Indicate the number of
outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered by the annual report.
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
If this
report is an annual report or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files) Yes ☒ No ☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated filer.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this
filing:
If Other has been checked in response to the previous question, indicate by check mark which financial statement
item the registrant has elected to follow.
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ☐ No ☒
PART I
Item 1. Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
I
tem 3. Key Information
A. Selected Financial Data
The following
table summarizes our financial data. We have derived the summary statements of operations data for the years ended December 31, 2016, 2015, and 2014, and the balance sheet data as of December 31, 2016 and 2015 from our audited financial
statements included elsewhere in this Annual Report. The statements of operations data for the years ended December 31, 2013 and 2012, and the balance sheet data as of December 31, 2014, 2013 and 2012 is derived from audited financial
statements not included in this Annual Report.
The summary of our financial data set forth below should be read together with our audited
financial statements and the related notes, as well as the section entitled Item 5. Operating and Financial Review and Prospects, included elsewhere in this Annual Report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
(in thousands, except share and per-share data)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
Statements of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses, net
|
|
$
|
12,447
|
|
|
$
|
11,198
|
|
|
$
|
10,974
|
|
|
$
|
13,508
|
|
|
$
|
10,572
|
|
General and administrative expenses
|
|
|
3,828
|
|
|
|
3,673
|
|
|
|
3,804
|
*
|
|
|
2,452
|
|
|
|
1,897
|
|
Operating loss
|
|
|
16,275
|
|
|
|
14,871
|
|
|
|
14,778
|
|
|
|
15,960
|
|
|
|
12,469
|
|
Financial income
|
|
|
(285
|
)
|
|
|
(100
|
)
|
|
|
(15
|
)
|
|
|
(240
|
)
|
|
|
(295
|
)
|
Financial expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from change in fair value of convertible loan
|
|
|
|
|
|
|
|
|
|
|
2,342
|
|
|
|
1,638
|
|
|
|
|
|
Other financial expenses
|
|
|
12
|
|
|
|
117
|
|
|
|
302
|
|
|
|
12
|
|
|
|
51
|
|
Financial (income) expenses, net
|
|
|
(273
|
)
|
|
|
17
|
|
|
|
2,629
|
|
|
|
1,410
|
|
|
|
(244
|
)
|
Other comprehensive loss (income)
|
|
|
5
|
|
|
|
(6
|
)
|
|
|
(10
|
)
|
|
|
(22
|
)
|
|
|
(7
|
)
|
Comprehensive Loss
|
|
$
|
16,007
|
|
|
$
|
14,882
|
|
|
|
17,397
|
|
|
$
|
17,348
|
|
|
$
|
12,218
|
|
Loss per ordinary share, basic and diluted
|
|
$
|
0.64
|
|
|
$
|
0.73
|
|
|
$
|
3.09
|
|
|
$
|
15.82
|
|
|
$
|
11.13
|
|
Weighted average ordinary shares outstanding, basic and diluted
|
|
|
24,970,585
|
|
|
|
20,309,596
|
|
|
|
5,627,324
|
|
|
|
1,098,248
|
|
|
|
1,098,248
|
|
*
|
Includes a
one-time
expense related to the IPO grant of options to our Chief Executive Officer of $2.2 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
(in thousands)
|
|
Statements of financial position data:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents and short-term bank deposits
|
|
$
|
45,254
|
|
|
$
|
37,146
|
|
|
$
|
36,783
|
|
|
$
|
10,871
|
|
|
$
|
13,959
|
|
Total assets
|
|
|
47,274
|
|
|
|
39,238
|
|
|
|
38,138
|
|
|
|
11,827
|
|
|
|
15,224
|
|
Total liabilities
|
|
|
4,874
|
|
|
|
4,231
|
|
|
|
3,036
|
|
|
|
35,410
|
|
|
|
2,552
|
|
Total equity (capital deficiency)
|
|
|
42,400
|
|
|
|
35,007
|
|
|
|
35,102
|
|
|
|
(23,583
|
)
|
|
|
12,672
|
|
3
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and
Use of Proceeds
Not applicable.
D.
Risk Factors
You should consider carefully the risks and uncertainties described below, together with all of the other information
in this Annual Report, including the financial statements and the related notes included elsewhere in this Annual Report. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are
unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks actually occurs, our business, financial condition, results of operations, and future
prospects could be materially and adversely affected.
Risks Related to Our Financial Condition and Capital Requirements
We have incurred significant losses since our inception and anticipate that we will continue to incur significant losses for the foreseeable future.
We are a clinical-stage biotechnology company, and we have not yet generated any revenue. We have incurred losses in each year since our inception in
2000, including net losses of $16.0 million, $14.9 million and $17.4 million for the years ended December 31, 2016, 2015 and 2014, respectively. As of December 31, 2016, we had an accumulated deficit of $158.1 million.
We have devoted most of our financial resources to research and development, including our clinical and
pre-clinical
development activities. To date, we have financed our operations primarily through the sale of equity securities and convertible debt and, to a lesser extent, through grants from governmental
agencies. The amount of our future net losses will depend, in part, on the rate of our future expenditures and our ability to obtain funding through equity or debt financings, strategic collaborations or additional grants. We have not completed
pivotal clinical trials for any product candidate and it will be a few years, if ever, before we have a product candidate ready for commercialization. Even if we obtain regulatory approval to market a product candidate, our future revenues will
depend upon the size of any markets in which our product candidates have received approval, and our ability to achieve sufficient market acceptance, reimbursement from third-party payors and adequate market share for our product candidates in those
markets.
We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. We anticipate that our expenses
will increase substantially if and as we:
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|
|
continue our research and
pre-clinical
and clinical development of our product candidates;
|
|
|
|
expand the scope of our current clinical trials for our product candidates;
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|
|
|
initiate additional
pre-clinical,
clinical or other studies for our product candidates;
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|
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|
seek regulatory and marketing approvals for any of our product candidates that successfully complete clinical trials;
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|
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|
further develop the manufacturing process for our product candidates;
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Establish our own, new, commercial scale manufacturing facility;
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change or add additional manufacturers or suppliers;
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4
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|
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establish a sales, marketing and distribution infrastructure to commercialize any products for which we may obtain marketing approval;
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|
seek to identify and validate additional product candidates;
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|
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|
acquire or
in-license
other product candidates and technologies;
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|
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|
make milestone or other payments under any
in-license
or other intellectual property related agreements, including our agreement with Tel HashomerMedical Research,
Infrastructure and Services Ltd. and our license from Crucell Holland B.V., or Crucell, and any other licensing arrangements we may enter into the future;
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maintain, protect and expand our intellectual property portfolio;
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attract and retain skilled personnel;
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|
|
create additional infrastructure to support our operations as a public company; and
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|
|
experience any delays or encounter issues with any of the above.
|
The net losses we incur may fluctuate
significantly from quarter to quarter and year to year, such that a
period-to-period
comparison of our results of operations may not be a good indication of our future
performance. In any particular quarter or quarters, our operating results could be below the expectations of securities analysts or investors, which could cause our share price to decline.
We have never generated any revenue from product sales and may never be profitable.
Our ability to generate revenue and achieve profitability depends on our ability, alone or with strategic collaboration partners, to successfully complete the
development of, obtain the regulatory approvals of, and commercialize our product candidates. We do not anticipate generating revenues from product sales for the foreseeable future, if ever. Our ability to generate future revenues from product sales
depends heavily on our success in:
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|
|
completing research and
pre-clinical
and clinical development of our product candidates;
|
|
|
|
seeking and obtaining regulatory and marketing approvals for product candidates for which we complete clinical trials;
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|
|
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developing a sustainable, scalable, reproducible, and transferable manufacturing process for our product candidates;
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|
|
|
establishing and maintaining supply and manufacturing relationships with third parties that can provide products and services adequate, in amount and quality, to support clinical development and the market demand for
our product candidates, if approved;
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|
|
|
And/or successfully establishing, validating and operating our own manufacturing facility to produce our products in amount and quality, to support clinical development and the market demand for our product candidates,
if approved, as well as gaining the health authorities, such as the FDA and EMEA, approval for our manufacturing facility and product.
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|
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|
launching and commercializing any product candidates for which we obtain regulatory and marketing approval, either by collaborating with a partner or, if launched independently, by establishing a sales, marketing and
distribution infrastructure;
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|
|
|
obtaining market acceptance of any product candidates that receive regulatory approval as viable treatment options;
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|
|
|
addressing any competing technological and market developments;
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|
|
|
implementing additional internal systems and infrastructure, as needed;
|
5
|
|
|
identifying and validating new product candidates;
|
|
|
|
negotiating favorable terms in any collaboration, licensing or other arrangements into which we may enter;
|
|
|
|
maintaining, protecting and expanding our portfolio of intellectual property rights, including patents, trade secrets and
know-how;
and
|
|
|
|
attracting, hiring and retaining qualified personnel.
|
Even if one or more of our product candidates is
approved for commercial sale, we anticipate incurring significant costs associated with commercializing any approved product candidate. Our expenses could increase beyond expectations if we are required by the FDA, the European Medicines Agency, or
the EMA, or other regulatory agencies, domestic or foreign, to perform clinical and other studies in addition to those that we currently anticipate. Even if we are able to generate revenues from the sale of any approved products, we may not become
profitable and may need to obtain additional funding to continue operations.
We will need to raise additional funding, which may not be available on
acceptable terms, or at all. Failure to obtain this necessary capital when needed may force us to delay, limit or terminate our product development efforts or other operations.
We are currently advancing
VB-111
for rGBM and ovarian cancer. We intend to advance this current clinical product
candidate through clinical development and other product candidates through
pre-clinical
and clinical development. Developing pharmaceutical products is expensive, and we expect our research and development
expenses to increase substantially in connection with our ongoing activities, particularly as we advance our product candidates in clinical trials. For instance, in order to complete our Phase 3 trial of
VB-111
in ovarian cancer, we will need to obtain additional funding.
As of December 31, 2016, our cash and
cash equivalents and short-term bank deposits were $45.3 million. As of December 31, 2016, we estimate that our existing cash, cash equivalents and short-term bank deposits will be sufficient to fund our operations into 2019. However, our
operating plan may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner than planned through public or private equity or debt financings, government or other third-party funding, marketing and
distribution arrangements and other collaborations, strategic alliances and licensing arrangements or a combination of these approaches. In any event, we will require additional capital to obtain regulatory approval for our product candidates, and
to commercialize any that receive regulatory approval. Raising funds in the current economic environment may present additional challenges. Even if we believe we have sufficient funds for our current or future operating plans, we may seek additional
capital if market conditions are favorable or if we have specific strategic considerations.
Any additional fundraising efforts may divert our management
from their
day-to-day
activities, which may compromise our ability to develop and commercialize our product candidates. In addition, we cannot guarantee that future
financing will be available in sufficient amounts or on terms acceptable to us, if at all. Moreover, the terms of any financing may adversely affect the holdings or the rights of our shareholders, and the issuance of additional securities, whether
equity or debt, by us, or the possibility of such issuance, may cause the market price of our ordinary shares to decline. The sale of additional equity or convertible securities would dilute all of our shareholders. The incurrence of indebtedness
would result in increased fixed payment obligations and we may be required to agree to certain restrictive covenants such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual
property rights and other operating restrictions that could adversely impact our ability to conduct our business. We could also be required to seek funds through arrangements with collaborative partners or otherwise at an earlier stage than
otherwise would be desirable, and we may be required to relinquish rights to some of our technologies or product candidates or otherwise agree to terms unfavorable to us.
6
If we are unable to obtain funding on a timely basis, we may be required to significantly curtail, delay or
discontinue one or more of our research or development programs or the commercialization of any product candidates, and we may be unable to expand our operations or otherwise capitalize on our business opportunities, as desired.
We have received and may continue to receive Israeli governmental grants to assist in the funding of our research and development activities. If we lose
our funding from these research and development grants, we may encounter difficulties in the funding of future research and development projects and implementing technological improvements, which would harm our operating results.
Through December 31, 2016 we had received an aggregate of $19.0 million in the form of grants from the Israeli Office of the Chief Scientist, or OCS,
which has later transformed to the National Authority for Technology and Innovation, or NATI. The requirements and restrictions for such grants are found in the Israel Encouragement of Research and Development in Industries, or the Research Law.
Under the Research Law, royalties of 3% to 3.5% on the revenues derived from sales of products or services developed in whole or in part using these NATI grants are payable to the Israeli government. We developed both of our platform technologies,
at least in part, with funds from these grants, and accordingly we would be obligated to pay these royalties on sales of any of our product candidates that achieve regulatory approval. The maximum aggregate royalties paid generally cannot exceed
100% of the grants made to us, plus annual interest equal to the
12-month
LIBOR applicable to dollar deposits, as published on the first business day of each calendar year. As of December 31, 2016, the
balance of the principal and interest in respect of our commitments for future payments to the NATI totaled approximately $23.3 million. As of December 31, 2016, we had not paid any royalties to the NATI. As part of funding our current and
planned product development activities, we submitted
follow-up
grant application, of which we expect that grants totaling between $1.5 million and $3.0 million will be approved for 2017 in connection
with our
VB-111
development. We do not intend to submit any further application in support of the development of
VB-201/Lecinoxoid
project.
These grants have funded some of our personnel, development activities with subcontractors and other research and development costs and expenses. However, if
these awards are not funded in their entirety or if new grants are not awarded in the future, due to, for example, NATI budget constraints or governmental policy decisions, our ability to fund future research and development and implement
technological improvements would be impaired, which would negatively impact our ability to develop our product candidates.
The Israeli government
grants we have received for research and development expenditures restrict our ability to manufacture products and transfer technologies outside of Israel and require us to satisfy specified conditions. If we fail to satisfy these conditions, we may
be required to refund grants previously received together with interest and penalties.
Our research and development efforts have been financed, in
part, through the grants that we have received from the NATI. We, therefore, must comply with the requirements of the Research Law.
Under the Research
Law, we are required to manufacture the major portion of each of our products developed using these grants in the State of Israel or otherwise ask for special approvals. We may not receive the required approvals for any proposed transfer of
manufacturing activities. Even if we do receive approval to manufacture products developed with government grants outside of Israel, the royalty rate may be increased and we may be required to pay up to 300% of the grant amounts plus interest,
depending on the manufacturing volume that is performed outside of Israel. This restriction may impair our ability to outsource manufacturing or engage in our own manufacturing operations for those products or technologies. See Item 5.
Operating and Financial Review and ProspectsFinancial OverviewResearch and Development Expenses for additional information.
Additionally, under the Research Law, we are prohibited from transferring, including by way of license, the NATI-financed technologies and related
intellectual property rights and
know-how
outside of the State of Israel, except under limited circumstances and only with the approval of the NATI Research Committee. We may not
7
receive the required approvals for any proposed transfer and, even if received, we may be required to pay the NATI a portion of the consideration that we receive upon any sale of such technology
to a
non-Israeli
entity up to 600% of the grant amounts plus interest. The scope of the support received, the royalties that we have already paid to the NATI, the amount of time that has elapsed between the
date on which the
know-how
or the related intellectual property rights were transferred and the date on which the NATI grants were received and the sale price and the form of transaction will be taken into
account in order to calculate the amount of the payment to the NATI. Approval of the transfer of technology to residents of the State of Israel is required, and may be granted in specific circumstances only if the recipient abides by the provisions
of applicable laws, including the restrictions on the transfer of
know-how
and the obligation to pay royalties. No assurance can be made that approval to any such transfer, if requested, will be granted.
These restrictions may impair our ability to sell our technology assets or to perform or outsource manufacturing outside of Israel, engage in change of
control transactions or otherwise transfer our
know-how
outside of Israel and may require us to obtain the approval of the NATI for certain actions and transactions and pay additional royalties and other
amounts to the NATI. In addition, any change of control and any change of ownership of our ordinary shares that would make a
non-Israeli
citizen or resident an interested party, as defined in the
Research Law, requires prior written notice to the NATI, and our failure to comply with this requirement could result in criminal liability.
These
restrictions will continue to apply even after we have repaid the full amount of royalties on the grants. For the years ended December 31, 2016, 2015 and, 2014, we recorded grants totaling $1.7 million, $1.9 million, and
$1.6 million from the NATI, respectively. The grants represented 12%, 14%, and 12.7% respectively, of our gross research and development expenditures for the years ended December 31, 2016, 2015 and, 2014. If we fail to satisfy the
conditions of the Research Law, we may be required to refund certain grants previously received together with interest and penalties, and may become subject to criminal charges.
Risks Related to the Discovery and Development of Our Product Candidates
We currently depend heavily on the future success of our lead product candidate,
VB-111.
Any failure to successfully
develop, obtain regulatory approval for and commercialize
VB-111
for rGBM, independently or in cooperation with a third party collaborator, or the experience of significant delays in doing so, would compromise
our ability to generate revenue and become profitable.
We have invested a significant portion of our efforts and financial resources in the
development of
VB-111
for rGBM, for which we are conducting our Phase 3 pivotal trial, and
VB-201
for psoriasis and ulcerative colitis for which we have completed Phase
2 clinical trials in which it did not meet its primary endpoints. Our ability to generate product revenue from our product candidate depends heavily on the successful development and commercialization of our products, which, in turn, depends on
several factors, including the following:
|
|
|
our ability to continue and support the lecinoxoids platform technology in light of the negative results in psoriasis and ulcerative colitis, or otherwise
out-license
or
collaborate with third party partner to further develop the platform;
|
|
|
|
our ability to continue and support the VTS platform technology and its lead candidate
VB-111;
|
|
|
|
successfully completing our ongoing and future trials of
VB-111
for rGBM;
|
|
|
|
our ability to raise additional funding sufficient to conduct other future clinical trials;
|
|
|
|
demonstrating that
VB-111
for rGBM is safe and effective at a sufficient level of statistical or clinical significance and otherwise obtaining marketing approvals from regulatory
authorities;
|
|
|
|
establishing successful manufacturing arrangements with third-party manufacturers that are compliant with current good manufacturing practices, or cGMP, and which will ensure the development of a large scale
manufacturing process and adequate facilities or being able to conduct such manufacturing ourselves;
|
8
|
|
|
establishing a facility for the manufacture of commercial quantities of
VB-111,
if approved;
|
|
|
|
establishing successful sales and marketing arrangements for
VB-111,
if approved;
|
|
|
|
maintaining an acceptable safety and efficacy profile for
VB-111;
|
|
|
|
the availability of coverage and reimbursement to patients from healthcare payors for
VB-
111, if approved; and
|
|
|
|
other risks described in these Risk Factors.
|
Our product candidates are based on novel
technologies, which makes it difficult to predict the time and cost of product candidate development and potential regulatory approval.
We have
concentrated our product research and development efforts on our two distinct platform technologies, and our future success depends on the successful development of these technologies. We could experience development problems in the future related
to our technologies, which could cause significant delays or unanticipated costs, and we may not be able to solve such development problems. We may also experience delays in developing a sustainable, reproducible and scalable manufacturing process
or transferring that process to commercial partners, if we decide to do so, which may prevent us from completing our clinical trials or commercializing our products on a timely or profitable basis, if at all.
In addition, the clinical trial requirements of the FDA, the EMA and other regulatory agencies and the criteria these regulators use to determine the safety
and efficacy of a product candidate vary substantially according to the type, complexity, novelty and intended use and market of the potential products. The regulatory approval process for novel product candidates such as ours can be more expensive
and take longer than for other, better known or extensively studied pharmaceutical or other product candidates. Approvals by the FDA may not be indicative of what the EMA or other regulatory agencies may require for approval, and vice versa.
Regulatory requirements governing pharmaceutical products have changed frequently and may continue to change in the future. Also, before a clinical trial can
begin at an institution funded by the U.S. National Institutes of Health, or the NIH, that institutions institutional review board, or IRB, and its Institutional Biosafety Committee will have to review the proposed clinical trial to assess the
safety of the trial. In addition, adverse developments in clinical trials of pharmaceutical products conducted by others may cause the FDA or other regulatory bodies to change the requirements for approval of any of our product candidates.
These regulatory agencies and review committees and the new requirements and guidelines they promulgate may lengthen the regulatory review process, require us
to perform additional studies, increase our development costs, lead to changes in regulatory positions and interpretations, delay or prevent approval and commercialization of these treatment candidates or lead to significant post-approval
limitations or restrictions. As we advance our product candidates, we will be required to consult with these regulatory groups, and comply with applicable requirements and guidelines. If we fail to do so, we may be required to delay or discontinue
development of our product candidates. Delay or failure to obtain, or unexpected costs in obtaining, the regulatory approval necessary to bring a potential product candidate to market could impair our ability to generate product revenue and to
become profitable.
We may find it difficult to enroll patients in our clinical trials, and patients could discontinue their participation in our
clinical trials, which could delay or prevent clinical trials of our product candidates.
Identifying and qualifying patients to participate in
clinical trials of our product candidates is critical to our success. The timing of our clinical trials depends on the speed at which we can recruit patients to participate in testing our product candidates. We have experienced delays in some of our
clinical trials, and we may experience similar delays in the future. If patients are unwilling to participate in our clinical trials because of negative publicity from adverse events in the biotechnology or pharmaceutical industries or for other
reasons, including
9
competitive clinical trials for similar patient populations, the timeline for recruiting patients, conducting trials and obtaining regulatory approval of potential products may be delayed. These
delays could result in increased costs, delays in advancing our product development, delays in testing the effectiveness of our technology or termination of the clinical trials altogether.
We may not be able to identify, recruit and enroll a sufficient number of patients, or those with required or desired characteristics to achieve diversity in
a trial, to complete our clinical trials in a timely manner. Patient enrollment is affected by factors including:
|
|
|
severity of the disease under investigation;
|
|
|
|
design of the trial protocol;
|
|
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size of the patient population;
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eligibility criteria for the trial in question;
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perceived risks and benefits of the product candidate under study;
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proximity and availability of clinical trial sites for prospective patients;
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availability of competing therapies and clinical trials;
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efforts to facilitate timely enrollment in clinical trials;
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patient referral practices of physicians; and
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ability to monitor patients adequately during and after treatment.
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In particular,
VB-111
for ovarian cancer is intended for a rare disorder with limited patient pools from which to draw for clinical trials. The eligibility criteria of our clinical trials will further limit the pool of available
trial participants. Additionally, the process of finding and diagnosing patients may prove costly.
We plan to seek initial marketing approval in Europe
in addition to the United States. We may not be able to initiate or continue clinical trials if we cannot enroll a sufficient number of eligible patients to participate in the clinical trials required by the EMA or other foreign regulatory agencies.
Our ability to successfully initiate, enroll and complete a clinical trial in any foreign country is subject to numerous risks unique to conducting business in foreign countries, including:
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difficulty in establishing or managing relationships with contract research organizations, or CROs, and physicians;
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different standards for the conduct of clinical trials;
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our inability to locate qualified local consultants, physicians and partners; and
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the potential burden of complying with a variety of foreign laws, medical standards and regulatory requirements, including the regulation of pharmaceutical and biotechnology products and treatment.
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If we have difficulty enrolling a sufficient number of patients to conduct our clinical trials as planned, we may need to delay, limit or terminate ongoing or
planned clinical trials.
In addition, patients enrolled in our clinical trials may discontinue their participation at any time during the trial as a
result of a number of factors, including withdrawing their consent or experiencing adverse clinical events, which may or may not be judged related to our product candidates under evaluation. The discontinuation of patients in any one of our trials
may cause us to delay or abandon our clinical trial, or cause the results from that trial not to be positive or sufficient to support a filing for regulatory approval of the applicable product candidate.
10
We may encounter substantial delays in our clinical trials or we may fail to demonstrate safety and efficacy
to the satisfaction of applicable regulatory authorities.
We are currently in Phase 3 clinical trial for
VB-111
for rGBM and plan a Phase 3 clinical trials for
VB-111
for ovarian cancer. Before obtaining marketing approval from regulatory authorities for the sale of our
product candidates, we must conduct extensive clinical trials to demonstrate the safety and efficacy of the product candidates in humans. Clinical testing is expensive, time-consuming and uncertain as to outcome. We cannot guarantee that any
clinical trials will be conducted as planned or completed on schedule, if at all. A failure of one or more clinical trials can occur at any stage of testing. Events that may prevent successful or timely completion of clinical development include:
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delays in reaching a consensus with regulatory agencies on trial design;
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delays in reaching agreement on acceptable terms with prospective CROs and clinical trial sites;
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delays in obtaining required IRB approval at each clinical trial site;
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delays in recruiting suitable patients to participate in our clinical trials including in particular for those trials for rare diseases such as ovarian cancer;
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imposition of a clinical hold by regulatory agencies, including after an inspection of our clinical trial operations or trial sites;
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failure by our CROs, other third parties or us to adhere to clinical trial requirements;
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failure to perform in accordance with the FDAs good clinical practices, or GCP, or applicable regulatory requirements in other countries;
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delays in the testing, validation, manufacturing and delivery of our product candidates to the clinical sites;
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delays in having patients complete participation in a trial or return for post-treatment
follow-up;
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clinical trial sites or patients dropping out of a trial;
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occurrence of serious adverse events associated with the product candidate that are viewed to outweigh its potential benefits; or
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changes in regulatory requirements and guidance that require amending or submitting new clinical trial protocols.
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Any inability to successfully complete
pre-clinical
and clinical development could result in additional costs to us or
impair our ability to generate revenue from product sales. In addition, if we make manufacturing or formulation changes to our product candidates, we may need to conduct additional studies to bridge our modified product candidates to earlier
versions. Clinical trial delays could also shorten any periods during which we may have the exclusive right to commercialize our product candidates or allow our competitors to bring products to market before we do, which could impair our ability to
successfully commercialize our product candidates.
If the results of our clinical trials are inconclusive or if there are safety concerns or adverse
events associated with our product candidates, we may:
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fail to obtain, or be delayed in obtaining, marketing approval for our product candidates;
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obtain approval for indications or patient populations that are not as broad as intended or desired;
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obtain approval with labeling that includes significant use or distribution restrictions or safety warnings;
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need to change the way the product is administered;
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be required to perform additional clinical trials to support approval or be subject to additional post-marketing testing requirements;
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have regulatory authorities withdraw their approval of the product or impose restrictions on its distribution in the form of a risk evaluation and mitigation strategy, or REMS, or modified REMS;
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be subject to the addition of labeling statements, such as warnings or contraindications;
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experience damage to our reputation.
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Any of these events could prevent us from achieving or maintaining
market acceptance of our product candidates and impair our ability to commercialize our product candidates.
Side effects may occur following treatment
with our product candidates, which could make it more difficult for our product candidates to receive regulatory approval.
Treatment with our product
candidates may cause side effects or adverse events. In addition, since our product candidates are in some cases administered in combination with other therapies, patients or clinical trial participants may experience side effects or other adverse
events that are unrelated to our product candidate, but may still impact the success of our clinical trials. Additionally, our product candidates could potentially cause other adverse events that have not yet been predicted. The inclusion of
critically ill patients in our clinical trials may result in deaths or other adverse medical events due to other therapies or medications that such patients may be using or the severity of the medical condition treated. The experience of side
effects and adverse events in our clinical trials could make it more difficult to achieve regulatory approval of our product candidates or, if approved, could negatively impact the market acceptance of such products.
Success in early clinical trials may not be indicative of results obtained in later trials.
There is a high failure rate for drugs and biologics proceeding through clinical trials. A number of companies in the pharmaceutical and biotechnology
industries have suffered significant setbacks in later stage clinical trials even after achieving promising results in earlier stage clinical trials. Data obtained from
pre-clinical
and clinical activities are
subject to varying interpretations, which may delay, limit or prevent regulatory approval. In addition, regulatory delays or rejections may be encountered as a result of many factors, including changes in regulatory policy during the period of
product development.
Although we have reached agreement with the FDA on the SPA relating to our pivotal Phase 3 clinical trial of
VB-111
for rGBM, the agencys concurrence does not guarantee any particular outcome with respect to regulatory review of the pivotal trial or with respect to regulatory approval of
VB-111.
The FDA normally requires two pivotal clinical trials to approve a biologic or drug product. The FDA
typically does not consider a single clinical trial to be adequate to serve as a pivotal trial unless it is, among other things, well-controlled and demonstrates a clinically meaningful effect on mortality, irreversible morbidity, or prevention of a
disease with potentially serious outcome, and a confirmatory trial would be practically or ethically impossible. Although we have reached agreement with the FDA on an SPA under which we agreed with the FDA that, if successful, our pivotal Phase 3
clinical trial will be sufficient for approval, and even if we believe that the data from the pivotal Phase 3 clinical trial are supportive, an SPA is not a guarantee of approval, and we cannot be certain that the design of, or data collected from,
the pivotal Phase 3 clinical trial will be adequate to demonstrate the safety, purity and potency of
VB-111
for the potential treatment of rGBM, or will otherwise be sufficient to support FDA or any foreign
regulatory approvals. Indeed, while the FDA has accepted our planned safety database, the agency has stated that the adequacy of such database will depend on the magnitude of the clinical benefit and the adverse event profile.
Further, an SPA is not binding on the FDA if public health concerns unrecognized at the time the SPA is entered into become evident, other new scientific
concerns regarding product safety or efficacy arise, or if we fail to
12
comply with the agreed upon trial protocol. In addition, an SPA may be changed on written agreement of both parties, and the FDA retains significant latitude and discretion in interpreting the
terms of an SPA and the data and results of clinical trials conducted under an SPA. Therefore, significant uncertainty remains regarding the clinical development of, and regulatory approval process for,
VB-111
for rGBM, and it is possible that we might never receive any regulatory approvals for
VB-111.
The results from
our clinical trials may not be sufficiently robust to support the submission for marketing approval for our product candidates. Before we submit our product candidates for marketing approval, the FDA and the EMA may require us to conduct additional
clinical trials, or evaluate subjects for an additional
follow-up
period.
It is possible that, even if we
achieve favorable results in our clinical trials, the FDA may require us to conduct additional clinical trials, possibly involving a larger sample size or a different clinical trial design, particularly if the FDA does not find the results from our
completed clinical trials to be sufficiently persuasive to support a Biologics License Application, or BLA, or a New Drug Application, or NDA. For example, because the dose we used in our Phase 2 trial was limited by our production capacity, the
dose of
VB-111
that we intend to use in our Phase 3 pivotal trial may not be the maximum efficacious dose. If the FDA requires data on higher doses of
VB-111,
this will
likely delay development or prevent approval of
VB-111
for rGBM. The FDA may also require that we conduct a longer
follow-up
period of subjects treated with our product
candidates prior to accepting our BLA or NDA.
It is possible that the FDA or the EMA may not consider the results of our clinical trials to be sufficient
for approval of our product candidates for their target indications. If the FDA or the EMA requires additional studies for any reason, we would incur increased costs and delays in the marketing approval process, which may require us to expend more
resources than we have available. In addition, it is possible that the FDA and the EMA may have divergent opinions on the elements necessary for a successful BLA or NDA and Marketing Authorization Application, which is the equivalent of a BLA,
respectively, which may cause us to alter our development, regulatory or commercialization strategies.
Even if we complete the necessary
pre-clinical
studies and clinical trials, we cannot predict when or if we will obtain regulatory approval to commercialize a product candidate or the approval may be for a more narrow indication than we expect.
We cannot commercialize a product until the appropriate regulatory authorities have reviewed and approved the product candidate. Even if our product
candidates demonstrate safety and efficacy in clinical trials, the regulatory agencies may not complete their review processes in a timely manner, or we may not be able to obtain regulatory approval. Additional delays may result if an FDA Advisory
Committee or other regulatory authority recommends
non-approval
or restrictions on approval. In addition, we may experience delays or rejections based upon additional government regulation from future
legislation or administrative action, or changes in regulatory agency policy during the period of product development, clinical trials and the review process. Regulatory agencies also may approve a treatment candidate for fewer or more limited
indications than requested or may grant approval subject to the performance of post-marketing studies. In addition, regulatory agencies may not approve the labeling claims that are necessary or desirable for the successful commercialization of our
treatment candidates.
A fast track designation by the FDA may not actually lead to a faster development or regulatory review or approval process.
If a drug is intended for the treatment of a serious or life-threatening disease or condition and the drug demonstrates the potential to address unmet
medical needs for this disease or condition, the drug sponsor may apply for FDA fast track designation. If fast track designation is obtained, the FDA may initiate review of sections of a new drug application, or NDA, before the application is
complete. This rolling review is available if the applicant provides, and the FDA approves, a schedule for submission of the individual sections of the application.
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We have received fast track designation from the FDA for
VB-111
for
prolongation of survival in patients with glioblastoma that has recurred following treatment with temozolomide, a chemotherapeutic agent commonly used to treat newly diagnosed glioblastoma, and radiation. We may seek fast track designation for other
product candidates and other indications. Even though we have received fast track designation, we may not experience a faster development process, review or approval compared to conventional FDA procedures. The FDA may withdraw fast track
designation if it believes that the designation is no longer supported by data from our clinical development program. Our fast track designation does not guarantee that we will qualify for or be able to take advantage of the expedited review
procedures or that we will ultimately obtain regulatory approval of
VB-111.
Even though we have obtained
orphan drug designation for
VB-111
for treatment of malignant glioma in the United States and glioma in Europe, we may not be able to obtain orphan drug exclusivity for this drug or for any of our other
product candidates.
Regulatory authorities in some jurisdictions, including the United States and Europe, may designate drugs for relatively small
patient populations as orphan drugs. Under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is a drug intended to treat a rare disease or condition, which is generally defined as a patient population of fewer than 200,000
individuals annually in the United States. For
VB-111,
we have obtained orphan drug designation from the FDA for the treatment of malignant glioma and the EMA for the treatment of glioma, and we may seek
orphan drug designation for other drug candidates.
Generally, if a product with an orphan drug designation subsequently receives the first marketing
approval for the indication for which it has such designation, the product is entitled to a period of marketing exclusivity, which precludes the EMA or the FDA from approving another marketing application for the same drug for the same use or
indication for that time period. The applicable period is seven years in the United States and ten years in Europe. The European exclusivity period can be reduced to six years if a drug no longer meets the criteria for orphan drug designation or if
the drug is sufficiently profitable so that market exclusivity is no longer justified. Orphan drug exclusivity may be lost if the FDA or EMA determines that the request for designation was materially defective or if the manufacturer is unable to
assure sufficient quantity of the drug to meet the needs of patients with the rare disease or condition.
Even if we obtain orphan drug exclusivity for a
product, that exclusivity may not effectively protect the product from competition because different drugs can be approved for the same condition. Even after an orphan drug is approved, the FDA can subsequently approve the same drug for the same
condition if the FDA concludes that the later drug is clinically superior in that it is shown to be safer, more effective or makes a major contribution to patient care.
Even if we obtain regulatory approval for a product candidate, our products will remain subject to regulatory scrutiny.
Even if we obtain regulatory approval in a jurisdiction, the regulatory authority may still impose significant restrictions on the indicated uses or marketing
of our product candidates, or impose ongoing requirements for potentially costly post-approval studies or post-market surveillance. For example, the holder of an approved BLA is obligated to monitor and report adverse events and any failure of a
product to meet the specifications in the BLA. The holder of an approved BLA must also submit new or supplemental applications and obtain FDA approval for certain changes to the approved product, product labeling or manufacturing process.
Advertising and promotional materials must comply with FDA rules and are subject to FDA review, in addition to other potentially applicable federal and state laws.
In addition, product manufacturers and their facilities are subject to payment of user fees and continual review and periodic inspections by the FDA and other
regulatory authorities for compliance with cGMP, and adherence to commitments made in the BLA or NDA as the case may be. If we or a regulatory agency discover previously unknown problems with a product such as adverse events of unanticipated
severity or frequency, or problems
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with the facility where the product is manufactured, a regulatory agency may impose restrictions relative to that product or the manufacturing facility, including requiring recall or withdrawal
of the product from the market or suspension of manufacturing.
If we fail to comply with applicable regulatory requirements following approval of any of
our product candidates, a regulatory agency may:
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issue a warning letter asserting that we are in violation of the law;
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seek an injunction or impose civil or criminal penalties or monetary fines;
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suspend or withdraw regulatory approval;
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suspend any ongoing clinical trials;
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refuse to approve a pending BLA or NDA or supplements to a BLA or NDA submitted by us for other indications or new drug products;
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refuse to allow us to enter into supply contracts, including government contracts.
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Any government
investigation of alleged violations of law could require us to expend significant time and resources in response and could generate negative publicity. The occurrence of any event or penalty described above may inhibit our ability to commercialize
our product candidates and generate revenues.
We have only limited experience in regulatory affairs and intend to rely on consultants and other third
parties for regulatory matters, which may affect our ability or the time we require to obtain necessary regulatory approvals.
We have limited
experience in filing and prosecuting the applications necessary to gain regulatory approvals for drug and biologics candidates. Moreover, the product candidates that are likely to result from our development programs are based on new technologies
that have not been extensively tested in humans. The regulatory requirements governing these types of product candidates may be less well defined or more rigorous than for conventional products. As a result, we may experience a longer regulatory
process in connection with obtaining regulatory approvals of any products that we develop. We intend to rely on independent consultants for purposes of our regulatory compliance and product development and approvals in the United States and
elsewhere. Any failure by our consultants to properly advise us regarding, or properly perform tasks related to, regulatory compliance requirements could compromise our ability to develop and seek regulatory approval of our product candidates.
In addition to the level of commercial success of our product candidates, if approved, our future prospects are also dependent on our ability to
successfully develop a pipeline of additional product candidates, and we may not be successful in our efforts in using our platform technologies to identify or discover additional product candidates.
The success of our business depends primarily upon our ability to identify, develop and commercialize products based on our two platform technologies. Our
research programs may fail to identify other potential product candidates for clinical development for a number of reasons. Our research methodology may be unsuccessful in identifying potential product candidates or our potential product candidates
may be shown to have harmful side effects or may have other characteristics that may make the products unmarketable or unlikely to receive marketing approval.
If any of these events occur, we may be forced to abandon our development efforts for a program or programs. Research programs to identify new product
candidates require substantial technical, financial and human resources. We may focus our efforts and resources on potential programs or product candidates that ultimately prove to be unsuccessful.
15
Risks Related to Our Reliance on Third Parties
We expect to rely on third parties to conduct some or all aspects of our product manufacturing, protocol development, research and
pre-clinical
and clinical testing, and these third parties may not perform satisfactorily.
We do not expect to
independently conduct all aspects of our product manufacturing, protocol development, research and
pre-clinical
and clinical testing. We currently rely, and expect to continue to rely, on third parties with
respect to these items. In addition, we may pursue further clinical development of
VB-111
for thyroid cancer or other indications with a strategic partner.
Any of these third parties may terminate their engagements with us at any time. If we need to enter into alternative arrangements, it could delay our product
development activities. Our reliance on these third parties for research and development activities will reduce our control over these activities but will not relieve us of our responsibility to ensure compliance with all required regulations and
study protocols. For example, for product candidates that we develop and commercialize on our own, we will remain responsible for ensuring that each of our Investigational New Drug, or IND, enabling studies and clinical trials are conducted in
accordance with the study plan and protocols.
If these third parties do not successfully carry out their contractual duties, meet expected deadlines or
conduct our studies in accordance with regulatory requirements or our stated study plans and protocols, we will not be able to complete, or may be delayed in completing, the
pre-clinical
studies and clinical
trials required to support future IND submissions and approval of our product candidates.
Reliance on third-party manufacturers entails risks to which we
would not be subject if we manufactured the product candidates ourselves, including:
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the inability to negotiate manufacturing agreements with third parties under commercially reasonable terms;
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reduced control as a result of using third-party manufacturers for all aspects of manufacturing activities;
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termination or nonrenewal of manufacturing agreements with third parties in a manner or at a time that is costly or damaging to us; and
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disruptions to the operations of our third-party manufacturers or suppliers caused by conditions unrelated to our business or operations, including the bankruptcy of the manufacturer or supplier.
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Any of these events could lead to clinical trial delays or failure to obtain regulatory approval, or impact our ability to successfully commercialize future
products. Some of these events could be the basis for FDA action, including injunction, recall, seizure or total or partial suspension of production.
We and our contract manufacturers are subject to significant regulation with respect to manufacturing our product candidates. The manufacturing facilities
on which we rely may not continue to meet regulatory requirements and have limited capacity.
We currently have relationships with a limited number of
suppliers for the manufacturing of our product candidates. Each supplier may require licenses to manufacture components of our product candidates or to utilize certain processes for the manufacture of our product candidates. If such components or
licenses are not owned by the supplier or in the public domain, we may be unable to transfer or sublicense the intellectual property rights we may have with respect to such activities.
All entities involved in the preparation of therapeutics for clinical trials or commercial sale, including our existing contract manufacturers for our product
candidates, are subject to extensive regulation. Components of a
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finished therapeutic product approved for commercial sale or used in late-stage clinical trials must be manufactured in accordance with cGMP. These regulations govern manufacturing processes and
procedures (including record keeping) and the implementation and operation of systems to control and assure the quality of investigational products and products approved for sale. Poor control of production processes can lead to the introduction of
contaminants, or to inadvertent changes in the properties or stability of our product candidates that may not be detectable in final product testing. We or our contract manufacturers must supply all necessary documentation in support of a BLA or
NDA, as applicable, on a timely basis and must adhere to the FDAs good laboratory practices, or GLP, and cGMP regulations enforced by the FDA through its facilities inspection program. Our contract manufacturer for
VB-111
has not produced a commercially approved product based on viral vectors and therefore has not yet obtained the requisite FDA approvals to do so. Our facilities and controls and the facilities and controls of
some or all of our third-party contractors must pass a
pre-approval
inspection for compliance with the applicable regulations as a condition of regulatory approval of our product candidates or any of our other
potential products. In addition, the regulatory authorities may, at any time, audit or inspect a manufacturing facility involved with the preparation of our product candidates or our other potential products or the associated controls for compliance
with the regulations applicable to the activities being conducted. If these facilities do not pass a
pre-approval
plant inspection, FDA approval of the products will not be granted.
The regulatory authorities also may, at any time following approval of a product for sale, audit our manufacturing facilities or those of our third-party
contractors. If any such inspection or audit identifies a failure to comply with applicable regulations or our product specifications or if a violation of applicable regulations, including a failure to comply with the product specifications, occurs
independent of such an inspection or audit, we or the relevant regulatory authority may require remedial measures that may be costly and/or time-consuming for us or a third party to implement and that may include the temporary or permanent
suspension of a clinical trial or commercial sales or the temporary or permanent closure of a facility.
If we or any of our third-party manufacturers
fail to maintain regulatory compliance, the FDA can impose regulatory sanctions including, among other things, refusal to approve a pending application for a new drug product or biologic product, or revocation of a
pre-existing
approval.
Additionally, if supply from one approved manufacturer is interrupted, there could be a
significant disruption in commercial supply. An alternative manufacturer would need to be qualified through a BLA or NDA supplement which could result in further delay. The regulatory agencies may also require additional studies if a new
manufacturer is relied upon for commercial production. Switching manufacturers may involve substantial costs and is likely to result in a delay in our desired clinical and commercial timelines.
These factors could cause the delay of clinical trials, regulatory submissions, required approvals or commercialization of our product candidates, cause us to
incur higher costs and prevent us from commercializing our products successfully. Furthermore, if our suppliers fail to meet contractual requirements, and we are unable to secure one or more replacement suppliers capable of production at a
substantially equivalent cost, our clinical trials may be delayed or we could lose potential revenue.
We expect to rely on third parties to conduct,
supervise and monitor our clinical trials, and if these third parties perform in an unsatisfactory manner, it may harm our business.
We expect to rely
on CROs and clinical trial sites to ensure our clinical trials are conducted properly and on time. While we will have agreements governing their activities, we will have limited influence over their actual performance. We will control only some
aspects of our CROs activities. Nevertheless, we will be responsible for ensuring that each of our clinical trials is conducted in accordance with the applicable protocol, legal, regulatory and scientific requirements and standards, and our
reliance on the CROs does not relieve us of our regulatory responsibilities.
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We and our CROs are required to comply with the FDAs GCPs for conducting, recording and reporting the
results of
IND-enabling
studies and clinical trials to assure that the data and reported results are credible and accurate and that the rights, integrity and confidentiality of clinical trial participants are
protected. The FDA enforces these GCPs through periodic inspections of study sponsors, principal investigators and clinical trial sites. If we or our CROs fail to comply with applicable GCPs, the clinical data generated in our future clinical trials
may be deemed unreliable and the FDA may require us to perform additional clinical trials before approving any marketing applications. Upon inspection, the FDA may determine that our clinical trials did not comply with GCPs. In addition, our future
clinical trials will require a sufficient number of test subjects to evaluate the safety and effectiveness of our product candidates. Recruitment may be challenging in the event of rare diseases and may require the performance of trials in a
significant number of sites which may be harder to monitor. Accordingly, if our CROs fail to comply with these regulations or fail to recruit a sufficient number of patients, we may be required to repeat such clinical trials, which would delay the
regulatory approval process.
Our CROs are not our employees, and we are therefore unable to directly monitor whether or not they devote sufficient time
and resources to our clinical and nonclinical programs. These CROs may also have relationships with other commercial entities, including parties developing potentially competitive products, for whom they may also be conducting clinical trials or
other drug development activities that could harm our competitive position. If our CROs do not successfully carry out their contractual duties or obligations, fail to meet expected deadlines, or if the quality or accuracy of the clinical data they
obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements, or for any other reason, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for,
or successfully commercialize our product candidates. As a result, the commercial prospects for our product candidates would be harmed, our costs could increase, and our ability to generate revenues could be delayed.
We also expect to rely on other third parties to store and distribute our product candidates for any clinical trials that we may conduct. Any performance
failure on the part of our distributors could delay clinical development or marketing approval of our product candidates or commercialization of our products, if approved, producing additional losses and depriving us of potential product revenue.
Our reliance on third parties requires us to share our trade secrets, which increases the possibility that a competitor will discover them or that our
trade secrets will be misappropriated or disclosed.
Because we rely on third parties to manufacture our product candidates, and because we collaborate
with various organizations and academic institutions on the advancement of our technology, we must, at times, share trade secrets with them. We seek to protect our proprietary technology in part by entering into confidentiality agreements and, if
applicable, material transfer agreements, collaborative research agreements, consulting agreements or other similar agreements with our collaborators, advisors, employees and consultants prior to beginning research or disclosing proprietary
information. These agreements typically limit the rights of the third parties to use or disclose our confidential information, such as trade secrets. Despite these contractual provisions, the need to share trade secrets and other confidential
information increases the risk that such trade secrets become known by potential competitors, are inadvertently incorporated into the technology of others, or are disclosed or used in violation of these agreements. Given that our proprietary
position is based, in part, on our
know-how
and trade secrets, discovery by a third party of our trade secrets or other unauthorized use or disclosure would impair our intellectual property rights and
protections in our product candidates.
In addition, these agreements typically restrict the ability of our collaborators, advisors, employees and
consultants to publish data potentially relating to our trade secrets. Our academic collaborators typically have rights to publish data, provided that we are notified in advance and may delay publication for a specified time in order to secure our
intellectual property rights arising from the collaboration. In other cases, publication rights are controlled exclusively by us, although in some cases we may share these rights with other parties. Despite our efforts to protect our trade secrets,
our competitors may discover our trade secrets, either through breach of these agreements, independent development or publication of information including our trade secrets in cases where we do not have proprietary or otherwise protected rights at
the time of publication.
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Our development of
VB-111
for the treatment of rGBM relies upon the
continued availability of bevacizumab for the treatment of rGBM, and any interruption in availability or supply of bevacizumab, or negative results concerning the use of bevacizumab in rGBM or otherwise, may cause delays in our ongoing Phase 3
clinical trial or, if approved, adversely affect commercial utilization of
VB-111.
Our ongoing Phase 3 trial
of
VB-111
for the treatment of rGBM is designed for use of
VB-111
in combination with bevacizumab. Any shortage in supply of bevacizumab or any change in its
availability for use in patients with rGBM would delay enrollment or completion of our Phase 3 trial, or if approved, adversely affect commercial utilization of
VB-111.
We have no control over the availability
of bevacizumab, which is a sole source product and which may encounter manufacturing or other problems that adversely affect its availability. While bevacizumab is the standard of care treatment for rGBM in the United States, cost and other factors
have adversely impacted its availability elsewhere, and may similarly adversely impact the availability of
VB-111
to be investigated or used in combination with bevacizumab. Clinical trials of bevacizumab in
rGBM have achieved mixed results, and any negative future clinical results for bevacizumab in rGBM may undermine the reliability of our current Phase 3 trial design and require that we revise our development program and conduct additional trials, or
prevent us from obtaining approval for
VB-111
for use in combination with bevacizumab.
Risks Related to
Commercialization of Our Product Candidates
We intend to partially rely on third-party manufacturers to produce commercial quantities of any of our
product candidates that receives regulatory approval, but we have not entered into binding agreements with any such manufacturers to support commercialization. Additionally, these manufacturers do not have experience producing our product candidates
at commercial levels and may not achieve the necessary regulatory approvals or produce our product candidates at the quality, quantities, locations and timing needed to support commercialization.
We have not yet secured manufacturing capabilities for commercial quantities of our product candidates or established facilities in the desired locations to
support commercialization of our product candidates. Although we intend to partially rely on third-party manufacturers for commercialization, we have only entered into agreements with such manufacturers to assist in the scaling up of the
manufacturing process of
VB-111.
We may be unable to negotiate binding agreements with the manufacturers to support our commercialization activities on commercially reasonable terms, which agreements will
further be required to comply with the restrictions imposed under the Research Law.
We may encounter technical or scientific issues related to
manufacturing or development that we may be unable to resolve in a timely manner or with available funds. Although we currently have process development and small-scale manufacturing capabilities for
VB-111
internally, and although we have leased a site in which we are planning to establish a commercial scale manufacturing facility, we do not yet have the capacity to manufacture our product candidates on a commercial scale. In addition, our product
candidates are novel, and no manufacturer currently has the experience or ability to produce our product candidates at commercial levels. If we are unable to produce or engage manufacturing partners to produce our product candidates on a larger
scale on reasonable terms, our commercialization efforts will be harmed.
Even if we timely develop a manufacturing process and successfully transfer it
to the third- party manufacturers of our product candidates, if we or such third-party manufacturers are unable to produce the necessary quantities of our product candidates, or in compliance with cGMP or with pertinent regulatory requirements, and
within our planned time frame and cost parameters, the development and sales of our product candidates, if approved, may be impaired.
In addition, any
significant disruption in our supplier relationships could harm our business. We source key materials from third parties, either directly through agreements with suppliers or indirectly through our manufacturers who have agreements with suppliers.
There are a small number of suppliers for certain key materials that are used to manufacture our product candidates. Such suppliers may not sell these key materials to
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our manufacturers at the times we need them or on commercially reasonable terms. We do not have any control over the process or timing of the acquisition of these key materials by our
manufacturers. Moreover, we currently do not have any agreements for the commercial production of these key materials.
If we are unable to establish
sales and marketing capabilities or enter into agreements with third parties to market and sell any of our product candidates that obtain regulatory approval, we may be unable to generate any revenue.
We have no experience selling and marketing our product candidates or any other products. To successfully commercialize any products that may result from our
development programs and obtain regulatory approval, we will need to develop these capabilities, either on our own or with others. We may seek to enter into collaborations with other entities to utilize their marketing and distribution capabilities,
but we may be unable to do so on favorable terms, if at all. If any future collaborative partners do not commit sufficient resources to commercialize our future products, if any, and we are unable to develop the necessary marketing capabilities on
our own, we will be unable to generate sufficient product revenue to sustain our business. We will be competing with many companies that currently have extensive and well-funded marketing and sales operations. Without an internal team or the support
of a third party to perform marketing and sales functions, we may be unable to compete successfully against these more established companies or successfully commercialize any of our product candidates.
We face intense competition and rapid technological change and the possibility that our competitors may develop therapies that are more advanced or
effective than ours, which could impair our ability to successfully commercialize our product candidates.
We are engaged in pharmaceutical
development, which is a rapidly changing field. We have competitors both in the United States and internationally, including major multinational pharmaceutical companies, biotechnology companies and universities and other research institutions.
Many of our potential competitors have substantially greater financial, technical and other resources, such as larger research and development staff and
experienced marketing and manufacturing organizations. Competition may increase further as a result of advances in the commercial applicability of technologies and greater availability of capital for investment in these industries. Our potential
competitors may succeed in developing, acquiring or licensing on an exclusive basis, products that are more effective or less costly than any product candidate that we may develop, or achieve earlier patent protection, regulatory approval, product
commercialization and market penetration than us. Additionally, technologies developed by others may render our potential product candidates uneconomical or obsolete, and we may not be successful in marketing our product candidates against
competitors.
In particular,
VB-111
may face competition from currently approved drugs and drug candidates under
development by others to treat rGBM or ovarian cancer. In May 2009, the FDA granted accelerated approval to Avastin (bevacizumab), which is an angiogenesis inhibitor, to treat patients with rGBM at progression after standard first-line therapy. In
addition to bevacizumab, a number of companies are conducting late-stage clinical trials to test targeted drugs focused on angiogenesis inhibition for the treatment of ovarian cancer, including, among others, Amgens trebananib, Boehringer
Ingelheims nintedanib, AstraZenecas cediranib and Novartiss Votrient. The expansion of PARP inhibitors (such as olaparib) for ovarian cancer, and clinical studies evaluating the potential use of checkpoint inhibitors for ovarian
cancer may also affect the prior lines of therapy, or the segment of patient population who will seek treatment with
VB-111.
Even if we are successful in achieving regulatory approval to commercialize a product candidate faster than our competitors, we may face competition from
biosimilars. In the United States, the Biologics Price Competition and Innovation Act of 2009 created an abbreviated approval pathway for biological products that are demonstrated to be highly similar, or biosimilar, to or
interchangeable with an
FDA-approved
biological product. This pathway could allow competitors to reference data from biological products already approved after 12 years from the time of
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approval. In Europe, the European Commission has granted marketing authorizations for several biosimilars pursuant to a set of general and product class-specific guidelines for biosimilar
approvals issued over the past few years. In Europe, a competitor may reference data from biological products already approved, but will not be able to market a biosimilar until ten years after the time of approval. This
10-year
period will be extended to 11 years if, during the first eight of those 10 years, the marketing authorization holder obtains an approval for one or more new therapeutic indications that bring significant
clinical benefits compared with existing therapies. In addition, companies may be developing biosimilars in other countries that could compete with our products. If competitors are able to obtain marketing approval for biosimilars referencing our
products, our products may become subject to competition from such biosimilars, with the attendant competitive pressure and consequences. Expiration or successful challenge of our applicable patent rights could also trigger competition from other
products, assuming any relevant exclusivity period has expired.
In addition, although
VB-111
has been granted
orphan drug status by the FDA and EMA for a specified indication, there are limitations to the exclusivity. In the United States, the exclusivity period for orphan drugs is seven years, while pediatric exclusivity adds six months to any existing
patents or exclusivity periods. In Europe, orphan drugs may be able to obtain 10 years of marketing exclusivity and up to an additional two years on the basis of qualifying pediatric studies. However, orphan exclusivity may be reduced to six years
if the drug no longer satisfies the original designation criteria. Additionally, a marketing authorization holder may lose its orphan exclusivity if it consents to a second orphan drug application or cannot supply enough drug. Orphan drug
exclusivity also can be lost when a second applicant demonstrates its drug is clinically superior to the original orphan drug.
Finally, as a
result of the expiration or successful challenge of our patent rights, we could face more litigation with respect to the validity or scope of patents relating to other parties products. The availability of other parties products could
limit the demand, and the price we are able to charge, for any products that we may develop and commercialize.
Since some of our product candidates are
aimed for rare diseases, loss of exclusivity or competition as described above may be very significant in light of the limited size of the relevant market.
The commercial success of any current or future product candidate, if approved, will depend upon the degree of market acceptance by physicians, patients,
third-party payors and others in the medical community.
Even if we obtain the requisite regulatory approvals, the commercial success of our product
candidates will depend in part on the medical community, patients, and third-party payors accepting our product candidates as medically useful, cost-effective, and safe. Any product that we bring to the market may not gain market acceptance by
physicians, patients, third-party payors and others in the medical community. If these products do not achieve an adequate level of acceptance, we may not generate significant product revenue and may not become profitable. The degree of market
acceptance of these product candidates, if approved for commercial sale, will depend on a number of factors, including:
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the potential efficacy and potential advantages over alternative treatments;
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the prevalence and severity of any side effects, including any limitations or warnings contained in a products approved labeling;
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the prevalence and severity of any side effects resulting from the procedure by which our product candidates are administered;
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relative convenience and ease of administration;
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the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;
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the strength of marketing and distribution support and timing of market introduction of competitive products;
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publicity concerning our products or competing products and treatments; and
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sufficient third-party insurance coverage or reimbursement.
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Even if a potential product displays a favorable
efficacy and safety profile in
pre-clinical
studies and clinical trials, market acceptance of the product will not be known until after it is launched. Our efforts to educate the medical community and
third-party payors on the benefits of the product candidates may require significant resources and may never be successful. Such efforts to educate the marketplace may require more resources than are required by conventional technologies.
A variety of risks associated with international operations could hurt our business.
If any of our product candidates are approved for commercialization, it is our current intention to market them on a worldwide basis, either alone or in
collaboration with others. In addition, we conduct development activities in various jurisdictions throughout the world. We expect that we will be subject to additional risks related to engaging in international operations, including:
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different regulatory requirements for approval of drugs and biologics in foreign countries;
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reduced protection for intellectual property rights;
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unexpected changes in tariffs, trade barriers and regulatory requirements;
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economic weakness, including inflation, or political instability in particular foreign economies and markets;
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compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;
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foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations incident to doing business in another country;
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workforce uncertainty in countries where labor unrest is more common than in the United States and Israel;
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production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and
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business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters including earthquakes, typhoons, floods and fires.
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The insurance coverage and reimbursement status of newly approved products is uncertain. Failure to obtain or maintain adequate coverage and reimbursement
for any of our product candidates that are approved could limit our ability to market those products and compromise our ability to generate revenue.
The availability of reimbursement by governmental and private payors is essential for most patients to be able to afford expensive treatments. Sales of our
product candidates will depend substantially, both in the U.S. and abroad, on the extent to which the costs of our product candidates will be paid by health maintenance, managed care, pharmacy benefit and similar healthcare management organizations,
or reimbursed by government health administration authorities, private health coverage insurers and other third-party payors. If reimbursement is not available, or is available only to limited levels, we may not be able to successfully commercialize
our product candidates. Even if coverage is provided, the approved reimbursement amount may not be high enough to allow us to establish or maintain pricing sufficient to realize a sufficient return on our investment.
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There is significant uncertainty related to the insurance coverage and reimbursement of newly approved products.
In the United States, the principal decisions about reimbursement for new medicines are typically made by the Centers for Medicare & Medicaid Services, or CMS, an agency within the U.S. Department of Health and Human Services, as CMS
decides whether and to what extent a new medicine will be covered and reimbursed under Medicare. Private payors tend to follow CMS to a substantial degree. It is difficult to predict what CMS will decide with respect to reimbursement for
fundamentally novel products such as ours, as there is no body of established practices and precedents for these new products. Reimbursement agencies in Europe may be more conservative than CMS. For example, a number of cancer drugs have been
approved for reimbursement in the United States and have not been approved for reimbursement in certain European countries.
The intended use of a drug
product by a physician can also affect pricing. For example, CMS could initiate a National Coverage Determination administrative procedure, by which the agency determines which uses of a therapeutic product would and would not be reimbursable under
Medicare. This determination process can be lengthy, thereby creating a long period during which the future reimbursement for a particular product may be uncertain.
Outside the United States, international operations are generally subject to extensive governmental price controls and other market regulations, and we
believe the increasing emphasis on cost-containment initiatives in Europe, Canada, and other countries is likely to put pressure on the pricing and usage of any of our product candidates that are approved for marketing. In many countries, the prices
of medical products are subject to varying price control mechanisms as part of national health systems. In general, the prices of medicines under such systems are substantially lower than in the United States. Other countries allow companies to fix
their own prices for medicines, but monitor and control company profits. Additional foreign price controls or other changes in pricing regulation could restrict the amount that we are able to charge for our product candidates. Accordingly, in
markets outside the United States, the reimbursement for our products may be reduced compared with the United States and may be insufficient to generate commercially reasonable revenue and profits.
Moreover, increasing efforts by governmental and third-party payors, in the United States and abroad, to cap or reduce healthcare costs, resulting in
legislation and reforms such as the Patient Protection and Affordable Care Act of 2010, may cause such organizations to limit both coverage and level of reimbursement for new products approved and, as a result, they may not cover or provide adequate
payment for our product candidates. We expect to experience pricing pressures in connection with the sale of any of our product candidates, due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and
additional legislative changes. The downward pressure on healthcare costs in general, particularly prescription drugs and surgical procedures and other treatments, has become very intense. As a result, increasingly high barriers are being erected to
the entry of new products.
The prescription for or promotion of
off-label
uses of our products by physicians
could adversely affect our business.
Any regulatory approval of our products is limited to those specific diseases and indications for which our
products have been deemed safe and effective by the FDA or similar authorities in other jurisdictions. In addition, any new indication for an approved product also requires regulatory approval. If we produce an approved therapeutic product, we will
rely on physicians to prescribe and administer it as we have directed and for the indications described on the labeling. It is not, however, uncommon for physicians to prescribe medication for unapproved, or
off-label,
uses or in a manner that is inconsistent with the manufacturers directions. To the extent such
off-label
uses and departures from our
administration directions become pervasive and produce results such as reduced efficacy or other adverse effects, the reputation of our products in the marketplace may suffer. In addition,
off-label
uses may
cause a decline in our revenue or potential revenue, to the extent that there is a difference between the prices of our product for different indications.
Furthermore, while physicians may choose to prescribe our drugs for
off-label
uses, our ability to promote the
products is limited to those indications that are specifically approved by the FDA or other regulators. Although
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regulatory authorities generally do not regulate the behavior of physicians, they do restrict communications by companies with respect to
off-label
use. If
our promotional activities fail to comply with these regulations or guidelines, we may be subject to warnings from, or enforcement action by, these authorities. In addition, failure to follow FDA rules and guidelines relating to promotion and
advertising can result in the FDAs refusal to approve a product, the suspension or withdrawal of an approved product from the market, product recalls, fines, disgorgement of money, operating restrictions, injunctions or criminal prosecution.
Due to the small target patient populations for some of our product candidates, we face uncertainty related to pricing and reimbursement for these
product candidates.
Some of our target patient populations for our initial product candidates are relatively small, as a result of which the pricing
and reimbursement of our product candidates, if approved, must be adequate to support commercial infrastructure. If we are unable to obtain adequate levels of reimbursement, our ability to successfully market and sell our product candidates will be
adversely affected. Inadequate reimbursement for such services may lead to physician resistance and adversely affect our ability to market or sell our products.
Risks Related to Our Business Operations
Our future
success depends on our ability to retain key employees, consultants and advisors and to attract, retain and motivate qualified personnel.
We are
highly dependent on principal members of our executive team listed under Management in this report, including
Prof. Dror Harats, our chief executive officer, the loss of whose services may adversely impact the achievement of our
objectives. While we have entered into employment agreements with each of our executive officers, any of them could leave our employment at any time, as all of our employees are at will employees. Recruiting and retaining other qualified
employees, consultants and advisors for our business, including scientific and technical personnel, will also be critical to our success. There is currently a shortage of skilled executives in our industry, which is likely to continue. As a result,
competition for skilled personnel is intense and the turnover rate can be high. We may not be able to attract and retain personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for individuals
with similar skill sets. In addition, failure to succeed in
pre-clinical
studies or clinical trials may make it more challenging to recruit and retain qualified personnel. The inability to recruit or loss of
the services of any executive, key employee, consultant or advisor may impede the progress of our research, development and commercialization objectives.
Our collaborations with outside scientists and consultants may be subject to restriction and change.
We work with medical experts, chemists, biologists and other scientists at academic and other institutions, and consultants who assist us in our research,
development and regulatory efforts, including the members of our scientific advisory board. In addition, these scientists and consultants have provided, and we expect that they will continue to provide, valuable advice regarding our programs and
regulatory approval processes. These scientists and consultants are not our employees and may have other commitments that would limit their future availability to us. If a conflict of interest arises between their work for us and their work for
another entity, we may lose their services. In addition, we are limited in our ability to prevent them from establishing competing businesses or developing competing products. For example, if a key scientist acting as a principal investigator in any
of our clinical trials identifies a potential product or compound that is more scientifically interesting to his or her professional interests, his or her availability to remain involved in our clinical trials could be restricted or eliminated.
We will need to expand our organization and we may experience difficulties in managing this growth, which could disrupt our operations.
As of March 1, 2017, we had 34 employees. As we mature and undertake the activities required to advance our product candidates into later stage clinical
development and to operate as a public company, we expect to expand
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our full-time employee base and to hire more consultants and contractors. Our management may need to divert a disproportionate amount of its attention away from our
day-to-day
activities and devote a substantial amount of time to managing these growth activities. We may not be able to effectively manage the expansion of our
operations, which may result in weaknesses in our infrastructure, operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. Our expected growth could require significant capital
expenditures and may divert financial resources from other projects, such as the development of additional product candidates. If our management is unable to effectively manage our growth, our expenses may increase more than expected, our ability to
generate or grow revenue could be compromised, and we may not be able to implement our business strategy. Our future financial performance and our ability to commercialize product candidates and compete effectively will depend, in part, on our
ability to effectively manage any future growth.
Our employees, principal investigators, consultants and commercial partners may engage in misconduct
or other improper activities, including
non-compliance
with regulatory standards and requirements and insider trading.
We are exposed to the risk of fraud or other misconduct by our employees, principal investigators, consultants and commercial partners. Misconduct by these
parties could include intentional failures to comply with the regulations of the FDA and
non-U.S.
regulators, provide accurate information to the FDA and
non-U.S.
regulators, comply with healthcare fraud and abuse laws and regulations in the United States and abroad, report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business
arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of
pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Such misconduct could also involve the improper use of information obtained in the course of clinical trials, which could
result in regulatory sanctions and cause serious harm to our reputation. We have adopted a code of conduct applicable to all of our employees, but it is not always possible to identify and deter employee misconduct, and the precautions we take to
detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or
regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or
other sanctions.
We face potential product liability, and, if successful claims are brought against us, we may incur substantial liability and costs.
If the use of our product candidates harms patients, or is perceived to harm patients even when such harm is unrelated to our product candidates, our regulatory approvals could be revoked or otherwise negatively impacted and we could be subject to
costly and damaging product liability claims.
The use of our product candidates in clinical trials and the sale of any products for which we obtain
marketing approval exposes us to the risk of product liability claims. Product liability claims might be brought against us by consumers, healthcare providers, pharmaceutical companies or others selling or otherwise coming into contact with our
product candidates. There is a risk that our product candidates may induce adverse events. If we cannot successfully defend against product liability claims, we could incur substantial liability and costs. In addition, regardless of merit or
eventual outcome, product liability claims may result in:
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impairment of our business reputation;
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withdrawal of clinical trial participants;
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costs due to related litigation;
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distraction of managements attention from our primary business;
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substantial monetary awards to patients or other claimants;
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the inability to commercialize our product candidates;
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decreased demand for our product candidates, if approved for commercial sale; and
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impairment of our ability to obtain product liability insurance coverage.
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We carry combined public and
products liability (including human clinical trials extension) insurance of $5.0 million per occurrence and $5.0 million aggregate limit. We believe our product liability insurance coverage is sufficient in light of our current clinical
programs; however, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. If we obtain marketing approval for any product candidates, we intend to expand our
insurance coverage to include the sale of commercial products, but we may not be able to obtain product liability insurance on commercially reasonable terms or in adequate amounts. On occasion, large judgments have been awarded in class action
lawsuits based on drugs or medical treatments that had unanticipated adverse effects. A successful product liability claim or series of claims brought against us could cause our share price to decline and, if judgments exceed our insurance coverage,
could materially and adversely affect our financial position.
Patients with the diseases targeted by some of our product candidates are often already in
severe and advanced stages of disease and have both known and unknown significant
pre-
existing and potentially life-threatening health risks. During the course of treatment, patients may suffer adverse
events, including death, for reasons that may be related to our product candidates. Such events could subject us to costly litigation, require us to pay substantial amounts of money to injured patients, delay, negatively impact or end our
opportunity to receive or maintain regulatory approval to market our products, or require us to suspend or abandon our commercialization efforts. Even in a circumstance in which we do not believe that an adverse event is related to our product
candidate, the investigation into the circumstance may be time-consuming or inconclusive. These investigations may harm our reputation, delay our regulatory approval process, limit the type of regulatory approvals our product candidates receive or
maintain, and compromise the market acceptance of any of our product candidates that receive regulatory approval. As a result of these factors, a product liability claim, even if successfully defended, could hurt our business and impair our ability
to generate revenue.
If our existing or future manufacturing facility is damaged or destroyed, or production at any of those facilities is otherwise
interrupted, our business and prospects would be negatively affected.
We currently have a single, small-scale manufacturing facility in Israel and we
are establishing a substitute manufacturing facility for commercial scale production. If our existing or future manufacturing facility, or the equipment in it, is damaged or destroyed, we likely would not be able to quickly or inexpensively replace
our manufacturing capacity and possibly would not be able to replace it at all. Any new facility needed to replace our existing or future manufacturing facility would need to comply with the necessary regulatory requirements, and be tailored to our
manufacturing requirements and processes. We would need FDA approval before using any product candidates manufactured at a new facility in clinical trials or selling any products that are ultimately approved. Such an event could delay our clinical
trials or, if any of our product candidates are approved by the FDA, reduce or eliminate our product sales.
If we fail to comply with environmental,
health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could have a material adverse effect on the success of our business.
We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use,
storage, treatment and disposal of hazardous materials and wastes. Our operations involve the use of hazardous and flammable materials, including chemicals and biological materials. Our operations also produce hazardous waste products. We generally
contract with third parties for the disposal of these materials and wastes. We cannot eliminate the risk of contamination or injury from these materials. In the event of
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contamination or injury resulting from our use of hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources. We also could incur
significant costs associated with civil or criminal fines and penalties.
Although we maintain workers compensation insurance to cover us for costs
and expenses we may incur due to injuries to our employees resulting from the use of hazardous materials or other work-related injuries, this insurance may not provide adequate coverage against potential liabilities. In addition, we may incur
substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations may impair our research, development or production efforts. Failure to comply with these
laws and regulations also may result in substantial fines, penalties or other sanctions.
If our shipping capabilities become unavailable due to an
accident, an act of terrorism, a labor strike or other similar event, our supply, production and distribution processes could be disrupted.
Some of
our raw materials for the manufacturing of
VB-111,
and
VB-111
itself, must be transported at a temperature controlled cold chain at temperatures varying between
-4
degrees Celsius to
-70
degrees Celsius (25 to
-94
degrees Fahrenheit) to ensure their quality and vitality. Not all shipping or
distribution channels are equipped to transport at these temperatures. If any of our shipping or distribution channels become inaccessible because of a serious accident, an act of terrorism, a labor strike or other similar event, we may experience
disruptions in our continued supply of raw materials, delays in our production process or a reduction in our ability to distribute our therapeutics to our customers.
We may use our financial and human resources to pursue a particular research program or product candidate and fail to capitalize on programs or product
candidates that may be more profitable or for which there is a greater likelihood of success.
Because we have limited resources, we may forego or
delay pursuit of opportunities with certain programs or product candidates or for indications that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products
or profitable market opportunities. Our spending on current and future research and development programs for product candidates may not yield any commercially viable products. If we do not accurately evaluate the commercial potential or target
market for a particular product candidate, we may relinquish valuable rights to that product candidate through strategic collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain
sole development and commercialization rights to such product candidate, or we may allocate internal resources to a product candidate in a therapeutic area in which it would have been more advantageous to enter into a collaboration arrangement.
We will continue to incur significant increased costs as a result of operating as a public company, and our management will continue to be required to
devote substantial time to new compliance initiatives.
As a public company, we will continue to incur significant legal, accounting and other
expenses. In addition, the Sarbanes-Oxley Act, as well as rules subsequently implemented by the Securities and Exchange Commission, or SEC, and The NASDAQ Global Market have imposed various requirements on public companies. Recent legislation
permits smaller emerging growth companies to implement many of these requirements over a longer period and up to five years from the pricing of our offering. We intend to take advantage of this new legislation but cannot guarantee that
we will not be required to implement these requirements sooner than budgeted or planned and thereby incur unexpected expenses. Shareholder activism, the current political environment and the current high level of government intervention and
regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact the manner in which we operate our business in ways we cannot currently anticipate. Our management and
other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and
costly. For example, we expect
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these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to incur substantial costs to maintain
our current levels of such coverage. While compliance with these additional requirements will result in increased costs to us, we cannot accurately predict or estimate at this time the amount of additional costs we may incur as a public company
under both U.S. and Israeli laws.
We are subject to foreign currency exchange risk, and fluctuations between the U.S. dollar and the NIS, the Euro and
other
non-U.S.
currencies may negatively affect our earnings and results of operations.
We operate in a number
of different currencies. While the dollar is our functional and reporting currency and investments in our share capital have been denominated in dollars, our financial results may be adversely affected by fluctuations in currency exchange rates as a
significant portion of our operating expenses, including our salary-related and manufacturing expenses are denominated in the NIS, and a significant portion of our clinical trials and manufacturing expenses are denominated in euros.
We are exposed to the risks that the NIS may appreciate relative to the dollar, or, if the NIS instead devalues relative to the dollar, that the inflation
rate in Israel may exceed such rate of devaluation of the NIS, or that the timing of such devaluation may lag behind inflation in Israel. In any such event, the dollar cost of our operations in Israel would increase and our dollar- denominated
results of operations would be adversely affected. We cannot predict any future trends in the rate of inflation in Israel or the rate of devaluation (if any) of the NIS against the dollar. For example, the average exchange rate of the dollar against
the NIS decreased in 2016, increased in 2015 and in 2014. Market volatility and currency fluctuations may limit our ability to cost- effectively hedge against our foreign currency exposure and, in addition, our ability to hedge our exposure to
currency fluctuations in certain emerging markets may be limited. Hedging strategies may not eliminate our exposure to foreign exchange rate fluctuations and may involve costs and risks of their own, such as devotion of management time, external
costs to implement the strategies and potential accounting implications. Foreign currency fluctuations, independent of the performance of our underlying business, could lead to materially adverse results or could lead to positive results that are
not repeated in future periods.
Risks Related to Our Intellectual Property
We depend on our license agreement with Crucell and if we cannot meet requirements under such license agreement, we could lose the rights to our products,
which could have a material adverse effect on our business.
VB-111
incorporates an adenoviral vector as the
delivery vehicle based on our rights under a license agreement with Crucell. If we fail to meet our obligations under this license agreement, including various diligence, milestone payment, royalty and other obligations, Crucell has the right to
terminate our license, and upon the effective date of such termination, our right to use the licensed technology would terminate. We may enter into additional agreements in the future with Crucell that may impose similar obligations on us. While we
would expect to exercise all rights and remedies available to us, including attempting to cure any breach by us, and otherwise seek to preserve our rights under the patents and other technology licensed to us, we may not be able to do so in a timely
manner, at an acceptable cost or at all. Any uncured, material breach under the license agreement could result in our loss of rights and may lead to a complete termination of our product development and any commercialization efforts for the
applicable product candidates since there are currently no significant similar alternatives on the market.
If we are unable to obtain or protect
intellectual property rights related to our product candidates, we may not be able to obtain exclusivity for our product candidates or prevent others from developing similar competitive products.
We rely upon a combination of patents, trade secret protection and confidentiality agreements to protect the intellectual property related to our product
candidates. The strength of patents in the biotechnology and pharmaceutical field involves
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complex legal and scientific questions and can be uncertain. The patent applications that we own or
in-license
may fail to result in issued patents with
claims that cover our product candidates in the United States or in other foreign countries. There is no assurance that all of the potentially relevant prior art relating to our patents and patent applications has been found, which can invalidate a
patent or prevent a patent from issuing from a pending patent application. Even if patents do successfully issue and even if such patents cover our product candidates, third parties may challenge their validity, enforceability or scope, which may
result in the patent claims being narrowed or invalidated. Furthermore, even if they are unchallenged, our patents and patent applications may not adequately protect our intellectual property, provide exclusivity for our product candidates or
prevent others from designing around our claims. Any of these outcomes could impair our ability to prevent competition from third parties.
If the patent
applications we hold or have
in-licensed
with respect to our programs or product candidates fail to issue, if the breadth or strength of our patent protection is threatened, or if our patent portfolio fails to
provide meaningful exclusivity for our product candidates, it could dissuade companies from collaborating with us to develop product candidates and threaten our ability to commercialize future products. Several patent applications covering our
product candidates have been filed recently. We cannot offer any assurances about which, if any, applications will issue as patents, the breadth of any such issued patent claims or whether any issued claims will be found invalid and unenforceable or
will be threatened by third parties. Any successful opposition to these patents or any other patents owned by or licensed to us could deprive us of rights necessary for the successful commercialization of any product candidates that we may develop.
Further, if we encounter delays in regulatory approvals, the period of time during which we could market a product candidate under patent protection could be reduced. Since patent applications in the United States and most other countries are
confidential for a period of time after filing, and some remain so until issued, we cannot be certain that we or our licensors were the first to file any patent application related to a product candidate. Furthermore, if third parties have filed
such patent applications, an interference proceeding in the United States can be initiated by a third party to determine who was the first to invent any of the subject matter covered by the patent claims of our applications. In addition, patents
have a limited lifespan. In the United States, the natural expiration of a patent is generally 20 years after it is filed. 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 for a product, we may be open to competition from generic medications. This risk is material in light of the length of the development process of our products and
lifespan of our current patent portfolio.
In addition to the protection afforded by patents, we rely on trade secret protection and confidentiality
agreements to protect proprietary
know-how
that is not patentable or that we elect not to patent, processes for which patents are difficult to enforce and any other elements of our product candidate discovery
and development processes that involve proprietary know- how, information or technology that is not covered by patents. However, trade secrets can be difficult to protect. We seek to protect our proprietary technology and processes, in part, by
entering into confidentiality agreements with our employees, consultants, scientific advisors and contractors. We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises
and physical and electronic security of our information technology systems. Security measures may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently
discovered by competitors. Although we expect all of our employees and consultants to assign their inventions to us, and all of our employees, consultants, advisors and any third parties who have access to our proprietary
know-how,
information or technology to enter into confidentiality agreements, we cannot provide any assurances that all such agreements have been duly executed or 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. Misappropriation or unauthorized disclosure of our
trade secrets could impair our competitive position and may have a material adverse effect on our business. Additionally, if the steps taken to maintain our trade secrets are deemed inadequate, we may have insufficient recourse against third parties
for misappropriating the trade secret. In addition, others may independently discover our trade secrets and proprietary information. For example, the FDA, as part of its Transparency Initiative, is currently considering whether to make additional
information publicly available on a routine basis, including information that we may consider to be trade secrets or other proprietary information, and it is not clear at the present time how the FDAs disclosure policies may change in the
future, if at all.
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Further, the laws of some foreign countries do not protect proprietary rights to the same extent or in the same
manner as the laws of the United States. As a result, we may encounter significant problems in protecting and defending our intellectual property both in the United States and abroad. If we are unable to prevent material disclosure of the
non-patented
intellectual property related to our technologies to third parties, and there is no guarantee that we will have any such enforceable trade secret protection, we may not be able to establish or maintain
a competitive advantage in our market.
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.
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 partes review proceedings before the U.S. Patent and Trademark Office, or U.S. PTO, 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 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 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 our product candidates may be accused of infringing. 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 manufacturing process of any of our product candidates, any molecules formed during the manufacturing
process or any final product itself, 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, 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.
Parties making claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to further develop and
commercialize one or more of 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.
We may not be successful in obtaining or maintaining
necessary rights to pharmaceutical product components and processes for our development pipeline through acquisitions and
in-
licenses.
Presently we have rights to the intellectual property, through licenses from Crucell and under patents that we own, to develop our product candidates. Because
our programs may involve additional product candidates that may require the use of proprietary rights held by third parties, the growth of our business may depend in part on our ability to acquire,
in-license
or use these proprietary rights. In addition, our product candidates may require specific formulations to work effectively and efficiently and these rights may be held by others. We may be unable to acquire or
in-license
any compositions, methods of use, processes or other third- party intellectual property rights from third parties that we identify. The licensing and acquisition of third-party intellectual property
rights is a
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competitive area, and a number of more established companies are also pursuing strategies to license or acquire third-party intellectual property rights that we may consider attractive. These
established companies may have a competitive advantage over us due to their size, cash resources and greater clinical development and commercialization capabilities. In addition, companies that perceive us to be a competitor may be unwilling to
assign or license rights to us. We also may be unable to license or acquire third-party intellectual property rights on terms that would allow us to make an appropriate return on our investment.
We may enter into license agreements with third parties, and if we fail to comply with our obligations in such agreements under which we license
intellectual property rights from third parties or otherwise experience disruptions to our business relationships with our licensors, we could lose license rights that are important to our business.
We may need to obtain licenses from third parties to advance our research or allow commercialization of our product candidates, and we have done so from time
to time. We may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all. In that event, we may be required to expend significant time and resources to develop or license replacement technology. If we are unable to
do so, we may be unable to develop or commercialize the affected product candidates.
In many cases, patent prosecution of our
in-licensed
technology is controlled solely by the licensor. If our licensors fail to obtain and maintain patent or other protection for the proprietary intellectual property we license from them, we could lose our
rights to the intellectual property or our exclusivity with respect to those rights, and our competitors could market competing products using the intellectual property. In some cases, we control the prosecution of patents resulting from licensed
technology. In the event we breach any of our obligations related to such prosecution, we may incur significant liability to our licensing partners. Licensing of intellectual property is of critical importance to our business and involves complex
legal, business and scientific issues and is complicated by the rapid pace of scientific discovery in our industry. 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 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 any collaboration relationships we might enter into in the future;
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our diligence obligations under the license agreement and what activities satisfy those diligence obligations;
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the 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 disputes over intellectual property that we have
licensed prevent or impair our ability to maintain our current licensing arrangements on acceptable terms, we may be unable to successfully develop and commercialize the affected product candidates.
We may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time-consuming and
unsuccessful.
Competitors may infringe our patents or the patents of our licensors. To counter infringement or unauthorized use, we may be required to
file infringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours or our licensors is not valid, is unenforceable or is not infringed, or may refuse to stop the
other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or
interpreted narrowly and could put our patent applications at risk of not issuing.
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Interference proceedings provoked by third parties or brought by us may be necessary to determine the priority of
inventions with respect to our patents or patent applications or those of our licensors. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to it from the prevailing party. Our business
could be harmed if the prevailing party does not offer us a license on commercially reasonable terms. Our defense of litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distract our management
and other employees. We may not be able to prevent, alone or with our licensors, misappropriation of our intellectual property rights, particularly in countries where the laws may not protect those rights as fully as in the United States.
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 trading price of our ordinary shares.
Recent patent
reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents.
Patent reform legislation (the Leahy-Smith Act) enacted in 2013 continues to increase the uncertainties and costs surrounding the prosecution of our patent
applications and the enforcement or defense of our issued patents. The Leahy-Smith Act introduced a number of significant changes to U.S. patent law, including provisions that affect the way patent applications are prosecuted and patent litigation
is conducted. The U.S. PTO continues to develop regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Act, in particular, the Inter Partes Review (IPR)
proceedings. It remains to be seen what impact the Leahy-Smith Act will have on the operation of our business. However, the Act and its implementation increases the uncertainties and costs surrounding the prosecution of our patent applications and
the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition.
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.
Certain of our key employees and personnel are or were previously employed at universities, medical institutions 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 employees 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. 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. Furthermore, universities or medical institutions who employ some of our key employees and personnel in parallel to their engagement by us may claim that intellectual property developed by such person
is owned by the respective academic or medical institution under the respective institution intellectual property policy or applicable law.
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
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employee during the term and as part of the scope of 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. Recent decisions by the Committee (which have been upheld by the Israeli Supreme Court on appeal) have created uncertainty
in this area, as it held that employees may be entitled to remuneration for their service inventions despite having specifically waived any such rights. Further, the Committee has not yet determined the method for calculating this remuneration nor
the criteria or circumstances under which an employees waiver of his right to remuneration will be disregarded. 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. Although our employees have agreed to assign to us service invention rights,
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 or former employees, or be forced to litigate such
claims, which could negatively affect our business.
We may be subject to claims challenging the inventorship or ownership of our patents and other
intellectual property.
We may be subject to claims that former employees, collaborators or other third parties have an ownership interest in our
patents or other intellectual property. We may have to in the future, ownership disputes arising, for example, from conflicting obligations of consultants or others who are involved in developing our product candidates. Litigation may be necessary
to defend against these and other claims challenging inventorship or ownership. If we 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, valuable intellectual property. Such an outcome could have a material adverse effect on 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.
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
non-compliance
with these requirements.
Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and applications will be due to be paid to the U.S. PTO
and various governmental patent agencies outside of the United States in several stages over the lifetime of the patents and applications. The U.S. PTO and various
non-U.S.
governmental patent agencies require
compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. There are situations in which
non-compliance
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.
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 one of our product candidates, the defendant may contend that the patent covering our product candidate is invalid, unenforceable or fails to cover the product candidate or the
infringing product. In patent litigation in the United States, defendants commonly allege that asserted patent claims are invalid and unenforceable. Grounds for a validity challenge could be an alleged failure to meet one or more of several
statutory requirements, including lack of novelty, obviousness, lack of written description, indefiniteness and
non-enablement.
Grounds for an unenforceability assertion could be an allegation that someone
connected with prosecution of the patent
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withheld relevant information from the U.S. PTO, 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, such as opposition proceedings. Such
proceedings could result in revocation, amendments to our patent claims or statements being made on the record such that our claims may no longer be construed to cover 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 during prosecution. If a defendant were to prevail
on a legal assertion of invalidity, unenforceability or
non-infringement,
we would lose at least part, and perhaps all, of the patent protection on our product candidates. Even if resolved in our favor,
litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses, and could distract our technical and management personnel from their normal responsibilities. In addition, there could be
public announcements of the results of hearings, motions or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the market price of
our ordinary shares. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities.
Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.
As is the case with other biotechnology companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing
patents in the biotechnology industry involve both technological and legal complexity, and is therefore is costly, time- consuming and inherently uncertain. In addition, the United States has recently enacted and is currently implementing
wide-ranging patent reform legislation. 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 some situations. In addition to increasing
uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the U.S. Congress, the federal courts, and the
U.S. PTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future.
We have not yet registered trademarks for a commercial trade name for our product candidates and failure to secure such registrations could adversely
affect our business.
We have not yet registered trademarks for a commercial trade name for our product candidates. During trademark registration
proceedings, we may receive rejections. Although we would be given an opportunity to respond to those rejections, we may be unable to overcome such rejections. In addition, in the U.S. PTO and in comparable agencies in many foreign jurisdictions,
third parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our trademarks, and our trademarks may not survive such
proceedings. Moreover, any name we propose to use with our product candidates in the United States must be approved by the FDA, regardless of whether we have registered it, or applied to register it, as a trademark. The FDA typically conducts a
review of proposed product names, including an evaluation of potential for confusion with other product names. If the FDA objects to any of our proposed proprietary product names, we may be required to expend significant additional resources in an
effort to identify a suitable substitute name that would qualify under applicable trademark laws, not infringe the existing rights of third parties and be acceptable to the FDA.
We may not be able to protect our intellectual property rights throughout the world.
Filing, prosecuting and defending patents on 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
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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. Potential competitors may use our technologies in jurisdictions where we have not obtained
patent protection to develop their own products and further, may export otherwise 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
product candidates, if approved, 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 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.
Under applicable employment laws, we may not be able to
enforce covenants not to compete.
We generally enter into
non-competition
agreements with our employees. These
agreements prohibit our employees, if they cease working for us, from competing directly with us or working for our competitors or clients for a limited period. We may be unable to enforce these agreements under the laws of the jurisdictions in
which our employees work and it may be difficult for us to restrict our competitors from benefitting from the expertise our former employees or consultants developed while working for us. For example, Israeli labor courts have required employers
seeking to enforce
non-compete
undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of the employer
which have been recognized by the courts, such as the protection of a companys trade secrets or other intellectual property.
Risks Related to
Ownership of Our Ordinary Shares
The market price of our ordinary shares may be highly volatile, and you may not be able to resell your shares at
the purchase price.
An active trading market for our ordinary shares may not be available. You may not be able to sell your shares quickly or at the
market price if trading in our ordinary shares is not active.
The market price of our ordinary shares has been and is likely to remain volatile. Our
share price could be subject to wide fluctuations in response to a variety of factors, including the following:
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adverse results or delays in
pre-clinical
studies or clinical trials, and resulting changes in our clinical development programs;
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reports of adverse events in other similar products or clinical trials of such products;
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inability to obtain additional funding;
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any delay in filing an IND or BLA for any of our product candidates and any adverse development or perceived adverse development with respect to the FDAs review of that IND or BLA;
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failure to develop successfully and commercialize our product candidates for the proposed indications and future product candidates for other indications or new candidates;
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failure to maintain our licensing arrangements or enter into strategic collaborations;
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failure by us or our licensors and strategic collaboration partners to prosecute, maintain or enforce our intellectual property rights;
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changes in laws or regulations applicable to future products;
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inability to scale up our manufacturing capabilities (including in Israel), inability to obtain adequate product supply for our product candidates or the inability to do so at acceptable prices;
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adverse regulatory decisions, including by the NATI under the Research Law;
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introduction of new products, services or technologies by our competitors;
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failure to meet or exceed financial projections we may provide to the public;
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failure to meet or exceed the financial expectations of the investment community;
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the perception of the pharmaceutical industry by the public, legislatures, regulators and the investment community;
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announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors;
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disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;
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additions or departures of key scientific or management personnel;
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significant lawsuits, including patent or shareholder litigation;
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changes in the market valuations of similar companies;
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sales of our ordinary shares by us or our shareholders in the future; and
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trading volume of our ordinary shares.
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In addition, companies trading in the stock market in general, and
biopharmaceutical companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively
affect the market price of our ordinary shares, regardless of our actual operating performance.
There has been limited trading volume for our ordinary
shares.
Even though our ordinary shares have been listed on the NASDAQ Global Market, there has been limited liquidity in the market for the ordinary
shares, which could make it more difficult for holders to sell their ordinary shares. There can be no assurance that an active trading market for our ordinary shares will be sustained. In addition, the stock market generally has experienced extreme
price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of listed companies. Broad market and industry factors may negatively affect the market price of our ordinary shares, regardless of our
actual operating performance. The market price and liquidity of the market for our ordinary shares that will prevail in the market may be higher or lower than the price you pay and may be significantly affected by numerous factors, some of which are
beyond our control.
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Our principal shareholders and management own a significant percentage of our shares and will be able to exert
significant control over matters subject to shareholder approval.
As of December 31, 2016, our executive officers, directors, five percent
shareholders and their affiliates beneficially owned approximately 51.0% of our voting shares. Therefore, these shareholders have the ability to control us through their ownership positions. These shareholders may be able to determine all matters
requiring shareholder approval. For example, these shareholders, if they were to act together, may be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major
corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our ordinary shares that you may believe are in your best interest as one of our shareholders.
We are an emerging growth company and a foreign private issuer, and we cannot be certain if the reduced reporting requirements
applicable to emerging growth companies and foreign private issuers will make our ordinary shares less attractive to investors.
We are an
emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements
that are applicable to other public companies that are not emerging growth companies, including 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,
reduced disclosure obligations regarding executive compensation in this prospectus and our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder
approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although circumstances could cause us to lose that status earlier, including if the market value of our ordinary shares
held by
non-affiliates
exceeds $700.0 million as of any June 30 before that time or if we have total annual gross revenue of $1.0 billion or more during any fiscal year before that time, in
which cases we would no longer be an emerging growth company as of the following December 31 or, if we issue more than $1.0 billion in
non-convertible
debt during any three-year period before that
time, we would cease to be an emerging growth company immediately.
Furthermore, as a foreign private issuer, we are not subject to the same requirements
that are imposed upon U.S. domestic issuers by the SEC. Under the Securities Exchange Act of 1934, or the Exchange Act, we will be subject to reporting obligations that, in certain respects, are less detailed and less frequent than those of U.S.
domestic reporting companies. For example, we will not be required to issue quarterly reports, proxy statements that comply with the requirements applicable to U.S. domestic reporting companies, or individual executive compensation information that
is as detailed as that required of U.S. domestic reporting companies. We will also have four months after the end of each fiscal year to file our annual reports with the SEC and will not be required to file current reports as frequently or promptly
as U.S. domestic reporting companies. Furthermore, our officers, directors and principal shareholders will be exempt from the requirements to report transactions in our equity securities and from the short-swing profit liability provisions contained
in Section 16 of the Exchange Act. These exemptions and leniencies will reduce the frequency and scope of information and protections to which you may otherwise have been eligible in relation to a U.S. domestic reporting companies. See
Item 16G. Corporate Governance for more information.
We cannot predict if investors will find our ordinary shares less attractive because we
may rely on these reduced requirements. 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 share price may be more volatile.
Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private
companies. We are electing to not take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards, and as a result, we will comply with new or revised accounting standards on
the relevant dates on which adoption of such standards is required for
non-emerging
growth companies. Section 107 of the JOBS Act provides that our decision to not take advantage of the extended
transition period for complying with new or revised accounting standards is irrevocable.
37
Our ordinary shares are subject to substantial dilution in their book value.
As of December 31, 2016, options and warrants to purchase 4,491,535 ordinary shares at a weighted average exercise price of $4.55 per share were
outstanding. The exercise of any of these options and warrants would result in additional dilution.
Sales of a substantial number of our ordinary
shares in the public market could cause our share price to fall.
If our existing shareholders sell, indicate an intention to sell or the market
perceives that they intend to sell, substantial amounts of our ordinary shares in the public market, the market price of our ordinary shares could decline significantly. As of December 31, 2016, we had outstanding a total of 26,902,285 ordinary
shares. Substantially all of the shares are available for sale in the public market.
As of December 31, 2016, 12,054,249 ordinary shares are held by
directors, executive officers and other affiliates and are subject to Rule 144 under the Securities Act of 1933, as amended, or the Securities Act.
In
addition, as of March 1, 2017, an aggregate of 4,539,715 ordinary shares that are either subject to outstanding options, reserved for future issuance under our 2014 Plan or subject to outstanding warrants will or may become eligible for sale in
the public market to the extent permitted by the provisions of various vesting schedules and Rule 144 and Rule 701 under the Securities Act. In addition, our investor rights agreement entitles certain shareholders who previously held preferred
shares prior to our initial public offering to certain registration rights. As of March 1, 2017, these holders collectively held an aggregate of 9,043,261 ordinary shares entitled to such registration rights. If these additional ordinary shares
are sold, or if it is perceived that they will be sold, in the public market, the market price of our ordinary shares could decline.
Future sales and
issuances of our ordinary shares or rights to purchase ordinary shares, including pursuant to our equity incentive plans, could result in additional dilution of the percentage ownership of our shareholders and could cause our share price to fall.
Additional capital will be needed in the future to continue our planned operations. To the extent we raise additional capital by issuing equity
securities, our shareholders may experience substantial dilution. We may sell ordinary shares, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell
ordinary shares, convertible securities or other equity securities in more than one transaction, investors may be materially diluted by subsequent sales. These sales may also result in material dilution to our existing shareholders, and new
investors could gain rights superior to our existing shareholders.
Pursuant to our Employee Share Ownership and Option Plan (2014), or the 2014 Plan, our
management is authorized to grant share options and other equity-based awards to our employees, directors and consultants. Currently, we plan to register the increased number of shares available for issuance under the 2014 Plan each year. If our
board of directors elects to increase the number of shares available for future grant by the maximum amount each year, our shareholders may experience additional dilution, which could cause our share price to fall.
We could be subject to securities class action litigation.
In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk
is especially relevant for us because pharmaceutical companies have experienced significant share price volatility in recent years. For example, the price of our ordinary shares, which reached its high record of $17.02 per share at the close of the
trading on January 27, 2015, decreased as low as $2.8 per share at the close of the trading on February 1, 2016 a drop of about 84%. If we face such litigation, it could result in substantial costs and a diversion of managements
attention and resources, which could harm our business.
38
We do not intend to pay dividends on our ordinary shares, so any returns will be limited to the value of our
shares.
We have never declared or paid any cash dividends on our share capital. We currently anticipate that we will retain future earnings for the
development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any return to shareholders will therefore be limited to the appreciation of their shares. In addition,
Israeli law limits our ability to declare and pay dividends, and may subject our dividends to Israeli withholding taxes. Furthermore, our payment of dividends (out of
tax-
exempt income) may retroactively
subject us to certain Israeli corporate income taxes, to which we would not otherwise be subject.
If equity research analysts do not publish research
reports about our business or if they issue unfavorable commentary or downgrade our ordinary shares, the price of our ordinary shares could decline.
The trading market for our ordinary shares relies in part on the research and reports that equity research analysts publish about us and our business. The
price of our ordinary shares could decline if we do not obtain research analyst coverage, or one or more securities analysts downgrade our ordinary shares or if those analysts issue other unfavorable commentary or cease publishing reports about us
or our business.
Risks Related to Our Incorporation and Operations in Israel
We are a foreign private issuer and intend to follow certain home country corporate governance practices, and our shareholders may not have the
same protections afforded to shareholders of companies that are subject to all NASDAQ corporate governance requirements.
As a foreign private issuer,
we are permitted, and intend, to follow certain home country corporate governance practices instead of those otherwise required under the NASDAQ Stock Market for domestic U.S. issuers. For instance, we intend to follow home country practice in
Israel with regard to the quorum requirement for shareholder meetings. As permitted under the Israeli Companies Law, 5759-1999, or the Companies Law, our articles of association provide that the quorum for any meeting of shareholders shall be the
presence of at least two shareholders present in person, by proxy or by a voting instrument, who hold at least 25% of the voting power of our shares instead of the 33 1/3% of the issued share capital requirement. We may in the future elect to follow
home country practices in Israel (and consequently avoid the requirements that would otherwise apply to a U.S. company listed on The NASDAQ Global Market) with regard to other matters, as well, such as the formation of compensation, nominating and
governance committees, separate executive sessions of independent directors and
non-management
directors and the requirement to obtain shareholder approval for certain dilutive events (such as for the
establishment or amendment of certain equity-based compensation plans, issuances that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or more interest in the company
and certain acquisitions of the stock or assets of another company). Following our home country governance practices as opposed to the requirements that would otherwise apply to a U.S. company listed on The NASDAQ Global Market may provide less
protection to you than what is accorded to investors under the NASDAQ Stock Market rules applicable to domestic U.S. issuers. See Item 16G. Corporate Governance for more information.
In addition, as a foreign private issuer, we are exempt from the rules and regulations under the Exchange Act related to the furnishing and content of proxy
statements, including the requirement for an emerging growth company to disclose the compensation of the chief executive officer and other two highest compensated executive officers on an individual, rather than aggregate, basis. A recent amendment
to regulations under the Israeli Companies Law will require us to disclose, at the latest, in the notice for our 2016 annual meeting of shareholders, the annual compensation of our five most highly compensated officers on an individual, rather than
aggregate, basis. However, this disclosure will not be as extensive as that required of a U.S. domestic issuer.
We would lose our foreign private issuer
status if a majority of our directors or executive officers are U.S. citizens or residents and we fail to meet additional requirements necessary to avoid loss of foreign private issuer
39
status. Although we have elected to comply with certain U.S. regulatory provisions, our loss of foreign private issuer status would make such provisions mandatory. The regulatory and compliance
costs to us under U.S. securities laws as a U.S. domestic reporting company may be significantly higher. If we are not a foreign private issuer, we will be required to file periodic reports and registration statements on U.S. domestic reporting
company forms with the SEC, which are more detailed and extensive than the forms available to a foreign private issuer. We may also be required to modify certain of our policies to comply with accepted governance practices associated with U.S.
domestic reporting companies. Such conversion and modifications will involve additional costs. In addition, we may lose our ability to rely upon exemptions from certain corporate governance requirements on U.S. stock exchanges that are available to
foreign private issuers.
Potential political, economic and military instability in the State of Israel, where the majority of our senior management
and our research and development facilities are located, may adversely affect our results of operations.
We are incorporated under Israeli law and our
offices and operations are located in the State of Israel. In addition, our key employees, officers and all but two of our directors are residents of Israel. Accordingly, political, economic and military conditions in Israel directly affect our
business. Since the State of Israel was established in 1948, a number of armed conflicts have occurred between Israel and its neighboring countries.
Any
hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners, or a significant downturn in the economic or financial condition of Israel, could affect adversely our operations. Since
October 2000, there have been increasing occurrences of terrorist violence. Ongoing and revived hostilities or other Israeli political or economic factors could harm our operations, product development and results of operations.
Although Israel has entered into various agreements with Egypt, Jordan and the Palestinian Authority, there has been an increase in unrest and terrorist
activity, which began in October 2000 and has continued with varying levels of severity. The establishment in 2006 of a government in the Palestinian Authority by representatives of the Hamas militant group has created additional unrest and
uncertainty in the region. In 2006, a conflict between Israel and the Hezbollah in Lebanon resulted in thousands of rockets being fired from Lebanon up to 50 miles into Israel. Starting in December 2008, for approximately three weeks, Israel engaged
in an armed conflict with Hamas in the Gaza Strip, which involved missile strikes against civilian targets in various parts of Israel and negatively affected business conditions in Israel. In November 2012, for approximately one week, Israel
experienced a similar armed conflict, resulting in hundreds of rockets being fired from the Gaza Strip and disrupting most
day-to-day
civilian activity in southern
Israel. Beginning in July 2014, for approximately seven weeks, Israel experienced additional armed conflict between Israel and Hamas, which included rocket strikes against civilian targets in various parts of Israel. If renewed, these hostilities
may negatively affect business conditions in Israel. In addition, Israel faces threats from more distant neighbors, in particular, Iran. Our insurance policies do not cover us for the damages incurred in connection with these conflicts or for any
resulting disruption in our operations. The Israeli government, as a matter of law, provides coverage for the reinstatement value of direct damages that are caused by terrorist attacks or acts of war; however, the government may cease providing such
coverage or the coverage might not be enough to cover potential damages. In the event that hostilities disrupt the ongoing operation of our facilities or the airports and seaports on which we depend to import and export our supplies and products,
our operations may be materially adversely affected.
In addition, since the end of 2010, numerous acts of protest and civil unrest have taken place in
several countries in the Middle East and North Africa, many of which involved significant violence. The civil unrest in Egypt, which borders Israel, resulted in the resignation of its president Hosni Mubarak, and to significant changes to the
countrys government. In Syria, also bordering Israel, a civil war is continuing to take place. The ultimate effect of these developments on the political and security situation in the Middle East and on Israels position within the region
is not clear at this time. Such instability may lead to deterioration in the political and trade relationships that exist between the State of Israel and certain other countries.
40
Popular uprisings in various countries in the Middle East and North Africa are affecting the political stability
of those countries. Such instability may lead to deterioration in the political and trade relationships that exist between the State of Israel and these countries. Several countries, principally in the Middle East, still restrict doing business with
Israel and Israeli companies, and additional countries may impose restrictions on doing business with Israel and Israeli companies if hostilities in Israel or political instability in the region continues or increases. Any hostilities involving
Israel or the interruption or curtailment of trade between Israel and its present trading partners, or significant downturns in the economic or financial condition of Israel, could adversely affect our operations and product development and
adversely affect our share price. Similarly, Israeli companies are limited in conducting business with entities from several countries. For instance, in 2008, the Israeli legislature passed a law forbidding any investments in entities that transact
business with Iran.
Our operations may be disrupted by the obligations of personnel to perform military service.
As of March 1, 2017, we had 34 employees, all of whom were based in Israel. Some of our employees may be called upon to perform up to 36 days (and in some
cases more) of annual military reserve duty until they reach the age of 40 (and in some cases, up to 45 or older) and, in emergency circumstances, could be called to immediate and unlimited active duty. In the event of severe unrest or other
conflict, individuals could be required to serve in the military for extended periods of time. Since September 2000, in response to increased tension and hostilities, there have been occasional
call-ups
of
military reservists, including in connection with the 2006 conflict in Lebanon, and the December 2008 and November 2012 conflicts with Hamas, and it is possible that there will be additional
call-ups
in the
future. Our operations could be disrupted by the absence of a significant number of our employees related to military service or the absence for extended periods of one or more of our key employees for military service. Such disruption could
materially adversely affect our business and results of operations. Additionally, the absence of a significant number of the employees of our Israeli suppliers and contractors related to military service or the absence for extended periods of one or
more of their key employees for military service may disrupt their operations.
The tax benefits that are available to us if and when we generate
taxable income require us to meet various conditions and may be prevented or reduced in the future, which could increase our costs and taxes.
If and
when we generate taxable income, we would be eligible for certain tax benefits provided to Benefited Enterprises under the Israeli Law for the Encouragement of Capital Investments, 1959, as amended, or the Investment Law. In order to
remain eligible for the tax benefits for Benefited Enterprises we must continue to meet certain conditions stipulated in the Investment Law and its regulations, as amended. In addition, we informed the Israeli Tax Authority of our choice
of 2012 as a Benefited Enterprise election year, all under the Investment Law. The benefits available to us under this tax regulation are subject to the fulfillment of conditions stipulated in the regulation. Further, in the future these
tax benefits may be reduced or discontinued. If these tax benefits are reduced, cancelled or discontinued, our Israeli taxable income would be subject to regular Israeli corporate tax rates. The standard corporate tax rate for Israeli companies is
25% for 2016, 24% for 2017 and 23% for 2018 and thereafter. Additionally, if we increase our activities outside of Israel through acquisitions, for example, our expanded activities might not be eligible for inclusion in future Israeli tax benefit
programs. See Item 10E. TaxationIsraeli Tax Considerations and Government ProgramsLaw for the Encouragement of Capital Investments, 5719-1959.
It may be difficult to enforce a U.S. judgment against us, our officers and directors and the Israeli experts named in this prospectus in Israel or the
United States, or to assert U.S. securities laws claims in Israel or serve process on our officers and directors and these experts.
We were
incorporated in Israel, and our corporate headquarters and substantially all of our operations are located in Israel. All of our executive officers and all but two of our directors, and the Israeli experts named in this prospectus, are located in
Israel. The majority of our assets and the assets of these persons are located outside the United States. Therefore, it may be difficult for an investor, or any other person or entity, to enforce a U.S. court
41
judgment based upon the civil liability provisions of the U.S. federal securities laws against us or any of these persons in a U.S. or Israeli court, or to effect service of process upon these
persons in the United States. Additionally, it may be difficult for an investor, or any other person or entity, to assert U.S. securities law claims in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on an
alleged violation of U.S. securities laws against us or our officers and directors on the grounds that Israel is not the most appropriate forum in which to bring such a claim. 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.
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.
Since we are incorporated under Israeli law, the rights and responsibilities of our shareholders are governed by our articles of association and Israeli law.
These rights and responsibilities differ in some material respects from the rights and responsibilities of shareholders of U.S. corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith and in a customary
manner in exercising its rights and performing its obligations towards the company and other shareholders and to refrain from abusing its power in the company, including, among other things, in voting at the general meeting of shareholders on
certain matters, such as an amendment to the companys articles of association, an increase of the companys authorized share capital, a merger of the company and approval of related party transactions that require shareholder approval. A
shareholder also has a general duty to refrain from discriminating against other shareholders. In addition, a controlling shareholder or a shareholder who knows that it possesses the power to determine the outcome of a shareholder vote or to appoint
or prevent the appointment of an officer of the company has a duty to act in fairness towards the company with regard to such vote or appointment. However, Israeli law does not define the substance of this duty of fairness. There is limited case law
available to assist us in understanding the nature of this duty or the implications of these provisions. These provisions may be interpreted to impose additional obligations and liabilities on our shareholders that are not typically imposed on
shareholders of U.S. corporations. See Item 6. Directors, Senior Management and EmployeesApproval of Related Party Transactions Under Israeli LawShareholders Duties.
Provisions of Israeli law and our amended and restated articles of association could make it more difficult for a third party to acquire us or increase the
cost of acquiring us, even if doing so would benefit our shareholders.
Israeli law regulates mergers, requires tender offers for acquisitions of
shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to such types of transactions. For example, a tender offer for
all of a companys issued and outstanding shares can only be completed if the acquirer receives positive responses from the holders of at least 95% of the issued share capital. Completion of the tender offer also requires approval of a majority
of the offerees that do not have a personal interest in the tender offer, unless at least 98% of the companys outstanding shares are tendered. Furthermore, the shareholders, including those who indicated their acceptance of the tender offer
(unless the acquirer stipulated in its tender offer that a shareholder that accepts the offer may not seek appraisal rights), may, at any time within six months following the completion of the tender offer, petition an Israeli court to alter the
consideration for the acquisition. See Item 10B. Memorandum and Articles of AssociationAcquisitions under Israeli Law for additional information.
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. For example, Israeli tax law does not recognize
tax-free
share exchanges to the same extent as U.S. tax law. With respect to
mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of a number of conditions, including, in some cases, a holding period of two years from the date of
42
the transaction during which sales and dispositions of shares of the participating companies are subject to certain restrictions. Moreover, with respect to certain share swap transactions, the
tax deferral is limited in time, and when such time expires, the tax becomes payable even if no disposition of the shares has occurred.
Certain U.S.
shareholders may be subject to adverse tax consequences if we are characterized as Controlled Foreign Corporation.
Each Ten Percent
Shareholder in a
non-U.S.
corporation that is classified as a controlled foreign corporation, or a CFC, for U.S. federal income tax purposes generally is required to include in income for
U.S. federal tax purposes such Ten Percent Shareholders pro rata share of the CFCs Subpart F income and investment of earnings in U.S. property, even if the CFC has made no distributions to its shareholders. A
non-U.S.
corporation generally will be classified as a CFC for U.S. federal income tax purposes if Ten Percent Shareholders own, directly or indirectly, more than 50% of either the total combined voting power of all
classes of stock of such corporation entitled to vote or of the total value of the stock of such corporation. A Ten Percent Shareholder is a U.S. person (as defined by the U.S. Internal Revenue Code of 1986, as amended), who owns or is
considered to own 10% or more of the total combined voting power of all classes of stock entitled to vote of such corporation. The determination of CFC status is complex and includes attribution rules, the application of which is not entirely
certain.
We do not believe that we were a CFC for the taxable year ended December 31, 2016 or that we are currently a CFC. It is possible, however,
that a shareholder treated as a U.S. person for U.S. federal income tax purposes will acquire, directly or indirectly, enough shares to be treated as a Ten Percent Shareholder after application of the constructive ownership rules and, together with
any other Ten Percent Shareholders of our company, cause us to be treated as a CFC for U.S. federal income tax purposes. We believe that certain of our shareholders are Ten Percent Shareholders for U.S. federal income tax purposes. Holders should
consult their own tax advisors with respect to the potential adverse U.S. federal income tax consequences of becoming a Ten Percent Shareholder in a CFC.
We expect to be classified as a passive foreign investment company, and our U.S. shareholders may suffer adverse tax consequences as a result.
Generally, if, for any taxable year, at least 75% of our gross income is passive income, or at least 50% of the value of our assets is attributable to assets
that produce passive income or are held for the production of passive income, including cash, we would be characterized as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes. For purposes of these tests, passive
income includes dividends, interest, and gains from the sale or exchange of investment property and rents and royalties other than rents and royalties which are received from unrelated parties in connection with the active conduct of a trade or
business. If we are characterized as a PFIC, our U.S. shareholders may suffer adverse tax consequences, including having gains realized on the sale of our ordinary shares treated as ordinary income, rather than 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. See Item 10E. TaxationCertain
Material U.S. Federal Income Tax ConsiderationsPassive Foreign Investment Company Considerations.
Since PFIC status depends on the
composition of our income and the composition and value of our assets (which may be determined in large part by reference to the market value of our ordinary shares, which may be volatile) from time to time, there can be no assurance that we will
not be considered a PFIC for any taxable year. However, because we had no revenue-producing operations, we believe that we were likely a PFIC for our 2016 taxable year. In addition, unless and until we generate sufficient revenue from active
licensing and other
non-passive
sources and otherwise satisfy the asset test above, we expect to be treated as a PFIC in future taxable years.
43
I
tem 4. Information on the Company
Corporate Information
The legal name of our company is
Vascular Biogenics Ltd. and we conduct business under the name VBL Therapeutics. We were incorporated in Israel on January 27, 2000 as a company limited by shares under the name Medicard Ltd. In January 2003, we changed our name to Vascular
Biogenics Ltd. Our registered and principal office is located at 6 Jonathan Netanyahu St., Or Yehuda, Israel 60376. Our service agent in the United States is located at c/o CT Corporation System, 111 8th Avenue, New York, New York 10011 and our
telephone number is
972-3-6346450.
Throughout this prospectus, we refer to various trademarks, service marks and trade names that we use in our business. The
Vascular Biogenics design logo, VBL Therapeutics, Vascular Targeting System, VTS, Lecinoxoids,
VB-111,
VB-201,
the GLOBE design logo and other trademarks or service marks of Vascular Biogenics Ltd. appearing in this prospectus are the property of Vascular Biogenics Ltd. We have several
other registered trademarks, service marks and pending applications relating to our products. Although we have omitted the
®
and trademark designations for such marks in this prospectus, all rights to such trademarks are nevertheless reserved. Other trademarks and service marks appearing in this prospectus are the property of their respective holders.
Emerging Growth Company
We are an emerging
growth company, as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. Thus, we may take advantage of certain exemptions from various reporting requirements that are applicable to public companies generally. For example, we
have elected not to have our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting, as would otherwise be required by Section 404(b) of the
Sarbanes-Oxley Act, or SOX.
We will cease to be an emerging growth company upon the earliest of:
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December 31, 2019, which is the last day of the fiscal year in which the fifth anniversary of our initial public offering in the United States has occurred;
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the last day of the fiscal year in which our annual gross revenues are $1.0 billion or more;
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the date on which we have, during the previous three-year period, issued more than $1.0 billion in
non-convertible
debt securities; or
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the last day of any fiscal year in which the market value of our ordinary shares held by
non-affiliates
exceeded $700.0 million as of the end of the second quarter of that
fiscal year.
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The JOBS Act also provides that an emerging growth company can utilize the extended transition period provided
in
Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards. However, we have chosen to opt out of such extended transition period, and, as a result, we will comply with new or revised
accounting standards on the relevant dates on which adoption of such standards is required for companies that are not emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended
transition period for complying with new or revised accounting standards is irrevocable.
Capital Expenditures
For a discussion of our capital expenditures, see Item 5. Operating and Financial Review and ProspectsLiquidity and Capital Resources.
Business Overview
We are a clinical-stage
biopharmaceutical company focused on the discovery, development and commercialization of
first-in-class
treatments for cancer. Our program is based on our proprietary
Vascular
44
Targeting System, or VTS, platform technology, which utilizes genetically targeted therapy to destroy newly formed, or angiogenic, blood vessels, and which we believe will allow us to develop
product candidates for multiple oncology indications.
Our lead product candidate,
VB-111
(ofranergene
obadenovec), is a gene-based biologic that we are developing for solid tumor indications, with an advanced program for recurrent glioblastoma, or rGBM, an aggressive form of brain cancer. We have obtained fast track designation for
VB-111
in the United States for prolongation of survival in patients with glioblastoma that has recurred following treatment with standard chemotherapy and radiation. We have also received orphan drug designation in
both the United States and Europe. In September 2015, we reported complete results from our Phase 2 trial of
VB-111
in rGBM, demonstrating a statistically-significant benefit in overall survival and favorable
response rate in patients treated with
VB-111
in combination with bevacizumab. Our pivotal Phase 3 GLOBE study in rGBM began in August 2015 and is comparing a combination of
VB-111
and bevacizumab to bevacizumab alone. The study is being conducted under a special protocol assessment, or SPA, agreement with the U.S. Food and Drug Administration, or FDA, with full endorsement by
the Canadian Brain Tumor Consortium (CBTC). We completed enrollment for the trial in December 2016, five months ahead of our initial plan, with a total of 256 patients in the US, Canada and Israel.
We also have been conducting a program targeting anti-inflammatory diseases, based on the use of our Lecinoxoid platform technology. Lecinoxoids are a novel
class of small molecules we developed that are structurally and functionally similar to naturally occurring molecules known to modulate inflammation. The lead product candidate from this program,
VB-201,
is a
Phase
2-ready
molecule that demonstrated efficacy in reducing vascular inflammation in a Phase 2
sub-study
in psoriatic patients with cardiovascular risk. Due to
business limitations associated with the heavy burden of developing medications for cardiovascular diseases, we chose to test it in psoriasis and ulcerative colitis; however, as we reported in February 2015,
VB-201
failed to meet the primary endpoint in Phase 2 clinical trials for psoriasis and for ulcerative colitis. As a result, we have terminated our development of
VB-201
in those indications. Nevertheless, based on recent
pre-clinical
studies, we believe that
VB-201
and some second generation molecules such as
VB-703
may be applicable for NASH and renal fibrosis. Since the company intends to focus substantially all of our efforts and resources on advancing our oncology program, we will seek to advance our Lecinoxoid
assets via strategic deals.
We are also conducting a research program exploring the potential of targeting of MOSPD2 for immuno-oncology applications. In
January 2017, we reported that targeting of MOSPD2 inhibits chemotaxis of monocytes and neuropils, and that unpublished VBL data also show MOSPD2 expression on certain tumor cells. We believe that targeting of MOSPD2 may have several therapeutic
applications, including inhibition of monocyte migration in chronic inflammatory conditions, inhibition of tumor cell metastases and targeting of MOSPD2-expressing tumor cells. We are developing our
VB-600
series of pipeline candidates towards these applications.
We are developing our lead oncology
product candidate,
VB-111,
for solid tumor indications, with current clinical programs in rGBM, thyroid cancer and ovarian cancer. In interim analyses of data from our ongoing open-label Phase 2 clinical trial
of
VB-111
in rGBM, we observed dose-dependent attenuation of tumor growth and an increase in median overall survival, which is the time interval from initiation of treatment to the patients death. The
U.S. Food and Drug Administration, or FDA, has granted
VB-111
fast track designation for prolongation of survival in patients with glioblastoma that has recurred following treatment with temozolomide, a
chemotherapeutic agent commonly used to treat newly diagnosed glioblastoma, and radiation. On July 1, 2014, the FDA concurred with the design and planned analyses of our Phase 3 pivotal trial of
VB-111
in
rGBM pursuant to an SPA. At the time, commencement of the trial was subject to our providing the agency with more information regarding our potency release assay for the trial. We developed this assay and submitted initial information to the FDA on
May 26, 2014. On February 5, 2015 the FDA has found our data satisfactory and removed the partial hold. We began our Phase 3 pivotal trial of
VB-111
in rGBM in August 2015 and completed patient
enrollment for the study in December 2016. According to the current study protocol, which was modified in December 2016, an interim analysis will take place when 105 mortality events will occur in the trial and after 50% of the patients
45
have more than 12 months potential follow up, whichever occurs later. The timing of the interim analysis, which depends both on the timing of enrollment and on
VB-111
activity, is expected
mid-2017.
Top-line data will be available when 189 events will occur in the trial, which is expected in early 2018. We received FDA approval
for the protocol amendment, while maintaining the SPA status for the trial. Following a positive safety review announced in December 2016, the GLOBE trial continues as planned. Based on interactions with the FDA, we believe the current trial, if
successful, will support a Biologics License Application (BLA) in 2018.
VB-111
was also being studied in a Phase
2 trial for recurrent platinum-resistant Ovarian Cancer and in a Phase 2 study in recurrent, iodine-resistant differentiated Thyroid Cancer. In a Phase 2 trial for recurrent platinum-resistant ovarian cancer,
VB-111
demonstrated a statistically significant increase in overall survival and 60% durable response rate (as measured by reduction in
CA-125),
approximately twice
the historical response with bevacizumab plus chemotherapy in ovarian cancer. In December 2016, we had an
end-of-Phase-2
meeting with the FDA, in which we received approval from the FDA to advance
VB-111
for a Phase 3 study in platinum-resistant ovarian cancer, which we intend to launch in the second half of 2017.
In February 2017, we reported full data from our exploratory Phase 2 study of
VB-111
in recurrent, iodine-resistant
differentiated thyroid cancer. The primary endpoint of the trial, defined as
6-month
progression-free-survival
(PFS-6)
of 25%, was met with a dose response. Forty-seven
percent of patients in the therapeutic-dose cohort reached
PFS-6,
versus 25% in the
sub-therapeutic
cohort, both groups meeting the primary endpoint. An overall survival
benefit was seen, with a tail of more than 40% at 3.7 years for the therapeutic-dose cohort, similar to historical data for pazopanib (Votrient
®
), a tyrosine kinase inhibitor; however, most
patients in the
VB-111
study had tumors that previously had progressed on pazopanib or other kinase inhibitors. As of December 31, 2016, we had studied
VB-111
in
over 200 patients and have observed it to be well-tolerated. In December 2015, we have been granted a US composition of matter patents that provides intellectual property protection for
VB-111
in the US until
October 2033 before any patent term extension.
Our Strategy
Our goal is to become a leading biopharmaceutical company focused on discovering, developing and commercializing innovative therapeutics that leverage our
proprietary VTS platform technology for oncology indications. We intend to achieve this goal by pursuing the following strategies:
|
|
|
Pursue regulatory approval for our lead oncology compound,
VB-111,
for rGBM
|
We commenced a Phase 3 pivotal trial of
VB-111
for rGBM in August 2015, under our SPA with the FDA, and estimate that
we will receive interim data in the first half of
mid-2017.
We have secured funding for the GLOBE trial through a
follow-on
offering of $15 million on November
2015, and strengthened our cash position through a $24 million registered direct offering in June 2016. We expect to complete the trial in the beginning of 2018. The timing of this data will depend on overall survival of the patients in the
trial. If we receive positive data from the trial, we expect to submit a BLA to the FDA during 2018, seeking approval of
VB-111
for the treatment of rGBM in the United States.
|
|
|
Expand indications for
VB-111
|
We believe
VB-111
has the potential for applications in other solid tumors in addition to rGBM. We have conducted clinical trials of
VB-111
in both ovarian and thyroid cancer. We intend
to continue development of
VB-111
for platinum-resistant ovarian cancer and plan to launch a Phase 3 study for this indication in the second half of 2017. We also plan to conduct an exploratory study for
VB-111
in combination with a checkpoint inhibitor in lung cancer. For advanced clinical development of
VB-111
for thyroid cancer and additional cancer indications we intend to
seek to establish collaborations with one or more strategic partner. We may also pursue expansion of the treatment indication of
VB-111
in glioblastoma beyond recurrent cases to include newly diagnosed cases
if clinical data support such expansion.
46
|
|
|
Selectively enter into licensing and collaboration arrangements to supplement our internal development capabilities
|
As we advance our pipeline of anti-cancer product candidates, we will evaluate opportunities to selectively form collaborative alliances for our
non-oncology
assets to expand our capabilities and accelerate the development and commercialization of our oncology products. We engage in conversations with third parties to evaluate such potential collaborations
on an ongoing basis.
|
|
|
Expand our manufacturing capacity to support clinical trials and commercialization of
VB-111
|
We currently manufacture clinical quantities of
VB-111
at our facility in Israel and through a third party in the
United States. We are in the process of constructing a large-scale manufacturing facility that would enable us to manufacture commercial quantities of
VB-111,
if it receives regulatory approval, and
potentially other product candidates. We have entered into a long-term lease contract of a new stand-alone facility in Modiin, Israel. We plan to operate this new facility in the second half of 2017.
Our Product Candidates and Technology
The following
table summarizes the status of pipeline:
47
Our VTS Platform
Overview
Our innovative, proprietary VTS platform
technology enables systemic administration of gene therapy to either destroy or promote angiogenic blood vessels. VTS is both tissue- and condition-specific, allowing for targeted and limited gene expression in endothelial cells, the thin layer of
cells that lines the interior surface of blood vessels undergoing angiogenesis.
Our VTS platform technology comprises three components, a viral vector, a
promoter and a transgene:
1. Viral vectora modified virus that is used as a delivery vehicle to distribute the promoter and the transgene throughout
the body.
2. Promoterour proprietary, genetically modified promoter, called
PPE-1-3X,
that specifically targets the endothelial cells of angiogenic blood vessels. When present in these cells, the promoter initiates the expression of the
transgene.
3. Transgenea genetic sequence designed to yield a specific biologic effect, the expression of which is directed by
PPE-1-3X.
The particular transgene will vary depending on the therapeutic objectives of the product candidate.
Once the gene therapy has reached the angiogenic blood vessels, the
PPE-1-3X
promoter activates expression of the transgene to produce a desired RNA or protein in the endothelial cells of those vessels. For oncology applications, the transgene selected is designed to destroy angiogenic blood vessels that feed solid tumors.
For other potential applications, such as the treatment of ischemia, a different transgene can be selected that is designed to promote the development of angiogenic blood vessels instead of their destruction.
VB-111
(ofranergene obadenovec)
VB-111
is a unique biologic agent that uses a dual mechanism to target solid tumors. Its mechanism combines blockade of
tumor vasculature with an anti-tumor immune response.
Based on a
non-integrating,
non-replicating,
Adeno 5 vector,
VB-111
utilizes VBLs proprietary Vascular Targeting System (VTS) to target the tumor vasculature for cancer therapy. We
designed
VB-111
to address oncology indications, specifically solid tumors, by selectively targeting the blood vessels required for tumor growth and encouraging the programmed cell-death process, or apoptosis,
of cells in those blood vessels.
VB-111
is administered intravenously.
PPE-1-3X
is activated specifically in angiogenic
endothelial cells and regulates a transgene consisting of a combination of two gene sequences known as Fas and TNFR1. When expressed, the transgene produces a unique
pro-apoptotic
protein, the
Fas-TNFR1
chimera, that interacts with a native inflammatory molecule, Tumor Necrosis Factor, or
TNF-
alpha, and results in the destruction of newly formed or immature blood
vessels. When activated by
PPE-1-3X,
specifically in angiogenic endothelial cells, this combination enables
VB-111
to reduce
tumor growth in a highly targeted manner.
In addition,
VB-111
induces a specific anti-tumor immune response. In
2004, we published preclinical data, which suggested that there is an immune inflammatory response to the presence of the viral vector and the
Fas-TNFR1
chimera. Further support for a potential role of the
immune system as part of
VB-111s
mechanism of action came from an observation that patients who developed fever as a response to
VB-111
administration, at least
once along the treatment course, had a survival benefit over those who did not experience post-dosing fever. Moreover, an immunotherapeutic effect was also observed in biopsies taken from ovarian cancer patients. Immunohistochemistry staining showed
regions of apoptotic cancer cells and infiltration of cytotoxic CD8
T-cells
following treatment with
VB-111.
48
VB-111s
mechanism of action is illustrated below:
Unlike anti-VEGF agents (such as Avastin
®
) or tyrosine-kinase
inhibitors (TKIs),
VB-111
does not aim to block a specific pro-angiogenic pathway; instead, it uses an angiogenesis-specific sensor (VBLs
PPE-1-3x
proprietary promoter) to specifically induce cell death in angiogenic endothelial cells in the tumor milieu. This mechanism retains activity regardless of
baseline tumor mutations or the identity of the pro-angiogenic factors secreted by the tumor and shows activity even after failure of prior treatment with other anti-angiogenics.
Moreover,
VB-111
induces specific anti-tumor immune response, which is accompanied by recruitment of CD8
T-cells
and apoptosis of tumor cells. We believe that this mode of action makes
VB-111
less susceptible to resistance and, therefore, potentially applicable for a broader patient population than current therapies.
We have conducted
pre-clinical
studies in animal models of lung cancer, colon cancer, thyroid cancer, rGBM and
melanoma. Based on those studies, and clinical results to date, we believe that
VB-111
has anti-tumoral activity that may hold clinical promise and may be suitable for treatment of rGBM and other solid tumors.
We also decided to focus on rGBM as our first indication because we expect the rapid kinetics of this disease will enable us to accumulate clinical data in a short time and, therefore, may facilitate development of
VB-111
for this and other indications.
VB-111
Clinical Programs
We initially studied
VB-111
in a Phase 1 all comers trial involving patients with multiple
types of advanced metastatic cancer types, including thyroid cancer, neuroendocrine cancer, renal cell carcinoma and lung cancer. In that trial,
VB-111
was well-tolerated and showed a dose- dependent extension
in median overall survival across a range of tumor types. Based on these results, we decided to proceed with the development of
VB-111
for the lead indication of rGBM, as well as to investigate
VB-111
as a monotherapy for the treatment of thyroid cancer and, in combination with chemotherapy, for ovarian cancer. We have an open IND for
VB-111
with the Office of
Cellular, Tissue, and Gene Therapeutics within FDAs Center for Biologics Evaluation and Research.
49
Glioblastoma is a brain cancer that affects approximately 10,000 newly diagnosed people each year in the
United States. It is a devastating, rapidly progressing tumor, with a median time from diagnosis to the patients death of 12 to 15 months. In recurrent glioblastoma, treatment consists of both symptomatic and palliative therapies.
However, with currently available therapies, glioblastoma typically remains fatal within a very short period of time.
We conducted an open-label Phase 2
trial in rGBM, which was originally initiated as an adaptive Phase 1/2 trial. The trial was intended to evaluate the safety and efficacy of
VB-111,
both by itself and in combination with bevacizumab, an
anti-angiogenesis agent approved by the FDA for use in rGBM. In this trial, patients were initially dosed with
VB-111
alone. After disease progression on
VB-111
alone,
they receive either bevacizumab alone as standard of care, or, in a second cohort, a combination of
VB-111
and bevacizumab. Disease progression was defined as a worsening of the patients cancer with an
increase of at least 25% in the overall mass of measurable tumors, the appearance of new tumors, the worsening of
non-measurable
tumors since beginning of treatment, a need for an increased dose of
corticosteroids or clinical deterioration.
On September 28, 2015, we reported full Phase 2 data on
VB-111
in
combination with Bevacizumab (Avastin) in rGBM. Trial results include 46 patients with rGBM treated with
VB-111;
upon disease progression, 23 patients were treated with
VB-111
in combination with Avastin , and 22 received Avastin alone. One patient, who achieved a complete response, is still stable on
VB-111
alone for more than
3 years as of January 25, 2017, and was included in the continuous exposure cohort. The median number of
bi-monthly
VB-111
doses was four for the cohort, which was
treated with
VB-111
through progression, versus one in the limited exposure cohort (average of 4.6 vs. 2.2, respectively). Continuous exposure to
VB-111
demonstrated
significant improvement in overall survival, with median overall survival of 15 months, compared to eight months in patients on limited
VB-111
exposure (p=0.048), meeting the primary endpoint of the
trial. Two complete responses and five partial responses were seen in the
VB-111
continuous exposure cohort (n=24), compared to only two partial responses in
VB-111
limited exposure cohort (n=22).
VB-111
was found to be well tolerated.
Trial data also suggest that
VB-111
may induce an immuno-therapeutic effect. Of the 46 patients who received
VB-111,
25 patients experienced a fever post-dosing of
VB-111
at least once, while 21 patients did not. Patients with fevers demonstrated increased overall survival of 16 months, compared to patients without fevers, who had a median overall survival of 8.5 months
(p=0.03). This correlation between clinical efficacy and fever suggests that
VB-111
may induce an immune response in patients and supports a role of the immune system as part of
VB-111s
mechanism of action.
In 62 patients with rGBM, the most frequent toxicity was self-limited fever,
starting several hours post therapy and usually resolving within 24 hours and controlled with anti-pyretics. There were 22 adverse events classified as grade 3 or higher, of which 7 were considered possibly related to
VB-111
including asthenia, pyrexia, brain edema, depressed consciousness, pulmonary embolism, or PE (in a patient with PE prior to enrollment in the trial) and hypertension. Safety results were reviewed five
times by the trial Data and Safety Monitoring Board, as well as by the FDA, without safety concerns.
In June 2016 at the ASCO conference, we presented
clinical data that demonstrate a significant overall survival benefit in rGBM patients receiving
VB-111
compared with historical Avastin
®
meta-analysis
data. In the Phase 2
VB-111
trial, the median overall survival of patients who received continuous exposure of
VB-111
in combination with Avastin was 59.1 weeks. This is
compared to 32.1 weeks in the pooled data from the 8 studies in the meta-analysis (p=0.0295; Hazard Ratio 0.62, 95% CI:
0.40-0.96).
Median survival ranged from 26.0 weeks to 45.7 weeks in the
meta-analysis. Overall survival at 12 months for patients on continuous exposure of
VB-111
was 57%, compared with 24% overall survival (range 16%-38%) for the pooled Avastin
®
treated rGBM data (p=0.03).
VBLs pivotal Phase 3 GLOBE study is proceeding under a
Special Protocol Assessment (SPA) granted by the FDA, with full endorsement by the Canadian Brain Tumor Consortium (CBTC). On January 6, 2017 we reported that we completed enrollment in the GLOBE Phase 3 study evaluating the efficacy
of
VB-111
in patients with recurrent glioblastoma (rGBM). Enrollment in the study, 256 patients in total, has been completed five months ahead of schedule.
50
On December 5, 2016 we announced that the independent Data Safety Monitoring Committee (DSMC) met to conduct
its first safety review of the Phase 3 GLOBE Study investigating ofranergene obadenovec
(VB-111)
in recurrent glioblastoma (rGBM). The DSMC is an independent multidisciplinary group that conducts detailed
review of
un-blinded
study data, discusses potential safety concerns and provides recommendations regarding trial continuation. The committee reviewed the GLOBE safety data collected through a cutoff date
in September 2016, and did not find any adverse events that would be cause for concern. As a result, the DSMC recommended that the study continue as planned.
Following a meeting with FDA in December 2016, VBL has also received FDA approval for adjustments in the GLOBE protocol, while keeping the SPA in
place. Originally, the interim analysis in GLOBE was to be conducted after 91 deaths. The modified protocol specifies that it will be conducted after 105 deaths, and after 50% of the patients have more than 12 months potential follow up, whichever
occurs later. The final analysis will be conducted at 189 deaths (75% of events), versus the original planned for 151 deaths (60% of events).
These
adjustments to the GLOBE protocol are intended to provide better powering and increase the probability for a clearer efficacy signal. Given the fast recruitment pace and completion of recruitment ahead of schedule, we continue to expect that the
interim analysis will occur in
mid-2017
and that the
top-line
results from the full dataset will be available in early 2018.
In addition to GBM, based on observations from early clinical trials, we have advanced
VB-111
into tumor specific,
repeat-dose trials, in ovarian cancer and thyroid cancer.
Ovarian cancer was diagnosed in approximately 22,000 American women in 2013, according to the
National Cancer Institute. In ovarian cancer, clinical trials of bevacizumab, which, like
VB-111,
is an anti-angiogenic agent, demonstrated some improvement in progression free survival in women with high-risk
advanced ovarian cancer. Therefore, we conducted a Phase 1/2 clinical trial in ovarian cancer using
VB-111
in combination with paclitaxel, a common chemotherapeutic agent.
This trial was designed as a Phase 1/2 dose escalation study. The primary objectives were to evaluate the safety and tolerability and identify dose
limiting toxicity in combination of
VB-111
and weekly paclitaxel; and explore the efficacy in an expanded cohort of the optimally tolerated dose of combination
VB-111
and weekly paclitaxel, based on RECIST response,
CA-125
response, progression free survival (PFS) and overall survival (OS) in patients with recurrent platinum-resistant ovarian cancer.
Twenty one patients with recurrent platinum-resistant Müllerian/ovarian cancer were enrolled at Massachusetts General Hospital and Dana
Farber Cancer Institute, and received up to 7 doses of treatment. Patients were treated in two consecutive cohorts: Low Dose Treatment (n=4, 3x10
12
VPs + 40mg/80 paclitaxel) or a
Therapeutic Dose (n=17, 1x10
13
VPs + 80 paclitaxel). All patients had measurable disease, with a grade at diagnosis of: 1A (1, 5%), 1B (1, 5%), 1C (1, 5%); IIIC (12, 57%); or IV (6,
29%). The patients included in the study were of particularly adverse prognosis as 48% of the patients were primary platinum refractory and 52% had tumors that failed to respond to prior anti-angiogenic agents, including Avastin.
In June 2016 at the ASCO conference, we presented clinical
top-line
data from this trial. The results showed a
significant increase in overall survival at the therapeutic dose of
VB-111
vs. the low dose level (810 vs. 172 days, p=0.042). Nine of the 15 evaluable patients (60%) on the therapeutic dose had a
response, as defined by a 50% reduction in
CA-125.
Durable RECIST responses and disease stabilizations were seen. This represents an approximate doubling in response rate, compared to historical data with
ovarian cancer patients treated with a combination of Avastin
®
and chemotherapy in the AURELIA trial which reported
CA-125
response in 11.6%
of patients treated with chemotherapy and 31.8%
CA-125
response in ovarian cancer patients treated with a combination of chemotherapy and Avastin
®
.
51
An immunotherapeutic effect was also observed in biopsies taken from patients. H&E and immunohistochemistry
staining showed regions of apoptotic cancer cells and infiltration of cytotoxic CD8
T-cells
following treatment with
VB-111.
VB-111
was found to be safe and well tolerated. Toxicity was similar to what would be expected with antiangiogenics and taxanes in this patient population. Eight serious adverse events were reported,
2 were considered by the investigator to be possibly related to be
VB-111. No
dose limiting toxicities were reported at any dose level.
In December 2016 we had an
end-of-Phase
2 meeting with
the FDA to discuss the clinical path of
VB-111
in ovarian cancer. We reached agreement with the FDA on our clinical plan to proceed to a Phase 3 pivotal study of
VB-111
in platinum-resistant patients, with OS as the primary endpoint. We intend to advance
VB-111
for this patient population, for which most current therapies fail to
prolong patient survival, and plan to launch an ovarian cancer pivotal study in the second half of 2017.
In thyroid cancer, we conducted an exploratory
Phase 2 clinical trial to evaluate safety and efficacy of
VB-111.
According to the National Cancer Institute, there are an estimated 535,000 people currently living with thyroid cancer in the United States,
with an estimated 60,000 new cases of thyroid cancer each year. Most cases can be treated by surgery and radioactive iodine. If radioactive iodine is ineffective, other treatments are prescribed, such tyrosine kinase inhibitors and systemic
chemotherapy. However, if such treatments are unsuccessful, the therapeutic options for patients are currently very limited. There are an estimated 2,000 annual deaths in the U.S. as a result of the disease. This subset of
patients has an unmet need for novel therapeutic options such as
VB-111.
Our open-label dose-escalating study
enrolled patients with advanced, recently-progressive, differentiated thyroid cancer that was unresponsive to radioactive iodine, in two cohorts. Most patients had tumors that had not responded to multiple therapies prior to enrollment, including
radiation and kinase inhibitors. In the first cohort, thirteen patients received a single intravenous infusion of
VB-111
at a
sub-therapeutic
dose of 3X10
12
viral particles (VPs). The second cohort included seventeen patients, who received
VB-111
at a therapeutic dose of 10
13
VPs every two months until disease progression. One patient proceeded from a single low dose to receive later multiple high doses at progression and was included in both groups (for PFS only).
On February 21, 2017 we announced full data from this trial. The primary endpoint of the trial, defined as
6-month
progression-free-survival
(PFS-6)
of 25%, was met with a dose response. Forty-seven percent (47%; 8/17) of patients in the therapeutic-dose cohort reached
PFS-6,
versus 25% (4/12) in the
sub-therapeutic
cohort, both groups meeting the primary endpoint. Reduction in tumor measurement after the first dose was seen in 44% (7/16) of
patients in the therapeutic-dose cohort, compared to 9% (1/11) in the
sub-therapeutic-dose
cohort. An overall survival benefit was seen with a tail of more than 40% at 3.7 years for the therapeutic-dose cohort
(mOS 684 days). This is similar to historical data for pazopanib (Votrient
®
), a tyrosine kinase inhibitor; however, most patients in the
VB-111
study
had tumors that previously had progressed on pazopanib or other kinase inhibitors.
VB-111
was observed to be well-tolerated in this study, with no signs of clinically significant safety issues.
We see these positive data as additional
proof-of-concept
for
VB-111
in a third type of advanced solid tumor, particularly important for investigating the therapeutic potential of
VB-111
even as monotherapy. Our primary focus continues
to be advancement of
VB-111
towards commercialization, if approved, in the rGBM and ovarian cancer indications. Further clinical development of
VB-111
for thyroid cancer
may also be pursued, potentially with a strategic partner.
Additional VTS Pipeline candidates
Our VTS platform technology enables systemic administration of gene therapy to either destroy or promote angiogenic blood vessels. Beyond
VB-111,
we have generated additional product candidates which utilize the same vector and promoter as in
VB-111,
yet comprise alternative functional transgenes.
VB-511
is an anti-angiogenic candidate, while
VB-211
and
VB-411
are pro-angiogenic candidates that may be employed for ischemic
conditions like peripheral vascular disease. All three candidates have demonstrated
pre-clinical
efficacy and are ready for toxicology. We may pursue further development of
VB-511
internally, but we aim to
partner-out
the pro-angiogenic candidates.
52
The following table summarizes the status of our VTS platform:
Our Lecinoxoid Platform Technology
Our proprietary Lecinoxoid platform technology comprises a family of orally administered small molecules designed to modulate the bodys inflammatory
response. Lecinoxoids are compounds that are structurally and functionally similar to naturally occurring molecules, known as oxidized phospholipids, which possess immune modulating anti-inflammatory properties, modified to enhance stability and
activity. We believe that Lecinoxoids hold significant promise in their ability to treat a range of chronic immune-based inflammatory diseases.
The
inflammatory response is a complex physiologic process balancing both
pro-
and anti- inflammatory components that interact intimately with the bodys immune system. Oxidized phospholipids are instrumental
in the interplay of these components that maintain equilibrium. When the inflammatory response is not adequately balanced, excess inflammation results and may cause both acute and chronic disease states.
The Lecinoxoid platform seeks to harness the ability of oxidized phospholipids to regulate and attenuate key
immune-inflammatory signaling. We believe that our approachidentifying naturally occurring anti-inflammatory compounds and modifying them to enhance stability and activitymay lead to more physiologically balanced responses than other
available anti-inflammatory therapies.
53
VB-201
Our lead Lecinoxoid-based compound,
VB-201,
was designed as an oral agent for the control of chronic inflammatory
disorders. It was clinically developed for psoriasis and ulcerative colitis, however, our recent Phase 2 data do not support further development for these indications. We believe that
VB-201
may still have
potential in other disorders in which
TLR-2
and
TLR-4
or monocytes play a role. In this regard, in April 2016 we announced a scientific publication of preclinical
findings demonstrating that
VB-201,
and its next-generation derivative
VB-703,
can inhibit
Non-Alcoholic
Steatohepatitis, or
NASH, and liver fibrosis in a murine NASH model.
Non-alcoholic
fatty liver disease is the most common liver
disease in the western world. This pathological condition is characterized by lipid accumulation in hepatocytes and ranges from the
non-progressive
form termed steatosis to NASH, the progressive form that is
prone to the development of cirrhosis, liver cancer, and liver failure. NASH is characterized by fatty liver inflammation. Several studies have implicated TLR4 and its
co-receptor
CD14 in NASH and fibrosis. In
addition, studies have emphasized the crucial role of infiltrating monocytes/macrophages for the progression of liver inflammation and fibrosis in experimental mouse models and in patients with liver cirrhosis. It has become clear that the
macrophage compartment of the liver, traditionally called Kupffer cells, is greatly augmented by an overwhelming number of infiltrating monocytes upon acute or chronic liver injury.
VB-201
inhibits the
CD-14/TLR4
and TLR2 pathways as well as monocyte
migration. Using an external CRO, we studied
VB-201
in a mouse model of NASH and found that while treatment with
VB-201
did not reduce steatosis, it significantly
decreased liver lobular inflammation and liver fibrosis compared to vehicle treated mice.
Beyond
VB-201,
we have
developed second and third generations of Lecinoxoid product candidates. Our results highlight the potential of some of these molecules, such as
VB-703,
a third generation candidate whose IP life-cycle can
extend to the
mid-2030s.
In May 2015 at the DDW conference, we presented that
VB-703
inhibits liver fibrosis by blocking TLR4 signaling pathways.
Recent preclinical studies which we performed also demonstrate efficacy of
VB-201
and
VB-703
in a rat model of renal fibrosis. Renal fibrosis is a direct consequence of the kidneys limited capacity to regenerate after injury. Renal scarring results in a progressive loss of renal function,
ultimately leading to
end-stage
renal failure and a requirement for dialysis or kidney transplantation.
Our lead
Lecinoxoid molecule,
VB-201,
is a
Phase-2
ready oral molecule which has demonstrated safety in > 600 patients and
proof-of-concept
in a Phase 2 study for vascular inflammation. Our next-generation molecule
VB-703,
offers long IP lifecycle with demonstrated efficacy in liver and
renal fibrosis models.
The following table summarizes the status of the Lecinoxoid platform:
54
We believe that Lecinoxoids have therapeutic potential in disorders in which
TLR-2
and
TLR-4
or monocytes play a role, such as atherosclerosis, NASH/Liver fibrosis and renal fibrosis. In spite of that potential, we have decided strategically to
focus our efforts and resources on development of novel anti-cancer therapies, such as
VB-111,
and therefore we intend to seek one or more strategic partners that would help us to promote the development of
our Lecinoxoid assets.
Expanding our PipelineThe
VB-600
Family
We intend to continue research and development activities in the oncology field to strengthen the pipeline of our anti-cancer drug candidates. In this regard,
we believe that we have identified a novel tumor-related target, MOSPD2, that may be used as a marker for selective targeting of several types of tumors. In January 2017, a manuscript published by VBL disclosed that MOSPD2, a protein with a
previously unknown function, regulates cell migration in human monocytes. While this first manuscript focused on the importance of MOSPD2 in immune cells, research conducted by VBL has explored the relevance of MOSPD2 in motility and metastasis of
tumor cells. These oncology-related data will be presented at the forthcoming American Association of Cancer research (AACR) conference in Washington, DC, April
1-5,
2017. We believe that targeting of MOSPD2
may have several therapeutic applications, including inhibition of monocyte migration in chronic inflammatory conditions, inhibition of tumor cell metastases and targeting of MOSPD2-expressing tumor cells. We are developing our
VB-600
series of pipeline candidates towards these applications. We expect to report additional findings related to MOSPD2 in the second quarter of 2017.
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 intellectual property rights.
Patents
As of January 30, 2017, we had 163
granted patents and 49 applications pending worldwide for our oncology program and VTS platform technology and 95 granted patents and 24 patent applications pending worldwide for our anti-inflammatory program and Lecinoxoid family of compounds. Our
lead VTS asset,
VB-111,
is covered by US granted patent extending to 2033 before any extensions. Our lead Lecinoxoid,
VB-201,
is protected by US granted
composition-of-matter
patent extending to 2027 before any extensions. In addition, we have pending patent applications covering use of
VB-201,
VB-703
and additional Lecinoxoid for NASH and fibrosis indications that may extend, if granted, to the 2030s. For MOSPD2, there are 2 applications pending
worldwide.
Trademarks
We rely on trade
names, trademarks and service marks to protect our name brands. Our registered trademarks in several countries include the following: VTS, VASCULAR TARGETING SYSTEMS, VBL, VASCULAR BIOGENICS and
VASCULAR THERAPEUTICS.
Trade Secrets and Confidential Information
In addition to patented technology, we rely on our unpatented proprietary technology, trade secrets, processes and
know-how.
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.
55
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 Risk Factors.
Sales and Marketing
We have not yet established sales, marketing or product distribution operations because our lead candidates are still in early clinical development.
Manufacturing
We generally perform process development
for our drug substance candidates and manufacture quantities of our drug candidates necessary to conduct
pre-clinical
studies and clinical trials of our drug candidates. We rely on third-party manufacturers to
produce bulk drug substance required for our clinical trials and expect to continue to rely on third parties to manufacture clinical trial drug supplies for the foreseeable future. We also contract with additional third parties for the formulating,
labeling, packaging, storage and distribution of the final drug products.
VB-111
We manufacture the active pharmaceutical ingredient and the formulated drug product of
VB-111
for the clinical
development at our small-scale cGMP-compliant production facility in Israel and pursuant to an arrangement with a third party in the United States.
We
intend to establish a facility to manufacture
VB-111
in Israel, which would serve as a second manufacturing site for the supply of
VB-111
and enable us to comply with
the restrictions of the Research Law and our undertaking to the OCS that an essential portion of our
VB-111
production, and in any event not less than the majority of
VB-111
production, will remain in Israel.
In October 2016, we entered into a long-term lease contract of a new
stand-alone facility in Modiin, Israel. The site will house VBLs local biological drugs manufacturing facility, as we plan ahead for potential commercialization of
VB-111,
if approved. The site
design enables modular expansion of the manufacturing capacity, to supply growing demand following commercialization, while requiring only limited capital resources in the immediate stage. The near-term investment is not expected to materially
impact VBLs cash position. We project that our current cash resources will be sufficient to support our operations into 2019, beyond the readout of the pivotal GLOBE trial, while supporting a potential registration trial in ovarian cancer and
the investment in the new facility.
Employees
As of
March 1, 2017, we employed 34 employees, including 27 in research and development, and 7 in general and administrative positions, and of which 13 employees have either MDs or PhDs. All of our employees are located in Israel. We believe our
employee relations are good.
Israeli labor laws 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 specified 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 the applicable Israeli legal requirements.
56
None of our employees currently work under any collective bargaining agreements.
Property
Our corporate headquarters and research
facilities are currently located in Or Yehuda, Israel, where we lease an aggregate of approximately 9,000 square feet of office and laboratory space, pursuant to lease agreements that expire in October 2017. This facility additionally houses our
clinical development, clinical operations, regulatory and management functions.
VBL intends to relocate to a new site in Modiin, Israel in the second
half of 2017. The new site will house VBLs local biological drugs manufacturing facility, as the company plans ahead for potential commercialization of
VB-111.The
new facility will also include the
companys headquarters, discovery research and clinical development.
Organizational Structure
We do not have any subsidiaries.
Legal Proceedings
We are not a party to any legal proceedings.
It
em 4A. Unresolved Staff Comments
Not applicable.
Ite
m 5. Operating and Financial Review and Prospects
The following discussion of our financial condition and results of operations should be read in conjunction with Item 3. Key
InformationSelected Financial Data and our financial statements and the related notes to those statements included elsewhere in this Annual Report. In addition to historical financial information, the following discussion and analysis
contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors,
including those discussed under Item 3. Key InformationD. Risk Factors and elsewhere in this Annual Report.
The
audited financial statements for the years ended December 31, 2016, 2015 and 2014 in this Annual Report have been prepared in accordance with IFRS as issued by the IASB. None of the financial information in this Annual Report has been prepared
in accordance with U.S. GAAP.
Overview
We are a
clinical-stage biopharmaceutical company focused on the discovery, development and commercialization of
first-in-class
treatments for cancer. Our program is based on our
proprietary Vascular Targeting System, or VTS, platform technology, which utilizes genetically targeted therapy to destroy newly formed, or angiogenic, blood vessels, and which we believe will allow us to develop product candidates for multiple
oncology indications.
Our lead product candidate,
VB-111(ofranergene
obadenovec), is a gene-based biologic that
we are developing for solid tumor indications, with an advanced program for recurrent glioblastoma, or rGBM, an aggressive form of brain cancer. We have obtained fast track designation for
VB-111
in the United
States for prolongation of survival in patients with glioblastoma that has recurred following treatment with standard chemotherapy and
57
radiation. We have also received orphan drug designation in both the United States and Europe. Our pivotal Phase 3 GLOBE study in rGBM began in August 2015. The study is being conducted under a
special protocol assessment, or SPA, agreement with the U.S. Food and Drug Administration, or FDA, with full endorsement by the Canadian Brain Tumor Consortium (CBTC). We completed enrollment for the trial in December 2016, five months ahead of
our initial plan, with a total of 256 patients in the US, Canada and Israel.
We also have been conducting a program targeting anti-inflammatory
diseases based on the use of our Lecinoxoid platform technology. Lecinoxoids are a novel class of small molecules we developed that are structurally and functionally similar to naturally occurring molecules known to modulate inflammation. As we
reported in February 2015, the lead product candidate from this program,
VB-201,
failed to meet the primary endpoint in Phase 2 clinical trials for psoriasis and for ulcerative colitis. As a result, we have
terminated our development of
VB-201
in those indications. Nevertheless, based on recent
pre-clinical
studies, we believe that
VB-201
and some second generation molecules such as
VB-703
may be applicable for NASH and renal fibrosis. Since the Company intends to focus substantially all of our
efforts and resources on advancing our oncology program, we will seek to advance our Lecinoxoid assets via strategic deals.
We are also conducting a
research program exploring the potential of targeting of MOSPD2 for immuno-oncology applications. We believe that targeting of MOSPD2 may have several therapeutic applications, including inhibition of monocyte migration in chronic inflammatory
conditions, inhibition of tumor cell metastases and targeting of MOSPD2-expressing tumor cells. We are developing our
VB-600
series of pipeline candidates towards these applications.
We are developing our lead oncology product candidate,
VB-111,
for solid tumor indications, with current clinical
programs in rGBM, thyroid cancer and ovarian cancer. In interim analyses of data from our ongoing open-label Phase 2 clinical trial of
VB-111
in rGBM, we observed dose-dependent attenuation of tumor growth and
an increase in median overall survival, which is the time interval from initiation of treatment to the patients death. The U.S. FDA has granted
VB-111
fast track designation for prolongation of survival
in patients with glioblastoma that has recurred following treatment with temozolomide, a chemotherapeutic agent commonly used to treat newly diagnosed glioblastoma, and radiation. On July 1, 2014, the FDA concurred with the design and planned
analyses of our Phase 3 pivotal trial of
VB-111
in rGBM pursuant to an SPA. At the time, commencement of the trial was subject to our providing the agency with more information regarding our potency release
assay for the trial. We developed this assay and submitted initial information to the FDA on May 26, 2014. On February 5, 2015, the FDA found our data satisfactory and removed the partial hold. We began our Phase 3 pivotal trial of
VB-111
in rGBM in August 2015 and completed patient enrollment for the study in December 2016. According to the current study protocol, which was modified in December 2016, an interim analysis will take place when
105 mortality events will occur in the trial and after 50% of the patients have more than 12 months potential follow up, whichever occurs later. The timing of the interim analysis, which depends both on the timing of enrollment and on
VB-111
activity, is expected in
mid-2017.
Top-line data will be available when 189 events will occur in the trial, which is expected in early 2018. We received FDA approval
for the protocol amendment while maintaining the SPA status for the trial. Following a positive safety review announced in December 2016, the GLOBE trial continues as planned. Based on interactions with the FDA, we believe the current trial, if
successful, will support a Biologics License Application (BLA) in 2018.
VB-111
was also being studied in a Phase
2 trial for recurrent platinum-resistant ovarian cancer and in a Phase 2 study in recurrent, iodine-resistant differentiated thyroid cancer. In a Phase 2 trial for recurrent platinum-resistant ovarian cancer,
VB-111
demonstrated a statistically significant increase in overall survival and 60% durable response rate (as measured by reduction in
CA-125),
approximately twice
the historical response with bevacizumab plus chemotherapy in ovarian cancer. In December 2016, we had an
end-of-Phase-2
meeting with the FDA, following which we plan to advance
VB-111
to a Phase 3 study in platinum-resistant ovarian cancer, which we intend to launch in the second half of 2017.
58
In February 2017, we reported full data from our exploratory Phase 2 study of
VB-111
in recurrent, iodine-resistant differentiated thyroid cancer. The primary endpoint of the trial, defined as
6-month
progression-free-survival
(PFS-6)
of 25%, was met with a dose response. Forty-seven percent of patients in the therapeutic-dose cohort reached
PFS-6,
versus 25% in the
sub-therapeutic
cohort, both groups meeting the primary endpoint. An overall survival benefit was seen, with a tail of more than 40% at 3.7 years for the therapeutic-dose cohort, similar to historical data for
pazopanib (Votrient), a tyrosine kinase inhibitor; however, most patients in the
VB-111
study had tumors that previously had progressed on pazopanib or other kinase inhibitors. As of December 31, 2016, we
had studied
VB-111
in over 200 patients and have observed it to be well-tolerated. In December 2015, we have been granted a US composition of matter patents that provides intellectual property protection for
VB-111
in the US until October 2033 before any patent term extension.
We commenced operations in 2000, and our
operations to date have been limited to organizing and staffing our company, business planning, raising capital, developing our VTS and Lecinoxoid platform technologies and developing our product candidates, including conducting
pre-clinical
studies and clinical trials of
VB-111
and
VB-201.
To date, we have funded our operations through private sales of
preferred shares, a convertible loan, public offering and grants from the Israeli Office of Chief Scientist, or OCS, which has later transformed to the National Authority for Technology and Innovation, or NATI, under the Israel Encouragement of
Research and Development in Industry, or the Research Law. We have no products that have received regulatory approval and accordingly have never generated revenue. Since our inception and through December 31, 2016, we had raised an aggregate of
$211.9 million to fund our operations, of which $113.4 million was from sales of our equity securities, $40.5 from our initial public offering, or IPO, $15 million from a November 3, 2015 underwritten offering, approximately
$24.0 million from a June 7, 2016 registered direct offering and $19.0 million from NATI grants.
Since inception, we have incurred
significant losses. For the years ended December 31, 2016, 2015 and 2014, our loss was $16.0 million, $14.9 million, and $17.4 million, respectively. We expect to continue to incur significant expenses and losses for at least the
next several years. As of December 31, 2016, we had an accumulated deficit of $158.1 million. Our losses may fluctuate significantly from quarter to quarter and year to year, depending on the timing of our clinical trials, the receipt of
payments under any future collaborations we may enter into, and our expenditures on other research and development activities.
As of December 31,
2016, we had cash, cash equivalents and short-term bank deposits of $45.3 million. To fund further operations, we will need to raise additional capital. We may seek to raise more capital to pursue additional activities, which may be through a
combination of private and public equity offerings, government grants, strategic collaborations and licensing arrangements. Additional financing may not be available when we specifically need it or may not be available on terms that are favorable to
us. As of March 1, 2017, we had 34 employees. Our operations are located in a single facility in Or Yehuda, Israel.
Financial Overview
Revenue
To date, we have not generated any
revenue. We do not expect to receive any revenue from any product candidates that we develop unless and until we obtain regulatory approval and commercialize our products or enter into collaborative agreements with third parties.
Research and Development Expenses
Research and
development expenses consist of costs incurred for the development of both of our platform technologies and our product candidates. Those expenses include:
|
|
|
employee-related expenses, including salaries and share-based compensation expenses for employees in research and development functions;
|
|
|
|
expenses incurred in operating our laboratories and small-scale manufacturing facility;
|
59
|
|
|
expenses incurred under agreements with CROs and investigative sites that conduct our clinical trials;
|
|
|
|
expenses relating to outsourced and contracted services, such as external laboratories, consulting and advisory services;
|
|
|
|
supply, development and manufacturing costs relating to clinical trial materials;
|
|
|
|
maintenance of facilities, depreciation and other expenses, which include direct and allocated expenses for rent and insurance; and
|
|
|
|
costs associated with
pre-clinical
and clinical activities.
|
Research
and development activities are the primary focus of our business. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased
size and duration of later-stage clinical trials. Our research and development expenses may increase in absolute dollars in future periods as we continue to invest in research and development activities related to the development of our platform
technologies and product candidates. In particular, our research and development expenses may increase as we develop
VB-111
beyond rGBM, and continue its clinical development in ovarian cancer and thyroid
cancer. In addition, our research and development expenses may increase as we develop our
VB-600
series of product candidates.
Research expenses are recognized as incurred. An intangible asset arising from the development of our product candidates is recognized if certain
capitalization conditions are met. As of December 31, 2016, we did not have any capitalized development costs.
Costs for certain development
activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and clinical sites. Nonrefundable advance payments for goods or services to be received in
future periods for use in research and development activities are deferred and capitalized. The capitalized amounts are then expensed as the related goods are delivered and the services are performed.
We have received grants from the NATI as part of the research and development programs for our VTS and Lecinoxoid platform technologies. The requirements and
restrictions for such grants are found in the Research Law. These grants are subject to repayment through future royalty payments on any products resulting from these research and development programs, including
VB-111
and
VB-201.
Under the Research Law, royalties of 3% to 3.5% on the revenues derived from sales of products or services developed in whole or in part using these
NATI grants are payable to the Israeli government. The maximum aggregate royalties paid generally cannot exceed 100% of the grants made to us, plus annual interest generally equal to the
12-month
LIBOR
applicable to dollar deposits, as published on the first business day of each calendar year. The total gross amount of grants actually received by us from the NATI, including accrued LIBOR interest as of December 31, 2016 and 2015, totaled
$23.3 million and $21.7 million, respectively. As of December 31, 2016, we had not paid any royalties to the NATI.
The Research Law is
targeted at maintaining the intellectual property and manufacturing rights relating to NATI-funded projects in Israel. Under certain circumstances, where the above is not followed, the royalty rate might be higher and accordingly calculated to a
formula based on the ratio of the participation by the State in the project to the total project costs incurred us.
In addition to paying any royalty
due, we must abide by other restrictions associated with receiving such grants under the Research Law that continue to apply following repayment to the NATI. These restrictions may impair our ability to outsource manufacturing, engage in change of
control transactions or otherwise transfer our
know-how
outside of Israel, and may require us to obtain the approval of the NATI for certain actions and transactions and pay additional royalties and other
amounts to the NATI. In addition, any change of control and any change of ownership of our ordinary shares that would make a
non-Israeli
citizen or resident an interested party, as defined in the
Research Law, requires prior written notice to the NATI. If we fail to comply with the Research Law, we may be subject to criminal charges.
60
Under applicable accounting rules, the grants from the NATI have been accounted for as an
off-set
against the related research and development expenses in our financial statements. As a result, our research and development expenses are shown on our financial statements net of the NATI grants.
General and Administrative Expenses
General and
administrative expenses consist principally of salaries and related costs for personnel in executive and finance functions such as salaries, benefits and share-based compensation. Other general and administrative expenses include facility costs not
otherwise included in research and development expenses, communication expenses, and professional fees for legal services, patent counseling and portfolio maintenance, consulting, auditing and accounting services.
Financial Expenses (Income), Net
Financial income
is comprised of interest income generated from interest earned on our cash, cash equivalents and short-term bank deposits and gains and losses due to fluctuations in foreign currency exchange rates mainly in the appreciation and depreciation of the
NIS exchange rate against the U.S. dollar.
Financial expenses primarily consist of fluctuations in foreign currency exchange rates and gains and losses
resulting from the
re-measurement
of our convertible loan liability between July 2013 and May 2014. We continued to record adjustments to the estimated fair value of the convertible loan liability until it was
converted into our Series E preferred shares in May 2014, after which we no longer record any related periodic fair value adjustments.
Taxes on
Income
We have not generated taxable income since our inception, and had carry forward tax losses as of December 31, 2016 of
$139.5 million. We anticipate that we will be able to carry forward these tax losses indefinitely to future tax years. Accordingly, we do not expect to pay taxes in Israel until we have taxable income after the full utilization of our carry
forward tax losses.
We recognize deferred tax assets on losses for tax purposes carried forward to subsequent years if utilization of the related tax
benefit against a future taxable income is expected. We have not created deferred taxes on our tax loss carry forward since their utilization is not expected in the foreseeable future.
Critical Accounting Policies and Significant Judgments and Estimates
This managements discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been
prepared in accordance with IFRS. 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 expenses incurred during the reporting periods. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future
events that are believed to be reasonable under the circumstances.
We make estimates and assumptions concerning the future. The resulting accounting
estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are
discussed below.
Share-Based Compensation
We
operate a number of equity-settled, share-based compensation plans for employees (as defined in IFRS 2 Share-Based Payments), directors and service providers. As part of the plans, we grant employees, directors
61
and service providers, from time to time and at our discretion, options to purchase our ordinary shares. The fair value of the services received in exchange for the grant of the options is
recognized as an expense in our statements of comprehensive loss and is carried to additional paid in capital in our statements of financial position. The total amount is recognized as an expense ratably over the vesting period of the options, which
is the period during which all vesting conditions are expected to be met.
We estimate the fair value of our share-based awards to employees, directors
and service providers using the Black-Scholes option pricing model, which requires the input of highly subjective assumptions, including (a) the expected volatility of our shares, (b) the expected term of the award, (c) the risk-free
interest rate, and (d) expected dividends. Due to the lack of a public market for the trading of our shares until October 2014 and a lack of company-specific historical and implied volatility data, we have based our estimate of expected
volatility on the historic volatility of a group of similar companies that are publicly traded. For options granted since 2015, the expected volatility was calculated using weighted average and was based on the stock price volatility of the Company
since October 1st, 2014 (IPO date) and the remaining years on the stock price volatility of similar companies.
We will continue to apply this process
until a sufficient amount of historical information regarding the volatility of our own share price becomes available.
We are also required to estimate
forfeitures at the time of grant, and revise those estimates in subsequent periods if actual forfeitures differ from the estimates. Vesting conditions are included in assumptions about the number of options that are expected to vest. At the end of
each reporting period, we revise our estimates of the number of options that are expected to vest based on the nonmarket vesting conditions. We recognize the impact of the revision to original estimates, if any, in profit or loss, with a
corresponding adjustment to additional paid in capital.
The following table summarizes the weighted average assumptions we have used in our Black-Scholes
calculations for the years ended December 31, 2016, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Employee share options:
|
|
|
|
|
Risk-free interest rate
|
|
|
1.64%-1.78
|
%
|
|
|
1.99%-2.28
|
%
|
|
|
2.42
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
86%-97.0
|
%
|
|
|
69%-85.0
|
%
|
|
|
85.0
|
%
|
Expected term (years)
|
|
|
11
|
|
|
|
11
|
|
|
|
10
|
|
The following table summarizes the allocation of our share compensation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Research and development
|
|
$
|
900
|
|
|
$
|
385
|
|
|
$
|
711
|
|
General and administrative
|
|
|
520
|
|
|
|
656
|
|
|
|
1,906
|
|
Total
|
|
$
|
1,420
|
|
|
$
|
1,041
|
|
|
$
|
2,617
|
|
The increase in share-based compensation expense by $379 thousand to $1,420 thousand is mainly due to stock based
compensation expenses granted and recognized in 2016 to the employees and officers of the Company.
Convertible Loan
On July 1, 2013, we closed a Convertible Bridge Loan Agreement, or the CLA, with some of our shareholders and related parties. The CLA
provided for the infusion of an aggregate amount of $10.0 million in the form of a convertible bridge loan, or the Convertible Loan, to bridge our cash needs until a financing opportunity is achieved. The Convertible Loan was denominated in
U.S. dollars and bore an annual interest rate of 10%.
62
On May 15, 2014, or the Conversion Date, the Convertible Loan was converted into 1,082,235 Preferred E
Shares. Following such conversion, the entire balance of the Convertible Loan was reflected in equity.
The change in the fair value from January 1,
2014 until the Conversion Date and from July 1, 2013 to December 31, 2013 amounting to $2.3 million and $1.6 million, respectively, were charged to financial expenses in the statement of comprehensive loss.
Results of Operations
Comparison of Years Ended
December 31, 2016, 2015 and 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
2016 Increase
(Decrease)
|
|
|
2015 Increase
(Decrease)
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, gross
|
|
$
|
14,147
|
|
|
$
|
13,049
|
|
|
$
|
12,550
|
|
|
$
|
1,098
|
|
|
|
8
|
%
|
|
$
|
499
|
|
|
|
4
|
%
|
Government grants
|
|
|
(1,700
|
)
|
|
|
(1,851
|
)
|
|
|
(1,576
|
)
|
|
|
151
|
|
|
|
-8
|
%
|
|
|
(275
|
)
|
|
|
17
|
%
|
Research and development, net
|
|
$
|
12,447
|
|
|
$
|
11,198
|
|
|
$
|
10,974
|
|
|
$
|
1,249
|
|
|
|
11
|
%
|
|
$
|
224
|
|
|
|
2
|
%
|
General and administrative
|
|
|
3,828
|
|
|
|
3,673
|
|
|
|
3,804
|
|
|
|
155
|
|
|
|
4
|
%
|
|
|
(131
|
)
|
|
|
-3
|
%
|
Operating loss
|
|
|
16,275
|
|
|
|
14,871
|
|
|
|
14,778
|
|
|
|
1,404
|
|
|
|
9
|
%
|
|
|
93
|
|
|
|
0.6
|
%
|
Financial expense (income), net
|
|
|
(273
|
)
|
|
|
17
|
|
|
|
2,629
|
|
|
|
(290
|
)
|
|
|
-1706
|
%
|
|
|
(2,612
|
)
|
|
|
-99
|
%
|
Loss
|
|
$
|
16,002
|
|
|
$
|
14,888
|
|
|
$
|
17,407
|
|
|
$
|
1,114
|
|
|
|
7
|
%
|
|
$
|
(2,519
|
)
|
|
|
-14
|
%
|
Research and development expenses, net
. Research and development expenses are shown net of NATI grants. Research
and development expenses, net for the year ended December 31, 2016 were $12.4 million, compared to $11.2 million for the year ended December 31, 2015 and $11.0 million for the year ended December 31, 2014, an increase
of $1.2 million or 11% and an increase of $0.2 million, or 2%, respectively. The increase in research and development expenses, net in 2016 was mainly due to increased expenses for the
VB-111
subcontractors and consultants in 2016 of $2.4 million as the Phase 3 pivotal trial of
VB-111
in rGBM continued with the completion of patient recruitment and trial progression, offset by lower expenses
for
VB-201
and psoriasis subcontractors and consultants of $0.6 million in 2015 that began winding down from 2014, and lower
VB-111
batch production costs of
$0.5 million due to the increased manufacturing costs in 2015 to supply the Phase 3 trial supply. The increase in research and development expenses, net in 2015 was mainly due to increased expenses for the
VB-111
subcontractors and consultants in 2015 of $3.6 million as the Phase 3 pivotal trial of
VB-111
in rGBM commenced in August 2015, offset by lower expenses for
VB-201
and psoriasis subcontractors and consultants of $2.8 million in 2015 as the clinical trials were completed by 2014 and payroll related expenses of $0.6 million due to an overall reduction of share
based compensation expense and favorable currency exchange rates.
General and administrative expenses.
General and administrative expenses for the year ended December 31, 2016 was $3.8 million, compared to $3.7 million for the year ended
December 31, 2015 and $3.8 million for the year ended December 31, 2014, an increase of $155 thousand or 4%, and a decrease of $130 thousand or 3%, respectively. The increase in 2016 is mainly due to payroll related costs
for management bonuses and employee share-based compensation expense of approximately $500 thousand, offset by a decrease to share-based compensation expense for options granted to external directors of approximately $300 thousand. The
decrease in 2015 is related to the share-based compensation of $1.7 million for options granted to the Chief Executive Officer Prof. Dror Harats in 2014, offset by an increase to share-based compensation expense for options granted to two of
our external directors and additional costs associated with being a public company such as increased legal, insurance, investor and public relations, accounting and compliance fees for a total of $1.6 million.
63
Financial expense (income), net.
Financial expense (income), net for the year ended
December 31, 2016 was ($273 thousand), compared to $17 thousand for the year ended December 31, 2015, and $2.6 million for the year ended December 31, 2014, a decrease of $290 thousand and $2.6 million or
100%, respectively. The decrease in 2016 was mainly related to higher interest received due to more favorable interest rates, and the decrease in 2015 was primarily attributable to the change in the fair value of the convertible loan in 2014 with no
additional impact in 2015 since the convertible loans conversion to Preferred E Shares on May 15, 2014.
Liquidity and Capital Resources
Since our inception and through December 31, 2016, we have raised a total of $113.4 million from sales of our equity securities before the
initial public offering, $40.5 million gross in our initial public offering ($34.9 million net), $15.0 million from a November 3, 2015 underwritten offering ($13.6 million net), $24.0 million from a June 7, 2016
registered direct offering ($21.9 million net) and $19.0 million from NATI grants. Our primary uses of cash have been to fund working capital requirements and research and development, and we expect these will continue to represent our
primary uses of cash. We intend to use our cash resources, together with the proceeds from the offerings described above, to advance clinical programs, working capital, and other general corporate purposes. We expects that our cash resources as of
December 31, 2016 would provide sufficient funding for our operations into 2019.
In December 2016, we entered into separate Equity Distribution
Agreements with JMP Securities LLC and Chardan Capital Markets, LLC, as sales agents, to implement an at the market offering program under which we, from time to time, may offer and sell our ordinary shares, having an aggregate offering
price of up to $20.0 million. We have provided the sales agents with customary indemnification rights, and the sales agents will be entitled to a fixed commission of 3.0% of the aggregate gross proceeds from the shares sold. For the year ended
December 31, 2016, we had not sold any shares pursuant to this program.
Funding Requirements
At December 31, 2016, we had cash, cash equivalents and short-term bank deposits of $45.3 million and working capital of $41.8 million. We
expect that our cash and cash equivalents and short-term bank deposits will enable us to fund our operating expenses and capital expenditure requirements into 2019 and are expected to be sufficient to enable us to complete our
on-going
Phase 3 clinical trial of
VB-111
in rGBM, our Phase 2 clinical trial of
VB-111
in thyroid cancer, our Phase 1/2 clinical
trial for
VB-111
in ovarian cancer and support the investment in the new Modiin facility. We are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing
the development of
VB-111
and our other product candidates. Our future capital requirements will depend on many factors, including:
|
|
|
the costs, timing and outcome of regulatory review of
VB-111
and any other product candidates we may pursue;
|
|
|
|
the costs of future development activities, including clinical trials, for
VB-111
and any other product candidates we may pursue;
|
|
|
|
the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;
|
|
|
|
the extent to which we acquire or
in-license
other products and technologies; and
|
|
|
|
our ability to establish any future collaboration arrangements on favorable terms, if at all.
|
Until such
time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. We do not have any
committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our shareholders will be
64
diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a holder of our ordinary shares. Debt financing, if available, may
involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations,
strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams or research programs or grant licenses on terms that may not be favorable to us. If we are unable
to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market
VB-111
and any other product candidates that we would otherwise prefer to develop and market ourselves.
Cash
Flows
The following table sets forth the primary sources and uses of cash for each of the periods set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Cash used in operating activities
|
|
$
|
(13,412
|
)
|
|
$
|
(13,203
|
)
|
|
$
|
(13,703
|
)
|
Cash (used in) provided by investing activities
|
|
|
(4,091
|
)
|
|
|
(30,090
|
)
|
|
|
1,437
|
|
Cash provided by financing activities
|
|
|
21,980
|
|
|
|
13,746
|
|
|
|
40,084
|
|
Net (decrease) increase in cash and cash equivalents
|
|
$
|
4,477
|
|
|
$
|
(29,547
|
)
|
|
$
|
27,818
|
|
Operating Activities
Cash used in operating activities for the year ended December 31, 2016 was $13.4 million and consisted of primarily net loss of $16.0 million
arising primarily from research and development activities, partially offset by a net reduction of working capital of $1.1 million and net aggregate
non-cash
charges of $1.3 million.
Cash used in operating activities for the year ended December 31, 2015 was $13.2 million and consisted of primarily net loss of $14.9 million
arising primarily from research and development activities, partially offset by a net reduction of working capital of $0.5 million and net aggregate
non-cash
charges of $1.2 million.
Cash used in operating activities for the year ended December 31, 2014 was $13.7 million and consisted primarily of net loss of $17.4 million
arising primarily from research and development activities in addition to net increase in working capital of $1.8 million, partially offset by net aggregate
non-cash
charges of $5.5 million.
Investing Activities
Net cash used in investing
activities was $4.1 million for the year ended December 31, 2016. This was primarily due to the purchases of short-term bank deposits.
Net cash
used in investing activities was $30.1 million for the year ended December 31, 2015. This was primarily due to the purchases of short-term bank deposits.
Net cash provided by investing activities was $1.4 million for the year ended December 31, 2014. This was primarily due to maturation of short-term
bank deposits.
Financing Activities
Net cash
provided by financing activities was $22.0 million for the year ended December 31, 2016 was the result of the net receipt of $21.9 million from the issuance of ordinary shares per the closing of June 7, 2016 securities offering.
65
Net cash provided by financing activities was $13.7 million for the year ended December 31, 2015 was
the result of the net receipt of $13.6 million from the issuance of ordinary shares per the closing of the November 6, 2015 underwritten offering.
Net cash provided by financing activities of $40.1 million for the year ended December 31, 2014 was the result of the net receipt of
$34.9 million from issuance of ordinary shares in our IPO, and the receipt of $4.9 million from the issuance of preferred E shares.
Contractual Obligations and Commitments
The following
tables summarize our contractual obligations and commitments as of December 31, 2016 that will affect our future liquidity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Less
than 1
Year
|
|
|
1-3
Years
|
|
|
3-5
Years
|
|
|
More
than 5
Years
|
|
|
|
(in thousands)
|
|
Licenses
|
|
$
|
315
|
|
|
$
|
105
|
|
|
$
|
210
|
|
|
$
|
|
|
|
$
|
|
|
Operating Leases
|
|
|
2,508
|
|
|
|
438
|
|
|
|
692
|
|
|
|
624
|
|
|
|
754
|
|
Total
|
|
$
|
2,823
|
|
|
$
|
543
|
|
|
$
|
902
|
|
|
$
|
624
|
|
|
$
|
754
|
|
We also have obligations to make future payments to third parties that become due and payable on the achievement of certain
development, regulatory and commercial milestones, such as the start of a clinical trial, filing of an NDA, approval by the FDA or product launch, or royalties upon sale of products. We have not included these commitments on our statements of
financial position or in the table above because the achievement and timing of these milestones is not fixed and determinable. These potential future commitments include:
|
|
|
Agreement with the Contact Research Organization (CRO).
In January 2015, the Company entered into an agreement with a CRO according to which it will receive project management, clinical development
and other related services from the CRO for the execution of the Phase 3 rGBM clinical trial study in consideration for up to $18.7 million. Through December 31, 2016, expenses in the total amount of $9.2 million were incurred.
|
Agreement with Tel Hashomer.
On February 3, 2013, we entered into an agreement with Tel
HashomerMedical Research, Infrastructure and Services Ltd., or Tel Hashomer, a private company whose purpose is to promote the welfare of the Sheba Medical Center, or the Hospital, and Prof. Dror Harats, our chief executive officer. The
agreement with Tel Hashomer resolved claims of the Hospital regarding the ownership of certain inventions and patent rights owned by us and developed in part by Prof. Harats and other inventors who were engaged by us and by the Hospital in parallel.
The agreement provided us with a waiver of rights by the Hospital and Tel Hashomer in connection with intellectual property developed by these inventors prior to the date of the agreement. In consideration for the waiver, we undertook to pay 1% of
any net sales of any product covered by the intellectual property covered under the agreement, which includes all of our current product candidates, and 2% of any consideration that we receive for granting a license or similar rights to this
intellectual property. Such amounts will be recorded as part of our cost of revenues. In addition, upon the occurrence of an exit event such as a merger, sale of all shares or assets or the closing of an initial public offering, we are required to
pay to Tel Hashomer 1% of the proceeds received by us or our shareholders as the case may be. In November 2014, following the completion of our IPO, we paid to Tel Hashomer the amount
of $0.4 million. Royalty and all other payment obligations under this agreement will expire once we have paid an aggregate sum of NIS
100 million (approximately $26 million) to Tel Hashomer by way of pay out, exit proceeds and licensing consideration. Amounts previously paid as royalties on any net sales will not be taken into account when calculating this aggregate sum.
66
|
|
|
Agreement with Crucell.
On April 15, 2011, we entered into a Commercial License Agreement with Crucell Holland B.V., or Crucell, for incorporating the adenovirus 5 in
VB-
111 and other drug candidates for cancer for consideration including the following potential future payments:
|
|
|
|
an annual license fee of 100,000 ($105,170), continuing until the termination of the agreement, which will occur upon (i) the later of the expiration date of the last related patent or 10 years from the
first commercial sale of
VB-111
or (ii) the termination of the agreement by us, which is permitted, upon three months written advance notice to Crucell;
|
|
|
|
a milestone payment of 400,000 ($420,681) upon receipt of the first regulatory approval for the marketing of the first indication for each product covered under the agreement; and
|
|
|
|
royalties of
0.5%-2.0%
on net sales.
|
There are no limits or caps on
the amount of potential royalties. Pursuant to the agreement, the Company has the right to terminate the agreement by giving Crucell three months written notice.
|
|
|
Participation by the NATI.
We receive grants from the NATI, as part of the oncology and anti-inflammatory research and development programs. The requirements and restrictions for such grants are set forth in
the Research Law. These grants are subject to repayment through future royalty payments on sales of any products resulting from these research and development programs, including
VB-111
and
VB-201.
Under the Research Law, we are obligated to pay royalties of 3% to 3.5%. The maximum aggregate royalties paid generally cannot exceed 100% of the grants made to us, plus annual interest generally equal to
the
12-month
LIBOR applicable to dollar deposits, as published on the first business day of each calendar year. The total gross amount of grants actually received by us from the NATI as of December 31,
2016 totaled approximately $19.0 million, and the balance of the principal and interest in respect of our commitments for future payments to the NATI totaled approximately $23.3 million. As of December 31, 2016, we had not paid any
royalties to the NATI.
|
Off-Balance
Sheet Arrangements
Since our inception, we have not engaged in any
off-balance
sheet arrangements, as defined in the rules and regulations
of the SEC, such as relationships with unconsolidated entities or financial partnerships, which are often referred to as structured finance or special purpose entities, established for the purpose of facilitating financing transactions that are not
required to be reflected on our statements of financial position.
Recently Issued and Adopted Accounting Pronouncements
IFRS 9, Financial Instruments, addresses the classification, measurement and recognition of financial assets and financial liabilities. The complete version of
IFRS 9 was issued in July 2014. It replaces the guidance in IAS 39 that relates to the classification and measurement of financial instruments. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement
categories for financial assets: amortized cost, fair value through OCI and fair value through P&L. There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. For financial liabilities, there
were no changes to classification and measurement except for the recognition of changes in own credit risk in other comprehensive income for liabilities designated at fair value through profit or loss. The standard is effective for accounting
periods beginning on or after January 1, 2018. Early adoption is permitted. We have yet to assess IFRS 9s full impact.
In January 2016, the
IASB issued IFRS 16Leases which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract and replaces the previous leases
standard, IAS 17Leases. IFRS 16 eliminates the classification of leases for the lessee as either operating leases or finance leases as required by IAS 17
and instead introduces a single lessee accounting model whereby a lessee is required to recognize assets and liabilities for all leases with a term that is greater than 12 months, unless the underlying asset is of low value, and to recognize
depreciation of leases assets separately from interest on lease
67
liabilities in the income statement. As IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17, a lessor will continue to classify its leases as operating leases or
finance leases and to account for those two types of leases differently. IFRS 16 is effective from January 1, 2019 with early adoption allowed only if IFRS 15Revenue from Contracts with Customers is also applied. The Company is currently
evaluating the impact of adoption on its Financial Statements.
JOBS Act
On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for
an emerging growth company. As an emerging growth company, we are electing to not take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards, and as
a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for
non-emerging
growth companies. Section 107 of the JOBS Act
provides that our decision to not take advantage of the extended transition period for complying with new or revised accounting standards is irrevocable.
Safe Harbor
See Cautionary Note Regarding
Forward-Looking Statements in the introduction to this Annual Report.
It
em 6. Directors, Senior Management and
Employees
Executive Officers and Directors
The
following table sets forth certain information relating to our executive officers and directors, including their ages as of February 1, 2017. Unless otherwise stated, the address for our directors and executive officers is c/o Vascular
Biogenics Ltd., 6 Jonathan Netanyahu St. Or Yehuda, Israel.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
|
Position
|
Executive Officers and Director
|
|
|
|
|
|
|
Dror Harats
|
|
|
60
|
|
|
Chief Executive Officer and Director
|
Amos Ron
|
|
|
61
|
|
|
Chief Financial Officer and Company Secretary
|
Erez Feige
|
|
|
43
|
|
|
Vice President, Business Operations
|
Yael Cohen
|
|
|
54
|
|
|
Vice President, Clinical Development
|
Eyal Breitbart
|
|
|
50
|
|
|
Vice President, Research and Operations
|
Naamit Sher
|
|
|
62
|
|
|
Vice President, Drug Development
|
Ayelet Horn
|
|
|
46
|
|
|
General Counsel
|
Non-Executive
Directors
|
|
|
|
|
|
|
Bennett M. Shapiro (3)(4)
|
|
|
77
|
|
|
Chairman and Director
|
Ruth Arnon (1)(3)(4)
|
|
|
84
|
|
|
Director
|
Jecheskiel Gonczarowski (2)(3)(4)
|
|
|
71
|
|
|
Director
|
Ruth Alon (3)(4)
|
|
|
65
|
|
|
Director
|
Ron Cohen (1)(2)(4)
|
|
|
61
|
|
|
Director
|
Philip A. Serlin (1)(2)(4)
|
|
|
56
|
|
|
Director
|
(1)
|
Member of the compensation committee.
|
(2)
|
Member of the audit committee.
|
(3)
|
Member of the nominating and corporate governance committee.
|
(4)
|
Independent director under the rules of the NASDAQ Stock Market.
|
68
Executive Officers
Prof. Dror Harats
founded our company in 2000 and has served as our chief executive officer since our inception. He has been a member of our board of
directors since January 2001. Prof. Harats is the Chairman of the Bert W. Strassburger Lipid Center at the Chaim Sheba Medical Center at Tel Hashomer and chairman of its Institute Review Board. Prof. Harats received his M.D. from Hadassah Medical
School at the Hebrew University of Jerusalem, Israel, following which he conducted post-doctoral work at the University of California, San Francisco. Prof. Harats is also a Professor of Medicine in the Departments of Internal Medicine and
Biochemistry at the Sackler Faculty of Medicine of
Tel-Aviv
University, Israel. Prof. Harats has also served as a visiting scientist at Syntax Discovery Research. Prof. Harats currently serves as an observer
on the board of directors of Art Healthcare Ltd. We believe Prof. Harats is qualified to serve on our board of directors because of his extensive technical and industry experience, as well as his knowledge of our company.
Amos Ron
has served as our chief financial officer since May 2011. Prior to joining our company, from July 2008 to April 2011, Mr. Ron was the
chief financial officer of Atlantium Technologies Ltd., a privately held
start-up
in the field of clean-tech. Prior to that, Mr. Ron served as the chief financial officer and chief operating officer of
Medical Compression Systems, and prior to that, Mr. Ron served as the chief financial officer of Interpharm Laboratories Group, a wholly owned subsidiary of Serono S.A. Mr. Ron holds an M.Sc. (Honors) in Chemical Technology Management from
the Hebrew University of Jerusalem, a B.Sc. in Business Administration, Empire State College (SUNY) (Jerusalem Branch) and a B.Sc. in Chemistry from the Hebrew University of Jerusalem.
Dr.
Erez Feige
has served as our vice president of business operations since January 2014. Prior to that, from 2012 to 2014,
Dr. Feige served as our director of business development and, from 2006 to 2012, Dr. Feige served as our head of biochemistry. Dr. Feige holds a B.Sc., and M.B.A. and a Ph.D. from Bar-Ilan University, Israel and completed a
post-doctoral fellowship at the Dana-Farber Cancer Institute and Harvard Medical School.
Dr.
Yael Cohen
has served as our vice
president of clinical development since 2008. Prior to joining our company, Dr. Cohen served in various positions in Gamida Cell Ltd., Merck & Co. and Merck Research Labs, from 2000 to 2008. Dr. Cohen holds an M.D. from the
Sackler Medical School at Tel Aviv University, Israel, and completed her residency in internal medicine at the Chaim Sheba Medical Center at Tel Hashomer, Israel, and a fellowship in hematology at the Rabin Medical Center, Petach Tikva, Israel.
Dr. Cohen is a senior physician at the Hematology Department at the Sourasky Medical Center, Tel Aviv, Israel.
Dr.
Eyal
Breitbart
has served as our vice president, research and operations since January 2014. Prior to that, from 2006 to 2013, Dr. Breitbart served as our vice president, research. Prior to that, Dr. Breitbart served as head of research
from 2002 to 2006 and prior to that as project manager from 2001 to 2002. Dr. Breitbart holds a B.Sc., M.Sc. and Ph.D. from Bar-Ilan University, Israel, and completed a post-doctoral fellowship at Tufts University School of Medicine.
Dr.
Naamit Sher
has served as our vice president of drug development and regulatory affairs since 2006. Prior to joining our
company, from 2005 to 2006, Dr. Sher was head of QC laboratories, operations division at Teva Pharmaceutical Industries Ltd. From 1992 to 2005, Dr. Sher acted as quality control/quality assurance director at InterPharm, a subsidiary of
Ares- Serono. Dr. Sher holds a B.Sc., M.Sc. and Ph.D. from the Hebrew University of Jerusalem, Israel. She completed post-doctoral fellowships at each of the Hebrew University, Jerusalem, Israel, and Rutgers University.
Adv. Ayelet Horn
has served as our general counsel since our inception in 2000, and has served as our company secretary between 2007-2016. Adv. Horn
holds an LL.B from
Tel-Aviv
University, Israel, and an M.B.A. from Herriot Watt University, Edinburgh, Scotland.
69
Non-Executive
Directors
Dr.
Bennett
M. Shapiro, M.D.
has served on our board of directors since September 2004 and as Chairman since
2007. In addition to serving on our board of directors, Dr. Shapiro has been a senior partner at Puretech Ventures, an innovation enterprise, since 2004, and as chairman from 2009-2015; he now continues as a
Non-Executive
Director of PureTech HealthPLC-PRTC. From 1990 to 2003, Dr. Shapiro served as executive vice president, Merck Research Laboratories. Prior to that, from 1970 to 1990, Dr. Shapiro was a
professor of the Department of Biochemistry at the University of Washington and served as chairman from 1985 to 1990. Prior to joining the University of Washington, from 1965 to 1970 Dr. Shapiro served as a research associate, then section
head, in the Laboratory of Biochemistry of the National Heart Institute of the U.S. National Institutes of Health. Dr. Shapiro has served as an external director on the board of directors of Momenta Pharmaceuticals from 2003-2016, various
private companies, and the Drugs for Neglected Diseases Initiative, an independent,
non-profit
drug development partnership. Dr. Shapiro previously served on the board of directors of Celera Corporation
prior to its acquisition by Quest Diagnostics Inc. Dr. Shapiro received his B.S. in chemistry from Dickinson College and his M.D. from Jefferson Medical College. Dr. Shapiro has been a Guggenheim Fellow, a fellow of the Japan Society for
the Promotion of Science and a visiting professor at the University of Nice. We believe Dr. Shapiro is qualified to serve on our board of directors because of his extensive technical and industry background, and his experience serving on boards
of directors of companies in our industry, including public companies.
Prof. Ruth Arnon
has served on our board of directors since August
2007. Prof. Arnon is an immunologist with the Weizmann Institute of Science in Israel. Prof. Arnon joined the staff of the Weizmann Institute in 1960, and served as vice president of the Institute from 1988 to 1997. Prof. Arnon is a member of the
Israel Academy of Sciences, and from 2010 until 2015 served as its president.
Prof. Arnon is also an elected member of the European Molecular Biology Organization. She has served as president of the European Federation of Immunological
Societies, and as secretary-general of the International Union of Immunological Societies. Her awards and honors include the Robert Koch Prize in Medical Sciences, Spains Jimenez Diaz Memorial Award, Frances Legion of Honor, the Hadassah
World Organizations Women of Distinction Award, the Wolf Prize for Medicine, the Rothschild Prize for Biology, and the Israel Prize. Prof. Arnon earned her M.Sc. in Chemistry from the Hebrew University, Jerusalem, Israel, and her Ph.D. from
the Hebrew University. We believe Prof. Arnon is qualified to serve on our board of directors because of her extensive technical and industry background.
Jecheskiel Gonczarowski
has served on our board of directors since March 2001. Since 2010, Mr. Gonczarowski has served as the chairman and chief
executive officer of D.S.N.I. Investments Ltd., an Israeli based private family office, managing various local and international investments. Prior to that, Mr. Gonczarowski founded and
co-managed
Getter
Group Ltd, a publicly traded company in Israel specializing in exclusive representation of leading international suppliers and brands, from 1982 to 2010. Mr. Gonczarowski also served on the board of directors of Rotshtein Realestate Ltd., a
publicly traded company in Israel performing private and public construction in Israel. Mr. Gonczarowski studied economics, mathematics and business administration at the Hebrew University of Jerusalem, Israel. We believe Mr. Gonczarowski
is qualified to serve on our board of directors because of his broad business background and experience with public companies.
Ruth Alon
has
served on our board of directors since March 2010. Ms. Alon is currently the founder and CEO of Medstrada. Since 1997 and until December 24, 2016, Ms. Alon has served as a general partner in Pitango Venture Capital. Prior to her
tenure at Pitango, Ms. Alon held senior positions with Montgomery Securities from 1981 to 1987, Genesis Securities, LLC from 1993 to 1996, and Kidder Peabody & Co. from 1987 to 1993, and managed her own independent consulting business
in San Francisco in the medical devices industry from 1995 to 1996. Ms. Alon is the chairperson of Israel Life Science Industry, a
not-for-profit
organization
representing the mutual goals of approximately 700 Israeli life science companies. Ms. Alon has a B.A. in Economics from the Hebrew University of Jerusalem, Israel, an M.B.A. from Boston University, and an M.S. from the Columbia University
School of Physicians and Surgeons. We believe Ms. Alon is qualified to serve on our board of directors because of her extensive business and industry background, as well as her experience as a seasoned investor.
70
Dr.
Ron Cohen, M.D
. joined our board in February 2015. In addition to serving on
our board of directors, Dr. Cohen has served as President, Chief Executive Officer and founder of Acorda Therapeutics, Inc., since 1995. Previously he was a principal in the startup and an officer of Advanced Tissue Sciences, Inc., a
biotechnology company engaged in the growth of human organ tissues for transplantation, from 1986 to 1992. Dr. Cohen received his B.A. with honors in Psychology from Princeton University, and his M.D. from the Columbia College of
Physicians & Surgeons. He completed his residency in Internal Medicine at the University of Virginia Medical Center, and is Board Certified in Internal Medicine. Dr. Cohen is Chair of the Board of the Biotechnology Innovation
Organization (BIO). He previously served as a Director of Dyax Corporation until the end or 2015, and also previously served as Director and Chair of the New York Biotechnology Association. He is a recipient of the NY CEO Lifetime Achievement Award
and the Ernst & Young Entrepreneur of the Year Award for the New York Metropolitan Region, and has been recognized by PharmaVOICE Magazine as one of the 100 Most Inspirational People in the Biopharmaceutical Industry. We believe
Dr. Cohen is qualified to serve on our board of directors because of his extensive business and industry background.
Philip A. Serlin
joined
our board in February 2015. In addition to serving on our board of directors, Mr. Serlin is the Chief Executive Officer of BioLineRx Ltd., having previously served as its Chief Financial and Operating Officer from 2009 to 2016.
Mr. Serlin also previously served as Chief Financial Officer of Tescom Software Systems Testing Ltd., an IT services company which was publicly traded in both Tel Aviv and London. His background also includes senior positions at Chiaro Networks
Ltd. and at Deloitte, where he was head of the SEC and U.S. Accounting Department at the National Office in Tel Aviv, as well as seven years at the SEC at its Washington, D.C., headquarters. Mr. Serlin previously served on the Board of
Directors of Kitov Pharmaceuticals Ltd. from 2013 to 2016, and on the Board of Directors of Vringo, Inc. from 2010 to 2012. Mr. Serlin is a CPA and holds a Masters degree in Economics and Public Policy from The George Washington
University. We believe Mr. Serlin is qualified to serve on our board of directors because of his experience servicing public companies (including biotech) and his accounting background.
Arrangements Concerning Election of Directors; Family Relationships
Our current board of directors consists of seven directors.
We
are not a party to, and are not aware of, any voting agreements among our shareholders. In addition, there are no family relationships among our executive officers and directors.
Advisory Boards
We established an advisory board with
specific expertise in oncology. In addition we have an advisory board comprised of industry experts with significant experience in the pharmaceutical industry.
Head of Scientific Advisory BoardRachel W. Humphrey, M.D.
Oncology Experts
Keith Bible, M.D.
Deborah Blumenthal, M.D.
Ernest Borden, Ph.D.
Andrew Brenner, M.D.
Nicholas Butowski, M.D.
Tim Cloughesy, M.D.
Thomas Herzog, M.D.
Kathleen Moore, M.D.
Richard Penson, M.D., MRCP
Patrick Wen, M.D.
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Additional Experts
Barry Buckland, Ph.D.
David T. Curiel, M.D., Ph.D.
Ronald Goldblum, M.D.
Bonnie Goldman, M.D.
John Konz, Ph.D.
James S. MacDonald, Ph.D.
Compensation of Executive Officers and Directors
The
aggregate compensation paid by us to our current directors and executive officers, including share based compensation, for the year ended December 31, 2016, was $2.7 million. This amount includes any amounts set aside or accrued to provide
pension, severance, retirement, annual leave and recuperation or similar benefits or expenses. It does not include any business travel, relocation, professional and business association dues and expenses reimbursed to office holders, and other
benefits commonly reimbursed or paid by companies in Israel. The above also includes the provision for bonuses for the year ended December 31, 2016 in the amount of $0.4 million. As of December 31, 2016, options and RSUs to
purchase an aggregate of 2,272,407 ordinary shares granted to our directors and executive officers were outstanding under the Employee Share Ownership and Option Plan (2000), or the 2000 Plan, and the Employee Share Ownership and Option Plan (2011),
or the 2011 Plan, and the Employee Share Ownership and Option Plan (2014), or the 2014 Plan at a weighted average exercise price of $2.91 per share.
Board of Directors
Under the Israeli Companies Law,
5759-1999, or the Companies Law, the management of our business is vested in our board of directors. Our board of directors may exercise all powers and may take all actions that are not specifically granted to our shareholders or to management. Our
executive officers are responsible for our
day-to-day
management and have individual responsibilities established by our board of directors. Our chief executive officer
is appointed by, and serves at the discretion of, our board of directors, subject to the employment agreement that we have entered into with him. All other executive officers are also appointed by our board of directors, and are subject to the terms
of any applicable employment agreements that we may enter into with them.
Under our amended and restated articles of association, our board of directors
must consist of at least three and not more than nine directors, including the external directors. Our board of directors currently consists of seven directors, including two directors who were formerly defined as external directors. Our amended and
restated articles of association further provides that external directors are elected according to the special election requirements under the Companies Law and two of our directors were nominated as external directors in compliance with the
Companies Law. Following the adoption by the Company of certain reliefs provided under the Companies Law, the Company is exempt from the requirement to appoint external directors and the individuals formerly appointed as external directors continue
to serve as part of our board of directors until the end of their term and may be removed from office in the same manner as any other director. We have only one class of directors.
The following of our directors were elected in accordance with the terms of our articles of association in effect prior to the initial public offering of our
shares on NASDAQ and are nominated for
re-election
by our shareholders at any consecutive annual general meeting:
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Dr. Shapiro was appointed as an industry expert by a majority of the other directors, a majority that included representatives of our major shareholders.
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Prof. Harats was entitled to be a board member for so long as Prof. Harats is either (i) the chief executive officer of our company; or (ii) a holder of 3% or more of our issued and outstanding share capital;
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Mr. Gonczarowski was appointed by J.J.D. Holdings G.P., A.J.J.G. Technology Investments 2003 and Inspe Aktiengesellschaft on behalf of the holders of the Series A preferred shares;
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Ms. Alon was appointed by persons affiliated with Pitango Venture Capital; and
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Prof. Ruth Arnon was appointed by a majority of the other directors, which included representatives of our major shareholders.
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Upon the adoption of our amended and restated articles of association upon the closing of our initial public offering, the rights set forth in the previous
articles were terminated and no additional agreements exist with respect to the nomination of our board members.
On February 11, 2015, at a general
meeting of our shareholders, each of Dr. Ron Cohen and Mr. Philip Serlin was appointed as an external director by a majority of the shareholders who have no personal interest in his nomination for a period of three years. In accordance
with the exemption available to certain Israeli public companies, whose shares are traded on NASDAQ, we chose as of November 7, 2016 not to follow the requirements of Companies Law with regard to the appointment of external
directors as defined in the Companies Law, and instead, will follow the NASDAQ rules applicable to US domestic companies with respect to the appointment of independent directors. Dr. Ron Cohen and Mr. Philip Serlin shall continue to
serve as part of our board of directors until the end of their term and may be removed from office in the same manner as any other director. As long as we follow such reliefs, any reference to the election of our external directors in our amended
articles of association shall have no actual expression.
We comply with NASDAQ rules that a majority of our directors are independent. Our board of
directors has determined that with the exception of Prof. Harats, all of our directors are independent under such rules.
In accordance with the exemption
available to foreign private issuers under NASDAQ rules, we do not intend to follow the requirements of NASDAQ rules with regard to the process of nominating directors, and instead, will follow Israeli law and practice, in accordance with which our
board of directors (or a committee thereof) is authorized to recommend to our shareholders director nominees for election. See Item 16G. Corporate Governance for more information.
Under the Companies Law and our amended and restated articles of association, nominees for directors may also be proposed by any shareholder holding at least
1% of our outstanding voting power. However, any such shareholder may propose a nominee only if a written notice of such shareholders intent to propose a nominee has been given to our company secretary (or, if we have no such company
secretary, our chief executive officer). Any such notice must include certain information, including, among other things, a description of all arrangements between the nominating shareholder and the proposed director nominee(s) and any other person
pursuant to which the nomination(s) are to be made by the nominating shareholder, the consent of the proposed director nominee(s) to serve as our director(s) if elected and a declaration signed by the nominee(s) declaring that there is no limitation
under the Companies Law preventing their election, and that all of the information that is required under the Companies Law to be provided to us in connection with such election has been provided.
In addition, our amended and restated articles of association allow our board of directors to appoint directors to fill vacancies on our board of directors,
for a term of office equal to the remaining period of the term of office of the director(s) whose office(s) have been vacated.
Under the Companies Law,
our board of directors must determine the minimum number of directors who are required to have accounting and financial expertise (as defined below). In determining the number of directors required to have such expertise, our board of directors must
consider, among other things, the type and size of the company and the scope and complexity of its operations. Our board of directors has determined that the minimum number of directors who are required to have accounting and financial expertise is
one.
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A director with accounting and financial expertise is a director who, due to his or her education, experience and
skills, possesses an expertise in, and an understanding of, financial and accounting matters and financial statements, such that he or she is able to understand the financial statements of the company and initiate a discussion about the presentation
of financial data. A director is deemed to have professional qualifications if he or she has: (i) an academic degree in economics, business management, accounting, law or public administration, (ii) an academic degree or has completed
other higher education, in the primary field of business of the company or a field which is relevant to his or her position in the company, or (iii) at least five years of experience serving in one of the following capacities, or at least five
years cumulative experience serving in two or more of the following capacities: (a) a senior business management position in a company with a significant volume of business, (b) a senior position in a companys primary field of
business, or (c) a senior position in public administration or service. The board of directors is charged with determining whether a director possesses financial and accounting expertise or professional qualifications.
Our board of directors has determined that Mr. Serlin has accounting and financial expertise as required under the Companies Law.
External Directors
Under the Companies Law, a public
company is required to have at least two directors who qualify as external directors. In accordance with the exemption available to certain Israeli public companies, whose shares are traded on NASDAQ, our board of directors elected on
November 7, 2016 not to follow the requirements of Companies Law with regard to the appointment of external directors as defined in the Companies Law, and instead, will follow the NASDAQ rules applicable to US domestic companies
with respect to the appointment of independent directors. The exemption applies as long as the Company has no controlling shareholder, is in compliance with applicable US law and regulations and complies with the NASDAQ rules applicable to US
domestic companies with respect to the appointment of independent directors and to the composition of the compensation and audit committees. Our board may further resolve at any time that we shall no longer follow the reliefs and in such event we
shall be required to appoint two directors as external directors.
The Companies Law provides that external directors must be elected by a majority vote
of the shares present and voting at a shareholders meeting, provided that either:
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such majority includes at least a majority of the shares held by all shareholders who are not controlling shareholders and do not have a personal interest in the election of the external director (other than a personal
interest not deriving from a relationship with a controlling shareholder) that are voted at the meeting, excluding abstentions, to which we refer as a disinterested majority; or
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the total number of shares voted against the election of the external director by
non-
controlling shareholders and by shareholders who do not have a personal interest in the
election of the external director (other than a personal interest not deriving from a relationship with a controlling shareholder does not exceed 2% of the aggregate voting rights in the company).
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The term controlling shareholder is defined in the Companies Law as a shareholder with the ability to direct the activities of the company, other
than by virtue of being an office holder. A shareholder is presumed to be a controlling shareholder if the shareholder holds 50% or more of the voting rights in a company or has the right to appoint the majority of the directors of the company or
its general manager. With respect to certain matters, a controlling shareholder is deemed to include any shareholder that holds 25% or more of the voting rights in a public company if no other shareholder holds more than 50% of the voting rights in
the company, but excludes a shareholder whose power derives solely from his or her position as a director of the company or from any other position with the company.
The Companies Law provides that a person is not qualified to serve as an external director if (i) the person is a relative of a controlling shareholder
of the company, or (ii) if that person or his or her relative, partner, employer,
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another person to whom he or she was directly or indirectly subject, or any entity under the persons control, has or had, during the two years preceding the date of appointment as an
external director: (a) any affiliation or other disqualifying relationship with the company, with any person or entity controlling the company or a relative of such person, or with any entity controlled by or under common control with the
company; or (b) in the case of a company with no shareholder holding 25% or more of its voting rights, had at the date of appointment as external director, any affiliation or other disqualifying relationship with a person then serving as
chairman of the board or chief executive officer, a holder of 5% or more of the issued share capital or voting power in the company or the most senior financial officer.
The term relative is defined under the Companies Law as a spouse, sibling, parent, grandparent or descendant; spouses sibling, parent or
descendant; and the spouse of each of the foregoing persons. Under the Companies Law, the term affiliation and the similar types of prohibited relationships include (subject to certain exceptions):
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an employment relationship;
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a business or professional relationship even if not maintained on a regular basis (excluding insignificant relationships);
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service as an office holder, excluding service as a director in a private company prior to the initial public offering of its shares if such director were appointed as a director of the private company in order to serve
as an external director following the initial public offering.
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The term office holder is defined under the Companies Law as the general
manager, chief executive officer, chief business manager, deputy general manager, vice general manager, any other person assuming the responsibilities of any of these positions regardless of that persons title, a director, or a manager
directly subordinate to the general manager.
In addition, no person may serve as an external director if that persons position or professional or
other activities create, or may create, a conflict of interest with that persons responsibilities as a director or otherwise interfere with that persons ability to serve as an external director or if the person is an employee of the
Israel Securities Authority or of an Israeli stock exchange. A person may furthermore not continue to serve as an external director if he or she received direct or indirect compensation from the company including amounts paid pursuant to
indemnification or exculpation contracts or commitments and insurance coverage for his or her service as an external director, other than as permitted by the Companies Law and the regulations promulgated thereunder.
According to regulations promulgated under the Companies Law, a person may be appointed as an external director only if he or she has professional
qualifications or if he or she has accounting and financial expertise (each, as defined below). In addition, at least one of the external directors must be determined by our board of directors to have accounting and financial expertise. However, if
at least one of our other directors (i) meets the independence requirements under the Exchange Act, (ii) meets the standards of the NASDAQ listing rules for membership on the audit committee, and (iii) has accounting and financial
expertise as defined under Israeli law, then neither of our external directors is required to possess accounting and financial expertise as long as each possesses the requisite professional qualifications.
A director with accounting and financial expertise is a director who, due to his or her education, experience and skills, possesses an expertise in, and an
understanding of, financial and accounting matters and financial statements, such that he or she is able to understand the financial statements of the company and initiate a discussion about the presentation of financial data. A director is deemed
to have professional qualifications if he or she has: (i) an academic degree in economics, business management, accounting, law or public administration, (ii) an academic degree or has completed other higher education, in the primary field
of business of the company or a field which is relevant to his or her position in the company, or (iii) at least five years of experience serving
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in one of the following capacities, or at least five years cumulative experience serving in two or more of the following capacities: (a) a senior business management position in a company
with a significant volume of business, (b) a senior position in a companys primary field of business, or (c) a senior position in public administration or service. The board of directors is charged with determining whether a director
possesses financial and accounting expertise or professional qualifications.
Role of Board in Risk Oversight Process
Risk assessment and oversight are an integral part of our governance and management processes. Our board of directors encourages management to promote a
culture that incorporates risk management into our corporate strategy and
day-to-day
business operations. Management discusses strategic and operational risks at regular
management meetings, and conducts specific strategic planning and review sessions during the year that include a focused discussion and analysis of the risks facing us. Throughout the year, senior management reviews these risks with the board of
directors at regular board meetings as part of management presentations that focus on particular business functions, operations or strategies, and presents the steps taken by management to mitigate or eliminate such risks.
Leadership Structure of the Board
In accordance with the
Companies Law and our amended and restated articles of association, our board of directors is required to appoint one of its members to serve as chairman of the board of directors. Our board of directors has appointed Dr. Shapiro to serve as
chairman of the board of directors.
Committees of the Board of Directors
We have an audit committee, a compensation committee and a nominating and corporate governance committee. We have adopted a charter for each of these
committees.
Audit Committee
Under the
Companies Law, we are required to appoint an audit committee. The audit committee must be comprised of at least three directors, including all of the external directors, one of whom must serve as chairman of the committee. In accordance with the
exemption available to certain Israeli public companies, whose shares are traded on NASDAQ, we chose as of November 7, 2016 and for as long the required conditions precedent are met and unless otherwise decided by our board of directors, not to
follow the requirements of Companies Law with regard to the composition of the audit committee, and instead, will follow the NASDAQ rules applicable to US domestic companies with respect to the appointment and composition of the audit committee.
Under the NASDAQ listing requirements, we are required to maintain an audit committee consisting of at least three independent directors, all of whom are
financially literate and at least one of whom has accounting or related financial management expertise. Our audit committee consists of our two external directors Mr. Serlin and Dr. Cohen, and of Mr. Gonczarowski and is chaired by
Mr. Serlin. Mr. Serlin is the audit committee financial expert as defined by the Securities and Exchange Commission rules and all of the members of our audit committee have the requisite financial literacy as defined by the NASDAQ Stock
Market rules. All the members of our audit committee are independent as such term is defined in Rule
10A-3(b)(1)
under the Exchange Act and under the listing standards of NASDAQ.
Our board of directors has adopted an audit committee charter setting forth the responsibilities of the audit committee consistent with the rules of the
Securities and Exchange Commission and NASDAQ rules as well as the requirements for such committee under the Companies Law, including the following:
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oversight of our independent registered public accounting firm and recommending the engagement, compensation or termination of engagement of our independent registered public accounting firm to the board of directors in
accordance with Israeli law;
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recommending the engagement or termination of the person filling the office of our internal auditor; and
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recommending the terms of audit and
non-audit
services provided by the independent registered public accounting firm for
pre-approval
by
our board of directors.
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Our audit committee provides assistance to our board of directors in fulfilling its legal and fiduciary obligations
in matters involving our accounting, auditing, financial reporting, internal control and legal compliance functions by
pre-approving
the services performed by our independent accountants and reviewing their
reports regarding our accounting practices and systems of internal control over financial reporting. Our audit committee also oversees the audit efforts of our independent accountants and takes those actions that it deems necessary to satisfy itself
that the accountants are independent of management.
Under the Companies Law, our audit committee is responsible for:
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determining whether there are deficiencies in our business management practices, including in consultation with our internal auditor or the independent auditor, and making recommendations to the board of directors to
improve such practices;
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determining whether to approve certain related party transactions (including transactions in which an office holder has a personal interest) and whether such transaction is extraordinary or material under the Companies
Law (see Approval of Related Party Transactions Under Israeli Law);
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where the board of directors approves the work plan of the internal auditor, to examine such work plan before its submission to the board and propose amendments thereto;
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establishing the approval process for certain transactions with a controlling shareholder or in which a controlling shareholder has a personal interest;
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examining our internal controls and internal auditors performance, including whether the internal auditor has sufficient resources and tools to dispose of its responsibilities;
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examining the scope of our auditors work and compensation and submitting a recommendation with respect thereto to our board of directors or shareholders, depending on which of them is considering the appointment
of our auditor; and
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establishing procedures for the handling of employees complaints as to deficiencies in the management of our business and the protection to be provided to such employees.
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Our audit committee may not approve any actions requiring its approval (see Approval of Related Party Transactions Under Israeli Law),
unless at the time of approval a majority of the committees members are present, which majority consists of unaffiliated directors including at least one external director.
Compensation Committee
Our compensation committee
consists of Mr. Serlin and Dr. Cohen and of Dr. Ruth Arnon. Mr. Serlin serves as the chairman of the compensation committee. The members of our compensation committee are independent under the NASDAQ listing requirements.
Under the Companies Law, the board of directors of a public company must appoint a compensation committee. In accordance with the exemption available to
certain Israeli public companies, whose shares are traded on NASDAQ, we chose as of November 7, 2016 and for as long the required conditions precedent are met and unless otherwise decided by our board of directors, not to follow the
requirements of Companies Law with regard to the composition of the compensation committee, and instead, will follow the NASDAQ rules applicable to US domestic companies with respect to the appointment and composition of the compensation committee.
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The duties of the compensation committee include the recommendation to our board of directors of a policy
regarding the terms of engagement of office holders, to which we refer as a compensation policy. That policy must be adopted by the companys board of directors, after considering the recommendations of the compensation committee, and will need
to be brought for approval by the companys shareholders, which approval requires what we refer to as a special majority. A special majority approval requires shareholder approval by a majority vote of the shares present and voting at a meeting
of shareholders called for such purpose, provided that either: (a) such majority includes at least a majority of the shares held by all shareholders who are not controlling shareholders and do not have a personal interest in such compensation
arrangement; or (b) the total number of shares of
non-controlling
shareholders and shareholders who do not have a personal interest in the compensation arrangement and who vote against the arrangement
does not exceed 2% of the companys aggregate voting rights. On May 27, 2015 our shareholders approved our compensation policy.
Our
compensation policy must serve as the basis for decisions concerning the financial terms of employment or engagement of office holders, including exculpation, insurance, indemnification or any monetary payment or obligation of payment in respect of
employment or engagement. The compensation policy must relate to certain factors, including advancement of the companys objectives, the companys business plan and its long term strategy, and creation of appropriate incentives for office
holders. It must also consider, among other things, the companys risk management, size and nature of its operations. The term office holder is defined under the Companies Law as the general manager, chief executive officer, chief business
manager, deputy general manager, vice general manager, any other person assuming the responsibilities of any of these positions regardless of that persons title, a director, or a manager directly subordinate to the general manager. The
compensation policy must furthermore consider the following additional factors:
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the knowledge, skills, expertise, and accomplishments of the relevant office holder;
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the office holders roles and responsibilities and prior compensation agreements with him or her;
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the relationship between the terms offered and the average compensation of the other employees of the company, including those employed through manpower companies;
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the impact of disparities in salary upon work relationships in the company;
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the possibility of reducing variable compensation at the discretion of the board of directors;
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the possibility of setting a limit on the exercise value of
non-cash
variable equity-based compensation; and
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as to severance compensation, the period of service of the office holder, the terms of his or her compensation during such service period, the companys performance during that period of service, the persons
contributions towards the companys achievement of its goals and the maximization of its profits, and the circumstances under which the person is leaving the company.
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The compensation policy must also include the following principles:
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the link between variable compensation and long term performance and measurable criteria;
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the relationship between variable and fixed compensation, and the ceiling for the value of variable compensation;
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the conditions under which an office holder would be required to repay compensation paid to him or her if it was later shown that the data upon which such compensation was based was inaccurate and was required to be
restated in the companys financial statements;
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the minimum holding or vesting period for variable, equity-based compensation; and
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maximum limits for severance compensation.
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The compensation committee is responsible for (a) recommending the compensation policy to a companys
board of directors for its approval (and subsequent approval by its shareholders) and (b) duties related to the compensation policy and to the compensation of a companys office holders as well as functions previously fulfilled by a
companys audit committee with respect to matters related to approval of the terms of engagement of office holders, including:
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recommending whether a compensation policy should continue in effect, if the then- current policy has a term of greater than three years (approval of either a new compensation policy or the continuation of an existing
compensation policy must in any case occur every three years);
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recommending to the board of directors periodic updates to the compensation policy;
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assessing implementation of the compensation policy; and
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determining whether the compensation terms of the chief executive officer of the company need not be brought to approval of the shareholders.
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Our board of directors has adopted a compensation committee charter setting forth the responsibilities of the committee, which include:
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the responsibilities set forth in the compensation policy;
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reviewing and approving the granting of options and other incentive awards to the extent such authority is delegated by our board of directors; and
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reviewing, evaluating and making recommendations regarding the compensation and benefits for our
non-employee
directors.
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Nominating and Corporate Governance Committee
Our
nominating and corporate governance committee consists of Dr. Shapiro, Mr. Gonczarowski, Ms. Alon and Dr. Arnon, and is chaired by Dr. Shapiro. Each of the members of our nominating and corporate governance committee are
independent under the listing requirements of The NASDAQ Global Market.
Our board of directors has adopted a nominating and governance committee charter
sets forth the responsibilities of the nominating and governance committee which include:
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overseeing and assisting our board in reviewing and recommending nominees for election as directors;
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assessing the performance of the members of our board; and
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establishing and maintaining effective corporate governance policies and practices, including, but not limited to, developing and recommending to our board a set of corporate governance guidelines applicable to our
company.
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Internal Auditor
Under the
Companies Law, the board of directors of a public company must appoint an internal auditor based on the recommendation of the audit committee. The role of the internal auditor is to examine, among other things, our compliance with applicable law and
orderly business procedures. The audit committee is required to oversee the activities and to assess the performance of the internal auditor as well as to review the internal auditors work plan. Our internal auditor is Ms. Orit Gal from
Ernst & Young Israel.
An internal auditor may not be:
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a person (or a relative of a person) who holds more than 5% of the companys outstanding shares or voting rights;
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a person (or a relative of a person) who has the power to appoint a director or the general manager of the company;
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an office holder or director of the company; or
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a member of the companys independent accounting firm, or anyone on its behalf.
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Approval of Related
Party Transactions Under Israeli Law
Fiduciary Duties of Directors and Executive Officers
The Companies Law codifies the fiduciary duties that office holders owe to a company. Each person listed in the table under ManagementExecutive
Officers and Directors is an office holder under the Companies Law.
An office holders fiduciary duties consist of a duty of care and a duty
of loyalty. The duty of care requires an office holder to act with the level of care with which a reasonable office holder in the same position would have acted under the same circumstances. The duty of loyalty requires that an office holder act in
good faith and in the best interests of the company.
The duty of care includes a duty to use reasonable means to obtain:
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information on the advisability of a given action brought for his or her approval or performed by virtue of his or her position; and
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all other important information pertaining to these actions.
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The duty of loyalty includes a duty to:
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refrain from any conflict of interest between the performance of his or her duties to the company and his or her other duties or personal affairs;
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refrain from any activity that is competitive with the company;
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refrain from exploiting any business opportunity of the company to receive a personal gain for himself or herself or others; and
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disclose to the company any information or documents relating to the companys affairs which the office holder received as a result of his or her position as an office holder.
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Disclosure of Personal Interests of an Office Holder and Approval of Certain Transactions
The Companies Law requires that an office holder promptly disclose to the company any personal interest that he or she may be aware of and all related material
information or documents concerning any existing or proposed transaction by the company. An interested office holders disclosure must be made promptly and in any event no later than the first meeting of the board of directors at which the
transaction is considered. An office holder is not obliged to disclose a personal interest if it derives solely from the personal interest of his or her relative in a transaction that is not considered as an extraordinary transaction.
A personal interest is defined under the Companies Law to include a personal interest of any person in an act or transaction of a company,
including the personal interest of such persons relative or of a corporate body in which such person or a relative of such person is a 5% or greater shareholder, director or general manager or in which he or she has the right to appoint at
least one director or the general manager, but excluding a personal interest stemming from ones ownership of shares in the company.
A personal
interest furthermore includes the personal interest of a person for whom the office holder holds a voting proxy or the personal interest of the office holder with respect to his or her vote on behalf of a person for
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whom he or she holds a proxy even if such shareholder has no personal interest in the matter. An office holder is not, however, obliged to disclose a personal interest if it derives solely from
the personal interest of his or her relative in a transaction that is not considered an extraordinary transaction.
Under the Companies Law, an
extraordinary transaction is defined as any of the following:
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a transaction other than in the ordinary course of business;
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a transaction that is not on market terms; or
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a transaction that may have a material impact on the companys profitability, assets or liabilities.
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If
it is determined that an office holder has a personal interest in a transaction, approval by the board of directors is required for the transaction, unless the companys articles of association provide for a different method of approval.
Further, so long as an office holder has disclosed his or her personal interest in a transaction, the board of directors may approve an action by the office holder that would otherwise be deemed a breach of duty of loyalty. However, a company may
not approve a transaction or action that is adverse to the companys interest or that is not performed by the office holder in good faith. An extraordinary transaction in which an office holder has a personal interest requires approval first by
the companys audit committee and subsequently by the board of directors. The compensation of, or an undertaking to indemnify or insure, an office holder who is not a director requires approval first by the companys compensation
committee, then by the companys board of directors, and, if such compensation arrangement or an undertaking to indemnify or insure is inconsistent with the companys stated compensation policy or if the office holder is the chief
executive officer (apart from a number of specific exceptions), then such arrangement is subject to a special majority approval. Arrangements regarding the compensation, indemnification or insurance of a director require the approval of the
compensation committee, board of directors and shareholders by ordinary majority, in that order, and under certain circumstances, a special majority approval. If shareholders of a company do not approve the compensation terms of office holders,
other than directors, but including the chief executive officer, the compensation committee and board of directors may override the shareholders decision, subject to certain conditions.
Generally, a person who has a personal interest in a matter which is considered at a meeting of the board of directors or the audit committee may not be
present at such a meeting or vote on that matter unless the chairman of the relevant committee or board of directors (as applicable) determines that he or she should be present in order to present the transaction that is subject to approval. If a
majority of the members of the audit committee or the board of directors (as applicable) has a personal interest in the approval of a transaction, then all directors may participate in discussions of the audit committee or the board of directors (as
applicable) on such transaction and the voting on approval thereof, but shareholder approval is also required for such transaction.
Disclosure of
Personal Interests of Controlling Shareholders and Approval of Certain Transactions
Pursuant to Israeli law, the disclosure requirements regarding
personal interests that apply to directors and executive officers also apply to a controlling shareholder of a public company. See Major Shareholders and Related Party Transactions for a definition of controlling shareholder. In
the context of a transaction involving a shareholder of the company, a controlling shareholder also includes a shareholder who holds 25% or more of the voting rights in the company if no other shareholder holds more than 50% of the voting rights in
the company. For this purpose, the holdings of all shareholders who have a personal interest in the same transaction will be aggregated. The approval of the audit committee, the board of directors and a special majority, in that order, is required
for (a) extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, (b) the engagement with a controlling shareholder or his or her relative, directly or indirectly, for the
provision of services to the company, (c) the terms of engagement and compensation of a controlling shareholder or his or her relative who is not an office holder or (d) the employment of a controlling shareholder or his or her relative by
the company, other than as an office holder.
81
To the extent that any such transaction with a controlling shareholder is for a period extending beyond three
years, approval is required once every three years, unless, with respect to certain transactions, the audit committee determines that the duration of the transaction is reasonable given the circumstances related thereto.
Arrangements regarding the compensation, indemnification or insurance of a controlling shareholder in his or her capacity as an office holder require the
approval of the compensation committee, board of directors and shareholders by a special majority and the terms thereof may not be inconsistent with the companys stated compensation policy.
Pursuant to regulations promulgated under the Companies Law, certain transactions with a controlling shareholder or his or her relative, or with directors,
that would otherwise require approval of a companys shareholders may be exempt from shareholder approval upon certain determinations of the audit committee and board of directors. Under these regulations, a shareholder holding at least 1% of
the issued share capital of the company may require, within 14 days of the publication of such determinations, that despite such determinations by the audit committee and the board of directors, such transaction will require shareholder approval
under the same majority requirements that would otherwise apply to such transactions.
Employment Agreements with Executive Officers and Directors
We have entered into written employment agreements with each of Dror Harats, Erez Feige, Amos Ron, Yael Cohen, Eyal Breitbart and Naamit Sher.
All such agreements contain provisions regarding
non-competition,
confidentiality of information and assignment of inventions. The
non-competition
provisions apply for a
period of 24 months following termination of the respective officers employment. In addition, we are required to provide notice of between three and six months prior to terminating the employment of such executive officers other than in the
case of a termination for cause. Other than with respect to Prof. Harats, these agreements do not provide for benefits upon the termination of these executives respective employment with us, other than payment of salary and benefits during the
required notice period for termination of these agreements, which varies under these individual agreements. Prof. Haratss agreement provides for six months of severance in the event Prof. Haratss employment is terminated by us without
cause or terminated by Prof. Harats for good reason. Pursuant to his employment agreement, Cause means Prof. Haratss conviction of any felony related to our business, a serious breach of trust by Prof. Harats, including theft,
embezzlement of our funds, self-dealing, prohibited disclosure of confidential or proprietary information and Prof. Haratss engagement in any prohibited business competitive to our own, Prof. Haratss disregard of lawful instructions of
our board of directors with respect to his duties to us following notice, or Prof. Haratss willful failure to perform any of his fundamental functions or duties. Pursuant to his employment agreement, Good reason means a material
reduction in Prof. Haratss status, title, position or responsibilities, a reduction in Prof. Haratss salary which is not part of a general reduction in salary applicable to all of our employees, a failure by us to continue any material
compensation or benefit plan, program or practice in which Prof. Harats is participating, or a material breach by us of any provision of Prof. Haratss employment agreement.
In addition, we have entered into compensation agreements with certain of our directors. The amounts payable pursuant to these arrangements have been approved
by our board of directors and shareholders.
Our directors do not receive compensation for their service as our directors or otherwise, unless such
compensation is approved by our compensation committee, and then by the board of directors followed by the shareholders. The compensation of our directors may be fixed, as an
all-inclusive
payment or as
payment for participation in meetings, or as a combination thereof. In addition, such compensation may include: (i) in the case of a director who is also an officer, a salary or other compensation in respect of his or her work as an officer, as
may be agreed upon by the director and us; and (ii) reimbursement of expenses, including travel expenses, expended in connection with his or her duties as a member of the board of directors.
82
Employees
As of March 1, 2017, we employed 34 employees, including 27 in research and development, and 7 in general and administrative positions, and of which 13
employees have either MDs or PhDs. All of our employees are located in Israel. We believe our employee relations are good.
Israeli labor laws 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 specified 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 the applicable Israeli legal requirements.
None of our employees currently work under any collective bargaining agreements.
Share Ownership
For information regarding the share
ownership of our directors and executive officers, please refer to Equity Compensation Plans below and Item 7. Major Shareholders and Related Party TransactionsMajor Shareholders.
As of February 11, 2017, our directors and executive officers hold, in the aggregate, options and RSUs outstanding for 2,292,407 ordinary shares.
These options have an exercise price of $2.93 per share and have expiration dates generally twenty years after the grant date of the option.
1,718,713
options are exercisable as of February 11, 2017 and have a weighted average exercise price of $2.16 per share.
Equity Compensation Plans
The 2000 Plan, the 2011 Plan and the 2014 Plan, allow us to grant options to purchase our ordinary shares to our directors, officers, employees, consultants,
advisers and service providers. The option plans are intended to enhance our ability to attract and retain desirable individuals by increasing their ownership interests in us. We no longer intend to grant options under the 2000 Plan or the 2011
Plan, and the remaining shares reserved for future grants under the option plans will constitute the initial share reserve for the 2014 Plan. Additionally, upon the expiration of options granted under the 2000 Plan or the 2011 Plan, the ordinary
shares underlying such expired options will increase the pool reserved for allocation under the 2014 Plan. As of February 11, 2017, we had reserved an aggregate of 3,551,930 ordinary shares under the option plans. As of February 11, 2017,
options to purchase an aggregate of 3,261,535 ordinary shares were outstanding, options to purchase 311,940 ordinary shares had been exercised, of which 4,384 had been transferred to the beneficiary holders, and options to purchase 28,180 ordinary
shares were reserved for future grant under the plans.
The plans are designed to reflect the provisions of the Israeli Income Tax Ordinance [New
Version]1961, as amended, mainly Sections 102 and 3(i), of the Ordinance, which affords certain tax advantages to Israeli employees, officers and directors that are granted options in accordance with its terms.
Section 102 of the Ordinance allows employees, directors and officers, who are not controlling shareholders and who are Israeli residents, to receive
favorable tax treatment for compensation in the form of shares or options. Section 102 of the Ordinance includes two alternatives for tax treatment involving the issuance of options or shares to a trustee for the benefit of the grantees and
also includes an additional alternative for the issuance of options or shares directly to the grantee. Section 102(b)(2) of the Ordinance, which provides the most favorable
83
tax treatment for grantees, permits the issuance to a trustee under the capital gains track. In order to comply with the terms of the capital gains track, all options granted under a
specific plan and subject to the provisions of Section 102 of the Ordinance, as well as the shares issued upon exercise of such options and other shares received following any realization of rights with respect to such options, such as share
dividends and share splits, must be registered in the name of a trustee selected by the board of directors and held in trust for the benefit of the relevant employee, director or officer. The trustee may not release these options or shares to the
relevant grantee before the second anniversary of the registration of the options in the name of the trustee. However, under this track, we are not allowed to deduct an expense with respect to the issuance of the options or shares. Section 3(i)
does not provide for a similar tax benefits.
The plans may be administered by our board of directors either directly or upon the recommendation of a
committee appointed by our board of directors.
The compensation committee recommends to the board of directors, and the board of directors determines or
approves the eligible individuals who receive options under the plans, the number of ordinary shares covered by those options, the terms under which such options may be exercised, and other terms and conditions of the options, all in accordance with
the provisions of the plans. Option holders may not transfer their options except in the event of death or if the compensation committee determines otherwise. Our compensation committee or board of directors may at any time amend or terminate each
of the plans; however, any amendment or termination may not adversely affect any options or shares granted under such plan prior to such action.
The
option exercise price is determined by the compensation committee and specified in each option award agreement. In general, the option exercise price is the fair market value of the shares on the date of grant as determined in good faith by our
board of directors.
Employee Share Ownership and Option Plan (2014)
In June 2014, we adopted and obtained shareholder approval for our 2014 Plan and the U.S. Appendix thereto. The 2014 Plan provides for the grant of options,
restricted shares, restricted share units and other share- based awards to our directors, employees, officers, consultants, advisors and service providers, among others and to any other person whose services are considered valuable to us. Following
the approval of the 2014 Plan by the Israeli tax authorities, we will only grant options or other equity incentive awards under the 2014 Plan, although previously-granted options and awards will continue to be governed by our 2000 Plan and 2011
Plan. The initial reserved pool under the 2014 Plan will be 928,288 ordinary shares, subject to adjustments as set forth in the 2014 Plan, including an automatic annual increase on January 1 of each year such that the number of shares issuable
under the 2014 Plan will equal 4% of our issued and outstanding share capital on a fully diluted basis on each such January 1, or a lesser number of shares determined by the board of directors.
The 2014 Plan will be administered by our board of directors or by a committee designated by the board of directors, which shall determine, subject to Israeli
law, the grantees of awards and the terms of the grant, including, exercise prices, vesting schedules, acceleration of vesting and the other matters necessary in the administration of the 2014 Plan. The 2014 Plan will enable us to issue awards under
various tax regimes including, without limitation, pursuant to Sections 102 and 3(i) of the Ordinance, and under Section 422 of the Code. Options granted under the 2014 Plan to U.S. residents may qualify as incentive stock options
within the meaning of Section 422 of the Code, or may be
non-qualified.
The exercise price for incentive stock options must not be less than the fair market value on the date on which an
option is granted, or 110% of the fair market value if the option holder holds more than 10% of our share capital.
We currently intend to grant awards
under the 2014 Plan only to our employees, directors and officers who are not controlling shareholders and are considered Israeli residents, under the capital gains track of Section 102(b)2 of the Ordinance.
84
Awards under the 2014 Plan may be granted until June 8, 2034, 20 years from the date on which the 2014 Plan
was approved by our board of directors, provided that awards granted to any U.S. participants may be granted until June 8, 2024, 10 years from the date on which the 2014 Plan was approved by our board of directors.
We expect that options granted under the 2014 Plan will generally vest over four years commencing on the date of grant such that 50% vest on the second
anniversary of the date of grant and an additional 6.25% vest at the end of each subsequent three-month period thereafter for 24 months. Options, other than certain incentive share options, that are not exercised within 20 years from the grant date
expire, unless otherwise determined by our board of directors or its designated committee, as applicable. Share options that qualify as incentive stock options granted to a person holding more than 10% of our voting power under the U.S.
appendix to the 2014 Plan will expire within five years from the date of the grant and any other options granted under the U.S. appendix to the 2014 Plan will expire within 10 years from the date of grant. Except as otherwise determined by the board
of directors or as set forth in an individuals award agreement, in the event of termination of employment or services for reasons of disability or death, or retirement, the grantee, or in the case of death, his or her legal successor, may
exercise options that have vested prior to termination within a period of one year from the date of disability or death, or within 180 days following retirement. If we terminate a grantees employment or service for cause, all of the
grantees vested and unvested options will expire on the date of termination. If a grantees employment or service is terminated for any other reason, the grantee may exercise his or her vested options within 90 days of the date of
termination. Any expired or unvested options return to the pool for reissuance.
In the event of a merger or consolidation of our company, or a sale of
all, or substantially all, of our shares or assets or other transaction having a similar effect on us, then without the consent of the option holder, our board of directors may determine, at its absolute discretion, whether outstanding awards held
by or for the benefit of any grantee and which have not yet vested, is to be assumed or substituted and whether acceleration of such awards will be available.
Employee Share Ownership and Option Plan (2011)
In April 2011, we adopted the 2011 Plan. The term of the 2011 Plan is twenty years. Each option granted under the 2011 Plan entitles the grantee to purchase
our ordinary shares. The options granted under the 2011 Plan generally vest during a four-year period following the date of the grant in 13 installments: 25% of the options vest one year following the grant date, and additional 1/16 of the options
vest at the end of each subsequent quarter over the course of the following three years. The options expire twenty years after the date of grant if not exercised earlier.
In the case of certain changes in our share capital structure, such as a consolidation or share split or dividend, appropriate adjustments will be made to the
numbers of shares and exercise prices under outstanding options. Unless otherwise determined by the board of directors, upon the consummation of certain kinds of transactions, such as a liquidation, a merger, reorganization or sale of all or
substantially all of our assets, any unexercised outstanding options shall expire, provided that in case of merger or consolidation or the sale, transfer or exchange of all or substantially all our assets or shares, the surviving corporation does
not assume the options or substitute them with appropriate options in the surviving corporation.
In general, when an option holders employment or
service with us terminates, his or her option will no longer continue to vest following termination, and the holder may exercise any vested options for a period of 90 days following termination without cause. If an option holders employment
with us terminates due to disability (as determined by the board of directors) or if the termination of employment results from his or her death then the option holder or his or her estate (as applicable) has twelve months to exercise the option. If
an option holder retires from our company, then, with the approval of the board of directors, the option holder or his or her estate (as applicable) has six months to exercise the option. If termination of employment results from cause, his or her
outstanding options will expire upon termination. No option may be exercised after its scheduled expiration date.
85
Employee Share Ownership and Option Plan (2000)
In February 2000, we adopted the 2000 Plan, which was amended and restated in 2003 due to changes in applicable tax law. The original term of the 2000 Plan was
ten years. In 2013, the terms of outstanding options were extended by 10 years.
Each option granted under the 2000 Plan entitles the grantee to purchase
one of our ordinary shares. The options granted under the 2000 Plan generally vest during a four-year period following the date of the grant in three installments: 50% of the options vest two years following the grant date, 25% of the options vest
three years following the grant date and the remaining 25% of the options vest four years following the grant date. The options under the plan expire ten years after the date of grant if not exercised earlier.
In the case of certain changes in our share capital structure, such as a consolidation or share split or dividend, appropriate adjustments will be made to the
numbers of shares and exercise prices under outstanding options. In the event of certain transactions, such as an acquisition, or a merger or reorganization or a sale of all or substantially all of our assets, there shall be an acceleration of
exercise of unvested options, immediate or otherwise, which depends on, among other things, the nature of such transaction, and provided that in case of merger or consolidation the surviving corporation does not assume the options or substitute them
with appropriate options in the surviving corporation.
In general, when an option holders employment or service with us terminates, his or her
option will no longer continue to vest following termination, and the holder may exercise any vested options for a period of 90 days following termination without cause. If an option holders employment with us terminates due to disability (as
determined by the board of directors) or if the termination of employment results from his or her death or due to retirement after age 60, then with the approval of the board of directors, the option holder or his or her estate (as applicable) has
twelve months to exercise the option; however, the option may not be exercised after its scheduled expiration date. If termination of employment results from cause, his or her outstanding options will expire upon termination.
Ite
m 7. Major Shareholders and Related Party Transactions
Major Shareholders
The following table
sets forth information with respect to the beneficial ownership of our ordinary shares as of February 11, 2017:
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each person or entity known by us to own beneficially more than 5% of our outstanding ordinary shares;
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each of our executive officers and directors individually; and
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all of our executive officers and directors as a group.
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The beneficial ownership of our
ordinary shares is determined in accordance with the rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or investment power, or the right to receive the economic benefit of ownership. For purposes
of the table below, we deem ordinary shares issuable pursuant to options that are currently exercisable or exercisable within 60 days of February 11, 2017 to be outstanding and to be beneficially owned by the person holding the options for the
purposes of computing the percentage ownership of that person, but we do not treat them as outstanding for the purpose of computing the percentage ownership of any other person. The percentage of ordinary shares beneficially owned is based on
26,902,285 ordinary shares outstanding as of February 11, 2017.
According to our transfer agent, as of February 17, 2017 there
were 16 record holders of our ordinary shares, of which three record holders were located in the United States. None of our shareholders has different voting rights from other shareholders.
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Except as described in the footnotes below, we believe each shareholder has voting and investment
power with respect to the ordinary shares indicated in the table as beneficially owned. Unless otherwise indicated, the address of each beneficial owner is c/o Vascular Biogenics Ltd., 6 Jonathan Netanyahu St., Or Yehuda, Israel 60376.
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Name
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Number of
Ordinary Shares
Beneficially Owned
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Percentage of
Ownership
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5% Shareholders
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Thai Lee Family Trust
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4,858,737
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18.1
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%
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Aurum Ventures M.K.I. Ltd (1)
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4,254,778
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15.8
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%
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Persons affiliated with Pitango Ventures (2)
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1,658,630
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6.2
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%
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Mr. Jecheskiel Gonczarowski (3)
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2,208,017
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8.2
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%
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Executive Officers and Directors
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Dr. Bennett M. Shapiro (4)
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260,980
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1.1
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%
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Prof. Dror Harats (5)
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1,638,532
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5.9
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%
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Mr. Jecheskiel Gonczarowski (6)
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2,208,017
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8.2
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%
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Prof. Ruth Arnon
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*
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Ms. Ruth Alon
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Dr. Ron Cohen
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*
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Mr. Philip Serlin
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*
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Mr. Amos Ron
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*
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Dr. Yael Cohen
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*
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Dr. Erez Feige
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|
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*
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Dr. Eyal Breitbart
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|
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|
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*
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Dr. Naamit Sher
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|
|
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*
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Adv. Ayelet Horn
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|
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*
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All directors and executive officers as a group (7)
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4,479,113
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15.8
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%
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(1)
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Consists of 4,254,778 shares held by Aurum Ventures M.K.I. Ltd. Voting and investment power over such shares are vested with Mr. Morris Kahn, who controls Aurum Ventures M.K.I. Ltd. As such, Mr. Kahn may be
deemed to have beneficial ownership over our shares held by Aurum Ventures M.K.I. Ltd. The address of Aurum Ventures M.K.I. Ltd. is 16 Abba Hillel Silver Rd., Ramat Gan, 5250608, Israel.
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(2)
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Consists of 1,623,570 shares held by Pitango Venture Capital Fund IV L.P. and 35,060 shares held by Pitango Venture Capital Principals Fund IV L.P. (collectively, the Pitango Funds). The Pitango Funds are
managed by their sole general partner, Pitango V.C. Fund IV, L.P., the sole general partner of which is Pitango G.P. Capital Holdings Ltd., an Israeli company owned indirectly (through personal holding entities) by each of the following individuals:
Rami Kalish, Chemi J. Peres, Aaron Mankovski, Isaac Hillel, Rami Beracha and Zeev Binman, none of whom has sole voting or investment power of our shares and each of whom has shared voting and investment power of such shares.
Ms. Alon is a General Partner of Pitango Ventures IV L.P., but does not have sole or shared voting or investment power over the shares held by the Pitango Funds. The address of the Pitango Funds is
11 HaMenofim Street, Building B,
Herzliya, Israel 46725.
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(3)
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Consists of 1,471,115 shares held directly by Mr. Jecheskiel Gonczarowski, 583,333 shares held by D.S.N.I. Investments Ltd. and 153,569 shares held by Inspe Aktiengesellschaft (collectively, the J.J.D.
Funds). The shares held by D.S.N.I. Investments Ltd. and Inspe Aktiengesellschaft may be deemed to be beneficially owned by Jecheskiel Gonczarowski, our shareholder and director.
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(4)
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Consists of (a) 24,440 outstanding shares held by Puretech Ventures LLC, which may be deemed to be beneficially owned by Bennett M. Shapiro, our chairman and a senior partner and chairman of Puretech Ventures LLC;
(b) 26,141 outstanding shares held by Bennett M. Shapiro and Fredericka F. Shapiro, JTWROS; and (c) options to purchase 183,890 shares exercisable within 60 days of February 11, 2016 held by Bennett M. Shapiro.
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87
(5)
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Consists of (a) 666,742 outstanding shares held by or for Prof. Harats; (b) options to purchase 939,858 shares exercisable within 60 days of February 11, 2017; and (c) warrants exercisable for 31,932
shares within 60 days of February 11, 2017.
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(6)
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Consists of 736,902 shares held by D.S.N.I. Investments Ltd. and Inspe Aktiengesellschaft. These shares may be deemed to be beneficially owned by Jecheskiel Gonczarowski, our shareholder and director. In addition, this
number consists of 1,471,115 shares held directly by Mr. Jecheskiel Gonczarowski.
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(7)
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Consists of (a) options to purchase 1,358,088 shares exercisable within 60 days of February 11, 2017; (b) warrants exercisable for 49,725 shares within 60 days of February 11, 2017; and (c) 7,
831,501 outstanding shares.
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Related Party Transactions
The following is a description of the material terms of those transactions with related parties to which we are party since January 1, 2016.
We have adopted a written policy which provides that the approval of the audit committee is required to effect specified actions and transactions with our
directors, executive officers and controlling shareholders, or in which such persons have an interest. See Item 6. Directors, Senior Management and EmployeesApproval of Related Party Transactions Under Israeli Law. The term
controlling shareholder means a shareholder with the ability to direct the activities of our company, other than by virtue of being an executive officer or director. A shareholder is presumed to be a controlling shareholder if the
shareholder holds 50% or more of the voting rights in a company or has the right to appoint the majority of the directors of the company or its general manager. For the purpose of approving transactions with controlling shareholders, as well as
corporate approval of executive compensation, the term also includes any shareholder (or two or more shareholders having a personal interest in the same matter being brought for approval) that holds 25% or more of the voting rights of a company if
the company has no shareholder that owns more than 50% of its voting rights. The transactions described below were entered into prior to the effectiveness of this policy.
Indemnification Agreements
We have in place
indemnification agreements with each of our executive officers exculpating them from a breach of their duty of care to us to the fullest extent permitted by law, subject to limited exceptions, and undertaking to indemnify them to the fullest extent
permitted by Israeli law, subject to limited exceptions, including with respect to liabilities resulting from the initial public offering to the extent such liabilities are not covered by insurance.
Employment Agreements
We have entered into employment
agreements with our executive officers and key employees. The employment agreements contain standard provisions, including assignment of invention provisions and
non-competition
clauses. See Item 6.
Directors, Senior Management and EmployeesEmployment Agreements with Executive Officers.
Registration Rights Agreement
Our investor rights agreement entitles our preferred shareholders to certain registration rights following the closing of our initial public offering. In
accordance with this agreement, and subject to conditions described below, the following executives, directors and entities, which as of the date of the prospectus relating to the initial public offering beneficially owned more than 5% of our
ordinary shares are entitled to registration rights: Jecheskiel Gonczarowski and entity affiliated therewith, Thai Lee Family Trust, Aurum Ventures and Pitango Ventures.
Form
F-1
Demand Rights
. Upon the request of the holders of more than 50% of the shares held by our former
preferred shareholders given more than 180 days after the effective date of the registration statement related to our initial public offering, we are required to file a registration statement on Form
F-1
in
respect of the ordinary shares held by our former preferred shareholders. Following a request to effect such a registration, we are required to
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give notice of the request to the other holders of registrable securities and offer them an opportunity to include their shares in the registration statement. We are not required to effect more
than two registrations on Form
F-1
in the aggregate and not more than one registration in any 12 month period and we are only required to do so if the aggregate proceeds from any such registration are
estimated in good faith to be in excess of $6.0 million.
Form
F-3
Demand Rights
. After we become
eligible under applicable securities laws to file a registration statement on Form
F-3,
which will not be until at least 12 months after the date of initial public offering, upon the request of the holders of
more than 20% of the shares held by our former preferred shareholders, we are required to file a registration statement on Form
F-3
in respect of the ordinary shares held by our former preferred
shareholders
.
Following a request to effect such a registration, we are required to give notice of the request to the other holders of registrable securities and offer them an opportunity to include their shares in the registration
statement. We are not required to effect a registration on Form
F-3
more than twice in any 12 month period and are only required to do so if the aggregate proceeds from any such registration are estimated in
good faith to be in excess of $2.0 million.
Piggyback Registration Rights
. Following our initial public offering, shareholders holding
registrable securities also have the right to request that we include their registrable securities in any registration statement filed by us in the future for the purposes of a public offering for cash, subject to specified exceptions.
Cutback
. In the event that the managing underwriter advises the registering shareholders that marketing factors require a limitation on the number of
shares that can be included in a registered offering, the shares will be included in the registration statement in an agreed order of preference among the holders of registration rights. The same preference also applies in the case of a piggyback
registration, but we have first preference and the number of shares of shareholders that are included may not be less than 30% of the total number of shares included in the offering.
Termination
. All registration rights granted to holders of registrable securities terminate on the fifth anniversary of the closing of our initial
public offering and, with respect to any of our holders of registrable securities when the shares held by such shareholder can be sold within a 90 day period under Rule 144
.
Expenses
. We will pay all expenses in carrying out the foregoing registrations other than selling shareholders underwriting discounts and
transfer taxes.
It
em 8. Financial Information
Financial statements are set forth under Item 18.
We have
never declared or paid any cash dividends to our shareholders. We currently anticipate that we will retain all of our future earnings, if any, for use in the operation of our business. Additionally, our ability to pay dividends on our ordinary
shares is limited by restrictions under the terms of the agreements governing our indebtedness and under Israeli law.
Ite
m 9. The Offer and Listing
Our ordinary shares are quoted on the Nasdaq Global Market under the symbol VBLT.
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Nasdaq Global Market
The following table sets forth, for the periods indicated since October 1, 2014, which was the date on which our ordinary shares began trading on the
Nasdaq Global Market under the symbol VBLT, the high and low sales prices of our ordinary shares as reported by the Nasdaq Global Market.
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Price Per Ordinary Share
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High
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Low
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Annual:
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2014
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$
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7.56
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$
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4.65
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2015
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17.02
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3.09
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2016
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7.58
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2.76
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Quarterly:
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First Quarter 2015
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$
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17.02
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$
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3.09
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Second Quarter 2015
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$
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9.13
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$
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3.60
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Third Quarter 2015
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$
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12.25
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$
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4.60
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Fourth Quarter 2015
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$
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8.54
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$
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4.66
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First Quarter 2016
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$
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5.22
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$
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2.76
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Second Quarter 2016
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$
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7.58
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$
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3.03
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Third Quarter 2016
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$
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5.83
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$
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3.74
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Fourth Quarter 2016
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$
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6.20
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$
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4.45
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First Quarter 2017 (through March 24, 2017)
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$
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6.50
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$
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4.20
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Most Recent Six Months:
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October 2016
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$
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5.55
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$
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4.85
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November 2016
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$
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6.20
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$
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4.60
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December 2016
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$
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5.60
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$
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4.45
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January 2017
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$
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5.45
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$
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4.85
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February 2017
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$
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5.90
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$
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5.15
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On March 24, 2017, the last reported sale price of our ordinary shares on the Nasdaq Global Market was
$
5.65 per share.
I
tem 10. Additional Information
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
Ordinary
Shares
Voting
All ordinary shares will have
identical voting and other rights in all respects.
Transfer of Shares
Our fully paid ordinary shares are issued in registered form and may be freely transferred under our amended and restated articles of association, unless the
transfer is restricted or prohibited by another instrument, applicable law or the rules of a stock exchange on which the shares are listed for trade. The ownership or voting of our ordinary shares by
non-residents
of Israel is not restricted in any way by our amended and restated articles of association or the laws of the State of Israel, except for ownership by nationals of some countries that are, or
have been, in a state of war with Israel.
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Election of Directors
Our ordinary shares do not have cumulative voting rights for the election of directors. As a result, the holders of a majority of the voting power represented
at a shareholders meeting have the power to elect all of our directors, subject to the special approval requirements for external directors described under Item 6. Directors, Senior Management and EmployeesBoard of Directors.
Under our amended and restated articles of association, our board of directors must consist of not less than three, not including two external directors, but
no more than nine directors (including the external directors).. Pursuant to our amended and restated articles of association, other than the external directors, for whom special election requirements apply under the Companies Law, the vote required
to appoint a director is a simple majority vote of holders of our voting shares, participating and voting at the relevant meeting. Each director will serve until his or her successor is duly elected and qualified or until his or her earlier death,
resignation or removal by a vote of the majority voting power of our shareholders at a general meeting of our shareholders or until his or her office expires by operation of law, in accordance with the Companies Law. In addition, our amended and
restated articles of association allow our board of directors to appoint directors to fill vacancies on the board of directors to serve for a term of office equal to the remaining period of the term of office of the directors(s) whose office(s) have
been vacated. External directors are elected for an initial term of three years, may be elected for additional terms of three years each under certain circumstances, and may be removed from office pursuant to the terms of the Companies Law. See
Item 6. Directors, Senior Management and EmployeesBoard of Directors.
Dividend and Liquidation Rights
We may declare a dividend to be paid to the holders of our ordinary shares in proportion to their respective shareholdings. Under the Companies Law, dividend
distributions are determined by the board of directors and do not require the approval of the shareholders of a company unless the companys articles of association provide otherwise. Our amended and restated articles of association do not
require shareholder approval of a dividend distribution and provide that dividend distributions may be determined by our board of directors.
Pursuant to
the Companies Law, the distribution amount is limited to the greater of retained earnings or earnings generated over the previous two years, according to our then last reviewed or audited financial statements, provided that the date of the financial
statements is not more than six months prior to the date of the distribution, or we may otherwise only distribute dividends that do not meet such criteria only with court approval. In each case, we are only permitted to distribute a dividend if our
board of directors and the court, if applicable, determines that there is no reasonable concern that payment of the dividend will prevent us from satisfying our existing and foreseeable obligations as they become due.
In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of our ordinary shares in
proportion to their shareholdings. This right, as well as the right to receive dividends, may be affected by the grant of preferential dividend or distribution rights to the holders of a class of shares with preferential rights that may be
authorized in the future.
Shareholder Meetings
Under Israeli law, we are required to hold an annual general meeting of our shareholders once every calendar year that must be held no later than 15 months
after the date of the previous annual general meeting. All meetings other than the annual general meeting of shareholders are referred to in our amended and restated articles of association as extraordinary general meetings. Our board of
directors may call extraordinary general meetings whenever it sees fit, at such time and place, within or outside of Israel, as it may determine. In addition, the Companies Law provides that our board of directors is required to convene an
extraordinary general meeting upon the written request of (i) any two of our directors or
one-
quarter of the members of our board of directors or (ii) one or more shareholders holding, in the
aggregate, either (a) 5% or more of our outstanding issued shares
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and 1% of our outstanding voting power or (b) 5% or more of our outstanding voting power. One or more shareholders, holding 1% or more of the outstanding voting power, may ask the board to
add an item to the agenda of a prospective meeting, if the proposal merits discussion at the general meeting.
Subject to the provisions of the Companies
Law and the regulations promulgated thereunder, shareholders entitled to participate and vote at general meetings are the shareholders of record on a date to be decided by the board of directors, which may be between four and 40 days prior to the
date of the meeting. Furthermore, the Companies Law requires that resolutions regarding the following matters must be passed at a general meeting of our shareholders:
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amendments to our articles of association;
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appointment or termination of our auditors;
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appointment of external directors;
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approval of certain related party transactions;
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increases or reductions of our authorized share capital;
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the exercise of our board of directors powers by a general meeting, if our board of directors is unable to exercise its powers and the exercise of any of its powers is required for our proper management.
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The Companies Law and our amended and restated articles of association require that a notice of any annual general meeting or extraordinary
general meeting be provided to shareholders at least 21 days prior to the meeting and if the agenda of the meeting includes the appointment or removal of directors, the approval of transactions with office holders or interested or related parties,
or an approval of a merger, notice must be provided at least 35 days prior to the meeting.
Under the Companies Law and our amended and restated articles
of association, shareholders are not permitted to take action via written consent in lieu of a meeting.
Quorum Requirements
Pursuant to our amended and restated articles of association, holders of our ordinary shares have one vote for each ordinary share held on all matters
submitted to a vote before the shareholders at a general meeting. As a foreign private issuer, the quorum required for our general meetings of shareholders consists of at least two shareholders present in person, by proxy or written ballot who hold
or represent between them at least 25% of the total outstanding voting rights. A meeting adjourned for lack of a quorum is generally adjourned to the same day in the following week at the same time and place or to a later time or date if so.
Vote Requirements
Our amended and restated
articles of association provide that all resolutions of our shareholders require a simple majority vote, unless otherwise required by the Companies Law or by our amended and restated articles of association. Under the Companies Law, each of
(i) the approval of an extraordinary transaction with a controlling shareholder and (ii) the terms of employment or other engagement of the controlling shareholder of the company or such controlling shareholders relative (even if not
extraordinary) requires, the approval described above under ManagementApproval of Related Party Transactions Under Israeli LawDisclosure of Personal Interests of Controlling Shareholders and Approval of Certain Transactions.
Under our amended and restated articles of association, the alteration of the rights, privileges, preferences or obligations of any class of our shares requires a simple majority vote of the class so affected (or such other percentage of the
relevant class that may be set forth in the governing documents relevant to such class), in addition to the ordinary majority vote of all classes of shares
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voting together as a single class at a shareholder meeting. An exception to the simple majority vote requirement is a resolution for the voluntary winding up, or an approval of a scheme of
arrangement or reorganization, of the company pursuant to Section 350 of the Companies Law, which requires the approval of holders of 75% of the voting rights represented at the meeting, in person, by proxy or by voting deed and voting on the
resolution.
Access to Corporate Records
Under the Companies Law, shareholders are provided access to: minutes of our general meetings; our shareholders register and principal shareholders register,
articles of association and financial statements; and any document that we are required by law to file publicly with the Israeli Companies Registrar or the Israel Securities Authority. In addition, shareholders may request to be provided with any
document related to an action or transaction requiring shareholder approval under the related party transaction provisions of the Companies Law. We may deny this request if we believe it has not been made in good faith or if such denial is necessary
to protect our interest or protect a trade secret or patent.
Acquisitions Under Israeli Law
Full Tender Offer
A person wishing to acquire shares of
an Israeli public company and who would as a result hold over 90% of the target companys issued and outstanding share capital is required by the Companies Law to make a tender offer to all of the companys shareholders for the purchase of
all of the issued and outstanding shares of the company. A person wishing to acquire shares of a public Israeli company and who would as a result hold over 90% of the issued and outstanding share capital of a certain class of shares is required to
make a tender offer to all of the shareholders who hold shares of the relevant class for the purchase of all of the issued and outstanding shares of that class. If the shareholders who do not accept the offer hold less than 5% of the issued and
outstanding share capital of the company or of the applicable class, and more than half of the shareholders who do not have a personal interest in the offer accept the offer, all of the shares that the acquirer offered to purchase will be
transferred to the acquirer by operation of law. However, a tender offer will also be accepted if the shareholders who do not accept the offer hold less than 2% of the issued and outstanding share capital of the company or of the applicable class of
shares.
Upon a successful completion of such a full tender offer, any shareholder that was an offeree in such tender offer, whether such shareholder
accepted the tender offer or not, may, within six months from the date of acceptance of the tender offer, petition an Israeli court to determine whether the tender offer was for less than fair value and that the fair value should be paid as
determined by the court. However, under certain conditions, the offeror may include in the terms of the tender offer that an offeree who accepted the offer will not be entitled to petition the Israeli court as described above.
If (a) the shareholders who did not respond or accept the tender offer hold at least 5% of the issued and outstanding share capital of the company or of
the applicable class or the shareholders who accept the offer constitute less than a majority of the offerees that do not have a personal interest in the acceptance of the tender offer, or (b) the shareholders who did not accept the tender
offer hold 2% or more of the issued and outstanding share capital of the company (or of the applicable class), the acquirer may not acquire shares of the company that will increase its holdings to more than 90% of the companys issued and
outstanding share capital or of the applicable class from shareholders who accepted the tender offer.
Special Tender Offer
The Companies Law provides that an acquisition of shares of an Israeli public company must be made by means of a special tender offer if as a result of the
acquisition the purchaser would become a holder of 25% or more of the voting rights in the company. This requirement does not apply if there is already another holder of at least 25% of
93
the voting rights in the company. Similarly, the Companies Law provides that an acquisition of shares in a public
company must be made by means of a special tender offer if, as a result of the acquisition, the purchaser would become a holder of more than 45% of the voting rights in the company, provided that there is no other shareholder of the company who
holds more than 45% of the voting rights in the company, subject to certain exceptions.
A special tender offer must be extended to all shareholders of a
company but the offeror is not required to purchase shares representing more than 5% of the voting power attached to the companys outstanding shares, regardless of how many shares are tendered by shareholders. A special tender offer may be
consummated only if (i) outstanding shares representing at least 5% of the voting power of the company will be acquired by the offeror and (ii) the number of shares tendered in the offer exceeds the number of shares whose holders objected
to the offer (excluding the purchaser, controlling shareholders, holders of 25% or more of the voting rights in the company or any person having a personal interest in the acceptance of the tender offer). If a special tender offer is accepted, then
the purchaser or any person or entity controlling it or under common control with the purchaser or such controlling person or entity may not make a subsequent tender offer for the purchase of shares of the target company and may not enter into a
merger with the target company for a period of one year from the date of the offer, unless the purchaser or such person or entity undertook to effect such an offer or merger in the initial special tender offer.
Merger
The Companies Law permits merger transactions if
approved by each partys board of directors and, unless certain requirements described under the Companies Law are met, by a majority vote of each partys shareholders, and, in the case of the target company, a majority vote of each class
of its shares, voted on the proposed merger at a shareholders meeting.
For purposes of the shareholder vote, unless a court rules otherwise, the merger
will not be deemed approved if a majority of the votes of shares represented at the shareholders meeting that are held by parties other than the other party to the merger, or by any person (or group of persons acting in concert) who holds (or hold,
as the case may be) 25% or more of the voting rights or the right to appoint 25% or more of the directors of the other party, vote against the merger. If, however, the merger involves a merger with a companys own controlling shareholder or if
the controlling shareholder has a personal interest in the merger, then the merger is instead subject to the same special majority approval that governs all extraordinary transactions with controlling shareholders (as described under Item 6.
Directors, Senior Management and EmployeesDisclosure of Personal Interests of Controlling Shareholders and Approval of Certain Transactions).
If the transaction would have been approved by the shareholders of a merging company but for the separate approval of each class or the exclusion of the votes
of certain shareholders as provided above, a court may still approve the merger upon the request of holders of at least 25% of the voting rights of a company, if the court holds that the merger is fair and reasonable, taking into account the value
of the parties to the merger and the consideration offered to the shareholders of the target company.
Upon the request of a creditor of either party to
the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that, as a result of the merger, the surviving company will be unable to satisfy the obligations of the merging entities, and may
further give instructions to secure the rights of creditors.
In addition, a merger may not be consummated unless at least 50 days have passed from the
date on which a proposal for approval of the merger was filed by each party with the Israeli Registrar of Companies and at least 30 days have passed from the date on which the merger was approved by the shareholders of each party.
94
Anti-takeover Measures
The Companies Law allow us to create and issue shares having rights different from those attached to our ordinary shares, including shares providing certain
preferred rights with respect to voting, distributions or other matters and shares having preemptive rights. No preferred shares are currently authorized under our amended and restated articles of association. In the future, if we do authorize,
create and issue a specific class of preferred shares, such class of shares, depending on the specific rights that may be attached to it, may have the ability to frustrate or prevent a takeover or otherwise prevent our shareholders from realizing a
potential premium over the market value of their ordinary shares. The authorization and designation of a class of preferred shares will require an amendment to our amended and restated articles of association, which requires the prior approval of
the holders of a majority of the voting power attaching to our issued and outstanding shares at a general meeting. The convening of the meeting, the shareholders entitled to participate and the majority vote required to be obtained at such a meeting
will be subject to the requirements set forth in the Companies Law as described above in Voting Rights.
Tax Law
Israeli tax law treats some acquisitions, such as
stock-for-stock
swaps between
an Israeli company and a foreign company, less favorably than U.S. tax law. For example, Israeli tax law may subject a shareholder who exchanges ordinary shares in an Israeli company for shares in a
non-Israeli
corporation to immediate taxation unless such shareholder receives authorization from the Israeli Tax Authority for different tax treatment.
Modification of Class Rights
Under the
Companies Law and our amended and restated articles of association, the rights attached to any class of share, such as voting, liquidation and dividend rights, may be amended by adoption of a resolution by the holders of a majority of the shares of
that class present at a separate class meeting, or otherwise in accordance with the rights attached to such class of shares, as set forth in our amended and restated articles of association.
Establishment
Our registration number with the
Israeli Registrar of Companies is
51-289976-6.
Our purpose as set forth in our amended and restated articles of association is to engage in any lawful activity.
Transfer Agent and Registrar
The transfer agent
and registrar for our ordinary shares is American Stock Transfer & Trust Company, LLC.
C. Material Contracts
We have not entered into any material contracts other than in the ordinary course of business and other than those described in Item 4. Information on
the Company, Item 6. Directors, Senior Management and Employees or elsewhere in this Annual Report.
D. Exchange Controls
There are currently no Israeli currency control restrictions on remittances of dividends on our ordinary shares, proceeds from the sale of the shares or
interest or other payments to
non-
residents of Israel, except for shareholders who are subjects of countries that are, or have been, in a state of war with Israel.
In 1998, Israeli currency control regulations were liberalized significantly, so that Israeli residents generally may freely deal in foreign currency and
foreign assets, and
non-residents
may freely deal in Israeli currency and Israeli assets. There are currently no Israeli currency control restrictions on remittances of dividends on the
95
ordinary shares or the proceeds from the sale of the shares provided that all taxes were paid or withheld; however, legislation remains in effect pursuant to which currency controls can be
imposed by administrative action at any time.
Non-residents
of Israel may freely hold and trade our securities.
Neither our articles of association nor the laws of the State of Israel restrict in any way the ownership or voting of ordinary shares by
non-residents,
except that such restrictions may exist with respect to
citizens of countries which are in a state of war with Israel. Israeli residents are allowed to purchase our ordinary shares.
E. Taxation
The following description is not intended to constitute a complete analysis of all tax consequences relating to the acquisition, ownership and disposition of
our ordinary shares. You should consult your own tax advisor concerning the tax consequences of your particular situation, as well as any tax consequences that may arise under the laws of any state, local, foreign or other taxing jurisdiction.
Israeli Tax Considerations and Government Programs
The
following is a brief summary of the material Israeli tax laws applicable to us, and certain Israeli Government programs that may benefit us. This section also contains a discussion of material Israeli tax consequences concerning the ownership and
disposition of our ordinary shares purchased by investors. This summary does not discuss all the aspects of Israeli tax law that may be relevant to a particular investor in light of his or her personal investment circumstances or to some types of
investors subject to special treatment under Israeli law. Examples of such investors include residents of Israel or traders in securities who are subject to special tax regimes not covered in this discussion. Because parts of this discussion are
based on new tax legislation that has not yet been subject to judicial or administrative interpretation, we cannot assure you that the appropriate tax authorities or the courts will accept the views expressed in this discussion. The discussion below
is subject to change, including due to amendments under Israeli law or changes to the applicable judicial or administrative interpretations of Israeli law, which change could affect the tax consequences described below.
General Corporate Tax Structure in Israel
Israeli
companies are generally subject to corporate tax, currently at the rate of 25% of a companys taxable income. However, the effective tax rate payable by a company that derives income from an Approved Enterprise, a Benefited Enterprise or a
Preferred Enterprise (as discussed below) may be considerably less. Capital gains derived by an Israeli company are subject to tax at the prevailing corporate tax rate.
In December 2016, the Economic Efficiency Law (Legislative Amendments for Implementing the Economic Policy for the 2017 and 2018 Budget Year) was published,
introducing a gradual reduction in corporate tax rate from 25% to 23%. However, the law also included a temporary provision setting the corporate tax rate in 2017 at 24%. As a result, the corporate tax rate will be 24% in 2017 and 23% in 2018 and
thereafter.
Law for the Encouragement of Industry (Taxes), 5729-1969
The Law for the Encouragement of Industry (Taxes), 5729-1969, generally referred to as the Industry Encouragement Law, provides several tax benefits for
Industrial Companies.
The Industry Encouragement Law defines an Industrial Company as a company resident in Israel, of which 90%
or more of its income in any tax year, other than income from defense loans, is derived from an Industrial Enterprise owned by it. An Industrial Enterprise is defined as an enterprise whose principal activity in a given tax
year is industrial production.
96
The following corporate tax benefits, among others, are available to Industrial Companies:
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amortization over an eight-year period of the cost of patents and rights to use patents and
know-how
which were purchased in good faith and are used for the development or
advancement of the Industrial Enterprise;
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under certain conditions, an election to file consolidated tax returns with related Israeli Industrial Companies; and
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expenses related to a public offering are deductible in equal amounts over three years.
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As we have not
generated income yet, there is no assurance that we qualify as an Industrial Company or that the benefits described above will be available to us in the future.
Law for the Encouragement of Capital Investments, 5719-1959
The Law for the Encouragement of Capital Investments, 5719-1959, generally referred to as the Investment Law, provides certain incentives for capital
investments in productive assets, such as production facilities, by Industrial Enterprises (as defined under the Investment Law).
The
Investment Law was significantly amended effective April 1, 2005 (the 2005 Amendment), and further amended as of January 1, 2011 (the 2011 Amendment). Pursuant to the 2005 Amendment, tax benefits granted in
accordance with the provisions of the Investment Law prior to its revision by the 2005 Amendment remain in force but any benefits granted subsequently are subject to the provisions of the 2005 Amendment. Similarly, the 2011 Amendment introduced new
benefits to replace those granted in accordance with the provisions of the Investment Law in effect prior to the 2011 Amendment. However, companies entitled to benefits under the Investment Law as in effect prior to January 1, 2011 were
entitled to choose to continue to enjoy such benefits, provided that certain conditions are met, or elect instead, irrevocably, to forego such benefits and have the benefits of the 2011 Amendment apply. We have examined the possible effect, if any,
of these provisions of the 2011 Amendment on our financial statements and have decided, at this time, not to opt to apply the new benefits under the 2011 Amendment.
Tax Benefits Prior to the 2005 Amendment
An
investment program that is implemented in accordance with the provisions of the Investment Law prior to the 2005 Amendment, referred to as an Approved Enterprise, is entitled to certain benefits. A company that wished to receive benefits
as an Approved Enterprise must have received approval from the Investment Center of the Israeli Ministry of the Economy (formerly the Ministry of Industry, Trade and Labor), or the Investment Center. Each certificate of approval for an Approved
Enterprise relates to a specific investment program in the Approved Enterprise, delineated both by the financial scope of the investment and by the physical characteristics of the facility or the asset.
In general, an Approved Enterprise is entitled to receive a grant from the Government of Israel or an alternative package of tax benefits, known as the
alternative benefits track. The tax benefits from any certificate of approval relate only to taxable income attributable to the specific Approved Enterprise. Income derived from activity that is not integral to the activity of the Approved
Enterprise does not enjoy tax benefits.
In addition, a company that has an Approved Enterprise program is eligible for further tax benefits if it
qualifies as a Foreign Investors Company (FIC), which is a company with a level of foreign investment, as defined in the Investment Law, of more than 25%. The level of foreign investment is measured as the percentage of rights in
the company (in terms of shares, rights to profits, voting and appointment of directors), and of combined share capital and loans, that are owned, directly or indirectly, by persons who are not residents of Israel. The determination as to whether a
company qualifies as an FIC is made on an annual basis.
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If a company elects the alternative benefits track and distributes a dividend out of income derived by its
Approved Enterprise during the tax exemption period it will be subject to corporate tax in respect of the amount of the dividend
(grossed-up
to reflect the
pre-tax
income that it would have had to earn in order to distribute the dividend) at the corporate tax rate which would have been applicable without the tax exemption under the alternative benefits track. In addition, dividends paid out of income
attributed to an Approved Enterprise are generally subject to withholding tax at source at the rate of 15% or such lower rate as may be provided in an applicable tax treaty.
The Investment Law also provides that an Approved Enterprise is entitled to accelerated depreciation on its property and equipment that are included in an
Approved Enterprise program during the first five years in which the equipment is used.
The benefits available to an Approved Enterprise are subject to
the fulfillment of conditions stipulated in the Investment Law and its regulations and the criteria in the specific certificate of approval. If a company does not meet these conditions, it would be required to repay the amount of tax benefits, as
adjusted by the Israeli consumer price index, and interest.
We do not have Approved Enterprise programs.
Tax Benefits Subsequent to the 2005 Amendment
The
2005 Amendment applies to new investment programs commencing after 2004, but does not apply to investment programs approved prior to April 1, 2005. The 2005 Amendment provides that terms and benefits included in any certificate of approval that
was granted before the 2005 Amendment became effective (April 1, 2005) will remain subject to the provisions of the Investment Law as in effect on the date of such approval.
The 2005 Amendment provides that a certificate of approval from the Investment Center will only be necessary for receiving cash grants. As a result, it was no
longer necessary for a company to obtain an Approved Enterprise certificate of approval in order to receive the tax benefits previously available under the alternative benefits track. Rather, a company may claim the tax benefits offered by the
alternative benefits track directly in its tax returns, provided that it meets the criteria for tax benefits set forth in the amendment. In order to receive the tax benefits, the 2005 Amendment states that a company must make an investment which
meets all of the conditions, including a minimum qualifying investment in certain productive assets as specified in the Investment Law. Such investment allows a company to receive Benefited Enterprise status, and may be made over a
period of no more than three years culminating with the end of the Benefited Enterprise election year.
The extent of the tax benefits available under the
2005 Amendment to qualifying income of a Benefited Enterprise depends on, among other things, the geographic location in Israel of the Benefited Enterprise. The location will also determine the period for which tax benefits are available. Such tax
benefits include an exemption from corporate tax on undistributed income generated by the Benefited Enterprise for a period of between two to ten years, depending on the geographic location of the Benefited Enterprise in Israel, and a reduced
corporate tax rate of between 10% to 25% for the remainder of the benefits period, depending on the level of foreign investment in the company in each year. The benefits period is limited to 12 or 14 years from the beginning of the Benefited
Enterprise election year, depending on the location of the Benefited Enterprise. We informed the Israeli Tax Authority of our choice of 2012 as a Benefited Enterprise election year. A company qualifying for tax benefits under the 2005 Amendment
which pays a dividend out of income derived by its Benefited Enterprise during the tax exemption period will be subject to corporate tax in respect of the amount of the dividend
(grossed-up
to reflect the
pre-tax
income that it would have had to earn in order to distribute the dividend) at the corporate tax rate which would have otherwise been applicable. Dividends paid out of income attributed to a Benefited
Enterprise are generally subject to withholding tax at source at the rate of
15%-20%
or such lower rate as may be provided in an applicable tax treaty.
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The benefits available to a Benefited Enterprise are subject to the fulfillment of conditions stipulated in the
Investment Law and its regulations. If a company does not meet these conditions, in a given tax year during the benefits period, it would generally not be eligible for tax benefits during such tax year; however, the companys eligibility for
tax benefits in prior and future years should not be impacted.
We currently have one Benefited Enterprise program under the Investments Law, which, we
believe, may entitle us to certain tax benefits. The tax benefit period for this program has not yet commenced but is expected to end no later than the end of tax year 2023 or tax year 2025. During the benefits period, which shall commence with the
year we will first earn taxable income relating to such enterprise, subject to the 12 or 14 year limitation described above, and shall run for a period of up to 10 years (assuming FIC status), a corporate tax exemption is expected to apply with
respect to the taxable income from our Benefited Enterprise program (once generated) generated during the first two years of the benefits period (so long as it remains undistributed) and reduced corporate tax rates are expected to apply to such
taxable income generated in the remaining years of the benefits period.
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.
Tax Benefits Under the 2011 Amendment
The 2011 Amendment canceled the availability of the benefits granted to companies under the Investment Law prior to 2011 and, instead, introduced new benefits
for income generated by a Preferred Company through its Preferred Enterprise (as such terms are defined in the Investment Law) as of January 1, 2011. The definition of a Preferred Company includes a company incorporated
in Israel that is not wholly-owned by a governmental entity, and that has, among other things, Preferred Enterprise status and is controlled and managed from Israel. Pursuant to the 2011 Amendment, in 2014 and thereafter a Preferred Company is
entitled to a reduced corporate tax rate of 16% with respect to its income derived by its Preferred Enterprise unless the Preferred Enterprise is located in development zone A, in which case the rate will be 9%. It should be noted, that the
classification of income generated from the provision of usage rights in
know-how
or software that were developed in the Preferred Enterprise, as well as royalty income received with respect to such usage, as
Preferred Enterprise income is subject to the issuance of a
pre-ruling
from the Israel Tax Authority stipulating that such income is associated with the productive activity of the Preferred Enterprise in
Israel.
Dividends paid out of income attributed to a Preferred Enterprise are generally subject to withholding tax at source at the rate of 20% or such
lower rate as may be provided in an applicable tax treaty. However, if such dividends are paid to an Israeli company, no tax is required to be withheld (although, if such dividends are subsequently distributed to individuals or a
non-Israeli
company, withholding tax at a rate of 20% or such lower rate as may be provided in an applicable tax treaty will apply).
The 2011 Amendment also provided transitional provisions to address companies that may be eligible for tax benefits under the Approved Enterprise or Benefited
Enterprise regimes. These transitional provisions provide, among other things, that unless an irrevocable request is made to apply the provisions of the Investment Law as amended in 2011 with respect to income to be derived as of January 1,
2011: (1) the terms and benefits included in any certificate of approval that was granted to an Approved Enterprise which chose to receive grants before the 2011 Amendment became effective will remain subject to the provisions of the Investment
Law as in effect on the date of such approval, and subject to certain other conditions, (2) terms and benefits included in any certificate of approval that was granted to an Approved Enterprise which had participated in an alternative benefits
track before the 2011 Amendment became effective will remain subject to the provisions of the Investment Law as in effect on the date of such approval, provided that certain conditions are met, and (3) a Benefited Enterprise can elect to
continue to benefit from the benefits provided to it before the 2011 Amendment came into effect, provided that certain conditions are met.
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We have examined the potential Israeli tax implications associated with the adoption and implementation of the
provisions of the 2011 Amendment and have decided, at this time, not to apply the new benefits under the 2011 Amendment. There is no assurance that our future taxable income will qualify as Preferred Enterprise income or that the benefits described
above will be available to us in the future.
The termination or substantial reduction of any of the benefits available under the Investment Law could
materially increase our tax liabilities.
Taxation of Our Shareholders
This discussion does not address the tax consequences applicable to shareholders that own, or have owned at any time, directly or indirectly, 10% or more of
our shares (Controlling Shareholders), and such shareholders should consult their tax advisers as to the tax consequences of owning or disposing of our shares.
Capital Gains Taxes Applicable to
Non-Israeli
Resident Shareholders
A
non-Israeli
resident who derives capital gains from the sale of shares in an Israeli resident company that were
purchased after the Company was listed for trading on a stock exchange outside of Israel will be exempt from Israeli tax so long as such capital gains were not attributable to a permanent establishment that the
non-resident
maintains in Israel.
However,
non-Israeli
resident
corporations will not be entitled to the foregoing exemption if the Israeli residents: (i) have a controlling interest, directly or indirectly, alone, together with another (i.e., together with a relative, or together with someone who is not a
relative but with whom, according to an agreement, there is regular cooperation in material matters of the company, directly or indirectly), or together with another Israeli resident, of more than 25% in one or more of the means of control in such
non-Israeli
resident corporation, or (ii) Israeli residents are the beneficiaries of, or are entitled to, 25% or more of the revenues or profits of such
non-Israeli
resident corporation, whether directly or indirectly.
Additionally, a sale of securities by a
non-Israeli
resident may be exempt from Israeli capital gains tax under the provisions of an applicable tax treaty. For example, under the United States- Israel Tax Treaty, the disposition of shares by a shareholder who (1) is a U.S. resident (for purposes
of the treaty), (2) holds the shares as a capital asset, and (3) is entitled to claim the benefits afforded to such person by the treaty, is generally exempt from Israeli capital gains tax. Such exemption will not apply if: (1) the
capital gain arising from the disposition can be attributed to a permanent establishment in Israel, (2) the shareholder holds, directly or indirectly, shares
representing 10% or more of the voting power of the company during any part of the
12-month
period preceding the
disposition, subject to certain conditions, or (3) such U.S. resident is an individual and was present in Israel for 183 days or more during the relevant taxable year. In such case, the sale, exchange or disposition of our ordinary shares would
be subject to Israeli tax, to the extent applicable; however, under the United States-Israel Tax Treaty, the taxpayer would be permitted to claim a credit for such taxes against the U.S. federal income tax imposed with respect to such sale, exchange
or disposition, subject to the limitations under U.S. law applicable to foreign tax credits. The United States-Israel Tax Treaty does not relate to U.S. state or local taxes.
In some instances where our shareholders may be liable for Israeli tax on the sale of their ordinary shares, the payment of the consideration may be subject
to the withholding of Israeli tax at source. Shareholders may be required to demonstrate that they are exempt from tax on their capital gains in order to avoid withholding at source at the time of sale.
Taxation of
Non-Israeli
Shareholders on Receipt of Dividends
Non-Israeli
residents are generally subject to Israeli withholding tax on the receipt of dividends paid on our ordinary
shares at the rate of 25%, unless relief is provided in a treaty between Israel and the shareholders country
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of residence, subject to receipt of a valid certificate from the Israeli Tax Authority allowing for such reduced rate. With respect to a person who is a substantial shareholder at the
time of receiving the dividend or at any time during the preceding twelve months, the applicable withholding tax rate is 30%. Furthermore, an additional 2% tax might be applicable to individual shareholders if certain conditions are met. A
substantial shareholder is generally a person who alone or together with such persons relative or another person who collaborates with such person on a permanent basis, holds, directly or indirectly, at least 10% of any of the
means of control of the corporation. Means of control generally include the right to vote, receive profits, nominate a director or an executive officer, receive assets upon liquidation, or order someone who holds any of the
aforesaid rights how to act, regardless of the source of such right. Notwithstanding the above, dividends paid to a
non-Israeli
resident substantial shareholder on publicly traded shares, like our
ordinary shares, which are held via a nominee company (as defined under the Securities Law, 1968), are generally subject to Israeli withholding tax at a rate of 25%, unless a different rate is provided under an applicable tax treaty,
provided that a certificate from the Israeli Tax Authority allowing for a reduced withholding tax rate is obtained in advance. Under the United States-Israel Tax Treaty, the maximum rate of tax withheld at source in Israel on dividends paid to a
holder of our ordinary shares who is a U.S. resident (for purposes of the United States- Israel Tax Treaty) is 25%. Unless a reduced tax rate is provided under an applicable tax treaty, a distribution of dividends to
non-Israeli
residents is subject to withholding tax at source at a rate of 15% if the dividend is distributed from income attributed to an Approved Enterprise or a Benefited Enterprise, while a 20% rate
applies if the dividend is distributed from income attributed to a Preferred Enterprise. We cannot assure you that in the event we declare a dividend we will designate the income out of which the dividend is paid in a manner that will reduce
shareholders tax liability.
If the dividend is attributable partly to income derived from an Approved Enterprise, Benefited Enterprise or Preferred
Enterprise, and partly to other sources of income, the withholding rate will be a blended rate reflecting the relative portions of the two types of income. U.S. residents who are subject to Israeli withholding tax on a dividend may be entitled to a
credit or deduction for Untied States federal income tax purposes in the amount of the taxes withheld, subject to detailed rules contained in U.S. tax legislation.
Estate and Gift Tax
Israeli law presently does not
impose estate or gift taxes.
Certain Material U.S. Federal Income Tax Considerations
The following is a description of the material U.S. federal income tax considerations relating to the ownership and disposition of our ordinary shares by a
U.S. Holder (as defined below). This description addresses only the U.S. federal income tax considerations to U.S. Holders that will hold such ordinary shares as capital assets. This description does not address tax considerations applicable to U.S.
Holders that may be subject to special tax rules, including, without limitation:
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banks, financial institutions or insurance companies;
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real estate investment trusts, regulated investment companies or grantor trusts;
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brokers, dealers or traders in securities, commodities or currencies;
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tax exempt entities or organizations, including an individual retirement account or Roth IRA as defined in Section 408 or 408A of the Code (as defined below), respectively;
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certain former citizens or long term residents of the United States;
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persons that received our shares as compensation for the performance of services;
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persons that will hold our shares as part of a hedging, integrated or conversion transaction or as a position in a straddle for U.S. federal income tax purposes;
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partnerships (including entities classified as partnerships for U.S. federal income tax purposes) or other pass-through entities, or holders that will hold our shares through such an entity;
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persons that acquire ordinary shares as a result of holding or owning our preferred shares;
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persons whose functional currency is not the U.S. dollar; or
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persons that own directly, indirectly or through attribution 10% or more of the voting power or value of our shares.
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Moreover, this description does not address the U.S. federal estate, gift, or alternative minimum tax considerations, or any U.S. state, local or
non-U.S.
tax considerations of the ownership and disposition of our ordinary shares.
This description is based on the
U.S. Internal Revenue Code of 1986, as amended, or the Code, existing, proposed and temporary U.S. Treasury Regulations promulgated thereunder and administrative and judicial interpretations thereof, in each case as in effect and available on the
date hereof. All the foregoing is subject to change, which change could apply retroactively, and to differing interpretations, all of which could affect the tax considerations described below. There can be no assurances that the U.S. Internal
Revenue Service, or the IRS, will not take a different position concerning the tax consequences of the ownership and disposition of our ordinary shares or that such a position would not be sustained. Holders should consult their own tax advisers
concerning the U.S. federal, state, local and foreign tax consequences of owning and disposing of our ordinary shares in their particular circumstances.
For purposes of this description, the term U.S. Holder means a beneficial owner of our ordinary shares that, for U.S. federal income tax purposes,
is (i) a citizen or resident of the United States, (ii) a corporation (or entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof, or the
District of Columbia, (iii) an estate the income of which is subject to U.S. federal income tax regardless of its source, or (iv) a trust with respect to which a court within the United States is able to exercise primary supervision over
its administration and one or more U.S. persons have the authority to control all of its substantial decisions.
If a partnership (or any other entity
treated as a partnership for U.S. federal income tax purposes) holds our ordinary shares, the U.S. federal income tax consequences relating to an investment in our ordinary shares will depend in part upon the status of the partner and the activities
of the partnership. Such a partner or partnership should consult its tax advisor regarding the U.S. federal income tax considerations of acquiring, owning and disposing of our ordinary shares in its particular circumstances.
As indicated below, this discussion is subject to U.S. federal income tax rules applicable to a passive foreign investment company, or a PFIC.
Persons considering an investment in our ordinary shares should consult their own tax advisors as to the particular tax consequences applicable to
them relating to the ownership and disposition of our ordinary shares, including the applicability of U.S. federal, state and local tax laws and
non-U.S.
tax laws.
Distributions
Subject to the discussion under
Passive Foreign Investment Company Considerations, below, if you are a U.S. Holder, the gross amount of any distribution made to you with respect to our ordinary shares before reduction for any Israeli taxes withheld therefrom,
other than certain distributions, if any, of our ordinary shares distributed pro rata to all our shareholders, generally will be includible in your income as dividend income to the
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extent such distribution is paid out of our current or accumulated earnings and profits as determined under U.S. federal income tax principles. To the extent that the amount of any distribution
by us exceeds our current and accumulated earnings and profits as determined under U.S. federal income tax principles, it will generally be treated first as a return of your adjusted tax basis in our ordinary shares and thereafter as either
long-term or short-term capital gain depending upon whether the U.S. Holder has held our ordinary shares for more than one year as of the time such distribution is received. We do not expect to maintain calculations of our earnings and profits under
U.S. federal income tax principles. Therefore, U.S. Holders should expect that the entire amount of any distribution generally will be reported as dividend income.
Non-corporate
U.S. Holders may qualify for
the preferential rates of taxation with respect to dividends on ordinary shares applicable to long-term capital gains (i.e., gains from the sale of capital assets held for more than one year) applicable to qualified dividend income (as discussed
below). The Company, which is incorporated under the laws of the State of Israel, believes that it qualifies as a resident of Israel for purposes of, and is eligible for the benefits of, the Convention between the Government of the United States of
America and the Government of the State of Israel with Respect to Taxes on Income, signed on November 20, 1975, as amended and currently in force, or the U.S.-Israel Tax Treaty, although there can be no assurance in this regard. Further, the
IRS has determined that the U.S.-Israel Tax Treaty is satisfactory for purposes of the qualified dividend rules and that it includes an
exchange-of-information
program.
Therefore, subject to the discussion under Passive Foreign Investment Company Considerations, below, if the U.S.-Israel Tax Treaty is applicable, such dividends will generally be qualified dividend income in the hands
of individual U.S. Holders, provided that certain conditions are met, including holding period and the absence of certain risk reduction transaction requirements are met. The dividends will not be eligible for the dividends received deduction
generally allowed to corporate U.S. Holders.
U.S. Holders generally may claim the amount of Israel withholding tax withheld either as a deduction from
gross income or as a credit against U.S. federal income tax liability. However, the foreign tax credit is subject to numerous complex limitations that must be determined and applied on an individual basis. Generally, the credit cannot exceed the
proportionate share of a U.S. Holders U.S. federal income tax liability that such U.S. Holders foreign source taxable income bears to such U.S. Holders worldwide taxable income. In applying this limitation, a U.S.
Holders various items of income and deduction must be classified, under complex rules, as either foreign source or U.S. source. In addition, this limitation is calculated separately with respect to specific categories
of income. The amount of a distribution with respect to the ordinary shares that is treated as a dividend may be lower for U.S. federal income tax purposes than it is for Israeli income tax purposes, potentially resulting in a reduced
foreign tax credit for the U.S. Holder. Each U.S. Holder should consult its own tax advisors regarding the foreign tax credit rules.
In general, the
amount of a distribution paid to a U.S. Holder in a foreign currency will be the dollar value of the foreign currency calculated by reference to the spot exchange rate on the day the U.S. Holder receives the distribution, regardless of whether the
foreign currency is converted into U.S. dollars at that time. Any foreign currency gain or loss a U.S. Holder realizes on a subsequent conversion of foreign currency into U.S. dollars will be U.S. source ordinary income or loss. If dividends
received in foreign currency are converted into U.S. dollars on the day they are received, a U.S. Holder generally should not be required to recognize foreign currency gain or loss in respect of the dividend.
Sale, Exchange or Other Taxable Disposition of Our Ordinary Shares
Subject to the discussion below under Passive Foreign Investment Company Considerations, if you are a U.S. Holder, you generally will
recognize gain or loss on the sale, exchange or other taxable disposition of our ordinary shares equal to the difference between the amount realized on such sale, exchange or other taxable disposition and your adjusted tax basis in our ordinary
shares, and such gain or loss will be capital gain or loss. The adjusted tax basis in an ordinary share generally will be equal to the cost of such ordinary share. If you are a
non-corporate
U.S. Holder,
capital gain from the sale, exchange or other taxable disposition of ordinary shares is generally eligible for a preferential rate of taxation applicable to capital gains, if your holding period determined at the time of such sale, exchange or other
taxable disposition for such ordinary shares exceeds one year (i.e., such gain is long-term capital gain). The deductibility of capital losses for U.S. federal income tax purposes is subject to limitations under the Code. Any such gain or loss that
a U.S. Holder recognizes generally will be treated as U.S. source income or loss for foreign tax credit limitation purposes.
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For a cash basis taxpayer, units of foreign currency paid or received are translated into U.S. dollars at the
spot rate on the settlement date of the purchase or sale. In that case, no foreign currency exchange gain or loss will result from currency fluctuations between the trade date and the settlement date of such a purchase or sale. An accrual basis
taxpayer, however, may elect the same treatment required of cash basis taxpayers with respect to purchases and sales of our ordinary shares that are traded on an established securities market, provided the election is applied consistently from year
to year. Such election may not be changed without the consent of the IRS. For an accrual basis taxpayer who does not make such election, units of foreign currency paid or received are translated into U.S. dollars at the spot rate on the trade date
of the purchase or sale. Such an accrual basis taxpayer may recognize exchange gain or loss based on currency fluctuations between the trade date and the settlement date. Any foreign currency gain or loss a U.S. Holder realizes will be U.S. source
ordinary income or loss.
Passive Foreign Investment Company Considerations
If we are classified as a PFIC in any taxable year, a U.S. Holder would be subject to special rules generally intended to reduce or eliminate any benefits from
the deferral of U.S. federal income tax that a U.S. Holder could derive from investing in a
non-U.S.
company that does not distribute all of its earnings on a current basis.
A
non-U.S.
corporation is classified as a PFIC for U.S. federal income tax purposes in any taxable year in which,
after applying certain look-through rules with respect to the income and assets of subsidiaries, either (i) at least 75% of its gross income is passive income or (ii) at least 50% of the average quarterly value of its total
gross assets (which, assuming we are not a CFC for the year being tested, would be measured by fair market value of the assets, and for which purpose the total value of our assets may be determined in part by the market value of our ordinary shares,
which is subject to change) is attributable to assets that produce passive income or are held for the production of passive income.
Passive
income for this purpose generally includes dividends, interest, royalties, rents, gains from commodities and securities transactions, the excess of gains over losses from the disposition of assets which produce passive income, and includes amounts
derived by reason of the temporary investment of funds raised in offerings of our ordinary shares. If a
non-U.S.
corporation owns directly or indirectly at least 25% by value of the stock of another
corporation, the
non-U.S.
corporation is treated for purposes of the PFIC tests as owning its proportionate share of the assets of the other corporation and as receiving directly its proportionate share of the
other corporations income. If we are classified as a PFIC in any year with respect to which a U.S. Holder owns our ordinary shares, we will continue to be treated as a PFIC with respect to such U.S. Holder in all succeeding years during which
the U.S. Holder owns our ordinary shares, regardless of whether we continue to meet the tests described above.
We must determine our PFIC status annually
based on tests which are factual in nature, and our status will depend on our income, assets and activities each year.
However, because we had no
revenue-producing operations, we believe that we were likely a PFIC for our 2016 taxable year. In addition, unless and until we generate sufficient revenue from active licensing and other
non-passive
sources
and otherwise satisfy the asset test above, we expect to be treated as a PFIC in future taxable years.
If we are a PFIC, and you are a U.S. Holder, then
unless you make one of the elections described below, a special tax regime will apply to both (a) any excess distribution by us to you (generally, your ratable portion of distributions in any year which are greater than 125% of the
average annual distribution received by you in the shorter of the three preceding years or your holding period for our ordinary shares) and (b) any gain realized on the sale or other disposition of the ordinary shares. Under this regime, any
excess distribution and realized gain will be treated as ordinary income and will be subject to tax as if (a) the excess distribution or gain had been realized ratably over your holding period, (b) the amount deemed realized in each year
had been subject to tax in each year of that holding period at the highest marginal rate for such year (other than income allocated to the current period or any taxable period before we became a PFIC, which would be subject to tax at the U.S.
Holders regular ordinary
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income rate for the current year and would not be subject to the interest charge discussed below), and (c) the interest charge generally applicable to underpayments of tax had been imposed
on the taxes deemed to have been payable in those years. In addition, dividend distributions made to you will not qualify for the lower rates of taxation applicable to long-term capital gains discussed above under Distributions.
Certain elections may potentially be used to reduce the adverse impact of the PFIC rules on U.S. Holders (qualifying electing fund
(QEF) and
mark-to-market
elections), but these elections may accelerate the recognition of taxable income and may result in the recognition of
ordinary income.
The rules described above for excess distributions would not apply to a U.S. Holder if the U.S. Holder makes a timely QEF election for
the first taxable year of the U.S. Holders holding period for ordinary shares and we comply with specified reporting requirements. A timely QEF election for a taxable year generally must be made on or before the due date (as may be extended)
for filing the taxpayers U.S. federal income tax return for the year. A U.S. Holder who makes a QEF election generally must report on a current basis a pro rata share of our ordinary earnings and net capital gain for any taxable year in which
we are a PFIC, whether or not those earnings or gains are distributed. A U.S. Holder who makes a QEF election must file a Form 8621 with its annual income tax return. We have not historically provided the information necessary for U.S. Holders to
make qualified electing fund elections. However, beginning with our 2016 taxable year, for U.S. Holders who seek to make a QEF election with respect to our ordinary shares, we intend to make available an information statement that will contain the
necessary information required for making a QEF election and permit such U.S. Holders access to certain information in the event of an audit by the U.S. tax authorities.
If a U.S. Holder does not make a QEF election for the first taxable year of the U.S. Holders holding period for ordinary shares during which we are a
PFIC, the QEF election will not be treated as timely and the adverse tax regime described above would apply to dispositions of or excess distributions on the ordinary shares. In such case, a U.S. Holder may make a deemed sale election whereby the
U.S. Holder would be treated as if the U.S. Holder had sold the ordinary shares in a fully taxable sale at fair market value on the first day of such taxable year in which the QEF election takes effect. Such U.S. Holder would be required to
recognize any gain on the deemed sale as an excess distribution and pay any tax and interest due on the excess distribution when making the deemed sale election. The effect of such further election would be to restart the U.S. Holders holding
period in the ordinary shares, subject to the QEF regime, and to purge the PFIC status of such ordinary shares going forward.
If a U.S. Holder makes the
mark-to-market
election, the U.S. Holder generally will recognize as ordinary income any excess of the fair market value of the ordinary shares at the end of each taxable year
over their adjusted tax basis, and will recognize an ordinary loss in respect of any excess of the adjusted tax basis of the ordinary shares over their fair market value at the end of the taxable year (but only to the extent of the net amount of
income previously included as a result of the
mark-to-market
election). If a U.S. Holder makes the election, the U.S. Holders tax basis in the ordinary shares will
be adjusted to reflect these income or loss amounts. Any gain recognized on the sale or other disposition of ordinary shares in a year when we are a PFIC will be treated as ordinary income and any loss will be treated as an ordinary loss (but only
to the extent of the net amount of income previously included as a result of the
mark-to-market
election). The
mark-to-market
election is available only if we are a PFIC and our ordinary shares are regularly traded on a qualified exchange. Our ordinary shares will be treated as regularly
traded in any calendar year in which more than a de minimis quantity of the ordinary shares are traded on a qualified exchange on at least 15 days during each calendar quarter (subject to the rule that trades that have as one of their
principle purposes the meeting of the trading requirement as disregarded). The NASDAQ Global Market is a qualified exchange for this purpose and, consequently, if the ordinary shares are regularly traded, the
mark-to-market
election will be available to a U.S. Holder.
U.S. Holders should consult their tax advisors to
determine whether any of these elections would be available and if so, what the consequences of the alternative treatments would be in their particular circumstances.
If we are a PFIC, the general tax treatment for U.S. Holders described in this section would apply to indirect distributions and gains deemed to be realized
by U.S. Holders in respect of any of our subsidiaries that also may be determined to be PFICs.
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If a U.S. Holder owns ordinary shares during any year in which we are a PFIC and the U.S. Holder recognizes gain
on a disposition of our ordinary shares or receives distributions with respect to our ordinary shares, the U.S. Holder generally will be required to file an IRS Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company
or Qualified Electing Fund) with respect to the company, generally with the U.S. Holders federal income tax return for that year. If our company were a PFIC for a given taxable year, then you should consult your tax advisor concerning your
annual filing requirements.
The U.S. federal income tax rules relating to PFICs are complex. Prospective U.S. investors are urged to consult their own
tax advisers with respect to the ownership and disposition of our ordinary shares, the consequences to them of an investment in a PFIC, any elections available with respect to our ordinary shares and the IRS information reporting obligations with
respect to the ownership and disposition of our ordinary shares.
Medicare Tax
Certain U.S. Holders that are individuals, estates or trusts are subject to a 3.8% tax on all or a portion of their net investment income, which
may include all or a portion of their dividend income and net gains from the disposition of ordinary shares. Each U.S. Holder that is an individual, estate or trust is urged to consult its tax advisors regarding the applicability of the Medicare tax
to its income and gains in respect of its investment in our ordinary shares.
Backup Withholding Tax and Information Reporting Requirements
U.S. backup withholding tax and information reporting requirements may apply to certain payments to certain shareholders. Information reporting
generally will apply to payments of dividends on, and to proceeds from the sale or redemption of, our ordinary shares made within the United States, or by a U.S. payor or U.S. middleman, to a holder of our ordinary shares, other than an exempt
recipient (including a payee that is not a U.S. person that provides an appropriate certification and certain other persons). A payor will be required to withhold backup withholding tax from any payments of dividends on, or the proceeds from the
sale or redemption of, ordinary shares within the United States, or by a U.S. payor or U.S. middleman, to a holder, other than an exempt recipient, if such holder fails to furnish its correct taxpayer identification number or otherwise fails to
comply with, or establish an exemption from, such backup withholding tax requirements. Any amounts withheld under the backup withholding rules will be allowed as a credit against the beneficial owners U.S. federal income tax liability, if any,
and any excess amounts withheld under the backup withholding rules may be refunded, provided that the required information is timely furnished to the IRS.
Foreign Asset Reporting
Certain U.S. Holders who
are individuals are required to report information relating to an interest in our ordinary shares, subject to certain exceptions (including an exception for shares held in accounts maintained by U.S. financial institutions) by filing IRS Form 8938
(Statement of Specified Foreign Financial Assets) with their federal income tax return. U.S. Holders are urged to consult their tax advisors regarding their information reporting obligations, if any, with respect to their ownership and disposition
of our ordinary shares.
THE DISCUSSION ABOVE IS A GENERAL SUMMARY. IT DOES NOT COVER ALL TAX MATTERS THAT MAY BE OF IMPORTANCE TO A PROSPECTIVE
INVESTOR. EACH PROSPECTIVE INVESTOR IS URGED TO CONSULT ITS OWN TAX ADVISOR ABOUT THE TAX CONSEQUENCES TO IT OF AN INVESTMENT IN ORDINARY SHARES IN LIGHT OF THE INVESTORS OWN CIRCUMSTANCES.
F. Dividends and Paying Agents
Not
applicable.
106
G. Statement by Experts
Not applicable.
H. Documents on Display
You may inspect our securities filings, including this Annual Report and the exhibits and schedules thereto, without charge at the offices of the SEC
at 100 F Street, N.E., Washington, D.C. 20549. You may obtain copies of all or any part of the Annual Report from the Public Reference Section of the SEC, 100 F Street, NE, Washington, D.C. 20549 upon the payment of the prescribed fees. You may
obtain information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.
The SEC maintains a
website at www.sec.gov that contains reports, proxy and information statements and other information regarding registrants like us that file electronically with the SEC. You can also inspect the Annual Report on this website.
A copy of each document (or a translation thereof to the extent not in English) concerning our company that is referred to in this Annual Report is available
for public view (subject to confidential treatment of certain agreements pursuant to applicable law) at our principal executive offices.
I. Subsidiary
Information
Not applicable.
It
em 11. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks in the ordinary course of our business.
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of foreign currency exchange rates. Approximately 23% of our
expenses in 2016 were denominated in New Israeli Shekels. Changes of 5% in the US$/NIS exchange rate will increase or decrease the operating expenses by up to 1%.
Foreign Currency Risk
Fluctuations in exchange
rates, especially the NIS against the U.S. dollar, may affect our results, as some of our assets are linked to NIS, as are some of our liabilities. In addition, the fluctuation in the NIS exchange rate against the U.S. dollar may impact our results,
as a portion of our operating costs are NIS denominated.
The following table presents information about the changes in the exchange rates of the NIS
against the U.S. dollar at year end:
|
|
|
|
|
Period
|
|
%
|
|
Year ended December 31, 2016
|
|
|
1.5
|
%
|
Year ended December 31, 2015
|
|
|
(0.33
|
%)
|
Year ended December 31, 2014
|
|
|
(10.7
|
%)
|
Inflation Risk
We
do not believe that inflation had a material effect on our business, financial condition or results of operations in the last three fiscal years. If our costs were to become subject to significant inflationary pressures, we may not be able to fully
offset such higher costs through hedging transactions. Our inability or failure to do so could harm our business, financial condition and results of operations.
Ite
m 12. Description of Securities Other Than Equity Securities
Not applicable.
107