Item 1. Financial Statements
PROTALIX BIOTHERAPEUTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands)
(Unaudited)
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
41,319
|
|
|
$
|
51,163
|
|
Accounts receivable – Trade
|
|
|
4,756
|
|
|
|
1,721
|
|
Other assets
|
|
|
2,594
|
|
|
|
1,934
|
|
Inventories
|
|
|
7,019
|
|
|
|
7,833
|
|
Total current assets
|
|
$
|
55,688
|
|
|
$
|
62,651
|
|
|
|
|
|
|
|
|
|
|
FUNDS IN RESPECT OF EMPLOYEE RIGHTS UPON RETIREMENT
|
|
|
1,798
|
|
|
|
1,887
|
|
PROPERTY AND EQUIPMENT, NET
|
|
|
7,311
|
|
|
|
7,676
|
|
Total assets
|
|
$
|
64,797
|
|
|
$
|
72,214
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES NET OF CAPITAL DEFICIENCY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accruals:
|
|
|
|
|
|
|
|
|
Trade
|
|
$
|
4,872
|
|
|
$
|
7,521
|
|
Other
|
|
|
10,697
|
|
|
|
9,310
|
|
Convertible notes
|
|
|
5,930
|
|
|
|
5,921
|
|
Total current liabilities
|
|
$
|
21,499
|
|
|
$
|
22,752
|
|
|
|
|
|
|
|
|
|
|
LONG TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
Convertible notes
|
|
|
46,108
|
|
|
|
46,267
|
|
Deferred revenues
|
|
|
29,030
|
|
|
|
26,851
|
|
Liability for employee rights upon retirement
|
|
|
2,427
|
|
|
|
2,586
|
|
Other long term liabilities
|
|
|
5,172
|
|
|
|
5,051
|
|
Total long term liabilities
|
|
$
|
82,737
|
|
|
$
|
80,755
|
|
Total liabilities
|
|
$
|
104,236
|
|
|
$
|
103,507
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAPITAL DEFICIENCY
|
|
|
(39,439
|
)
|
|
|
(31,293
|
)
|
Total liabilities net of capital deficiency
|
|
$
|
64,797
|
|
|
$
|
72,214
|
|
The accompanying notes are an integral
part of the condensed consolidated financial statements.
PROTALIX
BIOTHERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. dollars in thousands, except share and per share data)
(Unaudited)
|
|
Three Months Ended
|
|
|
|
March 31, 2018
|
|
|
March 31, 2017
|
|
REVENUES
|
|
$
|
4,553
|
|
|
$
|
2,889
|
|
COST OF REVENUES
|
|
|
(2,924
|
)
|
|
|
(2,088
|
)
|
GROSS PROFIT
|
|
|
1,629
|
|
|
|
801
|
|
RESEARCH AND DEVELOPMENT EXPENSES (1)
|
|
|
(7,286
|
)
|
|
|
(5,967
|
)
|
Less – grants
|
|
|
843
|
|
|
|
1,338
|
|
RESEARCH AND DEVELOPMENT EXPENSES, NET
|
|
|
(6,443
|
)
|
|
|
(4,629
|
)
|
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (2)
|
|
|
(2,498
|
)
|
|
|
(2,537
|
)
|
OPERATING LOSS
|
|
|
(7,312
|
)
|
|
|
(6,365
|
)
|
FINANCIAL EXPENSES
|
|
|
(2,220
|
)
|
|
|
(2,087
|
)
|
FINANCIAL INCOME
|
|
|
132
|
|
|
|
1,625
|
|
LOSS FROM CHANGE IN FAIR VALUE OF CONVERTIBLE NOTES embedded derivative
|
|
|
|
|
|
|
(52,321
|
)
|
FINANCIAL (EXPENSES) INCOME, NET
|
|
|
(2,088
|
)
|
|
|
(52,783
|
)
|
LOSS FOR THE PERIOD
|
|
|
(9,400
|
)
|
|
|
(59,148
|
)
|
NET LOSS PER SHARE OF
COMMON STOCK – BASIC AND DILUTED
|
|
$
|
(0.06
|
)
|
|
$
|
(0.48
|
)
|
WEIGHTED AVERAGE NUMBER OF SHARES
OF COMMON STOCK USED IN COMPUTING LOSS PER SHARE – BASIC AND DILUTED
|
|
|
145,305,982
|
|
|
|
124,467,602
|
|
(1) Includes share-based compensation
|
|
|
42
|
|
|
|
65
|
|
(2) Includes share-based compensation
|
|
|
20
|
|
|
|
53
|
|
The accompanying
notes are an integral part of the condensed consolidated financial statements.
PROTALIX BIOTHERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN
CAPITAL DEFICIENCY
(U.S. dollars in thousands, except share
data)
(Unaudited)
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Common
|
|
|
Paid–In
|
|
|
Accumulated
|
|
|
|
|
|
|
Stock (1)
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
Number of
shares
|
|
|
Amount
|
|
Balance at December 31, 2016
|
|
|
124,134,085
|
|
|
$
|
124
|
|
|
$
|
202,575
|
|
|
$
|
(212,656
|
)
|
|
$
|
(9,957
|
)
|
Changes during the three-month period ended March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation related to stock options
|
|
|
|
|
|
|
|
|
|
|
118
|
|
|
|
|
|
|
|
118
|
|
Convertible notes conversions
|
|
|
923,018
|
|
|
|
1
|
|
|
|
516
|
|
|
|
|
|
|
|
517
|
|
Net loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(59,148
|
)
|
|
|
(59,148
|
)
|
Balance at March 31, 2017
|
|
|
125,057,103
|
|
|
|
125
|
|
|
|
203,209
|
|
|
|
(271,804
|
)
|
|
|
(68,470
|
)
|
Balance at December 31, 2017
|
|
|
143,728,797
|
|
|
$
|
144
|
|
|
$
|
266,495
|
|
|
$
|
(297,932
|
)
|
|
$
|
(31,293
|
)
|
Changes during the three-month period ended March 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation related to stock options
|
|
|
|
|
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
46
|
|
Share-based compensation related to restricted stock award
|
|
|
29,898
|
|
|
|
*
|
|
|
|
16
|
|
|
|
|
|
|
|
16
|
|
Convertible notes conversions
|
|
|
1,811,260
|
|
|
|
2
|
|
|
|
1,190
|
|
|
|
|
|
|
|
1,192
|
|
Net loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,400
|
)
|
|
|
(9,400
|
)
|
Balance at March 31, 2018
|
|
|
145,569,955
|
|
|
$
|
146
|
|
|
$
|
267,747
|
|
|
$
|
(307,332
|
)
|
|
$
|
(39,439
|
)
|
|
*
|
Represents an amount less than $1.
|
|
(1)
|
Common Stock, $0.001 par value; Authorized – as
of March 31, 2018 and 2017 – 250,000,000.
|
The
accompanying notes are an integral part of the condensed consolidated financial statements.
PROTALIX BIOTHERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(U.S. dollars in thousands)
(Unaudited)
|
|
Three Months Ended
|
|
|
|
March 31, 2018
|
|
|
March 31, 2017
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,400
|
)
|
|
$
|
(59,148
|
)
|
Adjustments required to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Share based compensation
|
|
|
62
|
|
|
|
118
|
|
Depreciation
|
|
|
430
|
|
|
|
492
|
|
Financial (income) expenses, net (mainly exchange differences)
|
|
|
28
|
|
|
|
(9
|
)
|
Changes in accrued liability for employee rights upon retirement
|
|
|
(124
|
)
|
|
|
42
|
|
Gain on amounts funded in respect of employee rights upon retirement
|
|
|
(44
|
)
|
|
|
(20
|
)
|
Net loss (income) in connection with conversions of convertible notes
|
|
|
218
|
|
|
|
(1,445
|
)
|
Change in fair value of convertible notes embedded derivative
|
|
|
|
|
|
|
52,321
|
|
Amortization of debt issuance costs and debt discount
|
|
|
619
|
|
|
|
590
|
|
Issuance of shares for interest payment in connection with conversions of convertible notes
|
|
|
205
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Increase in deferred revenues (including non-current portion)
|
|
|
2,179
|
|
|
|
1,088
|
|
Increase in accounts receivable and other assets
|
|
|
(3,512
|
)
|
|
|
(3,092
|
)
|
Decrease (increase) in inventories
|
|
|
814
|
|
|
|
(1,855
|
)
|
Increase (decrease) in accounts payable and accruals
|
|
|
(1,009
|
)
|
|
|
2,370
|
|
Increase in other long term liabilities
|
|
|
121
|
|
|
|
|
|
Net cash used in continuing operations
|
|
|
(9,413
|
)
|
|
|
(8,548
|
)
|
Net cash provided by discontinued operations
|
|
|
|
|
|
|
122
|
|
Net cash used in operating activities
|
|
|
(9,413
|
)
|
|
|
(8,426
|
)
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(249
|
)
|
|
|
(220
|
)
|
Increase in restricted deposit
|
|
|
(188
|
)
|
|
|
(23
|
)
|
Amounts funded in respect of employee rights upon retirement, net
|
|
|
109
|
|
|
|
(40
|
)
|
Net cash used in investing activities
|
|
|
(328
|
)
|
|
|
(283
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net payment for conversion of convertible notes
|
|
|
|
|
|
|
(6,726
|
)
|
Net cash used in financing activities
|
|
|
|
|
|
|
(6,726
|
)
|
EFFECT OF
EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
|
|
|
(103
|
)
|
|
|
171
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(9,844
|
)
|
|
|
(15,264
|
)
|
BALANCE OF
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
|
|
51,163
|
|
|
|
63,281
|
|
BALANCE OF CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$
|
41,319
|
|
|
$
|
48,017
|
|
The accompanying
notes are an integral part of the condensed consolidated financial statements.
PROTALIX BIOTHERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(U.S. dollars in thousands)
(Unaudited)
(Continued) – 2
|
|
Three Months Ended
|
|
|
|
March 31, 2018
|
|
|
March 31, 2017
|
|
SUPPLEMENTARY INFORMATION ON INVESTING AND FINANCING ACTIVITIES NOT INVOLVING CASH FLOWS:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
$
|
342
|
|
|
$
|
636
|
|
Convertible notes conversions
|
|
$
|
987
|
|
|
$
|
517
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY DISCLOSURE ON CASH FLOWS
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
145
|
|
|
$
|
432
|
|
The accompanying
notes are an integral part of the condensed consolidated financial statements.
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 current 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 directly 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.
Since its approval by the FDA,
taliglucerase alfa has been marketed by Pfizer Inc. (“Pfizer”), as provided in the exclusive license and supply agreement
by and 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 (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 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.
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES
(continued)
:
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 for sales of alfataliglicerase to Fiocruz in 2017, and $2.6 million during the three months ended
March 31, 2018.
On October 19, 2017, Protalix Ltd.
and Chiesi Farmaceutici S.p.A. (“Chiesi”) entered into an Ex-US license (the “Chiesi Agreement”) pursuant
to which Chiesi was granted an exclusive license for all markets outside of the United States to commercialize pegunigalsidase
alfa. Under the terms and conditions of the Chiesi Agreement, Protalix Ltd. retained the right to commercialize pegunigalsidase
in the United States.
Under the Chiesi 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 additional payments of up to $320.0 million, in the aggregate, in regulatory and commercial
milestone payments.
Under the terms of the Chiesi Agreement,
Protalix Ltd. will 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 will 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.
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 March 31, 2018 financial statements, 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.
The accompanying unaudited condensed consolidated
financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United
States (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes
required by GAAP for annual financial statements. In the opinion of management, all adjustments (of a normal recurring nature)
considered necessary for a fair statement of the results for the interim periods presented have been included. Operating results
for the interim period are not necessarily indicative of the results that may be expected for the full year.
These unaudited condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial statements in the Annual Report on Form 10-K for
the year ended December 31, 2017, filed by the Company with the Commission. The comparative balance sheet at December 31, 2017
has been derived from the audited financial statements at that date.
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.
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES
(continued)
:
Diluted LPS is calculated in continuing operations.
The calculation of diluted LPS does not include 78,142,133 and 73,800,491 shares of Common Stock underlying outstanding options
and restricted shares of Common Stock and shares issuable upon conversion of outstanding convertible notes for the three months ended March
31, 2017 and 2018, respectively, because the effect would be anti-dilutive.
|
1.
|
Revenues from supply agreements
|
The Company recognizes revenues
from supply agreements and from selling products when control is transferred to the customer and collectability is probable.
|
2.
|
Revenues from Chiesi Agreement
|
As Chiesi is obligated to acquire pegunigalsidase alfa
from the Company and the development services are not considered distinct, development and manufacturing of a product to be commercialized
by Chiesi is viewed as a single performance obligation. Since there is only one performance obligation, all payments received
by Chiesi prior to the satisfaction of the Company’s obligation will be deferred. Therefore, the $25.0 million upfront payment
and future research and development reimbursement payments (up to $25.0 million) and any potential additional development milestone
payments are contract liabilities and will be deferred until the commencement of commercial manufacturing.
|
e.
|
Recently adopted standards
|
In May 2014, the
Financial
Accounting Standards Board (“FASB”)
issued guidance on revenues from contracts with customers that will supersede
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. The guidance is effective
for the interim and annual periods beginning on or after December 15, 2017. On January 1, 2018, the Company adopted the new accounting
standard, ASC 606, Revenue from Contracts with Customers, 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 January 2016, the FASB issued ASU, No. 2016-01, Financial Instruments-Overall: Recognition and Measurement
of Financial Assets and Financial Liabilities. The guidance affects the accounting for equity investments, financial liabilities
under the fair value option and the presentation and disclosure requirements of financial instruments. The guidance is effective
for annual reporting periods beginning after December 15, 2017. The implementation of this ASU did not have a material impact on
the Company’s consolidated financial statements.
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 – INVENTORIES
Inventory at March 31, 2018 and December 31,
2017 consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(
U.S. dollars in thousands)
|
|
Raw materials
|
|
$
|
3,529
|
|
|
$
|
3,838
|
|
Work in progress
|
|
|
317
|
|
|
|
485
|
|
Finished goods
|
|
|
3,173
|
|
|
|
3,510
|
|
Total inventory
|
|
$
|
7,019
|
|
|
$
|
7,833
|
|
NOTE 3 – FAIR VALUE MEASUREMENT
The Company measures fair value and 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 remaining $5.9 million
in aggregate principal amount of the Company’s outstanding 4.50% convertible promissory notes due 2018 (the “2013 Notes”),
and of the remaining $58.1 million in aggregate principal amount of the Company’s outstanding 7.50% secured convertible
promissory notes due 2021 (the “2016 Notes”), is approximately $5.7 million and $69.3 million, respectively,
based on a Level 3 measurement.
PROTALIX BIOTHERAPEUTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – FAIR VALUE MEASUREMENT
(continued)
:
The Company prepared a valuation of the fair value
of the 2013 Notes and the 2016 Notes (a Level 3 valuation) as of March 31, 2018. The values 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:
|
|
2013 Notes
|
|
2016 Notes
|
Stock price (USD)
|
|
0.5399
|
|
0.5399
|
Expected
term (years)
|
|
0.46
|
|
3.63
|
Risk free rate
|
|
1.88%
|
|
2.45%
|
Volatility
|
|
62.44%
|
|
70.96%
|
Yield
|
|
12.89%
|
|
12.44%
|
NOTE 4 – CONVERTIBLE NOTES
All of our outstanding convertible notes are
accounted for using the guidance set forth in the FASB Accounting
Standards Codification (ASC) 815 which requires 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 accounts for the 2013 Notes as a liability,
on an aggregated basis, in their entirety. The 2016 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 2016
Notes are amortized using the effective interest rate.
The debt discount and debt issuance costs regarding
the issuance of the 2013 Notes are deferred and amortized over the 2013 Notes period (5 years).
During
the three months ended March 31, 2018, note holders converted
$1.0 million
aggregate
principal amount of the 2016 Notes into a total of 1,338,707 shares of Common Stock,
and cash payments of
approximately $11,668, in the aggregate.
As
of March 31, 2018, a total of $58.1 million aggregate principal amount of the 2016 Notes and
$5.9 million aggregate
principal amount of the
2013 Notes
were outstanding.
NOTE 5 – REVENUES
The following table summarizes
the Company’s disaggregation of revenues:
|
|
March 31,
|
|
(U.S. dollars in thousands)
|
|
2018
|
|
|
2017
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Pfizer
|
|
$
|
1,980
|
|
|
$
|
1,646
|
|
Brazil
|
|
$
|
2,573
|
|
|
$
|
1,243
|
|
|
|
$
|
4,553
|
|
|
$
|
2,889
|
|
Item 2. 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 financial statements and the consolidated financial
statements and the related notes included elsewhere in this Form 10-Q and in our Annual Report on Form 10-K for the year ended
December 31, 2017. 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 our Annual Report on Form 10-K for the year ended December 31, 2017 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 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 Agreement, Protalix Ltd. retained the right to commercialize pegunigalsidase alfa in the
United States. Under the Chiesi 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.
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.
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 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
.
Except for the rights to commercialize taliglucerase alfa worldwide
(other than Brazil), which we licensed to Pfizer, and the rights to pegunigalsidase alfa Chiesi outside the United States, which
we licensed to Chiesi, we hold the worldwide commercialization rights to all of our 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 in this Quarterly Report. There have not been any changes to
our significant accounting policies since we filed our Annual Report on Form 10-K for the year ended December 31, 2017.
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.
Convertible Notes
All of our outstanding convertible notes
are accounted for using the guidance set forth in FASB ASC 815 which requires 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 account for the 2013 Notes as
a liability, on an aggregated basis, in their entirety. The 2016 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 2016 Notes are amortized using the effective interest rate.
The debt discount and debt issuance
costs regarding the issuance of the 2013 Notes are deferred and amortized over the 2013 Notes period (5 years).
During the three months ended March
31, 2018, note holders converted $1.0 million aggregate principal amount of our 2016 Notes into a total of 1,338,707 shares
of our common stock, and cash payments of approximately $11,668, in the aggregate.
As of March 31, 2018, a total of
$58.1 million aggregate principal amount of the 2016 Notes and $5.9 million aggregate principal amount of the 2013 Notes
were outstanding.
Results of Operations
Three months ended March 31, 2018 compared to the three
months ended March 31, 2017
Revenues
We recorded revenues of $4.6 million during the three
months ended March 31, 2018, an increase of $1.7 million, or 58%, compared to revenues of $2.9 million for the three
months ended March 31, 2017. The increase resulted primarily from an increase of $1.3 million in drug product sold in
Brazil.
Cost of Revenues
Cost of revenues was $2.9 million for the three months
ended March 31, 2018, an increase of $836,000 from cost of revenues of $2.1 million for the three months ended March 31, 2017.
The increase resulted primarily from increased sales in Brazil.
Research and Development Expenses, Net
Research and development expenses were $6.4 million for
the three months ended March 31, 2018, an increase of $1.8 million, or 39%, compared to $4.6 million of research and
development expenses for the three months ended March 31, 2017. The increase resulted primarily from an increase of $1.6 million
in clinical trial related costs.
We expect research and development expenses for our various
development programs to continue to be our primary expense.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were
$2.5 million for the three months ended March 31, 2018 and for the three months ended March 31, 2017.
Financial Expenses, net
Financial expenses net were $2.1 million
for the three months ended March 31, 2018 compared to financial expenses net of $52.8 million for the three months ended March
31, 2017. During the three
months ended March 31, 2017, financial expenses included a charge of $52.3 million as a result of the re-measurement of
the fair value of the 2016 Notes embedded derivative resulting mainly from the increase in the market value of our common
stock during the three months ended March 31, 2017. In addition, financial expenses is composed primarily from interest
expense on convertible notes of $1.2 million and $1.3 million for the three months ended March 31, 2018 and 2017,
respectively.
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 incurred 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.
In addition to the foregoing, on September 18, 2013, we completed
a private placement of $69.0 million in aggregate principal amount of 4.50% convertible notes due 2018, including $9.0 million
aggregate principal amount of the of 4.50% convertible 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 7.50% convertible notes due 2021. Finally, on July 25, 2017, we completed a private placement of an additional $10.0 million
in aggregate principal amount of 7.50% convertible notes due 2021.
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 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 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 an upfront payment
to Protalix Ltd. of $25.0 million in connection with the execution of the Chiesi Agreement.
Cash Flows
Net cash used in operations was
$9.4 million for the three months ended March 31, 2018. The net loss for the three months ended March 31, 2018 of $9.4 million
was further increased by a $3.5 million increase in accounts receivable and a decrease of $1.0 million in accounts payable,
but was partially offset by an increase of $2.2 million in deferred revenues and by a decrease in inventories of $814,000.
Net cash used in investing activities for the three months ended March 31, 2018 was $328,000 and consisted primarily of purchases
of property and equipment, and an increase in restricted deposit.
Net cash used in operations was
$8.4 million for the three months ended March 31, 2017. The net loss for the three months ended March 31, 2017 of $59.1 million
was further increased by an increase of $3.1 million in accounts receivable and an increase of $1.9 million in inventories,
but was partially offset by change of $52.3 million in the fair value of convertible notes embedded derivative and increase
of $2.4 million in accounts payable. Net cash used in investing activities for the three months ended March 31, 2017 was $283,000
and consisted primarily of purchases of property and equipment.
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 pegunigalsidase
alfa. 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 outstanding 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 stockholders. 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 three months ended March 31, 2018 and March 31, 2017.
Currency fluctuations could affect us through
increased or decreased acquisition costs for certain goods and services. We do not believe currency fluctuations have had a material
effect on our results of operations during the three months ended March 31, 2018 and March 31, 2017.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements
as of each of March 31, 2018 and March 31, 2017.