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
51,163
|
|
|
$
|
37,808
|
|
Accounts receivable – Trade
|
|
|
1,721
|
|
|
|
4,729
|
|
Other assets
|
|
|
1,934
|
|
|
|
1,877
|
|
Inventories
|
|
|
7,833
|
|
|
|
8,569
|
|
Total current assets
|
|
|
62,651
|
|
|
|
52,983
|
|
|
|
|
|
|
|
|
|
|
NON-CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Funds in respect of employee right upon retirement
|
|
|
1,887
|
|
|
|
1,758
|
|
Property and equipment, net
|
|
|
7,676
|
|
|
|
6,390
|
|
Total assets
|
|
$
|
72,214
|
|
|
$
|
61,131
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES NET OF CAPITAL DEFICIENCY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accruals:
|
|
|
|
|
|
|
|
|
Trade
|
|
$
|
7,521
|
|
|
$
|
5,211
|
|
Other
|
|
|
9,310
|
|
|
|
10,274
|
|
Contracts liability
|
|
|
|
|
|
|
9,868
|
|
Convertible notes
|
|
|
5,921
|
|
|
|
|
|
Total current liabilities
|
|
|
22,752
|
|
|
|
25,353
|
|
|
|
|
|
|
|
|
|
|
LONG TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
Convertible notes
|
|
|
46,267
|
|
|
|
47,966
|
|
Contracts liability
|
|
|
25,015
|
|
|
|
33,027
|
|
Liability for employee rights upon retirement
|
|
|
2,586
|
|
|
|
2,374
|
|
Other long term liabilities
|
|
|
5,051
|
|
|
|
5,292
|
|
Total long term liabilities
|
|
|
78,919
|
|
|
|
88,659
|
|
Total liabilities
|
|
|
101,671
|
|
|
|
114,012
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
(Note 6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAPITAL DEFICIENCY:
|
|
|
|
|
|
|
|
|
Common Stock, $0.001 par value: Authorized - as of December 31, 2017 and 2018,250,000,000 shares; issued and outstanding, respectively - as of December 31, 2017 and 2018, 143,728,797 shares and 148,382,299 shares, respectively
|
|
|
144
|
|
|
|
148
|
|
Additional paid-in capital
|
|
|
266,495
|
|
|
|
269,524
|
|
Accumulated deficit
|
|
|
(296,096
|
)
|
|
|
(322,553
|
)
|
Total capital deficiency
|
|
|
(29,457
|
)
|
|
|
(52,881
|
)
|
Total liabilities net of capital deficiency
|
|
$
|
72,214
|
|
|
$
|
61,131
|
|
The accompanying
notes are an integral part of the consolidated financial statements.
PROTALIX BIOTHERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. dollars in thousands, except share and per share amounts)
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
REVENUES FROM SELLING GOODS
|
|
$
|
9,199
|
|
|
$
|
19,242
|
|
|
$
|
8,978
|
|
REVENUES FROM LICENSE AND R&D SERVICES
|
|
|
|
|
|
|
1,836
|
|
|
|
25,262
|
|
COST OF GOODS SOLD
|
|
|
(8,398
|
)
|
|
|
(15,231
|
)
|
|
|
(9,302
|
)
|
RESEARCH AND DEVELOPMENT EXPENSES
|
|
|
(30,412
|
)
|
|
|
(32,170
|
)
|
|
|
(35,534
|
)
|
Less – grants
|
|
|
5,804
|
|
|
|
3,336
|
|
|
|
2,204
|
|
RESEARCH AND DEVELOPMENT EXPENSES, NET
|
|
|
(24,608
|
)
|
|
|
(28,834
|
)
|
|
|
(33,330
|
)
|
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES
|
|
|
(9,356
|
)
|
|
|
(11,530
|
)
|
|
|
(10,916
|
)
|
OPERATING LOSS
|
|
|
(33,163
|
)
|
|
|
(34,517
|
)
|
|
|
(19,308
|
)
|
FINANCIAL EXPENSES
|
|
|
(4,192
|
)
|
|
|
(9,725
|
)
|
|
|
(7,685
|
)
|
FINANCIAL INCOME
|
|
|
589
|
|
|
|
188
|
|
|
|
536
|
|
LOSS FROM CHANGE IN FAIR VALUE OF CONVERTIBLE NOTES EMBEDDED DERIVATIVE
|
|
|
(6,473
|
)
|
|
|
(38,061
|
)
|
|
|
|
|
(LOSS) GAIN ON EXTINGUISHMENT OF CONVERTIBLE NOTES
|
|
|
14,063
|
|
|
|
(1,325
|
)
|
|
|
|
|
FINANCIAL (EXPENSES) INCOME – NET
|
|
|
3,987
|
|
|
|
(48,923
|
)
|
|
|
(7,149
|
)
|
LOSS FROM CONTINUING OPERATIONS
|
|
|
(29,176
|
)
|
|
|
(83,440
|
)
|
|
|
(26,457
|
)
|
LOSS FROM DISCONTINUED OPERATIONS
|
|
|
(189
|
)
|
|
|
|
|
|
|
|
|
NET LOSS FOR THE YEAR
|
|
$
|
(29,365
|
)
|
|
$
|
(83,440
|
)
|
|
$
|
(26,457
|
)
|
Net loss per share of common
stock – basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.29
|
)
|
|
$
|
(0.64
|
)
|
|
$
|
(0.18
|
)
|
Loss from discontinued operations
|
|
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
Net loss per share of common stock
|
|
$
|
(0.29
|
)
|
|
$
|
(0.64
|
)
|
|
$
|
(0.18
|
)
|
Weighted
average number of shares of common stock used in computing loss per share of common
stock, basic and diluted
|
|
|
101,387,704
|
|
|
|
131,085,958
|
|
|
|
147,135,182
|
|
The accompanying notes are an integral
part of the consolidated financial statements.
PROTALIX BIOTHERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL DEFICIENCY
(U.S. dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Common
|
|
|
paid–in
|
|
|
Accumulated
|
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
deficit
|
|
|
Total
|
|
|
|
Number of
shares
|
|
|
Amount
|
|
Balance at January 1, 2016
|
|
|
99,800,397
|
|
|
|
100
|
|
|
|
194,064
|
|
|
|
(183,291
|
)
|
|
|
10,873
|
|
Changes during 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock, net of issuance cost
|
|
|
23,846,735
|
|
|
|
24
|
|
|
|
6,824
|
|
|
|
|
|
|
|
6,848
|
|
Equity component of convertible notes
|
|
|
|
|
|
|
|
|
|
|
685
|
|
|
|
|
|
|
|
685
|
|
Share-based compensation related to stock options
|
|
|
|
|
|
|
|
|
|
|
920
|
|
|
|
|
|
|
|
920
|
|
Share-based compensation related to restricted stock award
|
|
|
7,843
|
|
|
|
*
|
|
|
|
68
|
|
|
|
|
|
|
|
68
|
|
Exercise of options granted to employee (including net exercise)
|
|
|
479,110
|
|
|
|
*
|
|
|
|
14
|
|
|
|
|
|
|
|
14
|
|
Net loss from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,176
|
)
|
|
|
(29,176
|
)
|
Net loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(189
|
)
|
|
|
(189
|
)
|
Balance at December 31, 2016
|
|
|
124,134,085
|
|
|
|
124
|
|
|
|
202,575
|
|
|
|
(212,656
|
)
|
|
|
(9,957
|
)
|
Changes during 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation related to stock options
|
|
|
|
|
|
|
|
|
|
|
337
|
|
|
|
|
|
|
|
337
|
|
Reclassification of embedded derivative
|
|
|
|
|
|
|
|
|
|
|
43,634
|
|
|
|
|
|
|
|
43,634
|
|
Convertible note conversions
|
|
|
19,594,712
|
|
|
|
20
|
|
|
|
18,634
|
|
|
|
|
|
|
|
18,654
|
|
Equity component of convertible notes
|
|
|
|
|
|
|
|
|
|
|
1,315
|
|
|
|
|
|
|
|
1,315
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(83,440
|
)
|
|
|
(83,440
|
)
|
Balance at December 31, 2017
|
|
|
143,728,797
|
|
|
|
144
|
|
|
|
266,495
|
|
|
|
(296,096
|
)
|
|
|
(29,457
|
)
|
Changes during 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation related to stock options
|
|
|
|
|
|
|
|
|
|
|
498
|
|
|
|
|
|
|
|
498
|
|
Share-based compensation related to restricted stock award
|
|
|
29,898
|
|
|
|
*
|
|
|
|
16
|
|
|
|
|
|
|
|
16
|
|
Convertible notes conversions
|
|
|
2,009,968
|
|
|
|
2
|
|
|
|
1,367
|
|
|
|
|
|
|
|
1,369
|
|
Convertible notes payment
|
|
|
2,613,636
|
|
|
|
2
|
|
|
|
1,148
|
|
|
|
|
|
|
|
1,150
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,457
|
)
|
|
|
(26,457
|
)
|
Balance at December 31, 2018
|
|
|
148,382,299
|
|
|
|
148
|
|
|
|
269,524
|
|
|
|
(322,553
|
)
|
|
|
(52,881
|
)
|
* Represents an amount of less
than $1 thousand.
The accompanying notes are an integral
part of the consolidated financial statements.
PROTALIX BIOTHERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(29,365
|
)
|
|
$
|
(83,440
|
)
|
|
$
|
(26,457
|
)
|
Loss from discontinued operations
|
|
|
(189
|
)
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(29,176
|
)
|
|
|
(83,440
|
)
|
|
|
(26,457
|
)
|
Adjustments required to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Share based compensation
|
|
|
988
|
|
|
|
337
|
|
|
|
514
|
|
Depreciation
|
|
|
1,983
|
|
|
|
1,920
|
|
|
|
1,671
|
|
Financial expenses (income), net (mainly exchange differences)
|
|
|
13
|
|
|
|
(40
|
)
|
|
|
20
|
|
Changes in accrued liability for employee rights upon retirement
|
|
|
10
|
|
|
|
(18
|
)
|
|
|
(18
|
)
|
(Gain) loss on amounts funded in respect of employee rights upon
retirement
|
|
|
7
|
|
|
|
(21
|
)
|
|
|
(46
|
)
|
Loss (gain) on sale of fixed assets
|
|
|
(7
|
)
|
|
|
6
|
|
|
|
|
|
Loss (gain) on extinguishment of convertible notes
|
|
|
(14,063
|
)
|
|
|
1,325
|
|
|
|
|
|
Net loss (income) in connection with convertible notes
|
|
|
|
|
|
|
(116
|
)
|
|
|
213
|
|
Change in fair value of convertible notes embedded derivative
|
|
|
6,473
|
|
|
|
38,061
|
|
|
|
|
|
Amortization of debt issuance costs and debt discount
|
|
|
568
|
|
|
|
2,334
|
|
|
|
2,602
|
|
Issuance of shares for interest payment in connection with conversions of convertible notes
|
|
|
|
|
|
|
2,391
|
|
|
|
234
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in contract liability (including non-current portion)
|
|
|
(411
|
)
|
|
|
24,178
|
|
|
|
17,880
|
|
(Increase) decrease in accounts receivable and other assets
|
|
|
(1,133
|
)
|
|
|
25
|
|
|
|
(3,099
|
)
|
Decrease (increase) in inventories
|
|
|
522
|
|
|
|
(2,588
|
)
|
|
|
(736
|
)
|
Increase (decrease) in accounts payable and accruals
|
|
|
2,139
|
|
|
|
4,902
|
|
|
|
(761
|
)
|
Increase in other long term liabilities
|
|
|
|
|
|
|
750
|
|
|
|
241
|
|
Net cash used in continuing operations
|
|
|
(32,087
|
)
|
|
|
(9,994
|
)
|
|
|
(7,742
|
)
|
Net cash used in discontinued operations
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
$
|
(32,098
|
)
|
|
$
|
(9,994
|
)
|
|
$
|
(7,742
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
$
|
(849
|
)
|
|
$
|
(971
|
)
|
|
$
|
(686
|
)
|
Proceeds from sale of property and equipment
|
|
|
20
|
|
|
|
3
|
|
|
|
|
|
(Increase) decrease in restricted deposit
|
|
|
(106
|
)
|
|
|
(146
|
)
|
|
|
62
|
|
Amounts funded in respect of employee rights upon retirement, net
|
|
|
(32
|
)
|
|
|
(5
|
)
|
|
|
33
|
|
Net cash used in investing activities
|
|
$
|
(967
|
)
|
|
$
|
(1,119
|
)
|
|
$
|
(591
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net payment for convertible notes
|
|
|
|
|
|
|
(10,961
|
)
|
|
|
(4,752
|
)
|
Net proceeds from issuance of convertible notes
|
|
|
19,681
|
|
|
|
9,542
|
|
|
|
|
|
Exercise of options
|
|
|
14
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
$
|
19,695
|
|
|
$
|
(1,419
|
)
|
|
$
|
(4,752
|
)
|
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS
|
|
|
277
|
|
|
|
414
|
|
|
|
(270
|
)
|
NET DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(13,093
|
)
|
|
|
(12,118
|
)
|
|
|
(13,355
|
)
|
BALANCE OF CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR
|
|
|
76,374
|
|
|
|
63,281
|
|
|
|
51,163
|
|
BALANCE OF CASH AND CASH
EQUIVALENTS AT END OF YEAR
|
|
$
|
63,281
|
|
|
$
|
51,163
|
|
|
$
|
37,808
|
|
The accompanying notes are an integral
part of the consolidated financial statements.
PROTALIX BIOTHERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S.
dollars in thousands)
(CONTINUED)
|
|
Year
ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
SUPPLEMENTARY INFORMATION
ON INVESTING AND FINANCING ACTIVITIES NOT INVOLVING CASH FLOWS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and
equipment
|
|
$
|
595
|
|
|
$
|
526
|
|
|
$
|
225
|
|
Issuance of common stock, net
of issuance cost
|
|
$
|
6,848
|
|
|
|
|
|
|
|
|
|
Convertible note conversions
|
|
|
|
|
|
$
|
16,263
|
|
|
$
|
2,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As to extinguishment of convertible
notes, see note 8.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY DISCLOSURE
ON CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
3,659
|
|
|
$
|
4,854
|
|
|
$
|
4,585
|
|
The
accompanying notes are an integral part of the consolidated financial statements.
|
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Protalix BioTherapeutics, Inc.
(collectively with its subsidiaries, the “Company”), and its wholly-owned subsidiaries, Protalix Ltd. and Protalix
B.V. (the “Subsidiaries”), are biopharmaceutical companies focused on the development and commercialization of recombinant
therapeutic proteins based on the Company’s proprietary ProCellEx
®
protein expression system (“ProCellEx”).
To date, the Company has successfully developed taliglucerase alfa (marketed under the name alfataliglicerase in Brazil and certain
other Latin American countries and Elelyso
®
in the rest of the territories) for the treatment of Gaucher disease
that has been approved for marketing in the United States, Brazil, Israel and other markets. The Company has a number of product
candidates in varying stages of the clinical development process. The Company’s strategy is to develop proprietary recombinant
proteins that are therapeutically superior to existing recombinant proteins currently marketed for the same indications.
The Company’s product pipeline
currently includes, among other candidates:
(1) pegunigalsidase alfa, or PRX-102,
a therapeutic protein candidate for the treatment of Fabry disease, a rare, genetic lysosomal disorder;
(2) alidornase alfa, or PRX-110,
a proprietary plant cell recombinant human Deoxyribonuclease 1, or DNase, under development for the treatment of Cystic Fibrosis,
to be administered by inhalation; and
(3) OPRX-106, the Company’s
oral antiTNF product candidate which is being developed as an orally-delivered anti-inflammatory treatment using plant cells as
a natural capsule for the expressed protein.
Obtaining marketing approval with
respect to any product candidate in any country is dependent on the Company’s ability to implement the necessary regulatory
steps required to obtain such approvals. The Company cannot reasonably predict the outcome of these activities.
On October 19, 2017,
Protalix Ltd. and Chiesi Farmaceutici S.p.A. (“Chiesi”) entered into an Exclusive License and Supply Agreement
(the “Chiesi Ex-U.S. Agreement”) pursuant to which Chiesi was granted an exclusive license for all markets
outside of the United States to commercialize pegunigalsidase alfa. On July 23, 2018, Protalix Ltd. entered into an
Exclusive License and Supply Agreement with Chiesi (the “Chiesi U.S. Agreement”), with respect to the commercialization of pegunigalsidase alfa in the United States.
Under each of the Chiesi Ex-U.S.
Agreement and the Chiesi U.S. Agreement, Chiesi made an upfront payment to Protalix Ltd. of $25.0 million in connection with
the execution of the agreement. In addition, under the Chiesi Ex-U.S. Agreement, Protalix Ltd. is entitled to additional payments
of up to $25.0 million in pegunigalsidase alfa development costs, capped at $10.0 million per year and to receive additional
payments of up to $320.0 million, in the aggregate, in regulatory and commercial milestone payments. Under the Chiesi U.S.
Agreement, Protalix Ltd. is entitled to payments of up to a maximum of $20.0 million to cover development costs for pegunigalsidase
alfa, subject to a maximum of $7.5 million per year, and to receive an additional up to a maximum of $760.0 million,
in the aggregate, in regulatory and commercial milestone payments.
Under the terms of both of
the Chiesi agreements, Protalix Ltd. will manufacture all of the pegunigalsidase alfa needed under the agreements, subject to
certain exceptions, and Chiesi will purchase pegunigalsidase alfa from Protalix, subject to certain terms and conditions.
Under the Chiesi Ex-U.S. Agreement, Chiesi is required to make tiered payments of 15% to 35% of its net sales, depending on
the amount of annual sales outside of the United States, as consideration for product supply. Under the Chiesi U.S.
Agreement, Chiesi is required to make tiered payments of 15% to 40% of its net sales, depending on the amount of annual sales
in the United States, as consideration for product supply.
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
(continued)
:
Since its approval by the FDA,
taliglucerase alfa has been marketed by Pfizer Inc. (“Pfizer”), in accordance with the exclusive license and supply
agreement between Protalix Ltd. and Pfizer, which is referred to herein as the Pfizer Agreement. In October 2015, the Company entered
into an Amended and Restated Exclusive License and Supply Agreement with Pfizer (the “Amended Pfizer Agreement”) which
amends and restates the Pfizer Agreement in its entirety. Pursuant to the Amended Pfizer Agreement, the Company sold to Pfizer
its share in the collaboration created under the Pfizer Agreement for the commercialization of Elelyso in exchange for a cash payment
equal to $36.0 million. As part of the sale, the Company agreed to transfer its rights to Elelyso in Israel to Pfizer while
gaining full rights to it in Brazil. Under the Amended Pfizer Agreement, Pfizer is entitled to all of the revenues, and is responsible
for 100% of expenses globally for Elelyso, excluding Brazil where the Company is responsible for all expenses and retains all revenues.
On June 18, 2013, the Company
entered into a Supply and Technology Transfer Agreement (the “Brazil Agreement”) with Fundação Oswaldo
Cruz (“Fiocruz”), an arm of the Brazilian Ministry of Health (the “Brazilian MoH”), for taliglucerase alfa.
Fiocruz’s purchases of alfataliglicerase to date have been significantly below certain agreed upon purchase milestones and,
accordingly, the Company has the right to terminate the Brazil Agreement. Notwithstanding the termination right, the Company is,
at this time, continuing to supply alfataliglicerase to Fiocruz under the Brazil Agreement, and patients continue to be treated
with alfataliglicerase in Brazil. Approximately 10% of adult Gaucher patients in Brazil are currently treated with alfataliglicerase.
The Company is discussing with Fiocruz potential actions that Fiocruz may take to comply with its purchase obligations and, based
on such discussions, the Company will determine what it believes to be the course of action that is in the best interest of the
Company.
In 2017, the Company received a
purchase order from the Brazilian MoH for the purchase of alfataliglicerase for the treatment of Gaucher patients in Brazil for
consideration of approximately $24.3 million. Shipments started in June 2017. The Company recorded revenues of $7.1 million
and $3.7 million for sales of alfataliglicerase to Fiocruz in 2017 and 2018, respectively.
Based on its current cash resources
and commitments, the Company believes it will be able to maintain its current planned development activities and the corresponding
level of expenditures for at least 12 months from the date of approval of the financial statements as of December 31, 2018,
although no assurance can be given that it will not need additional funds prior to such time. If there are unexpected increases
in general and administrative expenses or research and development expenses, the Company may need to seek additional financing.
Revision of Prior Year Financial
Information
The Company has identified an error in the recognized revenue for the last quarter of 2017 and accordingly
has revised certain items in its consolidated financial statements for December 31, 2017 presented herein
.
The impact of the revision on the balance sheet as of December 31, 2017 was a decrease in Contracts Liability and in Accumulated
Losses by $1.8 million and the impact on the statements of operations for the year then ended was an increase in Revenues and a
correspondent decrease in the Loss for the year by the same amount. Loss per share was reduced by $0.01 as a result of the revision.
The Company evaluated the materiality of the error from quantitative and qualitative perspectives, and concluded that the error
was immaterial to the Company’s prior annual consolidated financial statements. Since the revision was not material to any
prior interim period or annual consolidated financial statements, no amendments to previously filed interim or annual periodic
reports was required. Consequently, the Company revised the historical consolidated financial information presented herein.
The Company’s financial statements have been
prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”).
|
c.
|
Use of estimates in the preparation of financial statements
|
The preparation of financial statements in conformity
with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities,
the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those estimates.
The dollar is the currency of the primary economic
environment in which the operations of the Company and its Subsidiaries are conducted. Most of the Company’s revenues are
derived in dollars. Most of the Company’s expenses and capital expenditures are incurred in dollars, and the major source
of the Company’s financing has been provided in dollars.
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
(continued)
:
Transactions and balances originally denominated
in dollars are presented at their original amounts. Balances in non-dollar currencies are translated into dollars using historical
and current exchange rates for non-monetary and monetary balances, respectively. For non-dollar transactions and other items (stated
below) reflected in the statements of operations, the following exchange rates are used: (i) for transactions – exchange
rates at the transaction dates or average rates; and (ii) for other items (derived from non-monetary balance sheet items such as
depreciation and amortization, etc.) – historical exchange rates. Currency transaction gains and losses are recorded as financial
income or expenses, as appropriate.
The Company considers all short-term, highly liquid
investments, which include short-term bank deposits with original maturities of three months or less from the date of purchase,
that are not restricted as to withdrawal or use and are readily convertible to known amounts of cash, to be cash equivalents.
Inventories are valued at the lower of cost or net
realizable value. Cost of raw and packaging materials and purchased products is determined using the “moving average”
basis.
Cost of finished products is determined as follows:
the value of the raw and packaging materials component is determined primarily using the “moving average” basis; the
value of the labor and overhead component is determined on an average basis over the production period.
Inventory is written down for estimated obsolescence
based upon management assumptions about future demand and market conditions.
|
g.
|
Property and equipment
|
|
1.
|
Property and equipment are stated at cost, net of accumulated
depreciation and amortization.
|
|
2.
|
The Company’s assets are depreciated by the straight-line
method on the basis of their estimated useful lives as follows:
|
|
|
Years
|
|
Laboratory equipment
|
|
|
5
|
|
Furniture
|
|
|
10-15
|
|
Computer equipment
|
|
|
3
|
|
Leasehold improvements are amortized by the straight-line
method over the expected lease term, which is shorter than the estimated useful life of the improvements.
|
h.
|
Impairment in value of long-lived assets
|
The Company tests long-lived assets for impairment
if an indication of impairment exists. If the sum of expected future cash flows of definite life assets (undiscounted and without
interest charges) is less than the carrying amount of such assets, the Company recognizes an impairment loss, and writes down the
assets to their estimated fair values.
Deferred taxes are determined utilizing the assets and
liabilities method based on the estimated future tax effects of the differences between the financial accounting and tax bases
of assets and liabilities under the applicable tax laws. Deferred tax balances are computed using the tax rates expected to be
in effect when those differences reverse. A valuation allowance in
respect of deferred tax assets is provided if, based upon the weight of available evidence, it is more likely than not that some
or all of the deferred tax assets will not be realized. The Company has provided a full valuation allowance with respect to its
deferred tax assets. The Company used tax rates of 27%, 23% and 21%. See note 10.
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
(continued)
:
|
2.
|
Uncertainty in income taxes
|
Tax benefits recognized in the financial statements
are those that the Company’s management deems at least more likely than not to be sustained, based on technical merits. The
amount of benefits recorded for these tax benefits is measured as the largest benefit the Company’s management deems more
likely than not to be sustained.
On January 1, 2018,
the Company adopted the new accounting standard, ASC 606, Revenue from Contracts with Customers (“ASC 606”), and all
the related amendments, using the modified retrospective method. The implementation of this Accounting Standards Update (ASU) did
not have a material impact on the Company’s consolidated financial statement.
The Company’s revenue
recognition accounting policy from January 1, 2018, following the adoption of the new revenue standard
A contract with a customer
exists only when: the parties to the contract have approved it and are committed to perform their respective obligations, the Company
can identify each party’s rights regarding the distinct goods or services to be transferred (“performance obligations”),
the Company can determine the transaction price for the goods or services to be transferred, the contract has commercial substance
and it is probable that the Company will collect the consideration to which it will be entitled in exchange for the goods or services
that will be transferred to the customer.
Revenues are recorded in
the amount of consideration to which the Company expects to be entitled in exchange for performance obligations upon transfer of
control to the customer.
|
1.
|
Revenues from selling products
|
The Company recognizes revenues from selling goods
at
a point in time when control over the product is transferred to customers (upon delivery).
|
2.
|
Revenues from Chiesi Agreements
|
According to ASC 606, a performance obligation is a
promise to provide a distinct good or service or a series of distinct goods or services. Goods and services that are not distinct
are bundled with other goods or services in the contract until a bundle of goods or services that is distinct is created. A good
or service promised to a customer is distinct if the customer can benefit from the good or service either on its own or together
with other resources that are readily available to the customer and the entity’s promise to transfer the good or service
to the customer is separately identifiable from other promises in the contract.
The Company has identified two performance obligations
in each of the Chiesi agreements as follows: (1) the license and research and development services and (2) a contingent performance
obligation regarding future manufacturing.
The Company determined that the licenses granted to
Chiesi together with the research and development services should be combined into a single performance obligation under each agreement
since Chiesi cannot benefit from a license without the research and development services. The research and development services
are highly specialized and are dependent on the supply of the drug.
The future manufacturing is contingent on regulatory
approvals of the drug and the Company deems these services to be separately identifiable from other performance obligations in
the contract. Manufacturing services post-regulatory approval are not interdependent or interrelated with the license and research
and development services.
The transaction price was comprised of fixed consideration
and variable consideration (capped research and development reimbursements). Under ASC 606, the consideration to which the Company
would be entitled upon the achievement of contractual milestones, which are contingent upon the occurrence of future events, are
a form of variable consideration. The Company estimates variable consideration using the most likely method. Amounts included in
the transaction price are recognized only when it is probable that a significant reversal of cumulative revenues will not occur,
usually upon achievement of a specific milestone. The Company used significant judgment when it determined variable consideration.
Since the customer benefits from the research and development
services as the entity performs, revenue from granting the license and the research and development services is recognized over
time using the cost-to-cost method. The Company used significant judgment when it determined the costs expected to be incurred
upon satisfying the identified performance obligation.
Revenue from additional research and development services
ordered by Chiesi is recognized over time using the cost-to-cost method.
We accounted for the Chiesi U.S. agreement as a modification
of the Chiesi Ex-U.S. Agreement. As such, the Company recorded revenue through a cumulative catch-up adjustment in the third quarter
of 2018 in the amount of $6.2 million.
Our revenue recognition accounting policy prior to
January 1, 2018, was materially the same.
|
k.
|
Research and development costs
|
Research and development costs are expensed as incurred
and consist primarily of personnel, subcontractors and consultants (mainly in connection with clinical trials), facilities, equipment
and supplies for research and development activities. Grants received by the Israeli Subsidiary from the National Authority for
Technological Innovation (“NATI”), which has replaced many of the functions of the Office of the Chief Scientist of
Israel’s Ministry of Industry, Trade and Labor (the “OCS”), are recognized when the grant becomes receivable,
provided there is reasonable assurance that the Company or the Subsidiaries will comply with the conditions attached to the grant
and there is reasonable assurance the grant will be received. The grant is deducted from the research and development expenses
as the applicable costs are incurred. In connection with purchases of assets, amounts assigned to intangible assets to be used
in a particular research and development project that have no alternative future use are charged to research and development costs
at the purchase date.
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
(continued)
:
Nonrefundable advance payments for goods or services
that will be used or rendered for future research and development activities are deferred and amortized over the period that the
goods are consumed or the related services are performed.
|
l.
|
Concentration of credit risks and trade receivable
|
Financial instruments that potentially subject the
Company to concentration of credit risk consist principally of bank deposits. The Company deposits these instruments with highly
rated financial institutions, mainly in Israeli banks, and, as a matter of policy, limits the amounts of credit exposure to any
one financial institution. The Company has not experienced any credit losses in these accounts and does not believe it is exposed
to any significant credit risk on these instruments. The Company’s trade receivables represent amounts to be received from
Pfizer, Brazil and Chiesi. The Company does not require Pfizer, Brazil or Chiesi to post collateral with respect to receivables.
|
m.
|
Share-based compensation
|
The Company accounts for employee’s share-based
payment awards classified as equity awards using the grant-date fair value method. The fair value of share-based payment transactions
is recognized as an expense over the requisite service period.
The Company elected to recognize compensation cost
for an award with only service conditions that has a graded vesting schedule using the accelerated method based on the multiple-option
award approach.
When stock options are granted as consideration for
services provided by consultants and other non-employees, the grant is accounted for based on the fair value of the stock options
issued. Options granted are measured on a final basis at the end of the related service period and is recognized over the related
service period using the straight-line method.
The Company elects to account for forfeitures as they occur.
|
n.
|
Net (loss) earnings per share
|
Basic and diluted loss per share (“LPS”)
are computed by dividing net loss by the weighted average number of shares of the Company’s Common Stock, par value $0.001
per share (the “Common Stock”) outstanding for each period.
Diluted LPS is calculated in continuing operations.
The calculation of diluted LPS does not include 23,532,492, 76,848,199 and 74,583,792 shares of Common Stock underlying outstanding
options, restricted shares of Common Stock and shares issuable upon conversion of the convertible notes for the fiscal years ended
December 31, 2016, 2017 and 2018, respectively, because the effect would be anti-dilutive.
All outstanding convertible notes
are accounted for using the guidance set forth in the Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (ASC) 815 requiring that the Company determine whether the embedded conversion option must be separated and accounted
for separately. ASC 470-20 regarding debt with conversion and other options requires the issuer of a convertible debt instrument
that may be settled in cash upon conversion to separately account for the liability (debt) and equity (conversion option) components
of the instrument in a manner that reflects the issuer’s nonconvertible debt borrowing rate. The Company accounted for the
2018 Notes (as defined in note 8a) as a liability, on an aggregated basis, in their entirety.
The
2021 Notes were accounted for partially as liability and equity components of the instrument and partially as a debt host contract
with an embedded derivative resulting from the conversion feature. During the year ended December
31,
2017, the embedded derivative was reclassified to additional paid in capital, see note 8.
Issuance costs regarding the issuance
of the 2021 Notes are amortized using the effective interest rate. The debt discount and debt issuance costs regarding the issuance
of the 2018 Notes are deferred and amortized over the 2018 Notes period (5 years).
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
(continued)
:
As of December 31, 2018, a
total of $57.9 million aggregate principal amount of the 2021 Notes were outstanding. In addition, as of December 31,
2018, none of the 2018 Notes were outstanding.
|
p.
|
Recently adopted standards
|
In May 2014, the FASB issued guidance on revenues from contracts with customers that superseded most
current revenue recognition guidance, including industry-specific guidance. The underlying principle is to recognize revenue to
depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity
expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to
determine when and how revenue is recognized. Other major provisions require capitalization of certain contracts costs, consideration
of the time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies
are resolved in certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount timing and
uncertainty of revenues and cash flows arising from an entity’s contracts with customers. On January 1, 2018, the Company adopted the new accounting
standard, ASC 606, and all the related amendments, using the modified retrospective method. The implementation of this Accounting
Standards Update (ASU) did not have a material impact on the Company’s consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a
Consensus of the FASB Emerging Issues Task Force) (“ASU 2016-18”), which requires entities to include amounts generally
described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period
and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for annual reporting periods (including
interim periods within those annual reporting periods) beginning after December 15, 2017. This standard, adopted as of January
1, 2018, had no material impact on the Company’s financial statements.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10),
which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amended
guidance requires changes in the fair value of equity investments to be recognized through net income, rather than other comprehensive
income. This standard was
adopted on January 1, 2018 and its adoption had no material impact on the Company’s financial statements.
|
q.
|
Recently issued accounting pronouncements
|
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes the existing guidance
for lease accounting, Leases (Topic 840). The new standard requires lessees to record assets and liabilities on the balance sheet
for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification
affecting the pattern of expense recognition in the income statement. The Company plans to adopt the standard as of January 1,
2019 on a modified retrospective basis and will not restate comparative periods. The Company will elect the package of practical
expedients permitted under the transition guidance within the new standard, which among other things, allows the Company to carryforward
the historical lease classification. The Company will make an accounting policy election to keep leases with an initial term of
12 months or less off of the balance sheet. The Company will recognize those lease payments in the Statements of Operations on
a straight-line basis over the lease period. The Company expects that adoption of the standard will result in recognition of approximately
$5.9 million of lease assets and lease liabilities as of January 1, 2019 on the Company’s balance Sheets.
In June 2018, the FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718):
Improvements to Nonemployee Share-based Payment Accounting” that expands the scope of ASC Topic 718 to include share-based
payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of ASC Topic 718
to nonemployee awards except for certain exemptions specified in the amendment. The guidance is effective for fiscal years beginning
after December 15, 2018, including interim reporting periods within that fiscal year. Early adoption is permitted, but no earlier
than an entity’s adoption date of Topic 606. The Company does not expect to have a material impact on its financial statements.
NOTE 2 - COMMERCIALIZATION AGREEMENTS
|
1.
|
On November 30, 2009, Protalix Ltd. and Pfizer entered
into the Pfizer Agreement (as amended in June 2013) pursuant to which Pfizer was granted an exclusive, worldwide license to develop
and commercialize taliglucerase alfa, except for Israel and Brazil. Under the Pfizer Agreement Protalix was entitled to 40% of
the results (profits or losses) earned on Pfizer’s sales of taliglucerase alfa.
|
In October 2015, the Company entered into the following
agreements with Pfizer:
Amended Pfizer Agreement - Pursuant to the amendment,
the Company granted Pfizer an exclusive license in the entire world, including Israel but excluding Brazil. Pfizer acquired all
the information, knowledge and permission to manufacture and sell Elelyso.
Protalix also agreed to provide Pfizer with:
|
a.
|
Manufacturing and supply of the drug substance for its
incorporation into the licensed product in consideration of an agreed price per unit.
|
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - COMMERCIALIZATION AGREEMENTS
(continued)
:
|
b.
|
Assistance in arranging for the manufacture of the drug
substance by Pfizer or by alternative supplier chosen by Pfizer in consideration of an agreed hourly rate plus reimbursement of
expenses.
|
Stock Purchase Agreement - the
Company issued 5,649,079 shares of Common Stock to Pfizer.
Promissory note – as of the date of the amendment,
the Company owed Pfizer $4.3 million as a result of the accumulated losses incurred by the Collaboration Operation. Following
the new agreements, the Company committed to pay Pfizer the principal sum of the debt at the earlier of (a) November 12, 2020
and (b) the date upon which it becomes due pursuant to any event of default, as defined. The promissory note is presented in “other
long term liabilities.”
The Amended Pfizer Agreement resulted in a discontinued
operation as defined under ASU 2014-08 because it represented a strategic shift for the Company that has a major effect on the
entity’s operations and financial results.
Revenues from the Pfizer Agreements as well as revenues
from sales of Elelyso in Israel were presented as discontinued operations. The impact of the discontinued operations in the results of 2016 is immaterial.
|
2.
|
In October 2017, Protalix Ltd. entered into the Chiesi
Ex-U.S. Agreement with respect to the commercialization of pegunigalsidase alfa (hereafter – the drug) for treatment of
Fabry disease. Under the terms of the Chiesi Agreement, Protalix Ltd. granted to Chiesi exclusive licensing rights for the commercialization
of the drug for all markets outside of the United States. At the effective date, Protalix Ltd. had maintained the exclusive commercialization
rights to the drug in the United States, which rights were subsequently granted to Chiesi in July 2018.
|
Protalix Ltd. will be mainly responsible
for (i) continuing the development of the drug until a regulatory approval is granted and (ii) manufacture and supply the drug
to Chiesi, based on Chiesi’s requests.
The consideration consists of the
following:
a. Upfront, non-refundable payment
of $25.0 million.
b. Additional payments of up to $25.0 million
in development costs, capped at $10.0 million per year.
c. Milestone payments of up to $320.0 million
with respect to certain regulatory and commercial events as defined in the Chiesi Agreement.
d. Additional payments as consideration
for the supply of the drug. The payment will vary from 15% to 35% of Chiesi’s average selling price of the drug, depending
on the amount of annual sales.
e. Protalix will be the sole manufacturer
of the drug.
Chiesi does not have sublicensing
rights (except for certain territories).
|
3.
|
In July 2018, Protalix Ltd. entered into the Chiesi U.S.
Agreement with respect to the commercialization of the drug for treatment of Fabry disease. Under the terms of the Chiesi U.S.
Agreement, Protalix Ltd. granted to Chiesi exclusive licensing rights for the commercialization of the drug for all markets in
the United States.
|
Protalix Ltd. will be mainly responsible
for (i) continuing the development of the drug until a regulatory approval is granted and (ii) manufacture and supply the drug
to Chiesi, based on Chiesi’s requests.
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - COMMERCIALIZATION AGREEMENTS
(continued)
:
The consideration consists of the
following:
a. Upfront, non-refundable payment
of $25.0 million.
b. Additional payments of up to $20.0 million
in development costs, capped at $7.5 million per year.
c. Milestone payments of up to $760.0 million
with respect to certain regulatory and commercial events as defined in the Chiesi Agreement.
d. Additional payments as consideration
for the supply of the drug. The payment will vary from 15% to 40% of Chiesi’s average selling price of the drug, depending
on the amount of annual sales.
e. Protalix will be the sole manufacturer
of the drug.
Chiesi does not have sublicensing
rights.
|
4.
|
On June 18, 2013, the Company entered into the Brazil
Agreement with Fiocruz for alfataliglicerase. Fiocruz’s purchases of alfataliglicerase to date have been significantly below
certain agreed upon purchase milestones and, accordingly, the Company has the right to terminate the Brazil Agreement. Notwithstanding,
the Company is, at this time, continuing to supply alfataliglicerase to Fiocruz under the Brazil Agreement, and patients continue
to be treated with alfataliglicerase in Brazil. Approximately 10% of adult Gaucher patients in Brazil are currently treated with
alfataliglicerase. The Company is discussing with Fiocruz potential actions that Fiocruz may take to comply with its purchase
obligations and, based on such discussions, the Company will determine what it believes to be the course of action that is in
the best interest of the Company.
|
NOTE 3 - PROPERTY AND EQUIPMENT
|
a.
|
Composition of property and equipment grouped by major
classifications is as follows:
|
|
|
December 31,
|
|
(
U.S. dollars in thousands)
|
|
2017
|
|
|
2018
|
|
Laboratory equipment
|
|
$
|
16,561
|
|
|
$
|
16,732
|
|
Furniture and computer equipment
|
|
|
2,438
|
|
|
|
2,565
|
|
Leasehold improvements
|
|
|
16,123
|
|
|
|
16,191
|
|
Equipment under construction
|
|
|
19
|
|
|
|
18
|
|
|
|
$
|
35,141
|
|
|
$
|
35,506
|
|
Less – accumulated depreciation and
amortization
|
|
|
(27,465
|
)
|
|
|
(29,116
|
)
|
|
|
$
|
7,676
|
|
|
$
|
6,390
|
|
|
b.
|
Depreciation in respect of property and equipment totaled
approximately $2.0 million, $1.9 million and $1.7 million for the years ended December 31, 2016, 2017 and
2018, respectively.
|
NOTE 4 - INVENTORIES
|
a.
|
Inventories at December 31, 2017 and 2018 consisted
of the following:
|
|
|
December 31,
|
|
(
U.S. dollars in thousands)
|
|
2017
|
|
|
2018
|
|
Raw materials
|
|
$
|
3,838
|
|
|
$
|
3,792
|
|
Work in progress
|
|
|
485
|
|
|
|
|
|
Finished goods
|
|
|
3,510
|
|
|
|
4,777
|
|
Total inventory
|
|
$
|
7,833
|
|
|
$
|
8,569
|
|
|
b.
|
During the years ended December 31, 2017 and 2018, the
Company recorded approximately $0.5 million and $1.1 million, respectively, for write-down of inventory under cost of goods sold.
|
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - LIABILITY FOR EMPLOYEE RIGHTS
UPON RETIREMENT
The Israeli Subsidiary is required to make a severance
payment upon dismissal of an employee or upon termination of employment in certain circumstances. The severance pay liability to
the employees (based upon length of service and the latest monthly salary - one month’s salary for each year employed) is
recorded on the Company’s balance sheets under “Liability for employee rights upon retirement.” The liability
is recorded as if it were payable at each balance sheet date on an undiscounted basis.
The liability is funded in part from the purchase
of insurance policies or by the establishment of pension funds with dedicated deposits in the funds. The amounts used to fund these
liabilities are included in the Company’s balance sheets under “Funds in respect of employee rights upon retirement.”
These policies are the Company’s assets. However, under labor agreements and subject to certain limitations, any policy may
be transferred to the ownership of the individual employee for whose benefit the funds were deposited. In the years ended December 31,
2016, 2017 and 2018, the Company deposited approximately $164,000, $166,000 and $145,000, respectively, with insurance companies
in connection with its severance payment obligations.
In accordance with the current employment agreements
with certain employees, the Company makes regular deposits with certain insurance companies for accounts controlled by each applicable
employee in order to secure the employee’s rights upon retirement. The Company is fully relieved from any severance pay liability
with respect to each such employee after it makes the payments on behalf of the employee. The liability accrued in respect of these
employees and the amounts funded, as of the respective agreement dates, are not reflected in the Company’s balance sheets,
as the amounts funded are not under the control and management of the Company and the pension or severance pay risks have been
irrevocably transferred to the applicable insurance companies (the “Contribution Plans”).
The amounts of severance pay expenses were approximately
$842,000, $906,000 and $781,000 for each of the years ended December 31, 2016, 2017 and 2018, respectively, of which approximately
$675,000, $746,000 and $620,000 in the years ended December 31, 2016, 2017 and 2018, respectively, were in respect of the
Contribution Plans. Gain (loss) on amounts funded in respect of employee rights upon retirement totaled approximately ($7,000),
$21,000 and $46,000 for the years ended December 31, 2016, 2017 and 2018, respectively.
The Company expects to contribute approximately $748,000
in the year ending December 31, 2019 to insurance companies in connection with its severance liabilities for its operations
for that year, approximately $604,000 of which will be contributed to one or more Contribution Plans.
During the five-year period following December 31,
2018, the Company expects to pay future benefits to three employees upon each such employee’s normal retirement age. The
Company anticipates that the benefits payable will be approximately $248,000.
NOTE 6 - COMMITMENTS
|
1.
|
The Company is obligated to pay royalties to NATI on
proceeds from the sale of products developed from research and development activities that were funded, partially, by grants from
NATI or its predecessor, the Office of the Israeli Innovation Authority (IIA). At the time the grants were received, successful
development of the related projects was not assured.
|
In the case of failure of a project that was partly
financed as described above, the Company is not obligated to pay any such royalties or repay funding received from NATI or the
IIA.
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - COMMITMENTS
(continued)
:
Under the terms of the applicable funding arrangements,
royalties of 3% to 6% are payable on the sale of products developed from projects funded by NATI or the IIA, which payments shall
not exceed, in the aggregate, 100% of the amount of the grant received (dollar linked), plus, commencing upon January 1, 2001,
interest at an annual rate based on LIBOR. In addition, if the Company receives approval to manufacture products developed with
government grants outside the State of Israel, it will be required to pay an increased total amount of royalties (possibly up to
300% of the grant amounts plus interest), depending on the manufacturing volume that is performed outside the State of Israel,
and, possibly, an increased royalty rate.
Royalty expenses to NATI or the IIA are included in
the statement of operations as a component of the cost of revenues both in continuing and discontinued operations and were approximately
$288,000, $1,384,000 and $1,619,000 during the years ended December 31, 2016, 2017 and 2018, respectively.
At December 31, 2017 and 2018, the maximum total
royalty amount payable by the Company under these funding arrangements is approximately $42.2 million and $41.9 million,
respectively (without interest, assuming 100% of the funds are payable).
|
2.
|
The Company is a party to certain research and license
agreements. Under the agreements, the Company is obligated to pay royalties at varying rates from its future revenues. The aggregate
royalties payable under all of the agreements is equal to a varying range of percentages of net sales of licensed products. Royalty
expenses under the agreements are included in the statement of operations as a component of the cost of revenues both in continuing
and discontinued operations and were approximately $286,000, $0 and $0 during the years ended December 31, 2016, 2017 and
2018, respectively.
|
Under each agreement, the Company is also obligated
to pay milestone, licensing and other payments to the counterparties of the agreement. The payments under the agreements are for
varying amounts and are subject to varying conditions. If all of the contingencies with respect to milestone payments under the
research and license agreements are met, the aggregate milestone payments total payable would be approximately $14.3 million
and would be payable, if at all, as the Company’s projects progress over the course of a number of years. Milestone payments
of $300,000, $0 and $0 were made during the years ended December 31, 2016, 2017 and 2018, respectively.
None of the agreements has a fixed termination date.
Subject to earlier termination for other reasons, each agreement terminates after a certain number of years following the first
commercial sale of any licensed product under the agreement or after a certain number of years without the initiation of commercial
sales of any product under the agreement.
|
b.
|
Subcontracting Agreements
|
The Company has entered into sub-contracting agreements
with several clinical providers and consultants in Israel, the United States and certain other countries in connection with its
primary product development process. As of December 31, 2018, total commitments under said agreements were approximately $18.8 million.
The Company is a party to a number of lease agreements
for its facilities, the latest of which has been extended until 2021. The Company has the option to extend certain of such agreements
on two additional occasions for additional five-year periods each, for a total of 10 additional years. Under the leases, the aggregate
monthly rental payments are approximately $63,000. As of December 31, 2018, the Company provided bank guarantees of approximately
$402,000, in the aggregate, to secure the fulfillment of its obligations under the lease agreements. The future minimum lease payments
required under the operating leases for such premises are approximately $758,000, $758,000 and $621,000, for fiscal years 2019
through 2021, respectively. Lease expenses totaled approximately $1.0 million, $775,000 and 783,000 for each of the years
ended December 31, 2016, 2017 and 2018, respectively.
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - COMMITMENTS
(continued)
:
|
d.
|
Vehicle Lease and Maintenance Agreements
|
The Company entered into several three-year lease
and maintenance agreements for vehicles which are regularly amended as new vehicles are leased. The current monthly lease fees
aggregate approximately $43,000. The expected lease payments for the years ending December 31, 2019, 2020 and 2021 are approximately
$474,000, $333,000 and $82,000, respectively.
NOTE 7 - SHARE CAPITAL
|
a.
|
Rights of the Company’s Common Stock
|
The Company’s Common Stock
is listed on the NYSE American and on the Tel Aviv Stock Exchange. Each share of Common Stock is entitled to one vote. The holders
of shares of Common Stock are also entitled to receive dividends whenever funds are legally available, when and if declared by
the Board of Directors. Since its inception, the Company has not declared any dividends.
|
b.
|
Stock based compensation
|
On December 14, 2006, the Board of Directors
adopted the Protalix BioTherapeutics, Inc. 2006 Stock Incentive Plan, as amended (the “Plan”). The Plan has since been
amended to, among other things, increase the number of shares of common stock available under the Plan to 23,841,655 shares. The
grant of options to Israeli employees under the Plan is subject to the terms stipulated by Sections 102 and 102A of the Israeli
Income Tax Ordinance. Each option grant is subject to the track chosen by the Company, either Section 102 or Section 102A of the
Israeli Income Tax Ordinance, and pursuant to the terms thereof, the Company is not allowed to claim, as an expense for tax purposes,
the amounts credited to employees as a benefit, including amounts recorded as salary benefits in the Company’s accounts,
in respect of options granted to employees under the Plan, with the exception of the work-income benefit component, if any, determined
on the grant date. For Israeli non-employees, the share option plan is subject to Section 3(i) of the Israeli Income Tax Ordinance.
As of December 31, 2018, 7,303,119 shares of
Common Stock remain available for grant under the Plan.
For purposes of determining the fair value of the
options and restricted stock granted to employees and non-employees, the Company’s management uses the fair value of the
Common Stock.
From January 1, 2016 through December 31,
2018, the Company granted options and shares of restricted stock to certain employees and non-employees as follows:
|
1.
|
Options and restricted stock granted to employees:
|
|
a)
|
Below is a table summarizing all of the options grants to employees during the year ended December 31, 2018:
|
|
|
|
No. of options
granted
|
|
|
Exercise
price
|
|
|
Vesting period
|
|
|
Fair value
at grant
(U.S.
dollars in
thousands)
|
|
|
Expiration
period
|
|
|
2018
|
|
|
|
4,000,000
|
|
|
$
|
0.56
|
|
|
|
4 years
|
|
|
$
|
1,200
|
|
|
|
10 years
|
|
|
2018
|
|
|
|
2,360,000
|
|
|
$
|
0.51
|
|
|
|
4 years
|
|
|
$
|
700
|
|
|
|
10 years
|
|
Set forth below are grants made by the Company to employees
(including related parties) during the three-year period ended December 31, 2018 (such grants appear in the table above):
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - SHARE CAPITAL
(continued)
:
On September 13, 2018, the
Company’s compensation committee approved the grant of 10-year options to purchase, in the aggregate, 6,360,000 shares of
Common Stock, of which options to purchase 4,000,000 shares of Common Stock were granted to the Company’s executive officers
and options to purchase 2,360,000 shares of Common Stock were granted to other employees with an exercise price equal to $0.56
per share and $0.51 per share, respectively, under the Plan. The options vest over a four-year period in 16 equal quarterly increments.
Vesting of the options granted to the executive officers is subject to acceleration in full upon a Corporate Transaction or a Change
in Control, as those terms are defined in the Plan, and are subject to certain other terms and conditions. The Company estimated
the fair value of the options on the date of grant using the Black-Scholes option-pricing model to be approximately $1.9 million
based on the following weighted average assumptions: share price equal to $0.51; dividend yield of 0% for all years; expected volatility
of 64.3%; risk-free interest rates of 2.9%; and expected life of six years.
b) The
total unrecognized compensation cost of employee stock options at December 31, 2018 is approximately $1,524,000. The unrecognized
compensation cost of employee stock options is expected to be recognized over a weighted average period of 1.18 years.
The total cash received from employees
as a result of employee stock option exercises for the years ended December 31, 2016, 2017 and 2018 was approximately $14,000,
$0 and $0, respectively. The Company did not realize any tax benefit in connection with these exercises.
|
2.
|
Options granted to consultants, directors, and other
service providers:
|
During the three years ended December 31,
2018 there were no options granted by the Company to its consultants, directors, and other service providers. In addition, during
the three years ended December 31, 2018, there were no option exercises by any of the Company’s consultants, directors,
and other service providers and, consequently, no shares of Common Stock were issued in connection with exercises of options by,
nor was any cash received from, the Company’s consultants, directors, and other service providers during such period.
|
3.
|
A summary of share option plans, and related information,
under all of the Company’s equity incentive plans for the years ended December 31, 2016, 2017 and 2018 is as follows:
|
|
a.
|
Options granted to employees:
|
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
|
average
|
|
|
Number
|
|
|
Average
|
|
|
Number
|
|
|
average
|
|
|
|
of
|
|
|
exercise
|
|
|
of
|
|
|
Exercise
|
|
|
of
|
|
|
exercise
|
|
|
|
options
|
|
|
price
|
|
|
options
|
|
|
Price
|
|
|
options
|
|
|
price
|
|
Outstanding at beginning of year
|
|
|
6,952,293
|
|
|
$
|
3.363
|
|
|
|
4,884,211
|
|
|
$
|
3.617
|
|
|
|
4,729,617
|
|
|
$
|
3.604
|
|
Changes during the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,360,000
|
|
|
|
0.541
|
|
Forfeited and Expired
|
|
|
1,514,957
|
|
|
|
3.748
|
|
|
|
154,594
|
|
|
|
4.004
|
|
|
|
1,088,942
|
|
|
|
4.604
|
|
Exercised (*)
|
|
|
553,125
|
|
|
|
0.067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
4,884,211
|
|
|
$
|
3.617
|
|
|
|
4,729,617
|
|
|
$
|
3.604
|
|
|
|
10,000,675
|
|
|
$
|
1.547
|
|
Exercisable at end of year
|
|
|
3,498,492
|
|
|
$
|
4.296
|
|
|
|
4,457,461
|
|
|
$
|
3.696
|
|
|
|
3,944,863
|
|
|
$
|
3.065
|
|
(*)
The total intrinsic value of options exercised during the years ended December
31, 2016,
2017 and 2018, was approximately
$213,000, $0 and $0
, respectively.
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – SHARE CAPITAL
(continued)
:
|
b.
|
Restricted stock granted to employees:
|
|
|
Year ended
December 31, 2016
|
|
|
|
Number of shares of
restricted stock
|
|
Outstanding at beginning of year
|
|
|
127,874
|
|
Changes during the year:
|
|
|
|
|
Vested
|
|
|
127,874
|
|
Forfeited
|
|
|
-
|
|
Outstanding at end of year
|
|
|
-
|
|
|
c.
|
Options and restricted stocks granted to consultants, directors, and other service providers:
|
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
Number
|
|
|
|
|
|
Number
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
of
|
|
|
Weighted
|
|
|
of
|
|
|
Weighted
|
|
|
of
|
|
|
Weighted
|
|
|
|
options/
|
|
|
average
|
|
|
options/
|
|
|
average
|
|
|
options/
|
|
|
average
|
|
|
|
restricted
|
|
|
exercise
|
|
|
restricted
|
|
|
exercise
|
|
|
restricted
|
|
|
exercise
|
|
|
|
stock
|
|
|
price
|
|
|
stock
|
|
|
price
|
|
|
stock
|
|
|
price
|
|
Outstanding at beginning of Year
|
|
|
637,209
|
|
|
$
|
11.638
|
|
|
|
208,000
|
|
|
$
|
3.156
|
|
|
|
200,000
|
|
|
$
|
3.282
|
|
Changes during the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
429,209
|
|
|
|
15.748
|
|
|
|
8,000
|
|
|
|
0.001
|
|
|
|
50,000
|
|
|
|
3.02
|
|
Vested restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
208,000
|
|
|
|
3.156
|
|
|
|
200,000
|
|
|
|
3.282
|
|
|
|
150,000
|
|
|
|
3.37
|
|
Exercisable at end of year
|
|
|
170,500
|
|
|
$
|
3.109
|
|
|
|
200,000
|
|
|
$
|
3.282
|
|
|
|
150,000
|
|
|
$
|
3.37
|
|
|
d.
|
The following tables summarize information concerning outstanding
and exercisable options and restricted stock as of December 31, 2018:
|
December 31, 2018
|
|
Options outstanding
|
|
|
Options exercisable
|
|
Exercise
prices
|
|
|
Number of
options
outstanding
at end of
year
|
|
|
Weighted
average
remaining
contractual
life
|
|
|
Number of
options
exercisable
|
|
|
Weighted
average
remaining
contractual
life
|
|
|
n/a (Restricted Stock)
|
|
|
|
|
|
|
|
|
|
|
|
n/a
|
|
|
|
n/a
|
|
$
|
0.51
|
|
|
|
2,360,000
|
|
|
|
9.71
|
|
|
|
147,500
|
|
|
|
9.71
|
|
$
|
0.56
|
|
|
|
4,000,000
|
|
|
|
9.71
|
|
|
|
250,000
|
|
|
|
9.71
|
|
$
|
1.720
|
|
|
|
1,623,593
|
|
|
|
6.22
|
|
|
|
1,530,281
|
|
|
|
6.22
|
|
$
|
2.370
|
|
|
|
900,000
|
|
|
|
5.74
|
|
|
|
900,000
|
|
|
|
5.74
|
|
$
|
2.650
|
|
|
|
209,082
|
|
|
|
0.15
|
|
|
|
209,082
|
|
|
|
0.15
|
|
$
|
3.370
|
|
|
|
150,000
|
|
|
|
5.56
|
|
|
|
150,000
|
|
|
|
5.56
|
|
$
|
6.900
|
|
|
|
680,000
|
|
|
|
1.15
|
|
|
|
680,000
|
|
|
|
1.15
|
|
$
|
7.550
|
|
|
|
160,000
|
|
|
|
0.56
|
|
|
|
160,000
|
|
|
|
0.56
|
|
$
|
9.660
|
|
|
|
68,000
|
|
|
|
1.83
|
|
|
|
68,000
|
|
|
|
1.83
|
|
|
|
|
|
|
10,150,675
|
|
|
|
|
|
|
|
4,094,863
|
|
|
|
|
|
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – SHARE CAPITAL
(continued)
:
|
e.
|
The following table illustrates the effect of share-based
compensation on the statement of operations:
|
|
|
Year ended December 31,
|
|
(U.S. dollars in thousands)
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Research and development expenses
|
|
$
|
571
|
|
|
$
|
182
|
|
|
$
|
310
|
|
Selling, general and administrative expenses
|
|
|
417
|
|
|
|
155
|
|
|
|
204
|
|
|
|
$
|
988
|
|
|
$
|
337
|
|
|
$
|
514
|
|
|
c.
|
Private and 144A Offerings
|
|
1.
|
On December 7, 2016, the Company exchanged with
certain existing note holders $54.052 million aggregate principal amount of the Company’s outstanding 2018 Notes for, among
other consideration, $40.186 million aggregate principal amount of the 2021 Notes (as described in note 8b) and for 23,846,735
shares of common stock. See also note 8b.
|
|
2.
|
On July 24, 2017, the Company entered into a Note
Purchase Agreement with certain institutional investors relating to the private issuance and sale by the Company of $10 million
in aggregate principal amount of its 2021 Notes. The 2021 Notes were issued pursuant to the base indenture dated December 7,
2016. Concurrently, the Company exchanged with certain existing note holders $9.0 million aggregate principal amount of the
Company’s outstanding 2018 Notes for $8.55 million aggregate principal amount of newly issued 2022 Notes (as described
in note 8c). See also note 8c.
|
|
3.
|
On May 22, 2018, the Company agreed to a privately
negotiated exchange with certain existing note holders to exchange $3,423,000 aggregate principal amount of the Company’s
outstanding 2018 Notes for 2,613,636 shares of the Company’s common stock and $2.23 million in cash to cover outstanding
principal and accrued interest on the exchanged 2018 Notes. See also note 8a.
|
NOTE 8 - CONVERTIBLE NOTES
|
a.
|
4.5% Convertible Notes (“2018 Notes”)
|
On September 18, 2013, the
Company completed a private placement of $69.0 million in aggregate principal amount of Senior Convertible Notes (the “2018
Notes”), including $9.0 million aggregate principal amount of 2018 Notes related to the initial purchaser’s over-allotment
option, which was exercised in full. On September 15, 2018, the 2018 Notes matured and have been paid in full.
In connection with the completion
of the offering of the 2018 Notes, the Company had entered into an indenture with The Bank of New York Mellon Trust Company, N.A.,
as trustee, governing the 2018 Notes. The 2018 Notes accrued interest at a rate of 4.50% per year, payable semiannually in arrears.
In December 2016, $54.1 million aggregate principal amount of 2018 Notes were exchanged for 2021 Notes and shares of common
stock (see also note 8b) and in July 2017, $9.0 million aggregate principal amount of 2018 Notes were exchanged for 2022 Notes
as defined in note 8c (see also note 8c).
The initial conversion rate for
the 2018 Notes was 173.6593 shares of the Common Stock for each $1,000 principal amount of 2018 Notes (equivalent to an initial
conversion price of approximately $5.76 per share of the Common Stock), and was subject to adjustment for certain events but will
not be adjusted for any accrued and unpaid interest.
On June 2018, the Company exchanged
$3.423 million aggregate principal amount of the Company’s 2018 Notes for 2,613,636 shares of Common Stock and approximately
$2.23 million in cash and delivered the necessary funds under the indenture governing the 2018 Notes to effectively discharge
such notes, which was $2.53 million. On September 15, 2018, the 2018 Notes matured and were paid in full.
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - CONVERTIBLE NOTES
(continued)
:
The following table sets forth
total interest expense recognized for the years ended December 31, 2016, 2017 and 2018 related to the 2018 Notes:
|
|
Year ended December 31,
|
|
(U.S. Dollars in thousands)
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Contractual interest expense
|
|
$
|
2,943
|
|
|
$
|
501
|
|
|
$
|
139
|
|
Amortization of debt issuance costs and debt discount
|
|
|
421
|
|
|
|
71
|
|
|
|
15
|
|
Gain from early redemption
|
|
|
|
|
|
|
|
|
|
|
(32
|
)
|
Total
|
|
$
|
3,364
|
|
|
$
|
572
|
|
|
$
|
122
|
|
|
b.
|
7.5% Convertible Notes (“2021 Notes”)
|
On December 1, 2016, the Company
entered into a note purchase agreement with institutional investors, which held part of the 2018 Notes (the “2016 Purchasers”),
relating to the sale by the Company of $22.5 million aggregate principal amount of 7.50% Senior Secured Convertible Notes
due 2021 in a private placement pursuant to Section 4(a)(2) under the Securities Act of 1933, as amended (the “Securities
Act”). Concurrently with the consummation of the private placement of the 2021 Notes, the Company entered into a privately
negotiated exchange agreement (the “2016 Exchange Agreement”) with certain existing note holders identified therein
to exchange $54.1 million aggregate principal amount of the Company’s outstanding 2018 Notes for (i) $40.186 million
aggregate principal amount of 2021 Notes, (ii) 23,846,735 shares of Common Stock and (iii) cash, equal to the accrued and unpaid
interest on the 2018 Notes and any fractional shares. The closing date of the purchase agreement and the 2016 Exchange Agreement
was December 7, 2016. The issuance of the 2021 Notes and shares in the exchange and the private placement were made in reliance
on the exemption from the registration requirements of the Securities Act pursuant to Section 4(a)(2) thereof. The net proceeds
from the private placement were $19.7 million, after deducting the placement agent’s fees and the Company’s estimated
offering expenses.
In connection with the completion of the exchange
and the private placement, the Company entered into an indenture (the “2016 Indenture”) with The Bank of New York Mellon
Trust Company, N.A., as trustee, governing the 2021 Notes. The 2021 Notes accrue interest at a rate of 7.50% per year, payable
semiannually in arrears on May 15 and November 15 of each year, beginning on May 15, 2017. A portion of the interest
payable may be made in shares of Common Stock at the Company’s election. The Notes will mature on November 15, 2021.
On July 24, 2017, the Company entered into another
note purchase agreement with certain institutional investors relating to the private issuance and sale by the Company of $10.0 million
in aggregate principal amount of its 2021 Notes. The 2021 Notes were issued pursuant to the 2016 Indenture dated (December 7,
2016). The net proceeds from this purchase agreement were $9.5 million, after deducting the Company’s offering expenses.
Holders may convert their 2021 Notes at any time.
The initial conversion rate for the 2021 Notes is 1,176.4706 shares of the Common Stock for each $1,000 principal amount of 2021
Notes (equivalent to an initial conversion price of approximately $0.85 per share of the Common Stock). Upon conversion, the Company
may settle the 2021 Notes by paying or delivering, as the case may be, cash, shares of Common Stock or a combination thereof, at
the Company’s election.
During the year ended December 31, 2018, note
holders converted $1.15 million aggregate principal amount of the 2021 Notes into a total of 1,537,415 shares of Common Stock
and cash payments of approximately $15,887, in the aggregate. As of December 31, 2018, a total of $57.9 million aggregate
principal amount of the 2021 Notes were outstanding.
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - CONVERTIBLE NOTES
(continued)
:
Prior to the maturity date, the
Company may redeem in cash:
|
a)
|
any or all of the 2021 Notes if the last reported sale price of the common stock for at least 20 trading days (whether or not
consecutive) during the period of 30 consecutive trading days exceeds 150% of the conversion price on each applicable trading day,
or
|
|
b)
|
all of the 2021 Notes then outstanding if the aggregate
principal amount of the 2021 Notes then outstanding is less than 15% of the aggregate principal amount of the notes issued.
|
No redemption was made during the
years 2017 and 2018.
The 2021 Notes are guaranteed by
the Restricted Subsidiaries (as defined in the 2016 Indenture) and are secured by a first-priority security interest in all of
the present and after-acquired assets of the Company and each of the Restricted Subsidiaries (the “Collateral”), including,
but not limited to, (i) 100% of the capital stock of the Guarantors (as defined in the 2016 Indenture) and each Restricted Subsidiary
of the Company that is held by the Company or any Restricted Subsidiary, (ii) intellectual property, including all copyrights,
copyright licenses, patents, patent licenses, software, trademarks, trademark licenses and trade secrets and other proprietary
information, including, but not limited to, domain names, (iii) all cash, deposit accounts, securities accounts, commodities accounts
and contract rights, (iv) all real property and leased property, subject to applicable minimum thresholds, as set forth in the
2016 Indenture, and (v) all other tangible and intangibles of the Company and the Guarantors. In connection with the grant of such
liens, the Company entered into certain agreements with both Wilmington Savings Fund Society, FSB, as collateral agent in the United
States, and with Altshuler Shaham Trusts Ltd., as security trustee in Israel. The 2016 Indenture restricts the ability of the Company,
the Subsidiaries and any future subsidiaries to make certain investments, including transfers of the Company’s assets that
constitute collateral securing the 2016 Notes, in its existing and future foreign subsidiaries, subject to certain exceptions.
Upon (i) the occurrence of a fundamental
change (as defined in the 2016 Indenture) or (ii) if the Company calls the 2021 Notes for redemption as described below (either
event, a “make-whole fundamental change”) and a holder elects to convert its 2021 Notes in connection with such make-whole
fundamental change, the Company will, in certain circumstances, increase the conversion rate by a number of additional shares (the
“Additional Shares”). In no event will the conversion rate exceed the maximum conversion rate, which is 1,787.3100
shares per $1,000 principal amount of 2021 Notes, which amount is inclusive of repayment of the principal of the 2021 Notes.
If a fundamental change occurs
at any time, holders will have the right, at their option, to require the Company to purchase for cash any or all of the 2021 Notes,
or any portion of the principal amount thereof, that is equal to $1,000 or an integral multiple of $1,000 in excess thereof, on
a date of the Company’s choosing that is not less than 20 calendar days nor more than 35 calendar days after the date of
the applicable fundamental change company notice. The price the Company is required to pay for a 2021 Note is equal to 100% of
the principal amount of such 2021 Note plus accrued and unpaid interest, if any, to, but excluding, the fundamental change purchase
date.
For accounting purposes, since
the terms of the 2018 Notes and the 2021 Notes are substantially different, the 2016 Exchange Agreement was considered as an extinguishment,
which in essence means recording a gain due to the 2018 Notes that were exchanged for the 2021 Notes recorded at fair value as
of the closing date. The gain on extinguishment of $14.1 million was recognized.
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - CONVERTIBLE NOTES
(continued)
:
As the settlement upon
conversion was subject to compliance with the listing standards of the NYSE American, until the Company’s
stockholders’ approval was obtained, the Company was prohibited by these rules from issuing shares in excess of 20% of
its outstanding shares (calculated as of December 1, 2016). The accounting guidance assumed that the conversion will be
settled in cash and, as such, is precluded from equity classification for any part of the 2021 Notes that may have cash
settlement. As such, that part of the conversion feature was accounted for as a derivative which is bifurcated from the debt
host contract and was measured at fair value through the statement of operations until the Company’s stockholders
approved, in April 2017, the issuance of shares in excess of 20% of its outstanding shares. On April 12, 2017, the
Company’s stockholders approved the issuance of shares of the Company’s Common Stock in excess of 20% of the
Company’s outstanding shares of Common Stock to settle conversion requests and pay interest on the Company’s
issued 2021 Notes. As a result, the Company reclassified the embedded derivative to additional paid in capital. During 2017,
the measurement of the derivative resulted in a non-cash charge to the Company’s statement of operations of $38,061
thousand. The conversion feature of the 2021 Notes issued in July 2017 is accounted for as equity, which is bifurcated from
the debt host contract. With respect to the remainder of the 2021 Notes, for which the conversion feature qualifies for
equity classification (since upon conversion the Company at its election may settle the 2021 Notes by paying cash, shares of
Common Stock or a combination of cash and shares of Common Stock) separate liability (debt) and equity (conversion option)
components of such 2021 Notes were recorded. The Company measures the liability according to amortized cost using the
effective interest method.
The Company prepared a valuation
of the fair value of the 2021 Notes (a Level 3 valuation) for the issuance dates. The value of the 2021 Notes was estimated by
implementing the binomial model. The liability component was valued based on the Income Approach. The following parameters were
used:
|
|
December 7, 2016
|
|
|
July 24, 2017
|
|
Stock price (USD)
|
|
|
0.3
|
|
|
|
0.77
|
|
Expected term
|
|
|
4.94
|
|
|
|
4.32
|
|
Risk free rate
|
|
|
1.86
|
%
|
|
|
1.74
|
%
|
Volatility
|
|
|
54.12
|
%
|
|
|
63.79
|
%
|
Yield
|
|
|
13.98
|
%
|
|
|
11.56
|
%
|
The following table sets forth total interest expense
recognized related to the 2021 Notes:
|
|
Year Ended December 31,
|
|
(U.S. Dollars in thousands)
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Contractual interest expense
|
|
$
|
313
|
|
|
$
|
4,434
|
|
|
$
|
4,359
|
|
Debt discount amortization
|
|
|
147
|
|
|
|
2,309
|
|
|
|
2,587
|
|
Gain on extinguishment
|
|
|
(14,063
|
)
|
|
|
|
|
|
|
|
|
Change in fair value of convertible note embedded derivative
|
|
|
6,473
|
|
|
|
38,061
|
|
|
|
|
|
Interest payment in connection with conversions
|
|
|
|
|
|
|
3,918
|
|
|
|
234
|
|
Loss (Income) in connection with conversions
|
|
|
|
|
|
|
(1,643
|
)
|
|
|
245
|
|
Total
|
|
$
|
(7,130
|
)
|
|
$
|
47,079
|
|
|
$
|
7,425
|
|
|
c.
|
4.5% Convertible Notes Due 2022 (“2022 Notes”)
|
On July 24, 2017, the Company entered into a
privately negotiated exchange agreement (the “2017 Exchange Agreement”) with certain existing note holders identified
therein to exchange $9.0 million aggregate principal amount of the Company’s outstanding 2018 Notes for (i) $8.55 million
aggregate principal amount of the Company’s 4.5% convertible promissory notes due 2022, (ii) $275,000 in cash consideration
and (iii) cash, equal to the accrued and unpaid interest on the exchanged 2018 Notes.
As the terms of the 2018 Notes and the 2022 Notes
were substantially different, the 2017 Exchange Agreement was considered an extinguishment of debt, which in essence means recording
a loss due to the 2018 Notes that were exchanged for the 2022 Notes recorded at fair value as of the closing date. The Company
recognized a loss of $1.3 million due to the extinguishment.
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - CONVERTIBLE NOTES
(continued)
:
The Company prepared a valuation of the fair value
of the 2022 Notes (a Level 3 valuation) for the issuance date. The value of the 2022 Notes was estimated by implementing the binomial
model. The liability component was valued based on the Income Approach. The following parameters were used:
|
|
July 24, 2017
|
|
Stock price (USD)
|
|
|
0.77
|
|
Expected term
|
|
|
4.57
|
|
Risk free rate
|
|
|
1.78
|
%
|
Volatility
|
|
|
62.68
|
%
|
Yield
|
|
|
15.21
|
%
|
The Company accounts for the convertible notes as
a liability, on an aggregated basis, in their entirely. The debt discount and debt issuance costs are deferred and amortized over
the applicable convertible period.
All of the 2022 Notes were converted
during the year ended December 31, 2017 into 11,239,641 shares of Common Stock.
The following table sets forth total interest expense
recognized related to the 2022 Notes:
(U.S. Dollars in thousands)
|
|
Year Ended
December 31, 2017
|
|
Contractual interest expense
|
|
$
|
55
|
|
Debt premium amortization
|
|
|
(46
|
)
|
Loss on extinguishment
|
|
|
1,325
|
|
Total
|
|
$
|
1,334
|
|
NOTE 9 - FAIR VALUE MEASUREMENT
The Company discloses fair value measurements for
financial assets and liabilities. Fair value is based on the price that would be received from the sale of an asset, or paid to
transfer a liability, in an orderly transaction between market participants at the measurement date.
The accounting standard establishes a fair value
hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described
below:
Level 1: Quoted prices (unadjusted) in active markets
that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level
1 inputs.
Level 2: Observable prices that are based on inputs
not quoted on active markets, but corroborated by market data.
Level 3: Unobservable inputs are used when little
or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
In determining fair value, the Company utilizes
valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible
and considers counterparty credit risk in its assessment of fair value.
The fair value of the financial instruments included
in the working capital of the Company is usually identical or close to their carrying value. The fair value of the convertible
notes derivative is based on level 3 measurement.
The fair value of the $57.9 million 2021 Notes
as of December 31, 2018 is approximately $56.6 million based on a level 3 measurement.
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - FAIR VALUE MEASUREMENT
(continued)
:
The
Company prepared a valuation of the fair value of the 2021 Notes (a Level 3 valuation) as of December
31,
2018. The value of these notes were estimated by implementing the binomial model. The liability component was valued based on the
Income Approach. The following parameters were used:
|
|
2021 Notes
|
|
Stock price (USD)
|
|
|
0.31
|
|
Expected term
|
|
|
2.88
|
|
Risk free rate
|
|
|
2.44
|
%
|
Volatility
|
|
|
75.94
|
%
|
Yield
|
|
|
13.34
|
%
|
NOTE 10 - TAXES ON INCOME
Protalix BioTherapeutics, Inc. is taxed according
to U.S. tax laws. The Company’s income is taxed in the United States at the rate of up to 27%.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”)
was enacted into law. The new legislation represents fundamental and dramatic modifications to the U.S. tax system. The Act contained
several key tax provisions that impacted the Company including the reduction of the maximum U.S. federal corporate income tax rate
from 35% to 21%, effective January 1, 2018. Other significant changes under the Act included, among others, a one-time repatriation
tax on accumulated foreign earnings, a limitation of net operating loss deduction to 80% of taxable income, and indefinite carryover
of post-2017 net operating losses. The Act also repealed the corporate alternative minimum tax for tax years beginning after December
31, 2017. Losses generated prior to January 1, 2018 will still be subject to the 20-year carryforward limitation and the alternative
minimum tax. Other impacts due to the Act included the repeal of the domestic manufacturing deduction, modification of taxation
of controlled foreign corporations, a base erosion anti-abuse tax, modification of interest expense limitation rules, modification
of limitation on deductibility of excessive executive compensation, and taxation of global intangible low-taxed income.
Modification of interest expense limitation rules under the
Act provides generally that for taxable years 2018-2021 interest expense deduction shall be limited to 30% of the EBITDA and for
taxable years 2022 onwards to 30% of EBIT. Disallowed interest deduction may be carried forward indefinitely. The Company believes
that any potential impact (if applicable) of this limitation will be offset by utilization of available net operating losses.
U.S. GAAP requires that the impact of tax legislation be recognized
in the period in which the law was enacted.
The Company believes that all future
profits of its subsidiaries will be indefinitely reinvested or that there is no expectation to distribute any taxable dividends
from these subsidiaries. The determination of the amount of the unrecognized deferred tax liability related to the undistributed
earnings is estimated as an immaterial amount.
The Israeli Subsidiary is taxed according to Israeli
tax laws:
The income of the Israeli Subsidiary, other than income
from “Approved Enterprises,” is taxed in Israel at the regular corporate tax rates which were 26.5% for fiscal year
2015.
In January 2016, the Law for the Amendment of the Income
Tax Ordinance (No.216) was published, enacting a reduction of corporate tax rate beginning in 2016 and thereafter, from 26.5% to
25%.
In December 2016, the Economic Efficiency Law (Legislative
Amendments for Implementing the Economic Policy for the 2017 and 2018 Budget Years), 2016 was published, introducing a gradual reduction
in corporate tax rate from 25% to 23%. However, the law also included a temporary provision setting the corporate tax rate in 2017
at 24%. As a result, the corporate tax rate was 23% in 2018 and will be 23% in 2019 and thereafter.
Capital gain is subject to capital gain tax according
to the corporate tax rate for the year during which the assets are sold.
|
2.
|
The Law for the Encouragement of Capital Investments,
1959 (the “Encouragement of Capital Investments Law”)
|
Under the Encouragement of Capital Investments Law,
including Amendment No. 60 to the Encouragement of Capital Investments Law as published in April 2005, by virtue of the “Approved
Enterprise” or “Benefited Enterprise” status the Israeli Subsidiary is entitled to various tax benefits as follows:
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – TAXES ON INCOME
(continued)
:
Income derived from the Approved Enterprise during
a 10-year period commencing upon the year in which the enterprise first realizes taxable income is tax exempt, provided that the
maximum period to which it is restricted by the Encouragement of Capital Investments Law has not elapsed.
The Israeli Subsidiary has an “Approved Enterprise”
plan since 2004 and “Benefited Enterprise” plan since 2009. The period of benefits in respect of the main enterprise
of the Company has not yet commenced. The period during which the Company is entitled to benefits in connection with the Benefited
Enterprise expires in 2021.
If the Israeli Subsidiary subsequently pays a dividend
out of income derived from the “Approved Enterprise” or “Benefited Enterprise” during the tax exemption
period, it will be subject to tax on the gross amount distributed (including the company tax on these amounts), at the rate which
would have been applicable had such income not been exempted.
|
b.
|
Accelerated depreciation
|
The Israeli Subsidiary is entitled to claim accelerated
depreciation, as provided by Israeli law, in the first five years of operation of each asset, in respect of buildings, machinery
and equipment used by the Approved Enterprise and the Benefited Enterprise.
|
c.
|
Conditions for entitlement to the benefits
|
The Israeli Subsidiary’s entitlement to the
benefits described above is subject to its fulfilling the conditions stipulated by the law, rules and regulations published thereunder,
and the instruments of approval for the specific investment in an approved enterprise. Failure by the Israeli Subsidiary to comply
with these conditions may result in the cancellation of the benefits, in whole or in part, and the Subsidiary may be required to
refund the amount of the benefits with interest. The Israeli Subsidiary received a final implementation approval with respect to
its “Approved Enterprise” from the Investment Center.
|
d.
|
Amendment of the Law for the Encouragement of Capital
Investments, 1959
|
In recent years, several amendments have been made
to the Encouragement of Capital Investments Law which have enabled new alternative benefit tracks, subject to certain conditions.
The Encouragement of Capital Investments Law was
amended as part of the Economic Policy Law for the years 2011-2012, which was passed by the Israeli Knesset on December 29,
2010. The amendment sets alternative benefit tracks to those currently in effect under the provisions of the Encouragement of Capital
Investments Law. On December 29, 2016, Amendment 73 to the Encouragement of Capital Investments Law was published. This amendment
sets new benefit tracks, inter alia, “Preferred Technological Enterprise” and “Special Preferred Technological
Enterprise” (the “Capital Investments Law Amendment”).
The Company elected not to have the Capital Investments
Law Amendment apply to the Company.
|
c.
|
Tax losses carried forward to future years
|
As of December 31, 2018, the Company had
aggregate net operating loss (“NOL”) carry-forwards equal to approximately $211 million that are available to
reduce future taxable income as follows:
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – TAXES ON INCOME
(continued)
:
The Company’s carry-forward NOLs, equal to approximately
$26 million (as of December 31, 2017, approximately $23 million), may be restricted under Section 382
of the Internal Revenue Code (“IRC”). IRC Section 382 applies whenever a corporation with NOL experiences an
ownership change. As a result of IRC Section 382, the taxable income for any post change year that may be offset by a pre-change
NOL may not exceed the general IRC Section 382 limitation, which is the fair market value of the pre-change entity multiplied
by the IRC long-term tax exempt rate.
Significant judgment is required in
determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, the
Company considered all available evidence, including past operating results, the most recent projections for taxable income, and
prudent and feasible tax planning strategies. The Company reassesses its valuation allowance periodically and if future evidence
allows for a partial or full release of the valuation allowance, a tax benefit will be recorded accordingly.
At December 31, 2018, the Israeli Subsidiary had
approximately $185 million (as of December 31, 2017, approximately $182 million) of carry-forward NOLs
that are available to reduce future taxable income with no limited period of use.
|
d.
|
Deferred income taxes:
|
The components of the Company’s
net deferred tax assets at December 31, 2017 and 2018 were as follows:
|
|
December 31,
|
|
(U.S. dollars in thousands)
|
|
2017
|
|
|
2018
|
|
In respect of:
|
|
|
|
|
|
|
|
|
Timing Differences of Protalix Ltd.
|
|
$
|
11,761
|
|
|
$
|
6,678
|
|
Timing Differences of Protalix BioTherapeutics, Inc.
|
|
|
(426
|
)
|
|
|
(501
|
)
|
Net operating loss carry forwards
|
|
|
47,033
|
|
|
|
49,436
|
|
Valuation allowance
|
|
|
(58,368
|
)
|
|
|
(55,613
|
)
|
|
|
|
-
|
|
|
|
-
|
|
Deferred taxes are computed using
the tax rates expected to be in effect when those differences reverse.
|
e.
|
Reconciliation of the theoretical tax expense to actual
tax expense
|
The main reconciling item between the statutory tax
rate of the Company and the effective rate is the provision for a full valuation allowance in respect of tax benefits from carry
forward tax losses due to the uncertainty of the realization of such tax benefits (see above).
In accordance with the Income Tax Ordinance, as
of December 31, 2018, all of Protalix Ltd.’s tax assessments through tax year 2013 are considered final.
A summary of open tax years by major jurisdiction
is presented below:
Jurisdiction:
|
|
Years:
|
Israel
|
|
2014-2018
|
United States (*)
|
|
2014-2018
|
(*) Includes federal, state and local (or similar
provincial jurisdictions) tax positions.
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - SUPPLEMENTARY FINANCIAL STATEMENT
INFORMATION
Balance sheets:
|
|
December 31,
|
|
(U.S. dollars in thousands)
|
|
2017
|
|
|
2018
|
|
a. Other assets:
|
|
|
|
|
|
|
|
|
Institutions
|
|
$
|
394
|
|
|
$
|
574
|
|
State of Israel (see note 6a)
|
|
|
195
|
|
|
|
190
|
|
Restricted deposit
|
|
|
623
|
|
|
|
561
|
|
Prepaid expenses
|
|
|
433
|
|
|
|
453
|
|
Assets of discontinued operation
|
|
|
215
|
|
|
|
|
|
Sundry
|
|
|
74
|
|
|
|
99
|
|
|
|
$
|
1,934
|
|
|
$
|
1,877
|
|
|
|
December 31,
|
|
(U.S. dollars in thousands)
|
|
2017
|
|
|
2018
|
|
b. Accounts payable and accruals – other:
|
|
|
|
|
|
|
|
|
Payroll and related expenses
|
|
$
|
1,386
|
|
|
$
|
1,099
|
|
Interest payable
|
|
|
645
|
|
|
|
555
|
|
Provision for vacation
|
|
|
1,650
|
|
|
|
1,658
|
|
Accrued expenses
|
|
|
4,802
|
|
|
|
6,368
|
|
Royalties payable
|
|
|
301
|
|
|
|
369
|
|
Property and equipment suppliers
|
|
|
526
|
|
|
|
225
|
|
|
|
$
|
9,310
|
|
|
$
|
10,274
|
|
Statements of operations:
|
|
December 31,
|
|
(U.S. dollars in thousands)
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Revenues from selling goods:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pfizer
|
|
$
|
5,226
|
|
|
$
|
12,181
|
|
|
$
|
5,320
|
|
Brazil
|
|
$
|
3,973
|
|
|
$
|
7,061
|
|
|
$
|
3,658
|
|
|
|
$
|
9,199
|
|
|
$
|
19,242
|
|
|
$
|
8,978
|
|
Revenue from license and
R&D services
|
|
|
|
|
|
$
|
1,836
|
|
|
$
|
25,262
|
|
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - RELATED PARTY TRANSACTIONS
|
|
Year ended December 31,
|
|
(U.S.
dollars in thousands)
|
|
|
2016
|
|
|
|
2017
|
|
|
|
2018
|
|
Compensation (including share based compensation) to the non-executive directors
|
|
$
|
560
|
|
|
$
|
499
|
|
|
$
|
467
|
|
NOTE 13 - SUBSEQUENT EVENTS
The Company has evaluated
subsequent events through the date on which the consolidated financial statements were available to be issued and no subsequent
events were identified.
Protalix BioTherapeutics (AMEX:PLX)
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