Item 1. Business.
Historical Background and Corporate Structure
Intec Pharma Ltd. was
established and incorporated in Israel on October 23, 2000 as a private Israeli company under the name Orly Guy Ltd. In February
2001, our name was changed to Intec Pharmaceuticals (2000) Ltd. Our research and development activities began originally through
a private partnership, Intec Pharmaceutical Partnership I.P.P, a general Israeli partnership, formed on September 21, 2000. Its
operations were transferred in full to us at the beginning of 2002 in return for the allocation of shares in our company to the
partners in the partnership, pro rata with their ownership in the partnership. In March 2004, we changed our corporate name to
Intec Pharma Ltd. In February 2010, we successfully completed an initial public offering in Israel on the Tel Aviv Stock Exchange,
or TASE and in August 2015 we completed an initial public offering in the U.S. In September 2017, we incorporated a wholly-owned
subsidiary, Intec Pharma Inc., in the State of Delaware. In August 2018, we voluntarily delisted from the TASE.
In connection with
our initial public offering in Israel in February 2010, we raised approximately NIS 35.3 million before issuance costs and issued
783,969 ordinary shares and registered warrants (Series 1) to purchase 313,588 of our ordinary shares. As of the date of this Annual
Report, all warrants issued in our initial public offering in Israel have expired.
In connection with
our initial public offering in the U.S. in August 2015, we raised gross proceeds of approximately $34.0 million before deducting
underwriting discounts and commissions and other offering expenses and since then we have raised approximately $104 million in
gross proceeds in public offerings in the U.S.
Effective
January 1, 2019, we ceased reporting as a “foreign private issuer” as defined in Rule 3b-4 of the Exchange Act, and
became subject to the rules and regulations under the Securities Exchange Act of 1934, as amended, or Exchange Act, applicable
to U.S. domestic issuers. As a result, we have been filing an Annual Report on Form 10-K beginning with the fiscal year ended December
31, 2018. Our annual reports for prior years were filed on Form 20-F.
We are an “emerging
growth company,” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As such, we are eligible to, and
intend to, take advantage of certain exemptions from various reporting requirements applicable to other public companies that are
not “emerging growth companies” such as reduced disclosure obligations regarding executive compensation and not being
required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley
Act. We will remain an emerging growth company until the earliest of: (i) the last day of the fiscal year during which we have
total annual gross revenues of $1.07 billion or more, (ii) the last day of the fiscal year following the fifth anniversary of the
date of the first sale of our ordinary shares pursuant to an effective registration statement (i.e., December 31, 2020) (iii) the
date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt or (iv) the date
on which we are deemed a “large accelerated issuer” as defined in Regulation S-K of the Securities Act of 1933, as
amended, or the Securities Act.
We are also a smaller
reporting company, and we will remain a smaller reporting company until the fiscal year following the determination that our voting
and non-voting common shares held by non-affiliates is more than $250 million measured on the last business day of our second fiscal
quarter, or our annual revenues are more than $100 million during the most recently completed fiscal year and our voting and non-voting
common shares held by non-affiliates is more than $700 million measured on the last business day of our second fiscal quarter.
Similar to emerging growth companies, smaller reporting companies are able to provide simplified executive compensation disclosure,
are exempt from the auditor attestation requirements of Section 404, and have certain other reduced disclosure obligations, including,
among other things, being required to provide only two years of audited financial statements and not being required to provide
selected financial data, supplemental financial information or risk factors.
Our principal executive
offices are located in Har Hotzvim at 12 Hartom Street, Jerusalem, Israel 9777512 and our telephone number is (+972) (2) 586-4657.
Our website address is http://www.intecpharma.com. The information contained on, or that can be accessed through, our website is
neither a part of nor incorporated into this Annual Report. We have included our website address in this Annual Report solely as
an inactive textual reference.
We use our investor
relations website (http://ir.intecpharma.com) as a channel of distribution of Company information. The information we post through
this channel may be deemed material. Accordingly, investors should monitor our website, in addition to following our press releases,
SEC filings and public conference calls and webcasts. The contents of our website are not, however, a part of this Annual Report.
Overview
We are a clinical stage
biopharmaceutical company focused on developing drugs based on our proprietary Accordion Pill platform technology, which we refer
to as the Accordion Pill. Our Accordion Pill is an oral drug delivery system that is designed to improve the efficacy and safety
of existing drugs and drugs in development by utilizing an efficient gastric retention, or GR, and specific release mechanism.
Our product pipeline currently includes several product candidates in various stages of development. Our leading product candidate,
Accordion Pill Carbidopa/Levodopa, or AP-CD/LD, is being developed for the indication of treatment of Parkinson’s disease
symptoms in advanced Parkinson’s disease patients.
In July 2019, we announced
top-line results from our pivotal Phase III clinical for AP-CD/LD for the treatment of advanced Parkinson’s disease known
as the ACCORDANCE study in which the ACCORDANCE study did not meet its target endpoints. While AP-CD/LD provided treatment for
Parkinson’s disease symptoms, it did not demonstrate statistically superiority over immediate release CD/LD on the primary
endpoint of OFF time reduction under the conditions established in the protocol. Treatment-emergent adverse effects observed with
AP-CD/LD were generally consistent with the known safety profile of CD/LD formulations and no new safety issues were observed throughout
the double-blinded study, during the gastroscopy safety sub-study or the 12-month open-label extension study. From our review of
the data, we have observed a meaningful reduction in OFF time in certain subsets of patients. We have completed the analysis of
the full data set and we are currently seeking to partner AP-CD/LD as the basis for the strategy for AP-CD/LD moving forward.
Previously, we successfully
completed a Phase II clinical trial for AP-CD/LD for the treatment of Parkinson’s disease symptoms in advanced Parkinson’s
disease patients and in February 2019, we announced that AP-CD/LD met the primary endpoint in a pharmacokinetic, or PK, study comparing
the AP-CD/LD 50/500mg dosed three times daily, the most common dose used in our ACCORDANCE study, to 1.5 tablets of CD/LD immediate
release (Sinemet™) 25/100 dosed five times per day in Parkinson’s disease patients.
We have invested in
the commercial scale manufacture of AP-CD/LD, for which we are in partnership with LTS Lohmann Therapie-Systeme AG, or LTS. In
December 2018, the large commercial scale production line, or the Production Line, was delivered to LTS in Andernach, Germany and
recently we completed the qualification studies for the commercial scale manufacture of the Accordion Pill and we have initiated
the validation and stability studies which are expected to serve as the clinical material for the next Phase 3 clinical trial plan.
In addition, we have
initiated a clinical development program for our Accordion Pill platform with the two primary cannabinoids contained in cannabis
sativa, which we refer to as AP-Cannabinoids. We are formulating and testing CBD and THC for the treatment of various pain indications.
AP-Cannabinoids are designed to extend the absorption phase of CBD and THC, with the goal of more consistent levels for an improved
therapeutic effect, which may address several major drawbacks of current methods of treatment, such as short duration of effect,
delayed onset, variability of exposure, variability of the administered dose and adverse events that correlate with peak levels.
In March 2017, we initiated a Phase I single-center, single-dose, randomized, three-way crossover clinical trial in Israel to compare
the safety, tolerability and PK of AP-THC/CBD with Sativex®, an oral buccal spray containing CBD and THC that is commercially
available outside of the United States. Initial results demonstrated that the Accordion Pill platform is well suited to safely
deliver CBD and THC with significant improvements in exposure compared with Sativex®. In December 2018, we initiated a PK study
of AP-THC and the results of the study demonstrate that the custom designed AP delivery system in the AP-THC PK study did not meet
our expectations. We are continuing to advance the AP-Cannabinoids clinical development program and we are seeking to launch a
PK study with the optimized AP-THC in 2020.
While the ACCORDANCE
results were not what we expected, we continue to believe in the potential of the Accordion Pill platform. In December 2018, we
reported that we successfully developed an Accordion Pill for a Novartis proprietary compound that met the required in vitro
specifications set forth in a feasibility agreement with Novartis. We recently completed the human PK study that was initiated
during the first quarter of 2019 and the study demonstrated that the AP met the technical requirements set forth by Novartis. In
December 2019, Novartis, following an internal and revised commercial strategic assessment, advised us that this program no longer
meets Novartis’ mid to long-term strategic goals. Novartis paid Intec Pharma $1.5 million on conclusion of the program. We
restructured our clinical manufacturing planned to support this program in order to reduce costs. We are looking to identify additional
compounds in the Novartis portfolio that can benefit from the unique characteristics of the AP platform.
In May 2019, we reported
entering into a research collaboration agreement with Merck for the development of a custom-designed AP for one of Merck’s
proprietary compounds that met the required in vitro specifications. We aim to initiate an in-vivo study by the
middle of 2020.
We continue to advance
discussions with other potential pharmaceutical partners for the development of new custom-designed APs. We believe the data from
our ACCORDANCE trial enhances those discussions as it validates the AP platform and provides long-term safety data.
Our Accordion Pill Platform Technology
We believe that our
Accordion Pill technology has the potential to improve the performance of approved drugs and drugs in development, including Levodopa,
by providing several distinct advantages, including, but not limited to:
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increasing efficacy of the drug incorporated into the Accordion Pill;
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improving safety of the drug incorporated into the Accordion Pill by reducing the side effects of such drugs;
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reducing the number of daily administrations required to achieve the same or superior therapeutic effect as the non-Accordion Pill version of such drugs; and
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expanding the intellectual protection period of the drug incorporated into the Accordion Pill.
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Our anticipated ability
to submit NDAs pursuant to Section 505(b)(2) for our existing pipeline and future products increases the likelihood of accelerating
the time to commercialization of our products and decreasing costs when compared to those typically associated with new chemical
entities, or NCEs.
Our Accordion Pill
platform technology is designed to increase the time that drugs are retained in the stomach as compared to other oral dosage forms,
such as tablets and capsules. This capability is particularly important to drugs with a narrow absorption window, or NAW, which
are absorbed mainly in the upper part of the gastrointestinal, or GI, tract. Regular controlled-release formulations of such drugs
currently on the market sometimes fail to provide an efficient solution, as once the regular dosage form has passed the drug’s
NAW in the upper gastrointestinal, or GI, tract, the drug is not, or is very poorly, absorbed in the distal parts of the GI tract.
The Accordion Pill platform technology is also designed for drugs with low solubility, which do not efficiently dissolve in the
GI tract, and drugs with low permeability, which do not efficiently penetrate the intestinal wall and reach the blood stream, such
as Biopharmaceutics Classification System, or BCS, Class II (low solubility, high permeability) and Class IV (low solubility, low
permeability) drugs. According to The AAPS Journal published by the American Association of Pharmaceutical Scientists, of the top
200 oral drugs in the United States, Great Britain, Spain and Japan in 2006, approximately 30% to 35% were BCS Class II drugs and
approximately 5% to 10% were BCS Class IV drugs. Further, according to The AAPS Journal in 2011 approximately 90% of new molecular
entities in development were either Class II or Class IV drugs. Poorly soluble drugs are sometimes characterized by low bioavailability,
which is strongly affected by the drug’s solubility. In addition, the extent of absorption of poorly soluble drugs can be
dose dependent, leading to non-linear PK behavior. The Accordion Pill’s efficient GR and specific release mechanism prolongs
the absorption phase of drugs with an NAW, which can result in significantly more stable plasma levels. In addition, the Accordion
Pill has demonstrated an enhancement of the absorption of a poorly soluble, BCS Class II/IV drug in a crossover PK clinical study
in 12 healthy volunteers. For poorly soluble drugs, we believe that our technology acts through the gradual delivery of an undissolved
drug by the Accordion Pill in the stomach, which allows for the complete dissolution of the drug dose in the stomach over the delivery
period. The gradual passage of the drug from the stomach to the upper part of the GI tract enables an increase in the amount of
the drug that can be dissolved and thus absorbed, in the upper small bowel. In addition, we believe that bile secretion in the
upper part of the GI tract also improves the intestinal environment for better absorption. Finally, the significant dilution of
the drug solution in the small bowel caused by prolonged delivery increases the amount of the drug available for absorption.
Our clinical trials
to date have demonstrated that the Accordion Pill is retained in the stomach for eight to 12 hours, as compared to significantly
shorter time periods, typically as little as two to three hours, when using other solid dosage forms. The efficient GR and the
predetermined release profile for each specific drug associated with our Accordion Pill technology demonstrated a significant improvement
in PK, which is the drug plasma level over time and a corresponding improvement in efficacy and safety.
The following chart
depicts the Accordion Pill’s capability to improve the PK of Levodopa, which is a drug characterized by a narrow absorption
window:
AP-CD/LD Phase II clinical trial —
more stable Levodopa levels with statistically significant
reduced peak-to-trough fluctuations
Levodopa plasma levels
in n=8 advanced Parkinson’s disease patients following twice daily, or b.i.d, administration (eight hours apart) of AP-CD/LD
50/375 versus four times daily, or q.i.d, administration (four hours apart) of a commercial Carbidopa/Levodopa formulation (equivalent
daily Levodopa dose). The PK study was performed on day seven, following six days of drug administration at home. No Levodopa medication
was allowed for ten hours before the first administration at day seven. The PK results showed that the peak to trough ratio, which
measures the maximum average concentration relative to the minimum average concentration of LD plasma levels, was reduced from
29.9 to 3.2 with the AP-CD/LD.
The following chart
depicts the Accordion Pill’s capability to improve the PK of a BCS Class II/IV drug combined with our Accordion Pill technology
that is currently on the market and is characterized with poor solubility:
PK results with the Accordion Pill
with a BCS Class II/IV drug that is currently available
on the market in 12 healthy volunteers
The results of our
clinical trial have demonstrated approximately a 100% increase in bioavailability in 12 healthy volunteers with our Accordion Pill
technology, as compared to the commercial formulation of the drug. Furthermore, the results demonstrated that the increase in bioavailability
obtained when administering one Accordion Pill and two Accordion Pills was proportional to the increase in dosage, or linear absorption,
whereas the commercial formulation does not show linear absorption in these dosage ranges.
Although there is no
assurance that these results will be repeated in other instances, we believe that these results are important because the enhancement
of bioavailability of poorly soluble drugs is one of the main challenges facing the pharmaceutical industry.
Our Accordion Pill
technology enables us to combine active pharmaceutical ingredients, or APIs, which are also referred to as drugs, and inactive
ingredients that are included in the FDA’s list of approved inactive ingredients, into pharmaceutical-grade, biodegradable
polymeric films, welded into a planar structure, folded into the shape of an accordion and placed inside of a capsule. While in
the stomach, the capsule dissolves and the Accordion Pill unfolds and releases the drug in a predetermined profile. In order to
provide optimum results for each drug, each Accordion Pill drug differs and will likely differ in several ways, including composition,
structure and properties.
The diagram below illustrates
the general structure of the Accordion Pill:
All of the ingredients
in the Accordion Pill (active and inactive) are combined physically, not chemically, thus maintaining the chemical composition
of the active ingredients.
The Accordion Pill
has a drug release mechanism that is independent of the gastric retention mechanism. It can combine both immediate and controlled
release profiles, as well as more than one drug. We have demonstrated that the Accordion Pill has the ability to carry a drug load
of up to 550 mg. We have also demonstrated that the Accordion Pill fully degrades in the intestine once it is expelled from the
stomach.
Our Product Pipeline
Our product pipeline
currently includes several product candidates in various stages of development.
Our leading product
candidate, AP-CD/LD, is being developed for the indication of treatment of Parkinson’s disease symptoms in advanced Parkinson’s
disease patients. In July 2019, we announced top-line results from our pivotal Phase III clinical for AP-CD/LD for the treatment
of advanced Parkinson’s disease known as the ACCORDANCE study in which the ACCORDANCE study did not meet its target endpoints.
While AP-CD/LD provided treatment for Parkinson’s disease symptoms, it did not demonstrate statistically superiority over
immediate release CD/LD on the primary endpoint of OFF time reduction under the conditions established in the protocol. Treatment-emergent
adverse effects observed with AP-CD/LD were generally consistent with the known safety profile of CD/LD formulations and no new
safety issues were observed throughout the double-blinded study, during the gastroscopy safety sub-study or the 12-month open-label
extension study. From our review of the data, we have observed a meaningful reduction in OFF time in certain subsets of patients.
We have completed the analysis of the full data set and we are currently seeking to partner AP-CD/LD as the basis for the strategy
for AP-CD/LD moving forward.
In addition, we have
initiated a clinical development program for our Accordion Pill platform with the two primary cannabinoids contained in cannabis
sativa, which we refer to as AP-Cannabinoids. We are formulating and testing CBD and THC for the treatment of various pain indications.
AP-Cannabinoids are designed to extend the absorption phase of CBD and THC, with the goal of more consistent levels for an improved
therapeutic effect, which may address several major drawbacks of current methods of treatment, such as short duration of effect,
delayed onset, variability of exposure, variability of the administered dose and adverse events that correlate with peak levels.
In March 2017, we initiated a Phase I single-center, single-dose, randomized, three-way crossover clinical trial in Israel to compare
the safety, tolerability and PK of AP-THC/CBD with Sativex®, an oral buccal spray containing CBD and THC that is commercially
available outside of the United States. Initial results demonstrated that the Accordion Pill platform is well suited to safely
deliver CBD and THC with significant improvements in exposure compared with Sativex®. In December 2018, we initiated a PK study
of AP-THC and the results of the study demonstrate that the custom designed AP delivery system in the AP-THC PK study did not meet
our expectations. We are continuing to advance the AP-Cannabinoids clinical development program and we are seeking to launch a
PK study with the optimized AP-THC in 2020.
In
May 2019, we reported entering into a research collaboration agreement with Merck for the development of a custom-designed AP
for one of Merck’s proprietary compounds that met the required in vitro specifications. We aim to initiate
an in-vivo study by the middle of 2020.
Our Business Strategy
We plan to leverage
our Accordion Pill technology platform to become a leading specialty pharmaceutical company focused on developing, manufacturing
and commercializing improved proprietary versions of approved and development stage drugs for the treatment of various diseases.
We intend to continue
to develop our existing product candidates while reviewing other drug candidates that may also benefit from our platform technology.
We seek to create global partnerships to assist us in the development and marketing of our products and may also independently
commercialize certain products in the U.S., depending on cash resources available to us at the time. We believe that our approach
will allow us to continue to advance our current product candidates and should allow us to avoid dependency on a small number of
drugs.
Using this approach,
we have advanced our product candidates into various stages of development. Specific elements of our current strategy include the
following:
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Continue to advance our current pipeline by developing or co-developing improved versions of drugs with reduced side effects and that enhance the efficacy of existing drugs. We expect that our products will potentially offer significant advantages over the original versions of the drugs. We are advancing both our co-development program with Merck and our in-house AP-Cannabinoids clinical development program while seeking to partner AP-CD/LD for the treatment of advanced Parkinson’s disease.
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Seek attractive partnership opportunities. With respect to AP-CD/LD, while the ACCORDANCE
results were not what we expected, we continue to believe in the potential of the Accordion Pill platform and we are currently
seeking to partner AP-CD/LD as the basis for the strategy for AP-CD/LD moving forward. We believe that our business development
efforts are significantly enhanced by our large safety database, ACCORDANCE results that validate the platform, our ability to
build customized Accordion Pills that meet specified PK parameters and our large scale commercial manufacturing capabilities. More
generally, we believe that our Accordion Pill technology can be applied to many drugs that have already been approved by the FDA,
as well as developmental stage drugs. We believe that the proprietary rights provided by our Accordion Pill technology, together
with the clinical and compliance benefits, will be attractive to potential partners. We are seeking to build a portfolio of commercially
attractive partnerships in a blend of co-developments and licenses. Where possible, we are seeking partnerships that allow us to
participate significantly in the commercial success of each of the drugs. We are looking to partner with the owners of rights to
patented drugs in order to develop Accordion Pill versions of those drugs, and we may seek strategic partners to market our Accordion
Pill products worldwide. We may also seek arrangements with third parties to assist in the development and commercialization of
our products. These arrangements will allow us to share the high development cost, minimize the risk of failure and benefit from
our partners’ marketing capabilities, while also enabling us to treat a more significant number of patients.
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Utilize the 505(b)(2) regulatory pathway to leverage extensive existing clinical and regulatory experience with the original drugs and bring our improved versions of these drugs to market more quickly. An NDA submitted under Section 505(b)(2) of the FDCA may be permitted to reference FDA’s prior conclusions regarding the safety and effectiveness of that previously approved drug, or rely in part on data in the public domain. This may expedite the development program for our product candidates by potentially decreasing the amount of clinical data that we would need to generate to submit an NDA. As the FDA has previously agreed that our lead product, AP-CD/LD, would likely be eligible to file under Section 505(b)(2), assuming the successful completion of the ACCORDANCE study, we believe that there is a strong likelihood that our future products would similarly qualify. The factors related to this qualification are expected to reduce the time and costs associated with clinical trials when compared to a traditional NDA for an NCE. We also believe the strategy of targeting drugs with proven safety and efficacy provides a better prospect of clinical success of our proprietary development portfolio as compared to de novo drug development. We estimate that the average time to market and cost of clinical trials for our products could be less than that required to develop a new drug.
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Use our expertise with our platform technology to evaluate drug development and commercialization opportunities. We continuously seek attractive product candidates to develop and commercialize. We intend to focus on product candidates that we believe would be synergistic with our Accordion Pill technology. We intend to use our expertise in our technology and our pharmacological expertise to grow our product candidate portfolio.
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Develop products that target significant commercial opportunities. Our existing product candidates are intended to target diseases that have major global markets. Our intent is to continue to develop or co-develop products that present significant market opportunities by leveraging our Accordion Pill technology.
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Maintain a prominent intellectual property position. We believe our licensed and proprietary patents and patent applications provide and will provide broad and comprehensive coverage for the use of our Accordion Pill technology for the treatment of certain diseases, focusing on BCS Class II/IV and NAW drugs, or drugs where longer retention in the upper GI tract could improve efficacy and absorption and reduce side effects. We seek to protect our proprietary position by, among other methods, filing U.S. and foreign patent applications related to our proprietary technology, inventions and improvements that we believe are important to the development of our business. We also rely on know-how and continuing technological innovation to develop and maintain our proprietary position. We have submitted and intend to continue to submit patent applications for various Accordion Pill and drug combinations that we develop.
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AP-CD/LD for the Treatment of Parkinson’s Disease Symptoms
in Advanced Parkinson’s Disease Patients
Parkinson’s disease
Parkinson’s disease
is a progressive, degenerative disease characterized by movement symptoms such as involuntary tremor or trembling in the hands,
arms and legs; muscle rigidity of the limbs and trunk; slowness of and a decline in movement; and impaired balance and coordination.
In its advanced stages, the disease causes comprehensive dysfunction of the patient’s bodily systems, including difficulties
in swallowing, speech disorders and significant mental decline. Parkinson’s disease results from a continuing loss of dopamine-producing
nerve cells. Dopamine is required for normal functioning of the central nervous system and smooth, coordinated function of the
body’s muscles and movement. According to the National Parkinson’s Foundation, the symptoms of Parkinson’s disease
appear when approximately 60–80% of dopamine-producing cells are damaged.
Although there is presently
no cure for Parkinson’s disease, there are a number of medications that provide relief from the symptoms. Dopamine replacement
therapy with Levodopa is generally considered to be the most effective treatment for Parkinson’s disease. After 50 years
of clinical use, Levodopa therapy still offers the best symptomatic control of Parkinson’s disease and is the most widely
used therapy. Levodopa is converted into dopamine in the brain and is usually administered with Carbidopa, which helps prevent
Levodopa from converting to dopamine outside the brain. Levodopa helps reduce tremor, stiffness and slowness and helps improve
muscle control, balance and walking. Virtually all Parkinson’s disease patients will require Levodopa therapy during the
course of their disease.
Parkinson’s disease
patients typically experience a satisfactory response to initial treatment with Levodopa. However, at later stages of Parkinson’s
disease, there is a decline in the capacity of the nigrostriatal dopaminergic system, or the brain pathways that moderate control
of voluntary movement, to synthesize, store, and release dopamine. Therefore, the dopaminergic system becomes more and more dependent
on dopamine from external sources, such as Levodopa treatment.
As the disease progresses,
it becomes increasingly difficult to control the symptoms adequately by Levodopa treatment, and patients develop motor complications,
for the following reasons:
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The duration of the response after each Levodopa dose declines, resulting in a “wearing off” effect, wherein the clinical benefits of Levodopa are lost until the next dose reaches therapeutic levels.
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The patients suffer from longer periods in which Levodopa does not provide symptom relief and patients’ movements are severely restricted (i.e., off time).
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When Levodopa doses are increased to address the loss of clinical benefit, involuntary movements or troublesome dyskinesia emerges.
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Recent studies have
reported that up to 50% of patients show the onset of motor fluctuations within two years of starting conventional Levodopa therapy.
For many patients with advanced Parkinson’s disease, the repeated emergence of off states can occupy up to one-third or more
of a typical waking day. The loss of consistent symptomatic control from Levodopa is a major challenge for the long-term management
of Parkinson’s disease. When Parkinson’s disease patients experience “wearing off” between Levodopa doses,
this short-duration response occurs in parallel to the drug’s peripheral PK profile. Therefore, with the evolution of these
short-duration responses, improving the consistency in Levodopa’s plasma levels becomes the major factor for improving symptom
control.
Oral Levodopa formulations
currently on the market do not provide satisfactory consistent Levodopa plasma levels. There are two major challenges to maintaining
consistency in Levodopa plasma levels: (i) the very short half-life of Levodopa (approximately 90 minutes) and (ii) the fact that
Levodopa’s absorption is confined to the upper part of the GI tract (i.e., it has an NAW). For drugs with an NAW, conventional
controlled release formulations are limited in providing long-acting performance, as once the drug has passed through the upper
GI tract, it will no longer be absorbed. These factors result in high peak-to-trough ratios of Levodopa in the plasma, namely high
variability of the concentration of the drug in the blood, rather than a consistent level being maintained, reducing the clinical
benefits of Levodopa therapy. Providing stable Levodopa plasma levels is therefore a major unmet need for the long-term management
of Parkinson’s disease.
Key opinion leaders
interviewed by Global Data, a market research provider, summarized the unmet needs in Parkinson’s disease treatment to include,
among others, greater efficacy in reducing motor complications, reducing side effects and reducing pill burden.
Market. According
to a 2018 report by Global Data, Parkinson’s disease is the second most common chronic progressive neurodegenerative disorder
in the elderly after Alzheimer’s disease, affecting 1%–2% of individuals worldwide over the age of 65 and the annual
growth of Parkinson’s disease cases in individuals over the age of 65 from 2016 to 2026, in the Seven Major Markets, is estimated
to be 2.28%. According to Global Data, in 2016 the market for pharmaceutical treatments for Parkinson’s disease was approximately
$3.1 billion a year in the Seven Major Markets growing to $8.8 billion by 2026. According to a 2016 Global Burden of Disease
Study there are approximately 6.1 million people worldwide who suffer from Parkinson’s disease.
We have also conducted,
together with leading consultants, market assessment of AP-CD/LD for the treatment of the symptoms associated with advanced Parkinson’s
disease. The assessment indicates there is a substantial market for AP-CD/LD with hundreds of thousands of patients suffering with
Parkinson’s disease appropriate for AP-CD/LD treatment.
Our Solution — AP-CD/LD
AP-CD/LD, our lead
product candidate, is in development for the treatment of Parkinson’s disease symptoms. AP-CD/LD is an Accordion Pill that
contains the generic drugs Carbidopa and Levodopa, which are currently approved for the treatment of Parkinson’s disease
symptoms. We have successfully completed a Phase II clinical trial, and the FDA has permitted us to initiate a Phase III clinical
trial of AP-CD/LD which was completed and its top-line results were announced in July 2019.
AP-CD/LD – Clinical Trials
Phase III ACCORDANCE Study
The Phase III ACCORDANCE
clinical trial of AP-CD/LD was a multi-center, global, randomized, double-blind, double-dummy, active-controlled, parallel-group
study in adult subjects with advanced PD. The study was evaluating the safety and efficacy of AP-CD/LD compared with immediate
release CD/LD (IR-CD/LD; Sinemet) as a treatment for the symptoms of PD.
The study enrolled
a total of 462 patients into the Sinemet titration period. After the multiple titration and optimization steps, 320 patients were
then randomized into the 13-week double-blinded portion of the study. The study was conducted at approximately 90 clinical sites
throughout the U.S., Europe and Israel.
Preliminary analysis
of the baseline data for the enrolled population shows:
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Average age at study entry was 63 and 65% of enrolled patients were male;
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Entering patients had a diagnosis of PD for 8.8 years on average;
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The average daily levodopa dose for patients upon entering the blinded portion of the study was in excess of 800 mg and the most common Accordion Pill dose was AP-CD/LD 50/500mg three times per day;
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Average daily OFF time for patients upon entering the study was approximately 6.1 hours; and
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Approximately 31% of patients were enrolled in the U.S.
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Prior
to the 13-week randomized portion of the study, the ACCORDANCE study had two open label periods of 6 weeks each during which
all patients in these open label periods were first stabilized and optimized on the active comparator, Sinemet, and then on
AP-CD/LD. All patients who completed the 13-week randomized period were eligible to continue in an Open Label Extension
study, or the OLE study, in which they received treatment with AP-CD/LD for up to an additional 12 months.
The
following is an illustration of the study design:
The
primary efficacy endpoint of the study was the change from baseline to endpoint in the percentage of daily off time during waking
hours based on Hauser home diaries. The study was 90% powered to be statistically significant for a one-hour difference in off
time between Sinemet and AP-CD/LD.
Secondary
endpoints included change from baseline to endpoint in “on time” without troublesome dyskinesia during waking hours,
CGI-I at endpoint as recorded by physician and patient and change from baseline through endpoint in the Unified Parkinson’s
Disease Rating Scale (UPDRS) Score parts 2 and 3.
In July 2019, we announced
top-line results from our pivotal Phase III clinical for AP-CD/LD for the treatment of advanced Parkinson’s disease known
as the ACCORDANCE study in which the ACCORDANCE study did not achieve its primary objective. The ACCORDANCE study featured two
open-label titration steps where patients were first optimized on immediate release CD/LD, and then optimized on the AP-CD/LD formulation.
Patients entered the study with an average OFF time of 6.0 hours per 16-hour day. After the initial open-label titration, the average
OFF time was reduced to 5.02 hours. Double blinded treatment for 13 weeks with either immediate release or AP CD/LD led to further
improvements in OFF time, with the final OFF time for the IR treated group at 4.76 hours and the OFF time for the AP group at 4.53
hours. Therefore, while AP-CD/LD provided treatment for Parkinson’s disease symptoms comparable to the immediate release
preparation, it did not achieve the primary objective of demonstrating statistically superiority over immediate release CD/LD under
the conditions established in the protocol.
The following figure
displays the average hours of “off” time of the AP-CD/LD treated group and the IR treated group:
From our review of
the data, we observed a meaningful reduction in OFF time in certain subsets of patients and from a safety perspective, treatment-emergent
adverse effects observed with AP-CD/LD were generally consistent with the known safety profile of CD/LD formulations and no new
safety issues were observed throughout the double-blinded study, during the gastroscopy safety sub-study or the 12-month open-label
extension study. We believe that both dosing was suboptimal and titration targets in the protocol were suboptimal.
The following figures
display the post hoc analysis of a subset of patients that did not require the maximal AP dose of 1500 mg LD and who received 1.6
to 2.0 dose ratio of AP LD to IR LD.
We have completed the
analysis of the full data set and we are currently seeking to partner AP-CD/LD as the basis for the strategy for AP-CD/LD moving
forward.
Phase II Clinical Trial
Our Phase II clinical
trial with AP-CD/LD was a multi-center, open-label, randomized, crossover, active control trial that included five groups. Overall,
60 patients completed the trial per protocol, in several medical centers in Israel. The Phase II clinical trial assessed safety,
PK and pharmacodynamics/efficacy in patients with various stages of Parkinson’s disease compared with their current Levodopa
treatment. Each group of the clinical trial was deemed to initiate upon the first patient enrolling in a group and to be completed
upon the conclusion of data analysis. The initiation and completion dates for groups 1, 3, 4, 5 and 6 were August 2009 –
December 2009, April 2010 – August 2010, December 2010 – July 2011, August 2011 – November 2011 and December
2011 – October 2012, respectively. The following table details the structure, design and purpose of the Phase II clinical
trial:
Group
Number
|
|
Trial Design
|
|
Trial
Purpose
|
|
Population
|
|
N
(PP)
|
|
Test
Treatment
|
|
Treatment
and
Duration*
|
Group 1
|
|
Open-label,
multi-dose, multi-center, randomized
|
|
2-way crossover comparative
PK trial
|
|
Early-stage PD patients
|
|
12
|
|
AP-CD/LD 50/250 mg
|
|
b.i.d for 7 days
|
Group 2
|
|
This trial was originally planned in early non-fluctuators with a dose of 50/375 mg b.i.d. In light of the satisfactory PK results with 50/250 mg b.i.d in this population, the higher dose was considered unnecessary and therefore the trial was not performed.
|
Group 3
|
|
Open-label,
multi-dose, multi-center, randomized
|
|
2-way crossover comparative
PK and PHDS trial
|
|
Advanced PD patients
|
|
10a
|
|
AP-CD/LD 50/375 mg
|
|
b.i.d for 7 days
|
Group 4**
|
|
Open-label,
multi-dose, multi-center, randomized
|
|
2-way crossover comparative PHDS trial
|
|
Advanced PD patients
|
|
16
|
|
AP-CD/LD 50/375 mg
|
|
b.i.d for 21 days
|
Group 5b**
|
|
Open-label,
multi-dose,
multi-center, randomized
|
|
2-way crossover comparative PHDS trial
|
|
Advanced PD patients
|
|
4
|
|
AP-CD/LD 50/500 mg
|
|
b.i.d for 21 days
|
Group 6**
|
|
Open-label,
multi-dose, multi-center, randomized
|
|
2-way crossover comparative PHDS trial
|
|
Advanced PD patients
|
|
18
|
|
AP-CD/LD 50/500 mg
|
|
b.i.d for 21 days
|
a
|
Eight patients completed the PK trial.
|
b
|
Group 5 was terminated early due to low enrollment.
|
d = days;
PP = Per Protocol; N = number of subjects; PD = Parkinson’s disease; PHDS = pharmacodynamics.
*
|
Not including add-on dosing of immediate release Carbidopa/Levodopa, if needed.
|
**
|
Compared against each patient’s optimized current Levodopa treatment.
|
Pharmacokinetic Results
Group 1 of our Phase
II clinical trial with AP-CD/LD was conducted with 12 male and female patients with non-fluctuating Parkinson’s disease.
The crossover design included the following treatment arms: (i) AP-CD/LD 50/250 mg administered b.i.d and (ii) immediate release
CD/LD 25/250 mg administered by half tablet q.i.d, resulting in a total daily dosage of 50/500mg. The treatments were administered
for six days, with the seventh day consisting of PK testing. On the PK day of the control period, patients were given an additional
50 mg of Carbidopa (12.5 mg q.i.d) to achieve the recommended daily 70 – 100 mg dose of Carbidopa. Immediately following
the PK testing on day seven, the patients crossed over to the other treatment to repeat the seven day process. This study concluded
that (i) the bioavailability of Levodopa when administered via AP-CD/LD was similar to the immediate release reference; (ii) AP-CD/LD
provided more stable plasma levels of Levodopa, with reduced peak-to-trough ratio, when compared to the immediate release reference;
and (iii) AP-CD/LD provided higher morning Levodopa plasma levels than the immediate release reference.
Group 3 of our Phase
II clinical trial with AP-CD/LD was conducted with ten male and female patients with advanced, fluctuating Parkinson’s disease,
of which eight completed the PK trial per protocol. The crossover design included the following treatment arms: in the AP-CD/LD
treatment arm, the AP-CD/LD 50/375 mg was administered b.i.d for six at home days of treatment with up to an additional three add-on
immediate release Carbidopa/Levodopa, as needed, and on day seven, b.i.d administration of AP-CD/LD 50/375 mg. In the control arm,
the patient’s current treatments were administered for six at home days and, on the seventh day, they were given immediate
release Carbidopa/Levodopa 18.75/187.5 mg q.i.d, resulting in a total dosage of 75/750 mg. On the seventh day of each treatment
regime, we conducted PK testing. Immediately following the PK testing on day seven, the patients were crossed over to the other
treatment to repeat the seven day process.
These trials concluded
that (i) the PK of AP-CD/LD demonstrated an efficient controlled-release profile, with significantly more stable Levodopa levels;
(ii) the Levodopa absorption phase was increased more than six-fold versus the control treatment; (iii) the b.i.d administration
of AP-CD/LD provided daily coverage of therapeutic Levodopa plasma levels; (iv) the peak-to-trough ratio in Levodopa plasma levels
was half of those of the control; (v) the morning, or pre-first dose, Levodopa plasma levels of AP-CD/LD, were significantly higher
than the control; and (vi) Levodopa’s high bioavailability was preserved when using AP-CD/LD.
The following figure
displays the concentrations of Levodopa in plasma of patients over time, comparing AP-CD/LD (pink) to the reference treatment (blue):
AP-CD/LD Phase II clinical trial —
more stable Levodopa levels with statistically significant reduced
peak-to-trough fluctuations
The PK results showed
that peak to trough ratio, which measures the maximum average concentration relative to the minimum average concentration of LD
plasma levels, was reduced from 29.9 to 3.2 with the AP-CD/LD. Cmax/Cmin with the AP-CD/LD was 5.8. The average LD plasma levels
during time 0-16 hours was 1,038 ng/ml.
Pharmacodynamics Results
The following figure
sets forth the structure of the Phase II clinical trial for Groups 4 and 6:
*
|
Patient’s optimized CD/LD regimen.
|
CD/LD
= Carbidopa/Levodopa
Groups 3, 4 and 6 of
our Phase II clinical trial examined the pharmacodynamic effects of AP-CD/LD. Each group assessed the effects in patients with
advanced Parkinson’s disease; ten, 16 and 18 patients completed the trials per protocol in Groups 3, 4 and 6, respectively.
Groups 3 and 4 tested AP-CD/LD in the 50/375 mg strength, administered b.i.d. with additional CD/LD immediate release tablets if
needed; Group 6 tested the 50/500 mg strength administered b.i.d. with additional CD/LD immediate release tablets if needed. In
these three trials, AP-CD/LD was compared to the patients’ current Levodopa treatment (including a dopamine decarboxylase
inhibitor, such as Carbidopa). All three groups were cross-over, with Group 3 receiving the treatments as described above and Groups
4 and 6 receiving each of their current treatment and AP-CD/LD for 21 days, with the second tested treatment starting immediately
after completion of the first. In Groups 4 and 6, off time, on time and dyskinesia were assessed by patient-completed home diaries
during days 18 through 20 of each arm.
Because Levodopa is
usually prescribed for long-term treatment, three weeks of treatment with AP-CD/LD was sufficient to demonstrate statistically
significant improvements in the primary endpoint, as well as most of the secondary endpoints. The statistical significance of a
result was captured by the associated “p-value”, or the estimated probability that the observed effect was by chance.
A “p-value” of less than 0.05 implied that there was less than a 5% probability that the observed effect was by chance,
and was generally accepted as a statistically significant event.
These studies demonstrated
that (i) total off time was decreased when taking AP-CD/LD versus the control, by 44% and 45% in Groups 4 and 6, respectively (statistically
significant p<0.0001); (ii) improvements in off time and on time without troublesome dyskinesia did not come at the expense
of an increase of on time with troublesome dyskinesia, and, moreover, with the AP-CD/LD 50/500 mg troublesome dyskinesia was decreased
by 0.5 hours (statistically significant p = 0.002); (iii) the effect of AP-CD/LD on total off time and on time with troublesome
dyskinesia resulted in a total increase of “good” on time (i.e., without troublesome dyskinesia) of 2.1 and 2.7 hours
per day in Groups 4 and 6, respectively (statistically significant p<0.0001); (iv) the improvements in treating symptoms with
AP-CD/LD were achieved with fewer daily doses; and (v) the improvements in treating symptoms with AP-CD/LD correlate with stable
Levodopa plasma levels throughout the day with appropriate therapeutic levels of the drug.
The figure below reflects
the mean total off time in hours over a 24 hour period during days 18 through 20 of Groups 4 and 6. The average total off time
was reduced by 1.9 hours and 2.3 hours with AP-CD/LD 50/375 mg (Group 4) and 50/500 mg (Group 6), respectively. This reduction
is statistically significant (p<0.0001).
AP-CD/LD – Significant reduction
of total off time compared to current Levodopa treatment
The figure below reflects
the mean total “good” on time (on time without troublesome dyskinesia) in hours over a 24 hour period during days 18
through 20 of Groups 4 and 6. The average total “good” on time was increased by 2.1 hours and 2.7 hours with AP-CD/LD
50/375 mg (Group 4) and 50/500 mg (Group 6), respectively. This reduction is statistically significant (p<0.0001).
AP-CD/LD – Increase of total
“good” on time compared to current Levodopa treatment
The figure below reflects
the mean total on time with troublesome dyskinesia in hours over a 24 hour period during days 18 through 20 of Groups 4 and 6.
On time with troublesome dyskinesia was not changed and decreased by 0.5 hours (p = 0.002) with AP-CD/LD 50/375 mg (Group 4) and
50/500 mg (Group 6), respectively.
AP-CD/LD – Reduction of total
on time with dyskinesia compared to current Levodopa treatment
Finally, the figure
below displays the mean number of daily Levodopa administrations of the treatments in Groups 4 and 6.
AP-CD/LD –Number of daily Levodopa
administrations* compared to current Levodopa treatment
*
|
In the
administration of the AP-CD/LD arm, patients received b.i.d AP-CD/LD pills and were allowed to take additional commercially
available immediate release Carbidopa/Levodopa formulations, as add-ons when needed. As seen in the figure above, patients
took, in addition to the b.i.d AP-CD/LD pills, one-and-a-half to two commercially available immediate-release
Carbidopa/Levodopa formulations, in Groups 4 and 6, respectively.
|
Demonstration of the
clinical benefits of these peak to trough ratios will be further studied and confirmed in the ACCORDANCE study.
Phase I Clinical Trials
We conducted five Phase
I clinical trials - four to assess the PK profile of Levodopa when administered in several formulations and one to measure the
GR time of our Accordion Pill without an active ingredient.
The first PK trial
was conducted with early formulations in 24 healthy volunteers to assess the PK profile of Levodopa when administered in the following
three forms: (i) in an Accordion Pill with a dosage of 75/300 mg; (ii) in the immediate release form currently on the market, Sinemet;
and (iii) in the controlled release form currently on the market, Sinemet CR. This group underwent a partially randomized open
trial compared with immediate release Sinemet and controlled release Sinemet. The trial results indicated a significant prolongation
of Levodopa’s mean residence time, or MRT, in the blood when administered with the Accordion Pill compared with the Sinemet
and Sinemet CR. Furthermore, the study showed the level of Levodopa received with the Accordion Pill reached treatment-relevant
levels.
The second PK trial
was conducted with early formulations in 23 healthy volunteers to assess the PK profile of Levodopa when administered in the following
two forms: (i) an Accordion Pill in two formulations, 75/300 mg and 50/200 mg; and (ii) in the currently marketed immediate release
form, Sinemet. This was a randomized open trial, compared with immediate release Sinemet. The trial results indicated a very significant
increase in the MRT of Levodopa in the blood when administered with the Accordion Pill in both formulations, and a very significant
prolongation of the absorption phase (up to 12 hours) of Levodopa was demonstrated when administered with the Accordion Pill compared
with Sinemet (two hours).
The third PK trial
was conducted with the AP-CD/LD 50/500 mg Phase II formulation in 18 healthy volunteers to assess the PK profile of Levodopa when
administered in the following two forms: (i) AP-CD/LD 50/500 mg; and (ii) the currently marketed immediate release form, Sinemet.
This was a randomized open trial, compared with immediate release Sinemet. The trial results indicated that the absorption phase
of Levodopa was increased to approximately ten hours when administered with the Accordion Pill compared to approximately two hours
with Sinemet.
The fourth PK
trial was conducted in order to determine the performance of the to-be-marketed formulation of AP-CD/LD when dosed three time
per day (t.i.d). The objective of this open-label, crossover PK study was to compare the plasma levodopa variability in 12
Parkinson’s disease patients treated with standard levodopa therapy and with AP-CD/LD 50/500 mg t.i.d. On day one, all
participants received 1.5 tablets of standard Sinemet 25/100 mg five times at approximately three-hour intervals. Plasma was
collected for PK determination at 30-minute intervals for 16 hours in the clinic. This period provided the reference PK
profile for Sinemet. On days two through seven, PD patients were treated at home with AP-CD/LD 50/500 mg capsules dosed
t.i.d., at approximately five-hour intervals. On day eight, participants returned to the clinic and PK assessments were
repeated as described above. The primary outcome measure in this study was the fluctuation index [(Cmax-Cmin)/Cavg] in plasma
levodopa concentration at steady state (between hours four and 16.) The key secondary endpoint was the levodopa coefficient
of variation. AP-CD/LD 50/500 mg t.i.d. met its primary endpoint demonstrating significantly less variability than standard oral
CD/LD when dosed 5x/ day in the levodopa fluctuation index (p<0.005) (see the table below). These results were supported
by the findings of significant outcomes on each of the pre-specified sensitivity analyses. Similar results were observed for
the key secondary endpoint of coefficient of variation of plasma levodopa levels (p<0.047). AP-CD/LD was very well
tolerated with no reported adverse events.
|
|
Primary Endpoint:
Levodopa Fluctuation Index at Steady
State (4-16 Hours)
|
Treatment/ Difference
|
|
Mean Value
|
|
95% Confidence Interval
|
|
p-Value
|
Sinemet (IR-CD/LD)
|
|
2.22
|
|
1.82 – 2.62
|
|
--
|
Accordion AP-CD/LD
|
|
1.59
|
|
1.23 – 1.95
|
|
--
|
Difference
|
|
0.63
|
|
0.24 – 1.03
|
|
0.005
|
The GR Phase I clinical
trial was an MRI study conducted with 17 Parkinson’s patients to measure the GR time of the Accordion Pill without an active
pharmaceutical ingredient. This trial was a non-randomized open trial comparison of a few formulations. The results indicated that
GR of over 13 hours can be achieved in these patients using all three formulations.
Safety
AP-CD/LD was tested
for safety on Göttingen minipigs in accordance with the FDA’s guidelines. The study was 180 days and a subgroup of minipigs
were kept for recovery for an additional 30 days without receiving any treatments. This study included the following four arms:
AP-CD/LD 50/400 mg three times daily, AP-CD/LD 50/500 mg b.i.d, a Carbidopa/Levodopa reference (Sinemet) and a placebo. The study
was completed in March 2014. The study evaluated (i) animal wellbeing as represented by behavior, food consumption and weight,
(ii) microscopic and macroscopic organ pathology, (iii) ophthalmic evaluation and (iv) electrocardiograms of the miniature pigs,
which is the recording of the electrical activity of the heart. This study’s results form an additional basis regarding the
safety of AP-CD/LD.
In the Phase I and
Phase II clinical trials, AP-CD/LD was well-tolerated with no serious adverse events that were related to the study drug. Adverse
events were generally mild in severity and resolved without intervention. The most common adverse events reported included nausea,
vomiting, diarrhea, abdominal pain, chest pain and fatigue, which are known adverse events associated with Levodopa treatment.
In the Phase III clinical
trial, treatment-emergent adverse effects observed with AP-CD/LD were generally consistent with the known safety profile of CD/LD
formulations and no new safety issues were observed throughout the double-blinded study, during the gastroscopy safety sub-study
or the 12-month open-label extension study.
Development of Accordion Pills with additional drugs
We are continuously
evaluating the possibilities of developing Accordion Pills with various additional specific drugs for its pipeline. In August 2016,
we announced the initiation of a new clinical development program for the Accordion Pill platform with the two primary cannabinoids
contained in Cannabis Sativa, Cannabidiol (CBD) and 9-Tetrahydrocannabinol (THC), for treatment of various pain indications.
The Cannabis sativa plant is used in treatment of chronic pain and a variety of other indications. Previous clinical
studies conducted using the whole plant or specific extracts generated evidence of the cannabis analgesic activity. Furthermore,
extracts containing known amounts of the active plant driven compounds (mainly THC and CBD) or diverse synthetic THC derivatives
are promising treatments for painful conditions that do not respond properly to currently available treatments, such as chronic,
neuropathic, and inflammatory pain.
We believe that AP-Cannabinoids
hold the potential to address several major drawbacks of current methods of use and treatment with cannabis and cannabinoids, such
as short duration of effect, delayed onset, variability of exposure, variability of the administered dose and adverse events that
correlate with peak levels. AP-Cannabinoids are designed to extend the absorption phase of CBD and THC, with the goal of more consistent
levels, for an improved therapeutic effect. We believe that the cannabis market has significant commercial potential and is projected
to represent approximately 10% of the specialty pharmaceutical market by 2020, or a market of at least $20 billion.
In August 2017, we
announced the results of a Phase I clinical trial that compared the safety, tolerability and PK of AP-THC/CBD with Sativex®.
This Phase I trial is a single-center, single-dose, randomized, three-way crossover study in Israel to compare the safety, tolerability
and PK of two formulations of AP-CBD/THC with Buccal Sativex® in 21 normal healthy volunteers. The results
showed that patients in the Accordion Pill CBD/THC arm demonstrated significant improvements in exposure to CBD (290% to 330%)
and THC (25% to 50%) compared with Sativex®. The median time to peak concentration was 2-3 times longer than Sativex
and absorption was significantly higher. Additionally, the formation of THC metabolites was meaningfully reduced, and the drug
had a good safety profile and was well-tolerated with no serious adverse events reported. Sativex® is a commercially
available oral buccal spray containing CBD and THC. Following the Phase 1 clinical trial, we evaluated the program and decided
as a next step to develop two new Accordion Pills containing only the individual cannabinoid components, namely CBD and THC. In
December 2018, we initiated a PK study of AP-THC. The study was a single-center, single-dose, randomized, open-label three-way
crossover study to investigate the PK, safety and tolerability of AP-THC in up to 18 normal healthy volunteers and the results
of the study demonstrated that the custom designed AP delivery system in the AP-THC PK study did not meet our expectations. We
are continuing to advance the AP-Cannabinoids clinical development program and we are seeking to launch a PK study with the optimized
AP-THC in 2020.
In January 2018, we
also entered into a feasibility and option agreement with Novartis Pharmaceutical to explore using the Accordion Pill platform
for a proprietary Novartis compound. Following potentially successful feasibility studies, including a Phase I PK study, Novartis
has the option to enter into negotiations with respect to a potential licensing agreement for employing Intec Pharma Accordion
Pill technology. In December 2018, we reported that we successfully developed an Accordion Pill for the Novartis proprietary compound
that met the required in vitro specifications set forth in a feasibility and option agreement with Novartis. On December
11, 2019, we announced the termination of the Feasibility and Option agreement with Novartis for the development of a custom-designed
Accordion Pill® (AP) for a proprietary Novartis compound, despite the AP having met the technical and PK clinical specifications
set forth by Novartis. Novartis, following an internal and revised commercial strategic assessment, advised us that this program
no longer meets Novartis’ mid to long-term strategic goals. Novartis paid us $1.5 million USD on conclusion of the program.
In May 2019, we reported
entering into a research collaboration agreement with Merck for the development of a custom-designed AP for one of Merck’s
proprietary compounds that met the required in vitro specifications. We aim to initiate an in-vivo study by mid-2020.
We successfully completed
a Phase II clinical trial for Accordion Pill Zaleplon, or AP–ZP, in November 2011 under an IND that we submitted to the FDA
for AP–ZP as a treatment for the induction and maintenance of sleep in patients suffering from insomnia. The FDA also agreed
that AP-ZP could also benefit from the streamlined pathway available through filing an NDA pursuant to Section 505(b)(2) of the
FDCA. The FDA indicated in written correspondence to us that we may be able to design the development program for AP–ZP in
a manner that would allow us to obtain sufficient data for the NDA submission for AP–ZP in one pivotal Phase III clinical
trial. The details of such a trial were not determined or confirmed with the FDA. We are not currently developing or seeking a
partner to develop AP-ZP and we have not presently budgeted any funds toward its development. In the future, we may consider viable
partnership opportunities for this product candidate.
In addition, in March
2016, we completed a Phase I clinical trial for one of our product candidates that is being developed for the prevention and treatment
of gastroduodenal and small bowel NSAID induced ulcers. The PK results demonstrated in the Phase I trial were within the well-defined
safety levels of the drug. At this time, we have not presently budgeted any funds toward the development of this product candidate.
Manufacturing
Our production and
packaging facility is located in Har Hotzvim, in Jerusalem, Israel, in the same building as our offices. This production and packaging
facility was granted the Certificate of GMP Compliance of Manufacturer from the Israeli Ministry of Health in August 2018. This
certificate applies in Israel, as well as in the EU, in accordance with the Conformity Assessment and Acceptance of Industrial
Products (CAA) agreement between the EU and Israel. The certificate is valid until August 2021.
Our fully automated
assembly line enables us to manufacture approximately two to three million capsules annually. With respect to any future commercialization
of the AP-CD/LD, we have decided to rely on a third-party manufacturer. Establishing a manufacturing facility to produce commercial
quantities of our products will require a substantial investment by any party intending to manufacture our products.
In March 2018, we entered
into a Term Sheet for Manufacturing Services with LTS, for the commercial manufacture of AP-CD/LD, which was subsequently superseded
in December 2018 by a Process Development Agreement. Under the agreement, LTS will exclusively manufacture and supply us with AP-CD/LD
capsules using our proprietary Accordion Pill production technology in LTS’ manufacturing facility in Andernach, Germany
subject to the execution and terms of a manufacturing and supply agreement to be negotiated and entered into between us and LTS.
The large-scale automated production line for manufacturing AP-CD/LD capsules, or the Production Line, will be owned by us with
LTS operating and maintaining the Production Line and owning the other production equipment for AP-CD/LD. Under the agreement,
we are responsible for compensating LTS for certain development activities and we agreed to bear the costs incurred by LTS to acquire
the other production equipment for AP-CD/LD, or Production Equipment, which amounted to approximately $6.8 million and was fully
paid as of December 31, 2019; however, such amount is required under the agreement to be later reimbursed to us by LTS in the form
of a reduction in the purchase price of the AP-CD/LD capsules. In addition, upon our decision to not continue with the project
or commercialization of the product, LTS has the right to (i) purchase the Production Equipment from us in which case LTS is required
to pay to us the share of the cost of the Production Equipment paid by us less up to two million Euros for upgrade costs of LTS’s
facility invested by LTS or (ii) transfer such Production Equipment to us in which case we are required to pay LTS up to two million
Euros for upgrade costs of LTS’s facility invested by LTS. The agreement shall continue in force unless earlier terminated
or upon the termination of any future manufacturing agreement. The agreement contains several termination rights which are expected
to be included in a definitive manufacturing and supply agreement, including, among others, in the cases of bankruptcy, breach
by either party, change of control of either of the parties, or the sale or licensing by us of the Accordion Pill to a third party.
In December 2018, the
Production Line was delivered to LTS in Andernach, Germany. In October 2019, we completed the qualification studies for the commercial
scale manufacture of the Accordion Pill, and initiated the validation and stability studies which are expected to serve as the
clinical material for the next Phase 3 clinical trial plan.
We have received Israeli
government grants for certain of our research and development activities. The terms of these grants may require us to satisfy specified
conditions in order to manufacture products and transfer technologies outside of Israel. With respect to the manufacturing of the
AP-CD/LD, the Israel Innovation Authority, or IIA (formerly known as the Office of the Chief Scientist of the Ministry of Economy
and Industry, or the OCS) approved our request to transfer 100% of the manufacturing rights to such product, which was developed
under one of the IIA funded programs, to a non-Israeli manufacturer. As a result, we will be required to pay the IIA royalties
from revenue generated from the AP-CD/LD product candidate at an increased rate and up to an increased cap amount. The IIA noted
that the approval granted was exceptional and that the IIA will not approve manufacturing additional product candidates out of
Israel.
The FDA will likely
condition granting any marketing and manufacturing approval, if any, on a satisfactory on-site inspection of our manufacturing
facilities. See “Item 1A. Risk Factors — Risks Related to the Clinical Development, Manufacturing and Regulatory Approval
of Our Product Candidates — Our product candidates are manufactured through a compounding, film casting and assembly process,
and if we or one of our materials suppliers encounters problems manufacturing our products or raw materials, our business could
suffer.”
Our manufacturing process
consists of the following stages: compounding, which includes manufacturing of solutions and/or suspensions; film casting, which
involves manufacturing of specific layers of films, including films containing the applicable drug; assembly and capsulation, which
is processing and folding the films into an accordion shape and capsulation; and packaging, which entails packaging the pills in
plastic bottles or blister packs.
Raw Materials and Supplies
With the exception
of three inactive ingredients, we believe the raw materials that we require to manufacture AP-CD/LD and AP–Cannabinoids,
as well as the raw materials that we require for our research and development operations relating to our products, are widely available
from numerous suppliers and are generally considered to be generic pharmaceutical materials and supplies. Except as described below,
we do not rely on a single supplier for the current production of any product in development or for our research and development
operations relating to our products.
We usually contract
with suppliers in Israel and worldwide to purchase the materials required for the research and development operations of our products.
All the materials required in the research and development operations of our products are off-the-shelf pharmaceutical products;
special production or special requirements are not required to order these materials. We have no written agreements with most of
our suppliers. Rather, we submit purchase orders to our suppliers from time to time and as required.
Three of our inactive
ingredients used in our products have only one supplier of each such ingredient. The three suppliers are each large, well-established
suppliers (BASF, the Dow Chemical Company and Evonik), and most of the pharmaceutical industry relies on these suppliers when they
need to purchase certain pharmaceutical products such as these inactive ingredients. To avoid a shortfall of these materials, we
usually purchase sufficient material in advance for a period of at least one year. The pharmaceutical industry usually relies on
these three manufacturers as suppliers of specific materials. The prices of these commonly used raw materials are not volatile.
Marketing and Sales
We do not currently
have any marketing or sales capabilities. We intend to license to, or enter into strategic alliances with, companies in the pharmaceutical
business, which are equipped to market and/or sell our products, if any, through their well-developed marketing and distribution
networks. We may establish marketing and/or sales forces in the future in addition to licensing arrangements or strategic alliances.
Competition
The pharmaceutical
and drug delivery technologies industries are characterized by rapidly evolving technology, intense competition and a highly risky,
costly and lengthy research and development process. Adequate protection of intellectual property, successful product development,
adequate funding and retention of skilled, experienced and professional personnel are among the many factors critical to success
in the pharmaceutical industry.
Assertio Therapeutics,
Inc. (formerly known as Depomed Inc.) has several products on the market based on its GR technology. Several companies have reported
research projects related to systems designed for GR including Teva Pharmaceutical Industries, Avadel Pharmaceuticals, Lyndra Therapeutics,
Merrion Pharmaceuticals, Sun Pharma and others, all of which develop products delivered orally that are designed for GR. We are
not aware of any approved drug delivery system currently on the market that is similar to the Accordion Pill.
Other drug delivery
technologies, other drugs on the market, new drugs under development (including drugs that are in more advanced stages of development
in comparison to our product pipeline) and additional drugs that were originally intended for other purposes, but were found effective
for the indications we target, may all be competitive to the current products in our pipeline. In fact, some of these drug delivery
systems and drugs are well-established and accepted among patients and physicians in their respective markets, are orally bioavailable,
can be efficiently produced and marketed, and are relatively safe and inexpensive. Moreover, other companies of various sizes engage
in activities similar to ours, including large pharmaceutical companies, such as Pfizer and Novartis, who have established in-house
capabilities for the development of drug delivery technologies. Most, if not all, of our competitors have substantially greater
financial and other resources available to them. Competitors include companies with marketed products and/or an advanced research
and development pipeline.
Current Treatments on
the Market and in Development for Parkinson’s Disease
The current common
treatments for Parkinson’s disease include Levodopa (usually used in conjunction with other drugs such as Carbidopa), which
is currently the standard and most efficient Parkinson’s medication used, and dopamine agonists, such as bromocriptine, pergolide,
pramipexole and ropinirole, as well as MAO inhibitors and COMT inhibitors. However, Levodopa therapy is associated with “wearing-off”,
a condition in which a treatment’s effects diminish over time as the disease progresses, and dyskinesia, or involuntary disturbing
movements.
We believe our direct
competition will include other technologies designed to address the need for more stable Levodopa levels. Our initial approach
with the AP-CD/LD program did not meet a statistically significant endpoint against Sinemet, a combination of Levodopa and Carbidopa,
which is sold by Merck, as well as generic Sinemet, which is sold by various generic manufacturers. Further clinical work will
be required to develop the AP-CD/LD if it is going to be competitive against existing treatments for Parkinson’s. We are
seeking a partner to undertake this clinical work. In addition, other technologies and drug delivery systems designed to address
the Levodopa blood concentration problem currently exist. To our knowledge, based on publicly-filed documents, press releases and
published studies, we believe the companies described below would be the primary competition with respect to AP-CD/LD.
Novartis and Orion
combine Levodopa and Carbidopa with Comtan (entacapone), a drug that inhibits the clearance of Levodopa from the blood, thereby
slowing the rapid drop in the Levodopa level in the blood. Additional drug candidates that are developed by Bial and Orion are
based on the same approach.
Solvay Pharmaceuticals,
which has been acquired by AbbVie Inc., introduced a drug delivery system based on implanting a tube in the duodenum area attached
to an external pump that releases Levodopa formulation directly to the NAW. This product has been approved for marketing in the
United States and Europe. The invasive nature of implanting a tube in patients, most of whom are elderly, as well as various difficulties
related to the system, are certain disadvantages of this technology.
Impax Laboratories,
which has merged with Amneal Pharmaceuticals, has developed a product, RytaryTM, or IPX066, a continuous release Levodopa
capsule formulation. The product was launched in April 2015. In addition, Amneal is developing IPX203, a new extended-release oral
capsule formulation of carbidopa and levodopa, as a potential treatment for symptoms of Parkinson’s disease. IPX203 has commenced
a Phase III clinical trial.
Civitas Therapeutics,
Inc., which was acquired by Acorda Therapeutics, Inc. in September 2014, has developed a product, INBRIJATM, or CVT-301,
a self-administered, adjunctive, as needed, inhaled oral Levodopa, for the ability to rapidly and predictably treat “off”
episodes as they occur. In December 2018, Acorda announced that the FDA approved INBRIJATM for intermittent treatment
of OFF episodes in people with Parkinson’s disease treated with carbidopa/levodopa.
NeuroDerm Ltd., which
was acquired by Mitsubishi Tanabe Pharma Corporation in October 2017, has the following subcutaneous product candidates, ND0612H
and ND0612L for the treatment of patients suffering from Parkinson’s disease. These product candidates have completed Phase
II clinical trials. In August 2019, the company announced that it was advancing ND0612 into a Phase III trial.
Other technologies
for delivering Levodopa, such as through the skin (transdermal administration) using a patch, injections or inhalations, as well
as new formulations and chemical modifications of Levodopa and/or complementary drugs, currently exist and might compete with AP-CD/LD
as well, but, to our knowledge, these technologies, formulations and modifications have not yet been submitted for approval.
Government Regulation
In the United States,
the FDA regulates pharmaceuticals under the FDCA, and its implementing regulations. These products are also subject to other federal,
state, and local statutes and regulations, including federal and state consumer protection laws, laws protecting the privacy of
health-related information, and laws prohibiting unfair and deceptive acts and trade practices.
The process required
by the FDA before a new drug product may be marketed in the United States generally involves the following: completion of extensive
preclinical laboratory tests and preclinical animal studies, performed in accordance with the FDA’s Good Laboratory Practice,
or GLP, regulations; submission to the FDA of an IND which FDA must allow to become effective before human clinical trials in the
US may begin; performance of adequate and well-controlled human clinical trials to establish the safety and efficacy of the product
candidate for each proposed indication; and submission to the FDA of an NDA for the drug, after completion of all pivotal clinical
trials. An IND is a request for authorization from the FDA to administer an investigational drug product to humans.
Clinical trials that
involve the administration of the investigational drug to human subjects are conducted under the supervision of qualified investigators
in accordance with current Good Clinical Practice, or cGCP which is intended to protect the rights, safety and welfare of humans
participating in research and assure the quality, reliability and integrity of data collected. A protocol for each clinical trial
conducted in the US, or other protocols under IND even not conducted in the US, and any subsequent protocol amendments must be
submitted to the FDA as part of the IND. Additionally, approval must also be obtained from each clinical trial site’s Institutional
Review Board, or IRB, before the trials may be initiated, and the IRB must monitor the trial until completed. There are also requirements
governing the reporting of ongoing clinical trials and clinical trial results to public registries.
Clinical trials are
usually conducted in three phases. Phase I clinical trials are normally conducted in small groups of healthy volunteers to assess
safety and tolerability. After an acceptable dose has been established, the drug is administered to small populations of patients
(Phase II) to look for initial signs of efficacy in treating the targeted disease or condition and to continue to assess safety.
Phase III clinical trials are usually multi-center, double-blind controlled trials in hundreds or even thousands of subjects at
various sites to assess as fully as possible both the safety and effectiveness of the drug.
The FDA, the IRB, or
the clinical trial sponsor may suspend or terminate a clinical trial at any time on various grounds, including a finding that the
trial subjects are being exposed to an unacceptable health risk. Additionally, some clinical trials are overseen by a data safety
monitoring board, or DSMB. This group of experts reviews unblinded data from clinical trials and provides authorization for whether
or not a trial may move forward at designated check points. A DSMB may order a trial halted if it believes that the risk to subjects
is unacceptable or the product is so effective as to make it unethical to administer placebos or alternate treatments to the non-treatment
arms. The sponsor may also suspend or terminate a clinical trial based on evolving business reasons.
Assuming successful
completion of all required testing in accordance with all applicable regulatory requirements, detailed investigational drug product
information is submitted to the FDA in the form of an NDA requesting approval to market the product in the US for one or more indications.
The NDA must be accompanied by a substantial user fee, which may be waived in certain circumstances. The application includes all
relevant data available from pertinent preclinical and clinical trials, including negative or ambiguous results as well as positive
findings, together with detailed information relating to the product’s chemistry, manufacturing, controls and proposed labeling,
among other things. FDA has sixty days from the applicant’s submission of an NDA to either accept the NDA for filing or issue
a refusal-to-file letter if it finds that the application is not sufficiently complete to permit substantive review.
Once the NDA submission
has been accepted for filing, the FDA’s goal is to review standard applications within ten months of filing. However, the
review process is often significantly extended by FDA requests for additional information or clarification. The FDA may refer the
application to an advisory committee for review, evaluation and recommendation as to whether the application should be approved.
The FDA is not bound by the recommendation of an advisory committee, but it typically follows such recommendations.
After the FDA evaluates
the NDA and conducts inspections of manufacturing facilities involved in the production of the product, as well as inspections
of selected clinical trial sites for data integrity, it may issue an approval letter or, instead, a Complete Response Letter. An
approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications. A Complete
Response Letter indicates that the application is not ready for approval in its present form. A Complete Response Letter may require
additional clinical data or other significant, expensive and time-consuming requirements related to clinical trials, preclinical
studies or manufacturing, or any combination thereof. Even if such additional information is submitted, the FDA may ultimately
decide that the NDA does not satisfy the criteria for approval. The FDA could also approve the NDA with restrictive indications,
labeling that includes particular risk information, or a risk evaluation and mitigation strategy, or REMS, which could include
medication guides, physician communication plans, or elements to assure safe use, such as restricted distribution methods, patient
registries and other risk minimization tools. The FDA also may condition approval on, among other things, changes to proposed labeling,
development of adequate controls and specifications, or a commitment to conduct one or more post-market studies or clinical trials.
Such post-market testing may include Phase IV clinical trials and surveillance to further assess and monitor the product’s
safety and effectiveness after commercialization.
After regulatory approval
of a drug product is obtained, we would be required to comply with a number of post-approval requirements. As a holder of an approved
NDA, we would be required to report, among other things, certain adverse reactions and production problems to the FDA, to provide
updated safety and efficacy information, and to comply with requirements concerning advertising and promotional labeling for any
of our products. Also, quality control and manufacturing procedures must continue to conform to current Good Manufacturing Practices,
or cGMP after approval, which includes, among other things, maintenance of a stability program. The FDA periodically inspects manufacturing
facilities to assess compliance with cGMP, which imposes extensive procedural, substantive, and record keeping requirements. In
addition, changes to the manufacturing process are strictly regulated, and, depending on the significance of the change, may require
prior FDA approval before being implemented. FDA regulations also require investigation and correction of product out of specification
results and impose reporting and documentation requirements upon us and any third-party manufacturers that we may decide to use.
Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain
compliance with cGMP and other aspects of regulatory compliance.
We produce, and expect
to continue to produce, the quantities of our product candidates required for our clinical trials, and we do not yet have a need
to produce our product candidates for commercial purposes. Future FDA and state inspections may identify compliance issues at our
facilities or at the facilities of our contract manufacturers or licensees that may disrupt production or distribution, or require
substantial resources to correct. In addition, discovery of previously unknown problems with a product or the failure to comply
with applicable requirements may result in restrictions on a product, manufacturer or holder of an approved NDA, including withdrawal
or recall of the product from the market or other voluntary withdrawal of the product’s approval, seizure, or FDA-initiated
judicial action that could delay or prohibit further marketing. Newly discovered or developed safety or effectiveness data may
require changes to a product’s approved labeling, including the addition of new warnings and contraindications, and also
may require the implementation of other risk management measures. Also, new government requirements, including those resulting
from new legislation, may be established, or the FDA’s policies may change, which could delay or prevent regulatory approval
of our products under development.
In addition, as the
NDA holder, we will be responsible for legal and regulatory compliance for advertising and promotion of the drug product. We are
required to provide to the FDA copies of all drug promotion at the time of first use, and to ensure that all information disseminated
conforms to the product’s approved labeling and other FDA regulations and policies.
505(b)(2) Applications
We intend to submit
NDAs for our proposed products, assuming that the clinical data justify submission, under Section 505(b)(2) of the FDCA, assuming
the FDA agrees with our assessment that a given proposed product qualifies for review under that section. If the FDA disagrees
with that assessment or revises its decision at a later date, we would be compelled to file under section 505(b)(1), which is the
normal route used for traditional new drugs where the data relied upon for the NDA filing have been developed by the sponsor during
its clinical trials. In contrast, Section 505(b)(2) permits the filing of an NDA when at least some of the information required
for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference.
The applicant may rely on published literature and the FDA’s findings of safety and effectiveness based on certain pre-clinical
or clinical studies conducted for an approved product. The FDA may also require companies to perform additional studies or measurements
to support the changes from the approved product. The FDA may then approve the new product candidate for all or some of the label
indications for which the referenced product has been approved, as well as for any new indication sought by the Section 505(b)(2)
applicant. The abbreviated Section 505(b)(2) approval pathway increases the likelihood that the timeframe and costs associated
with commercializing products will be lower than under a typical Section 505(b)(1) approval pathway.
Upon approval of an
NDA or a supplement thereto, NDA sponsors are required to list with the FDA each patent with claims that cover the applicant’s
product or an approved method of using the product. Each of the patents listed by the NDA sponsor is published in the Approved
Drug Products with Therapeutic Equivalence Evaluations (commonly known as the Orange Book) identifies drug products approved on
the basis of safety and effectiveness by the Food and Drug Administration (FDA) under the Federal Food, Drug, and Cosmetic Act
(the Act) and related patent and exclusivity information. When an Abbreviated New Drug Application, or ANDA, applicant files its
application with the FDA, the applicant is required to certify to the FDA concerning any patents listed for the reference product
in the Orange Book, except for patents covering methods of use for which the ANDA applicant is not seeking approval. To the extent
that the Section 505(b)(2) applicant is relying on studies conducted for an already approved product, the applicant is required
to certify to the FDA concerning any patents listed for the approved product in the Orange Book to the same extent that an ANDA
applicant would.
Specifically, the applicant
must certify with respect to each patent that:
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the required patent information has not been filed;
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the listed patent has expired;
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the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or
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the listed patent is invalid, unenforceable or will not be infringed by the new product.
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A certification that
the new product will not infringe the already approved product’s listed patents or that such patents are invalid or unenforceable
is called a Paragraph IV certification. If the applicant does not challenge the listed patents or indicates that it is not seeking
approval of a patented method of use, the ANDA application will not be approved until all the listed patents claiming the referenced
product have expired.
If the ANDA applicant
has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification to
the NDA and patent holders once the ANDA has been accepted for filing by the FDA. The NDA and patent holders may then initiate
a patent infringement lawsuit in response to the notice of the Paragraph IV certification. The filing of a patent infringement
lawsuit within 45 days after the receipt of a Paragraph IV certification automatically prevents the FDA from approving the ANDA
until the earlier of 30 months after the receipt of the Paragraph IV notice, expiration of the patent, or a decision in the infringement
case that is favorable to the ANDA applicant. This same procedure that applied to an ANDA applicant also applies to an NDA applicant
under Section 505(b)(2).
Patent Term Restoration
and Extension
A patent claiming a
new drug product may be eligible for a limited patent term extension under the Hatch-Waxman Act, which permits a patent restoration
of up to five years for the patent term lost during product development and the FDA regulatory review. The restoration period granted
is typically one-half the time between the effective date of an IND and the submission date of an NDA, plus the time between the
submission date of an NDA and the ultimate approval date. Patent term restoration cannot be used to extend the remaining term of
a patent past a total of 14 years from the product’s approval date. Only one patent applicable to an approved drug product
is eligible for the extension, and the application for the extension must be submitted prior to the expiration of the patent in
question. A patent that covers multiple drugs for which approval is sought can only be extended in connection with one of the approvals.
The USPTO reviews and approves the application for any patent term extension or restoration in consultation with the FDA.
Marketing Exclusivity
A Section 505(b)(2)
NDA applicant may be eligible for its own regulatory exclusivity period, such as three-year exclusivity. A Section 505(b)(2) NDA
applicant for a new condition of use, or change to a marketed product, such as a new extended release formulation for a previously
approved product, may be granted a three-year market exclusivity if one or more clinical studies, other than bioavailability or
bioequivalence studies, were essential to the approval of the application and were conducted or sponsored by the applicant. Should
this occur, the FDA would be precluded from approving any other application for the same new condition of use or for a change to
the drug product that was granted exclusivity until after that three-year exclusivity period has run. Additional exclusivities
may also apply.
Reimbursement
We face uncertainties
over the pricing of pharmaceutical products. Sales of our product candidates will depend, in part, on the extent to which the costs
of our product candidates will be covered by third-party payors, such as federal health programs, commercial insurance and managed
care organizations. These third-party payors are increasingly challenging the prices charged for medical products and services.
Additionally, the containment of healthcare costs has become a priority of federal and state governments and the prices of drugs
have been a focus in this effort. The U.S. government, state legislatures, foreign governments and third-party payors have shown
significant interest in implementing cost-containment programs, including price controls, pricing transparency disclosure obligations,
restrictions on reimbursement and requirements for substitution of generic products. Adoption of price controls and cost-containment
measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could further limit our
net revenue and results. If these third-party payors do not consider our products to be cost-effective compared to other therapies,
they may not cover any of our products after approved as a benefit under their plans or, if they do, the level of payment may not
be sufficient to allow us to sell our product candidates on a profitable basis.
Specifically, in both
the United States and some foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the
healthcare system in ways that could affect our ability to sell our product candidates profitably. In the United States, the Medicare
Prescription Drug, Improvement and Modernization Act of 2003, also called the Medicare Modernization Act, or MMA, changed the way
Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases by the elderly
and certain others. Prior to MMA, Medicare did not cover most outpatient prescription drugs. MMA created a new voluntary Part D,
which covers outpatient drugs for Medicare beneficiaries and is administered by private insurance plans that operate partially
at-risk under contract with the Centers for Medicare & Medicaid Services, or CMS. These private Part D plans have incentives
to keep costs down. MMA also introduced a new reimbursement methodology based on average sales prices for physician-administered
drugs. In addition, this legislation provided authority for limiting the number of certain outpatient drugs that will be covered
in any therapeutic class.
In recent years, Congress
has considered further reductions in Medicare reimbursement for drugs administered by physicians. CMS has issued and will continue
to issue regulations to implement the law which will affect Medicare, Medicaid and other third-party payors. Medicare, which is
the single largest third-party payment program and which is administered by CMS, covers prescription drugs in one of two ways.
Medicare part B covers outpatient prescription drugs that are administered by physicians and Medicare part D covers other outpatient
prescription drugs, but through private insurers. Medicaid, a health insurance program for the poor, is funded jointly by CMS and
the states, but is administered by the states; states are authorized to cover outpatient prescription drugs, but that coverage
is subject to caps and to substantial rebates. CMS also has the authority to revise reimbursement rates and to implement coverage
restrictions for some drugs. Cost reduction initiatives and changes in coverage implemented through legislation or regulation could
decrease utilization of and reimbursement for any approved products, which in turn would affect the price we can receive for those
products. While the MMA and implementing regulations apply primarily to drug benefits for Medicare beneficiaries, private payors
often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates. Therefore, any reduction
in reimbursement that results from federal legislation or regulation may result in a similar reduction in payments from private
payors.
In March 2010, the
Patient Protection and Affordable Care Act, as amended, or the Affordable Care Act, which was amended by the Health Care and Education
Affordability Reconciliation Act, or collectively, PPACA became law in the United States, a sweeping law intended to broaden access
to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency
requirements for healthcare and health insurance industries, impose new taxes and fees on pharmaceutical and medical device manufacturers
and impose additional health policy reforms. As amended, the PPACA expanded manufacturers’ rebate liability to include covered
drugs dispensed to individuals who are enrolled in Medicaid managed care organizations, increased the minimum rebate due for innovator
drugs (both single source drugs and innovator multiple source drugs) from 15.1% of average manufacturer price, or AMP to 23.1%
of AMP or the difference between the AMP and best price, whichever is greater. The total rebate amount for innovator drugs is capped
at 100.0% of AMP. The PPACA and subsequent legislation also narrowed the definition of AMP. Furthermore, the PPACA imposes a significant
annual, nondeductible fee on companies that manufacture or import certain branded prescription drug products. Substantial new provisions
affecting compliance have also been enacted, which may affect our business practices with healthcare practitioners, and a significant
number of provisions are not yet, or have only recently become, effective. The PPACA likely will continue to put pressure on pharmaceutical
pricing, especially under the Medicare program, and may also increase our regulatory burdens and operating costs. The PPACA remains
subject to continuing legislative scrutiny, including efforts by Congress to repeal and amend a number of its provisions, as well
as administrative actions delaying the effectiveness of key provisions. In addition, there have been lawsuits filed by various
stakeholders pertaining to certain portions of the PPACA that may have the effect of modifying or altering various parts of the
law. Efforts to date to amend or repeal the PPACA have generally been unsuccessful.
In addition, other
legislative changes have been proposed and adopted since the PPACA was enacted. In August 2011, then President Obama signed into
law the Budget Control Act of 2011, which, among other things, creates the Joint Select Committee on Deficit Reduction to recommend
to Congress proposals in spending reductions. The Joint Select Committee did not achieve a targeted deficit reduction of an amount
greater than $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction to several government
programs. This includes aggregate reductions to Medicare payments to healthcare providers of up to 2.0% per fiscal year, starting
in 2013. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things,
reduced Medicare payments to several categories of healthcare providers and increased the statute of limitations period for the
government to recover overpayments to providers from three to five years. The Bipartisan Budget Act of 2015, signed into law on
November 2, 2015, increased the rebates that generic drug manufacturers are obligated to pay under the Medicaid program by applying
an inflation-based rebate formula to generic drugs that previously only applied to brand name drugs. Legislative and regulatory
proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical
products.
In the fourth quarter
of 2018, the Trump Administration announced initiatives that it asserted are intended to result in purportedly lower drug prices.
The first initiative, announced on October 15, 2018, involved the plan for a new federal regulation that would require pharmaceutical
manufacturers to disclose the list prices of their respective prescription drugs in their television advertisements for their products
if the list price is greater than $35. With respect to the second initiative, on October 25, 2018, the CMS gave Advance Notice
of Proposed Rulemaking to propose the implementation of an “International Pricing Index” model for Medicare Part B
drugs and biologicals (single source drugs, biologicals, and biosimilars). Public comments were due on December 31, 2018 with a
proposed rule theoretically being offered as early as spring 2019 with target implementation of a 5-year pilot program beginning
in spring 2020 and ending in spring 2025. During the theoretical pilot program, which it is expected will focus on very expensive
drugs reimbursed by the Medicare Part B program, CMS would monitor and evaluate the impact of the model on beneficiary access to
drugs, program costs, and the quality of care for beneficiaries. Despite extensive media coverage of the roll out of this announcement
as well as the announcement by the Democratic majority in the U.S. House of Representatives of alternative legislative proposals,
no specific rule has been forthcoming during the intervening time since the original announcement in 2018.
Various states, such
as California, have also taken steps to consider and enact laws or regulations that are intended to increase the visibility of
the pricing of pharmaceutical products with the goal of reducing the prices at which we are able to sell our products. Because
these various actual and proposed legislative changes are intended to operate on a state-by-state level rather than a national
one, we cannot predict what the full effect of these legislative activities may be on our business in the future. This Trump Administration
initiative has been withdrawn for now.
Although we cannot
predict the full effect on our business of the implementation of existing legislation, including the PPACA or the enactment of
additional legislation pursuant to healthcare and other legislative reform, we believe that legislation or regulations that would
reduce reimbursement for or restrict coverage of our products could adversely affect how much or under what circumstances healthcare
providers will prescribe or administer our products.
Additionally, in some
countries, particularly the countries comprising the EU the pricing of pharmaceuticals and certain other therapeutics is subject
to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after
the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required
to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies.
DEA
Our AP-Cannabinoids
product candidates for treatment of various pain indications, uses CBD or THC. These products are quite distinct from crude herbal
“medical marijuana,” and we intend to seek FDA approval for these products in accordance with the customary FDA approval
process and based on adequate and well-controlled clinical studies. However, the active ingredients in our products are defined
as controlled substances under the federal Controlled Substances Act of 1970, or CSA. Under the CSA, the Drug Enforcement Administration
of the United States Department of Justice, or DEA, places each drug that has abuse potential into one of five categories. The
five categories, referred to as Schedules I-V, carry different degrees of restriction. Each schedule is associated with a distinct
set of controls that affect manufacturers, researchers, healthcare providers, and patients. The controls include registration with
the DEA, labeling and packaging, production quotas, security, recordkeeping, and dispensing. Schedule I is the most restrictive,
covering drugs that have “no accepted medical use” in the United States and that have high abuse potential.
If and when any of
our product candidates receive FDA approval, the DEA will make a scheduling determination and place the product in a schedule other
than Schedule I in order for it to be prescribed to patients in the United States. Accordingly, our ability to ultimately commercialize
the product will depend in part on the ultimate scheduling classification determination by DEA for our product.
The FDA has stated
that it will continue to facilitate the work of companies interested in bringing safe, effective, and quality products to market,
including scientifically-based research concerning the medical uses of products derived from marijuana and the FDA has approved
synthetic compositions of the active ingredients found in marijuana. However, the use and abuse of controlled substances is currently
subject to political and social pressures from certain constituencies related to their usage which could result in additional difficulty
with respect to the approval of AP-Cannabinoids as a prescription pharmaceutical. For example, the FDA or DEA may require us to
generate more clinical data about the potential for abuse than that which is currently anticipated, which could increase the cost
and/or delay the launch of our product. In addition, DEA scheduling may limit our ability to achieve market share in the United
States due to restricted access and the disinclination of some physicians to prescribe more restrictive scheduled controlled substances.
For example, Schedule II drugs may not be refilled without a new prescription. These factors may limit the commercial viability
of AP-Cannabinoids in the United States.
Most countries are
parties to the Single Convention on Narcotic Drugs 1961, which governs international trade and domestic control of narcotic substances,
including the compounds in our AP-Cannabinoids product candidates. Countries may interpret and implement their treaty obligations
in a way that creates a legal obstacle to our obtaining approval to market our AP-Cannabinoids product candidates. Approval to
market in these countries could require amendments or modifications to existing laws and regulations that such countries would
be unwilling to undertake or may cause material delays in any marketing approval.
Other U.S. Healthcare
Laws and Compliance Requirements
In the United States,
our current and future activities with investigators, healthcare professionals, consultants, third-party payors, patient organizations
and customers are subject to healthcare regulation and enforcement by the federal government and the states in which we conduct
our business. Applicable federal and state healthcare laws and regulations include the following:
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The federal healthcare Anti-Kickback Statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving, or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order, or recommendation of, any good, item, facility or service, for which payment may be made under federal healthcare programs such as Medicare and Medicaid.
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The federal Anti-Inducement Act which prohibits persons from offering remuneration to beneficiaries to induce them to use a particular item or service payable in whole or in part by Medicare or Medicaid.
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The Ethics in Patient Referrals Act of 1989, commonly referred to as the Stark Law, and its corresponding regulations, prohibit physicians from referring patients for designated health services (including outpatient drugs) reimbursed under the Medicare or Medicaid programs to entities with which the physicians or their family members have a financial relationship or an ownership interest, subject to narrow regulatory exceptions, and prohibits those entities from submitting claims to Medicare or Medicaid for payment of items or services provided to a referred beneficiary.
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The federal False Claims Act imposes criminal and civil penalties, including civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government claims for payment that are false or fraudulent or making a false statement to avoid, decrease, or conceal an obligation to pay money to the federal government.
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Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program and also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information.
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The federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items, or services.
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Analogous state laws and regulations, such as state anti-kickback and false claims laws, apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers, and some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government.
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A PPACA provision, generally referred to as the Physician Payments Sunshine Act or Open Payments Program, imposes reporting requirements for applicable drug and device manufacturers of covered products with regard to payments or other transfers of value made to physicians and teaching hospitals, and certain investment/ownership interests held by physicians and their immediate family members in the reporting entity. These disclosures are publicly disclosed by the Centers for Medicare & Medicaid Services, or CMS.
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In the European Union, the General
Data Protection Regulation, or GDPR, —Regulation EU 2016/679— was adopted in May 2016 and became applicable on
May 25, 2018, or GDPR. The GDPR further harmonizes data protection requirements across the European Union
member states by establishing new and expanded operational requirements for entities that collect, process or use personal
data generated in the European Union, including consent requirements for disclosing the way personal information will be
used, information retention requirements, and notification requirements in the event of a data breach.
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The California Consumer Privacy Act of 2018, or CCPA, effective as of January 1, 2020, that gives California residents expanded rights to access and require deletion of their personal information, opt out of certain personal information sharing, and receive detailed information about how their personal information is used. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation.
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In addition, failure to comply with the Israeli Privacy Protection Law 1981, and its regulations as well as the guidelines of the Israeli Privacy Protection Authority, may expose us to administrative fines, civil claims (including class actions) and in certain cases criminal liability. Current pending legislation may result in a change of the current enforcement measures and sanctions.
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Efforts to ensure that
our business arrangements with third parties comply with applicable healthcare laws and regulations could be costly. Although we
believe our business practices are structured to be compliant with applicable laws, it is possible that governmental authorities
will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable
fraud and abuse or other healthcare laws and regulations. If our past or present operations, including activities conducted by
our sales team or agents, are found to be in violation of any of these laws or any other governmental regulations that may apply
to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, disgorgement, exclusion from
third party payor programs, such as Medicare and Medicaid, debarment, imprisonment, integrity obligations and other compliance
oversight, and the curtailment or restructuring of our operations. If any of the physicians, providers or entities with whom we
do business are found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions,
including exclusion from government funded healthcare programs.
Many aspects of these
laws have not been definitively interpreted by the regulatory authorities or the courts, and their provisions are open to a variety
of subjective interpretations which increases the risk of potential violations. In addition, these laws and their interpretations
are subject to change. Any action against us for violation of these laws, even if we successfully defend against it, could cause
us to incur significant legal expenses, divert our management’s attention from the operation of our business, and damage
our reputation.
In addition, from time
to time in the future, we may become subject to additional laws or regulations administered by the U.S. Federal Trade Commission,
or FTC, or by other federal, state, local or foreign regulatory authorities, to the repeal of laws or regulations that we generally
consider favorable or to more stringent interpretations of current laws or regulations. We are not able to predict the nature of
such future laws, regulations, repeals or interpretations, and we cannot predict what effect additional governmental regulation,
if and when it occurs, would have on our business in the future. Such developments could, however, require reformulation of certain
products to meet new standards, recalls or discontinuance of certain products not able to be reformulated, additional record-keeping
requirements, increased documentation of the properties of certain products, additional or different labeling, additional scientific
substantiation, additional personnel or other new requirements. Any such developments could have a material adverse effect on our
business.
The growth and demand
for electronic commerce, or eCommerce, could result in more stringent consumer protection laws that impose additional compliance
burdens on online retailers. These consumer protection laws could result in substantial compliance costs and could interfere with
the conduct of our business.
There is currently
great uncertainty in many states whether or how existing laws governing issues such as property ownership, sales and other taxes,
and libel and personal privacy apply to the Internet and commercial online retailers. These issues may take years to resolve. For
example, tax authorities in a number of states, as well as a Congressional advisory commission, are currently reviewing the appropriate
tax treatment of companies engaged in online commerce and new state tax regulations may subject us to additional state sales and
income taxes. New legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently
apply to our business, or a change in application of existing laws and regulations to the Internet and commercial online services
could result in significant additional taxes on our business. These taxes could have an adverse effect on our results of operations.
Intellectual Property
Our success depends,
at least in part, on our ability to protect our proprietary technology and intellectual property, and to operate without infringing
or violating the proprietary rights of others. We rely on a combination of patent, trademark, trade secret and copyright laws,
know-how, intellectual property licenses and other contractual rights (including confidentiality and invention assignment agreements)
to protect our proprietary technology and intellectual property, including related intellectual property rights.
Patents
As of January 29, 2020,
we own or exclusively license six families of patents to use within our field of business (families IN-1, IN-3, IN-7, IN-11, IN-21
and IN-23). Four of the patent families (IN-1, IN-3, IN-7 and IN-11) have granted patents registered in various countries, as detailed
below. With the exception of the first family of patents (IN-1) four families (IN-3, IN-7, IN-11 and IN-23) have active pending
application under examination. The sixth patent family (IN-23) currently comprises of recently filed pending provisional US patent
application, dated January 2, 2020. The deadline for filing priority PCT or national applications is January 2, 2021. Our patents
and patent applications generally relate to gastroretentive drug delivery devices for oral intake, the integration of the drugs
into our delivery devices and their production, and our patents and any patents that issue from our pending patent applications
are expected to expire at various dates between 2020 and 2041. We also rely on trade secrets to protect certain aspects of our
technology. The following discussion describes certain patents/patent applications which we consider to be our material patents
and patent applications.
IN-1 and Yissum
License Agreement
The patent family,
IN-1, that we exclusively license from Yissum (i.e., Gastroretentive Controlled Release Pharmaceutical Dosage Forms) pursuant to
the license agreement described below, or the License Agreement covers gastroretentive system/device for controlled release of
an active ingredient in the GI tract. This patent does not cover the implementation of the accordion technology with respect to
any particular drug or in a manner that is readily manufactured commercially, but it broadly covers folded gastroretentive forms,
and forms the basis for the accordion technology in its most basic form. The system is intended mainly for drugs with NAW, drugs
that act locally in the digestive system and drugs whose active receptors are in the upper part of the GI tract. The system is
intended for clinical use in humans and in animals. The patent is issued in the United States, Israel, Japan, Australia, Canada,
South Africa, the United Kingdom and six other European countries, and expires in November 2020.
In the License Agreement,
Yissum granted us an exclusive license for developing, manufacturing and marketing of products based, directly or indirectly, on
the IN-1 patent, the know-how and research results defined therein. Under the provisions of the License Agreement, as amended,
Yissum may not transfer its rights in the patent without our prior written consent. In consideration of the license, we have undertaken
to pay Yissum royalties equaling 3% of the total net revenues from the sale of products based on Yissum’s patent and royalties
equal to 15% of any payment or benefit whatsoever received by us from any sublicensee. At the current time we have not commenced
sales and have not granted any sublicenses to any third parties. The parties to the License Agreement are entitled to terminate
the agreement in case of bankruptcy or receivership of the other party, or a material breach (including in respect of any payment
obligations) that is not cured within 30 days. The License Agreement will remain in effect until the later of the expiration date
of the patent or 15 years from the first commercial sale on the basis of the license. We have the right to assign our rights in
the License Agreement with the prior consent of Yissum, not to be unreasonably withheld, and we are entitled to grant sublicenses
under the licensed intellectual property of Yissum to third parties in our sole discretion, and any sublicensee(s) thereunder will
not be required to assume any undertaking towards Yissum.
IN-3
An additional patent
family (i.e., Method and Apparatus for Forming Delivery Devices for Oral Intake of an Agent), which we refer to as IN-3, covers
various methods for making and folding the gastroretentive drug delivery system, and for folding it in an accordion configuration
allowing its integration into an ordinary oral capsule, which are suitable for commercial manufacturing in mass quantities. The
IN-3 family patents, will expire in 2027, except for the first United States patent of this family, which will expire in 2028.
We consider our proprietary process for folding and cutting the films forming the drug delivery system for integration in an accordion-like
configuration into an ordinary oral capsule to be material to our business. We have five granted patents in the U.S. and an additional
pending patent application in connection with IN-3, as well as granted patents in Israel (four patents), Europe (two granted patents
validated in more than 15 countries and a pending divisional application), Canada and Japan. Importantly, the second IN-3 patents
granted in the U.S. and in Europe cover a specific embodiment of the Accordion Pill, particularly suitable for insoluble or poorly
soluble drugs. Similar divisional applications have been filed in other countries and patents for these have already been granted
in Israel and Japan.
IN-7
An additional patent
family (for “frameless” Accordion Pill, specifically but not limited to Levodopa as the active drug) that we consider
material to our business is referred to as IN-7. The accordion technology covered by our other patents may sometimes need to be
specifically adapted for a given drug that might benefit from prolonged gastroretentive release. Thus, the layered structure of
an Accordion Pill may be varied and specially designed by reference to factors that are unique to any given drug and indication,
such as the quantity of active ingredient desired to be released, the length of time over which the active drug is released, the
relative solubility of a particular drug molecule, and other factors. IN-7 patents/patent applications relate to a special Accordion
Pill, which is “frameless”, and is suitable for carrying various active drugs, including but not limited to Levodopa,
optionally in combination with Carbidopa. The IN-7 patent family relates to the Accordion Pill dosage form, the main feature of
which is the uniform inner drug-containing layer, which allows for, but does not require, high load of the drug, while maintaining
the requisite structural or mechanical strength of the Accordion Pill. This patent family includes patents/patent applications
filed in the United States, the European Patent Office, Japan and several other countries in April 2009. We have four granted U.S.
patents for an Accordion Pill with specific claims to Carbidopa/Levodopa as the active ingredient(s) (IN-7), which will be in force
until April 17, 2029, and have been granted IN-7 patents in China, Japan, Hong Kong, Canada, Europe, (validated in over 30 countries),
Israel, South Africa and South Korea. Application in Europe (divisional) and in India are pending.
An additional patent
family, related to IN-7, which we refer to as IN-11, seeks protection for an Accordion Pill containing Levodopa that is specifically
formulated for treatment of Parkinson’s disease in a specific treatment regimen. We have been granted two United States patents,
and have pending applications in Canada, EPO, India and Israel. Any granted patent of IN-11 will expire in November 2031.
IN-21
This patent family
is directed to Accordion Pill comprising cannabinoid/s as active drugs (including THC and CBD, separately or in combination) and
currently includes pending patent applications in 21 jurisdictions, including the US, EPO, Israel, China, Republic of Korea, Canada,
India, Japan, Australia, New Zealand, Russia, Brazil, Mexico and others. Patents to be granted on these applications will expire
in 2037.
IN-23
This patent family
is directed to a novel Accordion Pill, with a new platform for delivering active pharmaceutical agents.
General
We intend to submit
patent applications for each Accordion Pill and/or drug combination that we develop. The patent outlook for companies like ours
is generally uncertain and may involve complex legal and factual questions. Our ability to maintain and consolidate our proprietary
position for our technology will depend on our success in obtaining effective claims and enforcing those claims once granted. We
do not know whether any of our patent applications or any patent applications that we license will result in the issuance of any
patents. Our issued patents and those that may be issued in the future, or patents that we exclusively license, may be challenged,
narrowed, circumvented or found to be invalid or unenforceable, which could limit our ability to stop competitors from marketing
related products or the length of term of patent protection that we may have for our products. We cannot be certain that we were
the first to invent the inventions claimed in our owned patents or patent applications, or that Yissum was the first to invent
the invention claimed in the patent that we exclusively license from Yissum. In addition, our competitors may independently develop
similar technologies or duplicate any technology developed by us, and the rights granted under any issued patents may not provide
us with any meaningful competitive advantages against these competitors. Furthermore, because of the extensive time required for
development, testing and regulatory review of a potential product, it is possible that, before any of our products can be commercialized,
any related patent may expire or remain in force for only a short period following commercialization, thereby reducing any advantage
of the patent.
Trademarks
We rely on trade names,
trademarks and service marks to protect our name brands. Our trademark/service mark ACCORDION PILL is registered in Israel in Classes
5, 40 and 42. The ACCORDION PILL trademark/service mark is also registered in the United States and in the UK.
Trade Secrets and Confidential
Information
In addition to patents,
we rely on trade secrets and know-how to develop and maintain our competitive position. Trade secrets and know-how can be difficult
to protect. We rely on, among other things, confidentiality and invention assignment agreements to protect our proprietary know-how
and other intellectual property that may not be patentable, or that we believe is best protected by means that do not require public
disclosure. For example, we require our employees to execute confidentiality agreements in connection with their employment relationships
with us, and to disclose and assign to us inventions conceived in connection with their services to us. However, there can be no
assurance that these agreements will be enforceable or that they will provide us with adequate protection. We also seek to preserve
the integrity and confidentiality of our data, trade secrets and know-how by maintaining physical security of our premises and
physical and electronic security of our information technology systems.
We may be unable to
obtain, maintain and protect the intellectual property rights necessary to conduct our business, and may be subject to claims that
we infringe or otherwise violate the intellectual property rights of others, which could materially harm our business. For a more
comprehensive summary of the risks related to our intellectual property, see “Item 1A. Risk Factors — Risks Related
to Our Intellectual Property.”
Insurance
We maintain directors’
and officers’ liability insurance with a coverage limit of $20.0 million for the benefit of our office holders and directors.
Such directors’ and officers’ liability insurance contains certain standard exclusions.
We also maintain insurance
for our premises for a maximum of NIS 40.0 million, including coverage of equipment and lease improvements against risk of loss
(fire, natural hazard and allied perils, excluding damage from theft - hereinafter “named perils”) and business interruption
insurance coverage caused by named perils out of which up to NIS 24.0 million for fixed cost. In addition, we maintain the following
insurance: employer liability with coverage of NIS 20.0 million and third-party liability with coverage of NIS 20.0 million.
We also procure additional
insurance for each specific clinical trial which covers a certain number of trial participants and which varies based on the particular
clinical trial. Certain of such policies are based on the Declaration of Helsinki, which is a set of ethical principles regarding
human experimentation developed for the medical community by the World Medical Association, and certain protocols of the Israeli
Ministry of Health.
We believe our insurance
policies are adequate and customary for a business of our kind. However, because of the nature of our business, we cannot assure
you that we will be able to maintain insurance on a commercially reasonable basis or at all, or that any future claims will not
exceed our insurance coverage.
Research Grants
Grants under the Israeli
Innovation Law
Under the Encouragement
of Research, Development and Technological Innovation in the Industry Law 5744-1984, and the regulations, guidelines, rules, procedures
and benefit tracks thereunder, or the Innovation Law, research and development programs that meet specified criteria and are approved
by a committee of the IIA are eligible for grants. The grants awarded are typically up to 50% of the project’s expenditures,
as determined by the IIA committee and subject to the benefit track under which the grant was awarded. A company that receives
a grant from the IIA, or a Participating Company, is typically required to pay royalties to the IIA on income generated from products
incorporating know-how developed using such grants (including income derived from services associated with such products), until
100% of the U.S. dollars-linked grant plus annual LIBOR interest (or any other interest rate that the IIA may choose to apply in
the future) is repaid. The rate of royalties to be paid may vary between different benefits tracks, as shall be determined by the
IIA. Under the regular benefits tracks the rate of royalties varies between 3% to 5% of the income generated from the IIA-supported
products. The obligation to pay royalties is contingent on actual income generated from such products and services. In the absence
of such income, no payment of such royalties is required.
The terms of the grants
under the Innovation Law also (generally) require that the products developed as part of the programs under which the grants were
given be manufactured in Israel and that the know-how developed thereunder may not be transferred outside of Israel, unless a prior
written approval is received from the IIA (such approval is not required for the transfer of a portion of the manufacturing capacity
which does not exceed, in the aggregate, 10% of the portion declared to be manufactured outside of Israel in the applications for
funding, in which case only notification is required) and additional payments are required to be made to the IIA. It should be
noted, that this does not restrict the export of products that incorporate the funded know-how. See “Item 1A. Risk Factors
— Risks Related to Our Operations in Israel” for additional information.
The IIA approved our
request to transfer 100% of the manufacturing rights of AP-CD/LD that was developed under one of the IIA funded programs to LTS.
As a result, we will be required to pay the IIA royalties from revenue generated from the AP-CD/LD product candidate at an increased
rate and up to an increased cap amount. The IIA noted that the approval granted was exceptional and that the IIA will not approve
manufacturing additional product candidates out of Israel.
From January 1, 2009
through December 31, 2019, we received from IIA approximately NIS 42.3 million (approximately $11.3 million). We did not apply
for any grants from the IIA for the years ended December 31, 2019, 2018 and 2017. For more information see note 6c in our consolidated
financial statements for the year ended December 31, 2019.
Environmental Matters
We are subject to various
environmental, health and safety laws and regulations, including those governing air emissions, water and wastewater discharges,
noise emissions, the use, management and disposal of hazardous materials and wastes and the cleanup of contaminated sites. In addition,
all of our laboratory personnel participate in instruction on the proper handling of chemicals, including hazardous substances
before commencing employment, and during the course of their employment with us. In addition, all information with respect to any
chemical substance that we use is filed and stored as a Material Safety Data Sheet, as required by applicable environmental regulations.
Based on information currently available to us, we do not expect environmental costs and contingencies to have a material adverse
effect on us. The operation of our facilities, however, entails risks in these areas. Significant expenditures could be required
in the future if we are required to comply with new or more stringent environmental or health and safety laws, regulations or requirements.
We hold a business
license from the Jerusalem Municipality with respect to manufacturing pharmaceutical products at 12 Hartom Street, Har Hotzvim
in Jerusalem. The license is currently valid until December 31, 2023. The business license was granted after an inspection of our
raw materials inventory, which we are permitted to maintain in our facilities and warehouses located at 12 Hartom Street. We also
hold a toxic substance permit from July 26, 2018, which is valid until July 30, 2021.
We believe that our
business, operations and facilities are being operated in compliance in all material respects with applicable environmental and
health and safety laws and regulations.
Employees
As of December 31,
2019, we had 49 employees, 38 of whom are full-time employees, five of whom were employed in management, eight of whom were employed
in finance and administration, 29 of whom were employed in research and development and operations, one of whom were employed in
clinical trials and regulatory affairs and 6 of whom were employed in quality assurance. As of December 31, 2019, all of these
employees are located in Israel or the United States, where our U.S. subsidiary employs four employees.
Israeli labor laws
principally govern the length of the workday, minimum wages for employees, procedures for hiring and dismissing employees, determination
of severance pay, annual leave, sick days, advance notice of termination of employment, equal opportunity and anti-discrimination
laws and other conditions of employment. Subject to certain exceptions, Israeli law generally requires severance pay upon the retirement,
death or dismissal of an employee, and requires us and our employees to make payments to the National Insurance Institute, which
is similar to the U.S. Social Security Administration. Our employees have defined benefit pension plans that comply with applicable
Israeli legal requirements, which also include the mandatory pension payments required by applicable law and allocations for severance
pay.
While none of our employees
are party to any collective bargaining agreements, certain provisions of the collective bargaining agreements between the Histadrut
(General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations (including the Industrialists’
Associations) are applicable to our employees by extension orders issued by the Israel Ministry of Economy and Industry. These
provisions primarily concern the length of the workweek, pension fund benefits for all employees and for employees in the industry
section, insurance for work-related accidents, travel expenses reimbursement, holiday leave, convalescent payments and entitlement
for vacation days. We generally provide our employees with benefits and working conditions beyond the required minimums. We have
never experienced any employment-related work stoppages and believe our relationship with our employees is good.
Available Information
We maintain a corporate
website at www.intecpharma.com. Copies of our reports on Forms 10-K, Forms 10-Q and Forms 8-K, may be obtained, free of charge,
electronically through our corporate website at www.intecpharma.com as soon as reasonably practicable after we file such material
electronically with, or furnish to, the SEC. All of our SEC filings are also available on our website at http://www.intecpharma.com,
as soon as reasonably practicable after having been electronically filed or furnished to the SEC. The public may read and copy
any materials filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC
20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers
that file electronically with the SEC at www.sec.gov. The information on our website is not, and will not be deemed, a part of
this Annual Report or incorporated into any other filings we make with the SEC.
Item 1A. Risk Factors.
An investment in
our securities involves a high degree of risk. We operate in a dynamic and rapidly changing industry that involves numerous risks
and uncertainties. You should carefully consider the factors described below, together with all of the other information contained
in this Annual Report, including the audited consolidated financial statements and the related notes included in this Annual Report
beginning on page F-1, before deciding whether to invest in our ordinary shares. If any of the risks discussed below actually occur,
our business, financial condition, operating results and cash flows could be materially adversely affected. The risks described
below are not the only risks facing us. Additional risks and uncertainties not presently known to us or that we currently deem
immaterial also may impair our business operations. This could cause the trading price of our ordinary shares to decline, and you
may lose all or part of your investment.
Risks Related to Our Financial Position
and Capital Requirements
We are a clinical
stage biopharmaceutical company with a history of operating losses, are not currently profitable, do not expect to become profitable
in the near future and may never become profitable.
We are a clinical stage
biopharmaceutical company that was incorporated in 2000. Since our incorporation, we have primarily focused our efforts on research
and development and clinical trials. We are not profitable
and have incurred losses since inception, principally as a result of research and development, clinical trials and general administrative
expenses in support of our operations. We have not generated any revenue, expect to incur substantial losses for the foreseeable
future and may never become profitable. We also expect to incur significant operating and capital expenditures and anticipate that
our expenses and losses may increase substantially in the foreseeable future if we:
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initiate, either alone or with a partner, further clinical trials for our current and any new product candidates;
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prepare new drug applications, or NDAs, for our product candidates, assuming that the clinical trial data support an NDA;
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seek regulatory approvals for our current product candidates, or future product candidates, if any;
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implement internal systems and infrastructure;
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seek to in-license additional technologies for development, if any;
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hire additional management and other personnel; and
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move towards commercialization of our product candidates and future product candidates, if any.
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We may out-license
our ability to generate revenue from one or more of our product candidates, depending on a number of factors, including our ability
to:
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obtain favorable results from and progress the clinical development of our product candidates;
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develop and obtain regulatory approvals in the countries and for the uses we intend to pursue for our product candidates;
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subject to successful completion of registration, clinical trials and perhaps additional clinical trials of any product candidate, apply for and obtain marketing approval in the countries we intend to pursue for such product candidate; and
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contract for the manufacture of commercial quantities of our product candidates at acceptable cost levels, subject to the receipt of marketing approval.
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For the years
ended December 31, 2018 and 2019, we had net losses of $43.5 million and $47.6 million, respectively, and we expect such
losses to continue for the foreseeable future. As a result, we will ultimately 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 future.
If our product candidates do not advance to further clinical trials, fail in clinical trials or do not gain regulatory
clearance or approval, or if our product candidates do not achieve market acceptance, we may never become profitable. Our
failure to achieve or maintain profitability, or substantial delays in achieving profitability, could negatively impact the
value of our ordinary shares and our ability to raise additional financing. A substantial decline in the value of our
ordinary shares would also affect the price at which we could sell shares to secure future funding, which could dilute the
ownership interest of current shareholders.
Even if we achieve
profitability in the future, we may not be able to sustain profitability in subsequent periods. Accordingly, it is difficult to
evaluate our business prospects. Moreover, our prospects must be considered in light of the negative outcome of the ACCORDANCE
study, the discontinuation of the Novartis program, and the general uncertainty regarding our development programs and the risks
and uncertainties encountered by an early-stage company in highly regulated and competitive markets, such as the biopharmaceutical
market, where regulatory approval and market acceptance of our products are uncertain. There can be no assurance that our efforts
will ultimately be successful or result in revenues or profits. As a result, our 2019 annual consolidated financial statements
note that there is a substantial doubt about our ability to continue as a going concern.
Our independent
registered public accounting firm has expressed substantial doubt regarding our ability to continue as a going concern.
Our independent registered
public accounting firm has issued its report on our consolidated financial statements for the year ended December 31, 2019 and
included an explanatory paragraph stating that the Company has suffered recurring losses from operations and negative cash outflows
from operating activities. As a result, there is substantial doubt about our ability to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from the outcome of this uncertainty. We have no current
source of revenue to sustain our present activities, and we do not expect to generate revenue until, and unless, the FDA, or other
regulatory authorities approve, and we successfully commercialize, our product candidates. Accordingly, our ability to continue
as a going concern will require us to obtain additional financing to fund our operations, such as submissions of applications for
grants from private funds, license agreements with third parties and raising capital from the public and/or private investors and/or
institutional investors. There can be no assurance that we will succeed in obtaining the necessary financing to continue our operations.
The perception that we might be unable to continue as a going concern may make it more difficult for us to obtain financing for
the continuation of our operations and could result in the loss of confidence by investors, suppliers and employees. If we cannot
successfully continue as a going concern, our shareholders may lose their entire investment in our ordinary shares.
We will need
substantial, additional capital in the future. If additional capital is not available, we will have to delay, reduce or cease operations.
We will need to raise
substantial, additional capital to complete the research and development of all of our product candidates and for working capital
and for general corporate purposes. In addition, we may choose to expand our current research and development focus, or other clinical
operations. The negative outcome of the ACCORDANCE study, the discontinuation of the Novartis program, and the general uncertainty
regarding our development programs has adversely affected our ability to obtain funding and there is no assurance that we will
be successful in obtaining the level of financing needed for our activities. As of December 31, 2019, we had cash and cash equivalents
of $9.3 million and marketable securities of $770,000.
On December 2, 2019,
we entered into an ordinary shares purchase agreement, or the Purchase Agreement, with Aspire Capital Fund, LLC, an Illinois limited
liability company, or Aspire Capital, which provides that, upon the terms and subject to the conditions and limitations set forth
therein, Aspire Capital is committed to purchase up to an aggregate of $10.0 million of our ordinary shares over the 30-month term
of the Purchase Agreement. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Liquidity and Capital Resources — Aspire Capital Financing Arrangement”.
In addition, on March
1, 2019, we entered into a Sales Agreement with Cowen and Company, LLC, or Cowen, which provides that, upon the terms and subject
to the conditions and limitations in the Sales Agreement, we may elect from time to time, to offer and sell ordinary shares through
an “at-the-market” equity offering program through Cowen acting as sales agent. The issuance and sale of ordinary shares
by us under the program will be made pursuant to our effective “shelf” registration statement on Form S-3 (Registration
Statement No. 333-230016) filed with the SEC on March 1, 2019, and declared effective on March 28, 2019. We may sell up to approximately
$72.4 million of ordinary shares under the Sales Agreement, subject to the Baby Shelf Rule described below. See “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Aspire
Capital Financing Arrangement”.
The extent to which
we utilize the Purchase Agreement with Aspire Capital or Sales Agreement with Cowen as a source of funding will depend on a number
of factors, including the prevailing market price of our ordinary shares, the volume of trading in our ordinary shares and the
extent to which we are able to secure funds from other sources. The number of ordinary shares that we may sell to Aspire Capital
under the Purchase Agreement on any given day and during the term of the agreement is limited. Additionally, we and Aspire Capital
may not effect any sales of ordinary shares under the Purchase Agreement and during the continuance of an event of default or on
any trading day that the closing sale price of our ordinary shares is less than $0.25 per share. As a result of certain lock-up
provisions in our recent underwritten public offering, we may not effect any sales under the Purchase Agreement or Sales Agreement
until after April 30, 2020 unless we receive prior written approval from the underwriter in the offering.
In addition, our future
capital requirements may be substantial and will depend on many factors including:
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our ability to enter into collaborative, licensing, and other commercial relationships;
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adhering to patient recruitment in any clinical trials;
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clinical trial results;
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developing the Accordion Pill for the treatment of other conditions or indications beyond those currently being explored;
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the cost of filing and prosecuting patent applications and the cost of defending our patents;
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the cost of prosecuting infringement actions against third parties;
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the cost, timing and outcomes of seeking marketing approval of our product candidates;
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the costs associated with commercializing our products if we receive marketing approval, and choose to commercialize our product candidates ourselves, including the cost and timing of establishing external, and potentially in the future, internal, sales and marketing capabilities to market and sell our product candidates;
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subject to receipt of marketing approval, revenue received from sales of approved products, if any, in the future;
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the costs associated with any product liability or other lawsuits related to our future product candidates or products, if any;
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the costs associated with post-market compliance with regulatory requirements, and of addressing any allegations of non-compliance by regulatory authorities in countries where we plan to market and sell our products;
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the demand for our products;
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the costs associated with developing and/or in-licensing other research and development programs;
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the expenses needed to attract and retain skilled personnel; and
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the costs associated with being a public company.
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Under General
Instruction I.B.6 to Form S-3, or the Baby Shelf Rule, the amount of funds we can raise through primary public offerings of
securities in any 12-month period using our registration statement on Form S-3 is limited to one-third of the aggregate
market value of the voting and non-voting common equity held by non-affiliates of the Company. As of March 5, 2020, our
public float was approximately $15.2 million, based on 52,552,032 ordinary shares held by non-affiliates and a price of $0.29
per share, which was the last reported sale price of our common stock on the Nasdaq Capital Market on March 5, 2020. We
therefore are limited by the Baby Shelf Rule as of the filing of this Annual Report on Form 10-K, until such time as our
public float exceeds $75 million. If we are required to file a new registration statement on another form, we may incur
additional costs and be subject to delays due to review by the SEC Staff.
Additional funds may
not be available when we need them, on terms that are acceptable to us, or at all. If adequate funds are not available to us on
a timely basis, we may be required to delay, limit, reduce or terminate preclinical studies, clinical trials or other research
and development activities for one or more of our product candidates or delay, limit, reduce or terminate our establishment of
sales and marketing capabilities or other activities that may be necessary to commercialize our product candidates.
We may incur substantial
costs in pursuing future capital financing, including investment banking fees, legal fees, accounting fees, securities law compliance
fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection
with certain securities we issue, such as convertible notes and warrants, which may adversely impact our financial condition.
Because of our
limited operating history, we may not be able to successfully operate our business or execute our business plan.
We have a limited operating
history upon which to evaluate our proposed business and prospects. Our proposed business operations will be subject to numerous
risks, uncertainties, expenses and difficulties associated with early-stage enterprises. Such risks include, but are not limited
to, the following:
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the absence of a lengthy operating history;
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insufficient capital to fully realize our operating plan;
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our ability to obtain FDA approvals in a timely manner, if ever, or that the approved label indications are sufficiently broad to make sale of the products commercially feasible;
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expected continual losses for the foreseeable future;
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operating in an environment that is highly regulated by a number of agencies;
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social and political unrest;
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operating in multiple currencies;
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our ability to anticipate and adapt to a developing market(s);
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acceptance of our Accordion Pill by the medical community and consumers;
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limited marketing experience;
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a competitive environment characterized by well-established and well-capitalized competitors;
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the ability to identify, attract and retain qualified personnel; and
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reliance on key personnel.
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Because we are subject
to these risks, evaluating our business may be difficult, our business strategy may be unsuccessful and we may be unable to address
such risks in a cost-effective manner, if at all. If we are unable to successfully address these risks our business could be harmed.
We may not be able to raise additional
funds unless we increase our authorized share capital.
As of February
29, 2020, we have 100,000,000 authorized ordinary shares, out of which 52,973,580 ordinary
shares are issued and outstanding, 21,714,809 are reserved for future issuance under outstanding options and warrants and
under our 2015 Option and 2005 Plan. Any additional equity financing in order to fund our operations may require us to
increase our authorized share capital prior to initiating any such financing transaction. Increasing our share capital is
subject to the approval of our shareholders. In the event we fail to obtain the approval of our shareholders to such increase
in our authorized share capital, our ability to raise sufficient funds, if at all, might be adversely
effected.
We have incurred
and could incur further impairment charges of our long-lived assets that could negatively affect our results of operations.
We periodically evaluate
whether events and circumstances have occurred that require an impairment assessment. In July 2019, we announced top-line results
from our ACCORDANCE study which did not meet its target endpoints. We determined that the clinical trial results constituted a
triggering event that required us to undertake an impairment test and as a result we recorded an impairment charge of approximately
$13.7 million with respect to our production line equipment and related assets for commercial scale manufacturing of AP-CD/LD.
In the third quarter ended September 30, 2019, we recorded for the first time an impairment charge of approximately $9.8 million
which was updated in the fourth quarter by approximately $3.9 million following a new impairment assessment performed at December
31, 2019 following changes in management assumptions. We could incur further impairment charges if we determine that the carrying
value of our production line equipment and related assets is reduced. In addition, any changes in the actual market conditions
versus the assumptions used in the model to determine impairment charges could result in further impairment charges in the future.
In the event that we determine that our long-lived assets are impaired, we may be required to record a non-cash charge that could
adversely affect our results of operations.
Risks Related to Our Business Strategy
and Operations
We have not yet
commercialized any products or technologies, and we may never become profitable.
We have not yet commercialized
any products or technologies, and we may never be able to do so. We do not know when or if we will complete any of our product
development efforts, obtain regulatory approval for any product candidates incorporating our technologies or successfully commercialize
any approved products. Due to the negative outcome of the ACCORDANCE study, the discontinuation of the Novartis program, and the
general uncertainty regarding our development programs, we do not anticipate commercializing any products or technologies in the
near future. Even if we are successful in developing products that are approved for marketing, we will not be successful unless
these products gain market acceptance for appropriate indications at favorable reimbursement rates. The degree of market acceptance
of these products will depend on a number of factors, including, but not limited to:
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the timing of regulatory approvals in the countries, and for the uses, we intend to pursue with respect to the commercialization of our product candidates;
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the competitive environment;
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the establishment and demonstration in, and acceptance by, the medical community of the safety and clinical efficacy of our products and their potential advantages over other therapeutic products;
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our ability to enter into strategic agreements with a commercial-scale manufacturer and with pharmaceutical and biotechnology companies with strong marketing and sales capabilities;
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the adequacy and success of distribution, sales and marketing efforts;
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the establishment of external, and potentially, internal, sales and marketing capabilities to effectively market and sell our product candidates in the United States and other countries; and
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the pricing and reimbursement policies of government and third-party payors, such as insurance companies, health maintenance organizations and other plan administrators.
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Physicians, patients,
third-party payors or the medical community in general may be unwilling to accept, utilize or recommend, and in the case of third-party
payors, cover payment for, any of our current or future products or products incorporating our technologies. As a result, we are
unable to predict the extent of future losses or the time required to achieve profitability, if at all. Even if we successfully
develop one or more products that incorporate our technologies, we may not become profitable.
We seek to partner
with third-party collaborators with respect to the development and commercialization of AP-CD/LD and for new custom-designed APs,
and we may not succeed in establishing and maintaining collaborative relationships, which may significantly limit our ability to
develop and commercialize our product candidates successfully, if at all.
Our business strategy
relies on partnering with pharmaceutical companies to complement our internal development efforts. In July 2019, we announced top-line
results from our ACCORDANCE study in which the ACCORDANCE study did not meet its target endpoints. We have completed the analysis
of the full data set and we are currently seeking to partner AP-CD/LD as the basis for the strategy for AP-CD/LD moving forward.
In addition, we entered into a research collaboration agreement with Merck for the development of a custom-designed AP for one
of Merck’s proprietary compound and are seeking partners for the development of new custom-designed APs. We will be competing
with many other companies as we seek partners for AP-CD/LD and for any new custom-designed APs and we may not be able to compete
successfully against those companies. If we are not able to enter into collaboration arrangements for AP-CD/LD or for any new custom-designed
APs, we may be required to undertake and fund further development, clinical trials, manufacturing and commercialization activities
solely at our own expense and risk. If we are unable to finance and/or successfully execute those expensive activities, or we delay
such activities due to capital availability, our business could be materially and adversely affected, and potential future product
launch could be materially delayed, be less successful, or we may be forced to discontinue clinical development of these product
candidates. Furthermore, if we are unable to enter into a commercial agreement for the development and commercialization of the
custom-designed AP for Merck’s proprietary compound, then this could have a material adverse effect on our business, financial
condition or results of operations.
The process of establishing
and maintaining collaborative relationships is difficult, time-consuming and involves significant uncertainty, including:
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a collaboration partner
may shift its priorities and resources away from our product candidates due to a change in business strategies, or a merger, acquisition,
sale or downsizing;
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a collaboration partner
may seek to renegotiate or terminate their relationships with us due to unsatisfactory clinical results, manufacturing issues,
a change in business strategy, a change of control or other reasons;
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a collaboration partner may cease development in therapeutic areas which are the subject of our
strategic collaboration;
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a collaboration partner may not devote sufficient capital or resources towards our product candidates;
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a collaboration partner may change the success criteria for a drug candidate thereby delaying or
ceasing development of such candidate;
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a significant delay in initiation of certain development activities by a collaboration partner
will also delay payment of milestones tied to such activities, thereby impacting our ability to fund our own activities;
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a collaboration partner could develop a product that competes, either directly or indirectly, with
our drug candidate;
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a collaboration partner with commercialization obligations may not commit sufficient financial
or human resources to the marketing, distribution or sale of a product;
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a collaboration partner with manufacturing responsibilities may encounter regulatory, resource
or quality issues and be unable to meet demand requirements;
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a partner may exercise a contractual right to terminate
a strategic alliance;
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a dispute may arise between us and a partner concerning the research, development or commercialization
of a drug candidate resulting in a delay in milestones, royalty payments or termination of an alliance and possibly resulting in
costly litigation or arbitration which may divert management attention and resources; and
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a partner may use our products or technology in such a way as to invite litigation from a third
party.
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Any collaborative partners
we enter into agreements with in the future may shift their priorities and resources away from our product candidates or seek to
renegotiate or terminate their relationships with us. For example, in December 2019, we discontinued the development of a custom
designed AP for a Novartis proprietary compound following an internal and revised commercial strategic assessment, in which Novartis
advised us that this program no longer meets Novartis’ mid to long-term strategic goals. If any collaborator fails to fulfill
its responsibilities in a timely manner, or at all, our research, clinical development, manufacturing or commercialization efforts
related to that collaboration could be delayed or terminated, or it may be necessary for us to assume responsibility for expenses
or activities that would otherwise have been the responsibility of our collaborator. If we are unable to establish and maintain
collaborative relationships on acceptable terms or to successfully transition terminated collaborative agreements, we may have
to delay or discontinue further development of one or more of our product candidates, undertake development and commercialization
activities at our own expense or find alternative sources of capital.
If we are unable
to establish sales, marketing and distribution capabilities or enter into successful relationships with third parties to perform
these services, we may not be successful in commercializing our product candidates if and when they are approved.
We do not have a sales
or marketing infrastructure and have no experience in the sale, marketing or distribution of products. To achieve commercial success
for any product for which we have obtained marketing approval, we will need to establish a sales and marketing infrastructure or
to out-license the product.
In the future, we may
consider building a focused sales and marketing infrastructure to market AP-CD/LD and potentially other product candidates in the
United States, if and when they are approved. There are risks involved with establishing our own sales, marketing and distribution
capabilities. For example, recruiting and training a sales force could be expensive and time consuming and could delay any product
launch. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing capabilities
is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses.
This may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel.
Factors that may inhibit
our efforts to commercialize our products on our own include:
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our inability to recruit, train and retain adequate numbers of effective sales and marketing personnel;
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the inability of sales personnel to obtain access to physicians;
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the lack of adequate numbers of physicians to prescribe any future 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 an independent sales and marketing organization.
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If we are unable to
establish our own sales, marketing and distribution capabilities or enter into successful arrangements with third parties to perform
these services, our product revenues and our profitability, may be materially adversely affected.
In addition, we may
not be successful in entering into arrangements with third parties to sell, market and distribute our product candidates inside
or outside of the United States or may be unable to do so on terms that are favorable to us. We likely will have little control
over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our products
effectively. If we do not establish sales, marketing and distribution capabilities successfully, either on our own or in collaboration
with third parties, we will not be successful in commercializing our product candidates.
The members of
our management team are important to the efficient and effective operation of our business, and we may need to add and retain additional
leading experts. Failure to retain our management team and add additional leading experts could have a material adverse effect
on our business, financial condition or results of operations.
Our executive officers
and our management team are important to the efficient and effective operation of our business. Our failure to retain our management
personnel, who have developed much of the technology we utilize today, or any other key management personnel, could have a material
adverse effect on our future operations. Our success is also dependent on our ability to attract, retain and motivate highly-trained
technical and management personnel, among others, to continue the development and commercialization of our current and future products.
As such, our future
success highly depends on our ability to attract, retain and motivate personnel required for the development, maintenance and expansion
of our activities. There can be no assurance that we will be able to retain our existing personnel or attract additional qualified
personnel. The loss of personnel or the inability to hire and retain additional qualified personnel in the future could have a
material adverse effect on our business, financial condition and results of operation.
We expect to
face significant competition. If we cannot successfully compete with new or existing products, our marketing and sales will suffer
and we may never be profitable.
If any of our product
candidates are approved, we expect to compete against fully-integrated pharmaceutical and biotechnology companies and smaller companies
that are collaborating with pharmaceutical companies, academic institutions, government agencies and other public and private research
organizations. In addition, many of these competitors, either alone or together with their collaborative partners, operate larger
research and development programs than we do, 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 FDA approvals and addressing various regulatory matters and obtaining other regulatory approvals of drugs;
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formulating and manufacturing drugs; and
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launching, marketing and selling drugs.
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Our competitors are
likely to include companies with marketed products and/or an advanced research and development pipeline. The development of different
formulations or new chemical entities may remove any competitive advantage a product formulated with the Accordion Pill platform
technology may present. Other companies are engaged in research and development of gastric retention technologies that may become
competitive to or even superior to the capabilities of the Accordion Pill platform Technology.
There is a substantial
risk of product liability claims in our business. We currently do not maintain product liability insurance and a product liability
claim against us could adversely affect our business.
We may incur substantial
liabilities and may be required to limit commercialization of our products in response to product liability lawsuits, which may
result in substantial losses.
Any of our product
candidates could cause adverse events, including injury, disease or adverse side effects. These adverse events may or may not be
observed in clinical trials, but may nonetheless occur in the future. If any of these adverse events occur, they may render our
product candidates ineffective or harmful in some patients, and our sales would suffer, materially adversely affecting our business,
financial condition and results of operations.
In addition, potential
adverse events caused by our product candidates could lead to product liability lawsuits. If product liability lawsuits are successfully
brought against us, we may incur substantial liabilities and may be required to limit the marketing and commercialization of our
product candidates. Our business exposes us to potential product liability risks, which are inherent in the testing, manufacturing,
marketing and sale of pharmaceutical products. We may not be able to avoid product liability claims. Product liability insurance
for the pharmaceutical and biotechnology industries is generally expensive, if available at all. We do not have product liability
insurance (and currently have insurance coverage for each specific clinical trial, which covers a certain number of trial participants
and which varies based on the particular clinical trial) and if we are unable to obtain sufficient insurance coverage on reasonable
terms or to otherwise protect against potential product liability claims, we may be unable to clinically test, market or commercialize
our product candidates. A successful product liability claim brought against us in excess of our insurance coverage, if any, may
cause us to incur substantial liabilities, and, as a result, our business, liquidity and results of operations would be materially
adversely affected. In addition, the existence of a product liability claim could affect the market price of our ordinary shares.
We face continuous
technological change, and developments by competitors may render our products or technologies obsolete or non-competitive. If our
new or existing product candidates are rendered obsolete or non-competitive, our marketing and sales will suffer and we may never
be profitable.
If our competitors
develop and commercialize products faster than we do, or develop and commercialize products that are superior to our product candidates,
our commercial opportunities could be reduced or eliminated. The extent to which any of our product candidates achieve market acceptance
will depend on competitive factors, many of which are beyond our control. Competition in the biotechnology and biopharmaceutical
industry is intense and has been accentuated by the rapid pace of technology development. Our potential competitors include large
integrated pharmaceutical companies, biotechnology companies that currently have drug and target discovery efforts, universities,
and public and private research institutions. Almost all of these entities have substantially greater research and development
capabilities and financial, scientific, manufacturing, marketing and sales resources than we do. These organizations also compete
with us to:
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attract parties for acquisitions, joint ventures or other collaborations;
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license proprietary technology that is competitive with the technology we are developing;
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attract and hire scientific talent and other qualified personnel.
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Our competitors may
succeed in developing and commercializing products earlier and obtaining regulatory approvals from the FDA more rapidly than we
do. Our competitors may also develop products or technologies that are superior to those we are developing, and render our product
candidates or technologies obsolete or non-competitive. If we cannot successfully compete with new or existing products, our marketing
and sales could suffer and we may never be profitable.
We have reduced
the size of our organization, and we may encounter difficulties in managing our business as a result of this reduction, or the
attrition that may occur following this reduction, which could disrupt our operations. In addition, we may not achieve anticipated
benefits and savings from the reduction.
Following the negative
outcome of the ACCORDANCE study, we reduced the size of our headcount by approximately 50%, designed to focus our cash resources
mainly on research and development and business development activities. The restructuring, and the attrition thereafter, resulted
in the loss of longer-term employees, the loss of institutional knowledge and expertise and the reallocation and combination of
certain roles and responsibilities across the organization, all of which could adversely affect our operations. The restructuring
and possible additional cost containment measures may yield unintended consequences, such as attrition beyond our intended reduction
in headcount and reduced employee morale. In addition, the restructuring may result in employees who were not affected by the reduction
in headcount seeking alternate employment, which would result in us seeking contract support at unplanned additional expense. In
addition, we may not achieve anticipated benefits from the restructuring. Due to our limited resources, we may not be able to effectively
manage our operations or recruit and retain qualified personnel, which may result in weaknesses in our infrastructure and operations,
risks that we may not be able to comply with legal and regulatory requirements, loss of business opportunities, loss of employees
and reduced productivity among remaining employees. We may also determine to take additional measures to reduce costs, which could
result in further disruptions to our operations and present additional challenges to the effective management of our company. If
our management is unable to effectively manage this transition and restructuring and additional cost containment measures, our
expenses may be more than expected, and we may not be able to implement our business strategy.
If we are unable
to obtain adequate insurance, our financial condition could be adversely affected in the event of uninsured or inadequately insured
loss or damage. Our ability to effectively recruit and retain qualified officers and directors could also be adversely affected
if we experience difficulty in obtaining adequate directors’ and officers’ liability insurance.
We may not be able
to obtain insurance policies on terms affordable to us that would adequately insure our business and property against damage, loss
or claims by third parties. To the extent our business or property suffers any damages, losses or claims by third parties, which
are not covered or adequately covered by insurance, our financial condition may be materially adversely affected.
We may be unable to
maintain sufficient insurance as a public company to cover liability claims made against our officers and directors. If we are
unable to adequately insure our officers and directors, we may not be able to retain or recruit qualified officers and directors
to manage our Company.
If we acquire
or license additional technologies or product candidates, we may incur a number of additional costs, have integration difficulties
and/or experience other risks that could harm our business and results of operations.
We may acquire and
in-license additional product candidates and technologies. Any product candidate or technologies we in-license or acquire will
likely require additional development efforts prior to commercial sale, including extensive preclinical or clinical testing, or
both, and approval by the FDA and applicable foreign regulatory authorities, if any. All product candidates are prone to risks
of failure inherent in pharmaceutical product development, including the possibility that the product candidate or product developed
based on in-licensed technology will not be shown to be sufficiently safe and effective for approval by regulatory authorities.
In addition, we cannot assure you that any product candidate that we develop based on acquired or licensed technology that is granted
regulatory approval will be manufactured or produced economically, successfully commercialized or widely accepted or competitive
in the marketplace. Moreover, integrating any newly acquired or in-licensed product candidates could be expensive and time-consuming.
If we cannot effectively manage these aspects of our business strategy, our business may not succeed.
A security breach or disruption or
failure in a computer or communications systems could adversely affect us.
Despite the implementation
of security measures, our internal computer systems, and those of our CROs and other third parties on which we rely, are vulnerable
to damage from computer viruses, unauthorized access, cyber-attacks, natural disasters, fire, terrorism, war, and telecommunication
and electrical failures. If such an event were to occur and interrupt our operations, it could result in a material disruption
of our drug development programs. For example, the loss of clinical trial data from ongoing or planned clinical trials could result
in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent
that any disruption or security breach results in a loss of or damage to our data or applications, loss of trade secrets or inappropriate
disclosure of confidential or proprietary information, including protected health information or personal data of employees or
former employees, access to our clinical data, or disruption of the manufacturing process, we could incur liability and the further
development of our Accordion Pill could be delayed. We may also be vulnerable to cyber-attacks by hackers or other malfeasance.
This type of breach of our cybersecurity may compromise our confidential information and/or our financial information and adversely
affect our business or result in legal proceedings. Further, these cybersecurity breaches may inflict reputational harm upon us
that may result in decreased market value and erode public trust.
Global economic,
capital market and political conditions could affect our ability to raise capital and could disrupt or delay the performance of
our third-party contractors and suppliers.
Our ability to raise
capital may be adversely affected by changes in global economic conditions and geopolitical risks, including credit market conditions,
levels of consumer and business confidence, exchange rates, levels of government spending and deficits, trade policies, political
conditions, actual or anticipated default on sovereign debt, emergence of a pandemic, or other widespread health emergencies (or
concerns over the possibility of such an emergency, including for example, the recent coronavirus outbreak), and other challenges
that could affect the global economy. These economic conditions affect businesses such as ours in a number of ways. Tightening
of credit in financial markets could adversely affect our ability to obtain financing. Similarly, such tightening of credit may
adversely affect our supplier base and increase the potential for one or more of our suppliers to experience financial distress
or bankruptcy. Our global business is also adversely affected by decreases in the general level of economic activity, such as decreases
in business and consumer spending.
We or the third
parties upon whom we depend may be adversely affected by natural disasters and/or health epidemics, and our business continuity
and disaster recovery plans may not adequately protect us from a serious disaster.
Natural disasters could
severely disrupt our operations and have a material adverse effect on our business, results of operations, financial condition
and prospects. If a natural disaster, power outage, health epidemic or other event occurred that prevented us from using all or
a significant portion of our office, manufacturing and/or lab spaces, that damaged critical infrastructure, such as the manufacturing
facilities of our third-party contract manufacturers, CROs, clinical sites, third parties ongoing activities and schedules or that
otherwise disrupted operations, it may be difficult or, in certain cases, impossible for us to continue our plans and business
for a substantial period of time.
Our business could
be adversely impacted by the effects of the coronavirus outbreak originating in China, or by other epidemics. Although we do not
currently source directly a material portion of our AP-CD/LD components directly from China, our supply chain for certain and critical
components is worldwide and accordingly could be subject to disruption. In addition, such an event may cause other parties to slow
down their activities and schedules and therefore influence our timelines. A health epidemic or other outbreak, including the current
coronavirus outbreak, may materially and adversely affect our business, financial condition and results of operations.
The disaster recovery
and business continuity plan we have in place may prove inadequate in the event of a serious disaster or similar event. We may
incur substantial expenses as a result of the limited nature of our disaster recovery and business continuity plans, which could
have a material adverse effect on our business.
Risks Related to the Clinical Development,
Manufacturing and Regulatory Approval of Our Product Candidates
Our product candidates
are at various stages of development and may never be commercialized.
The progress and results
of any future preclinical testing or future clinical trials are uncertain, and the failure of our product candidates and additional
product candidates which we may license, acquire or develop in the future to receive regulatory approvals could have a material
adverse effect on our business, operating results and financial condition to the extent we are unable to commercialize any such
products. For example, the negative outcome of our ACCORDANCE study had a material adverse effect on our business, operating results
and financial condition. None of our product candidates have received regulatory approval for commercial sale. In addition, we
face the risks of failure inherent in developing therapeutic products. All our product candidates are not expected to be commercially
available for several years, if at all.
Our product candidates
are subject to extensive regulation and are at various stages of regulatory development and may never obtain regulatory approval.
Our product candidates
must satisfy certain standards of safety and efficacy for a specific indication before they can be approved for commercial use
by the FDA or foreign regulatory authorities. The FDA and foreign regulatory authorities have full discretion over this approval
process. We will need to conduct significant additional research, including testing in animals and in humans, before we can file
applications for product approval. Typically, in the pharmaceutical industry, there is a high rate of attrition for product candidates
in preclinical testing and clinical trials. Also, even though we believe that some of our product candidates may be eligible for
FDA review under Section 505(b)(2) of the FDCA, the FDA may not agree with that assessment, and may require us to submit the application
under Section 505(b)(1) which usually requires more comprehensive clinical data than applications submitted under Section 505(b)(2).
Even under Section 505(b)(2), satisfying FDA’s requirements typically takes many years, is dependent upon the type, complexity
and novelty of the product and requires the expenditure of substantial resources. Success in preclinical testing and early clinical
trials does not ensure that later clinical trials will be successful. For example, a number of companies in the pharmaceutical
industry, including biotechnology companies, have suffered significant setbacks in advanced clinical trials, even after promising
results in earlier trials. In addition, delays or rejections may be encountered based upon additional government regulation, including
any changes in legislation or FDA policy, during the process of product development, clinical trials and regulatory reviews. After
clinical trials are completed, the FDA has substantial discretion in the drug approval process and may require us to conduct additional
preclinical and clinical testing or to perform post-marketing studies.
In order to receive
FDA approval or approval from foreign regulatory authorities to market a product candidate or to distribute our products, we must
demonstrate through preclinical testing and through human clinical trials that the product candidate is safe and effective for
its intended uses (e.g., treatment of a specific condition in a specific way subject to contradictions and other limitations).
We anticipate that some foreign regulatory agencies will have different testing and approval requirements from those of the FDA.
Even if we comply with all FDA requests, the FDA may ultimately reject or decline to approve one or more of our new drug applications,
or it may grant approval for a narrowly intended use that is not commercially feasible. We might not obtain regulatory approval
for our product candidates in a timely manner, if at all. Failure to obtain FDA approval of any of our product candidates in a
timely manner or at all could severely undermine our business by delaying or halting commercialization of our products, imposing
costly procedures, diminishing competitive advantages and reducing the number of salable products and, therefore, corresponding
product revenues.
If the FDA does
not conclude that a given product candidate using our Accordion Pill technology satisfies the requirements for approval under the
Section 505(b)(2) regulatory approval pathway, or if the requirements for approval of our product candidates under Section 505(b)(2)
are not as we expect, the approval pathway will likely take significantly longer, cost significantly more and entail significantly
greater complications and risks than anticipated, and in any case may not be successful.
We intend to seek FDA
approval for our product candidates implementing our Accordion Pill technology through the Section 505(b)(2) regulatory pathway.
Pursuant to Section 505(b)(2) of the FDCA, a NDA under Section 505(b)(2) is permitted to reference safety and effectiveness data
submitted by the sponsor of a previously approved drug as part of its NDA, or rely on FDA’s prior conclusions regarding the
safety and effectiveness of that previously approved drug, or rely in part on data in the public domain. Reliance on data collected
by others may expedite the development program for our product candidates by potentially decreasing the amount of clinical data
that we would need to generate in order to obtain FDA approval. If the FDA does not allow us to pursue the Section 505(b)(2) regulatory
pathway as anticipated, we may need to conduct additional clinical trials, provide additional data and information, and meet additional
standards for product approval. If this were to occur, the time and financial resources required to obtain FDA approval, and complications
and risks associated with regulatory approval of our product candidates, would likely substantially increase. Moreover, our inability
to pursue the Section 505(b)(2) regulatory pathway may result in new competitive products reaching the market more quickly than
our product, which would likely materially adversely impact our competitive position and prospects. Even if we are able to utilize
the Section 505(b)(2) regulatory pathway, there is no guarantee this will ultimately lead to accelerated product development or
earlier approval. A 505(b)(2) applicant may rely on the FDA’s finding of safety and effectiveness for a previously approved
drug only to the extent that the proposed product in the Section 505(b)(2) application shares characteristics (e.g., active ingredient,
dosage form, route of administration, strength, indication, conditions of use) in common with the previously approved drug. To
the extent that the previously approved drug and the drug proposed in the Section 505(b)(2) application differ (e.g., a product
with a different dosage form or route of administration), the Section 505(b)(2) application must include sufficient data to support
those differences.
In addition, the pharmaceutical
industry is highly competitive, and Section 505(b)(2) NDAs are subject to special requirements designed to protect the patent rights
of sponsors of previously approved drugs that may be referenced in a Section 505(b)(2) NDA. These requirements may give rise to
patent litigation and mandatory delays in approval of our NDA for up to 30 months or longer depending on the outcome of any litigation.
Further, it is not uncommon for a manufacturer of an approved product to file a citizen petition with the FDA seeking to delay
approval of, or impose additional approval requirements for, pending competing products. If successful, such petitions can significantly
delay, or even prevent, the approval of a new product. Even if the FDA ultimately denies such a petition, the FDA may substantially
delay approval while it considers and responds to the petition. Amendments to the FDCA attempt to limit the delay that can be caused
by a citizen petition to 150 days, although court action by a dissatisfied petitioner is a possibility and this could, in theory,
adversely affect the approval process.
Moreover, even if product
candidates implementing our Accordion Pill technology are approved under Section 505(b)(2), the approval may be subject to limitations
on the indicated uses for which the products may be marketed or to other conditions of approval, or may contain requirements for
costly post-marketing testing and surveillance to monitor the safety or efficacy of the products.
We might be unable
to develop any of our product candidates to achieve commercial success in a timely and cost-effective manner, or ever.
Even if regulatory
authorities approve any of our product candidates, they may not be commercially successful. Our product candidates may not be commercially
successful because government agencies or other third-party payors may not provide reimbursement for the costs of the product or
the reimbursement may be too low to be commercially successful. In addition, physicians and others may not use or recommend our
products candidates, even following regulatory approval. A product approval, even if issued, may limit the uses for which such
product may be distributed, which could adversely affect the commercial viability of the product. Moreover, third parties may develop
superior products or have proprietary rights that preclude us from marketing our products. We also expect that our product candidates,
if approved, will generally be more expensive than the non-Accordion Pill version of the same medication available to patients.
Physician and patient acceptance of, and demand for, any product candidates for which we obtain regulatory approval or license
will depend largely on many factors, including, but not limited to, the extent, if any, of reimbursement of costs by government
agencies and other third-party payors, pricing, competition, the effectiveness of our marketing and distribution efforts, the safety
and effectiveness of alternative products, and the prevalence and severity of side effects associated with such products. If physicians,
government agencies and other third-party payors do not accept the use or efficacy of our products, we will not be able to generate
significant revenue, if any.
Our product candidates
and future product candidates will remain subject to ongoing regulatory requirements even if they receive marketing approval, and
if we fail to comply with these requirements, we may not obtain such approvals or could lose those approvals that have been obtained,
and the sales of any approved commercial products could be suspended.
Even if we receive
regulatory approval to market a particular product candidate, any such product will remain subject to extensive regulatory requirements,
including requirements relating to manufacturing, labeling, packaging, adverse event reporting, storage, advertising, promotion,
distribution and record keeping. Even if regulatory approval of a product is granted, the approval may be subject to limitations
on the uses for which the product may be marketed or the conditions of approval, or may contain requirements for costly post-marketing
testing and surveillance to monitor the safety or efficacy of the product, which could negatively impact us or our collaboration
partners by reducing revenues or increasing expenses, and cause the approved product candidate not to be commercially viable. In
addition, as clinical experience with a drug expands after approval, typically because it is used by a greater number and more
diverse group of patients after approval than during clinical trials, side effects and other problems may be observed over time
after approval that were not seen or anticipated during pre-approval clinical trials or other studies. Any adverse effects observed
after the approval and marketing of a product candidate could result in limitations on the use of or withdrawal of FDA approval
of any approved products from the marketplace. Absence of long-term safety data may also limit the approved uses of our products,
if any. If we fail to comply with the regulatory requirements of the FDA and other applicable U.S. and foreign regulatory authorities,
or previously unknown problems with any approved commercial products, manufacturers or manufacturing processes are discovered,
we could be subject to administrative or judicially imposed sanctions or other setbacks, including, without limitation, the following:
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suspension or imposition of restrictions on the products, manufacturers or manufacturing processes, including costly new manufacturing requirements;
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civil or criminal penalties, fines and/or injunctions;
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product seizures or detentions;
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import or export bans or restrictions;
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voluntary or mandatory product recalls and related publicity requirements;
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suspension or withdrawal of regulatory approvals;
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total or partial suspension of production; and
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refusal to approve pending applications for marketing approval of new products or supplements to approved applications.
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If we or our collaborators
are slow to adapt, or are unable to adapt, to changes in existing regulatory requirements or adoption of new regulatory requirements
or policies, marketing approval for our product candidates may be lost or cease to be achievable, resulting in decreased revenue
from milestones, product sales or royalties, which would have a material adverse effect on our business, financial condition or
results of operations.
Clinical trials
are very expensive, time-consuming and difficult to design and implement, and, as a result, we may suffer delays or suspensions
to current or future trials, which would have a material adverse effect on our ability to advance products and generate revenues.
Human clinical trials
are very expensive and difficult to design and implement, in part because they are subject to rigorous regulatory requirements.
Regulatory authorities, such as the FDA, may preclude clinical trials from proceeding. Additionally, the clinical trial process
is time-consuming, failure can occur at any stage of the trial and we may encounter problems that cause us to abandon or repeat
clinical trials. The commencement and completion of clinical trials may be delayed by several factors, including, but not limited
to:
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unforeseen safety issues;
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clinical holds or suspension of a clinical trial by the FDA, us, ethics committees, or the DSMB to determine proper dosing;
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lack of effectiveness or efficacy during clinical trials;
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failure of our contract manufacturers to manufacture our product candidates in accordance with cGMP;
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failure of third party suppliers to perform final manufacturing steps for the drug substance;
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slower than expected rates of patient recruitment and enrollment;
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lack of healthy volunteers and patients to conduct trials;
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inability to monitor patients adequately during or after treatment;
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failure of third party contract research organizations to properly implement or monitor the clinical trial protocols;
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failure of IRBs to approve or renew approvals of our clinical trial protocols;
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inability or unwillingness of medical investigators to follow our clinical trial protocols; and
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lack of sufficient funding to finance the clinical trials.
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As noted above, we,
regulatory authorities, IRBs or DSMBs may suspend our clinical trials at any time if it appears that we are exposing participants
to unacceptable health risks or if the regulatory authorities find deficiencies in our regulatory submissions or conduct of these
trials. Any suspension of clinical trials will delay possible regulatory approval, if any, and adversely impact our ability to
develop products and generate revenue.
We may be forced
to abandon development of certain products altogether, which will significantly impair our ability to generate product revenues.
Upon the completion
of any clinical trial, if at all, the results of these trials might not support the claims sought by us. 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. For example, our Phase III ACCORDANCE study
failed to meet its target endpoints despite positive Phase II data. The clinical trial process may fail to demonstrate that our
product candidates are safe for humans and effective for its indicated uses. Any such failure may cause us to abandon a product
candidate and may delay development of other product candidates. Any delay in, or termination or suspension of, our clinical trials
will delay the requisite filings with the FDA and, ultimately, our ability to commercialize our product candidates and generate
product revenues. If the clinical trials do not support our drug product claims, the completion of development of such product
candidates may be significantly delayed or abandoned, which would significantly impair our ability to generate product revenues
and would materially adversely affect our business, financial condition or results of operations.
Positive results
in the previous clinical trials of one or more of our product candidates may not be replicated in future clinical trials of such
product candidate, which could result in development delays or a failure to obtain marketing approval.
Positive results in
the previous clinical trials of one or more of our product candidates may not be predictive of similar results in future clinical
trials for such product candidate. For example, our Phase III ACCORDANCE study failed to meet its target endpoints despite positive
Phase II data. Also, interim results during a clinical trial do not necessarily predict final results. We along with a number of
companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials even
after achieving promising results in early-stage development. Accordingly, the results from the completed preclinical studies and
clinical trials for our product candidates may not be predictive of the results we may obtain in later stage trials of such product
candidates. Our clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us,
to conduct additional clinical trials. Clinical trial results may be inconclusive, or contradicted by other clinical trials, particularly
larger clinical trials. Moreover, clinical data are often susceptible to varying interpretations and analyses, and many companies
that believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed
to obtain FDA or European Medicines Agency, or other applicable regulatory agency, approval for their products.
Our product candidates
are manufactured through a compounding, film casting and assembly process, and if we or one of our materials suppliers encounters
problems manufacturing our products or raw materials, our business could suffer.
We and our contract
manufacturers, if any, are, and will be, subject to extensive governmental regulation in connection with the manufacture of any
pharmaceutical products. 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 and our contract manufacturers must ensure that all of the processes, methods and equipment are compliant
with cGMP for drugs on an ongoing basis, as mandated by the FDA and other regulatory authorities, and conduct extensive audits
of vendors, contract laboratories and suppliers. The FDA will likely condition grant of any marketing approval, if any, on a satisfactory
on-site inspection of our manufacturing facilities.
We currently manufacture
our product candidates used in clinical testing and we order certain materials from single-source suppliers. If the supply of any
of these single-sourced materials is delayed or ceases, we may not be able to produce the related product in a timely manner or
in sufficient quantities, if at all, causing us to be unable to further develop our product candidates or bring them to market
or continue to develop our technology, which could materially and adversely affect our business. In addition, a single-source supplier
of a key component of one or more of our product candidates could potentially exert significant bargaining power over price, quality,
warranty claims or other terms relating to the single-sourced materials. Our materials suppliers may face manufacturing or quality
control problems causing product production and shipment delays or a situation where 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 substance
or raw materials. Drug manufacturers are subject to ongoing periodic unannounced inspections by the FDA, the DEA, and corresponding
foreign regulatory agencies to ensure strict compliance with cGMP requirements and other governmental regulations and corresponding
foreign standards. Any failure by us or our suppliers to comply with DEA requirements or FDA or foreign regulatory requirements
could adversely affect our clinical research activities and our ability to market and develop our products.
We intend to
rely on a third-party manufacturer to manufacture commercial quantities of AP-CD/LD, if approved, and we may rely on other third-party
manufacturers for other product candidates and any failure by a third-party manufacturer or supplier may delay or impair our ability
to commercialize our product candidates.
We have manufactured
our product candidates for our preclinical studies, Phase I clinical trials, Phase II clinical trials and Phase III clinical trial
in our own manufacturing facility. Completion of any future clinical trial and commercialization of our product candidates will
require access to, or development of, facilities to manufacture a sufficient supply of our product candidates. Although we believe
our facilities are sufficient to manufacture our product candidate needs for clinical trials, we may be incorrect and we may not
have the resources or facilities to manufacture our product candidates for clinical trials.
With respect to any
future commercialization of the AP-CD/LD, we have decided to rely on LTS, a third-party contract manufacturer. LTS will be the
sole source of production of AP-CD/LD and the establishment of a manufacturing facility to produce commercial quantities of AP-CD/LD
requires substantial investment. Producing products in commercial quantities requires developing and adhering to complex manufacturing
processes that are different from the manufacture of products in smaller quantities for clinical trials, including adherence to
regulatory standards. Although we believe that we have developed processes and protocols that will enable LTS to manufacture commercial-scale
quantities of products at acceptable costs, we cannot provide assurance that such processes and protocols will enable us to manufacture
in quantities that may be required for commercialization of AP-CD/LD with yields and at costs that will be commercially attractive.
If LTS is unable to establish or maintain commercial manufacture of AP-CD/LD or are unable to do so at costs that we currently
anticipate, our business could be adversely affected. Furthermore, if our current and future manufacturing and supply strategies
are unsuccessful, we may be unable to conduct and complete any future Phase III clinical trials or commercialize our product candidates
in a timely manner, if at all.
We have relied, and
we expect to continue to rely, on third-party manufacturers for certain raw materials (excipients, solvents and active pharmaceutical
ingredients, or APIs), and for the commercial manufacturing of our AP-CD/LD. Our reliance on third parties for the manufacture
of these items increases the risk that we will not have sufficient quantities of these items or will not be able to obtain such
quantities at an acceptable cost or quality, which could delay, prevent or impair our development or commercialization efforts.
If the third-party manufacturers on whom we rely fail to supply these items and we need to enter into alternative arrangements
with a different supplier, it could delay our product development activities, as we would have to requalify the casting and assembly
processes pursuant to FDA requirements. If this failure of supply were to occur after we received approval for and commenced commercialization
of AP-CD/LD, we might be unable to meet the demand for this product and our business could be adversely affected. In addition,
because we do not have any control over the process or timing of the supply of the APIs used in AP-CD/LD, there is greater risk
that we will not have sufficient quantities of these APIs at an acceptable cost or quality, which could delay, prevent or impair
our development or commercialization efforts.
Manufacturing
our product candidates is subject to extensive governmental regulation. Our failure or the failure of these third parties in any
respect (including noncompliance with governmental regulations) could have a material adverse effect on our business, results of
operations and financial condition.
Manufacturing our product
candidates is subject to extensive governmental regulation. See “Item 1. Business - Government Regulation.” Future
FDA, state and foreign inspections may identify compliance issues at our facilities or at the facilities of our contract manufacturers.
Failure by our third-party manufacturers to pass such inspections and otherwise satisfactorily complete the FDA or foreign regulatory
agency approval regimen with respect to our product candidates may result in regulatory actions such as the issuance of Form FDA
483 notices of observations or any foreign counterpart, warning letters or injunctions or the loss of operating licenses. Based
on the severity of the regulatory action, our clinical or commercial supply of the items manufactured by third-party manufacturers
could be interrupted or limited, which could have a material adverse effect on our business. In addition, discovery of previously
unknown problems with a product or the failure to comply with applicable requirements may result in restrictions on a product,
manufacturer or holder of an approved NDA, including withdrawal or recall of the product from the market or other voluntary, FDA
or foreign regulatory agency-initiated or judicial action that could delay or prohibit further marketing. Newly discovered or developed
safety or effectiveness data may require changes to a product’s approved labeling, including the addition of new warnings
and contraindications, and also may require the implementation of other risk management measures. Also, new government requirements,
including those resulting from new legislation, may be established, or the FDA’s or foreign regulatory agency’s policies
may change, which could delay or prevent regulatory approval of our products under development. The FDA will likely condition grant
of any marketing approval, if any, on a satisfactory on-site inspection of our manufacturing facilities.
If we are unable
to use our manufacturing facility for any reason, the manufacture of clinical supplies of our candidates would be delayed, which
would harm our business.
We currently able
to manufacture all clinical supply of all our product candidates at our own manufacturing facility. If we were to lose the
use of our facility or equipment, our manufacturing facility and manufacturing equipment would be difficult to replace and
could require substantial replacement lead time and substantial additional funds. Our facility may be affected by natural
disasters, such as floods or fire, or we may lose the use of our facility due to manufacturing issues that arise at our
facility, such as contamination or regulatory concerns following a regulatory inspection of our facility. We do not currently
have back-up capacity. In the event of a loss of the use of all or a portion of our facility or equipment for the reasons
stated above or any other reason, we would be unable to manufacture any of our product candidates until such time as our
facility could be repaired, rebuilt or we are able to address other manufacturing issues at our facility. Although we
currently maintain property insurance with personal property limits of up to NIS 40.0 million and business interruption
insurance coverage of up to NIS 24.0 million for damage to our property and the disruption of our business from fire and
other casualties, such insurance may not cover all occurrences of manufacturing disruption or be sufficient to cover all of
our potential losses in the event of occurrences that are covered and may not continue to be available to us on acceptable
terms, or at all.
We are subject
to extensive and costly government regulation.
The products we are
developing and planning to develop in the future are subject to extensive and rigorous domestic government regulation, including
regulation by the FDA, the CMS, the HHS, including its Office of Inspector General, the Office of Civil Rights, which administers
the privacy provisions of HIPAA, the U.S. Department of Justice, the Departments of Defense and Veterans Affairs, to the extent
our products are paid for directly or indirectly by those departments, state and local governments, and their respective foreign
equivalents. The FDA regulates the research, development, preclinical and clinical testing, manufacture, safety, effectiveness,
record keeping, reporting, labeling, storage, approval, advertising, promotion, sale, distribution, import and export of pharmaceutical
products under various regulatory provisions. If any drug products we develop are tested or marketed abroad, they will also be
subject to extensive regulation by foreign governments, whether or not we have obtained FDA approval for a given product and its
uses. Such foreign regulation may be equally or more demanding than corresponding U.S. regulation.
Government regulation
substantially increases the cost and risk of researching, developing, manufacturing, and selling our products. Our failure to comply
with these regulations could result in, by way of example, significant fines, criminal and civil liability, product seizures, recalls,
withdrawals, withdrawals of approvals, and exclusion and debarment from government programs. Any of these actions, including the
inability of our proposed products to obtain and maintain regulatory approval, would have a materially adverse effect on our business,
financial condition, results of operations and prospects.
In addition to government
regulation, rules and policies of professional and other quasi and non-governmental bodies and organizations may impact the prescription
of products, as well as the manner of their promotion, marketing, and education. Examples of such bodies are the American Medical
Association, the Accreditation Council of Continuing Medical Education, American College of Physicians and the American Academy
of Family Physicians.
Elections in the United
States could result in significant changes in, and uncertainty with respect to, legislation, regulation and government policy.
While it is not possible to predict whether and when any such changes will occur, changes at the federal level could significantly
impact our business and the health care industry; we are currently unable to predict whether any such changes would have a net
positive or negative impact on our business. To the extent that such changes have a negative impact on us or the health care industry,
including as a result of related uncertainty, these changes may materially and adversely impact our business, financial condition,
results of operations, cash flows and the trading price of our ordinary shares.
We are subject
to additional federal, state and local laws and regulations relating to our business, and our failure to comply with those laws
could have a material adverse effect on our results of operations and financial conditions.
In the United States,
our current and future activities with investigators, healthcare professionals, consultants, third-party payors, patient organizations
and customers are subject to healthcare regulation and enforcement by the federal government and the states in which we conduct
or will conduct our business. The laws that may affect our ability to operate include, but are not limited to, the following:
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the federal healthcare program Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good, item, facility or service for which payment may be made under government healthcare programs such as the Medicare and Medicaid programs;
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the Anti-Inducement Law, which prohibits persons from offering or paying remuneration to Medicare and Medicaid beneficiaries to induce them to use items or services paid for in whole or in part by the Medicare or Medicaid programs;
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the Ethics in Patient Referrals Act of 1989, commonly referred to as the Stark Law, prohibits physicians from referring Medicare or Medicaid patients for certain designated items or services where that physician or family member has a financial interest in the entity providing the designated item or service;
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federal false claims laws, including the Federal False Claims Act, that prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other government healthcare programs that are false or fraudulent;
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federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;
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HIPAA, which imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program and also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information;
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state and local law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payer, including commercial insurers; and
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federal, state and local taxation laws applicable to the marketing and sale of our products.
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Further, the PPACA,
among other things, amended the intent requirement of the federal Anti-Kickback Statute and criminal healthcare fraud statutes.
A person or entity can now be found guilty of fraud or false claims under PPACA without actual knowledge of the statute or specific
intent to violate it. 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 Statue constitutes a false or fraudulent claim for purposes of the false claims statutes.
Possible sanctions for violation of these anti-kickback laws include monetary fines, civil and criminal penalties, exclusion from
Medicare, Medicaid and other government programs, imprisonment, and forfeiture of amounts collected in violation of such prohibitions.
Any violations of these laws, or any action against us for violation of these laws, even if we successfully defend against it,
could result in a material adverse effect on our reputation, business, results of operations and financial condition.
PPACA also contains
legislation commonly known as the Physician Payments Sunshine Act, or Sunshine Act, which requires applicable drug and device manufacturers
of covered pharmaceutical, biological, device and medical supplies to annually report to CMS information regarding payments and
transfers of value made to physicians and teaching hospitals and certain ownership and investment interests held by physicians
and their immediate family members, and for CMS to annually collect and display information reported by device and pharmaceutical
manufacturers. Pursuant to the Sunshine Act, CMS created the federal Open Payments Program, under which data collected for each
calendar year is published by CMS in June of the following calendar year. For example, data that was submitted by applicable manufacturers
for the 2018 calendar year was published on June 30, 2019. Failure to submit required information may result in civil monetary
penalties for all payments, transfers of value or ownership or investment interests that are not reported.
Since its enactment,
there have been judicial and Congressional challenges to certain aspects of the PPACA. Congress and President Trump have expressed
their intentions to repeal or repeal and replace the PPACA. President Trump issued an Executive Order and both chambers of Congress
passed bills, all with the goal of fulfilling their intentions. However, to date, the Executive Order has had limited effect and
the Congressional activities have not resulted in the passage of a law to repeal and replace PPACA. If a law is enacted, many if
not all, of the provisions of the PPACA may no longer apply to prescription drugs. While we are unable to predict what changes may
ultimately be enacted, to the extent that future changes affect how any future products are paid for and reimbursed by government
and private payers, our business could be adversely impacted. On December 14, 2018, a federal district court in Texas ruled that
the PPACA is unconstitutional as a result of the Tax Cuts and Jobs Act, the federal income tax reform legislation previously passed
by Congress and signed by President Trump on December 22, 2017, that eliminated the individual mandate portion of the PPACA. The
case, Texas, et al, v. United States of America, et al., (N.D. Texas), is an outlier, but in 2019, the Fifth Circuit Court
of Appeals subsequently upheld the lower court decision which was then appealed to the United States Supreme Court. The U.S. Supreme
Court declined to hear the appeal on an expedited basis and so no decision will be forthcoming until the next Supreme Court term
in late 2020 or early 2021. We are not able to state with any certainty what will be the impact of this court decision on our business
pending further court action and possible appeals.
In addition, there
has been a recent trend of increased federal, state and local regulation of payments made to physicians for marketing. Some states,
such as California, Massachusetts and Vermont, mandate implementation of corporate compliance programs, along with the tracking
and reporting of gifts, compensation and other remuneration to physicians, and some states limit or prohibit such gifts. Various
trade associations, such as the Advanced Medical Technology Association for devices and the Pharmaceutical Research and Manufacturers
of America for drugs, have adopted voluntary standards of ethical behavior that limit the amount of and circumstances under which
payments made be made to physicians. Additionally, there are state and local laws that require pharmaceutical sales representatives
to register or obtain a license with the state or locality and to disclose or report certain information about their interactions
with physicians.
The scope and enforcement
of these laws is uncertain and subject to change in the current environment of healthcare reform, especially in light of the lack
of applicable precedent and regulations. We cannot predict the impact on our business of any changes in these laws. Federal or
state regulatory authorities may challenge our current or future activities under these laws. Any such challenge could have a material
adverse effect on our reputation, business, results of operations, and financial condition. Any state or federal regulatory review
of us, regardless of the outcome, would be costly and time-consuming.
We are subject
to anti-kickback laws and regulations. Our failure to comply with these laws and regulations could have adverse consequences to
us.
There are extensive
U.S. federal and state laws and regulations prohibiting fraud and abuse in the healthcare industry that can result in significant
criminal and civil penalties. These federal laws include: the Anti-Kickback Statute, which prohibits certain business practices
and relationships, including the payment or receipt of compensation for the referral of patients whose care will be paid by Medicare
or other federal healthcare programs; the physician self-referral prohibition, commonly referred to as the Stark Law; the anti-inducement
law, which prohibits providers from offering anything to a Medicare or Medicaid beneficiary to induce that beneficiary to use items
or services covered by either program; the civil False Claims Act in 1986, or the False Claims Act, which prohibits any person
from knowingly presenting or causing to be presented false or fraudulent claims for payment by the federal government, including
the Medicare and Medicaid programs; and the Civil Monetary Penalties Law, which authorizes the U.S. Department of Health and Human
Services to impose civil penalties administratively for fraudulent or abusive acts. In addition, the Sunshine Act requires device
and drug manufacturers to report to the government any payments to physicians for consulting services, research activities, educational
programs, travel, food, entertainment and the like.
Sanctions for violating
these federal laws include criminal and civil penalties that range from punitive sanctions, damage assessments, monetary penalties,
imprisonment, integrity obligations and other oversight, denial of Medicare and Medicaid payments or exclusion from the Medicare
and Medicaid programs, or both, and debarment. As federal and state budget pressures continue, federal and state administrative
agencies may also continue to escalate investigation and enforcement efforts to reduce or eliminate waste and to control fraud
and abuse in governmental healthcare programs. Private enforcement of healthcare fraud has also increased, due in large part to
amendments to the False Claims Act that were designed to encourage private persons, known as relators, to file qui tam actions
on behalf of the government. The Fraud Enforcement and Recovery Act of 2009 further encouraged whistleblowers to file suit under
the qui tam provisions of the False Claims Act. A violation of any of these federal and state fraud and abuse
laws and regulations could have a material adverse effect on our liquidity and financial condition. An investigation into the use
by physicians of any of our products, if ever commercialized, may dissuade physicians from either purchasing or using them, and
could have a material adverse effect on our ability to commercialize those products.
In addition, we are
subject to analogous foreign laws and regulations, which may apply to sales or marketing arrangements and claims involving healthcare
items or services reimbursed by non-governmental third-party payors, including private insurers; foreign laws that require pharmaceutical
companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance
promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers; foreign laws that
require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare
providers or marketing expenditures; and foreign laws governing the privacy and security of health information in certain circumstances.
Many of these laws differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance
efforts.
Our AP-CBD/THC,
AP-THC and AP-CBD product candidates (collectively “AP-Cannabinoids”) use Cannabidiol and 9-Tetrahydrocannabinol individually
or in combination, which are subject to U.S. and international controlled substance laws and regulations; our ability to commercialize
any product containing these substances will depend, in part, on the ultimate classification of the product under these laws and
regulations.
Our AP-Cannabinoids
product candidates for treatment of various pain indications, uses CBD, and THC. These products are quite distinct from crude herbal
“medical marijuana,” and we intend to seek FDA approval for these products in accordance with the customary FDA approval
process and based on adequate and well-controlled clinical studies. However, the active ingredients in our products are defined
as controlled substances under the federal CSA. Under the CSA, the DEA, places each drug that has abuse potential into one of five
categories. The five categories, referred to as Schedules I-V, carry different degrees of restriction. Each schedule is associated
with a distinct set of controls that affect manufacturers, researchers, healthcare providers, and patients. The controls include
registration with the DEA, labeling and packaging, production quotas, security, recordkeeping, and dispensing. Schedule I is the
most restrictive, covering drugs that have “no accepted medical use” in the United States and that have high abuse
potential.
If and when any of
our product candidates receive FDA approval, the DEA will make a scheduling determination and place the product in a schedule other
than Schedule I in order for it to be prescribed to patients in the United States. Accordingly, our ability to ultimately commercialize
the product will depend in part on the ultimate scheduling classification determination by DEA for our product.
The FDA has stated
that it will continue to facilitate the work of companies interested in bringing safe, effective, and quality products to market,
including scientifically-based research concerning the medical uses of products derived from marijuana and the FDA has approved
synthetic compositions of the active ingredients found in marijuana. However, the use and abuse of controlled substances is currently
subject to political and social pressures from certain constituencies related to their usage which could result in additional difficulty
with respect to the approval of AP-Cannabinoids as a prescription pharmaceutical. For example, the FDA or DEA may require us to
generate more clinical data about the potential for abuse than that which is currently anticipated, which could increase the cost
and/or delay the launch of our product. In addition, DEA scheduling may limit our ability to achieve market share in the United
States due to restricted access and the disinclination of some physicians to prescribe more restrictive scheduled controlled substances.
For example, Schedule II drugs may not be refilled without a new prescription. These factors may limit the commercial viability
of AP-Cannabinoids in the United States.
Most countries are
parties to the Single Convention on Narcotic Drugs 1961, which governs international trade and domestic control of narcotic substances,
including the compounds in our AP-Cannabinoids product candidates. Countries may interpret and implement their treaty obligations
in a way that creates a legal obstacle to our obtaining approval to market our AP-Cannabinoids product candidates. Approval to
market in these countries could require amendments or modifications to existing laws and regulations that such countries would
be unwilling to undertake or may cause material delays in any marketing approval.
Reimbursement
may not be available for our products, which could make it difficult for us to sell our products profitably.
Market acceptance and
sales of our products will depend on coverage and reimbursement policies and may be affected by healthcare reform measures. Government
authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which products
they will pay for and establish reimbursement levels. We cannot be sure that coverage and reimbursement will be available for our
products. We also cannot be sure that the amount of reimbursement available, if any, will not reduce the demand for, or the price
of, our products. If reimbursement is not available or is available only at limited levels, we may not be able to successfully
compete through sales of our proposed products.
Specifically, in both
the United States and some foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the
healthcare system in ways that could affect our ability to sell our products profitably. In the United States, MMA, changed the
way Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases by the
elderly and certain others. Prior to MMA, Medicare did not cover most outpatient prescription drugs. MMA created a new voluntary
Part D, which covers outpatient drugs for Medicare beneficiaries and is administered by private insurance plans that operate partially
at-risk under contract with the CMS. These private Part D plans have incentives to keep costs down. MMA also introduced a new reimbursement
methodology based on average sales prices for physician-administered drugs. In addition, this legislation provided authority for
limiting the number of certain outpatient drugs that will be covered in any therapeutic class. As a result of this legislation
and the expansion of federal coverage of drug products, we expect that there will be additional pressure to contain and reduce
costs. These and future cost-reduction initiatives could decrease the coverage and price that we receive for our products, if approved,
and could seriously harm our business. While the MMA applies only to drug benefits for Medicare beneficiaries, private payors often
follow Medicare coverage policies and payment limitations in setting their own reimbursement rates, and any reduction in reimbursement
under Medicare may result in a similar reduction in payments from private payors.
In March 2010, PPACA
became law in the United States. The goal of PPACA is to reduce the cost of healthcare and substantially change the way healthcare
is financed by both governmental and private insurers. Among other measures, PPACA imposes increased rebates on manufacturers for
certain covered drug products reimbursed by state Medicaid programs. The PPACA remains subject to continuing legislative scrutiny,
including efforts by Congress to repeal and amend a number of its provisions, as well as administrative actions delaying the effectiveness
of key provisions. In addition, there have been lawsuits filed by various stakeholders pertaining to certain portions of the PPACA
that may have the effect of modifying or altering various parts of the law. Efforts to date to amend or repeal the PPACA have generally
been unsuccessful. We ultimately cannot predict with any assurance the ultimate effect of the PPACA or changes to the PPACA on
our Company, nor can we provide any assurance that its provisions will not have a material adverse effect on our business, financial
condition, results of operations, cash flows and the trading price of our ordinary shares. In addition, we cannot predict whether
new proposals will be made or adopted, when they may be adopted or what impact they may have on us if they are adopted.
We expect to experience
pricing pressures in connection with the sale of our products generally due to the trend toward managed healthcare, the increasing
influence of health maintenance organizations, and additional legislative proposals. If we fail to successfully secure and maintain
adequate coverage and reimbursement for our future products or are significantly delayed in doing so, we will have difficulty achieving
market acceptance of our products and our business will be harmed.
We expect the
healthcare industry to face increased limitations on reimbursement, rebates and other payments as a result of healthcare reform,
which could adversely affect third-party coverage of our products and how much or under what circumstances healthcare providers
will prescribe or administer our products.
In both the United
States and other countries, sales of our products will depend in part upon the availability of reimbursement from third-party payors,
which include governmental authorities, managed care organizations and other private health insurers. Third-party payors are increasingly
challenging the price and examining the cost effectiveness of medical products and services.
Increasing expenditures
for healthcare 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 effect changes in the U.S. healthcare system
have been introduced or proposed in Congress and in some state legislatures, including reducing reimbursement for prescription
products and reducing the levels at which consumers and healthcare providers are reimbursed for purchases of pharmaceutical products.
In the United States,
the MMA changed the way Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug
purchases by the elderly and introduced a new reimbursement methodology based on average sales prices for physician-administered
drugs. In recent years, Congress has considered further reductions in Medicare reimbursement for drugs administered by physicians.
CMS has issued and will continue to issue regulations to implement the law which will affect Medicare, Medicaid and other third-party
payors. Medicare, which is the single largest third-party payment program and which is administered by CMS, covers prescription
drugs in one of two ways. Medicare part B covers outpatient prescription drugs that are administered by physicians and Medicare
part D covers other outpatient prescription drugs, but through private insurers. Medicaid, a health insurance program for the poor,
is funded jointly by CMS and the states, but is administered by the states; states are authorized to cover outpatient prescription
drugs, but that coverage is subject to caps and to substantial rebates. CMS also has the authority to revise reimbursement rates
and to implement coverage restrictions for some drugs. Cost reduction initiatives and changes in coverage implemented through legislation
or regulation could decrease utilization of and reimbursement for any approved products, which in turn would affect the price we
can receive for those products. While the MMA and implementing regulations apply primarily to drug benefits for Medicare beneficiaries,
private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates. Therefore,
any reduction in reimbursement that results from federal legislation or regulation may result in a similar reduction in payments
from private payors.
In March 2010, President
Obama signed into law the PPACA, a sweeping law intended to broaden access to health insurance, reduce or constrain the growth
of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and health insurance
industries, impose new taxes and fees on pharmaceutical and medical device manufacturers and impose additional health policy reforms.
As amended, the PPACA expanded manufacturers’ rebate liability to include covered drugs dispensed to individuals who are
enrolled in Medicaid managed care organizations, increased the minimum rebate due for innovator drugs (both single source drugs
and innovator multiple source drugs) from 15.1% of average manufacturer price, or AMP, to 23.1% of AMP or the difference between
the AMP and best price, whichever is greater. The total rebate amount for innovator drugs is capped at 100.0% of AMP. The PPACA
and subsequent legislation also narrowed the definition of AMP. Furthermore, the PPACA imposes a significant annual, nondeductible
fee on companies that manufacture or import certain branded prescription drug products. Substantial new provisions affecting compliance
have also been enacted, which may affect our business practices with healthcare practitioners, and a significant number of provisions
are not yet, or have only recently become, effective. The PPACA likely will continue to put pressure on pharmaceutical pricing,
especially under the Medicare program, and may also increase our regulatory burdens and operating costs. We ultimately cannot predict
with any assurance the ultimate effect of the PPACA or changes to the PPACA on our Company, nor can we provide any assurance that
its provisions will not have a material adverse effect on our business, financial condition, results of operations, cash flows
and the trading price of our ordinary shares. In addition, we cannot predict whether new proposals will be made or adopted, when
they may be adopted or what impact they may have on us if they are adopted.
In addition, other
legislative changes have been proposed and adopted since the PPACA was enacted. In August 2011, then President Obama signed into
law the Budget Control Act of 2011, which, among other things, creates the Joint Select Committee on Deficit Reduction to recommend
to Congress proposals in spending reductions. The Joint Select Committee did not achieve a targeted deficit reduction of an amount
greater than $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction to several government
programs. This includes aggregate reductions to Medicare payments to healthcare providers of up to 2.0% per fiscal year, starting
in 2013. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things,
reduced Medicare payments to several categories of healthcare providers and increased the statute of limitations period for the
government to recover overpayments to providers from three to five years. The Bipartisan Budget Act of 2015, signed into law on
November 2, 2015, increased the rebates that generic drug manufacturers are obligated to pay under the Medicaid program by applying
an inflation-based rebate formula to generic drugs that previously only applied to brand name drugs. If we ever obtain regulatory
approval and commercialization of any of our product candidates, these new laws may result in additional reductions in Medicare
and other healthcare funding, which could have a material adverse effect on our customers and accordingly, our financial operations.
Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities
for pharmaceutical products. We cannot be sure whether additional legislative changes will be enacted, or whether the FDA regulations,
guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our product candidates
may be.
In the fourth quarter
of 2018, the Trump Administration announced initiatives that it asserted are intended to result in purportedly lower drug prices.
The first initiative, announced on October 15, 2018, involved the plan for a new federal regulation that would require pharmaceutical
manufacturers to disclose the list prices of their respective prescription drugs in their television advertisements for their products
if the list price is greater than $35. With respect to the second initiative, on October 25, 2018, the CMS gave Advance Notice
of Proposed Rulemaking to propose the implementation of an “International Pricing Index” model for Medicare Part B
drugs and biologicals (single source drugs, biologicals, and biosimilars). Public comments were due on December 31, 2018 with a
proposed rule theoretically being offered as early as spring 2019 with target implementation of a 5 year pilot program beginning
in spring 2020 and ending in spring 2025. During the theoretical pilot program, which it is expected will focus on very expensive
drugs reimbursed by the Medicare Part B program, CMS would monitor and evaluate the impact of the model on beneficiary access to
drugs, program costs, and the quality of care for beneficiaries. Despite extensive media coverage of the roll out of this announcement
as well as the announcement by the Democratic majority in the U.S. House of Representatives of alternative legislative proposals,
no specific rule has been forthcoming during the intervening time since the original announcement in 2018.
Various states, such
as California, have also taken steps to consider and enact laws or regulations that are intended to increase the visibility of
the pricing of pharmaceutical products with the goal of reducing the prices at which we are able to sell our products. Because
these various actual and proposed legislative changes are intended to operate on a state-by-state level rather than a national
one, we cannot predict what the full effect of these legislative activities may be on our business in the future. This Trump Administration
initiative has been withdrawn for now.
Although we cannot
predict the full effect on our business of the implementation of existing legislation, including the PPACA or the enactment of
additional legislation pursuant to healthcare and other legislative reform, we believe that legislation or regulations that would
reduce reimbursement for or restrict coverage of our products could adversely affect how much or under what circumstances healthcare
providers will prescribe or administer our products. This could materially and adversely affect our business by reducing our ability
to generate revenue, raise capital, obtain additional collaborators and market our products. 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.
Governments outside
the United States tend to impose strict price controls, which may adversely affect our revenues, if any.
In some countries,
particularly the countries comprising the EU, the pricing of pharmaceuticals and certain other therapeutics is subject to governmental
control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of
marketing approval for a product. To obtain reimbursement or pricing approval in some countries, 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 is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, our business could be
materially harmed.
Changes in regulatory
requirements and guidance or unanticipated events during our clinical trials may occur, which may result in necessary changes to
clinical trial protocols, which could result in increased costs to us, delay our development timeline or reduce the likelihood
of successful completion of our clinical trials.
Changes in regulatory
requirements and guidance or unanticipated events during our clinical trials may occur, as a result of which we may need to amend
clinical trial protocols. Amendments may require us to resubmit our clinical trial protocols to IRBs for review and approval, which
may adversely affect the cost, timing and successful completion of a clinical trial. If we experience delays in the completion
of, or if we terminate, any of our clinical trials, the commercial prospects for our affected product candidates would be harmed
and our ability to generate product revenue would be delayed, possibly materially.
We may be subject
to extensive environmental, health and safety, and other laws and regulations in multiple jurisdictions.
Our business involves
the controlled use, directly or indirectly through our service providers, of hazardous materials, various biological compounds
and chemicals; therefore, we, our agents and our service providers may be subject to various environmental, health and safety laws
and regulations, including those governing air emissions, water and wastewater discharges, noise emissions, the use, management
and disposal of hazardous, radioactive and biological materials and wastes and the cleanup of contaminated sites. The risk of accidental
contamination or injury from these materials cannot be eliminated. If an accident, spill or release of any regulated chemicals
or substances occurs, we could be held liable for resulting damages, including for investigation, remediation and monitoring of
the contamination, including natural resource damages, the costs of which could be substantial. We are also subject to numerous
environmental, health and workplace safety laws and regulations, including those governing laboratory procedures, exposure to blood-borne
pathogens and the handling of biohazardous materials and chemicals. Although we maintain workers’ compensation insurance
to cover the costs and expenses that may be incurred because of injuries to our employees resulting from the use of these materials,
this insurance may not provide adequate coverage against potential liabilities. Additional or more stringent federal, state, local
or foreign laws and regulations affecting our operations may be adopted in the future. We may incur substantial capital costs and
operating expenses and may be required to obtain consents to comply with any of these or certain other laws or regulations and
the terms and conditions of any permits or licenses required pursuant to such laws and regulations, including costs to install
new or updated pollution control equipment, modify our operations or perform other corrective actions at our respective facilities
or the facilities of our service providers . For instance, we have undergone inspections and obtained approvals from various governmental
agencies. We hold a business license with respect to testing, developing, storing and manufacturing pharmaceutical products at
our current location from the municipality of Jerusalem, which is accompanied by additional terms and conditions approved by the
Israeli Ministry of Environmental Protection, or the Ministry of Environmental Protection. Our business license is valid until
December 31, 2023 and we also hold a toxic substances permit from the Ministry of Environmental Protection (the Hazardous Material
Division) and a Certificate of GMP Compliance of a Manufacturer from the Israeli Ministry of Health – Pharmaceutical Administration.
Failure to renew any of the foregoing licenses and permits may harm our on-going and future operations. In addition, fines and
penalties may be imposed for noncompliance with environmental, health and safety and other laws and regulations or for the failure
to have, or comply with the terms and conditions of our business license or, required environmental or other permits or consents.
Risks Related to Our Intellectual Property
If we fail to
comply with our obligations in the agreements under which we license intellectual property rights from third parties or these agreements
are terminated or we otherwise experience disruptions to our business relationships with our licensors, we could lose intellectual
property rights that are important to our business.
We license our core
intellectual property from Yissum, an affiliate of Hebrew University and may need to obtain additional licenses from others to
advance our research and development activities or allow the commercialization of the Accordion Pill. We initially entered into
an exclusive license agreement with Yissum in 2000 and, in 2004 and 2005, we amended the license, which we refer to, as amended,
as the License Agreement. According to the License Agreement, we hold an exclusive license for developing, manufacturing and/or
world marketing of products that are directly or indirectly based on the patent owned by Yissum and/or other related intellectual
property (including any information, research results and related know-how). Yissum is not permitted to transfer such intellectual
property to third parties without our prior written consent. Yissum may obtain future financing from other entities for its research,
provided that such entities will not be granted rights in its results (including other intellectual property rights) in a way prejudicing
the rights granted to us in accordance with the License Agreement. We are entitled to grant perpetual sublicenses of this intellectual
property to third parties, and such third parties will not be required to assume any undertaking towards Yissum. We are obligated
to research and develop products that are based on the intellectual property of Yissum and to pay Yissum from the date of first
sale an amount equal to 3% of our net sales of products based on the intellectual property and 15% from all other payments or benefits
received from any such sublicense. In addition, also in consideration of the exclusive license granted to us pursuant to the License
Agreement, we issued 5,618 ordinary shares to Yissum. As of the date of this Annual Report, no payments were paid and/or are due
under the License Agreement. The License Agreement will be in effect until the latest of: (1) the expiration of the last registered
patent within the relevant territory in November 2020; and (2) 15 years from the date of the first commercial sale. We also contracted
with Yissum for laboratory services. In January 2008, we signed an addendum to the License Agreement to conduct an additional joint
development and study regarding a technology, different from the Accordion Pill, for GR, of a drug. This addendum provides that
the intellectual property rights produced as a result of the joint development and study will be jointly owned and we are entitled
to receive a license for Yissum’s share in these rights in return for payment of royalties. One patent application has been
filed by Yissum and us as a result of the development related to that joint project, but this patent application was abandoned.
The License Agreement
imposes certain payment, reporting, confidentiality and other obligations on us. In the event that we were to breach any of our
obligations under the License Agreement and fail to cure such breach, Yissum would have the right to terminate the License Agreement
upon 30 days’ notice. In addition, Yissum has the right to terminate the License Agreement upon our bankruptcy or receivership.
In spite of our efforts,
Yissum or any future licensor might conclude that we have materially breached our obligations under such license agreements and
might therefore terminate the license agreements, thereby removing or limiting our ability to develop and commercialize products
and technology covered by these license agreements. Most of our current product candidates are partly based on the intellectual
property licensed under the License Agreement, and therefore if the License Agreement with Yissum was terminated, we may be required
to cease our development and commercialization of the Accordion Pill. Any of the foregoing could have a material adverse effect
on our business, financial condition or results of operations.
Moreover, disputes
may arise regarding intellectual property subject to a licensing agreement, including:
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the scope of rights granted under the license agreement and other interpretation-related issues;
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the extent to which our product candidates, technology and processes infringe on intellectual property of the licensor that is not subject to the licensing agreement;
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the sublicensing of patent and other rights under our collaborative development relationships;
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our diligence obligations under the license agreement and what activities satisfy those diligence obligations;
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the inventorship and ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and us and our partners; and
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the priority of invention of patented technology.
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If we fail to
adequately protect, enforce or secure rights to the patents which were licensed to us or any patents we own or may own in the future,
the value of our intellectual property rights would diminish and our business and competitive position would suffer.
Our success, competitive
position and future revenues, if any, depend in part on our ability to obtain and successfully leverage intellectual property covering
our products and 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 rights of third parties.
The risks and uncertainties
that we face with respect to our intellectual property rights include, but are not limited to, the following:
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the degree and range of protection any patents will afford us against competitors;
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if and when patents will be issued;
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whether or not others will obtain patents claiming aspects similar to those covered by our own or licensed patents and patent applications;
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we may be subject to interference proceedings;
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we may be subject to opposition or post-grant proceedings in foreign countries;
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any patents that are issued may not provide sufficient protection;
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we may not be able to develop additional proprietary technologies that are patentable;
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other companies may challenge patents licensed or issued to us or our customers;
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other companies may independently develop similar or alternative technologies, or duplicate our technologies;
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other companies may design around technologies we have licensed or developed;
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enforcement of patents is complex, uncertain and expensive; and
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we may need to initiate litigation or administrative proceedings that may be costly whether we win or lose.
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If patent rights covering
our products and methods are not sufficiently broad, they may not provide us with any protection against competitors with similar
products and technologies. Furthermore, if the USPTO, or foreign patent offices issue patents to us or our licensors, others may
challenge the patents or design around 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.
We cannot be certain
that patents will be issued as a result of any pending applications, and we cannot be certain that any of our issued patents or
patents licensed from Yissum (or any other third party in the future), will give us adequate protection from competing products.
For example, issued patents, including the patents licensed by us, may be circumvented or challenged, declared invalid or unenforceable,
or narrowed in scope.
In addition, since
publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain that
we were the first to make our inventions or to file patent applications covering those inventions.
It is also possible
that others may obtain issued patents that could prevent us from commercializing our products or require us to obtain licenses
requiring the payment of significant fees or royalties in order to enable us to conduct our business. As to those patents that
we have licensed, our rights depend on maintaining our obligations to the licensor under the applicable license agreement, and
we may be unable to do so.
In addition to patents
and patent applications, we depend upon trade secrets and proprietary know-how to protect our proprietary technology. We require
our employees, consultants, advisors and collaborators to enter into confidentiality agreements that prohibit the disclosure of
confidential information to any other parties. We also require our employees and consultants to disclose and assign to us their
ideas, developments, discoveries and inventions. These agreements may not, however, provide adequate protection for our trade secrets,
know-how or other proprietary information in the event of any unauthorized use or disclosure.
Obtaining and
maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements
imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for noncompliance with these
requirements.
Periodic maintenance
fees on any issued patent are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime of the
patent. The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary,
fee payment and other similar provisions during the patent application process. While an inadvertent lapse can in many cases be
cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance
can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights
in the relevant jurisdiction. Noncompliance events that could result in abandonment or lapse of a patent or patent application
include, but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and
failure to properly legalize and submit formal documents. In such an event, our competitors might be able to enter the market,
which could have a material adverse effect on our business.
Costly litigation
may be necessary to protect our intellectual property rights, and we may be subject to claims alleging the breach of license or
other agreements that we have entered into with third parties or the violation of the intellectual property rights of others.
We may face significant
expense and liability as a result of litigation or other proceedings relating to patents and other intellectual property rights
of ours and others. In the event that another party has also filed a patent application or been issued a patent relating to an
invention or technology claimed by us in pending applications, we may be required to participate in an interference proceeding
declared by the USPTO to determine priority of invention, which could result in substantial uncertainties and costs for us, even
if the eventual outcome were favorable to us. We, or our licensors, also could be required to participate in interference proceedings
involving issued patents and pending applications of another entity. An adverse outcome in an interference proceeding could require
us to cease using the technology or to license rights from prevailing third parties.
We have entered into
license and collaboration agreements with other parties, including other pharmaceutical companies, and intend to continue to do
so in the future. We and our counterparties to these agreements have granted and may grant each other, and have or may claim against
each other, certain rights with respect to the other party’s intellectual property and the intellectual property that we
have or may jointly develop, including rights of co-ownership and rights of first refusal in the event that we or our counterparties
seek to subsequently license or sell such intellectual property. For instance, a former partner under a terminated collaboration
agreement previously indicated to us after the termination of such agreement that it believed it had a right of first offer with
respect to a future license by us of certain intellectual property that existed in 2008 and is contained in AP-CD/LD. We do not
believe that this party has any such right. However, the cost to us of any litigation or other proceeding relating to our license
and collaboration agreements, our licensed patents or patent applications or other intellectual property, even if resolved in our
favor, could be substantial, divert management’s resources and attention and delay or impair our ability to license or sell
such intellectual property. Our ability to enforce our intellectual property protection could be limited by our financial resources,
and may be subject to lengthy delays. A third party may claim that we are using inventions claimed by their intellectual property
and may go to court to stop us from engaging in our normal operations and activities, such as research, development and the sale
of any future products. Such lawsuits are expensive and would consume time and other resources. There is a risk that the court
will decide that we are infringing the third party’s intellectual property and will order us to stop the activities claimed
by the intellectual property, redesign our products or processes to avoid infringement or obtain licenses (which may not be available
on commercially reasonable terms or at all). In addition, there is a risk that a court will order us to pay the other party damages
for having infringed their patents. Furthermore, because of the substantial amount of discovery required in connection with intellectual
property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type
of litigation. There could also be public announcements of the results of hearings, motions, or other interim proceedings or developments.
If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price
of our ordinary shares.
Moreover, there is
no guarantee that any prevailing patent or other intellectual property owner would offer us a license so that we could continue
to engage in activities claimed by the patent or other intellectual property, or that such a license, if made available to us,
could be acquired on commercially acceptable terms. In addition, third parties may, in the future assert other intellectual property
infringement claims against us with respect to our product candidates, technologies or other matters. Any claims of infringement
or other breach of license or collaboration agreement asserted against us, whether or not successful, may have a material adverse
effect on us.
Third-party claims
of intellectual property infringement may prevent or delay our development and commercialization efforts.
Our commercial success
depends in part on our avoiding infringement of the patents and proprietary rights of third parties. However, our research, development
and commercialization activities may be subject to claims that we infringe or otherwise violate patents or other intellectual property
rights owned or controlled by third parties. There is a substantial amount of litigation, both within and outside the United States,
involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries, including patent infringement
lawsuits, interferences, oppositions and inter parties re-examination proceedings before the USPTO, and corresponding foreign patent
offices. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the
fields in which we are pursuing development candidates. As the biotechnology and pharmaceutical industries expand and more patents
are issued, the risk increases that the Accordion Pill or our product candidates may be subject to claims of infringement of the
patent rights of third parties.
Third parties may assert
that we are employing their proprietary technology without authorization. There may be third-party patents or patent applications
with claims to materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of the
Accordion Pill or our product candidates. Because patent applications can take many years to issue, there may be currently pending
patent applications which may later result in issued patents that the Accordion Pill or our product candidates may infringe. In
addition, third parties may obtain patents in the future and claim that use of our technologies infringes upon these patents. If
any third-party patents were held by a court of competent jurisdiction to cover the patents protecting the Accordion Pill or our
product candidates, the holders of any such patents may be able to block our ability to commercialize such product candidate unless
we obtained a license under the applicable patents, or until such patents expire.
Similarly, if any third-party
patents were held by a court of competent jurisdiction to cover aspects of our formulations, processes for manufacture or methods
of use, including combination therapy, the holders of any such patents may be able to block our ability to develop and commercialize
the applicable product candidate unless we obtained a license or until such patent expires. In either case, such a license may
not be available on commercially reasonable terms or at all, or it may be non-exclusive, which could result in our competitors
gaining access to the same intellectual property.
Parties making claims
against us may obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize
the Accordion Pill or our product candidates. Defense of these claims, regardless of their merit, would involve substantial litigation
expense and would be a substantial diversion of employee resources from our business. In the event of a successful claim of infringement
against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement,
pay royalties, redesign our infringing products or obtain one or more licenses from third parties, which may be impossible or require
substantial time and monetary expenditure.
Parties making claims
against us may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially
greater resources. Furthermore, because of the substantial amount of discovery required in connection with intellectual property
litigation or administrative proceedings, there is a risk that some of our confidential information could be compromised by disclosure.
In addition, any uncertainties resulting from the initiation and continuation of any litigation could have material adverse effect
on our ability to raise additional funds or otherwise have a material adverse effect on our business, results of operations, financial
condition and prospects.
Patent terms
may be inadequate to protect our competitive position on our product candidates for an adequate amount of time.
Patents have a limited
lifespan. In the United States, if all maintenance fees are timely paid, the natural expiration of a patent is generally 20 years
from its earliest U.S. non-provisional filing date. Various extensions may be available, but the life of a patent, and the protection
it affords, is limited. Even if patents covering our product candidates are obtained, once the patent life has expired, we may
be open to competition from competitive products, including generics or biosimilars. Given the amount of time required for the
development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or
shortly after such candidates are commercialized. As a result, our owned and licensed patent portfolio may not provide us with
sufficient rights to exclude others from commercializing products similar or identical to ours. For example, the patent family,
IN-1, which we exclusively license from Yissum (i.e., Gastroretentive Controlled Release Pharmaceutical Dosage Forms), is expected
to expire in November 2020. This patent family relates to the foldable pharmaceutical gastroretentive drug delivery system for
the controlled release of an active agent in the GI tract, which can be folded into a single capsule.
If we are not
able to obtain patent term extension or non-patent exclusivity in the United States under the Hatch-Waxman Act and in foreign countries
under similar legislation, thereby potentially extending the term of our marketing exclusivity for the Accordion Pill or any product
candidates, our business may be materially harmed.
Depending upon the
timing, duration and specifics of FDA marketing approval, one of the U.S. patents covering our product candidates or the use thereof
may be eligible for up to five years of patent term extension under the Hatch-Waxman Act. The Hatch-Waxman Act allows a maximum
of one patent to be extended per FDA approved product as compensation for the patent term lost during the FDA regulatory review
process. A patent term extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of product
approval and only those claims covering such approved drug product, a method for using it or a method for manufacturing it may
be extended. Patent term extension also may be available in certain foreign countries upon regulatory approval of our product candidates.
Nevertheless, we may not be granted patent term extension either in the United States or in any foreign country because of, for
example, failing to exercise due diligence during the testing phase or regulatory review process, failing to apply within applicable
deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. Moreover,
the term of extension, as well as the scope of patent protection during any such extension, afforded by the governmental authority
could be less than we request.
If we are unable to
obtain patent term extension or restoration, or the term of any such extension is less than we request, the period during which
we will have the right to exclusively market our product may be shortened and our competitors may obtain approval of competing
products following our patent expiration sooner, and our revenue could be reduced, possibly materially.
It is possible that
we will not obtain patent term extension under the Hatch-Waxman Act for a U.S. patent covering any of our product candidates even
where that patent is eligible for patent term extension, or if we obtain such an extension, it may be for a shorter period than
we had sought. Further, for our licensed patents, we do not have the right to control prosecution, including filing with the USPTO,
a petition for patent term extension under the Hatch-Waxman Act. Thus, if one of our licensed patents is eligible for patent term
extension under the Hatch-Waxman Act, we may not be able to control whether a petition to obtain a patent term extension is filed,
or obtained, from the USPTO.
Also, there are detailed
rules and requirements regarding the patents that may be submitted to the FDA for listing in the Approved Drug Products with Therapeutic
Equivalence Evaluations, or the Orange Book. We may be unable to obtain patents covering our product candidates that contain one
or more claims that satisfy the requirements for listing in the Orange Book. Even if we submit a patent for listing in the Orange
Book, the FDA may decline to list the patent, or a manufacturer of generic drugs may challenge the listing. If one of our product
candidates is approved and a patent covering that product candidate is not listed in the Orange Book, a manufacturer of generic
drugs would not have to provide advance notice to us of any abbreviated new drug application filed with the FDA to obtain permission
to sell a generic version of such product candidate.
Issued patents
covering our product candidates could be found invalid or unenforceable if challenged in court.
If we or one of our
licensing partners initiated legal proceedings against a third party to enforce a patent covering the Accordion Pill or our product
candidates, the defendant could counterclaim that the patent covering our product candidate is invalid and/or unenforceable. In
patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds
for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty,
obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution
of the patent withheld relevant information from the USPTO, or made a misleading statement, during prosecution. Third parties may
also raise similar claims before administrative bodies in the United States or abroad, even outside the context of litigation.
Such mechanisms include re-examination, post grant review, and equivalent proceedings in foreign jurisdictions (e.g., opposition
proceedings). Such proceedings could result in revocation or amendment to our patents in such a way that they no longer cover the
Accordion Pill or our product candidates. The outcome following legal assertions of invalidity and unenforceability is unpredictable.
With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which we and
the patent examiner were unaware of during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or
unenforceability, we would lose at least part, and perhaps all, of the patent protection on our product candidates. Such a loss
of patent protection would have a material adverse impact on our business.
We may be subject
to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information
of third parties or that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.
As is common in the
biotechnology and pharmaceutical industry, we employ individuals who were previously employed at universities or other biotechnology
or pharmaceutical companies, including our competitors or potential competitors. Although we try to ensure that our employees,
consultants and independent contractors do not use the proprietary information or know-how of others in their work for us, we may
be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed
intellectual property, including trade secrets or other proprietary information, of any of our employee’s former employer
or other third parties. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in
addition to paying monetary damages, we may lose valuable intellectual property rights or personnel, which could adversely impact
our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a
distraction to management and other employees.
We may become
subject to claims for remuneration or royalties for assigned service invention rights by our employees, which could result in litigation
and adversely affect our business.
A significant
portion of our intellectual property has been developed by our employees in the course of their employment for us. Under the
Israeli Patent Law, 5727-1967, or the Patent Law, inventions conceived by an employee in the course and as a result of or
arising from his or her employment with a company are regarded as “service inventions,” which belong to the
employer, absent a specific agreement between the employee and employer giving the employee service invention rights. The
Patent Law also provides that if there is no such agreement between an employer and an employee, the Israeli Compensation and
Royalties Committee, or the Committee, a body constituted under the Patent Law, shall determine whether the employee is
entitled to remuneration for his inventions. Case law clarifies that the right to receive consideration for “service
inventions” can be waived by the employee and that in certain circumstances, such waiver does not necessarily have to
be explicit. The Committee will examine, on a case-by-case basis, the general contractual framework between the parties,
using interpretation rules of the general Israeli contract laws. Further, the Committee has not yet determined one specific
formula for calculating this remuneration (but rather uses the criteria specified in the Patent Law). Although we generally
enter into assignment-of-invention agreements with our employees pursuant to which such individuals assign to us all rights
to any inventions created in the scope of their employment or engagement with us, we may face claims demanding remuneration
in consideration for assigned inventions. As a consequence of such claims, we could be required to pay additional
remuneration or royalties to our current and/or former employees, or be forced to litigate such claims, which could
negatively affect our business. Further, litigation may be necessary to defend against these and other claims challenging
inventorship of our or of our licensors’ ownership of our owned or in-licensed patents, trade secrets or other
intellectual property. If we or our licensors fail in defending any such claims, in addition to paying monetary damages, we
may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, intellectual property that
is important to our product candidates. Even if we are successful in defending against such claims, litigation could result
in substantial costs and be a distraction to management and other employees. Any of the foregoing could have a material
adverse effect on our business, financial condition and results of operations.
We rely on confidentiality
agreements that could be breached and may be difficult to enforce, which could result in third parties using our intellectual property
to compete against us.
Although we believe
that we take reasonable steps to protect our intellectual property, including the use of agreements relating to the non-disclosure
of confidential information to third parties, 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, the
agreements can be difficult and costly to enforce. Although we seek to obtain these types of agreements from our contractors, consultants,
advisors and research collaborators, to the extent that employees and consultants utilize or independently develop intellectual
property in connection with any of our projects, we cannot be certain that such agreements have been entered into with all relevant
parties, and we cannot be certain that our trade secrets and other confidential proprietary information will not be disclosed or
that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information
and techniques. Furthermore, disputes may arise as to the intellectual property rights associated with our products. If a dispute
arises, a court may determine that the right belongs to a third party. We also rely on trade secrets and proprietary know-how that
we seek to protect in part by confidentiality agreements with our employees, contractors, consultants, advisors or 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;
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our trade secrets or proprietary know-how will otherwise become known; or
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our competitors will independently develop similar technology or proprietary information.
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We also seek to preserve
the integrity and confidentiality of our confidential proprietary information by maintaining physical security of our premises
and physical and electronic security of our information technology systems, but it is possible that these security measures could
be breached. If any of our confidential proprietary information were to be lawfully obtained or independently developed by a competitor,
we would have no right to prevent such competitor from using that technology or information to compete with us, which could harm
our competitive position.
International
patent protection is particularly uncertain, and if we are involved in opposition proceedings in foreign countries, we may have
to expend substantial sums and management resources.
Filing, prosecuting
and defending patents on our product candidates in all countries throughout the world would be prohibitively expensive, and our
intellectual property rights in some countries outside the United States can be less extensive than those in the United States.
In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state
laws in the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries
outside the United States, or from selling or importing products made using our inventions in and into the United States or other
jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their
own products and may also export infringing products to territories where we have patent protection, but enforcement is not as
strong as that in the United States. These products may compete with our products and our patents or other intellectual property
rights may not be effective or sufficient to prevent them from competing.
Many companies have
encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems
of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets, and other
intellectual property protection, particularly those relating to biotechnology products, which could make it difficult for us to
stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings
to enforce our patent rights in foreign jurisdictions, whether or not successful, could result in substantial costs and divert
our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted
narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may
not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful.
Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant
commercial advantage from the intellectual property that we develop or license.
Changes in U.S.
patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.
Changes in either the
patent laws or interpretation of the patent laws in the United States could increase the uncertainties and costs surrounding the
prosecution of patent applications and the enforcement or defense of issued patents. Assuming that other requirements for patentability
are met, prior to March 2013, in the United States, the first to invent the claimed invention was entitled to the patent,
while outside the United States, the first to file a patent application was entitled to the patent. After March 2013, under the
Leahy-Smith America Invents Act, or the America Invents Act, enacted in September 2011, the United States transitioned to a first
inventor to file system in which, assuming that other requirements for patentability are met, the first inventor to file a patent
application will be entitled to the patent on an invention regardless of whether a third party was the first to invent the claimed
invention. A third party that files a patent application in the USPTO after March 2013, but before us could therefore be awarded
a patent covering an invention of ours even if we had made the invention before it was made by such third party. This will require
us to be cognizant of the time from invention to filing of a patent application. Since patent applications in the United States
and most other countries are confidential for a period of time after filing or until issuance, we cannot be certain that we or
our licensors were the first to either (i) file any patent application related to our product candidates or (ii) invent
any of the inventions claimed in our or our licensor’s patents or patent applications.
The America Invents
Act also includes a number of significant changes that affect the way patent applications will be prosecuted and also may affect
patent litigation. These include allowing third party submission of prior art to the USPTO during patent prosecution and additional
procedures to attack the validity of a patent by USPTO administered post-grant proceedings, including post-grant review, inter
parties review, and derivation proceedings. Because of a lower evidentiary standard in USPTO proceedings compared to the evidentiary
standard in United States federal courts necessary to invalidate a patent claim, a third party could potentially provide evidence
in a USPTO proceeding sufficient for the USPTO to hold a claim invalid even though the same evidence would be insufficient to invalidate
the claim if first presented in a district court action. Accordingly, a third party may attempt to use the USPTO procedures to
invalidate our patent claims that would not have been invalidated if first challenged by the third party as a defendant in a district
court action. Therefore, the America Invents Act and its implementation could increase the uncertainties and costs surrounding
the prosecution of our owned or in-licensed patent applications and the enforcement or defense of our owned or in-licensed issued
patents, all of which could have a material adverse effect on our business, financial condition, results of operations, and prospects.
In addition, the patent
positions of companies in the development and commercialization of pharmaceuticals are particularly uncertain. Recent U.S. Supreme
Court rulings have narrowed the scope of patent protection available in certain circumstances and weakened the rights of patent
owners in certain situations. This combination of events has created uncertainty with respect to the validity and enforceability
of patents, once obtained. Depending on future actions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations
governing patents could change in unpredictable ways that could have a material adverse effect on our existing patent portfolio
and our ability to protect and enforce our intellectual property in the future.
Risks Related to Ownership of Our Ordinary
Shares
The market price
of our ordinary shares is volatile and you may sustain a complete loss of your investment.
The market price of
our ordinary shares may fluctuate significantly in response to numerous factors, some of which are beyond our control, such as:
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inability to obtain the approvals necessary to commence further clinical trials;
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results of clinical and preclinical studies;
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announcements of regulatory approval or the failure to obtain it, or specific label indications or patient populations for its use, or changes or delays in the regulatory review process;
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announcements of technological innovations, new products or product enhancements by us or others;
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adverse actions taken by regulatory agencies with respect to our clinical trials, manufacturing supply chain or sales and marketing activities;
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changes or developments in laws, regulations or decisions applicable to our product candidates or patents;
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any adverse changes to our relationship with manufacturers, suppliers or partners;
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announcements concerning our competitors or the pharmaceutical or biotechnology industries in general;
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achievement of expected product sales and profitability or our failure to meet expectations;
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our commencement of or results of, or involvement in, litigation, including, but not limited to, any product liability actions or intellectual property infringement actions;
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any major changes in our board of directors, management or other key personnel;
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legislation in the United States, Europe and other foreign countries relating to the sale or pricing of pharmaceuticals;
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announcements by us of significant strategic partnerships, out-licensing, in-licensing, joint ventures, acquisitions or capital commitments;
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expiration or terminations of licenses, research contracts or other collaboration agreements;
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public concern as to the safety of therapeutics we, our licensees or others develop;
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success of research and development projects;
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developments concerning intellectual property rights or regulatory approvals;
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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, if our ordinary shares are covered by analysts;
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future issuances of ordinary shares or other securities;
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general market conditions, including the volatility of market prices for shares of biotechnology companies generally, and other factors, including factors unrelated to our operating performance;
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political and economic instability, war or acts of terrorism or natural disasters, emergence of a pandemic, or other widespread health emergencies (or concerns over the possibility of such an emergency, including for example, the recent coronavirus outbreak); and
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the other factors described in this “Risk Factors” section.
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These factors and any
corresponding price fluctuations may materially and adversely affect the market price of our ordinary shares, which would result
in substantial losses by our investors.
Further, the stock
market in general, the Nasdaq Capital Market and the market for biotechnology companies in particular, have experienced extreme
price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies like
ours. Broad market and industry factors may negatively affect the market price of our ordinary shares regardless of our actual
operating performance. In addition, a systemic decline in the financial markets and related factors beyond our control may cause
our share price to decline rapidly and unexpectedly. Price volatility of our ordinary shares might be worse if the trading volume
of our ordinary shares is low. In the past, following periods of market volatility, shareholders have often instituted securities
class action litigation. If we were involved in securities litigation, it could have a substantial cost and divert resources and
attention of management from our business, even if we are successful. Future sales of our ordinary shares could also reduce the
market price of such shares.
Moreover, the liquidity
of our ordinary shares will be limited, not only in terms of the number of ordinary shares that can be bought and sold at a given
price, but by potential delays in the timing of executing transactions in our ordinary shares and a reduction in security analyst
and media’s coverage of our Company, if any. These factors may result in lower prices for our ordinary shares than might
otherwise be obtained and could also result in a larger spread between the bid and ask prices for our ordinary shares. In addition,
without a large float, our ordinary shares will be less liquid than the stock of companies with broader public ownership and, as
a result, the trading prices of our ordinary shares may be more volatile. In the absence of an active public trading market, an
investor may be unable to liquidate its investment in our ordinary shares. Trading of a relatively small volume of our ordinary
shares may have a greater impact on the trading price of our ordinary shares than would be the case if our public float were larger.
We cannot predict the prices at which our ordinary shares will trade in the future.
If securities
or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they adversely
change their recommendations or publish negative reports regarding our business or our ordinary shares, our share price and trading
volume could be negatively impacted.
The trading market
for our ordinary shares could be influenced by the research and reports that industry or securities analysts may publish about
us, our business, our market or our competitors. We do not have any control over these analysts, and we cannot provide any assurance
that analysts will cover us or provide favorable coverage. If any of the analysts who may cover us adversely change their recommendation
regarding our ordinary shares, or provide more favorable relative recommendations about our competitors, our share price would
likely decline. If any analyst who may cover us were to cease coverage of our Company or fail to regularly publish reports on us,
we could lose visibility in the financial markets, which in turn could negatively impact our share price or trading volume.
We have not paid,
and do not intend to pay, dividends on our ordinary shares and, therefore, unless our ordinary shares appreciate in value, our
investors may not benefit from holding our ordinary shares.
We have not paid any
cash dividends on our ordinary shares since inception. We do not anticipate paying any cash dividends on our ordinary shares in
the foreseeable future. Moreover, the Israeli Companies Law, 5759-1999, or the Companies Law, imposes certain restrictions on our
ability to declare and pay dividends. As a result, investors in our ordinary shares will not be able to benefit from owning our
ordinary shares unless the market price of our ordinary shares becomes greater than the price paid for the shares by such investors
and they are able to sell such shares. We cannot assure you that you will ever be able to resell our ordinary shares at a price
in excess of the price paid for the shares.
The public trading
market for our ordinary shares is volatile and may result in higher spreads in share prices, which may limit the ability of our
investors to sell their ordinary shares at a profit, if at all.
Our ordinary shares
currently trade on the Nasdaq Capital Market. Our results of operations and the value of our investments are affected by volatility
in the securities markets. These difficulties and the volatility of the securities markets in general, and specifically during
economic slowdowns, have affected and may continue to affect our ability to realize our investments or to raise financing, which
in turn may result in us having to record impairment charges.
It may be difficult
for you to sell your ordinary shares at or above the purchase price therefor or at all.
Although our ordinary
shares now trade on the Nasdaq Capital Market, an active trading market for our ordinary shares may not be sustained. The market
price of our ordinary shares is highly volatile and could be subject to wide fluctuations in price as a result of various factors,
some of which are beyond our control. It may be difficult for you to sell your ordinary shares without depressing the market price
for the ordinary shares or at all. As a result of these and other factors, you may not be able to sell your ordinary shares at
current market price or at all. Further, an inactive market may also impair our ability to raise capital by selling our ordinary
shares and may impair our ability to enter into strategic partnerships or acquire companies or products by using our ordinary shares
as consideration.
The tax benefits
that are available to us require us to continue to meet various conditions and may be terminated or reduced in the future, which
could increase our costs and taxes.
We have obtained a
tax ruling from the Israeli Tax Authority according to which our activity has been qualified as an “industrial activity,”
as defined in the Law for the Encouragement of Capital Investments, 1959, generally referred to as the Investment Law, and is eligible
for tax benefits as a “Benefited Enterprise,” which will apply to the turnover attributed to such enterprise, for a
period of up to ten years from the first year in which we generated taxable income. The tax benefits under the Benefited Enterprise
status are scheduled to expire at the end of 2023.
In order to remain
eligible for the tax benefits of a Benefited Enterprise, we must continue to meet certain conditions stipulated in the Investment
Law and its regulations, as amended. In addition, in order to remain eligible for the tax benefits available to the Benefited Enterprise,
we must also comply with the conditions set forth in the tax ruling. These conditions include, among other things, that the production,
directly or through subcontractors, of all our products should be performed within certain regions of Israel. If we do not meet
these requirements, the tax benefits would be reduced or canceled.
There is no assurance
that our future taxable income will qualify as Benefited Enterprise income or that the benefits described above will be available
to us in the future.
Future changes to tax laws could have
a material adverse effect on us and reduce net returns to our shareholders.
Our tax treatment is
subject to changes in tax laws, regulations and treaties, or the interpretation thereof, tax policy initiatives and reforms under
consideration and the practices of tax authorities in jurisdictions in which we operate, as well as tax policy initiatives and
reforms related to the Organization for Economic Co-Operation and Development’s, or OECD, Base Erosion and Profit Shifting,
or BEPS Project, the European Commission’s state aid investigations and other initiatives.
Such changes may include
(but are not limited to) the taxation of operating income, investment income, dividends received or, in the specific context of
withholding tax, dividends paid. We are unable to predict what tax reform may be proposed or enacted in the future or what effect
such changes would have on our business, but such changes, to the extent they are brought into tax legislation, regulations, policies
or practices, could affect our financial position and overall or effective tax rates in the future in countries where we have operations,
reduce post-tax returns to our shareholders, and increase the complexity, burden and cost of tax compliance.
In addition, on December
22, 2017, U.S. federal income tax legislation was signed into law (H.R. 1, “An Act to provide for reconciliation pursuant
to titles II and V of the concurrent resolution on the budget for fiscal year 2018”), informally titled the Tax Cuts and
Jobs Act, that significantly revised the U.S. Internal Revenue Code of 1986, as amended, or the Code. The Tax Cuts and Jobs Act,
among other things, contains significant changes to U.S. corporate income taxation, including the reduction of the corporate tax
rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for business interest expense to business
interest income plus 30% of adjusted taxable income (except with respect to certain small businesses), limitation of the deduction
for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, immediate deductions
for certain new investments instead of deductions for depreciation expense over time, and the modification or repealing of many
business deductions and credits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the Tax
Cuts and Jobs Act is uncertain and our business and financial condition could be adversely affected. In addition, it is uncertain
if and to what extent various states will conform to the Tax Cuts and Jobs Act. The impact of this tax reform on holders of our
ordinary shares is also uncertain and could be adverse. We urge you to consult with your legal and tax advisors with respect to
this legislation and the potential tax consequences of investing in or holding our ordinary shares.
Tax authorities
may disagree with our positions and conclusions regarding certain tax positions, resulting in unanticipated costs, taxes or non-realization
of expected benefits.
A tax authority may
disagree with tax positions that we have taken, which could result in increased tax liabilities. For example, the U.S. Internal
Revenue Service or another tax authority could challenge our allocation of income by tax jurisdiction and the amounts paid between
our affiliated companies pursuant to our intercompany arrangements and transfer pricing policies, including amounts paid with respect
to our intellectual property development. Similarly, a tax authority could assert that we are subject to tax in a jurisdiction
where we believe we have not established a taxable nexus, often referred to as a “permanent establishment” under international
tax treaties, and such an assertion, if successful, could increase our expected tax liability in one or more jurisdictions. A tax
authority may take the position that material income tax liabilities, interest and penalties are payable by us, in which case,
we expect that we might contest such assessment. Contesting such an assessment may be lengthy and costly and if we were unsuccessful
in disputing the assessment, the implications could increase our anticipated effective tax rate, where applicable.
We expect to
be characterized as a passive foreign investment company for the taxable years ending December 31, 2019, and December 31, 2020,
and, as such, our U.S. shareholders may suffer adverse tax consequences.
Generally, if for any
taxable year 75% or more of our gross income is passive income, or at least 50% of our assets are held for the production of, or
produce, passive income, we would be characterized as a passive foreign investment company, or PFIC, for U.S. federal income tax
purposes. For the taxable year ending December 31, 2019, we believe that we were a PFIC. We also expect to be classified as a PFIC
for 2020. Furthermore, because PFIC status is determined annually and is based on our income, assets and activities for the entire
taxable year, it is not possible to determine with certainty whether we will be characterized as a PFIC for the 2020 taxable year
until after the close of the year, and there can be no assurance that we will not be classified as a PFIC in any future year. If
we were to be characterized as a PFIC for U.S. federal income tax purposes in any taxable year during which a U.S. Holder owns
ordinary shares, such U.S. Holder could face adverse U.S. federal income tax consequences, including having gains realized on the
sale of our ordinary shares classified as ordinary income, rather than as capital gain, the loss of the preferential rate applicable
to dividends received on our ordinary shares by individuals who are U.S. Holders, and having interest charges apply to distributions
by us and the proceeds of share sales. Certain elections exist that may alleviate some adverse consequences of PFIC status and
would result in an alternative treatment (such as “qualified electing fund” and “mark-to-market” treatment)
of our ordinary shares. Upon request, we expect to provide the information necessary for U.S. Holders to make “qualified
electing fund elections” if we are classified as a PFIC. Each investor is urged to consult its tax advisor with respect to
the application of the PFIC rules.
For purposes of this
discussion, a “U.S. Holder” is a beneficial owner of our ordinary shares that, for U.S. federal income tax purposes,
is or is treated as any of the following: (a) an individual who is a citizen or resident of the United States; (b) a corporation,
or entity treated as a corporation for U.S. federal income tax purposes, created or organized under the laws of the United States,
any state thereof, or the District of Columbia; (c) an estate, the income of which is subject to U.S. federal income tax regardless
of its source; or (d) a trust that (1) is subject to the supervision of a U.S. court and the control of one or more “United
States persons” (within the meaning of Section 7701(a)(30) of the Code), or (2) has a valid election in effect to be treated
as a United States person for U.S. federal income tax purposes.
U.S. persons
who own 10% or more of our ordinary shares may be subject to adverse U.S. tax consequences under the U.S. controlled foreign corporation
rules.
If we are or become
a controlled foreign corporation, or “CFC,” “10% U.S. Shareholders” (as defined below) may be taxed on
their pro rata share of certain of our earnings, even if those earnings are not distributed by us. A non-U.S. corporation is a
“CFC” if more than 50% of its shares (by vote or value) are owned by “10% U.S. Shareholders.” A U.S. person
is a “10% U.S. Shareholder” if such person owns (directly, indirectly and/or constructively) 10% or more of the total
combined voting power of all classes of shares entitled to vote of such corporation or 10% or more of the total value of shares
of all classes of stock of such corporation.
In general, if a U.S.
person sells or exchanges stock in a foreign corporation and such person is a “10% U.S. Shareholder” at any time during
the 5-year period ending on the date of the sale or exchange when such foreign corporation was a CFC, any gain from such sale or
exchange may be treated as a dividend to the extent of the corporation’s earnings and profits attributable to such shares
that were accumulated during the period that the shareholder held the shares while the corporation was a CFC (with certain adjustments).
The CFC rules are complex.
The foregoing is merely a summary of certain potential applications of these rules. No assurances can be given that we are not
or will not become a CFC, and certain changes to the CFC constructive ownership rules introduced by the Tax Cuts and Jobs Act could,
under certain circumstances, cause us to be classified as a CFC. Each investor is urged to consult its tax advisor with respect
to the possible application of the CFC rules.
Your percentage
ownership in us may be diluted by future issuances of share capital, which could reduce your influence over matters on which shareholders
vote.
Our board of directors
has the authority, in most cases without action or vote of our shareholders, to issue all or any part of our authorized but unissued
shares, including ordinary shares issuable upon the exercise of outstanding warrants and options. Issuances of additional shares
would reduce your influence over matters on which our shareholders vote.
The sale of a
substantial number of our ordinary shares may cause the market price of our ordinary shares to decline.
Sales of a substantial
number of ordinary shares in the public market, or the perception that these sales could occur, could cause the market price of
our ordinary shares to decline. We had 52,973,580 ordinary shares outstanding as of February 29, 2020. All of our ordinary shares
outstanding as of December 31, 2019 are freely tradable, without restriction, in the public market in the United States. Any sales
of our ordinary shares or any perception in the market that such sales may occur could cause the trading price of our ordinary
shares to decline.
In addition, as of
February 29, 2020, up to 16,250,000 ordinary shares are issuable upon exercise of outstanding registered warrants. Furthermore, as
of February 29, 2020, up to 5,484,808 ordinary shares that are subject to outstanding options under the 2005 Share Option Plan, or
the 2005 Plan, and outstanding options and reserved options for future issuance under our 2015 Incentive Compensation Plan, or
the 2015 Plan, will be eligible for sale in the public market. We have filed registration statements on Form S-8 under the Securities
Act to register such ordinary shares under the 2005 and 2015 Plans.
If these additional
ordinary shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our ordinary
shares could decline.
Raising additional
capital would cause dilution to our existing shareholders, and may restrict our operations or require us to relinquish rights.
We may seek additional
capital through a combination of private and public equity offerings, “at-the-market” issuances, equity-linked and
structured transactions, debt (straight, convertible, or otherwise) financings, collaborations and licensing arrangements. Under
our existing equity line with Aspire Capital, we may generally sell, from time to time, up to $10 million of additional ordinary
shares and under our “at the market” equity offering program, we may sell, from time to time, up to approximately $72.4
million of additional ordinary shares, subject to limitations under the Baby Shelf Rule. To the extent that we raise additional
capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms may include
liquidation or other preferences that adversely affect your rights as a shareholder. Debt financing, if available, would result
in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to
take specific actions such as incurring debt, making capital expenditures or declaring dividends. If we raise additional funds
through collaboration, strategic alliance and licensing arrangements with third parties, we may have to relinquish valuable rights
to our technologies, future revenue streams or product candidates, or grant licenses on terms that are not favorable to us. Depending
upon market liquidity at the time, additional sales of shares registered at any given time could cause the trading price of our
ordinary shares to decline.
Because our ordinary
shares may be, or become, a “penny stock,” it may be more difficult for investors to sell their ordinary shares, and
the market price of our ordinary shares may be adversely affected.
Our ordinary shares
may be, or become, a “penny stock” if, among other things, the share price is below $5.00 per share, they are not listed
on a national securities exchange or they have not met certain net tangible asset or average revenue requirements. Broker-dealers
who sell penny stocks must provide purchasers of these stocks with a standardized risk-disclosure document prepared by the SEC.
This document provides information about penny stocks and the nature and level of risks involved in investing in the penny-stock
market. A broker must also give a purchaser, orally or in writing, bid and offer quotations and information regarding broker and
salesperson compensation, make a written determination that the penny stock is a suitable investment for the purchaser, and obtain
the purchaser’s written agreement to the purchase. Broker-dealers must also provide customers that hold penny stock in their
accounts with such broker-dealer a monthly statement containing price and market information relating to the penny stock. If a
penny stock is sold to an investor in violation of the penny stock rules, the investor may be able to cancel its purchase and get
its money back.
If applicable, the
penny stock rules may make it difficult for investors to sell their ordinary shares. Because of the rules and restrictions applicable
to a penny stock, there is less trading in penny stocks and the market price of our ordinary shares may be adversely affected.
Also, many brokers choose not to participate in penny stock transactions. Accordingly, investors may not always be able to resell
their ordinary shares publicly at times and prices that they feel are appropriate and the market price of our ordinary shares may
be adversely affected.
We must meet
the Nasdaq Capital Market’s continued listing requirements and comply with the other Nasdaq rules, or we may risk delisting.
Delisting could negatively affect the price of our ordinary shares, which could make it more difficult for us to sell securities
in a financing and for you to sell your ordinary shares.
We are required to
meet the continued listing requirements of the Nasdaq Capital Market and comply with the other Nasdaq rules, including those regarding
director independence and independent committee requirements, minimum shareholders’ equity, minimum share price and certain
other corporate governance requirements. We currently do not meet Nasdaq’s bid price rule and if we do not cure the bid price
rule deficiency or do not meet other continued listing requirements, our ordinary shares could be delisted. See “Item 1A.
Risk Factors — Risks Related to Ownership of Our Ordinary Shares — If we fail to comply with the continued listing
requirements of the Nasdaq Capital Market, our ordinary shares may be delisted and the price of our ordinary shares and our ability
to access the capital markets could be negatively impacted.” Delisting of our ordinary shares from the Nasdaq Capital Market
would cause us to pursue eligibility for trading on other markets or exchanges, or on the pink sheets. In such case, our shareholders’
ability to trade, or obtain quotations of the market value of, our ordinary shares would be severely limited because of lower trading
volumes and transaction delays. These factors could contribute to lower prices and larger spreads in the bid and ask prices for
our securities. There can be no assurance that our ordinary shares, if delisted from the Nasdaq Capital Market in the future, would
be listed on a national securities exchange or quoted on a national quotation service, the OTCQB or OTC Pink. Delisting from the
Nasdaq Capital Market, or even the issuance of a notice of potential delisting, would also result in negative publicity, make it
more difficult for us to raise additional capital, adversely affect the market liquidity of our ordinary shares, reduce security
analysts’ coverage of us and diminish investor, supplier and employee confidence. In addition, as a consequence of any such
delisting, our share price could be negatively affected and our shareholders would likely find it more difficult to sell, or to
obtain accurate quotations as to the prices of, our ordinary shares.
We incur significant
costs as a result of the listing of our ordinary shares for trading on the Nasdaq Capital Market and thereby being a public company
in the United States, and our management is required to devote substantial additional time to new compliance initiatives as well
as to compliance with ongoing U.S. reporting requirements.
As a public company
in the U.S., we incur significant accounting, legal and other expenses in order to comply with requirements of the SEC, and the
Nasdaq Capital Market, including requirements under Section 404 and other provisions of the Sarbanes-Oxley Act. These rules and
regulations have increased our legal and financial compliance costs, introduced new costs such as investor relations, stock exchange
listing fees and shareholder reporting, and made some activities more time consuming and costly. Any future changes in the laws
and regulations affecting public companies in the United States, including Section 404 and other provisions of the Sarbanes-Oxley
Act, the rules and regulations adopted by the SEC and the Nasdaq Capital Market, for so long as they apply to us, will result in
increased costs to us as we respond to such changes.
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, results of operation or financial condition. In addition, current and potential shareholders could lose confidence in
our financial reporting, which could have a material adverse effect on the price of our ordinary shares.
Effective internal
controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We are required to document
and test our internal control procedures in order to satisfy the requirements of Section 404, which requires annual management
assessments of the effectiveness of our internal controls over financial reporting. 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 ensure that
we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section
404. Disclosing deficiencies or weaknesses in our internal controls, failing to remediate these deficiencies or weaknesses in a
timely fashion or failing to achieve and maintain an effective internal control environment may cause investors to lose confidence
in our reported financial information, which could have a material adverse effect on the price of our ordinary shares. If we cannot
provide reliable financial reports or prevent fraud, our operating results could be harmed.
While we currently
qualify as an “emerging growth company” under the JOBS Act, we will cease to be an emerging growth company on or before
the end of 2020, and, to the extent we do not qualify as a smaller reporting company, at such time our costs and the demands placed
upon our management will increase.
As an “emerging
growth company” under the JOBS Act, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements.
Most of such requirements relate to disclosures that we would otherwise be required to make, having ceased to be a foreign private
issuer. While we currently qualify as an “emerging growth company” under the JOBS Act, we will cease to be an emerging
growth company on or before the end of 2020, and, to the extent we do not qualify as a smaller reporting company, at such time
our costs and the demands placed upon our management will increase unless we qualify as a smaller reporting company. For so long
as we remain an emerging growth company, we will not be required to:
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have an auditor report on our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;
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comply with any requirement that may be adopted by the Public Company Accounting Oversight Board, or PCAOB, regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the consolidated financial statements (auditor discussion and analysis);
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submit certain executive compensation matters to shareholders advisory votes pursuant to the “say on frequency” and “say on pay” provisions (requiring a non-binding shareholder vote to approve compensation of certain executive officers) and the “say on golden parachute” provisions (requiring a non-binding shareholder vote to approve golden parachute arrangements for certain executive officers in connection with mergers and certain other business combinations) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010; and
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include detailed compensation discussion and analysis in our filings under the Exchange Act, and instead may provide a reduced level of disclosure concerning executive compensation.
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We are also a smaller
reporting company, and we will remain a smaller reporting company until the fiscal year following the determination that our voting
and non-voting common shares held by non-affiliates is more than $250 million measured on the last business day of our second fiscal
quarter, or our annual revenues are more than $100 million during the most recently completed fiscal year and our voting and non-voting
common shares held by non-affiliates is more than $700 million measured on the last business day of our second fiscal quarter.
Similar to emerging growth companies, smaller reporting companies are able to provide simplified executive compensation disclosure,
are exempt from the auditor attestation requirements of Section 404, and have certain other reduced disclosure obligations, including,
among other things, being required to provide only two years of audited financial statements and not being required to provide
selected financial data, supplemental financial information or risk factors.
We have elected to
take advantage of certain of the reduced reporting obligations. We cannot predict whether investors will find our ordinary shares
less attractive if we rely on these exemptions. If some investors find our ordinary shares less attractive as a result, there may
be a less active trading market for our ordinary shares and our stock price may be reduced or more volatile.
If
we fail to comply with the continued listing requirements of the Nasdaq Capital Market, our ordinary shares may be delisted and
the price of our ordinary shares and our ability to access the capital markets could be negatively impacted.
On September
3, 2019, we were notified by Nasdaq that we were not in compliance with the minimum bid price requirements set forth in
Nasdaq Listing Rule 5550(a)(2) for continued listing on the Nasdaq Capital Market. Nasdaq Listing Rule 5550(a)(2) requires listed
securities to maintain a minimum bid price of $1.00 per share, and Nasdaq Listing Rule 5810(c)(3)(A) provides that a failure to
meet the minimum bid price requirement exists if the deficiency continues for a period of 30 consecutive business days. The notification
provided that we had 180 calendar days, or until March 2, 2020, to regain compliance with Nasdaq Listing Rule 5550(a)(2). On March
3, 2020, we were notified by Nasdaq that we are eligible for an additional 180 calendar
day period, or until August 31, 2020, to regain compliance. To regain compliance, the bid price of our ordinary shares must have
a closing bid price of at least $1.00 per share for a minimum of 10 consecutive business days. Failure to meet applicable Nasdaq
continued listing standards could result in a delisting of our ordinary shares. A delisting of our ordinary shares from Nasdaq
could materially reduce the liquidity of our ordinary shares and result in a corresponding material reduction in the price of our
ordinary shares. In addition, delisting could harm our ability to raise capital on terms acceptable to us, or at all, and may result
in the potential loss of confidence by investors, employees and fewer business development opportunities.
Risks Related to Our Operations in Israel
Potential political,
economic and military instability in the State of Israel, where some of our senior management, our head executive office, research
and development, and manufacturing facilities are located, may adversely affect our results of operations.
Our head executive
office, our research and development facilities, our current manufacturing facility, as well as some of our clinical sites are
located in Israel. Some of our officers and directors are residents of Israel. Accordingly, political, economic and military conditions
in Israel and the surrounding region may directly affect our business and operations. Since the establishment of the State of Israel
in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries, as well as terrorist acts committed
within Israel by hostile elements. Any hostilities involving Israel or the interruption or curtailment of trade between Israel
and its trading partners could adversely affect our operations and results of operations. During November 2012 and from July through
August 2014, Israel was engaged in an armed conflict with a militia group and political party who controls the Gaza Strip, and
during the summer of 2006, Israel was engaged in an armed conflict with Hezbollah, a Lebanese Islamist Shiite militia group and
political party. In December 2008 and January 2009 there was an escalation in violence among Israel, Hamas, the Palestinian Authority
and other groups, as well as extensive hostilities along Israel’s border with the Gaza Strip, which resulted in missiles
being fired from the Gaza Strip into Southern Israel. Similar hostilities accompanied by missiles being fired from the Gaza Strip
into Southern Israel, as well at areas more centrally located near Tel Aviv and at areas surrounding Jerusalem, occurred during
November 2012 and July through August 2014. These conflicts involved missile strikes against civilian targets in various parts
of Israel, including areas in which our employees and some of our consultants are located, and negatively affected business conditions
in Israel.
Since February 2011,
Egypt has experienced political turbulence and an increase in terrorist activity in the Sinai Peninsula following the resignation
of Hosni Mubarak as president. This included protests throughout Egypt, and the appointment of a military regime in his stead,
followed by the elections to parliament which brought groups affiliated with the Muslim Brotherhood (which had been previously
outlawed by Egypt), and the subsequent overthrow of this elected government by a military regime. Such political turbulence and
violence may damage peaceful and diplomatic relations between Israel and Egypt, and could affect the region as a whole. Similar
civil unrest and political turbulence has occurred in other countries in the region, including Syria which shares a common border
with Israel, and is affecting the political stability of those countries. Since April 2011, internal conflict in Syria has escalated,
and evidence indicates that chemical weapons have been used in the region. Intervention may be contemplated by outside parties
in order to prevent further chemical weapon use. This instability and any intervention may lead to deterioration of the political
and economic relationships that exist between the State of Israel and some of these countries, and may have the potential for additional
conflicts in the region. In addition, Iran has threatened to attack Israel and may be developing nuclear weapons. Iran is also
believed to have a strong influence among extremist groups in the region, such as Hamas in Gaza, Hezbollah in Lebanon, and various
rebel militia groups in Syria. These situations may potentially escalate in the future to more violent events which may affect
Israel and us. Any armed conflicts, terrorist activities or political instability in the region could adversely affect business
conditions and could harm our results of operations and could make it more difficult for us to raise capital. Parties with whom
we do business have sometimes declined to travel to Israel during periods of heightened unrest or tension, forcing us to make alternative
arrangements when necessary in order to meet our business partners face to face. In addition, the political and security situation
in Israel may result in parties with whom we have agreements involving performance in Israel claiming that they are not obligated
to perform their commitments under those agreements pursuant to force majeure provisions in such agreements.
Our commercial insurance
does not cover losses that may occur as a result of events associated with the security situation in the Middle East. Although
the Israeli government currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts
of war, we cannot assure you that this government coverage will be maintained or that it will sufficiently cover our potential
damages. Any losses or damages incurred by us could have a material adverse effect on our business. Any armed conflicts or political
instability in the region would likely negatively affect business conditions and could harm our results of operations.
Further, in the past,
the State of Israel and Israeli companies have been subjected to economic boycotts. Several countries still restrict business with
the State of Israel and with Israeli companies. These restrictive laws and policies may have an adverse impact on our operating
results, financial condition or the expansion of our business. A campaign of boycotts, divestment and sanctions has been undertaken
against Israel, which could also adversely impact our business.
The legislative power
of the State resides in the Knesset, a unicameral parliament that consists of 120 members elected by nationwide voting under a
system of proportional representation. Israel’s most recent general elections were held on April 9, 2019, September 17, 2019
and March 2, 2020, following which a process of composing and approving a new government has commenced. This uncertainty surrounding
future elections and/or the results of such elections in Israel may continue and the political situation in Israel may further
deteriorate. Actual or perceived political instability in Israel or any negative changes in the political environment, may individually
or in the aggregate adversely affect the Israeli economy and, in turn, our business, financial condition, results of operations
and prospects.
Our operations
may be disrupted as a result of the obligation of Israeli citizens to perform military service.
Many Israeli citizens
are obligated to perform up to 36 days, and in some cases more, of annual military reserve duty each year until they reach the
age of 40 (or older, for reservists who are military officers or who have certain occupations) and, in the event of a military
conflict, may be called to active duty. In response to increases in terrorist activity, there have been periods of significant
call-ups of military reservists. It is possible that there will be military reserve duty call-ups in the future. Our operations
could be disrupted by such call-ups, which may include the call-up of members of our management. Such disruption could materially
adversely affect our business, financial condition and results of operations.
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, or our executive officers and directors or asserting U.S. securities laws claims in Israel.
Not all of our directors
or officers are residents of the United States. Most of our assets and those of our non-U.S. directors and officers are located
outside the United States. Service of process upon us or our non-U.S. resident directors and officers and enforcement of judgments
obtained in the United States against us or our non-U.S. directors and executive officers may be difficult to obtain within the
United States. We have been informed by our legal counsel in Israel that it may be 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. Israeli courts may refuse to hear a claim based on a violation of U.S. securities laws against us or our non-U.S. officers
and directors because Israel may not be 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 or our non-U.S. officers and directors.
Moreover, among other
reasons, including but not limited to, fraud or absence of due process, or the existence of a judgment which is at variance with
another judgment that was given in the same matter if a suit in the same matter between the same parties was pending before a court
or tribunal in Israel, 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.
Under current
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 generally enter
into non-competition agreements with our key employees, in most cases within the framework of their employment agreements. These
agreements prohibit our key employees, if they cease working for us, from competing directly with us or working for our competitors
for a limited period. Under applicable Israeli law, we may be unable to enforce these agreements or any part thereof. If we cannot
enforce our non-competition agreements with our employees, then we may be unable to prevent our competitors from benefiting from
the expertise of our former employees, which could materially adversely affect our business, results of operations and ability
to capitalize on our proprietary information.
Your rights and
responsibilities as our shareholder will be governed by Israeli law, which may differ in some respects from the rights and responsibilities
of shareholders of U.S. corporations.
We are incorporated
under Israeli law. The rights and responsibilities of holders of our ordinary shares are governed by our articles of association
and the Companies Law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders
in typical U.S. corporations. In particular, pursuant to the Companies Law, each shareholder of an Israeli company has to act in
good faith in exercising his or her rights and fulfilling his or her obligations toward the Company and other shareholders and
to refrain from abusing his or her power in the Company, including, among other things, in voting at the general meeting of shareholders
and class meetings, on amendments to a company’s articles of association, increases in a company’s authorized share
capital, mergers, and transactions requiring shareholders’ approval under the Companies Law. In addition, a controlling shareholder
of an Israeli company or a shareholder who knows that it possesses the power to determine the outcome of a shareholder vote or
who has the power to appoint or prevent the appointment of a director or officer in the Company, or has other powers toward the
Company has a duty of fairness toward the Company. However, Israeli law does not define the substance of this duty of fairness.
There is little case law available to assist in understanding the implications of these provisions that govern shareholder behavior.
Provisions of
Israeli law and our articles of association may delay, prevent or make undesirable an acquisition of all or a significant portion
of our shares or assets.
Certain provisions
of Israeli law and our articles of association could have the effect of delaying or preventing a change in control and may make
it more difficult for a third party to acquire us or for our shareholders to elect different individuals to our board of directors,
even if doing so would be beneficial to our shareholders, and may limit the price that investors may be willing to pay in the future
for our ordinary shares. For example, Israeli corporate law regulates mergers and requires that a tender offer be effected when
more than a specified percentage of shares in a company are purchased. Further, Israeli tax considerations may make potential transactions
undesirable to us or to some of our shareholders whose country of residence does not have a tax treaty with Israel granting tax
relief to such shareholders from Israeli tax. With respect to certain mergers, Israeli tax law may impose certain restrictions
on future transactions, including with respect to dispositions of shares received as consideration, for a period of two years from
the date of the merger.
Furthermore, under
the Encouragement of Research, Development and Technological Innovation in the Industry Law 5744-1984 and the regulations guidelines,
rules, procedures and benefit tracks thereunder, or the Innovation Law, to which we are subject due to our receipt of grants from
the Israel Innovation Authority, or IIA (formerly known as the Office of the Chief Scientist of the Ministry of Economy and Industry,
or the OCS), a recipient of IIA grants such as us must report to IIA regarding any change of control or any change in the holding
of its means of control of our Company which transforms any non-Israeli citizen or resident into an “interested party”,
as defined in the Israeli Securities Law 5728-1968, or the Israeli Securities Law, and in the latter event, the non-Israeli citizen
or resident shall execute an undertaking in favor of IIA, in a form prescribed by IIA.
We have received
Israeli government grants for certain of our research and development activities. The terms of these grants may require us to satisfy
specified conditions in order to manufacture products and transfer technologies outside of Israel. We may be required to pay penalties
in addition to the repayment of the grants. Such grants may be terminated or reduced in the future, which would increase our costs.
Under the Innovation
Law, research and development programs that meet specified criteria and are approved by a committee of the IIA are eligible for
grants. The grants awarded are typically up to 50% of the project’s expenditures, as determined by the IIA committee and
subject to the benefit track under which the grant was awarded. A company that receives a grant from the IIA, or a Participating
Company, is typically required to pay royalties to IIA on income generated from products incorporating know-how developed using
such grants (including income derived from services associated with such products), until 100% of the U.S. dollar-linked grant
plus annual LIBOR interest (or any other interest rate that the IIA may choose to apply in the future) is repaid. The rate of royalties
to be paid may vary between different benefits tracks, as shall be determined by IIA. In general, the rate of royalties varies
between 3% to 5% of the income generated from the IIA supported products.
The obligation to pay
royalties is contingent on actual income generated from such products and services. In the absence of such income, no payment of
royalties is required. It should be noted that the restrictions under the Innovation Law will continue to apply even after the
repayment of such royalties in full by the Participating Company including restrictions on the sale, transfer or assignment outside
of Israel of know-how developed as part of the programs under which the grants were given.
The terms of the grants
under the Innovation Law also (generally) require that the products developed as part of the programs under which the grants were
given be manufactured in Israel and that the know-how developed thereunder may not be transferred outside of Israel, unless prior
written approval is received from the IIA (such approval is not required for the transfer of a portion of the manufacturing capacity
which does not exceed, in the aggregate, 10% of the portion declared to be manufactured outside of Israel in the applications for
funding (in which case only notification is required), and additional payments are required to be made to IIA, as described below.
It should be noted that this does not restrict the export of products that incorporate the funded know-how.
Ordinarily, as a condition
to obtaining approval to manufacture outside Israel, we may be required to pay royalties at an increased rate and up to an increased
cap amount of three times the total amount of the IIA grants, plus interest accrued thereon, depending on the manufacturing volume
to be performed outside Israel. The IIA approved our request to transfer 100% of the manufacturing rights of our AP-CD/LD product
candidate that was developed under the IIA funded program to a non-Israeli manufacturer. As a result, we will be required to pay
the IIA royalties from revenue generated from the AP-CD/LD product candidate at an increased rate, and up to an increased cap amount.
The IIA noted that the approval granted was exceptional and that the IIA will not approve manufacturing of additional product candidates
out of Israel.
The Innovation Law
restricts the ability to transfer know-how funded by IIA outside of Israel. Transfer of IIA-funded know-how outside of Israel requires
prior approval and is subject to payment of a redemption fee to the IIA calculated according to a formula provided under the Innovation
Law. A transfer for the purpose of the Innovation Law is generally interpreted very broadly and includes, inter alia, any actual
sale of the IIA-funded know-how, any license to develop the IIA-funded know-how or the products resulting from such IIA-funded
know-how or any other transaction, which, in essence, constitutes a transfer of the IIA-funded know-how. Generally, a mere license
solely to market products resulting from the IIA-funded know-how would not be deemed a transfer for the purpose of the Innovation
Law.
The IIA approval to
transfer know-how created, in whole or in part, in connection with an IIA-funded project to a third party outside Israel where
the transferring company remains an operating Israeli entity is subject to payment of a redemption fee to IIA calculated according
to a formula provided under the Innovation Law that is based, in general, on the ratio between the aggregate IIA grants received
by the company (including the accrued interest) and the company’s aggregate investments in the project that was funded by
these IIA grants, multiplied by the transaction consideration (taking into account any depreciation in accordance with a formula
set forth in the in the Innovation Law) less any royalties already paid to the IIA. The transfer of such know-how to a party outside
Israel where the transferring company ceases to exist as an Israeli entity is subject to a redemption fee formula that is based,
in general, on the ratio between aggregate IIA grants received by the company (including the accrued interest) and the company’s
aggregate research and development expenses, multiplied by the transaction consideration (taking into account any depreciation
in accordance with a formula set forth in the Innovation Law) less any royalties already paid to the IIA. The Innovation Law establishes
a maximum payment amount of the redemption fee paid to the IIA under the above mentioned formulas and differentiates between two
situations: (i) in the event that the company sells its IIA-funded know-how, in whole or in part, or is sold as part of certain
merger and acquisition transactions, and subsequently ceases to conduct business in Israel, the maximum redemption fee under the
above mentioned formulas shall be no more than six times the amount received (plus accrued interest) for the applicable know-how
being transferred; and (ii) in the event that following the transactions described above (i.e., asset sale of IIA-funded know-how
or transfer as part of certain merger and acquisition transactions), the company continues to conduct its research activity in
Israel (for at least three years following such transfer, keeps on staff at least 75% of the number of research and development
employees it had for the six months before the know-how was transferred and keeps the same scope of employment of such research
and development staff), then the company is eligible for a reduced cap of the redemption fee of no more than three times the amounts
received (plus accrued interest) for the applicable know-how being transferred. The obligation to pay royalties mentioned above
will no longer apply following the payment of the redemption fee, as described above.
Subject to prior approval
of the IIA, the Company may transfer the IIA-funded know-how to another Israeli company. If the IIA-funded know-how is transferred
to another Israeli entity, the transfer would still require IIA approval but will not be subject to the payment of the redemption
fee (although there will be an obligation to pay royalties to the IIA from the income of such sale transaction as part of the royalty
payment obligation). In such case, the acquiring company would have to assume all of the selling company’s restrictions and
obligations towards the IIA (including the restrictions on the transfer of know-how and manufacturing capacity outside of Israel)
as a condition to IIA approval.
Our research and development
efforts have been financed, partially, through grants that we have received from the IIA. We therefore must comply with the requirements
of the Innovation Law and related regulations. As of December 31, 2019, we received approximately NIS 42.3 million of such grants.
We did not apply for any grants from the IIA for the years ended December 31, 2019, 2018 and 2017. For more information see note
6c in our consolidated financial statements for the year ended December 31, 2019. The Innovation Law restricts the ability
to transfer know-how funded by the IIA outside of Israel. Transfer of IIA-funded know-how outside of Israel requires the prior
approval of the IIA and, under certain circumstances, is subject to significant payments to IIA (calculated according to a formula
set forth under the Innovation Law), as further described above. Therefore, the discretionary approval of an IIA committee will
be required for any transfer to third parties outside of Israel of rights related to our Accordion Pill, which has been developed
with IIA-funding. The restrictions under the Innovation Law may impair our ability to enter into agreements which involve IIA-funded
products or know-how without the approval of IIA. We cannot be certain that any approval of IIA will be obtained on terms that
are acceptable to us, or at all. We may not receive the required approvals should we wish to transfer IIA-funded know-how, manufacturing
and/or development outside of Israel in the future. Furthermore, in the event that we undertake a transaction involving the transfer
to a non-Israeli entity of know-how developed with IIA-funding pursuant to a merger or similar transaction, the consideration available
to our shareholders may be reduced by the amounts we are required to pay to IIA. Any approval, if given, will generally be subject
to additional financial obligations. Failure to comply with the requirements under the Innovation Law may subject us to mandatory
repayment of grants received by us (together with interest and penalties), as well as expose us to criminal proceedings. In addition,
IIA may from time to time conduct royalties audits and such audits may lead to additional royalties being payable on additional
products. Such grants may be terminated or reduced in the future, which would increase our costs. IIA approval is not required
for the marketing of products resulting from the IIA-funded research or development in the ordinary course of business.