PLX Protalix BioTherapeutics Inc

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the consolidated financial statements and the related notes included elsewhere in this Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2015. Some of the information contained in this discussion and analysis, particularly with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should read “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a biopharmaceutical company focused on the development and commercialization of recombinant therapeutic proteins based on our proprietary ProCellEx ^® protein expression system, or ProCellEx. We developed our first commercial drug product, Elelyso ^® , using our ProCellEx system and we are now focused on utilizing the system to develop a pipeline of proprietary, clinically superior versions of recombinant therapeutic proteins that primarily target large, established pharmaceutical markets and that in most cases rely upon known biological mechanisms of action. With our experience to date, we believe ProCellEx will enable us to develop additional proprietary recombinant proteins that are therapeutically superior to existing recombinant proteins currently marketed for the same indications. We are now also applying the unique properties of our ProCellEx system for the oral delivery of therapeutic proteins.

On May 1, 2012, the U.S. Food and Drug Administration, or the FDA, approved for sale our first commercial product, taliglucerase alfa for injection, an enzyme replacement therapy, or ERT, for the long-term treatment of adult patients with a confirmed diagnosis of type 1 Gaucher disease. Subsequently, taliglucerase alfa was approved for marketing by the regulatory authorities of other countries. Taliglucerase alfa is being marketed under the name Uplyso ^TM in Brazil and certain other Latin American countries, and as Elelyso in all other territories.

Since its approval by the FDA, taliglucerase alfa has been marketed mainly in the United States by Pfizer, as provided in the exclusive license and supply agreement by and between Protalix Ltd., our wholly-owned subsidiary, and Pfizer, which we refer to as the Pfizer Agreement. In October 2015, we entered into an Amended and Restated Exclusive License and Supply Agreement, or the Amended Pfizer Agreement, which amends and restates the Pfizer Agreement in its entirety. Pursuant to the Amended Pfizer Agreement, we sold to Pfizer our share in the collaboration created under the initial Pfizer Agreement for the commercialization of Elelyso in exchange for a cash payment equal to $36.0 million. As part of the sale, we agreed to transfer our rights to Elelyso in Israel to Pfizer, while gaining full rights to Elelyso in Brazil. We will continue to manufacture drug substance for Pfizer, subject to certain terms and conditions. Under the initial Pfizer Agreement, Pfizer shared revenues and expenses for the development and commercialization of Elelyso with us on a 60%/40% basis globally, excluding Israel and Brazil. Under the Amended Pfizer Agreement, Pfizer is responsible for 100% of expenses, and entitled to all revenues globally for Elelyso, excluding Brazil, where we are responsible for all expenses and retain all revenues.

For the first 10-year period after the execution of the Amended Pfizer Agreement, we have agreed to sell drug substance to Pfizer for the production of Elelyso, and Pfizer maintains the right to extend the supply period for up to two additional 30-month periods subject to certain terms and conditions. Any failure to comply with our supply commitments may subject us to substantial financial penalties, which will have a material adverse effect on our business, results of operations and financial condition. The Amended Pfizer Agreement also includes customary provisions regarding cooperation for regulatory matters, patent enforcement, termination, indemnification and insurance requirements.

On June 18, 2013, we entered into a Supply and Technology Transfer Agreement, or the Brazil Agreement, with Fiocruz, an arm of the Brazilian Ministry of Health, for taliglucerase alfa.

Fiocruz’s purchases of Uplyso to date have been significantly below certain agreed upon purchase milestones and, accordingly, we have the right to terminate the Brazil Agreement. Notwithstanding the low purchase amounts, we are, at this time, continuing to supply Uplyso to Fiocruz under the Brazil Agreement, and patients continue to be treated with Uplyso in Brazil. We are discussing with Fiocruz potential actions that Fiocruz may take to comply with its purchase obligations and, based on such discussions, we will determine what we believe to be the course of action that is in the best interest of our company.

We are developing an innovative product pipeline using our ProCellEx protein expression system. Our product pipeline currently includes, among other candidates:

(1) PRX-102, or alpha-GAL-A , a therapeutic protein candidate for the treatment of Fabry disease, a rare, genetic lysosomal disorder in humans, currently in an ongoing phase I/II clinical trial. We initiated phase III clinical trials of PRX-102 in June 2016 and patient enrollment is ongoing.

(2) PRX-110, a proprietary plant cell recombinant human Deoxyribonuclease 1, or AIR DNase ^TM , under development for the treatment of cystic fibrosis (CF), to be administered by inhalation. In July 2016, the first patient was dosed in our phase II clinical trial of AIR DNase for the treatment of CF.

(3) OPRX-106, our oral antiTNF product candidate which is being developed as an orally-delivered anti-inflammatory treatment using plant cells as a natural capsule for the expressed protein. We concluded the phase I clinical trial, which demonstrated that the drug was safe and well tolerated, showing biological activity in the gut and inducement of regulatory T cells . We expect to initiate a phase II clinical trial in Ulcerative Colitis patients shortly.

Except for the rights to commercialize taliglucerase alfa worldwide (other than Brazil), which we licensed to Pfizer, we hold the worldwide commercialization rights to all of our proprietary development candidates. In addition, we continuously evaluate potential strategic marketing partnerships as well as collaboration programs with biotechnology and pharmaceutical companies and academic research institutes.

Critical Accounting Policies

Our significant accounting policies are more fully described in note 1 to our unaudited condensed consolidated financial statements appearing in this Quarterly Report. There have not been any changes to our significant accounting policies since the Annual Report on Form 10-K for the year ended December 31, 2015.

The discussion and analysis of our financial condition and results of operations is based on our financial statements, which we prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate such estimates and judgments, including those described in greater detail below. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Discontinued Operations

Pursuant to the Amended Pfizer Agreement, we sold to Pfizer our share in the collaboration created under the initial Pfizer Agreement for the commercialization of Elelyso. As part of the sale, we agreed to transfer our rights to Elelyso in Israel to Pfizer while gaining full rights to Elelyso in Brazil. Under the Amended Pfizer Agreement, Pfizer is responsible for 100% of expenses, and entitled to all of the revenues, globally, for Elelyso, excluding Brazil where we are responsible for all expenses and retain all revenues. The Amended Pfizer Agreement eliminates Pfizer’s entitlement to annual payments of up to $12.5 million in relation to commercialization of Elelyso in Brazil. For further details see notes 1 and 12 to the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015 and notes 1 and 4 of the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

Results of Operations

Three months ended September 30, 2016 compared to the three months ended September 30, 2015

Revenues

We recorded revenues of $4.7 million during the three months ended September 30, 2016, an increase of $3.4 million from revenues of $1.3 million for the three months ended September 30, 2015. The increase resulted primarily from an increase in the amount of drug substance sold to Pfizer during the period.

Cost of Revenues

Cost of revenues was $4.2 million for the three months ended September 30, 2016, an increase of $4.0 million from cost of revenues of approximately $223,000 for the three months ended September 30, 2015. The increase is mainly due to cost of revenues that were attributed to an increase in the amount of drug substance sold to Pfizer at cost during the period.

Research and Development Expenses, Net

Research and development expenses were $5.1 million for the three months ended September 30, 2016, an increase of $1.1 million, or 28%, from $4.0 million for the three months ended September 30, 2015. The increase resulted primarily from an increase of $1.2 million for clinical trial related costs.

We expect research and development expenses for our various development programs to continue to be our primary expense.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $2.0 million for the three months ended September 30, 2016, a decrease of approximately $149,000, or 7%, from $2.2 million for the three months ended September 30, 2015.

Financial Expenses and Income, Net

Financial expenses net were approximately $642,000 for the three months ended September 30, 2016 compared to financial expenses net of $1.0 million for the three months ended September 30, 2015. Financial expenses is composed primarily from interest expense of $776,000 for each three-month period for the 4.5% convertible notes described below.

Nine months ended September 30, 2016 compared to the nine months ended September 30, 2015

Revenues

We recorded revenues of $7.1 million during the nine months ended September 30, 2016, compared to $4.4 million for the nine months ended September 30, 2015, an increase of $2.7 million or 63%. The increase resulted primarily from an increase in the amount of drug substance sold to Pfizer during the period.

Cost of Revenues

Cost of revenues was $6.4 million for the nine months ended September 30, 2016, an increase of $5.7 million from cost of revenues of approximately $730,000 for the nine months ended September 30, 2015. The increase is mainly due to cost of revenues that were attributed to an increase in the amount of drug substance sold to Pfizer at cost during the period.

Research and Development Expenses, Net

Research and development expenses were $18.9 million for the nine months ended September 30, 2016, an increase of $5.3 million, or 39%, from $13.6 million for the nine months ended September 30, 2015. The increase resulted primarily from an increase of $5.0 million in clinical trial related costs.

We expect research and development expenses for our various development programs to continue to be our primary expense.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $6.2 million for the nine months ended September 30, 2016, an increase of approximately $229,000, or 4%, from $6.0 million for the nine months ended September 30, 2015.

Financial Expenses and Income, Net

Financial expenses net were $2.1 million for the nine months ended September 30, 2016 compared to financial expenses of $2.7 million for the nine months ended September 30, 2015. Financial expenses is composed primarily from interest expense of $2.3 million for each nine-month period for the 4.5% convertible notes described below.

Liquidity and Capital Resources

Sources of Liquidity

As a result of our significant research and development expenditures which exceed our product sales revenue, we have not been profitable and have generated operating losses from our continuing operations since our inception. To date, we have funded our operations primarily with proceeds equal to $31.3 million from the sale of shares of convertible preferred and ordinary shares of Protalix Ltd., and an additional $14.1 million in connection with the exercise of warrants issued in connection with the sale of such shares, through December 31, 2008. In addition, on October 25, 2007, we generated gross proceeds of $50 million in connection with an underwritten public offering of our common stock and on each of March 23, 2011 and February 22, 2012, we generated gross proceeds of $22.0 million and $27.2 million, respectively, in connection with underwritten public offerings of our common stock.

In addition to the foregoing, on September 18, 2013, we completed a private placement of $69.0 million in aggregate principal amount of 4.50% convertible notes due 2018, or the Notes, including $9.0 million aggregate principal amount of Notes related to the offering’s initial purchaser’s over-allotment option, which was exercised in full.

Pfizer paid Protalix Ltd. $60.0 million as an upfront payment in connection with the execution of the Pfizer Agreement and subsequently paid to Protalix Ltd. an additional $5.0 million upon Protalix Ltd.’s meeting a certain milestone. Protalix Ltd. also received a milestone payment of $25.0 million in connection with the FDA’s approval of taliglucerase alfa in May 2012. Pfizer has also paid Protalix Ltd. $8.3 million in connection with the successful achievement of certain milestones under a clinical development agreement between Pfizer and Protalix Ltd. In connection with the execution of the Amended Pfizer Agreement, we received a $36.0 million payment from Pfizer, and Pfizer purchased 5,649,079 shares of our common stock for $10.0 million.

We believe that our existing cash and cash equivalents will be sufficient for at least 12 months. We have based this estimate on assumptions that are subject to change and may prove to be wrong, and we may be required to use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical trials.

Cash Flows

Net cash used in operations was $24.7 million for the nine months ended September 30, 2016. The net loss for the nine months ended September 30, 2016 of $26.7 million was further increased by an increase of $1.4 million in accounts receivable, but was partially offset by depreciation expenses of $1.5 million and share based compensation of $765,000. Net cash used in investing activities for the nine months ended September 30, 2016 was approximately $725,000 and consisted primarily of purchases of property and equipment.

Net cash used in operations was $20.4 million for the nine months ended September 30, 2015. The net loss for the nine months ended September 30, 2015 of $14.8 million was further increased by income from discontinued operations of $3.8 million, by an increase of $1.8 million in accounts receivable and other assets and by a decrease of $1.5 million in accounts payable, but was partially offset by depreciation expense of $1.8 million and $1.4 million of share based compensation. Net cash used in investing activities for the nine months ended September 30, 2015 was $516,000 and consisted primarily of purchases of property and equipment. Net cash provided from financing activities was $534,000 primarily from the exercise of stock options.

Future Funding Requirements

We expect to continue to incur significant expenditures in the near future, including significant research and development expenses related primarily to the clinical trials of PRX-102, PRX-110 and PRX-106, and the advancement of our other product candidates into preclinical trials.

Our future capital requirements will depend on many factors, including our progress in commercializing Uplyso in Brazil, the progress and results of our clinical trials, the duration and cost of discovery and preclinical development and laboratory testing and clinical trials for our product candidates, the timing and outcome of regulatory review of our product candidates, the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims and other intellectual property rights, the number and development requirements of other product candidates that we pursue and the costs of commercialization activities, including product marketing, sales and distribution.

We may need to finance our future cash needs through corporate collaboration, licensing or similar arrangements, public or private equity offerings or debt financings. We currently do not have any commitments for future external funding. We may need to raise additional funds more quickly if one or more of our assumptions prove to be incorrect or if we choose to expand our product development efforts more rapidly than we presently anticipate. We may also decide to raise additional funds even before we need them if the conditions for raising capital are favorable. Any sale of additional equity or debt securities will likely result in dilution to our stockholders. The incurrence of indebtedness would result in increased fixed obligations and could also result in covenants that would restrict our operations. Additional equity or debt financing, grants or corporate collaboration and licensing arrangements may not be available on acceptable terms, if at all. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate our research and development programs, reduce our planned commercialization efforts or obtain funds through arrangements with collaborators or others that may require us to relinquish rights to certain product candidates that we might otherwise seek to develop or commercialize independently.

Effects of Inflation and Currency Fluctuations

Inflation generally affects us by increasing our cost of labor and clinical trial costs. We do not believe that inflation has had a material effect on our results of operations during the nine and three months ended September 30, 2016 or the nine and three months ended September 30, 2015.

Currency fluctuations could affect us through increased or decreased acquisition costs for certain goods and services. We do not believe currency fluctuations have had a material effect on our results of operations during the nine and three months ended September 30, 2016 and December 31, 2015.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements as of each of September 30, 2016 and September 30, 2015.