Item 1. Business.
Historical Background and Corporate Structure
Intec Pharma Ltd. was
established and incorporated in Israel on October 23, 2000 as a private Israeli company under the name Orly Guy Ltd. In February
2001, our name was changed to Intec Pharmaceuticals (2000) Ltd. Our research and development activities began originally through
a private partnership, Intec Pharmaceutical Partnership I.P.P, a general Israeli partnership, formed on September 21, 2000. Its
operations were transferred in full to us at the beginning of 2002 in return for the allocation of shares in our company to the
partners in the partnership, pro rata with their ownership in the partnership. In March 2004, we changed our corporate name to
Intec Pharma Ltd. In February 2010, we successfully completed an initial public offering in Israel on the Tel Aviv Stock Exchange,
or TASE and in August 2015 we completed an initial public offering in the U.S. In September 2017, we incorporated a wholly-owned
subsidiary, Intec Pharma Inc., in the State of Delaware. In August 2018, we voluntarily delisted from the TASE.
In connection with
our initial public offering in Israel in February 2010, we raised approximately NIS 35.3 million before issuance costs and issued
783,969 ordinary shares and registered warrants (Series 1) to purchase 313,588 of our ordinary shares. As of the date of this Annual
Report, all warrants issued in our initial public offering in Israel have expired.
In connection with
our initial public offering in the U.S., we raised gross proceeds of approximately $34.0 million before deducting underwriting
discounts and commissions and other offering expenses. In August 2017, we completed an underwritten follow-on public offering in
the U.S. in which we raised gross proceeds of approximately $57.5 million before deducting underwriting discounts and commissions
and other offering expenses and in April 2018, we completed another underwritten follow-on public offering in the U.S. in which
we raised gross proceeds of approximately $37.5 million before deducting underwriting discounts and commissions and other offering
expenses.
Effective
January 1, 2019, we ceased reporting as a “foreign private issuer” as defined in Rule 3b-4 of the Exchange Act, and
became subject to the rules and regulations under the Securities Exchange Act of 1934, as amended, or Exchange Act, applicable
to U.S. domestic issuers. As a result, we are filing an Annual Report on Form 10-K beginning with the fiscal year ended December
31, 2018. Our annual reports for prior years were filed on Form 20-F.
We are an
“emerging growth company,” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As such, we
are eligible to, and intend to, take advantage of certain exemptions from various reporting requirements applicable to other
public companies that are not “emerging growth companies” such as reduced disclosure obligations regarding
executive compensation and not being required to comply with the auditor attestation requirements of Section 404 of the
Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. We will remain an emerging growth company until the earliest of: (i)
the last day of the fiscal year during which we have total annual gross revenues of $1.07 billion or more, (ii) the last day
of the fiscal year following the fifth anniversary of the date of the first sale of our ordinary shares pursuant to an
effective registration statement (i.e., December 31, 2020) (iii) the date on which we have, during the previous three-year
period, issued more than $1 billion in non-convertible debt or (iv) the date on which we are deemed a “large
accelerated issuer” as defined in Regulation S-K of the Securities Act of 1933, as amended, or the Securities Act.
We are also a smaller
reporting company, and we will remain a smaller reporting company until the fiscal year following the determination that our voting
and non-voting common shares held by non-affiliates is more than $250 million measured on the last business day of our second fiscal
quarter, or our annual revenues are more than $100 million during the most recently completed fiscal year and our voting and non-voting
common shares held by non-affiliates is more than $700 million measured on the last business day of our second fiscal quarter.
Similar to emerging growth companies, smaller reporting companies are able to provide simplified executive compensation disclosure,
are exempt from the auditor attestation requirements of Section 404, and have certain other reduced disclosure obligations, including,
among other things, being required to provide only two years of audited financial statements and not being required to provide
selected financial data, supplemental financial information or risk factors.
Our principal executive
offices are located in Har Hotzvim at 12 Hartom Street, Jerusalem, Israel 9777512 and our telephone number is (+972) (2) 586-4657.
Our website address is http://www.intecpharma.com. The information contained on, or that can be accessed through, our website is
neither a part of nor incorporated into this Annual Report. We have included our website address in this Annual Report solely as
an inactive textual reference.
We use our investor
relations website (http://ir.intecpharma.com) as a channel of distribution of Company information. The information we post through
this channel may be deemed material. Accordingly, investors should monitor our website, in addition to following our press releases,
SEC filings and public conference calls and webcasts. The contents of our website are not, however, a part of this Annual Report.
Overview
We are a clinical stage
biopharmaceutical company focused on developing drugs based on our proprietary Accordion Pill platform technology, which we refer
to as the Accordion Pill. Our Accordion Pill is an oral drug delivery system that is designed to improve the efficacy and safety
of existing drugs and drugs in development by utilizing an efficient gastric retention, or GR, and specific release mechanism.
Our product pipeline currently includes several product candidates in various clinical trial stages. Our leading product candidate,
Accordion Pill Carbidopa/Levodopa, or AP-CD/LD, is being developed for the indication of treatment of Parkinson’s disease
symptoms in advanced Parkinson’s disease patients. We have successfully completed a Phase II clinical trial for AP-CD/LD
for the treatment of Parkinson’s disease symptoms in advanced Parkinson’s disease patients and have agreed with the
U.S. Food and Drug Administration, or FDA, on the remaining clinical development program for AP-CD/LD for the treatment of Parkinson’s
disease symptoms in advanced Parkinson’s disease patients, including the main principles of the single required pivotal Phase
III clinical trial in advanced Parkinson’s disease patients.
We are currently conducting
a pivotal Phase III clinical for AP-CD/LD for the treatment of advanced Parkinson’s disease known as the ACCORDANCE study.
In April 2016, we enrolled the first patient in the ACCORDANCE study and in October 2018, we completed enrollment. We currently
expect to release top-line results in mid-2019. In our correspondence with the FDA, the FDA previously agreed that an acceptable
regulatory pathway for AP-CD/LD would be to submit a new drug application, or NDA, pursuant to Section 505(b)(2) of the Federal
Food, Drug, and Cosmetic Act, or FDCA which is a streamlined approval pathway that may accelerate the time to commercialize and
decrease the costs of FDA approval for AP–CD/LD, as compared to those typically associated with a new chemical entity, or
NCE.
In February 2019, we
announced that AP-CD/LD met the primary endpoint in a pharmacokinetic, or PK, study comparing the AP-CD/LD 50/500mg dosed three
times daily, the most common dose used in our on-going ACCORDANCE study, to 1.5 tablets of CD/LD immediate release (Sinemet™)
25/100 dosed five times per day in Parkinson’s disease patients.
We have invested in
the commercial scale manufacture of AP-CD/LD, for which we are in partnership with LTS Lohmann Therapie-Systeme AG, or LTS. In
December 2018, the large commercial scale production line was delivered to LTS in Andernach, Germany. We are in the process of installing and connecting all the ancillary equipment and expect to begin the
validation, bioequivalency and stability studies needed for approval of our commercial production processes in the coming months.
After preliminary discussions with the FDA in anticipation of filing for marketing approval of AP-CD/LD, we remain confident we
are on track to submit a New Drug Application, or NDA, for approval of AP-CD/LD in mid- to late-2020, assuming positive topline
data in the Accordance Study in mid-2019.
In addition, we have
initiated a clinical development program for our Accordion Pill platform with the two primary cannabinoids contained in cannabis
sativa, which we refer to as AP-Cannabinoids. We are formulating and testing cannabidiol, or CBD, and 9-tetrahydrocannabinol, or
THC, for the treatment of various pain indications. AP-Cannabinoids are designed to extend the absorption phase of CBD and THC,
with the goal of more consistent levels for an improved therapeutic effect which may address several major drawbacks of current
methods of treatment, such as short duration of effect, delayed onset, variability of exposure, variability of the administered
dose and adverse events that correlate with peak levels. In March 2017, we initiated a Phase I single-center, single-dose, randomized,
three-way crossover clinical trial in Israel to compare the safety, tolerability and PK of AP-THC/CBD, with Sativex
®
,
an oral buccal spray containing CBD and THC that is commercially available outside of the United States. Initial results demonstrate
that the Accordion Pill platform is well-suited to safely deliver CBD and THC with significant improvements in exposure compared
with Sativex. In December 2018, we initiated a PK study of AP-THC. We have completed the dosing of the AP-THC PK study and the
data is in the process of being analyzed by a third party contract research organization per protocol. However, upon raw data review,
the delivery of THC does not appear to meet our full program expectations. We await the full dataset and the statistical analysis
to determine our next steps.
In December 2018,
we reported that we successfully developed an Accordion Pill for a Novartis proprietary compound that met the required
in vitro
specifications set forth in a feasibility agreement with Novartis. We have mutually agreed to proceed with the program
and plan to enter the clinic with a first-in-human PK study in the first half of 2019. We believe continued success with this program
further validates the platform, confirms our technical abilities to build custom APs and paves the way for additional collaborative
agreements.
Our Accordion Pill Platform Technology
We believe that our
Accordion Pill technology has the potential to improve the performance of approved drugs and drugs in development, including Levodopa,
by providing several distinct advantages, including, but not limited to:
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increasing efficacy of the drug incorporated into the Accordion
Pill;
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improving safety of the drug incorporated into the Accordion
Pill by reducing the side effects of such drugs;
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reducing the number of daily administrations required to achieve the same or superior therapeutic effect as the non-Accordion
Pill version of such drugs; and
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expanding the intellectual protection period of the drug
incorporated into the Accordion Pill.
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Our anticipated ability
to submit NDAs pursuant to Section 505(b)(2) for our existing pipeline and future products increases the likelihood of accelerating
the time to commercialization of our products and decreasing costs when compared to those typically associated with NCEs.
Our Accordion Pill
platform technology is designed to increase the time that drugs are retained in the stomach as compared to other oral dosage forms,
such as tablets and capsules. This capability is particularly important to drugs with a narrow absorption window, or NAW, which
are absorbed mainly in the upper part of the gastrointestinal, or GI, tract. Regular controlled-release formulations of such drugs
currently on the market sometimes fail to provide an efficient solution, as once the regular dosage form has passed the drug’s
NAW in the upper gastrointestinal, or GI, tract, the drug is not, or is very poorly, absorbed in the distal parts of the GI tract.
The Accordion Pill platform technology is also designed for drugs with low solubility, which do not efficiently dissolve in the
GI tract, and drugs with low permeability, which do not efficiently penetrate the intestinal wall and reach the blood stream, such
as Biopharmaceutics Classification System, or BCS, Class II (low solubility, high permeability) and Class IV (low solubility, low
permeability) drugs. According to The AAPS Journal published by the American Association of Pharmaceutical Scientists, of the top
200 oral drugs in the United States, Great Britain, Spain and Japan in 2006, approximately 30% to 35% were BCS Class II drugs and
approximately 5% to 10% were BCS Class IV drugs. Further, according to The AAPS Journal in 2011 approximately 90% of new molecular
entities in development were either Class II or Class IV drugs. Poorly soluble drugs are sometimes characterized by low bioavailability,
which is strongly affected by the drug’s solubility. In addition, the extent of absorption of poorly soluble drugs can be
dose dependent, leading to non-linear PK behavior. The Accordion Pill’s efficient GR and specific release mechanism prolongs
the absorption phase of drugs with an NAW, which can result in significantly more stable plasma levels. In addition, the Accordion
Pill has demonstrated an enhancement of the absorption of a poorly soluble, BCS Class II/IV drug in a crossover PK clinical study
in 12 healthy volunteers. For poorly soluble drugs, we believe that our technology acts through the gradual delivery of an undissolved
drug by the Accordion Pill in the stomach, which allows for the complete dissolution of the drug dose in the stomach over the delivery
period. The gradual passage of the drug from the stomach to the upper part of the GI tract enables an increase in the amount of
the drug that can be dissolved and thus absorbed, in the upper small bowel. In addition, we believe that bile secretion in the
upper part of the GI tract also improves the intestinal environment for better absorption. Finally, the significant dilution of
the drug solution in the small bowel caused by prolonged delivery increases the amount of the drug available for absorption.
Our clinical trials
to date have demonstrated that the Accordion Pill is retained in the stomach for eight to 12 hours, as compared to significantly
shorter time periods, typically as little as two to three hours, when using other solid dosage forms. The efficient GR and the
predetermined release profile for each specific drug associated with our Accordion Pill technology demonstrated a significant improvement
in PK, which is the drug plasma level over time and a corresponding improvement in efficacy and safety.
The following chart
depicts the Accordion Pill’s capability to improve the PK of Levodopa, which is a drug characterized by a narrow absorption
window:
AP-CD/LD Phase II clinical trial —
more stable Levodopa levels with statistically significant
reduced peak-to-trough fluctuations
Levodopa plasma levels
in n=8 advanced Parkinson’s disease patients following twice daily, or b.i.d, administration (eight hours apart) of AP-CD/LD
50/375 versus four times daily, or q.i.d, administration (four hours apart) of a commercial Carbidopa/Levodopa formulation (equivalent
daily Levodopa dose). The PK study was performed on day seven, following six days of drug administration at home. No Levodopa medication
was allowed for ten hours before the first administration at day seven. The PK results showed that the peak to trough ratio, which
measures the maximum average concentration relative to the minimum average concentration of LD plasma levels, was reduced from
29.9 to 3.2 with the AP-CD/LD. Demonstration of the clinical benefits of these peak to trough ratios are being further studied
and confirmed in the ACCORDANCE study.
The following chart
depicts the Accordion Pill’s capability to improve the PK of a BCS Class II/IV drug combined with our Accordion Pill technology
that is currently on the market and is characterized with poor solubility:
PK results with the Accordion Pill
with a BCS Class II/IV drug that is currently available
on the market in 12 healthy volunteers
The results of our
clinical trial have demonstrated approximately a 100% increase in bioavailability in 12 healthy volunteers with our Accordion Pill
technology, as compared to the commercial formulation of the drug. Furthermore, the results demonstrated that the increase in bioavailability
obtained when administering one Accordion Pill and two Accordion Pills was proportional to the increase in dosage, or linear absorption,
whereas the commercial formulation does not show linear absorption in these dosage ranges.
Although there is no
assurance that these results will be repeated in other instances, we believe that these results are important because the enhancement
of bioavailability of poorly soluble drugs is one of the main challenges facing the pharmaceutical industry.
Our Accordion Pill
technology enables us to combine active pharmaceutical ingredients, or APIs, which are also referred to as drugs, and inactive
ingredients that are included in the FDA’s list of approved inactive ingredients, into pharmaceutical-grade, biodegradable
polymeric films, welded into a planar structure, folded into the shape of an accordion and placed inside of a capsule. While in
the stomach, the capsule dissolves and the Accordion Pill unfolds and releases the drug in a predetermined profile. In order to
provide optimum results for each drug, each Accordion Pill drug differs and will likely differ in several ways, including composition,
structure and properties.
The diagram below illustrates
the general structure of the Accordion Pill:
All of the ingredients
in the Accordion Pill (active and inactive) are combined physically, not chemically, thus maintaining the chemical composition
of the active ingredients.
The Accordion Pill
has a drug release mechanism that is independent of the gastric retention mechanism. It can combine both immediate and controlled
release profiles, as well as more than one drug. We have demonstrated that the Accordion Pill has the ability to carry a drug load
of up to 550 mg. We have also demonstrated that the Accordion Pill fully degrades in the intestine once it is expelled from the
stomach.
Our Product Pipeline
Our product pipeline
currently includes several product candidates in various clinical trial stages. Our leading pipeline product, AP-CD/LD, is focused
on leveraging our Accordion Pill technology to improve the efficacy and safety of an approved drug for the treatment of Parkinson’s
disease symptoms in advanced Parkinson’s disease patients. We have agreed with the FDA on the remaining clinical development
program for AP-CD/LD for the treatment of Parkinson’s disease symptoms in advanced Parkinson’s disease patients, including
the main principles of our ongoing ACCORDANCE study, a pivotal Phase III clinical for AP-CD/LD for the treatment of advanced Parkinson’s
disease. In April 2016, we enrolled the first patient in the ACCORDANCE study and in October 2018, we completed enrollment. We
currently expect to release top-line results in mid-2019. See “— Current Regulatory Status of AP-CD/LD.” We also
initiated a new clinical development program for our Accordion Pill platform with the two primary cannabinoids contained in cannabis
sativa, which we refer to as AP-Cannabinoids. We are formulating and testing CBD, and THC, for the treatment of various pain indications.
The AP-Cannabinoids are currently in Phase I.
In addition, in December
2018, we reported that we successfully developed an Accordion Pill for a Novartis proprietary compound that met the required
in
vitro
specifications set forth in a feasibility agreement with Novartis. We have mutually agreed to proceed with
the program and plan to enter the clinic with a first-in-human PK study in the first half of 2019. We believe continued success
with this program further validates the platform, confirms our technical abilities to build custom APs and paves the way for additional
collaborative agreements.
Our Business Strategy
We plan to leverage
our Accordion Pill technology platform to become a leading specialty pharmaceutical company focused on developing, manufacturing
and commercializing improved proprietary versions of approved and development stage drugs for the treatment of various diseases.
We intend to continue
to develop our existing product candidates while reviewing other drug candidates that may also benefit from our platform technology.
We seek to create global partnerships to assist us in the development and marketing of our products and may also independently
commercialize certain products in the U.S. We believe that our approach will allow us to continue to advance our current product
candidates and should allow us to avoid dependency on a small number of drugs.
Using this approach,
we have advanced our product candidates into various stages of clinical development. Specific elements of our current strategy
include the following:
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Continue to advance our current pipeline by developing improved versions of drugs with reduced
side effects and that enhance the efficacy of existing drugs
. We expect that our products will potentially offer significant
advantages over the original versions of the drugs. Results from our completed Phase II clinical trial demonstrate that AP-CD/LD
can improve motor function in patients suffering “off time” episodes. “Off time” refers to debilitating
periods of decreased motor and non-motor functions. We are pursuing the development and approval of AP-CD/LD under the Section
505(b)(2) pathway, which allows us to rely in part upon FDA’s prior findings of safety or efficacy for an approved CD/LD
reference drug. In October 2018, we completed patient enrollment in our Phase III ACCORDANCE Study and expect to report top-line
results in mid-2019. If our pivotal Phase III clinical trial is successful, we intend to submit an NDA for regulatory approval
in the United States.
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Utilize the 505(b)(2) regulatory pathway to leverage extensive existing clinical and regulatory
experience with the original drugs and bring our improved versions of these drugs to market more quickly
. An NDA submitted
under Section 505(b)(2) of the FDCA may be permitted to reference FDA’s prior conclusions regarding the safety and effectiveness
of that previously approved drug, or rely in part on data in the public domain. This may expedite the development program for our
product candidates by potentially decreasing the amount of clinical data that we would need to generate to submit an NDA. As the
FDA has previously agreed that our lead product, AP-CD/LD, would likely be eligible to file under Section 505(b)(2), assuming the
successful completion of the ACCORDANCE study, we believe that there is a strong likelihood that our future products would similarly
qualify. The factors related to this qualification are expected to reduce the time and costs associated with clinical trials when
compared to a traditional NDA for an NCE. We also believe the strategy of targeting drugs with proven safety and efficacy provides
a better prospect of clinical success of our proprietary development portfolio as compared to de novo drug development. We estimate
that the average time to market and cost of clinical trials for our products could be less than that required to develop a new
drug.
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Use our expertise with our platform technology to evaluate drug development and commercialization
opportunities
. We continuously seek attractive product candidates to develop and commercialize. We intend to focus
on product candidates that we believe would be synergistic with our Accordion Pill technology. We intend to use our expertise in
our technology and our pharmacological expertise to grow our product candidate portfolio.
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Seek attractive partnership opportunities
. We believe that our Accordion Pill
technology can be applied to many drugs that have already been approved by the FDA, as well as developmental stage drugs. We believe
that the proprietary rights provided by our Accordion Pill technology, together with the clinical and compliance benefits, will
be attractive to potential partners. We are seeking to build a portfolio of commercially attractive partnerships in a blend of
co-developments and licenses. Where possible, we are seeking partnerships that allow us to participate significantly in the commercial
success of each of the drugs. Although we are currently developing most of our current pipeline, we are looking to partner with
the owners of rights to patented drugs in order to develop Accordion Pill versions of those drugs, and we may seek strategic partners
to market our Accordion Pill products worldwide. We may also seek arrangements with third parties to assist in the development
and commercialization of our products. These arrangements will allow us to share the high development cost, minimize the risk of
failure and enjoy our partners’ marketing capabilities, while also enabling us to treat a more significant number of patients.
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Develop products that target significant commercial opportunities
. Our existing product
candidates are intended to target diseases that have major global markets. Our intent is to continue to develop products that present
significant market opportunities by leveraging our Accordion Pill technology.
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Maintain a prominent intellectual property position
. We believe our licensed
and proprietary patents and patent applications provide and will provide broad and comprehensive coverage for the use of our Accordion
Pill technology for the treatment of certain diseases, focusing on BCS Class II/IV and NAW drugs, or drugs where longer retention
in the upper GI tract could improve efficacy and absorption and reduce side effects. We seek to protect our proprietary position
by, among other methods, filing U.S. and foreign patent applications related to our proprietary technology, inventions and improvements
that we believe are important to the development of our business. We also rely on know-how and continuing technological innovation
to develop and maintain our proprietary position. We have submitted and intend to continue to submit patent applications for various
Accordion Pill and drug combinations that we develop.
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AP-CD/LD for the Treatment of Parkinson’s Disease Symptoms
in Advanced Parkinson’s Disease Patients
Parkinson’s disease
Parkinson’s disease
is a progressive, degenerative disease characterized by movement symptoms such as involuntary tremor or trembling in the hands,
arms and legs; muscle rigidity of the limbs and trunk; slowness of and a decline in movement; and impaired balance and coordination.
In its advanced stages, the disease causes comprehensive dysfunction of the patient’s bodily systems, including difficulties
in swallowing, speech disorders and significant mental decline. Parkinson’s disease results from a continuing loss of dopamine-producing
nerve cells. Dopamine is required for normal functioning of the central nervous system and smooth, coordinated function of the
body’s muscles and movement. According to the National Parkinson’s Foundation, the symptoms of Parkinson’s disease
appear when approximately 60–80% of dopamine-producing cells are damaged.
Although there is presently
no cure for Parkinson’s disease, there are a number of medications that provide relief from the symptoms. Dopamine replacement
therapy with Levodopa is generally considered to be the most effective treatment for Parkinson’s disease. After 50 years
of clinical use, Levodopa therapy still offers the best symptomatic control of Parkinson’s disease and is the most widely
used therapy. Levodopa is converted into dopamine in the brain and is usually administered with Carbidopa, which helps prevent
Levodopa from converting to dopamine outside the brain. Levodopa helps reduce tremor, stiffness and slowness and helps improve
muscle control, balance and walking. Virtually all Parkinson’s disease patients will require Levodopa therapy during the
course of their disease.
Parkinson’s disease
patients typically experience a satisfactory response to initial treatment with Levodopa. However, at later stages of Parkinson’s
disease, there is a decline in the capacity of the nigrostriatal dopaminergic system, or the brain pathways that moderate control
of voluntary movement, to synthesize, store, and release dopamine. Therefore, the dopaminergic system becomes more and more dependent
on dopamine from external sources, such as Levodopa treatment.
As the disease progresses,
it becomes increasingly difficult to control the symptoms adequately by Levodopa treatment, and patients develop motor complications,
for the following reasons:
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The duration of the response after each Levodopa dose declines, resulting in a “wearing off”
effect, wherein the clinical benefits of Levodopa are lost until the next dose reaches therapeutic levels.
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The patients suffer from longer periods in which Levodopa does not provide symptom relief and patients’
movements are severely restricted (i.e., off time).
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When Levodopa doses are increased to address the loss of clinical benefit, involuntary movements
or troublesome dyskinesia emerges.
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Recent studies have
reported that up to 50% of patients show the onset of motor fluctuations within two years of starting conventional Levodopa therapy.
For many patients with advanced Parkinson’s disease, the repeated emergence of off states can occupy up to one-third or more
of a typical waking day. The loss of consistent symptomatic control from Levodopa is a major challenge for the long-term management
of Parkinson’s disease. When Parkinson’s disease patients experience “wearing off” between Levodopa doses,
this short-duration response occurs in parallel to the drug’s peripheral PK profile. Therefore, with the evolution of these
short-duration responses, improving the consistency in Levodopa’s plasma levels becomes the major factor for improving symptom
control.
Oral Levodopa formulations
currently on the market do not provide satisfactory consistent Levodopa plasma levels. There are two major challenges to maintaining
consistency in Levodopa plasma levels: (i) the very short half-life of Levodopa (approximately 90 minutes) and (ii) the fact that
Levodopa’s absorption is confined to the upper part of the GI tract (i.e., it has an NAW). For drugs with an NAW, conventional
controlled release formulations are limited in providing long-acting performance, as once the drug has passed through the upper
GI tract, it will no longer be absorbed. These factors result in high peak-to-trough ratios of Levodopa in the plasma, namely high
variability of the concentration of the drug in the blood, rather than a consistent level being maintained, reducing the clinical
benefits of Levodopa therapy. Providing stable Levodopa plasma levels is therefore a major unmet need for the long-term management
of Parkinson’s disease.
Key opinion leaders
interviewed by Global Data, a market research provider, summarized the unmet needs in Parkinson’s disease treatment to include,
among others, greater efficacy in reducing motor complications, reducing side effects and reducing pill burden.
Market
.
According to a 2018 report by Global Data, Parkinson’s disease is the second most common chronic progressive
neurodegenerative disorder in the elderly after Alzheimer’s disease, affecting 1%–2% of individuals worldwide
over the age of 65 and the annual growth of Parkinson’s disease cases in individuals over the age of 65 from 2016 to
2026, in the Seven Major Markets, is estimated to be 2.28%. According to Global Data, in 2016 the market for pharmaceutical
treatments for Parkinson’s disease was approximately $3.1 billion a year in the Seven Major Markets growing to $8.8
billion by 2026. According to a 2016 Global Burden of Disease Study there are approximately 6.1 million people worldwide
who suffer from Parkinson’s disease.
We have also conducted,
together with leading consultants, market assessment of AP-CD/LD for the treatment of the symptoms associated with advanced Parkinson’s
disease. The assessment indicates there is a substantial market for AP-CD/LD with hundreds of thousands of patients suffering with
Parkinson’s disease appropriate for AP-CD/LD treatment.
Our Solution — AP-CD/LD
AP-CD/LD, our lead
product candidate, is in development for the treatment of Parkinson’s disease symptoms. AP-CD/LD is an Accordion Pill that
contains the generic drugs Carbidopa and Levodopa, which are currently approved for the treatment of Parkinson’s disease
symptoms. We have successfully completed a Phase II clinical trial, and the FDA has permitted us to initiate a Phase III clinical
trial of AP-CD/LD. On May 5, 2015, we held an end of Phase II meeting with the FDA for AP-CD/LD. We reached an agreement with the
FDA on the remaining clinical development program for AP-CD/LD and are currently conducting a pivotal Phase III clinical trial,
the ACCORDANCE Study.
AP-CD/LD – Clinical Trials
Phase II Clinical Trial
Our Phase II clinical
trial with AP-CD/LD was a multi-center, open-label, randomized, crossover, active control trial that included five groups. Overall,
60 patients completed the trial per protocol, in several medical centers in Israel. The Phase II clinical trial assessed safety,
PK and pharmacodynamics/efficacy in patients with various stages of Parkinson’s disease compared with their current Levodopa
treatment. Each group of the clinical trial was deemed to initiate upon the first patient enrolling in a group and to be completed
upon the conclusion of data analysis. The initiation and completion dates for groups 1, 3, 4, 5 and 6 were August 2009 –
December 2009, April 2010 – August 2010, December 2010 – July 2011, August 2011 – November 2011 and December
2011 – October 2012, respectively. The following table details the structure, design and purpose of the Phase II clinical
trial:
Group
Number
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Trial Design
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Trial
Purpose
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Population
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N
(PP)
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Test
Treatment
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Treatment
and
Duration*
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Group 1
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Open-label, multi-dose, multi-center, randomized
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2-way crossover comparative PK trial
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Early-stage PD patients
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12
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AP-CD/LD 50/250 mg
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b.i.d for 7 days
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Group 2
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This trial was originally planned in early non-fluctuators with a dose of 50/375 mg b.i.d. In light of the satisfactory PK results with 50/250 mg b.i.d in this population, the higher dose was considered unnecessary and therefore the trial was not performed.
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Group 3
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Open-label, multi-dose, multi-center, randomized
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2-way crossover comparative PK and PHDS trial
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Advanced PD patients
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10
a
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AP-CD/LD 50/375 mg
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b.i.d for 7 days
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Group 4**
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Open-label, multi-dose, multi-center, randomized
|
|
2-way crossover comparative PHDS trial
|
|
Advanced PD patients
|
|
16
|
|
AP-CD/LD 50/375 mg
|
|
b.i.d for 21 days
|
Group 5
b
**
|
|
Open-label, multi-dose, multi-center, randomized
|
|
2-way crossover comparative PHDS trial
|
|
Advanced PD patients
|
|
4
|
|
AP-CD/LD 50/500 mg
|
|
b.i.d for 21 days
|
Group 6**
|
|
Open-label, multi-dose, multi-center, randomized
|
|
2-way crossover comparative PHDS trial
|
|
Advanced PD patients
|
|
18
|
|
AP-CD/LD 50/500 mg
|
|
b.i.d for 21 days
|
a
|
Eight patients completed the PK trial.
|
b
|
Group 5 was terminated early due to low enrollment.
|
d = days;
PP = Per Protocol; N = number of subjects; PD = Parkinson’s disease; PHDS = pharmacodynamics.
|
*
|
Not
including add-on dosing of immediate release Carbidopa/Levodopa, if needed.
|
|
**
|
Compared against each patient’s optimized current
Levodopa treatment.
|
Pharmacokinetic Results
Group 1 of our Phase
II clinical trial with AP-CD/LD was conducted with 12 male and female patients with non-fluctuating Parkinson’s disease.
The crossover design included the following treatment arms: (i) AP-CD/LD 50/250 mg administered b.i.d and (ii) immediate release
CD/LD 25/250 mg administered by half tablet q.i.d, resulting in a total daily dosage of 50/500mg. The treatments were administered
for six days, with the seventh day consisting of PK testing. On the PK day of the control period, patients were given an additional
50 mg of Carbidopa (12.5 mg q.i.d) to achieve the recommended daily 70 – 100 mg dose of Carbidopa. Immediately following
the PK testing on day seven, the patients crossed over to the other treatment to repeat the seven day process. This study concluded
that (i) the bioavailability of Levodopa when administered via AP-CD/LD was similar to the immediate release reference; (ii) AP-CD/LD
provided more stable plasma levels of Levodopa, with reduced peak-to-trough ratio, when compared to the immediate release reference;
and (iii) AP-CD/LD provided higher morning Levodopa plasma levels than the immediate release reference.
Group 3 of our Phase
II clinical trial with AP-CD/LD was conducted with ten male and female patients with advanced, fluctuating Parkinson’s disease,
of which eight completed the PK trial per protocol. The crossover design included the following treatment arms: in the AP-CD/LD
treatment arm, the AP-CD/LD 50/375 mg was administered b.i.d for six at home days of treatment with up to an additional three add-on
immediate release Carbidopa/Levodopa, as needed, and on day seven, b.i.d administration of AP-CD/LD 50/375 mg. In the control arm,
the patient’s current treatments were administered for six at home days and, on the seventh day, they were given immediate
release Carbidopa/Levodopa 18.75/187.5 mg q.i.d, resulting in a total dosage of 75/750 mg. On the seventh day of each treatment
regime, we conducted PK testing. Immediately following the PK testing on day seven, the patients were crossed over to the other
treatment to repeat the seven day process.
These trials concluded
that (i) the PK of AP-CD/LD demonstrated an efficient controlled-release profile, with significantly more stable Levodopa levels;
(ii) the Levodopa absorption phase was increased more than six-fold versus the control treatment; (iii) the b.i.d administration
of AP-CD/LD provided daily coverage of therapeutic Levodopa plasma levels; (iv) the peak-to-trough ratio in Levodopa plasma levels
was half of those of the control; (v) the morning, or pre-first dose, Levodopa plasma levels of AP-CD/LD, were significantly higher
than the control; and (vi) Levodopa’s high bioavailability was preserved when using AP-CD/LD.
The following figure
displays the concentrations of Levodopa in plasma of patients over time, comparing AP-CD/LD (pink) to the reference treatment (blue):
AP-CD/LD Phase II clinical trial —
more stable Levodopa levels with statistically significant reduced
peak-to-trough fluctuations
The PK results showed
that peak to trough ratio, which measures the maximum average concentration relative to the minimum average concentration of LD
plasma levels, was reduced from 29.9 to 3.2 with the AP-CD/LD. Cmax/Cmin with the AP-CD/LD was 5.8. The average LD plasma levels
during time 0-16 hours was 1,038 ng/ml.
Pharmacodynamics Results
The following figure
sets forth the structure of the Phase II clinical trial for Groups 4 and 6:
|
*
|
Patient’s optimized CD/LD regimen.
|
CD/LD
= Carbidopa/Levodopa
Groups 3, 4 and 6 of
our Phase II clinical trial examined the pharmacodynamic effects of AP-CD/LD. Each group assessed the effects in patients with
advanced Parkinson’s disease; ten, 16 and 18 patients completed the trials per protocol in Groups 3, 4 and 6, respectively.
Groups 3 and 4 tested AP-CD/LD in the 50/375 mg strength, administered b.i.d. with additional CD/LD immediate release tablets if
needed; Group 6 tested the 50/500 mg strength administered b.i.d. with additional CD/LD immediate release tablets if needed. In
these three trials, AP-CD/LD was compared to the patients’ current Levodopa treatment (including a dopamine decarboxylase
inhibitor, such as Carbidopa). All three groups were cross-over, with Group 3 receiving the treatments as described above and Groups
4 and 6 receiving each of their current treatment and AP-CD/LD for 21 days, with the second tested treatment starting immediately
after completion of the first. In Groups 4 and 6, off time, on time and dyskinesia were assessed by patient-completed home diaries
during days 18 through 20 of each arm.
Because Levodopa is
usually prescribed for long-term treatment, three weeks of treatment with AP-CD/LD was sufficient to demonstrate statistically
significant improvements in the primary endpoint, as well as most of the secondary endpoints. The statistical significance of a
result was captured by the associated “p-value”, or the estimated probability that the observed effect was by chance.
A “p-value” of less than 0.05 implied that there was less than a 5% probability that the observed effect was by chance,
and was generally accepted as a statistically significant event.
These studies demonstrated
that (i) total off time was decreased when taking AP-CD/LD versus the control, by 44% and 45% in Groups 4 and 6, respectively (statistically
significant p<0.0001); (ii) improvements in off time and on time without troublesome dyskinesia did not come at the expense
of an increase of on time with troublesome dyskinesia, and, moreover, with the AP-CD/LD 50/500 mg troublesome dyskinesia was decreased
by 0.5 hours (statistically significant p = 0.002); (iii) the effect of AP-CD/LD on total off time and on time with troublesome
dyskinesia resulted in a total increase of “good” on time (i.e., without troublesome dyskinesia) of 2.1 and 2.7 hours
per day in Groups 4 and 6, respectively (statistically significant p<0.0001); (iv) the improvements in treating symptoms with
AP-CD/LD were achieved with fewer daily doses; and (v) the improvements in treating symptoms with AP-CD/LD correlate with stable
Levodopa plasma levels throughout the day with appropriate therapeutic levels of the drug.
The figure below reflects
the mean total off time in hours over a 24 hour period during days 18 through 20 of Groups 4 and 6. The average total off time
was reduced by 1.9 hours and 2.3 hours with AP-CD/LD 50/375 mg (Group 4) and 50/500 mg (Group 6), respectively. This reduction
is statistically significant (p<0.0001).
AP-CD/LD – Significant reduction
of total off time compared to current Levodopa treatment
The figure below reflects
the mean total “good” on time (on time without troublesome dyskinesia) in hours over a 24 hour period during days 18
through 20 of Groups 4 and 6. The average total “good” on time was increased by 2.1 hours and 2.7 hours with AP-CD/LD
50/375 mg (Group 4) and 50/500 mg (Group 6), respectively. This reduction is statistically significant (p<0.0001).
AP-CD/LD – Increase of total
“good” on time compared to current Levodopa treatment
The figure below reflects
the mean total on time with troublesome dyskinesia in hours over a 24 hour period during days 18 through 20 of Groups 4 and 6.
On time with troublesome dyskinesia was not changed and decreased by 0.5 hours (p = 0.002) with AP-CD/LD 50/375 mg (Group 4) and
50/500 mg (Group 6), respectively.
AP-CD/LD – Reduction of total
on time with dyskinesia compared to current Levodopa treatment
Finally, the figure
below displays the mean number of daily Levodopa administrations of the treatments in Groups 4 and 6.
AP-CD/LD –Number of daily Levodopa
administrations* compared to current Levodopa treatment
|
*
|
In the administration of the AP-CD/LD arm, patients received
b.i.d AP-CD/LD pills and were allowed to take additional commercially available immediate release Carbidopa/Levodopa formulations,
as add-ons when needed. As seen in the figure above, patients took, in addition to the b.i.d AP-CD/LD pills, one-and-a-half to
two commercially available immediate-release Carbidopa/Levodopa formulations, in Groups 4 and 6, respectively.
|
Demonstration of the
clinical benefits of these peak to trough ratios will be further studied and confirmed in the ACCORDANCE study.
Phase I Clinical Trials
We conducted four Phase
I clinical trials - three to assess the PK profile of Levodopa when administered in several formulations and one to measure the
GR time of our Accordion Pill without an active ingredient.
The first PK trial
was conducted with early formulations in 24 healthy volunteers to assess the PK profile of Levodopa when administered in the following
three forms: (i) in an Accordion Pill with a dosage of 75/300 mg; (ii) in the immediate release form currently on the market, Sinemet;
and (iii) in the controlled release form currently on the market, Sinemet CR. This group underwent a partially randomized open
trial compared with immediate release Sinemet and controlled release Sinemet. The trial results indicated a significant prolongation
of Levodopa’s mean residence time, or MRT, in the blood when administered with the Accordion Pill compared with the Sinemet
and Sinemet CR. Furthermore, the study showed the level of Levodopa received with the Accordion Pill reached treatment-relevant
levels.
The second PK trial
was conducted with early formulations in 23 healthy volunteers to assess the PK profile of Levodopa when administered in the following
two forms: (i) an Accordion Pill in two formulations, 75/300 mg and 50/200 mg; and (ii) in the currently marketed immediate release
form, Sinemet. This was a randomized open trial, compared with immediate release Sinemet. The trial results indicated a very significant
increase in the MRT of Levodopa in the blood when administered with the Accordion Pill in both formulations, and a very significant
prolongation of the absorption phase (up to 12 hours) of Levodopa was demonstrated when administered with the Accordion Pill compared
with Sinemet (two hours).
The third PK trial
was conducted with the AP-CD/LD 50/500 mg Phase II formulation in 18 healthy volunteers to assess the PK profile of Levodopa when
administered in the following two forms: (i) AP-CD/LD 50/500 mg; and (ii) the currently marketed immediate release form, Sinemet.
This was a randomized open trial, compared with immediate release Sinemet. The trial results indicated that the absorption phase
of Levodopa was increased to approximately ten hours when administered with the Accordion Pill compared to approximately two hours
with Sinemet.
The GR Phase I clinical
trial was a MRI study conducted with 17 Parkinson’s patients to measure the GR time of the Accordion Pill without an active
pharmaceutical ingredient. This trial was a non-randomized open trial comparison of a few formulations. The results indicated that
GR of over 13 hours can be achieved in these patients using all three formulations.
Safety
AP-CD/LD was tested
for safety on Göttingen minipigs in accordance with the FDA’s guidelines. The study was 180 days and a subgroup of minipigs
were kept for recovery for an additional 30 days without receiving any treatments. This study included the following four arms:
AP-CD/LD 50/400 mg three times daily, AP-CD/LD 50/500 mg b.i.d, a Carbidopa/Levodopa reference (Sinemet) and a placebo. The study
was completed in March 2014. The study evaluated (i) animal wellbeing as represented by behavior, food consumption and weight,
(ii) microscopic and macroscopic organ pathology, (iii) ophthalmic evaluation and (iv) electrocardiograms of the miniature pigs,
which is the recording of the electrical activity of the heart. This study’s results form an additional basis regarding the
safety of AP-CD/LD.
In the Phase I and
Phase II clinical trials, AP-CD/LD was well-tolerated with no serious adverse events that were related to the study drug. Adverse
events were generally mild in severity and resolved without intervention. The most common adverse events reported included nausea,
vomiting, diarrhea, abdominal pain, chest pain and fatigue, which are known adverse events associated with Levodopa treatment.
Current Regulatory Status of AP-CD/LD
On May 5, 2015, we
held an end of Phase II meeting with the FDA for AP-CD/LD. We reached an agreement with the FDA on the remaining clinical development
program for AP-CD/LD, and the following are the main principles of the single required pivotal Phase III clinical trial:
|
●
|
A multicenter, randomized, double-blind, double-dummy, parallel, active-controlled trial, comparing
the efficacy and safety of AP-CD/LD to Sinemet IR, an immediate release CD/LD, which is a conventional Levodopa medication for
the treatment of Parkinson’s disease symptoms that is currently on the market.
|
|
●
|
The total treatment period for each patient is 25 weeks,
composed of:
|
|
○
|
Six weeks open-label titration/ conversion/ optimization
of Sinemet IR (all patients);
|
|
○
|
Six weeks open-label titration/ optimization of AP-CD/LD
(all patients); and
|
|
○
|
13 weeks double-blind, double-dummy active comparator period, in which approximately half of the
patients are randomized to AP-CD/LD and half of the patients are randomized to Sinemet IR.
|
|
●
|
The primary efficacy endpoint is the change from baseline to endpoint in the percent of daily off
time during waking hours, based on Hauser home diaries.
|
In October 2018, we
completed enrollment in our ACCORDANCE Study with a total of 462 patients entered into the Sinemet titration period. After the
multiple titration and optimization steps, 320 patients were then randomized into the 13-week double-blinded portion of the study.
As part of our agreement
with FDA regarding the approval of the AP-CD/LD product, we committed to perform additional safety studies on the first 100 patients
with a predefined safety stopping rule related to gastric ulcers. These additional safety evaluations involved endoscopy procedures
that would detect whether the AP was causing gastric ulcers of a predefined size that might be of medical concern. By the time
the safety study completed enrollment of 123 patients, we were able to obtain evaluable paired gastroscopies (endoscopy procedures
prior to AP treatment and at end of treatment) on 64 patients who completed all stages of the study. At the second scheduled periodic
meeting of the independent data monitoring committee (DMC) in February 2018, the DMC determined that based on available results,
there did not appear to be a significantly increased rate of the prespecified gastric ulcers defined in the safety charter. At
that meeting, the DMC recommended to continue the ACCORDANCE study without modification. The DMC will continue to monitor adverse
events of special interest, and also recommended we submit its comments and findings to the FDA, which we have done. No further
endoscopic procedures are planned.
Consistent with International
Council for Harmonisation of Technical Requirements for Human Use (ICH) guidelines, we are also required to submit evidence of
the adequate safety experience of at least 100 patients receiving AP-CD/LD for one year, with at least 50% receiving the highest
proposed dose of AP-CD/LD. This is a standard requirement for drugs intended for long-term treatment of non-life-threatening conditions.
We are collecting this long-term safety data, from our on-going open label extension of the ACCORDANCE study.
We also agreed, at
the FDA’s request, to conduct an additional bioavailability study to compare the PK between Sinemet IR and the to-be-marketed
formulation of AP-CD/LD as the formulation of AP-CD/LD has changed from our previously completed comparative bioavailability study.
We currently intend to conduct this study during 2019. The FDA also strongly suggested that we conduct additional dissolution testing
and we anticipate doing so.
In addition, in February
2019 we announced the results of a new PK study to determine the performance of the to-be-marketed formulation of AP-CD/LD when
dosed three time per day (t.i.d). The objective of this open-label, crossover PK study was to compare the plasma levodopa variability
in 12 Parkinson’s disease patients treated with standard levodopa therapy and with AP-CD/LD 50/500 mg t.i.d. On day
one, all participants received 1.5 tablets of standard Sinemet 25/100 mg five times at approximately three-hour intervals.
Plasma was collected for PK determination at 30-minute intervals for 16 hours in the clinic. This period provided the reference
PK profile for Sinemet. On days two through seven, PD patients were treated at home with AP-CD/LD 50/500 mg capsules dosed t.i.d.,
at approximately five-hour intervals. On day eight, participants returned to the clinic and PK assessments were repeated as described
above. The primary outcome measure in this study was the fluctuation index [(C
max
-C
min
)/C
avg
]
in plasma levodopa concentration at steady state (between hours four and 16.) The key secondary endpoint was the levodopa
coefficient of variation.
AP-CD/LD 50/500 mg
TID met its primary endpoint demonstrating significantly less variability than standard oral CD/LD when dosed 5x/ day in the levodopa
fluctuation index (p<0.005) (see the table below). These results were supported by the findings of significant outcomes
on each of the prespecified sensitivity analyses. Similar results were observed for the key secondary endpoint of coefficient
of variation of plasma levodopa levels (p<0.047). AP-CD/LD was very well tolerated with no reported adverse events.
|
|
Primary Endpoint:
Levodopa Fluctuation Index at Steady State (4-16 Hours)
|
Treatment/ Difference
|
|
Mean Value
|
|
95% Confidence Interval
|
|
p-Value
|
Sinemet (IR-CD/LD)
|
|
2.22
|
|
1.82 – 2.62
|
|
--
|
Accordion AP-CD/LD
|
|
1.59
|
|
1.23 – 1.95
|
|
--
|
Difference
|
|
0.63
|
|
0.24 – 1.03
|
|
0.005
|
Phase III ACCORDANCE Study
The Phase III ACCORDANCE
clinical trial of AP-CD/LD is a multi-center, global, randomized, double-blind, double-dummy, active-controlled, parallel-group
study in adult subjects with advanced PD. The study is evaluating the safety and efficacy of AP-CD/LD compared with immediate release
CD/LD (IR-CD/LD; Sinemet) as a treatment for the symptoms of PD.
The study enrolled
a total of 462 patients into the Sinemet titration period. After the multiple titration and optimization steps, 320 patients were
then randomized into the 13-week double-blinded portion of the study. The study is being conducted at approximately 90 clinical
sites throughout the U.S., Europe and Israel.
Preliminary analysis
of the baseline data for the enrolled population shows:
|
·
|
Average
age at study entry was 63 and 65% of enrolled patients were male;
|
|
·
|
Entering
patients had a diagnosis of PD for 8.8 years on average;
|
|
·
|
The average daily levodopa dose for patients upon entering the blinded
portion of the study was in excess of 800 mg and the most common Accordion Pill dose was AP-CD/LD 50/500mg three times per day;
|
|
·
|
Average
daily OFF time for patients upon entering the study was approximately 6.1 hours; and
|
|
·
|
Approximately
31% of patients were enrolled in the U.S.
|
Prior
to the 13-week randomized portion of the study, the ACCORDANCE study had two open label periods of 6 weeks each during which all
patients in these open label periods were first stabilized and optimized on the active comparator, Sinemet, and then on AP-CD/LD. All
patients completing the 13-week randomized period are eligible to continue in an OLE study in which they will receive treatment
with AP-CD/LD for up to an additional 12 months. To date, more than 90% of eligible patients have elected to enter an open label
extension study.
The
following is an illustration of the study design:
The
primary efficacy endpoint of the study is the change from baseline to endpoint in the percentage of daily off time during waking
hours based on Hauser home diaries. The study is 90% powered to be statistically significant for a one-hour difference in off time
between Sinemet and AP-CD/LD.
Secondary
endpoints currently include change from baseline to endpoint in “on time” without troublesome dyskinesia during waking
hours, CGI-I at endpoint as recorded by physician and patient and change from baseline through endpoint in the Unified Parkinson’s
Disease Rating Scale (UPDRS) Score parts 2 and 3.
We
expect to report topline results from the ACCORDANCE Study in mid-2019.
Development of Accordion Pills with additional drugs
We are continuously
evaluating the possibilities of developing Accordion Pills with various additional specific drugs for its pipeline. In August 2016,
we announced the initiation of a new clinical development program for the Accordion Pill platform with the two primary cannabinoids
contained in
Cannabis Sativa
, Cannabidiol (CBD) and 9-Tetrahydrocannabinol (THC), for treatment of various pain indications.
The
Cannabis sativa
plant is used in treatment of chronic pain and a variety of other indications. Previous clinical
studies conducted using the whole plant or specific extracts generated evidence of the cannabis analgesic activity. Furthermore,
extracts containing known amounts of the active plant driven compounds (mainly THC and CBD) or diverse synthetic THC derivatives
are promising treatments for painful conditions that do not respond properly to currently available treatments, such as chronic,
neuropathic, and inflammatory pain.
We believe that AP-Cannabinoids
hold the potential to address several major drawbacks of current methods of use and treatment with cannabis and cannabinoids, such
as short duration of effect, delayed onset, variability of exposure, variability of the administered dose and adverse events that
correlate with peak levels. AP-Cannabinoids are designed to extend the absorption phase of CBD and THC, with the goal of more consistent
levels, for an improved therapeutic effect. We believe that the cannabis market has significant commercial potential and is projected
to represent approximately 10% of the specialty pharmaceutical market by 2020, or a market of at least $20 billion.
In August 2017, we
announced the results of a Phase I clinical trial that compared the safety, tolerability and PK of AP-THC/CBD with Sativex
®
.
This Phase I trial is a single-center, single-dose, randomized, three-way crossover study in Israel to compare the safety, tolerability
and PK of two formulations of AP-CBD/THC with Buccal Sativex
®
in 21 normal healthy volunteers. The results
showed that patients in the Accordion Pill CBD/THC arm demonstrated significant improvements in exposure to CBD (290% to 330%)
and THC (25% to 50%) compared with Sativex
®
. The median time to peak concentration was 2-3 times longer than Sativex
and absorption was significantly higher. Additionally, the formation of THC metabolites was meaningfully reduced, and the drug
had a good safety profile and was well-tolerated with no serious adverse events reported. Sativex
®
is a commercially
available oral buccal spray containing CBD and THC. Following the Phase 1 clinical trial, we evaluated the program and decided
as a next step to develop two new Accordion Pills containing only the individual cannabinoid components, namely CBD and THC.
We recently commenced
a Phase 1 PK study of AP-THC. The study is a single-center, single-dose, randomized, open-label three-way crossover study to investigate
the PK, safety and tolerability of AP-THC in up to 18 normal healthy volunteers and we dosed the first patient in January 2019.
We have completed the dosing of the AP-THC PK study and the data is in the process of being analyzed by a third party contract
research organization per protocol. However, upon raw data review, the delivery of THC does not appear to meet our full program
expectations. We await the full dataset and the statistical analysis to determine our next steps.
We successfully completed
a Phase II clinical trial for Accordion Pill Zaleplon, or AP–ZP, in November 2011 under an IND that we submitted to the FDA
for AP–ZP as a treatment for the induction and maintenance of sleep in patients suffering from insomnia. The FDA also agreed
that AP-ZP could also benefit from the streamlined pathway available through filing an NDA pursuant to Section 505(b)(2) of the
FDCA. The FDA indicated in written correspondence to us that we may be able to design the development program for AP–ZP in
a manner that would allow us to obtain sufficient data for the NDA submission for AP–ZP in one pivotal Phase III clinical
trial. The details of such a trial were not determined or confirmed with the FDA. We are currently focusing on the development
of, and are employing almost all of our resources toward, AP-CD/LD and AP-Cannabinoids. We are not currently developing or seeking
a partner to develop AP-ZP and we have not presently budgeted any funds toward its development. In the future, we may consider
viable partnership opportunities for this product candidate.
In addition, in March
2016, we completed a Phase I clinical trial for one of our product candidates that is being developed for the prevention and treatment
of gastroduodenal and small bowel NSAID induced ulcers. The PK results demonstrated in the Phase I trial were within the well-defined
safety levels of the drug. At this time, we have not presently budgeted any funds toward the development of this product candidate.
In January 2018, we
also entered into a feasibility and option agreement with Novartis Pharmaceutical to explore using the Accordion Pill platform
for a proprietary Novartis compound. Following potentially successful feasibility studies, including a Phase I PK study, Novartis
has the option to enter into negotiations with respect to a potential licensing agreement for employing Intec Pharma Accordion
Pill technology. In December 2018, we reported that we successfully developed an Accordion Pill for the Novartis proprietary compound
that met the required
in vitro
specifications set forth in a feasibility and option agreement with Novartis. We
have mutually agreed to proceed with the program and plan to enter the clinic with a first-in-human PK study in the first half
of 2019.
Manufacturing
We currently manufacture
the Accordion Pill in our production and packaging facility located in Har Hotzvim, in Jerusalem, Israel, in the same building
as our offices. This production and packaging facility was granted the Certificate of GMP Compliance of Manufacturer from the Israeli
Ministry of Health in August 2018. This certificate applies in Israel, as well as in the EU, in accordance with the Conformity
Assessment and Acceptance of Industrial Products (CAA) agreement between the EU and Israel. The certificate is valid until August
2021.
We have the capacity
to manufacture the required quantities for the ACCORDANCE study. Our fully automated assembly line enables us to manufacture approximately
two to three million capsules annually. With respect to the future commercialization of the AP-CD/LD, we have decided to rely on
a third-party manufacturer. Establishing a manufacturing facility to produce commercial quantities of our products will require
a substantial investment by any party intending to manufacture our products.
In March 2018, we entered
into a Term Sheet for Manufacturing Services with LTS, for the commercial manufacture of AP-CD/LD, which was subsequently superseded
in December 2018 by a Process Development Agreement. Under the agreement, LTS will exclusively manufacture and supply us with AP-CD/LD
capsules using our proprietary Accordion Pill production technology in LTS’ manufacturing facility in Andernach, Germany
subject to the execution and terms of a manufacturing and supply agreement to be negotiated and entered into between us and LTS.
The large-scale automated production line for manufacturing AP-CD/LD capsules, or the Production Line, will be owned by us with
LTS operating and maintaining the Production Line and owning the other production equipment for AP-CD/LD. Under the agreement,
we are responsible for compensating LTS for certain development activities and we agreed to bear the costs incurred by LTS to acquire
the other production equipment for AP-CD/LD, or Production Equipment, (which are estimated to total approximately seven million
Euros and as of December 31, 2018 we transferred payments of approximately 4.3 million Euros); however such amount is required
under the agreement to be later reimbursed to us by LTS in the form of a reduction in the purchase price of the AP-CD/LD capsules.
In addition, upon our decision to not continue with the project or commercialization of the product, LTS has the right to (i) purchase
the Production Equipment from us in which case LTS is required to pay to us the share of the cost of the Production Equipment paid
by us less up to two million Euros for upgrade costs of LTS’s facility invested by LTS or (ii) transfer such Production Equipment
to us in which case we are required to pay LTS up to two million Euros for upgrade costs of LTS’s facility invested by LTS.
In addition, we may under certain circumstances be required to pay to LTS up to one million Euros for certain upgrade costs of
LTS’ facility invested by LTS upon the earlier of the announcement of our Phase III results or October 31, 2019. The agreement
shall continue in force unless earlier terminated or upon the termination of any future manufacturing agreement. The agreement
contains several termination rights which are expected to be included in a definitive manufacturing and supply agreement, including,
among others, in the cases of bankruptcy, breach by either party, change of control of either of the parties, or the sale or licensing
by us of the Accordion Pill to a third party.
In December 2018,
the Production Line was delivered to LTS in Andernach, Germany. We are in the process of installing and connecting all the
ancillary equipment and expect to begin the validation, bioequivalency and stability studies needed for approval of our
commercial production processes in the coming months. After preliminary discussions with the FDA in anticipation of filing
for marketing approval of AP-CD/LD, we remain confident we are on track to submit a NDA for approval of AP-CD/LD in mid- to
late-2020, assuming positive topline data in the Accordance Study in mid-2019.
We have received Israeli
government grants for certain of our research and development activities. The terms of these grants may require us to satisfy specified
conditions in order to manufacture products and transfer technologies outside of Israel. We may be required to pay penalties in
addition to the repayment of the grants in case we decide to manufacture outside of Israel. With respect to the manufacturing of
the AP-CD/LD, the Israel Innovation Authority, or IIA (formerly known as the Office of the Chief Scientist of the Ministry of Economy
and Industry, or the OCS) approved our request to transfer 100% of the manufacturing rights to such product, which was developed
under one of the IIA funded programs, to a non-Israeli manufacturer. As a result, we will be required to pay the IIA royalties
from revenue generated from the AP-CD/LD product candidate at an increased rate and up to an increased cap amount. The IIA noted
that the approval granted was exceptional and that the IIA will not approve manufacturing additional product candidates out of
Israel.
The FDA will
likely condition granting any marketing approval, if any, on a satisfactory on-site inspection of our manufacturing
facilities. See “Item 1A. Risk Factors — Risks Related to the Clinical Development, Manufacturing and Regulatory
Approval of Our Product Candidates — Our product candidates are manufactured through a compounding, film casting and
assembly process, and if we or one of our materials suppliers encounters problems manufacturing our products or
raw materials, our business could suffer.”
Our manufacturing process
consists of the following stages: compounding, which includes manufacturing of solutions and/or suspensions; film casting, which
involves manufacturing of specific layers of films, including films containing the applicable drug; assembly and capsulation, which
is processing and folding the films into an accordion shape and capsulation; and packaging, which entails packaging the pills in
plastic bottles or blister packs.
Raw Materials and Supplies
With the exception
of three inactive ingredients, we believe the raw materials that we require to manufacture AP-CD/LD and AP–Cannabinoids,
as well as the raw materials that we require for our research and development operations relating to our products, are widely available
from numerous suppliers and are generally considered to be generic pharmaceutical materials and supplies. Except as described below,
we do not rely on a single supplier for the current production of any product in development or for our research and development
operations relating to our products.
We usually contract
with suppliers in Israel and worldwide to purchase the materials required for the research and development operations of our products.
All the materials required in the research and development operations of our products are off-the-shelf pharmaceutical products;
special production or special requirements are not required to order these materials. We have no written agreements with most of
our suppliers. Rather, we submit purchase orders to our suppliers from time to time and as required.
Three of our inactive
ingredients used in our products have only one supplier of each such ingredient. The three suppliers are each large, well-established
suppliers (BASF, the Dow Chemical Company and Evonik), and most of the pharmaceutical industry relies on these suppliers when they
need to purchase certain pharmaceutical products such as these inactive ingredients. To avoid a shortfall of these materials, we
usually purchase sufficient material in advance for a period of at least one year. The pharmaceutical industry usually relies on
these three manufacturers as suppliers of specific materials. The prices of these commonly used raw materials are not volatile.
Marketing and Sales
We do not currently
have any marketing or sales capabilities. We intend to license to, or enter into strategic alliances with, companies in the pharmaceutical
business, which are equipped to market and/or sell our products, if any, through their well-developed marketing and distribution
networks. We may establish marketing and/or sales forces in the future in addition to licensing arrangements or strategic alliances.
Competition
The pharmaceutical
and drug delivery technologies industries are characterized by rapidly evolving technology, intense competition and a highly risky,
costly and lengthy research and development process. Adequate protection of intellectual property, successful product development,
adequate funding and retention of skilled, experienced and professional personnel are among the many factors critical to success
in the pharmaceutical industry.
Assertio Therapeutics,
Inc. (formerly known as Depomed Inc.) has several products on the market based on its GR technology. Several companies have reported
research projects related to systems designed for GR including Teva Pharmaceutical Industries, Avadel Pharmaceuticals, Merrion
Pharmaceuticals, Sun Pharma and others, all of which develop products delivered orally that are designed for GR. We are not aware
of any approved drug delivery system currently on the market that is similar to the Accordion Pill, nor are we aware of any product
candidates that are similar to our Accordion Pill with respect to mechanism of action.
Other drug delivery
technologies, other drugs on the market, new drugs under development (including drugs that are in more advanced stages of development
in comparison to our product pipeline) and additional drugs that were originally intended for other purposes, but were found effective
for the indications we target, may all be competitive to the current products in our pipeline. In fact, some of these drug delivery
systems and drugs are well-established and accepted among patients and physicians in their respective markets, are orally bioavailable,
can be efficiently produced and marketed, and are relatively safe and inexpensive. Moreover, other companies of various sizes engage
in activities similar to ours, including large pharmaceutical companies, such as Pfizer and Novartis, who have established in-house
capabilities for the development of drug delivery technologies. Most, if not all, of our competitors have substantially greater
financial and other resources available to them. Competitors include companies with marketed products and/or an advanced research
and development pipeline.
Current Treatments on
the Market and in Development for Parkinson’s Disease
The current common
treatments for Parkinson’s disease include Levodopa (usually used in conjunction with other drugs such as Carbidopa), which
is currently the standard and most efficient Parkinson’s medication used, and dopamine agonists, such as bromocriptine, pergolide,
pramipexole and ropinirole, as well as MAO inhibitors and COMT inhibitors. However, Levodopa therapy is associated with “wearing-off”,
a condition in which a treatment’s effects diminish over time as the disease progresses, and dyskinesia, or involuntary disturbing
movements.
We believe our direct
competition will include other technologies designed to address the need for more stable Levodopa levels. As such, AP-CD/LD will
compete against other Levodopa-based Parkinson’s drugs that are already on the market, such as Sinemet, a combination of
Levodopa and Carbidopa, which is sold by Merck, as well as generic Sinemet, which is sold by various generic manufacturers. In
addition, other technologies and drug delivery systems designed to address the Levodopa blood concentration problem currently exist.
To our knowledge, based on publicly-filed documents, press releases and published studies, we believe the companies described below
would be our primary competition with respect to AP-CD/LD.
Novartis and Orion
combine Levodopa and Carbidopa with Comtan (entacapone), a drug that inhibits the clearance of Levodopa from the blood, thereby
slowing the rapid drop in the Levodopa level in the blood. Additional drug candidates that are developed by Bial and Orion are
based on the same approach.
Solvay Pharmaceuticals,
which has been acquired by AbbVie Inc., introduced a drug delivery system based on implanting a tube in the duodenum area attached
to an external pump that releases Levodopa formulation directly to the NAW. This product has been approved for marketing in the
United States and Europe. The invasive nature of implanting a tube in patients, most of whom are elderly, as well as various difficulties
related to the system, are certain disadvantages of this technology.
Impax Laboratories,
which has merged with Amneal Pharmaceuticals, has developed a product, Rytary
TM
, or IPX066, a continuous release Levodopa
capsule formulation. The product was launched in April 2015. In addition, Amneal is developing IPX203, a new extended-release oral
capsule formulation of carbidopa and levodopa, as a potential treatment for symptoms of Parkinson’s disease. IPX203 has commenced
a Phase III clinical trial.
Civitas Therapeutics,
Inc., which was acquired by Acorda Therapeutics, Inc. in September 2014, has developed a product, INBRIJA
TM
, or CVT-301,
a self-administered, adjunctive, as needed, inhaled oral Levodopa, for the ability to rapidly and predictably treat “off”
episodes as they occur. In December 2018, Acorda announced that the FDA approved INBRIJA
TM
for intermittent treatment
of OFF episodes in people with Parkinson’s disease treated with carbidopa/levodopa.
NeuroDerm Ltd., which
was acquired by Mitsubishi Tanabe Pharma Corporation in October 2017, has the following subcutaneous product candidates, ND0612H
and ND0612L for the treatment of patients suffering from Parkinson’s disease. These product candidates have completed Phase
II clinical trials.
Other technologies
for delivering Levodopa, such as through the skin (transdermal administration) using a patch, injections or inhalations, as well
as new formulations and chemical modifications of Levodopa and/or complementary drugs, currently exist and might compete with AP-CD/LD
as well, but, to our knowledge, these technologies, formulations and modifications have not yet been submitted for approval.
Government Regulation
In the United States,
the FDA regulates pharmaceuticals under the FDCA, and its implementing regulations. These products are also subject to other federal,
state, and local statutes and regulations, including federal and state consumer protection laws, laws protecting the privacy of
health-related information, and laws prohibiting unfair and deceptive acts and trade practices.
The process required
by the FDA before a new drug product may be marketed in the United States generally involves the following: completion of extensive
preclinical laboratory tests and preclinical animal studies, performed in accordance with the FDA’s Good Laboratory Practice,
or GLP, regulations; submission to the FDA of an IND which FDA must allow to become effective before human clinical trials in the
US may begin; performance of adequate and well-controlled human clinical trials to establish the safety and efficacy of the product
candidate for each proposed indication; and submission to the FDA of an NDA for the drug, after completion of all pivotal clinical
trials. An IND is a request for authorization from the FDA to administer an investigational drug product to humans.
Clinical
trials that involve the administration of the investigational drug to human subjects are conducted under the supervision of qualified
investigators in accordance with current Good Clinical Practice, or cGCP which is intended to protect the rights, safety and welfare
of humans participating in research and assure the quality, reliability and integrity of data collected. A protocol for each clinical
trial conducted in the US, or other protocols under IND even not conducted in the US, and any subsequent protocol amendments must
be submitted to the FDA as part of the IND. Additionally, approval must also be obtained from each clinical trial site’s
Institutional Review Board, or IRB, before the trials may be initiated, and the IRB must monitor the trial until completed. There
are also requirements governing the reporting of ongoing clinical trials and clinical trial results to public registries.
Clinical trials are
usually conducted in three phases. Phase I clinical trials are normally conducted in small groups of healthy volunteers to assess
safety and tolerability. After an acceptable dose has been established, the drug is administered to small populations of patients
(Phase II) to look for initial signs of efficacy in treating the targeted disease or condition and to continue to assess safety.
Phase III clinical trials are usually multi-center, double-blind controlled trials in hundreds or even thousands of subjects at
various sites to assess as fully as possible both the safety and effectiveness of the drug.
The FDA, the IRB, or
the clinical trial sponsor may suspend or terminate a clinical trial at any time on various grounds, including a finding that the
trial subjects are being exposed to an unacceptable health risk. Additionally, some clinical trials are overseen by a data safety
monitoring board, or DSMB. This group of experts reviews unblinded data from clinical trials and provides authorization for whether
or not a trial may move forward at designated check points. A DSMB may order a trial halted if it believes that the risk to subjects
is unacceptable or the product is so effective as to make it unethical to administer placebos or alternate treatments to the non-treatment
arms. The sponsor may also suspend or terminate a clinical trial based on evolving business reasons.
Assuming successful
completion of all required testing in accordance with all applicable regulatory requirements, detailed investigational drug product
information is submitted to the FDA in the form of an NDA requesting approval to market the product in the US for one or more indications.
The NDA must be accompanied by a substantial user fee, which may be waived in certain circumstances. The application includes all
relevant data available from pertinent preclinical and clinical trials, including negative or ambiguous results as well as positive
findings, together with detailed information relating to the product’s chemistry, manufacturing, controls and proposed labeling,
among other things. FDA has sixty days from the applicant’s submission of an NDA to either accept the NDA for filing or issue
a refusal-to-file letter if it finds that the application is not sufficiently complete to permit substantive review.
Once the NDA submission
has been accepted for filing, the FDA’s goal is to review standard applications within ten months of filing. However, the
review process is often significantly extended by FDA requests for additional information or clarification. The FDA may refer the
application to an advisory committee for review, evaluation and recommendation as to whether the application should be approved.
The FDA is not bound by the recommendation of an advisory committee, but it typically follows such recommendations.
After the FDA evaluates
the NDA and conducts inspections of manufacturing facilities involved in the production of the product, as well as inspections
of selected clinical trial sites for data integrity, it may issue an approval letter or, instead, a Complete Response Letter. An
approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications. A Complete
Response Letter indicates that the application is not ready for approval in its present form. A Complete Response Letter may require
additional clinical data or other significant, expensive and time-consuming requirements related to clinical trials, preclinical
studies or manufacturing, or any combination thereof. Even if such additional information is submitted, the FDA may ultimately
decide that the NDA does not satisfy the criteria for approval. The FDA could also approve the NDA with restrictive indications,
labeling that includes particular risk information, or a risk evaluation and mitigation strategy, or REMS, which could include
medication guides, physician communication plans, or elements to assure safe use, such as restricted distribution methods, patient
registries and other risk minimization tools. The FDA also may condition approval on, among other things, changes to proposed labeling,
development of adequate controls and specifications, or a commitment to conduct one or more post-market studies or clinical trials.
Such post-market testing may include Phase IV clinical trials and surveillance to further assess and monitor the product’s
safety and effectiveness after commercialization.
After regulatory approval
of a drug product is obtained, we would be required to comply with a number of post-approval requirements. As a holder of an approved
NDA, we would be required to report, among other things, certain adverse reactions and production problems to the FDA, to provide
updated safety and efficacy information, and to comply with requirements concerning advertising and promotional labeling for any
of our products. Also, quality control and manufacturing procedures must continue to conform to current Good Manufacturing Practices,
or cGMP after approval, which includes, among other things, maintenance of a stability program. The FDA periodically inspects manufacturing
facilities to assess compliance with cGMP, which imposes extensive procedural, substantive, and record keeping requirements. In
addition, changes to the manufacturing process are strictly regulated, and, depending on the significance of the change, may require
prior FDA approval before being implemented. FDA regulations also require investigation and correction of product out of specification
results and impose reporting and documentation requirements upon us and any third-party manufacturers that we may decide to use.
Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain
compliance with cGMP and other aspects of regulatory compliance.
We produce, and expect
to continue to produce, the quantities of our product candidates required for our clinical trials, and we do not yet have a need
to produce our product candidates for commercial purposes. Future FDA and state inspections may identify compliance issues at our
facilities or at the facilities of our contract manufacturers or licensees that may disrupt production or distribution, or require
substantial resources to correct. In addition, discovery of previously unknown problems with a product or the failure to comply
with applicable requirements may result in restrictions on a product, manufacturer or holder of an approved NDA, including withdrawal
or recall of the product from the market or other voluntary withdrawal of the product’s approval, seizure, or FDA-initiated
judicial action that could delay or prohibit further marketing. Newly discovered or developed safety or effectiveness data may
require changes to a product’s approved labeling, including the addition of new warnings and contraindications, and also
may require the implementation of other risk management measures. Also, new government requirements, including those resulting
from new legislation, may be established, or the FDA’s policies may change, which could delay or prevent regulatory approval
of our products under development.
In addition, as the
NDA holder, we will be responsible for legal and regulatory compliance for advertising and promotion of the drug product. We are
required to provide to the FDA copies of all drug promotion at the time of first use, and to ensure that all information disseminated
conforms to the product’s approved labeling and other FDA regulations and policies.
505(b)(2) Applications
We intend to submit
NDAs for our proposed products, assuming that the clinical data justify submission, under Section 505(b)(2) of the FDCA, assuming
the FDA agrees with our assessment that a given proposed product qualifies for review under that section. If the FDA disagrees
with that assessment or revises its decision at a later date, we would be compelled to file under section 505(b)(1), which is the
normal route used for traditional new drugs where the data relied upon for the NDA filing have been developed by the sponsor during
its clinical trials. In contrast, Section 505(b)(2) permits the filing of an NDA when at least some of the information required
for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference.
The applicant may rely on published literature and the FDA’s findings of safety and effectiveness based on certain pre-clinical
or clinical studies conducted for an approved product. The FDA may also require companies to perform additional studies or measurements
to support the changes from the approved product. The FDA may then approve the new product candidate for all or some of the label
indications for which the referenced product has been approved, as well as for any new indication sought by the Section 505(b)(2)
applicant. The abbreviated Section 505(b)(2) approval pathway increases the likelihood that the timeframe and costs associated
with commercializing products will be lower than under a typical Section 505(b)(1) approval pathway.
Upon approval of an
NDA or a supplement thereto, NDA sponsors are required to list with the FDA each patent with claims that cover the applicant’s
product or an approved method of using the product. Each of the patents listed by the NDA sponsor is published in the Approved
Drug Products with Therapeutic Equivalence Evaluations (commonly known as the Orange Book) identifies drug products approved on
the basis of safety and effectiveness by the Food and Drug Administration (FDA) under the Federal Food, Drug, and Cosmetic Act
(the Act) and related patent and exclusivity information. When an Abbreviated New Drug Application, or ANDA, applicant files its
application with the FDA, the applicant is required to certify to the FDA concerning any patents listed for the reference product
in the Orange Book, except for patents covering methods of use for which the ANDA applicant is not seeking approval. To the extent
that the Section 505(b)(2) applicant is relying on studies conducted for an already approved product, the applicant is required
to certify to the FDA concerning any patents listed for the approved product in the Orange Book to the same extent that an ANDA
applicant would.
Specifically, the applicant
must certify with respect to each patent that:
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the required patent information has not been filed;
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the listed patent has expired;
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the listed patent has not expired, but will expire on a
particular date and approval is sought after patent expiration; or
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the listed patent is invalid, unenforceable or will not
be infringed by the new product.
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A certification that
the new product will not infringe the already approved product’s listed patents or that such patents are invalid or unenforceable
is called a Paragraph IV certification. If the applicant does not challenge the listed patents or indicates that it is not seeking
approval of a patented method of use, the ANDA application will not be approved until all the listed patents claiming the referenced
product have expired.
If the ANDA applicant
has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification to
the NDA and patent holders once the ANDA has been accepted for filing by the FDA. The NDA and patent holders may then initiate
a patent infringement lawsuit in response to the notice of the Paragraph IV certification. The filing of a patent infringement
lawsuit within 45 days after the receipt of a Paragraph IV certification automatically prevents the FDA from approving the ANDA
until the earlier of 30 months after the receipt of the Paragraph IV notice, expiration of the patent, or a decision in the infringement
case that is favorable to the ANDA applicant. This same procedure that applied to an ANDA applicant also applies to an NDA applicant
under Section 505(b)(2).
Patent Term Restoration
and Extension
A patent claiming a
new drug product may be eligible for a limited patent term extension under the Hatch-Waxman Act, which permits a patent restoration
of up to five years for the patent term lost during product development and the FDA regulatory review. The restoration period granted
is typically one-half the time between the effective date of an IND and the submission date of an NDA, plus the time between the
submission date of an NDA and the ultimate approval date. Patent term restoration cannot be used to extend the remaining term of
a patent past a total of 14 years from the product’s approval date. Only one patent applicable to an approved drug product
is eligible for the extension, and the application for the extension must be submitted prior to the expiration of the patent in
question. A patent that covers multiple drugs for which approval is sought can only be extended in connection with one of the approvals.
The USPTO reviews and approves the application for any patent term extension or restoration in consultation with the FDA.
Marketing Exclusivity
A Section 505(b)(2)
NDA applicant may be eligible for its own regulatory exclusivity period, such as three-year exclusivity. A Section 505(b)(2) NDA
applicant for a new condition of use, or change to a marketed product, such as a new extended release formulation for a previously
approved product, may be granted a three-year market exclusivity if one or more clinical studies, other than bioavailability or
bioequivalence studies, were essential to the approval of the application and were conducted or sponsored by the applicant. Should
this occur, the FDA would be precluded from approving any other application for the same new condition of use or for a change to
the drug product that was granted exclusivity until after that three-year exclusivity period has run. Additional exclusivities
may also apply.
Reimbursement
We face uncertainties
over the pricing of pharmaceutical products. Sales of our product candidates will depend, in part, on the extent to which the costs
of our product candidates will be covered by third-party payors, such as federal health programs, commercial insurance and managed
care organizations. These third-party payors are increasingly challenging the prices charged for medical products and services.
Additionally, the containment of healthcare costs has become a priority of federal and state governments and the prices of drugs
have been a focus in this effort. The U.S. government, state legislatures, foreign governments and third party payors have shown
significant interest in implementing cost-containment programs, including price controls, pricing transparency disclosure obligations,
restrictions on reimbursement and requirements for substitution of generic products. Adoption of price controls and cost-containment
measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could further limit our
net revenue and results. If these third-party payors do not consider our products to be cost-effective compared to other therapies,
they may not cover any of our products after approved as a benefit under their plans or, if they do, the level of payment may not
be sufficient to allow us to sell our product candidates on a profitable basis.
Specifically, in both
the United States and some foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the
healthcare system in ways that could affect our ability to sell our product candidates profitably. In the United States, the Medicare
Prescription Drug, Improvement and Modernization Act of 2003, also called the Medicare Modernization Act, or MMA, changed the way
Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases by the elderly
and certain others. Prior to MMA, Medicare did not cover most outpatient prescription drugs. MMA created a new voluntary Part D,
which covers outpatient drugs for Medicare beneficiaries and is administered by private insurance plans that operate partially
at-risk under contract with the Centers for Medicare & Medicaid Services, or CMS. These private Part D plans have incentives
to keep costs down. MMA also introduced a new reimbursement methodology based on average sales prices for physician-administered
drugs. In addition, this legislation provided authority for limiting the number of certain outpatient drugs that will be covered
in any therapeutic class.
In recent years, Congress
has considered further reductions in Medicare reimbursement for drugs administered by physicians. CMS has issued and will continue
to issue regulations to implement the law which will affect Medicare, Medicaid and other third-party payors. Medicare, which is
the single largest third-party payment program and which is administered by CMS, covers prescription drugs in one of two ways.
Medicare part B covers outpatient prescription drugs that are administered by physicians and Medicare part D covers other outpatient
prescription drugs, but through private insurers. Medicaid, a health insurance program for the poor, is funded jointly by CMS and
the states, but is administered by the states; states are authorized to cover outpatient prescription drugs, but that coverage
is subject to caps and to substantial rebates. CMS also has the authority to revise reimbursement rates and to implement coverage
restrictions for some drugs. Cost reduction initiatives and changes in coverage implemented through legislation or regulation could
decrease utilization of and reimbursement for any approved products, which in turn would affect the price we can receive for those
products. While the MMA and implementing regulations apply primarily to drug benefits for Medicare beneficiaries, private payors
often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates. Therefore, any reduction
in reimbursement that results from federal legislation or regulation may result in a similar reduction in payments from private
payors.
In March 2010, the
Patient Protection and Affordable Care Act, as amended, or the Affordable Care Act, which was amended by the Health Care and Education
Affordability Reconciliation Act, or collectively, PPACA became law in the United States, a sweeping law intended to broaden access
to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency
requirements for healthcare and health insurance industries, impose new taxes and fees on pharmaceutical and medical device manufacturers
and impose additional health policy reforms. As amended, the PPACA expanded manufacturers’ rebate liability to include covered
drugs dispensed to individuals who are enrolled in Medicaid managed care organizations, increased the minimum rebate due for innovator
drugs (both single source drugs and innovator multiple source drugs) from 15.1% of average manufacturer price, or AMP to 23.1%
of AMP or the difference between the AMP and best price, whichever is greater. The total rebate amount for innovator drugs is capped
at 100.0% of AMP. The PPACA and subsequent legislation also narrowed the definition of AMP. Furthermore, the PPACA imposes a significant
annual, nondeductible fee on companies that manufacture or import certain branded prescription drug products. Substantial new provisions
affecting compliance have also been enacted, which may affect our business practices with healthcare practitioners, and a significant
number of provisions are not yet, or have only recently become, effective. The PPACA likely will continue to put pressure on pharmaceutical
pricing, especially under the Medicare program, and may also increase our regulatory burdens and operating costs. The PPACA
remains subject to continuing legislative scrutiny, including efforts by Congress to repeal and amend a number of its provisions,
as well as administrative actions delaying the effectiveness of key provisions. In addition, there have been lawsuits filed by
various stakeholders pertaining to certain portions of the PPACA that may have the effect of modifying or altering various parts
of the law. Efforts to date to amend or repeal the PPACA have generally been unsuccessful.
In addition, other
legislative changes have been proposed and adopted since the PPACA was enacted. In August 2011, then President Obama signed into
law the Budget Control Act of 2011, which, among other things, creates the Joint Select Committee on Deficit Reduction to recommend
to Congress proposals in spending reductions. The Joint Select Committee did not achieve a targeted deficit reduction of an amount
greater than $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction to several government
programs. This includes aggregate reductions to Medicare payments to healthcare providers of up to 2.0% per fiscal year, starting
in 2013. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things,
reduced Medicare payments to several categories of healthcare providers and increased the statute of limitations period for the
government to recover overpayments to providers from three to five years. The Bipartisan Budget Act of 2015, signed into law on
November 2, 2015, increased the rebates that generic drug manufacturers are obligated to pay under the Medicaid program by applying
an inflation-based rebate formula to generic drugs that previously only applied to brand name drugs. Legislative and regulatory
proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical
products.
In the fourth quarter
of 2018, the Trump Administration announced initiatives that it asserted are intended to result in purportedly lower drug prices.
The first initiative, announced on October 15, 2018, involved the plan for a new federal regulation that would require pharmaceutical
manufacturers to disclose the list prices of their respective prescription drugs in their television advertisements for their products
if the list price is greater than $35. With respect to the second initiative, on October 25, 2018, the CMS gave Advance Notice
of Proposed Rulemaking to propose the implementation of an “International Pricing Index” model for Medicare Part B
drugs and biologicals (single source drugs, biologicals, and biosimilars). Public comments were due on December 31, 2018 with a
proposed rule theoretically being offered as early as spring 2019 with target implementation of a 5 year pilot program beginning
in spring 2020. On January 31, 2019, the U.S. Department of Health and Human Services, or HHS, Office of Inspector General proposed
modifications to federal Anti-Kickback Statute safe harbors which, among other things, may affect rebates paid by manufacturers
to Medicare Part D plans, the purpose of which is to further reduce the cost of drug products to consumers. While these initiatives
have not been put into effect, we are not in a position to know at this time whether they will ever become law or what impact the
enactment either of these proposals would have on our business.
Various states, such
as California, have also taken steps to consider and enact laws or regulations that are intended to increase the visibility of
the pricing of pharmaceutical products with the goal of reducing the prices at which we are able to sell our products. Because
these various actual and proposed legislative changes are intended to operate on a state-by-state level rather than a national
one, we cannot predict what the full effect of these legislative activities may be on our business in the future.
Although we cannot
predict the full effect on our business of the implementation of existing legislation, including the PPACA or the enactment of
additional legislation pursuant to healthcare and other legislative reform, we believe that legislation or regulations that would
reduce reimbursement for or restrict coverage of our products could adversely affect how much or under what circumstances healthcare
providers will prescribe or administer our products.
Additionally, in some
countries, particularly the countries comprising the EU the pricing of pharmaceuticals and certain other therapeutics is subject
to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after
the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required
to conduct a clinical trial that compares the cost-effectiveness of our product andidate to other available therapies.
DEA
Our AP-Cannabinoids
product candidates for treatment of various pain indications, uses CBD or THC. These products are quite distinct from crude herbal
“medical marijuana,” and we intend to seek FDA approval for these products in accordance with the customary FDA approval
process and based on adequate and well-controlled clinical studies. However, the active ingredients in our products are defined
as controlled substances under the federal Controlled Substances Act of 1970, or CSA. Under the CSA, the Drug Enforcement Administration
of the United States Department of Justice, or DEA, places each drug that has abuse potential into one of five categories. The
five categories, referred to as Schedules I-V, carry different degrees of restriction. Each schedule is associated with a distinct
set of controls that affect manufacturers, researchers, healthcare providers, and patients. The controls include registration with
the DEA, labeling and packaging, production quotas, security, recordkeeping, and dispensing. Schedule I is the most restrictive,
covering drugs that have “no accepted medical use” in the United States and that have high abuse potential.
If and when any of
our product candidates receive FDA approval, the DEA will make a scheduling determination and place the product in a schedule other
than Schedule I in order for it to be prescribed to patients in the United States. Accordingly, our ability to ultimately commercialize
the product will depend in part on the ultimate scheduling classification determination by DEA for our product.
The FDA has stated
that it will continue to facilitate the work of companies interested in bringing safe, effective, and quality products to market,
including scientifically-based research concerning the medical uses of products derived from marijuana and the FDA has approved
synthetic compositions of the active ingredients found in marijuana. However, the use and abuse of controlled substances is currently
subject to political and social pressures from certain constituencies related to their usage which could result in additional difficulty
with respect to the approval of AP-Cannabinoids as a prescription pharmaceutical. For example, the FDA or DEA may require us to
generate more clinical data about the potential for abuse than that which is currently anticipated, which could increase the cost
and/or delay the launch of our product. In addition, DEA scheduling may limit our ability to achieve market share in the United
States due to restricted access and the disinclination of some physicians to prescribe more restrictive scheduled controlled substances.
For example, Schedule II drugs may not be refilled without a new prescription. These factors may limit the commercial viability
of AP-Cannabinoids in the United States.
Most countries are
parties to the Single Convention on Narcotic Drugs 1961, which governs international trade and domestic control of narcotic substances,
including the compounds in our AP-Cannabinoids product candidates. Countries may interpret and implement their treaty obligations
in a way that creates a legal obstacle to our obtaining approval to market our AP-Cannabinoids product candidates. Approval to
market in these countries could require amendments or modifications to existing laws and regulations that such countries would
be unwilling to undertake or may cause material delays in any marketing approval.
Other U.S. Healthcare
Laws and Compliance Requirements
In the United States,
our current and future activities with investigators, healthcare professionals, consultants, third-party payors, patient organizations
and customers are subject to healthcare regulation and enforcement by the federal government and the states in which we conduct
our business. Applicable federal and state healthcare laws and regulations include the following:
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The federal healthcare Anti-Kickback Statute prohibits, among other things, persons from knowingly
and willfully soliciting, offering, receiving, or providing remuneration, directly or indirectly, in cash or in kind, to induce
or reward either the referral of an individual for, or the purchase, order, or recommendation of, any good, item, facility or service,
for which payment may be made under federal healthcare programs such as Medicare and Medicaid.
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The federal Anti-Inducement Act which prohibits persons from offering remuneration to beneficiaries
to induce them to use a particular item or service payable in whole or in part by Medicare or Medicaid.
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The Ethics in Patient Referrals Act of 1989, commonly referred to as the Stark Law, and its corresponding
regulations, prohibit physicians from referring patients for designated health services (including outpatient drugs) reimbursed
under the Medicare or Medicaid programs to entities with which the physicians or their family members have a financial relationship
or an ownership interest, subject to narrow regulatory exceptions, and prohibits those entities from submitting claims to Medicare
or Medicaid for payment of items or services provided to a referred beneficiary.
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The federal False Claims Act
imposes criminal and civil penalties, including civil whistleblower or
qui tam
actions, against individuals or entities for knowingly presenting, or causing to be presented,
to the federal government claims for payment that are false or fraudulent or making a
false statement to avoid, decrease, or conceal an obligation to pay money to the federal
government.
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Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes criminal and civil
liability for executing a scheme to defraud any healthcare benefit program and also imposes obligations, including mandatory contractual
terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information.
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The federal false statements statute prohibits knowingly and willfully falsifying, concealing or
covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare
benefits, items, or services.
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Analogous state laws and regulations, such as state anti-kickback and false claims laws, apply
to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party
payors, including private insurers, and some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s
voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government.
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A PPACA provision, generally referred
to as the Physician Payments Sunshine Act or Open Payments Program, imposes reporting requirements for applicable drug and device
manufacturers of covered products with regard to payments or other transfers of value made to physicians and teaching hospitals,
and certain investment/ownership interests held by physicians and their immediate family members in the reporting entity. These
disclosures are publicly disclosed by the Centers for Medicare &Medicaid Services, or CMS.
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Efforts to ensure that
our business arrangements with third parties comply with applicable healthcare laws and regulations could be costly. Although we
believe our business practices are structured to be compliant with applicable laws, it is possible that governmental authorities
will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable
fraud and abuse or other healthcare laws and regulations. If our past or present operations, including activities conducted by
our sales team or agents, are found to be in violation of any of these laws or any other governmental regulations that may apply
to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, disgorgement, exclusion from
third party payor programs, such as Medicare and Medicaid, debarment, imprisonment, integrity obligations and other compliance
oversight, and the curtailment or restructuring of our operations. If any of the physicians, providers or entities with whom we
do business are found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions,
including exclusion from government funded healthcare programs.
Many aspects of these
laws have not been definitively interpreted by the regulatory authorities or the courts, and their provisions are open to a variety
of subjective interpretations which increases the risk of potential violations. In addition, these laws and their interpretations
are subject to change. Any action against us for violation of these laws, even if we successfully defend against it, could cause
us to incur significant legal expenses, divert our management’s attention from the operation of our business, and damage
our reputation.
In addition, from time
to time in the future, we may become subject to additional laws or regulations administered by the U.S. Federal Trade Commission,
or FTC, or by other federal, state, local or foreign regulatory authorities, to the repeal of laws or regulations that we generally
consider favorable or to more stringent interpretations of current laws or regulations. We are not able to predict the nature of
such future laws, regulations, repeals or interpretations, and we cannot predict what effect additional governmental regulation,
if and when it occurs, would have on our business in the future. Such developments could, however, require reformulation of certain
products to meet new standards, recalls or discontinuance of certain products not able to be reformulated, additional record-keeping
requirements, increased documentation of the properties of certain products, additional or different labeling, additional scientific
substantiation, additional personnel or other new requirements. Any such developments could have a material adverse effect on our
business.
The growth and demand
for electronic commerce, or eCommerce, could result in more stringent consumer protection laws that impose additional compliance
burdens on online retailers. These consumer protection laws could result in substantial compliance costs and could interfere with
the conduct of our business.
There is currently
great uncertainty in many states whether or how existing laws governing issues such as property ownership, sales and other taxes,
and libel and personal privacy apply to the Internet and commercial online retailers. These issues may take years to resolve. For
example, tax authorities in a number of states, as well as a Congressional advisory commission, are currently reviewing the appropriate
tax treatment of companies engaged in online commerce and new state tax regulations may subject us to additional state sales and
income taxes. New legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently
apply to our business, or a change in application of existing laws and regulations to the Internet and commercial online services
could result in significant additional taxes on our business. These taxes could have an adverse effect on our results of operations.
Intellectual Property
Our success depends,
at least in part, on our ability to protect our proprietary technology and intellectual property, and to operate without infringing
or violating the proprietary rights of others. We rely on a combination of patent, trademark, trade secret and copyright laws,
know-how, intellectual property licenses and other contractual rights (including confidentiality and invention assignment agreements)
to protect our proprietary technology and intellectual property, including related intellectual property rights.
Patents
As of December 31,
2018, we own or exclusively license six families of patents to use within our field of business (families IN-1, IN-3, IN-7, IN-8,
IN-11 and IN-21). Four of the patent families (IN-1, IN-3, IN-7 and IN-11) have granted patents registered in various countries,
as detailed below. One family (IN-8) has granted patents in force in the US, Japan and Israel, which we plan to allow to lapse
by non-payment of future renewal fees. With the exception of the first family of patents (IN-1) three families (IN-3, IN-7 and
IN-11) have active pending applications under examination. The sixth patent family (IN-21) currently comprises of recently filed
pending applications in 21 jurisdictions, including the United States, European Patent Office, Israel, China, Japan, Russia, Australia,
Canada, and other countries. Our patents and patent applications generally relate to gastroretentive drug delivery devices for
oral intake, the integration of the drugs into our delivery devices and their production, and our patents and any patents that
issue from our pending patent applications are expected to expire at various dates between 2020 and 2037. We also rely on trade
secrets to protect certain aspects of our technology. The following discussion describes certain patents/patent applications which
we consider to be our material patents and patent applications.
IN-1 and Yissum
License Agreement
The patent family,
IN-1, that we exclusively license from Yissum (i.e., Gastroretentive Controlled Release Pharmaceutical Dosage Forms) pursuant to
the license agreement described below, or the License Agreement covers gastroretentive system/device for controlled release of
an active ingredient in the GI tract. This patent does not cover the implementation of the accordion technology with respect to
any particular drug or in a manner that is readily manufactured commercially, but it broadly covers folded gastroretentive forms,
and forms the basis for the accordion technology in its most basic form. The system is intended mainly for drugs with NAW, drugs
that act locally in the digestive system and drugs whose active receptors are in the upper part of the GI tract. The system is
intended for clinical use in humans and in animals. The patent is issued in the United States, Israel, Japan, Australia, Canada,
South Africa, the United Kingdom and six other European countries, and expires in 2020.
In the License Agreement,
Yissum granted us an exclusive license for developing, manufacturing and marketing of products based, directly or indirectly, on
the IN-1 patent, the know-how and research results defined therein. Under the provisions of the License Agreement, as amended,
Yissum may not transfer its rights in the patent without our prior written consent. In consideration of the license, we have undertaken
to pay Yissum royalties equaling 3% of the total net revenues from the sale of products based on Yissum’s patent and royalties
equal to 15% of any payment or benefit whatsoever received by us from any sublicensee. At the current time we have not commenced
sales and have not granted any sublicenses to any third parties. The parties to the License Agreement are entitled to terminate
the agreement in case of bankruptcy or receivership of the other party, or a material breach (including in respect of any payment
obligations) that is not cured within 30 days. The License Agreement will remain in effect until the later of the expiration date
of the patent or 15 years from the first commercial sale on the basis of the license. We have the right to assign our rights in
the License Agreement with the prior consent of Yissum, not to be unreasonably withheld, and we are entitled to grant sublicenses
under the licensed intellectual property of Yissum to third parties in our sole discretion, and any sublicensee(s) thereunder will
not be required to assume any undertaking towards Yissum.
IN-3
An additional patent
family (i.e., Method and Apparatus for Forming Delivery Devices for Oral Intake of an Agent), which we refer to as IN-3, covers
various methods for making and folding the gastroretentive drug delivery system, and for folding it in an accordion configuration
allowing its integration into an ordinary oral capsule, which are suitable for commercial manufacturing in mass quantities. The
IN-3 family patents, will expire in 2027, except for the first United States patent of this family, which will expire in 2028.
We consider our proprietary process for folding and cutting the films forming the drug delivery system for integration in an accordion-like
configuration into an ordinary oral capsule to be material to our business. We have four granted patents in the U.S. and an additional
pending patent application in connection with IN-3, as well as granted patents in Israel (three patents), Europe (two granted patents
validated in more than 15 countries and a pending divisional application), Canada and Japan. Importantly, the second IN-3 patents
granted in the U.S. and in Europe cover a specific embodiment of the Accordion Pill, particularly suitable for insoluble or poorly
soluble drugs. Similar divisional applications have been filed in other countries and patents for these have already been granted
in Israel and Japan.
IN-7
An additional patent
family (for “frameless” Accordion Pill, specifically but not limited to Levodopa as the active drug) that we consider
material to our business is referred to as IN-7. The accordion technology covered by our other patents may sometimes need to be
specifically adapted for a given drug that might benefit from prolonged gastroretentive release. Thus, the layered structure of
an Accordion Pill may be varied and specially designed by reference to factors that are unique to any given drug and indication,
such as the quantity of active ingredient desired to be released, the length of time over which the active drug is released, the
relative solubility of a particular drug molecule, and other factors. IN-7 patents/patent applications relate to a special Accordion
Pill, which is “frameless”, and is suitable for carrying various active drugs, including but not limited to Levodopa,
optionally in combination with Carbidopa. The IN-7 patent family relates to the Accordion Pill dosage form, the main feature of
which is the uniform inner drug-containing layer, which allows for, but does not require, high load of the drug, while maintaining
the requisite structural or mechanical strength of the Accordion Pill. This patent family includes patents/patent applications
filed in the United States, the European Patent Office, Japan and several other countries in April 2009. We have four granted U.S.
patents for an Accordion Pill with specific claims to Carbidopa/Levodopa as the active ingredient(s) (IN-7), which will be in force
until April 17, 2029, and have been granted IN-7 patents in China, Japan, Hong Kong, Canada, Europe, (validated in over 30 countries),
Israel, South Africa and South Korea. Applications in Europe, Israel and China (divisional) and in India are pending.
An additional patent
family, related to IN-7, which we refer to as IN-11, seeks protection for an Accordion Pill containing Levodopa that is specifically
formulated for treatment of Parkinson’s disease in a specific treatment regimen. We have been granted two United States patents,
and have pending applications in Canada, EPO, India and Israel. Any granted patent of IN-11 will expire in November 2031.
IN-21
This patent family
is directed to Accordion Pill comprising cannabinoid/s as active drugs (including THC and CBD, separately or in combination) currently
includes pending patent applications in 21 jurisdictions, including the US, EPO, Israel, China, Republic of Korea, Canada, India,
Japan, Australia, New Zealand, Russia, Brazil, Mexico and others. Patents to be granted on these applications will expire in 2037.
General
We intend to submit
patent applications for each Accordion Pill and/or drug combination that we develop. The patent outlook for companies like ours
is generally uncertain and may involve complex legal and factual questions. Our ability to maintain and consolidate our proprietary
position for our technology will depend on our success in obtaining effective claims and enforcing those claims once granted. We
do not know whether any of our patent applications or any patent applications that we license will result in the issuance of any
patents. Our issued patents and those that may be issued in the future, or patents that we exclusively license, may be challenged,
narrowed, circumvented or found to be invalid or unenforceable, which could limit our ability to stop competitors from marketing
related products or the length of term of patent protection that we may have for our products. We cannot be certain that we were
the first to invent the inventions claimed in our owned patents or patent applications, or that Yissum was the first to invent
the invention claimed in the patent that we exclusively license from Yissum. In addition, our competitors may independently develop
similar technologies or duplicate any technology developed by us, and the rights granted under any issued patents may not provide
us with any meaningful competitive advantages against these competitors. Furthermore, because of the extensive time required for
development, testing and regulatory review of a potential product, it is possible that, before any of our products can be commercialized,
any related patent may expire or remain in force for only a short period following commercialization, thereby reducing any advantage
of the patent.
Trademarks
We rely on trade names,
trademarks and service marks to protect our name brands. Our trademark/service mark ACCORDION PILL is registered in Israel in Classes
5, 40 and 42. We are in the process of registering the ACCORDION PILL trademark/ service mark in the United States, where the application
has been recently published. The trademark/service mark ACCORDION PILL is also registered in the UK.
Trade Secrets and Confidential
Information
In addition to patents,
we rely on trade secrets and know-how to develop and maintain our competitive position. Trade secrets and know-how can be difficult
to protect. We rely on, among other things, confidentiality and invention assignment agreements to protect our proprietary know-how
and other intellectual property that may not be patentable, or that we believe is best protected by means that do not require public
disclosure. For example, we require our employees to execute confidentiality agreements in connection with their employment relationships
with us, and to disclose and assign to us inventions conceived in connection with their services to us. However, there can be no
assurance that these agreements will be enforceable or that they will provide us with adequate protection. We also seek to preserve
the integrity and confidentiality of our data, trade secrets and know-how by maintaining physical security of our premises and
physical and electronic security of our information technology systems.
We may be unable to
obtain, maintain and protect the intellectual property rights necessary to conduct our business, and may be subject to claims that
we infringe or otherwise violate the intellectual property rights of others, which could materially harm our business. For a more
comprehensive summary of the risks related to our intellectual property, see “Item 1A. Risk Factors — Risks Related
to Our Intellectual Property.”
Insurance
We maintain directors’
and officers’ liability insurance with maximum coverage of $40.0 million in the aggregate for the benefit of our office holders
and directors. Such directors’ and officers’ liability insurance contains certain standard exclusions.
We also maintain insurance
for our premises for a maximum of NIS 40.0 million, including coverage of equipment and lease improvements against risk of loss
(fire, natural hazard and allied perils, excluding damage from theft - hereinafter “named perils”) and business interruption
insurance coverage caused by named perils out of which up to NIS 44.0 million for fixed cost and up to NIS 120.0 million for expenses
related to the ACCORDANCE study, our Phase III clinical trial for AP-CD/LD. In addition, we maintain the following insurance: employer
liability with coverage of NIS 20.0 million; third-party liability with coverage of NIS 20.0 million; and all risk coverage for
machinery breakdown of our casting machine of approximately NIS 5.0 million.
We also procure additional
insurance for each specific clinical trial which covers a certain number of trial participants and which varies based on the particular
clinical trial. Certain of such policies are based on the Declaration of Helsinki, which is a set of ethical principles regarding
human experimentation developed for the medical community by the World Medical Association, and certain protocols of the Israeli
Ministry of Health.
We believe our insurance
policies are adequate and customary for a business of our kind. However, because of the nature of our business, we cannot assure
you that we will be able to maintain insurance on a commercially reasonable basis or at all, or that any future claims will not
exceed our insurance coverage.
Research Grants
Grants under the Israeli
Innovation Law
Under the Encouragement
of Research, Development and Technological Innovation in the Industry Law 5744-1984 (formerly known as the Law for the Encouragement
of Research and Development in Industry 5744-1984), and the regulations, guidelines, rules, procedures and benefit tracks thereunder,
or the Innovation Law, research and development programs that meet specified criteria and are approved by a committee of the IIA
are eligible for grants. The grants awarded are typically up to 50% of the project’s expenditures, as determined by the IIA
committee and subject to the benefit track under which the grant was awarded. A company that receives a grant from the IIA, or
a Participating Company, is typically required to pay royalties to the IIA on income generated from products incorporating know-how
developed using such grants (including income derived from services associated with such products), until 100% of the U.S. dollars-linked
grant plus annual LIBOR interest is repaid. The rate of royalties to be paid may vary between different benefits tracks, as shall
be determined by the IIA. Under the regular benefits tracks the rate of royalties varies between 3% to 5% of the income generated
from the IIA-supported products. The obligation to pay royalties is contingent on actual income generated from such products and
services. In the absence of such income, no payment of such royalties is required.
The terms of the grants
under the Innovation Law also (generally) require that the products developed as part of the programs under which the grants were
given be manufactured in Israel and that the know-how developed thereunder may not be transferred outside of Israel, unless a prior
written approval is received from the IIA (such approval is not required for the transfer of a portion of the manufacturing capacity
which does not exceed, in the aggregate, 10% of the portion declared to be manufactured outside of Israel in the applications for
funding, in which case only notification is required) and additional payments are required to be made to the IIA. It should be
noted, that this does not restrict the export of products that incorporate the funded know-how. See “Item 1A. Risk Factors
— Risks Related to Our Operations in Israel” for additional information.
The IIA approved our
request to transfer 100% of the manufacturing rights of AP-CD/LD that was developed under one of the IIA funded programs to LTS.
As a result, we will be required to pay the IIA royalties from revenue generated from the AP-CD/LD product candidate at an increased
rate and up to an increased cap amount. The IIA noted that the approval granted was exceptional and that the IIA will not approve
manufacturing additional product candidates out of Israel.
From January 1, 2009
through December 31, 2016, we received from IIA approximately NIS 50.2 million. However, in March 2018, we repaid a portion of
the grant amounts received in 2016 in the amount of approximately NIS 8.1 million (approximately $2.3 million), including interest
and linkage differences, following a review and assessment by the IIA on the 2016 program. For more information see note 6c in
our consolidated financial statements for the year ended December 31, 2018.
Environmental Matters
We are subject to various
environmental, health and safety laws and regulations, including those governing air emissions, water and wastewater discharges,
noise emissions, the use, management and disposal of hazardous materials and wastes and the cleanup of contaminated sites. In addition,
all of our laboratory personnel participate in instruction on the proper handling of chemicals, including hazardous substances
before commencing employment, and during the course of their employment with us. In addition, all information with respect to any
chemical substance that we use is filed and stored as a Material Safety Data Sheet, as required by applicable environmental regulations.
Based on information currently available to us, we do not expect environmental costs and contingencies to have a material adverse
effect on us. The operation of our facilities, however, entails risks in these areas. Significant expenditures could be required
in the future if we are required to comply with new or more stringent environmental or health and safety laws, regulations or requirements.
We hold a business
license from the Jerusalem Municipality with respect to manufacturing pharmaceutical products at 12 Hartom Street, Har Hotzvim
in Jerusalem. The license is currently valid until December 31, 2023. The business license
was granted after an inspection of our raw materials inventory, which we are permitted to maintain in our facilities and warehouses
located at 12 Hartom Street. We also hold a toxic substance permit from July 26, 2018, which is valid until July 30, 2021.
On December 15, 2015,
following our discussions with the Ministry of Environmental Protection to relax certain restrictions included in our business
license, including, among others, to remove certain conditions the compliance with which is not feasible in the premises in which
our facility is located, our business license was updated with additional terms which match our current activity.
We believe that our
business, operations and facilities are being operated in compliance in all material respects with applicable environmental and
health and safety laws and regulations.
Employees
As of December 31,
2018, we had 83 employees, 70 of whom are full-time employees, five of whom were employed in management, 10 of whom were employed
in finance and administration, 48 of whom were employed in research and development and operations, nine of whom were employed
in clinical trials and regulatory affairs and 11 of whom were employed in quality assurance. As of December 31, 2018, all of these
employees are located in Israel or the United States, where our U.S. subsidiary employs five employees.
Israeli labor laws
principally govern the length of the workday, minimum wages for employees, procedures for hiring and dismissing employees, determination
of severance pay, annual leave, sick days, advance notice of termination of employment, equal opportunity and anti-discrimination
laws and other conditions of employment. Subject to certain exceptions, Israeli law generally requires severance pay upon the retirement,
death or dismissal of an employee, and requires us and our employees to make payments to the National Insurance Institute, which
is similar to the U.S. Social Security Administration. Our employees have defined benefit pension plans that comply with applicable
Israeli legal requirements, which also include the mandatory pension payments required by applicable law and allocations for severance
pay.
While none of our employees
are party to any collective bargaining agreements, certain provisions of the collective bargaining agreements between the Histadrut
(General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations (including the Industrialists’
Associations) are applicable to our employees by extension orders issued by the Israel Ministry of Economy and Industry. These
provisions primarily concern the length of the workweek, pension fund benefits for all employees and for employees in the industry
section, insurance for work-related accidents, travel expenses reimbursement, holiday leave, convalescent payments and entitlement
for vacation days. We generally provide our employees with benefits and working conditions beyond the required minimums. We have
never experienced any employment-related work stoppages and believe our relationship with our employees is good.
Available Information
We maintain a corporate
website at www.intecpharma.com. Copies of our reports on Forms 10-K, Forms 10-Q and Forms 8-K, may be obtained, free of charge,
electronically through our corporate website at www.intecpharma.com as soon as reasonably practicable after we file such material
electronically with, or furnish to, the SEC. All of our SEC filings are also available on our website at http://www.intecpharma.com,
as soon as reasonably practicable after having been electronically filed or furnished to the SEC. The public may read and copy
any materials filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC
20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers
that file electronically with the SEC at www.sec.gov. The information on our website is not, and will not be deemed, a part of
this Annual Report or incorporated into any other filings we make with the SEC.
Item 1A. Risk Factors.
An investment in
our securities involves a high degree of risk. We operate in a dynamic and rapidly changing industry that involves numerous risks
and uncertainties. You should carefully consider the factors described below, together with all of the other information contained
in this Annual Report, including the audited consolidated financial statements and the related notes included in this Annual Report
beginning on page F-1, before deciding whether to invest in our ordinary shares. If any of the risks discussed below actually occur,
our business, financial condition, operating results and cash flows could be materially adversely affected. The risks described
below are not the only risks facing us. Additional risks and uncertainties not presently known to us or that we currently deem
immaterial also may impair our business operations. This could cause the trading price of our ordinary shares to decline, and you
may lose all or part of your investment.
Risks Related to Our Financial Position
and Capital Requirements
We are a clinical
stage biopharmaceutical company with a history of operating losses, are not currently profitable, do not expect to become profitable
in the near future and may never become profitable.
We are a clinical stage
biopharmaceutical company that was incorporated in 2000. Since our incorporation, we have primarily focused our efforts on research
and development and clinical trials. Our two most advanced therapeutic candidates are in clinical stages. We are not profitable
and have incurred losses since inception, principally as a result of research and development, clinical trials and general administrative
expenses in support of our operations. We have not generated any revenue, expect to incur substantial losses for the foreseeable
future and may never become profitable. We also expect to incur significant operating and capital expenditures and anticipate that
our expenses and losses will increase substantially in the foreseeable future as we:
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initiate and manage preclinical development and clinical
trials for our current and any new product candidates;
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prepare new drug applications, or NDAs, for our product candidates, assuming that the clinical
trial data support an NDA;
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seek regulatory approvals for our current product candidates,
or future product candidates, if any;
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implement internal systems and infrastructure;
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seek to in-license additional technologies for development,
if any;
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hire additional management and other personnel; and
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move towards commercialization of our product candidates
and future product candidates, if any.
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We may out-license
our ability to generate revenue from one or more of our product candidates, depending on a number of factors, including our ability
to:
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obtain favorable results from and progress the clinical
development of our product candidates;
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develop and obtain regulatory approvals in the countries
and for the uses we intend to pursue for our product candidates;
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subject to successful completion of registration, clinical trials and perhaps additional clinical
trials of any product candidate, apply for and obtain marketing approval in the countries we intend to pursue for such product
candidate; and
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contract for the manufacture of commercial quantities of our product candidates at acceptable cost
levels, subject to the receipt of marketing approval.
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For the years ended
December 31, 2017 and 2018, we had net losses of $28.9 million and $43.5 million, respectively, and we expect such losses to continue
for the foreseeable future. As a result, we will ultimately need to generate significant revenues in order to achieve and maintain
profitability. We may not be able to generate these revenues or achieve profitability in the future. If our product candidates
fail in clinical trials or do not gain regulatory clearance or approval, or if our product candidates do not achieve market acceptance,
we may never become profitable. Our failure to achieve or maintain profitability, or substantial delays in achieving profitability,
could negatively impact the value of our ordinary shares and our ability to raise additional financing. A substantial decline in
the value of our ordinary shares would also affect the price at which we could sell shares to secure future funding, which could
dilute the ownership interest of current shareholders.
Even if we achieve
profitability in the future, we may not be able to sustain profitability in subsequent periods. Accordingly, it is difficult to
evaluate our business prospects. Moreover, our prospects must be considered in light of the risks and uncertainties encountered
by an early-stage company in highly regulated and competitive markets, such as the biopharmaceutical market, where regulatory approval
and market acceptance of our products are uncertain. There can be no assurance that our efforts will ultimately be successful or
result in revenues or profits. As a result, our 2018 annual consolidated financial statements note that there is a substantial
doubt about our ability to continue as a going concern.
Our independent
registered public accounting firm has expressed substantial doubt regarding our ability to continue as a going concern.
Our independent registered
public accounting firm has issued its report on our consolidated financial statements for the year ended December 31, 2018 and
included an explanatory paragraph stating that the Company has suffered recurring losses from operations and negative cash outflows
from operating activities. We estimate that our current cash resources will allow us to complete our Phase III clinical trial
for AP-CD/LD. However, we estimate that further fund raising will be required in order to complete the research and development
of all of our product candidates including the manufacturing activities of the AP-CD/LD. As a result, there is substantial doubt
about our ability to continue as a going concern within one year after the date our accompanying consolidated financial statements
are issued. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We have no current source of revenue to sustain our present activities, and we do not expect to generate revenue until, and unless,
the FDA, or other regulatory authorities approve, and we successfully commercialize, our product candidates. Accordingly, our ability
to continue as a going concern will require us to obtain additional financing to fund our operations, such as submissions of applications
for grants from private funds, license agreements with third parties and raising capital from the public and/or private investors
and/or institutional investors. There can be no assurance that we will succeed in obtaining the necessary financing to continue
our operations. The perception that we might be unable to continue as a going concern may make it more difficult for us to obtain
financing for the continuation of our operations and could result in the loss of confidence by investors, suppliers and employees.
If we cannot successfully continue as a going concern, our shareholders may lose their entire investment in our ordinary shares.
We will need substantial, additional
capital in the future. If additional capital is not available, we will have to delay, reduce or cease operations.
We will need to raise
substantial, additional capital to complete the research and development of all of our product candidates including the manufacturing
activities of the AP-CD/LD. In addition, we may choose to expand our current research and development focus, or other clinical
operations. As of December 31, 2018, we had cash and cash equivalents of $39.3 million and marketable securities of $1.3 million.
Our future capital requirements may be substantial and will depend on many factors including:
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adhering to patient recruitment in our ongoing and planned
clinical trials;
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our clinical trial results;
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developing the Accordion Pill for the treatment of other conditions or indications beyond those
currently being explored;
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the cost of filing and prosecuting patent applications and the cost of defending our patents;
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the cost of prosecuting infringement actions against third parties;
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the cost, timing and outcomes of seeking marketing approval of our product candidates;
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the costs associated with commercializing our products if we receive marketing approval, and choose
to commercialize our product candidates ourselves, including the cost and timing of establishing external, and potentially in the
future, internal, sales and marketing capabilities to market and sell our product candidates;
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subject to receipt of marketing approval, revenue received
from sales of approved products, if any, in the future;
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the costs associated with any product liability or other lawsuits related to our future product
candidates or products, if any;
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the costs associated with post-market compliance with regulatory requirements, and of addressing
any allegations of non-compliance by regulatory authorities in countries where we plan to market and sell our products;
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the demand for our products;
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the costs associated with developing and/or in-licensing
other research and development programs;
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the expenses needed to attract and retain skilled personnel;
and
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the costs associated with being a public company.
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Additional funds may
not be available when we need them, on terms that are acceptable to us, or at all. If adequate funds are not available to us on
a timely basis, we may be required to delay, limit, reduce or terminate preclinical studies, clinical trials or other research
and development activities for one or more of our product candidates or delay, limit, reduce or terminate our establishment of
sales and marketing capabilities or other activities that may be necessary to commercialize our product candidates.
We may incur substantial
costs in pursuing future capital financing, including investment banking fees, legal fees, accounting fees, securities law compliance
fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection
with certain securities we issue, such as convertible notes and warrants, which may adversely impact our financial condition.
Because of our
limited operating history, we may not be able to successfully operate our business or execute our business plan.
We have a limited operating
history upon which to evaluate our proposed business and prospects. Our proposed business operations will be subject to numerous
risks, uncertainties, expenses and difficulties associated with early-stage enterprises. Such risks include, but are not limited
to, the following:
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the absence of a lengthy operating history;
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insufficient capital to fully realize our operating plan;
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our ability to obtain FDA approvals in a timely manner, if ever, or that the approved label indications
are sufficiently broad to make sale of the products commercially feasible;
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expected continual losses for the foreseeable future;
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operating in an environment that is highly regulated by
a number of agencies;
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social and political unrest;
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operating in multiple currencies;
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our ability to anticipate and adapt to a developing market(s);
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acceptance of our Accordion Pill by the medical community
and consumers;
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limited marketing experience;
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a competitive environment characterized by well-established
and well-capitalized competitors;
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the ability to identify, attract and retain qualified personnel;
and
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reliance on key personnel.
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Because we are subject
to these risks, evaluating our business may be difficult, our business strategy may be unsuccessful and we may be unable to address
such risks in a cost-effective manner, if at all. If we are unable to successfully address these risks our business could be harmed.
Risks Related to Our Business Strategy
and Operations
We have not yet
commercialized any products or technologies, and we may never become profitable.
We have not yet commercialized
any products or technologies, and we may never be able to do so. We do not know when or if we will complete any of our product
development efforts, obtain regulatory approval for any product candidates incorporating our technologies or successfully commercialize
any approved products. Even if we are successful in developing products that are approved for marketing, we will not be successful
unless these products gain market acceptance for appropriate indications at favorable reimbursement rates. The degree of market
acceptance of these products will depend on a number of factors, including, but not limited to:
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the timing of regulatory approvals in the countries, and for the uses, we intend to pursue with
respect to the commercialization of our product candidates;
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the competitive environment;
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the establishment and demonstration in, and acceptance by, the medical community of the safety
and clinical efficacy of our products and their potential advantages over other therapeutic products;
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our ability to enter into strategic agreements with a commercial-scale manufacturer and with pharmaceutical
and biotechnology companies with strong marketing and sales capabilities;
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the adequacy and success of distribution, sales and marketing
efforts;
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the establishment of external, and potentially, internal, sales and marketing capabilities to effectively
market and sell our product candidates in the United States and other countries; and
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the pricing and reimbursement policies of government and third-party payors, such as insurance
companies, health maintenance organizations and other plan administrators.
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Physicians, patients,
third-party payors or the medical community in general may be unwilling to accept, utilize or recommend, and in the case of third-party
payors, cover payment for, any of our current or future products or products incorporating our technologies. As a result, we are
unable to predict the extent of future losses or the time required to achieve profitability, if at all. Even if we successfully
develop one or more products that incorporate our technologies, we may not become profitable.
If we are unable
to establish sales, marketing and distribution capabilities or enter into successful relationships with third parties to perform
these services, we may not be successful in commercializing our product candidates if and when they are approved.
We do not have a sales
or marketing infrastructure and have no experience in the sale, marketing or distribution of products. To achieve commercial success
for any product for which we have obtained marketing approval, we will need to establish a sales and marketing infrastructure or
to out-license the product.
In the future, we may
consider building a focused sales and marketing infrastructure to market AP-CD/LD and potentially other product candidates in the
United States, if and when they are approved. There are risks involved with establishing our own sales, marketing and distribution
capabilities. For example, recruiting and training a sales force could be expensive and time consuming and could delay any product
launch. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing capabilities
is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses.
This may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel.
Factors that may inhibit
our efforts to commercialize our products on our own include:
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our inability to recruit, train and retain adequate numbers
of effective sales and marketing personnel;
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the inability of sales personnel to obtain access to physicians;
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the lack of adequate numbers of physicians to prescribe
any future products;
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the lack of complementary products to be offered by sales
personnel, which may put us at a competitive disadvantage relative to companies with more extensive product lines; and
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unforeseen costs and expenses associated with creating
an independent sales and marketing organization.
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If we are unable to
establish our own sales, marketing and distribution capabilities or enter into successful arrangements with third parties to perform
these services, our product revenues and our profitability, may be materially adversely affected.
In addition, we may
not be successful in entering into arrangements with third parties to sell, market and distribute our product candidates inside
or outside of the United States or may be unable to do so on terms that are favorable to us. We likely will have little control
over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our products
effectively. If we do not establish sales, marketing and distribution capabilities successfully, either on our own or in collaboration
with third parties, we will not be successful in commercializing our product candidates.
The members of
our management team are important to the efficient and effective operation of our business, and we may need to add and retain additional
leading experts. Failure to retain our management team and add additional leading experts could have a material adverse effect
on our business, financial condition or results of operations.
Our executive officers
and our management team are important to the efficient and effective operation of our business. Our failure to retain our management
personnel, who have developed much of the technology we utilize today, or any other key management personnel, could have a material
adverse effect on our future operations. Our success is also dependent on our ability to attract, retain and motivate highly-trained
technical and management personnel, among others, to continue the development and commercialization of our current and future products.
As such, our future
success highly depends on our ability to attract, retain and motivate personnel required for the development, maintenance and expansion
of our activities. There can be no assurance that we will be able to retain our existing personnel or attract additional qualified
personnel. The loss of personnel or the inability to hire and retain additional qualified personnel in the future could have a
material adverse effect on our business, financial condition and results of operation.
We expect to
face significant competition. If we cannot successfully compete with new or existing products, our marketing and sales will suffer
and we may never be profitable.
If any of our product
candidates are approved, we expect to compete against fully-integrated pharmaceutical and biotechnology companies and smaller companies
that are collaborating with pharmaceutical companies, academic institutions, government agencies and other public and private research
organizations. In addition, many of these competitors, either alone or together with their collaborative partners, operate larger
research and development programs than we do, and have substantially greater financial resources than we do, as well as significantly
greater experience in:
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undertaking preclinical testing and human clinical trials;
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obtaining FDA approvals and addressing various regulatory matters and obtaining other regulatory
approvals of drugs;
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formulating and manufacturing drugs; and
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launching, marketing and selling drugs.
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Our competitors are
likely to include companies with marketed products and/or an advanced research and development pipeline. The competitive landscape
of improving Levodopa for the treatment of Parkinson’s disease symptoms includes Novartis AG, Orion Corporation, AbbVie,
Amneal Pharmaceuticals, Inc., and more. The competitive landscape in the gastric retention system field includes Teva Pharmaceutical
Industries, Assertio Therapeutics, Inc., Merrion Pharmaceuticals, Avadel Pharmaceuticals, Sun Pharma and more. Management is not
aware of any companies that are developing or planning to develop a drug delivery system similar to our Accordion Pill platform
technology.
There is a substantial
risk of product liability claims in our business. We currently do not maintain product liability insurance and a product liability
claim against us could adversely affect our business.
We may incur substantial
liabilities and may be required to limit commercialization of our products in response to product liability lawsuits, which may
result in substantial losses.
Any of our product
candidates could cause adverse events, including injury, disease or adverse side effects. These adverse events may or may not be
observed in clinical trials, but may nonetheless occur in the future. If any of these adverse events occur, they may render our
product candidates ineffective or harmful in some patients, and our sales would suffer, materially adversely affecting our business,
financial condition and results of operations.
In addition, potential
adverse events caused by our product candidates could lead to product liability lawsuits. If product liability lawsuits are successfully
brought against us, we may incur substantial liabilities and may be required to limit the marketing and commercialization of our
product candidates. Our business exposes us to potential product liability risks, which are inherent in the testing, manufacturing,
marketing and sale of pharmaceutical products. We may not be able to avoid product liability claims. Product liability insurance
for the pharmaceutical and biotechnology industries is generally expensive, if available at all. We do not have product liability
insurance (and currently have insurance coverage for each specific clinical trial, which covers a certain number of trial participants
and which varies based on the particular clinical trial) and if we are unable to obtain sufficient insurance coverage on reasonable
terms or to otherwise protect against potential product liability claims, we may be unable to clinically test, market or commercialize
our product candidates. A successful product liability claim brought against us in excess of our insurance coverage, if any, may
cause us to incur substantial liabilities, and, as a result, our business, liquidity and results of operations would be materially
adversely affected. In addition, the existence of a product liability claim could affect the market price of our ordinary shares.
We face continuous
technological change, and developments by competitors may render our products or technologies obsolete or non-competitive. If our
new or existing product candidates are rendered obsolete or non-competitive, our marketing and sales will suffer and we may never
be profitable.
If our competitors
develop and commercialize products faster than we do, or develop and commercialize products that are superior to our product candidates,
our commercial opportunities could be reduced or eliminated. The extent to which any of our product candidates achieve market acceptance
will depend on competitive factors, many of which are beyond our control. Competition in the biotechnology and biopharmaceutical
industry is intense and has been accentuated by the rapid pace of technology development. Our potential competitors include large
integrated pharmaceutical companies, biotechnology companies that currently have drug and target discovery efforts, universities,
and public and private research institutions. Almost all of these entities have substantially greater research and development
capabilities and financial, scientific, manufacturing, marketing and sales resources than we do. These organizations also compete
with us to:
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attract parties for acquisitions, joint ventures or other
collaborations;
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license proprietary technology that is competitive with
the technology we are developing;
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attract and hire scientific talent and other qualified
personnel.
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Our competitors may
succeed in developing and commercializing products earlier and obtaining regulatory approvals from the FDA more rapidly than we
do. Our competitors may also develop products or technologies that are superior to those we are developing, and render our product
candidates or technologies obsolete or non-competitive. If we cannot successfully compete with new or existing products, our marketing
and sales could suffer and we may never be profitable.
We may encounter
difficulties in managing our growth. Failure to manage our growth effectively could have a material adverse effect on our business,
results of operations and financial condition.
We may not be able
to successfully grow and expand. Successful implementation of our business plan will require management of growth, including potentially
rapid and substantial growth, which will result in an increase in the level of responsibility for management personnel and place
a strain on our human and capital resources. To manage growth effectively, we will be required to continue to implement and improve
our operating and financial systems and controls to expand, train and manage our employee base. Our ability to manage our operations
and growth effectively requires us to continue to expend funds to enhance our operational, financial and management controls, reporting
systems and procedures and to attract and retain sufficient talented personnel. If we are unable to scale up and implement improvements
to our control systems in an efficient or timely manner, or if we encounter deficiencies in existing systems and controls, then
we may not be able to make available the products required to successfully commercialize our technology. Failure to attract and
retain sufficient talented personnel will further strain our human resources and could impede our growth or result in ineffective
growth. Moreover, the management, systems and controls currently in place or to be implemented may not be adequate for such growth,
and the steps taken to hire personnel and to improve such systems and controls might not be sufficient. If we are unable to manage
our growth effectively, it could have a material adverse effect on our business, results of operations and financial condition.
If we are unable
to obtain adequate insurance, our financial condition could be adversely affected in the event of uninsured or inadequately insured
loss or damage. Our ability to effectively recruit and retain qualified officers and directors could also be adversely affected
if we experience difficulty in obtaining adequate directors’ and officers’ liability insurance.
We may not be able
to obtain insurance policies on terms affordable to us that would adequately insure our business and property against damage, loss
or claims by third parties. To the extent our business or property suffers any damages, losses or claims by third parties, which
are not covered or adequately covered by insurance, our financial condition may be materially adversely affected.
We may be unable to
maintain sufficient insurance as a public company to cover liability claims made against our officers and directors. If we are
unable to adequately insure our officers and directors, we may not be able to retain or recruit qualified officers and directors
to manage our Company.
If we acquire
or license additional technologies or product candidates, we may incur a number of additional costs, have integration difficulties
and/or experience other risks that could harm our business and results of operations.
We may acquire and
in-license additional product candidates and technologies. Any product candidate or technologies we in-license or acquire will
likely require additional development efforts prior to commercial sale, including extensive preclinical or clinical testing, or
both, and approval by the FDA and applicable foreign regulatory authorities, if any. All product candidates are prone to risks
of failure inherent in pharmaceutical product development, including the possibility that the product candidate or product developed
based on in-licensed technology will not be shown to be sufficiently safe and effective for approval by regulatory authorities.
In addition, we cannot assure you that any product candidate that we develop based on acquired or licensed technology that is granted
regulatory approval will be manufactured or produced economically, successfully commercialized or widely accepted or competitive
in the marketplace. Moreover, integrating any newly acquired or in-licensed product candidates could be expensive and time-consuming.
If we cannot effectively manage these aspects of our business strategy, our business may not succeed.
A security breach or disruption or
failure in a computer or communications systems could adversely affect us.
Despite the implementation
of security measures, our internal computer systems, and those of our CROs and other third parties on which we rely, are vulnerable
to damage from computer viruses, unauthorized access, cyber-attacks, natural disasters, fire, terrorism, war, and telecommunication
and electrical failures. If such an event were to occur and interrupt our operations, it could result in a material disruption
of our drug development programs. For example, the loss of clinical trial data from ongoing or planned clinical trials could result
in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent
that any disruption or security breach results in a loss of or damage to our data or applications, loss of trade secrets or inappropriate
disclosure of confidential or proprietary information, including protected health information or personal data of employees or
former employees, access to our clinical data, or disruption of the manufacturing process, we could incur liability and the further
development of our Accordion Pill could be delayed. We may also be vulnerable to cyber-attacks by hackers or other malfeasance.
This type of breach of our cybersecurity may compromise our confidential information and/or our financial information and adversely
affect our business or result in legal proceedings. Further, these cybersecurity breaches may inflict reputational harm upon us
that may result in decreased market value and erode public trust.
Global economic,
capital market and political conditions could affect our ability to raise capital and could disrupt or delay the performance of
our third-party contractors and suppliers.
Our ability to raise
capital may be adversely affected by changes in global economic conditions and geopolitical risks, including credit market conditions,
levels of consumer and business confidence, exchange rates, levels of government spending and deficits, trade policies, political
conditions, actual or anticipated default on sovereign debt and other challenges that could affect the global economy. These economic
conditions affect businesses such as ours in a number of ways. Tightening of credit in financial markets could adversely affect
our ability to obtain financing. Similarly, such tightening of credit may adversely affect our supplier base and increase the potential
for one or more of our suppliers to experience financial distress or bankruptcy. Our global business is also adversely affected
by decreases in the general level of economic activity, such as decreases in business and consumer spending.
Risks Related to the Clinical Development,
Manufacturing and Regulatory Approval of Our Product Candidates
Our product candidates
are at various stages of preclinical and clinical development and may never be commercialized.
The progress and results
of any future preclinical testing or future clinical trials are uncertain, and the failure of our product candidates and additional
product candidates which we may license, acquire or develop in the future to receive regulatory approvals could have a material
adverse effect on our business, operating results and financial condition to the extent we are unable to commercialize any such
products. None of our product candidates have received regulatory approval for commercial sale. In addition, we face the risks
of failure inherent in developing therapeutic products. Some of our product candidates are not expected to be commercially available
for several years, if at all.
Our product candidates
are subject to extensive regulation and are at various stages of regulatory development and may never obtain regulatory approval.
Our product candidates
must satisfy certain standards of safety and efficacy for a specific indication before they can be approved for commercial use
by the FDA or foreign regulatory authorities. The FDA and foreign regulatory authorities have full discretion over this approval
process. We will need to conduct significant additional research, including testing in animals and in humans, before we can file
applications for product approval. Typically, in the pharmaceutical industry, there is a high rate of attrition for product candidates
in preclinical testing and clinical trials. Also, even though we believe that some of our product candidates may be eligible for
FDA review under Section 505(b)(2) of the FDCA, the FDA may not agree with that assessment, and may require us to submit the application
under Section 505(b)(1) which usually requires more comprehensive clinical data than applications submitted under Section 505(b)(2).
Even under Section 505(b)(2), satisfying FDA’s requirements typically takes many years, is dependent upon the type, complexity
and novelty of the product and requires the expenditure of substantial resources. Success in preclinical testing and early clinical
trials does not ensure that later clinical trials will be successful. For example, a number of companies in the pharmaceutical
industry, including biotechnology companies, have suffered significant setbacks in advanced clinical trials, even after promising
results in earlier trials. In addition, delays or rejections may be encountered based upon additional government regulation, including
any changes in legislation or FDA policy, during the process of product development, clinical trials and regulatory reviews. After
clinical trials are completed, the FDA has substantial discretion in the drug approval process and may require us to conduct additional
preclinical and clinical testing or to perform post-marketing studies.
In order to receive
FDA approval or approval from foreign regulatory authorities to market a product candidate or to distribute our products, we must
demonstrate through preclinical testing and through human clinical trials that the product candidate is safe and effective for
its intended uses (e.g., treatment of a specific condition in a specific way subject to contradictions and other limitations).
We anticipate that some foreign regulatory agencies will have different testing and approval requirements from those of the FDA.
Even if we comply with all FDA requests, the FDA may ultimately reject or decline to approve one or more of our new drug applications,
or it may grant approval for a narrowly intended use that is not commercially feasible. We might not obtain regulatory approval
for our product candidates in a timely manner, if at all. Failure to obtain FDA approval of any of our product candidates in a
timely manner or at all could severely undermine our business by delaying or halting commercialization of our products, imposing
costly procedures, diminishing competitive advantages and reducing the number of salable products and, therefore, corresponding
product revenues.
We have collected
limited clinical data about the safety and efficacy of AP-CD/LD in an open-label Phase II clinical trial that was not conducted
under a U.S. issued IND and we may be unable to replicate these results in large-scale and double-blind controlled clinical trials.
Although the clinical
trials performed to date using AP-CD/LD have shown promising results, these results were generated from open-label studies not
performed under a U.S.-issued IND and were conducted at a limited number of clinical sites on a limited number of patients. An “open-label”
trial is one where both the patient and investigator know whether the patient is receiving the test article or either an existing
approved drug or placebo. Open-label trials are subject to various limitations that may exaggerate any therapeutic effect as patients
in open-label studies are aware that they are receiving treatment. Open-label trials may be subject to a “patient bias”
where patients perceive their symptoms to have improved merely due to their awareness of receiving an experimental treatment. Patients
selected for early clinical studies often include the most severe sufferers and their symptoms may have been bound to improve notwithstanding
the new treatment. In addition, open-label trials may be subject to an “investigator bias” where those assessing and
reviewing the physiological outcomes of the clinical trials are aware of which patients have received treatment and may interpret
the information of the treated group more favorably given this knowledge.
Given that these were
open label studies, not conducted under an IND, the FDA may decide not to consider the data that we collected from these open-label
studies, even though we are obligated to submit these data to the FDA. The FDA will accept a well-designed, well-conducted, non-IND
foreign study as support for an application for marketing approval if the study was conducted in accordance with Good Clinical
Practice, or GCP, and if the FDA is able to validate the data from the study through an onsite inspection, if necessary. GCP is
an international ethical and scientific quality standard for designing, conducting, recording, and reporting trials that involve
the participation of human subjects. Compliance with this standard provides public assurance that the rights, safety, and well-being
of study subjects are protected, and that the clinical trial data are credible. GCP includes review and approval by an independent
ethics committee, or IEC, such as an institutional review board, or IRB, before initiating a study. It also includes continuing
review of an ongoing study by an IEC, and obtaining the freely given informed consent of the subject (or a subject’s legally
authorized representative, if a subject is unable to provide informed consent) before initiating a study.
Our Phase II clinical
trial for AP-CD/LD was conducted at several medical centers in Israel. Patients in Israel are genetically similar to European patients
and U.S. patients of European descent, but there may be unidentified genetic differences that may result in variable therapeutic
response in certain subpopulations in these countries or in patients in other countries. Furthermore, although our initial safety
profile has been favorable, safety could be dependent on operator skills. It is possible that we may experience a higher rate of
adverse events in the future with wider application of our Accordion Pill technology in real-world practice outside of clinical
trials.
If the FDA does
not conclude that a given product candidate using our Accordion Pill technology satisfies the requirements for approval under the
Section 505(b)(2) regulatory approval pathway, or if the requirements for approval of our product candidates under Section 505(b)(2)
are not as we expect, the approval pathway will likely take significantly longer, cost significantly more and entail significantly
greater complications and risks than anticipated, and in any case may not be successful.
We intend to seek
FDA approval for our product candidates implementing our Accordion Pill technology through the Section 505(b)(2) regulatory
pathway. Pursuant to Section 505(b)(2) of the FDCA, a NDA under Section 505(b)(2) is permitted to reference safety and
effectiveness data submitted by the sponsor of a previously approved drug as part of its NDA, or rely on FDA’s prior
conclusions regarding the safety and effectiveness of that previously approved drug, or rely in part on data in the public
domain. Reliance on data collected by others may expedite the development program for our product candidates by potentially
decreasing the amount of clinical data that we would need to generate in order to obtain FDA approval. If the FDA does not
allow us to pursue the Section 505(b)(2) regulatory pathway as anticipated, we may need to conduct additional clinical
trials, provide additional data and information, and meet additional standards for product approval. If this were to occur,
the time and financial resources required to obtain FDA approval, and complications and risks associated with regulatory
approval of our product candidates, would likely substantially increase. Moreover, our inability to pursue the Section
505(b)(2) regulatory pathway may result in new competitive products reaching the market more quickly than our product, which
would likely materially adversely impact our competitive position and prospects. Even if we are able to utilize the Section
505(b)(2) regulatory pathway, there is no guarantee this will ultimately lead to accelerated product development or earlier
approval. A 505(b)(2) applicant may rely on the FDA’s finding of safety and effectiveness for a previously
approved drug only to the extent that the proposed product in the Section 505(b)(2) application shares characteristics (e.g.,
active ingredient, dosage form, route of administration, strength, indication, conditions of use) in common with the
previously approved drug. To the extent that the previously approved drug and the drug proposed in the Section 505(b)(2) application
differ (e.g., a product with a different dosage form or route of administration), the Section 505(b)(2) application must include
sufficient data to support those differences.
In addition, the pharmaceutical
industry is highly competitive, and Section 505(b)(2) NDAs are subject to special requirements designed to protect the patent rights
of sponsors of previously approved drugs that may be referenced in a Section 505(b)(2) NDA. These requirements may give rise to
patent litigation and mandatory delays in approval of our NDA for up to 30 months or longer depending on the outcome of any litigation.
Further, it is not uncommon for a manufacturer of an approved product to file a citizen petition with the FDA seeking to delay
approval of, or impose additional approval requirements for, pending competing products. If successful, such petitions can significantly
delay, or even prevent, the approval of a new product. Even if the FDA ultimately denies such a petition, the FDA may substantially
delay approval while it considers and responds to the petition. Amendments to the FDCA attempt to limit the delay that can be caused
by a citizen petition to 150 days, although court action by a dissatisfied petitioner is a possibility and this could, in theory,
adversely affect the approval process.
Moreover, even if product
candidates implementing our Accordion Pill technology are approved under Section 505(b)(2), the approval may be subject to limitations
on the indicated uses for which the products may be marketed or to other conditions of approval, or may contain requirements for
costly post-marketing testing and surveillance to monitor the safety or efficacy of the products.
We might be unable
to develop any of our product candidates to achieve commercial success in a timely and cost-effective manner, or ever.
Even if regulatory
authorities approve any of our product candidates, they may not be commercially successful. Our product candidates may not be commercially
successful because government agencies or other third-party payors may not provide reimbursement for the costs of the product or
the reimbursement may be too low to be commercially successful. In addition, physicians and others may not use or recommend our
products candidates, even following regulatory approval. A product approval, even if issued, may limit the uses for which such
product may be distributed, which could adversely affect the commercial viability of the product. Moreover, third parties may develop
superior products or have proprietary rights that preclude us from marketing our products. We also expect that our product candidates,
if approved, will generally be more expensive than the non-Accordion Pill version of the same medication available to patients.
Physician and patient acceptance of, and demand for, any product candidates for which we obtain regulatory approval or license
will depend largely on many factors, including, but not limited to, the extent, if any, of reimbursement of costs by government
agencies and other third-party payors, pricing, competition, the effectiveness of our marketing and distribution efforts, the safety
and effectiveness of alternative products, and the prevalence and severity of side effects associated with such products. If physicians,
government agencies and other third-party payors do not accept the use or efficacy of our products, we will not be able to generate
significant revenue, if any.
We cannot be
certain that the results of our current or potential Phase III clinical trials, even if all endpoints are met, will support regulatory
approval of any of our product candidates for any indication.
Endpoints for most
Phase III clinical trials may vary from drug candidate to drug candidate and from indication to indication; therefore, there are
no universally accepted endpoints for Phase III clinical trials. It is possible that even if the results of our current or potential
Phase III clinical trial meet the primary endpoints, the FDA will require other data of our product candidates prior to granting
marketing approval. Although we held an end of Phase II meeting with the FDA in 2015 for AP-CD/LD and are conducting the ACCORDANCE
trial in a manner consistent with the guidance provided by the FDA at that meeting, we have not entered into any Special Protocol
Assessment agreement for the sufficiency of the ACCORDANCE trial, if successful, to achieve NDA approval.
Our product candidates
and future product candidates will remain subject to ongoing regulatory requirements even if they receive marketing approval, and
if we fail to comply with these requirements, we may not obtain such approvals or could lose those approvals that have been obtained,
and the sales of any approved commercial products could be suspended.
Even if we receive
regulatory approval to market a particular product candidate, any such product will remain subject to extensive regulatory requirements,
including requirements relating to manufacturing, labeling, packaging, adverse event reporting, storage, advertising, promotion,
distribution and record keeping. Even if regulatory approval of a product is granted, the approval may be subject to limitations
on the uses for which the product may be marketed or the conditions of approval, or may contain requirements for costly post-marketing
testing and surveillance to monitor the safety or efficacy of the product, which could negatively impact us or our collaboration
partners by reducing revenues or increasing expenses, and cause the approved product candidate not to be commercially viable. In
addition, as clinical experience with a drug expands after approval, typically because it is used by a greater number and more
diverse group of patients after approval than during clinical trials, side effects and other problems may be observed over time
after approval that were not seen or anticipated during pre-approval clinical trials or other studies. Any adverse effects observed
after the approval and marketing of a product candidate could result in limitations on the use of or withdrawal of FDA approval
of any approved products from the marketplace. Absence of long-term safety data may also limit the approved uses of our products,
if any. If we fail to comply with the regulatory requirements of the FDA and other applicable U.S. and foreign regulatory authorities,
or previously unknown problems with any approved commercial products, manufacturers or manufacturing processes are discovered,
we could be subject to administrative or judicially imposed sanctions or other setbacks, including, without limitation, the following:
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suspension or imposition of restrictions on the products, manufacturers or manufacturing processes,
including costly new manufacturing requirements;
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civil or criminal penalties, fines and/or injunctions;
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product seizures or detentions;
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import or export bans or restrictions;
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voluntary or mandatory product recalls and related publicity requirements;
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suspension or withdrawal of regulatory approvals;
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total or partial suspension of production; and
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refusal to approve pending applications for marketing approval of new products or supplements to
approved applications.
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If we or our collaborators
are slow to adapt, or are unable to adapt, to changes in existing regulatory requirements or adoption of new regulatory requirements
or policies, marketing approval for our product candidates may be lost or cease to be achievable, resulting in decreased revenue
from milestones, product sales or royalties, which would have a material adverse effect on our business, financial condition or
results of operations.
Clinical trials
are very expensive, time-consuming and difficult to design and implement, and, as a result, we may suffer delays or suspensions
to current or future trials, which would have a material adverse effect on our ability to advance products and generate revenues.
Human clinical trials
are very expensive and difficult to design and implement, in part because they are subject to rigorous regulatory requirements.
Regulatory authorities, such as the FDA, may preclude clinical trials from proceeding. Additionally, the clinical trial process
is time-consuming, failure can occur at any stage of the trial and we may encounter problems that cause us to abandon or repeat
clinical trials. The commencement and completion of clinical trials may be delayed by several factors, including, but not limited
to:
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unforeseen safety issues;
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clinical holds or suspension of a clinical trial by the FDA, us, ethics committees, or the DSMB
to determine proper dosing;
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lack of effectiveness or efficacy during clinical trials;
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failure of our contract manufacturers to manufacture our product candidates in accordance with
cGMP;
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failure of third party suppliers to perform final manufacturing
steps for the drug substance;
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slower than expected rates of patient recruitment and enrollment;
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lack of healthy volunteers and patients to conduct trials;
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inability to monitor patients adequately during or after
treatment;
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failure of third party contract research organizations
to properly implement or monitor the clinical trial protocols;
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failure of IRBs to approve or renew approvals of our clinical
trial protocols;
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inability or unwillingness of medical investigators to
follow our clinical trial protocols; and
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lack of sufficient funding to finance the clinical trials.
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As noted above, we,
regulatory authorities, IRBs or DSMBs may suspend our clinical trials at any time if it appears that we are exposing participants
to unacceptable health risks or if the regulatory authorities find deficiencies in our regulatory submissions or conduct of these
trials. For example, a DSMB has been selected for the Phase III clinical trial of AP-CD/LD and has been reviewing and will continue
to periodically review the safety data of the trial. Any suspension of clinical trials will delay possible regulatory approval,
if any, and adversely impact our ability to develop products and generate revenue.
We
may be forced to abandon development of certain products altogether, which will significantly impair our ability to generate product
revenues.
Upon
the completion of any clinical trial, if at all, the results of these trials might not support the claims sought by us. Further,
success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful, and the
results of later clinical trials may not replicate the results of prior clinical trials and preclinical testing. The clinical
trial process may fail to demonstrate that our product candidates are safe for humans and effective for its indicated uses. Any
such failure may cause us to abandon a product candidate and may delay development of other product candidates. Any delay in,
or termination or suspension of, our clinical trials will delay the requisite filings with the FDA and, ultimately, our ability
to commercialize our product candidates and generate product revenues. If the clinical trials do not support our drug product
claims, the completion of development of such product candidates may be significantly delayed or abandoned, which would significantly
impair our ability to generate product revenues and would materially adversely affect our business, financial condition or results
of operations.
Positive
results in the previous clinical trials of one or more of our product candidates may not be replicated in future clinical trials
of such product candidate, which could result in development delays or a failure to obtain marketing approval.
Positive
results in the previous clinical trials of one or more of our product candidates may not be predictive of similar results in future
clinical trials for such product candidate. Also, interim results during a clinical trial do not necessarily predict final results.
A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical
trials even after achieving promising results in early-stage development. Accordingly, the results from the completed preclinical
studies and clinical trials for our product candidates may not be predictive of the results we may obtain in later stage trials
of such product candidates. Our clinical trials may produce negative or inconclusive results, and we may decide, or regulators
may require us, to conduct additional clinical trials. Clinical trial results may be inconclusive, or contradicted by other clinical
trials, particularly larger clinical trials. Moreover, clinical data are often susceptible to varying interpretations and analyses,
and many companies that believed their product candidates performed satisfactorily in preclinical studies and clinical trials
have nonetheless failed to obtain FDA or European Medicines Agency, or other applicable regulatory agency, approval for their
products.
Our
product candidates are manufactured through a compounding, film casting and assembly process, and if we or one of our materials
suppliers encounters problems manufacturing our products or raw materials, our business could suffer.
We
and our contract manufacturers, if any, are, and will be, subject to extensive governmental regulation in connection with the
manufacture of any pharmaceutical products. The FDA and foreign regulators require manufacturers to register manufacturing facilities.
The FDA and foreign regulators also inspect these facilities to confirm compliance with cGMP or similar requirements that the
FDA or foreign regulators establish. We and our contract manufacturers must ensure that all of the processes, methods and equipment
are compliant with cGMP for drugs on an ongoing basis, as mandated by the FDA and other regulatory authorities, and conduct extensive
audits of vendors, contract laboratories and suppliers. The FDA will likely condition grant of any marketing approval, if any,
on a satisfactory on-site inspection of our manufacturing facilities.
We
currently manufacture our product candidates used in clinical testing and we order certain materials from single-source suppliers.
If the supply of any of these single-sourced materials is delayed or ceases, we may not be able to produce the related product
in a timely manner or in sufficient quantities, if at all, causing us to be unable to further develop our product candidates or
bring them to market or continue to develop our technology, which could materially and adversely affect our business. In addition,
a single-source supplier of a key component of one or more of our product candidates could potentially exert significant bargaining
power over price, quality, warranty claims or other terms relating to the single-sourced materials. Our materials suppliers may
face manufacturing or quality control problems causing product production and shipment delays or a situation where the supplier
may not be able to maintain compliance with the FDA’s cGMP requirements, or those of foreign regulators, necessary to continue
manufacturing our drug substance or raw materials. Drug manufacturers are subject to ongoing periodic unannounced inspections
by the FDA, the DEA, and corresponding foreign regulatory agencies to ensure strict
compliance with cGMP requirements and other governmental regulations and corresponding foreign standards. Any failure by us or
our suppliers to comply with DEA requirements or FDA or foreign regulatory requirements could adversely affect our clinical research
activities and our ability to market and develop our products.
We
intend to rely on a third-party manufacturer to manufacture commercial quantities of AP-CD/LD, if approved, and we may rely on
other third-party manufacturers for other product candidates and any failure by a third-party manufacturer or supplier may delay
or impair our ability to commercialize our product candidates.
We
have manufactured our product candidates for our preclinical studies, Phase I clinical trials, Phase II clinical trials and Phase
III clinical trial in our own manufacturing facility. Completion of any current or future Phase III clinical trial and commercialization
of our product candidates will require access to, or development of, facilities to manufacture a sufficient supply of our product
candidates. Although we believe our facilities are sufficient to manufacture our product candidate needs for Phase III clinical
trials, we may be incorrect and we may not have the resources or facilities to manufacture our product candidates for Phase III
clinical trials.
With
respect to the future commercialization of the AP-CD/LD, we have decided to rely on LTS, a third-party contract manufacturer.
LTS will be the sole source of production of AP-CD/LD and the establishment of a manufacturing facility to produce commercial
quantities of AP-CD/LD requires substantial investment. Producing products in commercial quantities requires developing and adhering
to complex manufacturing processes that are different from the manufacture of products in smaller quantities for clinical trials,
including adherence to regulatory standards. Although we believe that we have developed processes and protocols that will enable
LTS to manufacture commercial-scale quantities of products at acceptable costs, we cannot provide assurance that such processes
and protocols will enable us to manufacture in quantities that may be required for commercialization of AP-CD/LD with yields and
at costs that will be commercially attractive. If LTS is unable to establish or maintain commercial manufacture of AP-CD/LD or
are unable to do so at costs that we currently anticipate, our business could be adversely affected. Furthermore, if our current
and future manufacturing and supply strategies are unsuccessful, we may be unable to conduct and complete any future Phase III
clinical trials or commercialize our product candidates in a timely manner, if at all.
We
have relied, and we expect to continue to rely, on third-party manufacturers for certain raw materials (excipients, solvents and
active pharmaceutical ingredients, or APIs), and for the commercial manufacturing of our AP-CD/LD. Our reliance on third parties
for the manufacture of these items increases the risk that we will not have sufficient quantities of these items or will not be
able to obtain such quantities at an acceptable cost or quality, which could delay, prevent or impair our development or commercialization
efforts. If the third-party manufacturers on whom we rely fail to supply these items and we need to enter into alternative arrangements
with a different supplier, it could delay our product development activities, as we would have to requalify the casting and assembly
processes pursuant to FDA requirements. If this failure of supply were to occur after we received approval for and commenced commercialization
of AP-CD/LD, we might be unable to meet the demand for this product and our business could be adversely affected. In addition,
because we do not have any control over the process or timing of the supply of the APIs used in AP-CD/LD, there is greater risk
that we will not have sufficient quantities of these APIs at an acceptable cost or quality, which could delay, prevent or impair
our development or commercialization efforts.
Manufacturing
our product candidates is subject to extensive governmental regulation. Our failure or the failure of these third parties in any
respect (including noncompliance with governmental regulations) could have a material adverse effect on our business, results
of operations and financial condition.
Manufacturing
our product candidates is subject to extensive governmental regulation. See “Item 1. Business - Government Regulation.”
Future FDA, state and foreign inspections may identify compliance issues at our facilities or at the facilities of our contract
manufacturers. Failure by our third-party manufacturers to pass such inspections and otherwise satisfactorily complete the FDA
or foreign regulatory agency approval regimen with respect to our product candidates may result in regulatory actions such as
the issuance of Form FDA 483 notices of observations or any foreign counterpart, warning letters or injunctions or the loss of
operating licenses. Based on the severity of the regulatory action, our clinical or commercial supply of the items manufactured
by third-party manufacturers could be interrupted or limited, which could have a material adverse effect on our business. In addition,
discovery of previously unknown problems with a product or the failure to comply with applicable requirements may result in restrictions
on a product, manufacturer or holder of an approved NDA, including withdrawal or recall of the product from the market or other
voluntary, FDA or foreign regulatory agency-initiated or judicial action that could delay or prohibit further marketing. Newly
discovered or developed safety or effectiveness data may require changes to a product’s approved labeling, including the
addition of new warnings and contraindications, and also may require the implementation of other risk management measures. Also,
new government requirements, including those resulting from new legislation, may be established, or the FDA’s or foreign
regulatory agency’s policies may change, which could delay or prevent regulatory approval of our products under development.
The FDA will likely condition grant of any marketing approval, if any, on a satisfactory on-site inspection of our manufacturing
facilities.
If
we are unable to use our manufacturing facility for any reason, the manufacture of clinical supplies of our candidates would be
delayed, which would harm our business.
We
currently manufacture all clinical supply of all our product candidates at our own manufacturing facility. If we were to lose
the use of our facility or equipment, our manufacturing facility and manufacturing equipment would be difficult to replace and
could require substantial replacement lead time and substantial additional funds. Our facility may be affected by natural disasters,
such as floods or fire, or we may lose the use of our facility due to manufacturing issues that arise at our facility, such as
contamination or regulatory concerns following a regulatory inspection of our facility. We do not currently have back-up capacity.
In the event of a loss of the use of all or a portion of our facility or equipment for the reasons stated above or any other reason,
we would be unable to manufacture any of our product candidates until such time as our facility could be repaired, rebuilt or
we are able to address other manufacturing issues at our facility. Although we currently maintain property insurance with personal
property limits of up to NIS 40.0 million, business interruption insurance coverage of up to NIS 44.0 million for damage to our
property and the disruption of our business from fire and other casualties, and up to NIS 120.0 million for expenses related to
the ACCORDANCE study, our Phase III clinical trial for AP-CD/LD, such insurance may not cover all occurrences of manufacturing
disruption or be sufficient to cover all of our potential losses in the event of occurrences that are covered and may not continue
to be available to us on acceptable terms, or at all.
We
are subject to extensive and costly government regulation.
The
products we are developing and planning to develop in the future are subject to extensive and rigorous domestic government regulation,
including regulation by the FDA, the CMS, the HHS, including
its Office of Inspector General, the Office of Civil Rights, which administers the privacy provisions of HIPAA, the U.S. Department of Justice, the Departments of Defense and Veterans
Affairs, to the extent our products are paid for directly or indirectly by those departments, state and local governments, and
their respective foreign equivalents. The FDA regulates the research, development, preclinical and clinical testing, manufacture,
safety, effectiveness, record keeping, reporting, labeling, storage, approval, advertising, promotion, sale, distribution, import
and export of pharmaceutical products under various regulatory provisions. If any drug products we develop are tested or marketed
abroad, they will also be subject to extensive regulation by foreign governments, whether or not we have obtained FDA approval
for a given product and its uses. Such foreign regulation may be equally or more demanding than corresponding U.S. regulation.
Government
regulation substantially increases the cost and risk of researching, developing, manufacturing, and selling our products. Our
failure to comply with these regulations could result in, by way of example, significant fines, criminal and civil liability,
product seizures, recalls, withdrawals, withdrawals of approvals, and exclusion and debarment from government programs. Any of
these actions, including the inability of our proposed products to obtain and maintain regulatory approval, would have a materially
adverse effect on our business, financial condition, results of operations and prospects.
In
addition to government regulation, rules and policies of professional and other quasi and non-governmental bodies and organizations
may impact the prescription of products, as well as the manner of their promotion, marketing, and education. Examples of such
bodies are the American Medical Association, the Accreditation Council of Continuing Medical Education, American College of Physicians
and the American Academy of Family Physicians.
Elections
in the United States could result in significant changes in, and uncertainty with respect to, legislation, regulation and government
policy. While it is not possible to predict whether and when any such changes will occur, changes at the federal level could significantly
impact our business and the health care industry; we are currently unable to predict whether any such changes would have a net
positive or negative impact on our business. To the extent that such changes have a negative impact on us or the health care industry,
including as a result of related uncertainty, these changes may materially and adversely impact our business, financial condition,
results of operations, cash flows and the trading price of our ordinary shares.
We
are subject to additional federal, state and local laws and regulations relating to our business, and our failure to comply with
those laws could have a material adverse effect on our results of operations and financial conditions.
In
the United States, our current and future activities with investigators, healthcare professionals, consultants, third-party payors,
patient organizations and customers are subject to healthcare regulation and enforcement by the federal government and the states
in which we conduct or will conduct our business. The laws that may affect our ability to operate include, but are not limited
to, the following:
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the
federal healthcare program Anti-Kickback Statute, which prohibits, among other things,
persons from knowingly and willfully soliciting, receiving, offering or paying remuneration,
directly or indirectly, in exchange for or to induce either the referral of an individual
for, or the purchase, order or recommendation of, any good, item, facility or service
for which payment may be made under government healthcare programs such as the Medicare
and Medicaid programs;
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the
Anti-Inducement Law, which prohibits persons from offering or paying remuneration to
Medicare and Medicaid beneficiaries to induce them to use items or services paid for
in whole or in part by the Medicare or Medicaid programs;
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the
Ethics in Patient Referrals Act of 1989, commonly referred to as the Stark Law, prohibits
physicians from referring Medicare or Medicaid patients for certain designated items
or services where that physician or family member has a financial interest in the entity
provided the designated item or service;
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federal
false claims laws, including the Federal False Claims Act, that prohibit, among other
things, individuals or entities from knowingly presenting, or causing to be presented,
claims for payment from Medicare, Medicaid or other government healthcare programs that
are false or fraudulent;
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federal
criminal laws that prohibit executing a scheme to defraud any healthcare benefit program
or making false statements relating to healthcare matters;
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HIPAA, which imposes criminal
and civil liability for executing a scheme to defraud any healthcare benefit program
and also imposes obligations, including mandatory contractual terms, with respect to
safeguarding the privacy, security and transmission of individually identifiable health
information;
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state
and local law equivalents of each of the above federal laws, such as anti-kickback and
false claims laws which may apply to items or services reimbursed by any third-party
payer, including commercial insurers; and
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federal,
state and local taxation laws applicable to the marketing and sale of our products.
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Further,
the PPACA, among other things, amended the intent requirement of the federal Anti-Kickback Statute and criminal healthcare fraud
statutes. A person or entity can now be found guilty of fraud or false claims under PPACA without actual knowledge of the statute
or specific intent to violate it. In addition, PPACA provides that the government may assert that a claim including items or services
resulting from a violation of the federal Anti-Kickback Statue constitutes a false or fraudulent claim for purposes of the false
claims statutes. Possible sanctions for violation of these anti-kickback laws include monetary fines, civil and criminal penalties,
exclusion from Medicare, Medicaid and other government programs, imprisonment, and forfeiture of amounts collected in violation
of such prohibitions. Any violations of these laws, or any action against us for violation of these laws, even if we successfully
defend against it, could result in a material adverse effect on our reputation, business, results of operations and financial
condition.
PPACA
also contains legislation commonly known as the Physician Payments Sunshine Act, or Sunshine Act, which requires applicable drug
and device manufacturers of covered pharmaceutical, biological, device and medical supplies to annually report to CMS information
regarding payments and transfers of value made to physicians and teaching hospitals and certain ownership and investment interests
held by physicians and their immediate family members, and for CMS to annually collect and display information reported by device
and pharmaceutical manufacturers. Pursuant to the Sunshine Act, CMS created the federal Open Payments Program, under which data
collected for each calendar year is published by CMS in June of the following calendar year. For example, data that was submitted
by applicable manufacturers for the 2017 calendar year was published on June 30, 2018. Failure to submit required information
may result in civil monetary for all payments, transfers of value or ownership or investment interests that are not reported.
Since
its enactment, there have been judicial and Congressional challenges to certain aspects of the PPACA. Congress and President Trump
have expressed their intentions to repeal or repeal and replace the PPACA. President Trump issued an Executive Order and both
chambers of Congress passed bills, all with the goal of fulfilling their intensions. However, to date, the Executive Order has
had limited effect and the Congressional activities have not resulted in the passage of a law to repeal and replace PPACA. If
a law is enacted, many if not all of the provisions of the PPACA may no longer apply to prescription drugs. While we are unable
to predict what changes may ultimately be enacted, to the extent that future changes affect how any future products are paid for
and reimbursed by government and private payers, our business could be adversely impacted. On December 14, 2018, a federal district
court in Texas ruled that the PPACA is unconstitutional as a result of the Tax Cuts and Jobs Act, the federal income tax reform
legislation previously passed by Congress and signed by President Trump on December 22, 2017, that eliminated the individual mandate
portion of the PPACA. The case,
Texas, et al, v. United States of America, et al.
, (N.D. Texas), is an outlier, and the
ruling has been stayed by the ruling judge. We are not able to state with any certainty what will be the impact of this court
decision on our business pending further court action and possible appeals.
In
addition, there has been a recent trend of increased federal, state and local regulation of payments made to physicians for marketing.
Some states, such as California, Massachusetts and Vermont, mandate implementation of corporate compliance programs, along with
the tracking and reporting of gifts, compensation and other remuneration to physicians, and some states limit or prohibit such
gifts. Various trade associations, such as the Advanced Medical Technology Association for devices and the Pharmaceutical Research
and Manufacturers of America for drugs, have adopted voluntary standards of ethical behavior that limit the amount of and circumstances
under which payments made be made to physicians. Additionally, there are state and local laws that require pharmaceutical sales
representatives to register or obtain a license with the state or locality and to disclose or report certain information about
their interactions with physicians.
The
scope and enforcement of these laws is uncertain and subject to change in the current environment of healthcare reform, especially
in light of the lack of applicable precedent and regulations. We cannot predict the impact on our business of any changes in these
laws. Federal or state regulatory authorities may challenge our current or future activities under these laws. Any such challenge
could have a material adverse effect on our reputation, business, results of operations, and financial condition. Any state or
federal regulatory review of us, regardless of the outcome, would be costly and time-consuming.
We
are subject to anti-kickback laws and regulations. Our failure to comply with these laws and regulations could have adverse consequences
to us.
There
are extensive U.S. federal and state laws and regulations prohibiting fraud and abuse in the healthcare industry that can result
in significant criminal and civil penalties. These federal laws include: the Anti-Kickback Statute, which prohibits certain business
practices and relationships, including the payment or receipt of compensation for the referral of patients whose care will be
paid by Medicare or other federal healthcare programs; the physician self-referral prohibition, commonly referred to as the Stark
Law; the anti-inducement law, which prohibits providers from offering anything to a Medicare or Medicaid beneficiary to induce
that beneficiary to use items or services covered by either program; the civil False Claims Act in 1986, or the False Claims Act,
which prohibits any person from knowingly presenting or causing to be presented false or fraudulent claims for payment by the
federal government, including the Medicare and Medicaid programs; and the Civil Monetary Penalties Law, which authorizes the U.S.
Department of Health and Human Services to impose civil penalties administratively for fraudulent or abusive acts. In addition,
the Sunshine Act requires device and drug manufacturers to report to the government any payments to physicians for consulting
services, research activities, educational programs, travel, food, entertainment and the like.
Sanctions
for violating these federal laws include criminal and civil penalties that range from punitive sanctions, damage assessments,
monetary penalties, imprisonment, integrity obligations and other oversight, denial of Medicare and Medicaid payments or exclusion
from the Medicare and Medicaid programs, or both, and debarment. As federal and state budget pressures continue, federal and state
administrative agencies may also continue to escalate investigation and enforcement efforts to reduce or eliminate waste and to
control fraud and abuse in governmental healthcare programs. Private enforcement of healthcare fraud has also increased, due in
large part to amendments to the False Claims Act that were designed to encourage private persons, known as relators, to file
qui
tam
actions on behalf of the government. The Fraud Enforcement and Recovery Act of 2009 further encouraged whistleblowers
to file suit under the
qui tam
provisions of the False Claims Act. A violation of any of these federal and state
fraud and abuse laws and regulations could have a material adverse effect on our liquidity and financial condition. An investigation
into the use by physicians of any of our products, if ever commercialized, may dissuade physicians from either purchasing or using
them, and could have a material adverse effect on our ability to commercialize those products.
In
addition, we are subject to analogous foreign laws and regulations, which may apply to sales or marketing arrangements and claims
involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers; foreign
laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines
and the relevant compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to
healthcare providers; foreign laws that require drug manufacturers to report information related to payments and other transfers
of value to physicians and other healthcare providers or marketing expenditures; and foreign laws governing the privacy and security
of health information in certain circumstances. Many of these laws differ from each other in significant ways and often are not
preempted by HIPAA, thus complicating compliance efforts.
Our
AP-CBD/THC, AP-THC and AP-CBD product candidates (collectively “AP-Cannabinoids”) use Cannabidiol and 9-Tetrahydrocannabinol
individually or in combination, which are subject to U.S. and international controlled substance laws and regulations; our ability
to commercialize the product will depend in part on the ultimate classification of the product under these laws and regulations.
Our
AP-Cannabinoids product candidates for treatment of various indications, including low back pain, neuropathic pain and
fibromyalgia, uses CBD, and THC. These products are quite distinct from crude herbal “medical marijuana,” and we
intend to seek FDA approval for these products in accordance with the customary FDA approval process and based on adequate
and well-controlled clinical studies. However, the active ingredients in our products are defined as controlled substances
under the federal CSA. Under the CSA, the DEA, places each drug that has abuse potential into one of five categories.
The five categories, referred to as Schedules I-V, carry different degrees of restriction. Each schedule is associated with a
distinct set of controls that affect manufacturers, researchers, healthcare providers, and patients. The controls include
registration with the DEA, labeling and packaging, production quotas, security, recordkeeping, and dispensing. Schedule I is
the most restrictive, covering drugs that have “no accepted medical use” in the United States and that have high
abuse potential.
If
and when any of our product candidates receive FDA approval, the DEA will make a scheduling determination and place the product
in a schedule other than Schedule I in order for it to be prescribed to patients in the United States. Accordingly, our ability
to ultimately commercialize the product will depend in part on the ultimate scheduling classification determination by DEA for
our product.
The
FDA has stated that it will continue to facilitate the work of companies interested in bringing safe, effective, and quality products
to market, including scientifically-based research concerning the medical uses of products derived from marijuana and the FDA
has approved synthetic compositions of the active ingredients found in marijuana. However, the use and abuse of controlled substances
is currently subject to political and social pressures from certain constituencies related to their usage which could result in
additional difficulty with respect to the approval of AP-Cannabinoids as a prescription pharmaceutical. For example, the FDA or
DEA may require us to generate more clinical data about the potential for abuse than that which is currently anticipated, which
could increase the cost and/or delay the launch of our product. In addition, DEA scheduling may limit our ability to achieve market
share in the United States due to restricted access and the disinclination of some physicians to prescribe more restrictive scheduled
controlled substances. For example, Schedule II drugs may not be refilled without a new prescription. These factors may limit
the commercial viability of AP-Cannabinoids in the United States.
Most
countries are parties to the Single Convention on Narcotic Drugs 1961, which governs international trade and domestic control
of narcotic substances, including the compounds in our AP-Cannabinoids product candidates. Countries may interpret and implement
their treaty obligations in a way that creates a legal obstacle to our obtaining approval to market our AP-Cannabinoids product
candidates. Approval to market in these countries could require amendments or modifications to existing laws and regulations that
such countries would be unwilling to undertake or may cause material delays in any marketing approval.
Reimbursement
may not be available for our products, which could make it difficult for us to sell our products profitably.
Market
acceptance and sales of our products will depend on coverage and reimbursement policies and may be affected by healthcare reform
measures. Government authorities and third-party payors, such as private health insurers and health maintenance organizations,
decide which products they will pay for and establish reimbursement levels. We cannot be sure that coverage and reimbursement
will be available for our products. We also cannot be sure that the amount of reimbursement available, if any, will not reduce
the demand for, or the price of, our products. If reimbursement is not available or is available only at limited levels, we may
not be able to successfully compete through sales of our proposed products.
Specifically,
in both the United States and some foreign jurisdictions, there have been a number of legislative and regulatory proposals to
change the healthcare system in ways that could affect our ability to sell our products profitably. In the United States, MMA,
changed the way Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases
by the elderly and certain others. Prior to MMA, Medicare did not cover most outpatient prescription drugs. MMA created a new
voluntary Part D, which covers outpatient drugs for Medicare beneficiaries and is administered by private insurance plans that
operate partially at-risk under contract with the CMS. These private Part D plans have incentives to keep costs down. MMA also
introduced a new reimbursement methodology based on average sales prices for physician-administered drugs. In addition, this legislation
provided authority for limiting the number of certain outpatient drugs that will be covered in any therapeutic class. As a result
of this legislation and the expansion of federal coverage of drug products, we expect that there will be additional pressure to
contain and reduce costs. These and future cost-reduction initiatives could decrease the coverage and price that we receive for
our products, if approved, and could seriously harm our business. While the MMA applies only to drug benefits for Medicare beneficiaries,
private payors often follow Medicare coverage policies and payment limitations in setting their own reimbursement rates, and any
reduction in reimbursement under Medicare may result in a similar reduction in payments from private payors.
In
March 2010, PPACA became law in the United States. The goal of PPACA is to reduce the cost of healthcare and substantially change
the way healthcare is financed by both governmental and private insurers. Among other measures, PPACA imposes increased rebates
on manufacturers for certain covered drug products reimbursed by state Medicaid programs. The PPACA remains subject to continuing
legislative scrutiny, including efforts by Congress to repeal and amend a number of its provisions, as well as administrative
actions delaying the effectiveness of key provisions. In addition, there have been lawsuits filed by various stakeholders pertaining
to certain portions of the PPACA that may have the effect of modifying or altering various parts of the law. Efforts to date to
amend or repeal the PPACA have generally been unsuccessful. We ultimately cannot predict with any assurance the ultimate effect
of the PPACA or changes to the PPACA on our Company, nor can we provide any assurance that its provisions will not have a material
adverse effect on our business, financial condition, results of operations, cash flows and the trading price of our ordinary shares.
In addition, we cannot predict whether new proposals will be made or adopted, when they may be adopted or what impact they may
have on us if they are adopted.
We
expect to experience pricing pressures in connection with the sale of our products generally due to the trend toward managed healthcare,
the increasing influence of health maintenance organizations, and additional legislative proposals. If we fail to successfully
secure and maintain adequate coverage and reimbursement for our future products or are significantly delayed in doing so, we will
have difficulty achieving market acceptance of our products and our business will be harmed.
We
expect the healthcare industry to face increased limitations on reimbursement, rebates and other payments as a result of healthcare
reform, which could adversely affect third-party coverage of our products and how much or under what circumstances healthcare
providers will prescribe or administer our products.
In
both the United States and other countries, sales of our products will depend in part upon the availability of reimbursement from
third-party payors, which include governmental authorities, managed care organizations and other private health insurers. Third-party
payors are increasingly challenging the price and examining the cost effectiveness of medical products and services.
Increasing
expenditures for healthcare have been the subject of considerable public attention in the United States. Both private and government
entities are seeking ways to reduce or contain healthcare costs. Numerous proposals that would effect changes in the U.S. healthcare
system have been introduced or proposed in Congress and in some state legislatures, including reducing reimbursement for prescription
products and reducing the levels at which consumers and healthcare providers are reimbursed for purchases of pharmaceutical products.
In
the United States, the MMA changed the way Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare
coverage for drug purchases by the elderly and introduced a new reimbursement methodology based on average sales prices for physician-administered
drugs. In recent years, Congress has considered further reductions in Medicare reimbursement for drugs administered by physicians.
CMS has issued and will continue to issue regulations to implement the law which will affect Medicare, Medicaid and other third-party
payors. Medicare, which is the single largest third-party payment program and which is administered by CMS, covers prescription
drugs in one of two ways. Medicare part B covers outpatient prescription drugs that are administered by physicians and Medicare
part D covers other outpatient prescription drugs, but through private insurers. Medicaid, a health insurance program for the
poor, is funded jointly by CMS and the states, but is administered by the states; states are authorized to cover outpatient prescription
drugs, but that coverage is subject to caps and to substantial rebates. CMS also has the authority to revise reimbursement rates
and to implement coverage restrictions for some drugs. Cost reduction initiatives and changes in coverage implemented through
legislation or regulation could decrease utilization of and reimbursement for any approved products, which in turn would affect
the price we can receive for those products. While the MMA and implementing regulations apply primarily to drug benefits for Medicare
beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement
rates. Therefore, any reduction in reimbursement that results from federal legislation or regulation may result in a similar reduction
in payments from private payors.
In
March 2010, President Obama signed into law the PPACA, a sweeping law intended to broaden access to health insurance, reduce or
constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare
and health insurance industries, impose new taxes and fees on pharmaceutical and medical device manufacturers and impose additional
health policy reforms. As amended, the PPACA expanded manufacturers’ rebate liability to include covered drugs dispensed
to individuals who are enrolled in Medicaid managed care organizations, increased the minimum rebate due for innovator drugs (both
single source drugs and innovator multiple source drugs) from 15.1% of average manufacturer price, or AMP, to 23.1% of AMP or
the difference between the AMP and best price, whichever is greater. The total rebate amount for innovator drugs is capped at
100.0% of AMP. The PPACA and subsequent legislation also narrowed the definition of AMP. Furthermore, the PPACA imposes a significant
annual, nondeductible fee on companies that manufacture or import certain branded prescription drug products. Substantial new
provisions affecting compliance have also been enacted, which may affect our business practices with healthcare practitioners,
and a significant number of provisions are not yet, or have only recently become, effective. The PPACA likely will continue to
put pressure on pharmaceutical pricing, especially under the Medicare program, and may also increase our regulatory burdens and
operating costs. We ultimately cannot predict with any assurance the ultimate effect of the PPACA or changes to the PPACA on our
Company, nor can we provide any assurance that its provisions will not have a material adverse effect on our business, financial
condition, results of operations, cash flows and the trading price of our ordinary shares. In addition, we cannot predict whether
new proposals will be made or adopted, when they may be adopted or what impact they may have on us if they are adopted.
In
addition, other legislative changes have been proposed and adopted since the PPACA was enacted. In August 2011, then President
Obama signed into law the Budget Control Act of 2011, which, among other things, creates the Joint Select Committee on Deficit
Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee did not achieve a targeted deficit
reduction of an amount greater than $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic
reduction to several government programs. This includes aggregate reductions to Medicare payments to healthcare providers of up
to 2.0% per fiscal year, starting in 2013. In January 2013, President Obama signed into law the American Taxpayer Relief Act of
2012, which, among other things, reduced Medicare payments to several categories of healthcare providers and increased the statute
of limitations period for the government to recover overpayments to providers from three to five years. The Bipartisan Budget
Act of 2015, signed into law on November 2, 2015, increased the rebates that generic drug manufacturers are obligated to pay under
the Medicaid program by applying an inflation-based rebate formula to generic drugs that previously only applied to brand name
drugs. If we ever obtain regulatory approval and commercialization of any of our product candidates, these new laws may result
in additional reductions in Medicare and other healthcare funding, which could have a material adverse effect on our customers
and accordingly, our financial operations. Legislative and regulatory proposals have been made to expand post-approval requirements
and restrict sales and promotional activities for pharmaceutical products. We cannot be sure whether additional legislative changes
will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes
on the marketing approvals of our product candidates may be.
In
the fourth quarter of 2018, the Trump Administration announced initiatives that it asserted are intended to result in purportedly
lower drug prices. The first initiative, announced on October 15, 2018, involved the plan for a new federal regulation that would
require pharmaceutical manufacturers to disclose the list prices of their respective prescription drugs in their television advertisements
for their products if the list price is greater than $35. With respect to the second initiative, on October 25, 2018, the CMS
gave Advance Notice of Proposed Rulemaking to propose the implementation of an “International Pricing Index” model
for Medicare Part B drugs and biologicals (single source drugs, biologicals, and biosimilars). Public comments were due on Dec.
31, 2018 with a proposed rule theoretically being offered as early as spring 2019 with target implementation of a 5 year pilot
program beginning in spring 2020. On January 31, 2019, the HHS Office of Inspector General proposed modifications to federal Anti-Kickback
Statute safe harbors which, among other things, may affect rebates paid by manufacturers to Medicare Part D plans, the purpose
of which is to further reduce the cost of drug products to consumers. While these initiatives have not been put into effect, we
are not in a position to know at this time whether they will ever become law or what impact the enactment either of these proposals
would have on our business.
Various
states, such as California, have also taken steps to consider and enact laws or regulations that are intended to increase the
visibility of the pricing of pharmaceutical products with the goal of reducing the prices at which we are able to sell our products.
Because these various actual and proposed legislative changes are intended to operate on a state-by-state level rather than a
national one, we cannot predict what the full effect of these legislative activities may be on our business in the future.
Although
we cannot predict the full effect on our business of the implementation of existing legislation, including the PPACA or the enactment
of additional legislation pursuant to healthcare and other legislative reform, we believe that legislation or regulations that
would reduce reimbursement for or restrict coverage of our products could adversely affect how much or under what circumstances
healthcare providers will prescribe or administer our products. This could materially and adversely affect our business by reducing
our ability to generate revenue, raise capital, obtain additional collaborators and market our products. In addition, we believe
the increasing emphasis on managed care in the United States has and will continue to put pressure on the price and usage of pharmaceutical
products, which may adversely impact product sales.
Governments
outside the United States tend to impose strict price controls, which may adversely affect our revenues, if any.
In
some countries, particularly the countries comprising the EU, the pricing of pharmaceuticals and certain other therapeutics is
subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable
time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we
may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies.
If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels,
our business could be materially harmed.
Changes
in regulatory requirements and guidance or unanticipated events during our clinical trials may occur, which may result in necessary
changes to clinical trial protocols, which could result in increased costs to us, delay our development timeline or reduce the
likelihood of successful completion of our clinical trials.
Changes
in regulatory requirements and guidance or unanticipated events during our clinical trials may occur, as a result of which we
may need to amend clinical trial protocols. Amendments may require us to resubmit our clinical trial protocols to IRBs for review
and approval, which may adversely affect the cost, timing and successful completion of a clinical trial. If we experience delays
in the completion of, or if we terminate, any of our clinical trials, the commercial prospects for our affected product candidates
would be harmed and our ability to generate product revenue would be delayed, possibly materially.
We
may be subject to extensive environmental, health and safety, and other laws and regulations in multiple jurisdictions.
Our
business involves the controlled use, directly or indirectly through our service providers, of hazardous materials, various biological
compounds and chemicals; therefore, we, our agents and our service providers may be subject to various environmental, health and
safety laws and regulations, including those governing air emissions, water and wastewater discharges, noise emissions, the use,
management and disposal of hazardous, radioactive and biological materials and wastes and the cleanup of contaminated sites. The
risk of accidental contamination or injury from these materials cannot be eliminated. If an accident, spill or release of any
regulated chemicals or substances occurs, we could be held liable for resulting damages, including for investigation, remediation
and monitoring of the contamination, including natural resource damages, the costs of which could be substantial. We are also
subject to numerous environmental, health and workplace safety laws and regulations, including those governing laboratory procedures,
exposure to blood-borne pathogens and the handling of biohazardous materials and chemicals. Although we maintain workers’
compensation insurance to cover the costs and expenses that may be incurred because of injuries to our employees resulting from
the use of these materials, this insurance may not provide adequate coverage against potential liabilities. Additional or more
stringent federal, state, local or foreign laws and regulations affecting our operations may be adopted in the future. We may
incur substantial capital costs and operating expenses and may be required to obtain consents to comply with any of these or certain
other laws or regulations and the terms and conditions of any permits or licenses required pursuant to such laws and regulations,
including costs to install new or updated pollution control equipment, modify our operations or perform other corrective actions
at our respective facilities or the facilities of our service providers. For instance, we have undergone inspections and obtained
approvals from various governmental agencies. We hold a business license with respect to testing, developing, storing and manufacturing
pharmaceutical products at our current location from the municipality of Jerusalem, which is accompanied by additional terms and
conditions approved by the Israeli Ministry of Environmental Protection, or the Ministry of Environmental Protection. The business
license is currently valid until March 31, 2019 and we are in the process of renewing it. We also hold a toxic substances permit
from the Ministry of Environmental Protection (the Hazardous Material Division) and a Certificate of GMP Compliance of a Manufacturer
from the Israeli Ministry of Health – Pharmaceutical Administration. Failure to renew any of the foregoing licenses and
permits may harm our on-going and future operations. In addition, fines and penalties may be imposed for noncompliance with environmental,
health and safety and other laws and regulations or for the failure to have, or comply with the terms and conditions of our business
license or, required environmental or other permits or consents.
Risks
Related to Our Intellectual Property
If
we fail to comply with our obligations in the agreements under which we license intellectual property rights from third parties
or these agreements are terminated or we otherwise experience disruptions to our business relationships with our licensors, we
could lose intellectual property rights that are important to our business.
We
license our core intellectual property from Yissum, an affiliate of Hebrew University and may need to obtain additional licenses
from others to advance our research and development activities or allow the commercialization of the Accordion Pill. We initially
entered into an exclusive license agreement with Yissum in 2000 and, in 2004 and 2005, we amended the license, which we refer
to, as amended, as the License Agreement. According to the License Agreement, we hold an exclusive license for developing, manufacturing
and/or world marketing of products that are directly or indirectly based on the patent owned by Yissum and/or other related intellectual
property (including any information, research results and related know-how). Yissum is not permitted to transfer such intellectual
property to third parties without our prior written consent. Yissum may obtain future financing from other entities for its research,
provided that such entities will not be granted rights in its results (including other intellectual property rights) in a way
prejudicing the rights granted to us in accordance with the License Agreement. We are entitled to grant perpetual sublicenses
of this intellectual property to third parties, and such third parties will not be required to assume any undertaking towards
Yissum. We are obligated to research and develop products that are based on the intellectual property of Yissum and to pay Yissum
from the date of first sale an amount equal to 3% of our net sales of products based on the intellectual property and 15% from
all other payments or benefits received from any such sublicense. In addition, also in consideration of the exclusive license
granted to us pursuant to the License Agreement, we issued 5,618 ordinary shares to Yissum. As of the date of this Annual Report,
no payments were paid and/or are due under the License Agreement. The License Agreement will be in effect until the latest of:
(1) the expiration of the last registered patent within the relevant territory in November 2020; and (2) 15 years from the date
of the first commercial sale. We also contracted with Yissum for laboratory services. In January 2008, we signed an addendum to
the License Agreement to conduct an additional joint development and study regarding a technology, different from the Accordion
Pill, for GR, of a drug. This addendum provides that the intellectual property rights produced as a result of the joint development
and study will be jointly owned and we are entitled to receive a license for Yissum’s share in these rights in return for
payment of royalties. One patent application has been filed by Yissum and us as a result of the development related to that joint
project, but this patent application was abandoned.
The
License Agreement imposes certain payment, reporting, confidentiality and other obligations on us. In the event that we were to
breach any of our obligations under the License Agreement and fail to cure such breach, Yissum would have the right to terminate
the License Agreement upon 30 days’ notice. In addition, Yissum has the right to terminate the License Agreement upon our
bankruptcy or receivership.
In
spite of our efforts, Yissum or any future licensor might conclude that we have materially breached our obligations under such
license agreements and might therefore terminate the license agreements, thereby removing or limiting our ability to develop and
commercialize products and technology covered by these license agreements. Most of our current product candidates are partly based
on the intellectual property licensed under the License Agreement, and therefore if the License Agreement with Yissum was terminated,
we may be required to cease our development and commercialization of the Accordion Pill. Any of the foregoing could have a material
adverse effect on our business, financial condition or results of operations.
Moreover,
disputes may arise regarding intellectual property subject to a licensing agreement, including:
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the
scope of rights granted under the license agreement and other interpretation-related issues;
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the
extent to which our product candidates, technology and processes infringe on intellectual
property of the licensor that is not subject to the licensing agreement;
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the
sublicensing of patent and other rights under our collaborative development relationships;
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our
diligence obligations under the license agreement and what activities satisfy those diligence
obligations;
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the
inventorship and ownership of inventions and know-how resulting from the joint creation
or use of intellectual property by our licensors and us and our partners; and
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the
priority of invention of patented technology.
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If
we fail to adequately protect, enforce or secure rights to the patents which were licensed to us or any patents we own or may
own in the future, the value of our intellectual property rights would diminish and our business and competitive position would
suffer.
Our
success, competitive position and future revenues, if any, depend in part on our ability to obtain and successfully leverage intellectual
property covering our products and product candidates, know-how, methods, processes and other technologies, to protect our trade
secrets, to prevent others from using our intellectual property and to operate without infringing the intellectual property rights
of third parties.
The
risks and uncertainties that we face with respect to our intellectual property rights include, but are not limited to, the following:
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the
degree and range of protection any patents will afford us against competitors;
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if
and when patents will be issued;
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whether
or not others will obtain patents claiming aspects similar to those covered by our own
or licensed patents and patent applications;
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we
may be subject to interference proceedings;
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we
may be subject to opposition or post-grant proceedings in foreign countries;
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any
patents that are issued may not provide sufficient protection;
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we
may not be able to develop additional proprietary technologies that are patentable;
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other
companies may challenge patents licensed or issued to us or our customers;
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other
companies may independently develop similar or alternative technologies, or duplicate our technologies;
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other
companies may design around technologies we have licensed or developed;
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enforcement
of patents is complex, uncertain and expensive; and
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we
may need to initiate litigation or administrative proceedings that may be costly whether
we win or lose.
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If
patent rights covering our products and methods are not sufficiently broad, they may not provide us with any protection against
competitors with similar products and technologies. Furthermore, if the USPTO, or foreign patent offices issue patents to us or
our licensors, others may challenge the patents or design around the patents, or the patent office or the courts may invalidate
the patents. Thus, any patents we own or license from or to third parties may not provide any protection against our competitors.
We
cannot be certain that patents will be issued as a result of any pending applications, and we cannot be certain that any of our
issued patents or patents licensed from Yissum (or any other third party in the future), will give us adequate protection from
competing products. For example, issued patents, including the patents licensed by us, may be circumvented or challenged, declared
invalid or unenforceable, or narrowed in scope.
In
addition, since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot
be certain that we were the first to make our inventions or to file patent applications covering those inventions.
It
is also possible that others may obtain issued patents that could prevent us from commercializing our products or require us to
obtain licenses requiring the payment of significant fees or royalties in order to enable us to conduct our business. As to those
patents that we have licensed, our rights depend on maintaining our obligations to the licensor under the applicable license agreement,
and we may be unable to do so.
In
addition to patents and patent applications, we depend upon trade secrets and proprietary know-how to protect our proprietary
technology. We require our employees, consultants, advisors and collaborators to enter into confidentiality agreements that prohibit
the disclosure of confidential information to any other parties. We also require our employees and consultants to disclose and
assign to us their ideas, developments, discoveries and inventions. These agreements may not, however, provide adequate protection
for our trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure.
Obtaining
and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other
requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for noncompliance
with these requirements.
Periodic
maintenance fees on any issued patent are due to be paid to the USPTO and foreign patent agencies in several stages over the lifetime
of the patent. The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary,
fee payment and other similar provisions during the patent application process. While an inadvertent lapse can in many cases be
cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance
can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights
in the relevant jurisdiction. Noncompliance events that could result in abandonment or lapse of a patent or patent application
include, but are not limited to, failure to respond to official actions within prescribed time limits, non-payment of fees and
failure to properly legalize and submit formal documents. In such an event, our competitors might be able to enter the market,
which could have a material adverse effect on our business.
Costly
litigation may be necessary to protect our intellectual property rights, and we may be subject to claims alleging the breach of
license or other agreements that we have entered into with third parties or the violation of the intellectual property rights
of others.
We
may face significant expense and liability as a result of litigation or other proceedings relating to patents and other intellectual
property rights of ours and others. In the event that another party has also filed a patent application or been issued a patent
relating to an invention or technology claimed by us in pending applications, we may be required to participate in an interference
proceeding declared by the USPTO to determine priority of invention, which could result in substantial uncertainties and costs
for us, even if the eventual outcome were favorable to us. We, or our licensors, also could be required to participate in interference
proceedings involving issued patents and pending applications of another entity. An adverse outcome in an interference proceeding
could require us to cease using the technology or to license rights from prevailing third parties.
We
have entered into license and collaboration agreements with other parties, including other pharmaceutical companies, and intend
to continue to do so in the future. We and our counterparties to these agreements have granted and may grant each other, and have
or may claim against each other, certain rights with respect to the other party’s intellectual property and the intellectual
property that we have or may jointly develop, including rights of co-ownership and rights of first refusal in the event that we
or our counterparties seek to subsequently license or sell such intellectual property. For instance, a former partner under a
terminated collaboration agreement previously indicated to us after the termination of such agreement that it believed it had
a right of first offer with respect to a future license by us of certain intellectual property that existed in 2008 and is contained
in AP-CD/LD. We do not believe that this party has any such right. However, the cost to us of any litigation or other proceeding
relating to our license and collaboration agreements, our licensed patents or patent applications or other intellectual property,
even if resolved in our favor, could be substantial, divert management’s resources and attention and delay or impair our
ability to license or sell such intellectual property. Our ability to enforce our intellectual property protection could be limited
by our financial resources, and may be subject to lengthy delays. A third party may claim that we are using inventions claimed
by their intellectual property and may go to court to stop us from engaging in our normal operations and activities, such as research,
development and the sale of any future products. Such lawsuits are expensive and would consume time and other resources. There
is a risk that the court will decide that we are infringing the third party’s intellectual property and will order us to
stop the activities claimed by the intellectual property, redesign our products or processes to avoid infringement or obtain licenses
(which may not be available on commercially reasonable terms or at all). In addition, there is a risk that a court will order
us to pay the other party damages for having infringed their patents. Furthermore, because of the substantial amount of discovery
required in connection with intellectual property litigation, there is a risk that some of our confidential information could
be compromised by disclosure during this type of litigation. There could also be public announcements of the results of hearings,
motions, or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative,
it could have a material adverse effect on the price of our ordinary shares.
Moreover,
there is no guarantee that any prevailing patent or other intellectual property owner would offer us a license so that we could
continue to engage in activities claimed by the patent or other intellectual property, or that such a license, if made available
to us, could be acquired on commercially acceptable terms. In addition, third parties may, in the future assert other intellectual
property infringement claims against us with respect to our product candidates, technologies or other matters. Any claims of infringement
or other breach of license or collaboration agreement asserted against us, whether or not successful, may have a material adverse
effect on us.
Third-party
claims of intellectual property infringement may prevent or delay our development and commercialization efforts.
Our
commercial success depends in part on our avoiding infringement of the patents and proprietary rights of third parties. However,
our research, development and commercialization activities may be subject to claims that we infringe or otherwise violate patents
or other intellectual property rights owned or controlled by third parties. There is a substantial amount of litigation, both
within and outside the United States, involving patent and other intellectual property rights in the biotechnology and pharmaceutical
industries, including patent infringement lawsuits, interferences, oppositions and inter partes reexamination proceedings before
the USPTO, and corresponding foreign patent offices. Numerous U.S. and foreign issued patents and pending patent applications,
which are owned by third parties, exist in the fields in which we are pursuing development candidates. As the biotechnology and
pharmaceutical industries expand and more patents are issued, the risk increases that the Accordion Pill or our product candidates
may be subject to claims of infringement of the patent rights of third parties.
Third
parties may assert that we are employing their proprietary technology without authorization. There may be third-party patents
or patent applications with claims to materials, formulations, methods of manufacture or methods for treatment related to the
use or manufacture of the Accordion Pill or our product candidates. Because patent applications can take many years to issue,
there may be currently pending patent applications which may later result in issued patents that the Accordion Pill or our product
candidates may infringe. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes
upon these patents. If any third-party patents were held by a court of competent jurisdiction to cover the patents protecting
the Accordion Pill or our product candidates, the holders of any such patents may be able to block our ability to commercialize
such product candidate unless we obtained a license under the applicable patents, or until such patents expire.
Similarly,
if any third-party patents were held by a court of competent jurisdiction to cover aspects of our formulations, processes for
manufacture or methods of use, including combination therapy, the holders of any such patents may be able to block our ability
to develop and commercialize the applicable product candidate unless we obtained a license or until such patent expires. In either
case, such a license may not be available on commercially reasonable terms or at all, or it may be non-exclusive, which could
result in our competitors gaining access to the same intellectual property.
Parties
making claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to further
develop and commercialize the Accordion Pill or our product candidates. Defense of these claims, regardless of their merit, would
involve substantial litigation expense and would be a substantial diversion of employee resources from our business. In the event
of a successful claim of infringement against us, we may have to pay substantial damages, including treble damages and attorneys’
fees for willful infringement, pay royalties, redesign our infringing products or obtain one or more licenses from third parties,
which may be impossible or require substantial time and monetary expenditure.
Parties
making claims against us may be able to sustain the costs of complex patent litigation more effectively than we can because they
have substantially greater resources. Furthermore, because of the substantial amount of discovery required in connection with
intellectual property litigation or administrative proceedings, there is a risk that some of our confidential information could
be compromised by disclosure. In addition, any uncertainties resulting from the initiation and continuation of any litigation
could have material adverse effect on our ability to raise additional funds or otherwise have a material adverse effect on our
business, results of operations, financial condition and prospects.
Patent
terms may be inadequate to protect our competitive position on our product candidates for an adequate amount of time.
Patents
have a limited lifespan. In the United States, if all maintenance fees are timely paid, the natural expiration of a patent is
generally 20 years from its earliest U.S. non-provisional filing date. Various extensions may be available, but the life of a
patent, and the protection it affords, is limited. Even if patents covering our product candidates are obtained, once the patent
life has expired, we may be open to competition from competitive products, including generics or biosimilars. Given the amount
of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates
might expire before or shortly after such candidates are commercialized. As a result, our owned and licensed patent portfolio
may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours. For example,
the patent family, IN-1, which we exclusively license from Yissum (i.e., Gastroretentive Controlled Release Pharmaceutical Dosage
Forms), is expected to expire in 2020. This patent family relates to the foldable pharmaceutical gastroretentive drug delivery
system for the controlled release of an active agent in the GI tract, which can be folded into a single capsule.
If
we are not able to obtain patent term extension or non-patent exclusivity in the United States under the Hatch-Waxman Act and
in foreign countries under similar legislation, thereby potentially extending the term of our marketing exclusivity for the Accordion
Pill or any product candidates, our business may be materially harmed.
Depending
upon the timing, duration and specifics of FDA marketing approval, one of the U.S. patents covering our product candidates or
the use thereof may be eligible for up to five years of patent term extension under the Hatch-Waxman Act. The Hatch-Waxman Act
allows a maximum of one patent to be extended per FDA approved product as compensation for the patent term lost during the FDA
regulatory review process. A patent term extension cannot extend the remaining term of a patent beyond a total of 14 years from
the date of product approval and only those claims covering such approved drug product, a method for using it or a method for
manufacturing it may be extended. Patent term extension also may be available in certain foreign countries upon regulatory approval
of our product candidates. Nevertheless, we may not be granted patent term extension either in the United States or in any foreign
country because of, for example, failing to exercise due diligence during the testing phase or regulatory review process, failing
to apply within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy
applicable requirements. Moreover, the term of extension, as well as the scope of patent protection during any such extension,
afforded by the governmental authority could be less than we request.
If
we are unable to obtain patent term extension or restoration, or the term of any such extension is less than we request, the period
during which we will have the right to exclusively market our product may be shortened and our competitors may obtain approval
of competing products following our patent expiration sooner, and our revenue could be reduced, possibly materially.
It
is possible that we will not obtain patent term extension under the Hatch-Waxman Act for a U.S. patent covering any of our product
candidates even where that patent is eligible for patent term extension, or if we obtain such an extension, it may be for a shorter
period than we had sought. Further, for our licensed patents, we do not have the right to control prosecution, including filing
with the USPTO, a petition for patent term extension under the Hatch-Waxman Act. Thus, if one of our licensed patents is eligible
for patent term extension under the Hatch-Waxman Act, we may not be able to control whether a petition to obtain a patent term
extension is filed, or obtained, from the USPTO.
Also,
there are detailed rules and requirements regarding the patents that may be submitted to the FDA for listing in the Approved Drug
Products with Therapeutic Equivalence Evaluations, or the Orange Book. We may be unable to obtain patents covering our product
candidates that contain one or more claims that satisfy the requirements for listing in the Orange Book. Even if we submit a patent
for listing in the Orange Book, the FDA may decline to list the patent, or a manufacturer of generic drugs may challenge the listing.
If one of our product candidates is approved and a patent covering that product candidate is not listed in the Orange Book, a
manufacturer of generic drugs would not have to provide advance notice to us of any abbreviated new drug application filed with
the FDA to obtain permission to sell a generic version of such product candidate.
Issued
patents covering our product candidates could be found invalid or unenforceable if challenged in court.
If
we or one of our licensing partners initiated legal proceedings against a third party to enforce a patent covering the Accordion
Pill or our product candidates, the defendant could counterclaim that the patent covering our product candidate is invalid and/or
unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability
are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including
lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone
connected with prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement, during
prosecution. Third parties may also raise similar claims before administrative bodies in the United States or abroad, even outside
the context of litigation. Such mechanisms include re-examination, post grant review, and equivalent proceedings in foreign jurisdictions
(e.g., opposition proceedings). Such proceedings could result in revocation or amendment to our patents in such a way that they
no longer cover the Accordion Pill or our product candidates. The outcome following legal assertions of invalidity and unenforceability
is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior
art, of which we and the patent examiner were unaware of during prosecution. If a defendant were to prevail on a legal assertion
of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our product candidates.
Such a loss of patent protection would have a material adverse impact on our business.
We
may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential
information of third parties or that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.
As
is common in the biotechnology and pharmaceutical industry, we employ individuals who were previously employed at universities
or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although we try to ensure
that our employees, consultants and independent contractors do not use the proprietary information or know-how of others in their
work for us, we may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or
otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of any of our employee’s
former employer or other third parties. Litigation may be necessary to defend against these claims. If we fail in defending any
such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel, which could
adversely impact our business. Even if we are successful in defending against such claims, litigation could result in substantial
costs and be a distraction to management and other employees.
We
may become subject to claims for remuneration or royalties for assigned service invention rights by our employees, which could
result in litigation and adversely affect our business.
A
significant portion of our intellectual property has been developed by our employees in the course of their employment for us.
Under the Israeli Patent Law, 5727-1967, or the Patent Law, inventions conceived by an employee in the course and as a result
of or arising from his or her employment with a company are regarded as “service inventions,” which belong to the
employer, absent a specific agreement between the employee and employer giving the employee service invention rights. The Patent
Law also provides that if there is no such agreement between an employer and an employee, the Israeli Compensation and Royalties
Committee, or the Committee, a body constituted under the Patent Law, shall determine whether the employee is entitled to remuneration
for his inventions. Case law clarifies that the right to receive consideration for “service inventions” can be waived
by the employee and that in certain circumstances, such waiver does not necessarily have to be explicit. The Committee will examine,
on a case-by-case basis, the general contractual framework between the parties, using interpretation rules of the general Israeli
contract laws. Further, the Committee has not yet determined one specific formula for calculating this remuneration (but rather
uses the criteria specified in the Patent Law). Although we generally enter into assignment-of-invention agreements with our employees
pursuant to which such individuals assign to us all rights to any inventions created in the scope of their employment or engagement
with us, we may face claims demanding remuneration in consideration for assigned inventions. As a consequence of such claims,
we could be required to pay additional remuneration or royalties to our current and/or former employees, or be forced to litigate
such claims, which could negatively affect our business. Further, litigation may be necessary to defend against these and other
claims challenging inventorship or our or our licensors’ ownership of our owned or in-licensed patents, trade secrets or
other intellectual property. If we or our licensors fail in defending any such claims, in addition to paying monetary damages,
we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, intellectual property that
is important to our product candidates. Even if we are successful in defending against such claims, litigation could result in
substantial costs and be a distraction to management and other employees. Any of the foregoing could have a material adverse effect
on our business, financial condition and results of operations.
We
rely on confidentiality agreements that could be breached and may be difficult to enforce, which could result in third parties
using our intellectual property to compete against us.
Although
we believe that we take reasonable steps to protect our intellectual property, including the use of agreements relating to the
non-disclosure of confidential information to third parties, as well as agreements that purport to require the disclosure and
assignment to us of the rights to the ideas, developments, discoveries and inventions of our employees and consultants while we
employ them, the agreements can be difficult and costly to enforce. Although we seek to obtain these types of agreements from
our contractors, consultants, advisors and research collaborators, to the extent that employees and consultants utilize or independently
develop intellectual property in connection with any of our projects, we cannot be certain that such agreements have been entered
into with all relevant parties, and we cannot be certain that our trade secrets and other confidential proprietary information
will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially
equivalent information and techniques. Furthermore, disputes may arise as to the intellectual property rights associated with
our products. If a dispute arises, a court may determine that the right belongs to a third party. We also rely on trade secrets
and proprietary know-how that we seek to protect in part by confidentiality agreements with our employees, contractors, consultants,
advisors or others. Despite the protective measures we employ, we still face the risk that:
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these
agreements may be breached;
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these
agreements may not provide adequate remedies for the applicable type of breach;
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our
trade secrets or proprietary know-how will otherwise become known; or
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our
competitors will independently develop similar technology or proprietary information.
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We
also seek to preserve the integrity and confidentiality of our confidential proprietary information by maintaining physical security
of our premises and physical and electronic security of our information technology systems, but it is possible that these security
measures could be breached. If any of our confidential proprietary information were to be lawfully obtained or independently developed
by a competitor, we would have no right to prevent such competitor from using that technology or information to compete with us,
which could harm our competitive position.
International
patent protection is particularly uncertain, and if we are involved in opposition proceedings in foreign countries, we may have
to expend substantial sums and management resources.
Filing,
prosecuting and defending patents on our product candidates in all countries throughout the world would be prohibitively expensive,
and our intellectual property rights in some countries outside the United States can be less extensive than those in the United
States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal
and state laws in the United States. Consequently, we may not be able to prevent third parties from practicing our inventions
in all countries outside the United States, or from selling or importing products made using our inventions in and into the United
States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection
to develop their own products and may also export infringing products to territories where we have patent protection, but enforcement
is not as strong as that in the United States. These products may compete with our products and our patents or other intellectual
property rights may not be effective or sufficient to prevent them from competing.
Many
companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions.
The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade
secrets, and other intellectual property protection, particularly those relating to biotechnology products, which could make it
difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights
generally. Proceedings to enforce our patent rights in foreign jurisdictions, whether or not successful, could result in substantial
costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated
or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against
us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially
meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain
a significant commercial advantage from the intellectual property that we develop or license.
Changes
in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.
Changes
in either the patent laws or interpretation of the patent laws in the United States could increase the uncertainties and costs
surrounding the prosecution of patent applications and the enforcement or defense of issued patents. Assuming that other requirements
for patentability are met, prior to March 2013, in the United States, the first to invent the claimed invention was entitled
to the patent, while outside the United States, the first to file a patent application was entitled to the patent. After March
2013, under the Leahy-Smith America Invents Act, or the America Invents Act, enacted in September 2011, the United States transitioned
to a first inventor to file system in which, assuming that other requirements for patentability are met, the first inventor to
file a patent application will be entitled to the patent on an invention regardless of whether a third party was the first to
invent the claimed invention. A third party that files a patent application in the USPTO after March 2013, but before us could
therefore be awarded a patent covering an invention of ours even if we had made the invention before it was made by such third
party. This will require us to be cognizant of the time from invention to filing of a patent application. Since patent applications
in the United States and most other countries are confidential for a period of time after filing or until issuance, we cannot
be certain that we or our licensors were the first to either (i) file any patent application related to our product candidates
or (ii) invent any of the inventions claimed in our or our licensor’s patents or patent applications.
The
America Invents Act also includes a number of significant changes that affect the way patent applications will be prosecuted and
also may affect patent litigation. These include allowing third party submission of prior art to the USPTO during patent prosecution
and additional procedures to attack the validity of a patent by USPTO administered post-grant proceedings, including post-grant
review, inter partes review, and derivation proceedings. Because of a lower evidentiary standard in USPTO proceedings compared
to the evidentiary standard in United States federal courts necessary to invalidate a patent claim, a third party could potentially
provide evidence in a USPTO proceeding sufficient for the USPTO to hold a claim invalid even though the same evidence would be
insufficient to invalidate the claim if first presented in a district court action. Accordingly, a third party may attempt to
use the USPTO procedures to invalidate our patent claims that would not have been invalidated if first challenged by the third
party as a defendant in a district court action. Therefore, the America Invents Act and its implementation could increase the
uncertainties and costs surrounding the prosecution of our owned or in-licensed patent applications and the enforcement or defense
of our owned or in-licensed issued patents, all of which could have a material adverse effect on our business, financial condition,
results of operations, and prospects.
In
addition, the patent positions of companies in the development and commercialization of pharmaceuticals are particularly uncertain.
Recent U.S. Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances and weakened
the rights of patent owners in certain situations. This combination of events has created uncertainty with respect to the validity
and enforceability of patents, once obtained. Depending on future actions by the U.S. Congress, the federal courts, and the USPTO,
the laws and regulations governing patents could change in unpredictable ways that could have a material adverse effect on our
existing patent portfolio and our ability to protect and enforce our intellectual property in the future.
Risks
Related to Ownership of Our Ordinary Shares
The
market price of our ordinary shares is volatile and you may sustain a complete loss of your investment.
The
market price of our ordinary shares may fluctuate significantly in response to numerous factors, some of which are beyond our
control, such as:
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inability
to obtain the approvals necessary to commence further clinical trials;
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results
of clinical and preclinical studies;
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announcements
of regulatory approval or the failure to obtain it, or specific label indications or
patient populations for its use, or changes or delays in the regulatory review process;
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announcements
of technological innovations, new products or product enhancements by us or others;
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adverse
actions taken by regulatory agencies with respect to our clinical trials, manufacturing
supply chain or sales and marketing activities;
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changes
or developments in laws, regulations or decisions applicable to our product candidates or patents;
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any
adverse changes to our relationship with manufacturers or suppliers;
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announcements
concerning our competitors or the pharmaceutical or biotechnology industries in general;
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achievement
of expected product sales and profitability or our failure to meet expectations;
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our
commencement of or results of, or involvement in, litigation, including, but not limited to, any product liability actions or
intellectual property infringement actions;
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any
major changes in our board of directors, management or other key personnel;
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legislation
in the United States, Europe and other foreign countries relating to the sale or pricing of pharmaceuticals;
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announcements
by us of significant strategic partnerships, out-licensing, in-licensing, joint ventures,
acquisitions or capital commitments;
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expiration
or terminations of licenses, research contracts or other collaboration agreements;
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public
concern as to the safety of therapeutics we, our licensees or others develop;
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success
of research and development projects;
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developments
concerning intellectual property rights or regulatory approvals;
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variations
in our and our competitors’ results of operations;
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changes
in earnings estimates or recommendations by securities analysts, if our ordinary shares
are covered by analysts;
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future
issuances of ordinary shares or other securities;
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general
market conditions, including the volatility of market prices for shares of biotechnology
companies generally, and other factors, including factors unrelated to our operating
performance; and
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the
other factors described in this “Risk Factors” section.
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These
factors and any corresponding price fluctuations may materially and adversely affect the market price of our ordinary shares,
which would result in substantial losses by our investors.
Further,
the stock market in general, the Nasdaq Capital Market and the market for biotechnology companies in particular, have experienced
extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies
like ours. Broad market and industry factors may negatively affect the market price of our ordinary shares regardless of our actual
operating performance. In addition, a systemic decline in the financial markets and related factors beyond our control may cause
our share price to decline rapidly and unexpectedly. Price volatility of our ordinary shares might be worse if the trading volume
of our ordinary shares is low. In the past, following periods of market volatility, shareholders have often instituted securities
class action litigation. If we were involved in securities litigation, it could have a substantial cost and divert resources and
attention of management from our business, even if we are successful. Future sales of our ordinary shares could also reduce the
market price of such shares.
Moreover,
the liquidity of our ordinary shares will be limited, not only in terms of the number of ordinary shares that can be bought and
sold at a given price, but by potential delays in the timing of executing transactions in our ordinary shares and a reduction
in security analyst and media’s coverage of our Company, if any. These factors may result in lower prices for our ordinary
shares than might otherwise be obtained and could also result in a larger spread between the bid and ask prices for our ordinary
shares. In addition, without a large float, our ordinary shares will be less liquid than the stock of companies with broader public
ownership and, as a result, the trading prices of our ordinary shares may be more volatile. In the absence of an active public
trading market, an investor may be unable to liquidate its investment in our ordinary shares. Trading of a relatively small volume
of our ordinary shares may have a greater impact on the trading price of our ordinary shares than would be the case if our public
float were larger. We cannot predict the prices at which our ordinary shares will trade in the future.
If
securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or
if they adversely change their recommendations or publish negative reports regarding our business or our ordinary shares, our
share price and trading volume could be negatively impacted.
The
trading market for our ordinary shares could be influenced by the research and reports that industry or securities analysts may
publish about us, our business, our market or our competitors. We do not have any control over these analysts, and we cannot provide
any assurance that analysts will cover us or provide favorable coverage. If any of the analysts who may cover us adversely change
their recommendation regarding our ordinary shares, or provide more favorable relative recommendations about our competitors,
our share price would likely decline. If any analyst who may cover us were to cease coverage of our Company or fail to regularly
publish reports on us, we could lose visibility in the financial markets, which in turn could negatively impact our share price
or trading volume.
We
have not paid, and do not intend to pay, dividends on our ordinary shares and, therefore, unless our ordinary shares appreciate
in value, our investors may not benefit from holding our ordinary shares.
We
have not paid any cash dividends on our ordinary shares since inception. We do not anticipate paying any cash dividends on
our ordinary shares in the foreseeable future. Moreover, the Israeli Companies Law, 5759-1999, or the Companies Law, imposes
certain restrictions on our ability to declare and pay dividends. As a result, investors in our ordinary shares will not be
able to benefit from owning our ordinary shares unless the market price of our ordinary shares becomes greater than the price
paid for the shares by such investors and they are able to sell such shares. We cannot assure you that you will ever be able
to resell our ordinary shares at a price in excess of the price paid for the shares.
The
public trading market for our ordinary shares is volatile and may result in higher spreads in share prices, which may limit the
ability of our investors to sell their ordinary shares at a profit, if at all.
Our
ordinary shares currently trade on the Nasdaq Capital Market. Our results of operations and the value of our investments are affected
by volatility in the securities markets. These difficulties and the volatility of the securities markets in general, and specifically
during economic slowdowns, have affected and may continue to affect our ability to realize our investments or to raise financing,
which in turn may result in us having to record impairment charges.
It
may be difficult for you to sell your ordinary shares at or above the purchase price therefor or at all.
Although
our ordinary shares now trade on the Nasdaq Capital Market, an active trading market for our ordinary shares may not be sustained.
The market price of our ordinary shares is highly volatile and could be subject to wide fluctuations in price as a result of various
factors, some of which are beyond our control. It may be difficult for you to sell your ordinary shares without depressing the
market price for the ordinary shares or at all. As a result of these and other factors, you may not be able to sell your ordinary
shares at current market price or at all. Further, an inactive market may also impair our ability to raise capital by selling
our ordinary shares and may impair our ability to enter into strategic partnerships or acquire companies or products by using
our ordinary shares as consideration.
The
tax benefits that are available to us require us to continue to meet various conditions and may be terminated or reduced in the
future, which could increase our costs and taxes.
We
have obtained a tax ruling from the Israeli Tax Authority according to which our activity has been qualified as an “industrial
activity,” as defined in the Law for the Encouragement of Capital Investments, 1959, generally referred to as the Investment
Law, and is eligible for tax benefits as a “Benefited Enterprise,” which will apply to the turnover attributed to
such enterprise, for a period of up to ten years from the first year in which we generated taxable income. The tax benefits under
the Benefited Enterprise status are scheduled to expire at the end of 2023.
In
order to remain eligible for the tax benefits of a Benefited Enterprise, we must continue to meet certain conditions stipulated
in the Investment Law and its regulations, as amended. In addition, in order to remain eligible for the tax benefits available
to the Benefited Enterprise, we must also comply with the conditions set forth in the tax ruling. These conditions include, among
other things, that the production, directly or through subcontractors, of all our products should be performed within certain
regions of Israel. If we do not meet these requirements, the tax benefits would be reduced or canceled.
There
is no assurance that our future taxable income will qualify as Benefited Enterprise income or that the benefits described above
will be available to us in the future.
Future
changes to tax laws could have a material adverse effect on us and reduce net returns to our shareholders.
Our
tax treatment is subject to changes in tax laws, regulations and treaties, or the interpretation thereof, tax policy initiatives
and reforms under consideration and the practices of tax authorities in jurisdictions in which we operate, as well as tax policy
initiatives and reforms related to the Organization for Economic Co-Operation and Development’s, or OECD, Base Erosion and
Profit Shifting, or BEPS Project, the European Commission’s state aid investigations and other initiatives.
Such
changes may include (but are not limited to) the taxation of operating income, investment income, dividends received or, in the
specific context of withholding tax, dividends paid. We are unable to predict what tax reform may be proposed or enacted in the
future or what effect such changes would have on our business, but such changes, to the extent they are brought into tax legislation,
regulations, policies or practices, could affect our financial position and overall or effective tax rates in the future in countries
where we have operations, reduce post-tax returns to our shareholders, and increase the complexity, burden and cost of tax compliance.
In
addition, on December 22, 2017, U.S. federal income tax legislation was signed into law (H.R. 1, “An Act to provide for
reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018”), informally
titled the Tax Cuts and Jobs Act, that significantly revised the U.S. Internal Revenue Code of 1986, as amended, or the Code.
The Tax Cuts and Jobs Act, among other things, contains significant changes to U.S. corporate income taxation, including the reduction
of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for business
interest expense to 30% of adjusted earnings (except with respect to certain small businesses), limitation of the deduction for
net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, immediate deductions
for certain new investments instead of deductions for depreciation expense over time, and the modification or repealing of many
business deductions and credits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the Tax
Cuts and Jobs Act is uncertain and our business and financial condition could be adversely affected. In addition, it is uncertain
if and to what extent various states will conform to the Tax Cuts and Jobs Act. The impact of this tax reform on holders of our
ordinary shares is also uncertain and could be adverse. We urge you to consult with your legal and tax advisors with respect to
this legislation and the potential tax consequences of investing in or holding our ordinary shares.
Tax
authorities may disagree with our positions and conclusions regarding certain tax positions, resulting in unanticipated costs,
taxes or non-realization of expected benefits.
A
tax authority may disagree with tax positions that we have taken, which could result in increased tax liabilities. For example,
the U.S. Internal Revenue Service or another tax authority could challenge our allocation of income by tax jurisdiction and the
amounts paid between our affiliated companies pursuant to our intercompany arrangements and transfer pricing policies, including
amounts paid with respect to our intellectual property development. Similarly, a tax authority could assert that we are subject
to tax in a jurisdiction where we believe we have not established a taxable nexus, often referred to as a “permanent
establishment” under international tax treaties, and such an assertion, if successful, could increase our expected
tax liability in one or more jurisdictions. A tax authority may take the position that material income tax liabilities, interest
and penalties are payable by us, in which case, we expect that we might contest such assessment. Contesting such an assessment
may be lengthy and costly and if we were unsuccessful in disputing the assessment, the implications could increase our anticipated
effective tax rate, where applicable.
We
expect to be characterized as a passive foreign investment company for the taxable years ending December 31, 2018, and December
31, 2019, and, as such, our U.S. shareholders may suffer adverse tax consequences.
Generally,
if for any taxable year 75% or more of our gross income is passive income, or at least 50% of our assets are held for the production
of, or produce, passive income, we would be characterized as a passive foreign investment company, or PFIC, for U.S. federal income
tax purposes. For the taxable year ending December 31, 2018, we believe that we were a PFIC. We also expect to be classified as
a PFIC for 2019. Furthermore, because PFIC status is determined annually and is based on our income, assets and activities for
the entire taxable year, it is not possible to determine with certainty whether we will be characterized as a PFIC for the 2019
taxable year until after the close of the year, and there can be no assurance that we will not be classified as a PFIC in any
future year. If we were to be characterized as a PFIC for U.S. federal income tax purposes in any taxable year during which a
U.S. Holder owns ordinary shares, such U.S. Holder could face adverse U.S. federal income tax consequences, including having gains
realized on the sale of our ordinary shares classified as ordinary income, rather than as capital gain, the loss of the preferential
rate applicable to dividends received on our ordinary shares by individuals who are U.S. Holders, and having interest charges
apply to distributions by us and the proceeds of share sales. Certain elections exist that may alleviate some adverse consequences
of PFIC status and would result in an alternative treatment (such as “qualified electing fund” and “mark-to-market”
treatment) of our ordinary shares. Upon request, we expect to provide the information necessary for U.S. Holders to make “qualified
electing fund elections” if we are classified as a PFIC. Each investor is urged to consult its tax advisor with respect
to the application of the PFIC rules.
For
purposes of this discussion, a “U.S. Holder” is a beneficial owner of our ordinary shares that, for U.S. federal income
tax purposes, is or is treated as any of the following: (a) an individual who is a citizen or resident of the United States; (b)
a corporation, or entity treated as a corporation for U.S. federal income tax purposes, created or organized under the laws of
the United States, any state thereof, or the District of Columbia; (c) an estate, the income of which is subject to U.S. federal
income tax regardless of its source; or (d) a trust that (1) is subject to the supervision of a U.S. court and the control of
one or more “United States persons” (within the meaning of Section 7701(a)(30) of the Code), or (2) has a valid election
in effect to be treated as a United States person for U.S. federal income tax purposes.
U.S.
persons who own 10% or more of our ordinary shares may be subject to adverse U.S. tax consequences under the U.S. controlled foreign
corporation rules.
If
we are or become a controlled foreign corporation, or “CFC,” “10% U.S. Shareholders” (as defined below)
may be taxed on their pro rata share of certain of our earnings, even if those earnings are not distributed by us. A non-U.S.
corporation is a “CFC” if more than 50% of its shares (by vote or value) are owned by “10% U.S. Shareholders.”
A U.S. person is a “10% U.S. Shareholder” if such person owns (directly, indirectly and/or constructively) 10% or
more of the total combined voting power of all classes of shares entitled to vote of such corporation or 10% or more of the total
value of shares of all classes of stock of such corporation.
In
general, if a U.S. person sells or exchanges stock in a foreign corporation and such person is a “10% U.S. Shareholder”
at any time during the 5-year period ending on the date of the sale or exchange when such foreign corporation was a CFC, any gain
from such sale or exchange may be treated as a dividend to the extent of the corporation’s earnings and profits attributable
to such shares that were accumulated during the period that the shareholder held the shares while the corporation was a CFC (with
certain adjustments).
The
CFC rules are complex. The foregoing is merely a summary of certain potential application of these rules. No assurances can be
given that we are not or will not become a CFC, and certain changes to the CFC constructive ownership rules introduced by the
Tax Cuts and Jobs Act could, under certain circumstances, cause us to be classified as a CFC. Each investor is urged to consult
its tax advisor with respect to the possible application of the CFC rules.
Your
percentage ownership in us may be diluted by future issuances of share capital, which could reduce your influence over matters
on which shareholders vote.
Our
board of directors has the authority, in most cases without action or vote of our shareholders, to issue all or any part of our
authorized but unissued shares, including ordinary shares issuable upon the exercise of outstanding warrants and options. Issuances
of additional shares would reduce your influence over matters on which our shareholders vote.
The
sale of a substantial number of our ordinary shares may cause the market price of our ordinary shares to decline.
Sales
of a substantial number of ordinary shares in the public market, or the perception that these sales could occur, could cause the
market price of our ordinary shares to decline. We had 33,232,988 ordinary shares outstanding as of December 31, 2018 and as of
the date of this Annual Report. All of our ordinary shares outstanding as of December 31, 2018 are freely tradable, without restriction,
in the public market in the United States. Any sales of our ordinary shares or any perception in the market that such sales may
occur could cause the trading price of our ordinary shares to decline.
In
addition, as of February 22, 2019 up to 4,785,263 ordinary shares that are subject to outstanding options under the 2005 Share
Option Plan, or the 2005 Plan, and outstanding options and reserved options for future issuance under our 2015 Incentive Compensation
Plan, or the 2015 Plan, will be eligible for sale in the public market. We have filed registration statements on Form S-8 under
the Securities Act to register such ordinary shares.
If
these additional ordinary shares are sold, or if it is perceived that they will be sold, in the public market, the trading price
of our ordinary shares could decline.
Because
our ordinary shares may be, or become, a “penny stock,” it may be more difficult for investors to sell their ordinary
shares, and the market price of our ordinary shares may be adversely affected.
Our
ordinary shares may be, or become, a “penny stock” if, among other things, the share price is below $5.00 per share,
they are not listed on a national securities exchange or they have not met certain net tangible asset or average revenue requirements.
Broker-dealers who sell penny stocks must provide purchasers of these stocks with a standardized risk-disclosure document prepared
by the SEC. This document provides information about penny stocks and the nature and level of risks involved in investing in the
penny-stock market. A broker must also give a purchaser, orally or in writing, bid and offer quotations and information regarding
broker and salesperson compensation, make a written determination that the penny stock is a suitable investment for the purchaser,
and obtain the purchaser’s written agreement to the purchase. Broker-dealers must also provide customers that hold penny
stock in their accounts with such broker-dealer a monthly statement containing price and market information relating to the penny
stock. If a penny stock is sold to an investor in violation of the penny stock rules, the investor may be able to cancel its purchase
and get its money back.
If
applicable, the penny stock rules may make it difficult for investors to sell their ordinary shares. Because of the rules and
restrictions applicable to a penny stock, there is less trading in penny stocks and the market price of our ordinary shares may
be adversely affected. Also, many brokers choose not to participate in penny stock transactions. Accordingly, investors may not
always be able to resell their ordinary shares publicly at times and prices that they feel are appropriate and the market price
of our ordinary shares may be adversely affected.
We
must meet the Nasdaq Capital Market’s continued listing requirements and comply with the other Nasdaq rules, or we may risk
delisting. Delisting could negatively affect the price of our ordinary shares, which could make it more difficult for us to sell
securities in a financing and for you to sell your ordinary shares.
We
are required to meet the continued listing requirements of the Nasdaq Capital Market and comply with the other Nasdaq rules, including
those regarding director independence and independent committee requirements, minimum shareholders’ equity, minimum share
price and certain other corporate governance requirements. If we do not meet these continued listing requirements, our ordinary
shares could be delisted. Delisting of our ordinary shares from the Nasdaq Capital Market would cause us to pursue eligibility
for trading on other markets or exchanges, or on the pink sheets. In such case, our shareholders’ ability to trade, or obtain
quotations of the market value of, our ordinary shares would be severely limited because of lower trading volumes and transaction
delays. These factors could contribute to lower prices and larger spreads in the bid and ask prices for our securities. There
can be no assurance that our ordinary shares, if delisted from the Nasdaq Capital Market in the future, would be listed on a national
securities exchange or quoted on a national quotation service, the OTCQB or OTC Pink. Delisting from the Nasdaq Capital Market,
or even the issuance of a notice of potential delisting, would also result in negative publicity, make it more difficult for us
to raise additional capital, adversely affect the market liquidity of our ordinary shares, reduce security analysts’ coverage
of us and diminish investor, supplier and employee confidence. In addition, as a consequence of any such delisting, our share
price could be negatively affected and our shareholders would likely find it more difficult to sell, or to obtain accurate quotations
as to the prices of, our ordinary shares.
We
incur significant costs as a result of the listing of our ordinary shares for trading on the Nasdaq Capital Market and thereby
being a public company in the United States, and our management is required to devote substantial additional time to new compliance
initiatives as well as to compliance with ongoing U.S. reporting requirements.
As
a public company in the U.S., we incur significant accounting, legal and other expenses in order to comply with requirements of
the SEC, and the Nasdaq Capital Market, including requirements under Section 404 and other provisions of the Sarbanes-Oxley Act.
These rules and regulations have increased our legal and financial compliance costs, introduced new costs such as investor relations,
stock exchange listing fees and shareholder reporting, and made some activities more time consuming and costly. Any future changes
in the laws and regulations affecting public companies in the United States, including Section 404 and other provisions of the
Sarbanes-Oxley Act, the rules and regulations adopted by the SEC and the Nasdaq Capital Market, for so long as they apply to us,
will result in increased costs to us as we respond to such changes.
Failure
to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse
effect on our business, results of operation or financial condition. In addition, current and potential shareholders could lose
confidence in our financial reporting, which could have a material adverse effect on the price of our ordinary shares.
Effective
internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We are required to
document and test our internal control procedures in order to satisfy the requirements of Section 404, which requires annual management
assessments of the effectiveness of our internal controls over financial reporting. If we fail to maintain the adequacy of our
internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that
we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section
404. Disclosing deficiencies or weaknesses in our internal controls, failing to remediate these deficiencies or weaknesses in
a timely fashion or failing to achieve and maintain an effective internal control environment may cause investors to lose confidence
in our reported financial information, which could have a material adverse effect on the price of our ordinary shares. If we cannot
provide reliable financial reports or prevent fraud, our operating results could be harmed.
As
of January 1, 2019, we are required to report as a U.S. domestic issuer and the benefits of a “foreign private issuer”
are no longer available to us, which will likely result in additional costs and expenses for us.
As
of June 30, 2018, the last business day of our second quarter, we determined that we no longer qualify as a foreign private issuer
and as a result from January 1, 2019, we commenced reporting as a U.S. domestic issuer. As a result:
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we
are required to report on forms that are applicable to U.S. companies, such as Forms
10-K, 10-Q and 8-K, rather than the forms formerly used by us, such as Forms 20-F and 6-K;
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we
are required to prepare our consolidated financial statements in accordance with U.S.
GAAP rather than IFRS;
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we
are required to include substantially more information in proxy statements than previously
provided;
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we
can no longer make use of the shelf registration statement on Form F-3 that was declared
effective on June 19, 2017, and will need to file a new shelf registration statement on the
relevant form applicable to domestic issuers should we wish to engage in certain capital raising
activities;
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if
we engage in capital raising activities, there is a higher likelihood that investors
may require us to file resale registration statements with the SEC as a condition to
any such financing; and
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we
may be required to modify certain of our policies to comply with accepted governance
practices associated with U.S. domestic issuers.
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We
expect that complying with these additional requirements would increase our legal and audit fees which in turn, could have a material
adverse effect on our business, financial condition and results of operations. In addition, as a result of being considered a
“domestic issuer” for reporting and disclosure requirements:
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we
are no longer exempt from certain of the provisions of U.S. securities laws such as (i)
Regulation FD, which restricts the selective disclosure of material information, (ii)
exemptions for filing beneficial ownership reports under Section 16(a) of the Exchange
Act for executive officers, directors and 10% shareholders (Forms 3, 4, and 5), and (iii)
the Section 16(b) short swing profit rules;
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we
are no longer permitted to disclose compensation information for our executive officers
on an aggregate rather than an individual basis, although such exemption may still be
available to us as long as we remain an “emerging growth company”; and
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we
have lost the ability to rely upon exemptions from Nasdaq corporate governance requirements
that are available to foreign private issuers.
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While
we currently qualify as an “emerging growth company” under the JOBS Act, we will cease to be an emerging growth company
on or before the end of 2020, and, to the extent we do not qualify as a smaller reporting company, at such time our costs and
the demands placed upon our management will increase.
As
an “emerging growth company” under the JOBS Act, we are permitted to, and intend to, rely on exemptions from certain
disclosure requirements. Most of such requirements relate to disclosures that we would otherwise be required to make, having ceased
to be a foreign private issuer. While we currently qualify as an “emerging growth company” under the JOBS Act, we
will cease to be an emerging growth company on or before the end of 2020, and, to the extent we do not qualify as a smaller reporting
company, at such time our costs and the demands placed upon our management will increase unless we qualify as a smaller reporting
company. For so long as we remain an emerging growth company, we will not be required to:
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have
an auditor report on our internal control over financial reporting pursuant to Section
404(b) of the Sarbanes-Oxley Act;
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comply
with any requirement that may be adopted by the Public Company Accounting Oversight Board,
or PCAOB, regarding mandatory audit firm rotation or a supplement to the auditor’s
report providing additional information about the audit and the consolidated financial
statements (auditor discussion and analysis);
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submit
certain executive compensation matters to shareholders advisory votes pursuant to the
“say on frequency” and “say on pay” provisions (requiring a non-binding
shareholder vote to approve compensation of certain executive officers) and the “say
on golden parachute” provisions (requiring a non-binding shareholder vote to approve
golden parachute arrangements for certain executive officers in connection with mergers
and certain other business combinations) of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010; and
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include
detailed compensation discussion and analysis in our filings under the Exchange Act,
and instead may provide a reduced level of disclosure concerning executive compensation.
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We
are also a smaller reporting company, and we will remain a smaller reporting company until the fiscal year following the determination
that our voting and non-voting common shares held by non-affiliates is more than $250 million measured on the last business day
of our second fiscal quarter, or our annual revenues are more than $100 million during the most recently completed fiscal year
and our voting and non-voting common shares held by non-affiliates is more than $700 million measured on the last business day
of our second fiscal quarter. Similar to emerging growth companies, smaller reporting companies are able to provide simplified
executive compensation disclosure, are exempt from the auditor attestation requirements of Section 404, and have certain other
reduced disclosure obligations, including, among other things, being required to provide only two years of audited financial statements
and not being required to provide selected financial data, supplemental financial information or risk factors.
We
have elected to take advantage of certain of the reduced reporting obligations. We cannot predict whether investors will find
our ordinary shares less attractive if we rely on these exemptions. If some investors find our ordinary shares less attractive
as a result, there may be a less active trading market for our ordinary shares and our stock price may be reduced or more volatile.
Risks
Related to Our Operations in Israel
Potential
political, economic and military instability in the State of Israel, where some of our senior management, our head executive office,
research and development, and manufacturing facilities are located, may adversely affect our results of operations.
Our
head executive office, our research and development facilities, our current manufacturing facility, as well as some of our clinical
sites are located in Israel. Some of our officers and directors are residents of Israel. Accordingly, political, economic and
military conditions in Israel and the surrounding region may directly affect our business and operations. Since the establishment
of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries, as
well as terrorist acts committed within Israel by hostile elements. Any hostilities involving Israel or the interruption or curtailment
of trade between Israel and its trading partners could adversely affect our operations and results of operations. During November
2012 and from July through August 2014, Israel was engaged in an armed conflict with a militia group and political party who controls
the Gaza Strip, and during the summer of 2006, Israel was engaged in an armed conflict with Hezbollah, a Lebanese Islamist Shiite
militia group and political party. In December 2008 and January 2009 there was an escalation in violence among Israel, Hamas,
the Palestinian Authority and other groups, as well as extensive hostilities along Israel’s border with the Gaza Strip,
which resulted in missiles being fired from the Gaza Strip into Southern Israel. Similar hostilities accompanied by missiles being
fired from the Gaza Strip into Southern Israel, as well at areas more centrally located near Tel Aviv and at areas surrounding
Jerusalem, occurred during November 2012 and July through August 2014. These conflicts involved missile strikes against civilian
targets in various parts of Israel, including areas in which our employees and some of our consultants are located, and negatively
affected business conditions in Israel.
Since
February 2011, Egypt has experienced political turbulence and an increase in terrorist activity in the Sinai Peninsula following
the resignation of Hosni Mubarak as president. This included protests throughout Egypt, and the appointment of a military regime
in his stead, followed by the elections to parliament which brought groups affiliated with the Muslim Brotherhood (which had been
previously outlawed by Egypt), and the subsequent overthrow of this elected government by a military regime. Such political turbulence
and violence may damage peaceful and diplomatic relations between Israel and Egypt, and could affect the region as a whole. Similar
civil unrest and political turbulence has occurred in other countries in the region, including Syria which shares a common border
with Israel, and is affecting the political stability of those countries. Since April 2011, internal conflict in Syria has escalated,
and evidence indicates that chemical weapons have been used in the region. Intervention may be contemplated by outside parties
in order to prevent further chemical weapon use. This instability and any intervention may lead to deterioration of the political
and economic relationships that exist between the State of Israel and some of these countries, and may have the potential for
additional conflicts in the region. In addition, Iran has threatened to attack Israel and may be developing nuclear weapons. Iran
is also believed to have a strong influence among extremist groups in the region, such as Hamas in Gaza, Hezbollah in Lebanon,
and various rebel militia groups in Syria. These situations may potentially escalate in the future to more violent events which
may affect Israel and us. Any armed conflicts, terrorist activities or political instability in the region could adversely affect
business conditions and could harm our results of operations and could make it more difficult for us to raise capital. Parties
with whom we do business have sometimes declined to travel to Israel during periods of heightened unrest or tension, forcing us
to make alternative arrangements when necessary in order to meet our business partners face to face. In addition, the political
and security situation in Israel may result in parties with whom we have agreements involving performance in Israel claiming that
they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions in such agreements.
Our
commercial insurance does not cover losses that may occur as a result of events associated with the security situation in the
Middle East. Although the Israeli government currently covers the reinstatement value of direct damages that are caused by terrorist
attacks or acts of war, we cannot assure you that this government coverage will be maintained or that it will sufficiently cover
our potential damages. Any losses or damages incurred by us could have a material adverse effect on our business. Any armed conflicts
or political instability in the region would likely negatively affect business conditions and could harm our results of operations.
Further,
in the past, the State of Israel and Israeli companies have been subjected to economic boycotts. Several countries still restrict
business with the State of Israel and with Israeli companies. These restrictive laws and policies may have an adverse impact on
our operating results, financial condition or the expansion of our business. A campaign of boycotts, divestment and sanctions
has been undertaken against Israel, which could also adversely impact our business.
Our
operations may be disrupted as a result of the obligation of Israeli citizens to perform military service.
Many
Israeli citizens are obligated to perform up to 36 days, and in some cases more, of annual military reserve duty each year until
they reach the age of 40 (or older, for reservists who are military officers or who have certain occupations) and, in the event
of a military conflict, may be called to active duty. In response to increases in terrorist activity, there have been periods
of significant call-ups of military reservists. It is possible that there will be military reserve duty call-ups in the future.
Our operations could be disrupted by such call-ups, which may include the call-up of members of our management. Such disruption
could materially adversely affect our business, financial condition and results of operations.
Investors
may have difficulties enforcing a U.S. judgment, including judgments based upon the civil liability provisions of the U.S. federal
securities laws against us, or our executive officers and directors or asserting U.S. securities laws claims in Israel.
Not
all of our directors or officers are residents of the United States. Most of our assets and those of our non-U.S. directors and
officers are located outside the United States. Service of process upon us or our non-U.S. resident directors and officers and
enforcement of judgments obtained in the United States against us or our non-U.S. directors and executive officers may be
difficult to obtain within the United States. We have been informed by our legal counsel in Israel that it may be difficult to
assert claims under U.S. securities laws in original actions instituted in Israel or obtain a judgment based on the civil liability
provisions of U.S. federal securities laws. Israeli courts may refuse to hear a claim based on a violation of U.S. securities
laws against us or our non-U.S. officers and directors because Israel may not be the most appropriate forum to bring such a claim.
In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable
to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact, which can be
a time-consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There is little binding
case law in Israel addressing the matters described above. Israeli courts might not enforce judgments rendered outside Israel,
which may make it difficult to collect on judgments rendered against us or our non-U.S. officers and directors.
Moreover,
among other reasons, including but not limited to, fraud or absence of due process, or the existence of a judgment which is at
variance with another judgment that was given in the same matter if a suit in the same matter between the same parties was pending
before a court or tribunal in Israel, an Israeli court will not enforce a foreign judgment if it was given in a state whose laws
do not provide for the enforcement of judgments of Israeli courts (subject to exceptional cases) or if its enforcement is likely
to prejudice the sovereignty or security of the State of Israel.
Under
current Israeli law, we may not be able to enforce employees’ covenants not to compete and therefore may be unable to prevent
our competitors from benefiting from the expertise of some of our former employees.
We
generally enter into non-competition agreements with our key employees, in most cases within the framework of their employment
agreements. These agreements prohibit our key employees, if they cease working for us, from competing directly with us or working
for our competitors for a limited period. Under applicable Israeli law, we may be unable to enforce these agreements or any part
thereof. If we cannot enforce our non-competition agreements with our employees, then we may be unable to prevent our competitors
from benefiting from the expertise of our former employees, which could materially adversely affect our business, results of operations
and ability to capitalize on our proprietary information.
Your
rights and responsibilities as our shareholder will be governed by Israeli law, which may differ in some respects from the rights
and responsibilities of shareholders of U.S. corporations.
We
are incorporated under Israeli law. The rights and responsibilities of holders of our ordinary shares are governed by our articles
of association and the Companies Law. These rights and responsibilities differ in some respects from the rights and responsibilities
of shareholders in typical U.S. corporations. In particular, pursuant to the Companies Law each shareholder of an Israeli company
has to act in good faith in exercising his or her rights and fulfilling his or her obligations toward the Company and other shareholders
and to refrain from abusing his or her power in the Company, including, among other things, in voting at the general meeting of
shareholders and class meetings, on amendments to a company’s articles of association, increases in a company’s authorized
share capital, mergers, and transactions requiring shareholders’ approval under the Companies Law. In addition, a controlling
shareholder of an Israeli company or a shareholder who knows that it possesses the power to determine the outcome of a shareholder
vote or who has the power to appoint or prevent the appointment of a director or officer in the Company, or has other powers toward
the Company has a duty of fairness toward the Company. However, Israeli law does not define the substance of this duty of fairness.
There is little case law available to assist in understanding the implications of these provisions that govern shareholder behavior.
Provisions
of Israeli law and our articles of association may delay, prevent or make undesirable an acquisition of all or a significant portion
of our shares or assets.
Certain
provisions of Israeli law and our articles of association could have the effect of delaying or preventing a change in control
and may make it more difficult for a third party to acquire us or for our shareholders to elect different individuals to our board
of directors, even if doing so would be beneficial to our shareholders, and may limit the price that investors may be willing
to pay in the future for our ordinary shares. For example, Israeli corporate law regulates mergers and requires that a tender
offer be effected when more than a specified percentage of shares in a company are purchased. Further, Israeli tax considerations
may make potential transactions undesirable to us or to some of our shareholders whose country of residence does not have a tax
treaty with Israel granting tax relief to such shareholders from Israeli tax. With respect to certain mergers, Israeli tax law
may impose certain restrictions on future transactions, including with respect to dispositions of shares received as consideration,
for a period of two years from the date of the merger.
Furthermore,
under the Encouragement of Research, Development and Technological Innovation in the Industry Law 5744-1984 (formerly known as
the Law for the Encouragement of Research and Development in Industry 5744-1984), and the regulations guidelines, rules, procedures
and benefit tracks thereunder, or the Innovation Law, to which we are subject due to our receipt of grants from the Israel Innovation
Authority, or IIA (formerly known as the Office of the Chief Scientist of the Ministry of Economy and Industry, or the OCS), a
recipient of IIA grants such as us must report to IIA regarding any change of control or any change in the holding of its means
of control of our Company which transforms any non-Israeli citizen or resident into an “interested party”, as defined
in the Israeli Securities Law 5728-1968, or the Israeli Securities Law, and in the latter event, the non-Israeli citizen or resident
shall execute an undertaking in favor of IIA, in a form prescribed by IIA.
We
have received Israeli government grants for certain of our research and development activities. The terms of these grants may
require us to satisfy specified conditions in order to manufacture products and transfer technologies outside of Israel. We may
be required to pay penalties in addition to the repayment of the grants. Such grants may be terminated or reduced in the future,
which would increase our costs.
Under
the Innovation Law, research and development programs that meet specified criteria and are approved by a committee of the IIA
are eligible for grants. The grants awarded are typically up to 50% of the project’s expenditures, as determined by the
IIA committee and subject to the benefit track under which the grant was awarded. A company that receives a grant from the IIA,
or a Participating Company, is typically required to pay royalties to IIA on income generated from products incorporating know-how
developed using such grants (including income derived from services associated with such products), until 100% of the U.S. dollar-linked
grant plus annual LIBOR interest is repaid. The rate of royalties to be paid may vary between different benefits tracks, as shall
be determined by IIA. In general, the rate of royalties varies between 3% to 5% of the income generated from the IIA supported
products.
The
obligation to pay royalties is contingent on actual income generated from such products and services. In the absence of such income,
no payment of royalties is required. It should be noted that the restrictions under the Innovation Law will continue to apply
even after the repayment of such royalties in full by the Participating Company including restrictions on the sale, transfer or
assignment outside of Israel of know-how developed as part of the programs under which the grants were given.
The
terms of the grants under the Innovation Law also (generally) require that the products developed as part of the programs under
which the grants were given be manufactured in Israel and that the know-how developed thereunder may not be transferred outside
of Israel, unless prior written approval is received from the IIA (such approval is not required for the transfer of a portion
of the manufacturing capacity which does not exceed, in the aggregate, 10% of the portion declared to be manufactured outside
of Israel in the applications for funding (in which case only notification is required), and additional payments are required
to be made to IIA, as described below. It should be noted that this does not restrict the export of products that incorporate
the funded know-how.
Ordinarily,
as a condition to obtaining approval to manufacture outside Israel, we may be required to pay royalties at an increased rate and
up to an increased cap amount of three times the total amount of the IIA grants, plus interest accrued thereon, depending on the
manufacturing volume to be performed outside Israel. The IIA approved our request to transfer 100% of the manufacturing rights
of our AP-CD/LD product candidate that was developed under one of the IIA funded programs to a non-Israeli manufacturer. As a
result, we will be required to pay the IIA royalties from revenue generated from the AP-CD/LD product candidate at an increased
rate, and up to an increased cap amount. The IIA noted that the approval granted was exceptional and that the IIA will not approve
manufacturing of additional product candidates out of Israel.
The
Innovation Law restricts the ability to transfer know-how funded by IIA outside of Israel. Transfer of IIA-funded know-how outside
of Israel requires prior approval and is subject to payment of a redemption fee to the IIA calculated according to a formula provided
under the Innovation Law. A transfer for the purpose of the Innovation Law is generally interpreted very broadly and includes,
inter alia, any actual sale of the IIA-funded know-how, any license to develop the IIA-funded know-how or the products resulting
from such IIA-funded know-how or any other transaction, which, in essence, constitutes a transfer of the IIA-funded know-how.
Generally, a mere license solely to market products resulting from the IIA-funded know-how would not be deemed a transfer for
the purpose of the Innovation Law.
The IIA approval to
transfer know-how created, in whole or in part, in connection with an IIA-funded project to a third party outside Israel where
the transferring company remains an operating Israeli entity is subject to payment of a redemption fee to IIA calculated according
to a formula provided under the Innovation Law that is based, in general, on the ratio between the aggregate IIA grants received
by the company (including the accrued interest) and the company’s aggregate investments in the project that was funded by
these IIA grants, multiplied by the transaction consideration (taking into account any depreciation in accordance with a formula
set forth in the in the Innovation Law) less any royalties already paid to the IIA. The transfer of such know-how to a party outside
Israel where the transferring company ceases to exist as an Israeli entity is subject to a redemption fee formula that is based,
in general, on the ratio between aggregate IIA grants received by the company (including the accrued interest) and the company’s
aggregate research and development expenses, multiplied by the transaction consideration (taking into account any depreciation
in accordance with a formula set forth in the Innovation Law) less any royalties already paid to the IIA. The Innovation Law establishes
a maximum payment amount of the redemption fee paid to the IIA under the above mentioned formulas and differentiates between two
situations: (i) in the event that the company sells its IIA-funded know-how, in whole or in part, or is sold as part of certain
merger and acquisition transactions, and subsequently ceases to conduct business in Israel, the maximum redemption fee under the
above mentioned formulas shall be no more than six times the amount received (plus accrued interest) for the applicable know-how
being transferred; and (ii) in the event that following the transactions described above (i.e., asset sale of IIA-funded know-how
or transfer as part of certain merger and acquisition transactions), the company continues to conduct its research activity in
Israel (for at least three years following such transfer, keeps on staff at least 75% of the number of research and development
employees it had for the six months before the know-how was transferred and keeps the same scope of employment of such research
and development staff), then the company is eligible for a reduced cap of the redemption fee of no more than three times the amounts
received (plus accrued interest) for the applicable know-how being transferred. The obligation to pay royalties mentioned above
will no longer apply following the payment of the redemption fee, as described above.
Subject
to prior approval of the IIA, the Company may transfer the IIA-funded know-how to another Israeli company. If the IIA-funded know-how
is transferred to another Israeli entity, the transfer would still require IIA approval but will not be subject to the payment
of the redemption fee (although there will be an obligation to pay royalties to the IIA from the income of such sale transaction
as part of the royalty payment obligation). In such case, the acquiring company would have to assume all of the selling company’s
restrictions and obligations towards the IIA (including the restrictions on the transfer of know-how and manufacturing capacity
outside of Israel) as a condition to IIA approval.
Our
research and development efforts have been financed, partially, through grants that we have received from the IIA. We therefore
must comply with the requirements of the Innovation Law and related regulations. As of December 31, 2018, we received approximately
NIS 50.2 million of such grants. However, in March 2018, we repaid a portion of the grant amounts received in 2016 in the amount
of approximately NIS 8.1 million (approximately $2.3 million), including interest and linkage differences, following a review
and assessment by the IIA on the 2016 program. For more information see note 6c in our consolidated financial statements for
the year ended December 31, 2018. The Innovation Law restricts the ability to transfer know-how funded by the IIA outside of Israel.
Transfer of IIA-funded know-how outside of Israel requires the prior approval of the IIA and, under certain circumstances, is
subject to significant payments to IIA (calculated according to a formula set forth under the Innovation Law), as further described
above. Therefore, the discretionary approval of an IIA committee will be required for any transfer to third parties outside of
Israel of rights related to our Accordion Pill, which has been developed with IIA-funding. The restrictions under the Innovation
Law may impair our ability to enter into agreements which involve IIA-funded products or know-how without the approval of IIA.
We cannot be certain that any approval of IIA will be obtained on terms that are acceptable to us, or at all. We may not receive
the required approvals should we wish to transfer IIA-funded know-how, manufacturing and/or development outside of Israel in the
future. Furthermore, in the event that we undertake a transaction involving the transfer to a non-Israeli entity of know-how developed
with IIA-funding pursuant to a merger or similar transaction, the consideration available to our shareholders may be reduced by
the amounts we are required to pay to IIA. Any approval, if given, will generally be subject to additional financial obligations.
Failure to comply with the requirements under the Innovation Law may subject us to mandatory repayment of grants received by us
(together with interest and penalties), as well as expose us to criminal proceedings. In addition, IIA may from time to time conduct
royalties audits and such audits may lead to additional royalties being payable on additional products. Such grants may be terminated
or reduced in the future, which would increase our costs. IIA approval is not required for the marketing of products resulting
from the IIA-funded research or development in the ordinary course of business.