We may rely, in some circumstances, on trade secrets to protect our technology. However, trade secrets can be difficult to protect. We seek to protect our proprietary technology and processes, in part, by confidentiality agreements and assignment of inventionsinvention agreements with our employees, consultants, scientific advisors and contractors. We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in these individuals, organizations and systems, such agreements or security measures may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors.
Our Scientific Advisory Board, which consists of a number of leading scientists and physicians, plays an active role in the evaluation of in-licensing opportunities, the development of our pipeline, and in the rejection of in-licensing opportunities that do not meet our licensing criteria. We also seek advice from our Scientific Advisory Board on scientific and medical matters generally. Our Scientific Advisory Board meets approximately every six weeks to, among other things:
The following table sets forth information for our Scientific Advisory Board members.
Our laboratories, which are located in our headquarters in Jerusalem, Israel, are compliant with both current good manufacturing practices, or cGMP, and Good Laboratory Practices, or GLP, and allow us to manufacture drug products for our current clinical trials. The suppliers of the drug substances used for our current clinical trials have the necessary approvals as well. See “Item 4. Information on the Company — Business Overview —“— Property, Plant and Equipment.” If we decide to perform any phase 3 clinical trial with respect to, or commercialize, any therapeutic candidate on our own, we anticipate that we will rely on third parties to produce the therapeutic supplies. We have limited personnel with experience in drug or medical device manufacturing and we lack the resources and capabilities to manufacture any of our therapeutic candidates on a commercial scale.
We outsource certain preclinical and clinical development activities to contract research organizations, or CROs, which meet FDA or European Medicines Agency regulatory standards. We create and implement the drug development plans and, during the preclinical and clinical phases of development, manage the CROs according to the specific requirements of the therapeutic candidate under development.
The pharmaceutical, medical device and biotechnology industries are intensely competitive. Several of our therapeutic candidates, if commercialized, would compete with existing drugs and therapies. In addition, there are many pharmaceutical companies, biotechnology companies, medical device companies public and private universities, government agencies and research organizations actively engaged in research and development of products targeting the same markets as our therapeutic candidates. Many of these organizations have substantially greater financial, technical, manufacturing and marketing resources than we have. Our competitors may also be able to use alternative technologies that do not infringe upon our patents to formulate the active materials in our therapeutic candidates. They may, therefore, bring to market products that are able to compete with our candidates, or other products that we may develop in the future.
We are not aware of any marketed products for the prevention of ventricular remodeling following an AMI that, like BL-1040, are injectable and form a protective scaffold that supports the heart muscle during recovery and repair. If approved, BL-1040 will face competition from a number of therapies aimed at preventing ventricular remodeling and subsequent congestive heart failure (CHF) in different ways. Other treatments for ventricular remodeling include BioHeart, Inc.’s MyoCell® implantation procedure, Paracor Medical, Inc.’s HeartNetTM and LoneStar Heart’s Algisyl-VR. These devices are indicated for different patient populations than BL-1040 and require surgery. For example, CorCapTM is indicated for patients already suffering from congestive heart failure and requires surgery to apply the device. In addition, NuroVive’s Ciclomulsion formulation of cyclosporine is a drug evaluated for use in treatment of patients suffering from reperfusion injury or given to patients experiencing AMI just before percutaneous coronary intervention, and can therefore partially compete with BL-1040.
BL-8040
If approved, BL-8040 will compete with currently approved treatments for AML that include chemotherapy (Doxorubicin, Cyclophosphamide, Vincristine), radiation therapy and stem cell transplantation. In addition there are a number of potentially competitive compounds under development to treat AML including, among others: AMD 3100 (Mozobil), which is being developed by Genzyme and Sanofi; Dacogen (decitabine), which is being developed by Eisai and Johnson &Johnson; Vidaza (azacitidine), which is being developed by Celgene; Vosaroxin, which is being developed by Sunesis Pharmaceuticals; Midostaurin, which is being developed by Novartis; Quizartinib, which is being developed by Ambit; Volasertib, which is being developed by Boehringer Ingelheim; fludarabine, which is being developed by Sanofi; Uprosertib developed by GSK; PLX-3397 developed by Plexxikon Inc.; Vismodegib developed by Roche and Chugai; Lenalidomide developed by Celgene; erlotinib developed by Roche Astellas and Chugai; Trametinib developed by GSK; Vorinostat developed by Merck and Co.; Selumetinib developed by Astra Zeneca; SGI-110 developed by Astex Pharmaceuticals; filanesib developed by Array Biopharma; OCV-501 developed by Otsuka Pharmaceuticals; Birinapant developed by Tetralogic Pharmaceuticals; Alvocidib developed by Tolero Pharmaceuticals Inc; Pracinostat developed by MEI Pharma; Rigosertib developed by Onconova Therapeutics; and Sapacitabine developed by Cyclacel Pharmaceuticals. Some of these treatments are currently developed for specific AML patient populations and lines of treatments and not for the entire AML population. It should be noted that because cancer treatment in general and AML treatment in particular rely on the administration of combinations of drugs to achieve the greatest therapeutic activity, the treatments detailed above are in most cases not envisioned to be mutually exclusive with BL-8040.
BL-7010
If approved, BL-7010 will compete with other products for treatment of celiac disease that are currently undergoing development such as larazotide acetate (Alba Therapeutic Corp.), which inhibits the activity of Zonulin; latiglutenase (Alvine Pharmaceuticals Inc.), which is a combination of gluten targeting proteases and endopeptidases. Celiac patients are prescribed a gluten-free diet to relieve their disease symptoms. Nevertheless the symptoms persist in most cases despite the patient’s following a gluten-free diet. BL-7010, as well as the treatments specified above, is envisioned to be prescribed to patients who are on a gluten-free diet but still suffer from disease symptoms.
BL-5010
If approved, BL-5010 will compete with a variety of approved destructive and non-destructive treatments for skin lesions. Surgery is currently the most common approved non-destructive treatment for skin lesions but is invasive and painful, and generally results in cosmetically undesirable outcomes. Destructive treatments are associated with pain. Destructive treatments include cryotherapy, laser therapy, electrodessication, curettage and several cream-based treatments including Imiquimod, Disclofenac sodium, 5-Fluorouracil, Picato (Leo Pharma) and Metvix® (Galderma Pharma SA).Pharma. Picato involves repeated administrations for 2-3 days. Metvix involves exposure of the skin lesion to red light after the application of the cream. Both have been approved in many countries. BL-5010 requires a single application and does not require the use of any equipment. We are not aware of any marketed products or procedures for the preservation of skin lesions besides surgical removal.
BL-7040
If approved, BL-7040 will compete with currently marketed steroids, immunomodulators and anti-TNFs (tumor necrosis factors). Theimmunomodulatory antibodies. Approved treatments for IBD market leaders arecurrently include anti-TNFs, such as Remicade (infliximab, Janssen Biotech, Inc., a Johnson & Johnson company, Merck & Co. and Mitsubishi Tanabe Pharma) and Humira (adalimumab, Abbott Laboratories and Eisai Co.), inCimzia (certolizumab, UCB, Inc.) and Simponi (golimumab, Janssen Biotech, Inc., Merck & Co. and Mitsubishi Tanabe Pharma), as well as antibodies inhibiting immune cell migration such as Tysabri (natalizumab, Biogen and Elan) and Vedolizumab (Takeda). In addition tothere are generic brands of mesalazine, a 5-aminosalicylate. Additional market leaders are Cimzia (certolizumab, UCB, Inc.), an anti-TNF,5-aminosalicylate, and Tysabri (natalizumab, Biogen Inc.), an integrin inhibitor.the recently launched Budesonide MMX (Cosmo Pharmaceuticals, Ferring Pharmaceuticals and Santarus). The first biosimilar version of infliximab was approved for use in Europe in 2013. We are also aware of a number of potentially competitive compounds under development, including Simponi (golimumab, Janssen Biotech, Inc., Merck & Co. and Mitsubishi Tanabe Pharma), a TNF inhibitor, Xeljanz (tofacitinib, Pfizer Inc.), a Jak 1 inhibitor, and Budesonide MMX (Cosmo Pharmaceuticals, Ferring PharmaceuticalsVedolizumab (Takeda, Millenium Pharmaceuticals), a MAdCAM inhibitor /integrin alpha-4/beta-7 antagonist; Ustekinomab (Johnson & Johnson), an anti-IL-12/IL23 mAb and Santarus, Inc.).AJM-300 (Ajinomoto), an Integrin alpha-4/beta-7 antagonist.
BL-8040BL-8020
HCV treatment consists of either a combination of interferon and ribavirin alone or together with a combination of direct anti-viral agents (DAAs) of several classes including NS3/4 protease inhibitors, NS5A inhibitors and NS5B inhibitors. Recently, treatment regimens that do not include interferon have been approved, and treatment regimens without ribavirin are at advanced stages of development. If approved, BL-8040 will compete with current treatments for AML including chemotherapy (Doxorubicin, Arsenic dioxide, Cyclophosphamide, Vincristine), radiation therapy and stem cell transplantation. We are also aware of a number of potentially competitive compounds under development to treat AML including: AMD 3100 (Mozobil), which is being developed by Genzyme and Sanofi; Dacogen (decitabine), which is being developed by Eisai and J&J; Vidaza (azacitidine), which is being developed by Celgene; Elacytarabine, which is being developed by Clavis Pharma; Vosaroxin, which is being developed by Sunesis Pharmaceuticals; and Fludarabine, which is being developed by Schering.
BL-1021
If approved, BL-1021BL-8020 will compete with currently marketed anticonvulsants, antidepressantsapproved anti-HCV treatments that include Sovaldi (sofosbuvir, Gilead Sciences); Olysio (simeprevir, Janssen Therapeutics and narcotic analgesics. The neuropathic pain market leaders are anticonvulsants, such as Lyrica (Pregabalin, Pfizer)Medivir); Victrelis (boceprevir, Merck and the generic Gabapentin, together with off-label brands. Additional market leaders are Cymbalta (duloxetine; Eli Lilly/Shionogi), Lidoderm (5% lidocaine patch; Endo/Grünenthal), Qutenza (8% capsaicin patch; NeurogesX/Astellas)Co); and Gralise (extended-release Gabapentin; Depomed)Incivek (telaprevir, Janssen Pharmaceuticals and Vertex Pharmaceuticals). We are also aware of a number of potentially competitive compoundsCompounds under development including Nucynta ER (Tapentadol ER; Grünenthal/Johnson & Johnson), DM-1796 (Gabapentin GR; Depomed/Abbott), Horizant (Gabapentin enacarbil; XenoPort/GlaxoSmithKline/Astellas Pharma Inc.), AmiKet (amitriptylineinclude ledipasvir (Gilead Sciences); faldaprevir and ketamine; EpiCept), AVP-923 (dextromethorphan hydrobromide/quinidine sulfate; IriSys/Avanir)deleobuvir (Boehringer Ingelheim Corp); asunaprevir, daclatasvir and Ralfinamide (Newron)becalbuvir (Bristol Myers Squibb); vaniprevir and elbasvir (Merck and Co.); and ABT-450, ritonavir, dasabuvir and ombitasvir (AbbVie). NoneBL-8020’s mechanism of these compounds is considered revolutionaryaction suggests that it could potentially be suitable for treatment of other virological infections, each of which has numerous competing treatments approved or in termsadvanced stages of fulfilling all the critical clinical factors such as high efficacy, improved dosing regimen and improvement of related side effects.
Insurance
We maintain insurance for our offices and laboratory in Israel. This insurance covers approximately $3.8 million of equipment, consumables and lease improvements against risk of fire, lightning, natural perils and burglary (the latter coverage limited to $250,000), and $1.5 million of consequential damages (covering fixed damages and extra expenses). For our clinical trial activities, we carry life science liability insurance covering general liability with a coverage amount of $10.0 million per occurrence, product liability with an annual coverage amount of $5.0 million in the aggregate, and clinical trial insurance with a coverage amount of $10.0 million in the aggregate. The maximum indemnity for a single occurrence or circumstances under this policy is $10.0 million. In addition to this policy, we carry excess liability insurance with a coverage amount of $5.0 million which increases the coverage limit provided by our life science insurance package. In addition, we maintain the following insurance: employer liability with coverage of approximately $10.0 million; third party liability with coverage of approximately $5.0 million; all risk coverage of approximately $1.9$2.0 million for electronic and mechanical equipment; and directors and officers’ liability with coverage of $20.0 million.
We procure cargo marine coverage when we ship substances for our clinical studies. Such insurance is customized to the special requirements of the applicable shipment, such as temperature and/or climate sensitivity. If required, we insure the substances to the extent they are stored in central depots and at clinical sites.
We believe that the amounts of 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.
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, radioactive and biological materials and wastes and the cleanup of contaminated sites. 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. 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. See “Business — Government Regulation and Funding — Israel Ministry of Environment — Toxin Permit.”
Government Regulation and Funding
We operate in a highly controlled regulatory environment. Stringent regulations establish requirements relating to analytical, toxicological and clinical standards and protocols in respect of the testing of pharmaceuticals and medical devices. Regulations also cover research, development, manufacturing and reporting procedures, both pre- and post-approval. In many markets, especially in Europe, marketing and pricing strategies are subject to national legislation or administrative practices that include requirements to demonstrate not only the quality, safety and efficacy of a new product, but also its cost-effectiveness relating to other treatment options. Failure to comply with regulations can result in stringent sanctions, including product recalls, withdrawal of approvals, seizure of products and criminal prosecution.
Before obtaining regulatory approvals for the commercial sale of our therapeutic candidates, we or our licensees must demonstrate through preclinical studies and clinical trials that our therapeutic candidates are safe and effective. Historically, the results from preclinical studies and early clinical trials often have not accurately predicted results of later clinical trials. In addition, a number of pharmaceutical products have shown promising results in early clinical trials but subsequently failed to establish sufficient safety and efficacy results to obtain necessary regulatory approvals. We have incurred and will continue to incur substantial expense for, and devote a significant amount of time to, preclinical studies and clinical trials. Many factors can delay the commencement and rate of completion of clinical trials, including the inability to recruit patients at the expected rate, the inability to follow patients adequately after treatment, the failure to manufacture sufficient quantities of materials used for clinical trials, and the emergence of unforeseen safety issues and governmental and regulatory delays. If a therapeutic candidate fails to demonstrate safety and efficacy in clinical trials, this failure may delay development of other therapeutic candidates and hinder our ability to conduct related preclinical studies and clinical trials. Additionally, as a result of these failures, we may also be unable to find additional licensees or obtain additional financing.
Governmental authorities in all major markets require that a new pharmaceutical product or medical device be approved or exempted from approval before it is marketed, and have established high standards for technical appraisal, which can result in an expensive and lengthy approval process. The time to obtain approval varies by country. In the past, it generally took from six months to four years from the application date, depending upon the quality of the results produced, the degree of control exercised by the regulatory authority, the efficiency of the review procedure and the nature of the product. Some products are never approved. In recent years, there has been a trend towards shorter regulatory review times in the United States as well as certain European countries, despite increased regulation and higher quality, safety and efficacy standards.
Historically, different requirements by different countries’ regulatory authorities have influenced the submission of applications. However, the past 10 years have shown a gradual trend toward harmonization of drug and medical device approval standards, starting in individual territories in Europe and then in the EU as a whole, in Japan, and in the United States under the aegis of the International Conference on Harmonization, or ICH. In many cases, compliance with ICH standards can help avoid duplication of non-clinical and clinical trials and enable companies to use the same basis for submissions to each of the respective regulatory authorities. The adoption of the Common Technical Document format by the ICH has greatly facilitated use of a single regulatory submission for seeking approval in the ICH regions and certain other countries such as Canada and Australia.
A summarySummaries of the U.S.,United States, EU and Israeli regulatory process followsprocesses follow below.
United States
In the United States, drugs are subject to rigorous regulation by the FDA. The U.S. Federal Food, Drug and Cosmetic Act, or FDCA, and other federal and state statutes and regulations govern, among other things, the research, development, testing, manufacture, storage, record-keeping, packaging, labeling, adverse event reporting, advertising, promotion, marketing, distribution and import and export of pharmaceutical products. Failure to comply with applicable regulatory requirements may subject us to a variety of administrative or judicially imposed sanctions and/or prevent us from obtaining or maintaining required approvals or to market drugs. Failure to comply with the applicable U.S. requirements may subject us to stringent administrative or judicial sanctions, such as agency refusal to approve pending applications, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions or criminal prosecution.
Unless a drug is exempt from the NDA process, the steps required before a drug may be marketed in the United States include:
preclinical laboratory tests, animal studies and formulation studies;
| ● | preclinical laboratory tests, animal studies and formulation studies; |
submission to the FDA of a request for an investigational new drug, or IND, to conduct human clinical testing;
| ● | submission to the FDA of a request for an investigational new drug, or IND, to conduct human clinical testing; |
adequate and well controlled clinical trials to determine the safety and efficacy of the drug for each indication;
| ● | adequate and well controlled clinical trials to determine the safety and efficacy of the drug for each indication; |
submission to the FDA of an NDA;
| ● | submission to the FDA of an NDA; |
a potential public hearing of an outside advisory committee to discuss the application;
| ● | a potential public hearing of an outside advisory committee to discuss the application; |
satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the drug is manufactured; and
| ● | satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the drug is manufactured; and |
FDA review and approval of the NDA.
| ● | FDA review and approval of the NDA. |
Preclinical studies include laboratory evaluation of product chemistry, toxicity and formulation, as well as animal studies. For studies conducted in the United States, and certain studies carried out outside the United States, we submit the results of the preclinical studies, together with manufacturing information and analytical results, to the FDA as part of an IND, which must become effective before we may commence human clinical trials. An IND will automatically become effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions about issues such as the conduct of the trials as outlined in the IND. In such a case, the IND sponsor and the FDA must resolve any outstanding FDA concerns or questions before clinical trials can proceed. Submission of an IND does not always result in the FDA allowing clinical trials to commence and the FDA may halt a clinical trial if unexpected safety issues surface or the study is not being conducted in compliance with applicable requirements.
The FDA may refuse to accept an IND for review if applicable regulatory requirements are not met. Moreover, the FDA may delay or prevent the start of clinical trials if the manufacturing of the test drugs fails to meet cGMP requirements or the clinical trials are not adequately designed. Such government regulation may delay or prevent the study and marketing of potential products for a considerable time period and may impose costly procedures upon a manufacturer’s activities. In addition, the FDA may, at any time, impose a clinical hold on ongoing clinical trials. If the FDA imposes a clinical hold, clinical trials cannot continue without FDA authorization and then only under terms authorized by the FDA.
Success in early-stage clinical trials does not assure success in later-stage clinical trials. Results obtained from clinical activities are not always conclusive and may be susceptible to varying interpretations that could delay, limit or prevent regulatory approval. Even if a therapeutic candidate receives regulatory approval, later discovery of previously unknown problems with a product may result in restrictions on the product or even withdrawal of marketing approval for the product.
Clinical Trials
Clinical trials involve the administration of the investigational drug to people under the supervision of qualified investigators. We conduct clinical trials under protocols detailing the trial objectives, the parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated. We must submit each protocol to the FDA as part of the IND.
We conduct clinical trials typically in three sequential phases, but the phases may overlap or be combined. An institutional review board, or IRB, must review and approve each trial before it can begin. Phase 1 includes the initial administration of a tested drug to a small number of humans. These trials are closely monitored and may be conducted in patients, but are usually conducted in healthy volunteer subjects. These trials are designed to determine the metabolic and pharmacologic actions of the drug in humans and the side effects associated with increasing doses as well as, if possible, to gain early evidence on effectiveness. Phase 2 usually involves trials in a limited patient population to evaluate dosage tolerance and appropriate dosage, identify possible adverse effects and safety risks and preliminarily evaluate the efficacy of the drug for specific indications. Phase 3 trials are large trials used to further evaluate clinical efficacy and test further for safety by using the drug in its final form in an expanded patient population. There can be no assurance that we or our licensees will successfully complete phase 1, phase 2 or phase 3 testing with respect to any therapeutic candidate within any specified period of time, if at all. Furthermore, clinical trials may be suspended at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk. We and our licensees perform preclinical and clinical testing outside of the United States. The acceptability of the results of our preclinical and clinical testing by the FDA will be dependent upon adherence to applicable U.S. and foreign standards and requirements, including good laboratory practices, or GLP, Good Clinical Practices, or GCP, and the Declaration of Helsinki for protection of human subjects. Additionally, the FDA may require at least one pivotal clinical study to be conducted in the United States, in order to take into account medical practice and ethnic diversity in the United States.
NDAs and BLAs
After successful completion of the required clinical testing, an NDA, or in the case of certain biological products a Biological Product Application, or BLA, is prepared and submitted to the FDA. FDA approval of the NDA or BLA is required before product marketing may begin in the United States. The NDA/BLA must include the preclinical and clinical testing results and a compilation of detailed information relating to the product’s pharmacology, toxicology, chemistry, manufacture and manufacturing controls. In certain cases, an application for marketing approval may include information regarding the safety and efficacy of a proposed drug that comes from trials not conducted by, or for, the applicant and for which trials the applicant has not obtained a specific right to reference. Such an application, known as a 505(b)(2) NDA, is permitted for new drug products that incorporate previously approved active ingredients, even if the proposed new drug incorporates an approved active ingredient in a novel formulation or for a new indication. A 505(b)(2) type application is not available for drugs subject to BLAs. As interpreted by the FDA, Section 505(b)(2) also permits the FDA to rely for such approvals on literature or on a finding by the FDA of safety and/or efficacy for a previously approved drug product. Under this interpretation, a 505(b)(2) NDA for changes to a previously approved drug product may rely on the FDA’s finding of safety and efficacy of the previously approved product coupled with new clinical data and information needed by the FDA to support the change. NDAs submitted under 505(b)(2) are potentially subject to patent and non-patent exclusivity provisions which can block effective approval of the 505(b)(2) application until the applicable exclusivities have expired, which in the case of patents may be several years. The cost of preparing and submitting an NDA may be substantial. Under U.S. federal law, the submission of NDAs, including 505(b)(2) NDAs, is generally subject to substantial application user fees, and the manufacturer and/or sponsor under an NDA approved by the FDA is also subject to annual product and establishment user fees. These fees are typically increased annually. FeesSeparate fees are now assessed as wellpayable for an Abbreviated New Drug Application, or ANDA.ANDA, and for Biosimilar Biological Product Development, or BPD.
The FDA has 60 days from its receipt of an NDA to determine whether the application will be accepted for filing based on the FDA threshold determination that the NDA is sufficiently complete to permit substantive review. Once the submission is accepted for filing, the FDA begins an in-depth review of the NDA. Under U.S. federal law, the FDA has agreed to certain performance goals in the review of NDAs. Most such applications for non-priority drug products are to be reviewed within 10 months. The review process may be significantly extended by FDA requests for additional information or clarification. The FDA may also refer applications to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation as to whether the application should be approved. This often, but not exclusively, occurs for novel drug products or drug products that present difficult questions of safety or efficacy. The FDA is not bound by the recommendation of an advisory committee.
Before approving an application, the FDA typically will inspect the facility or facilities where the product is manufactured. The FDA will not approve the application unless the FDA determines that the product is manufactured in substantial compliance with GMPs. If the FDA determines that the NDA or BLA is supported by adequate data and information, the FDA may issue an approval letter, or, in some cases, when the FDA desires some additional data or information an approvable letter. An approvable letter generally contains a statement of specific conditions that must be met to secure final approval of the application. Upon compliance with the conditions stated in the approvable letter, the FDA will typically issue an approval letter. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications. As a condition of approval, the FDA may require additional trials or post-approval testing and surveillance to monitor the drug’s safety or efficacy, the adoption of risk evaluation and mitigation strategies, and may impose other conditions, including labeling and marketing restrictions on the use of the drug, which can materially affect its potential market and profitability. Once granted, product approvals may be withdrawn if compliance with regulatory standards for manufacturing and quality control are not maintained or if additional safety problems are identified following initial marketing.
If the FDA’s evaluation of the NDA or BLA submission or manufacturing processes and facilities is not favorable, the FDA may refuse to approve the NDA or BLA and may issue a not approvable letter. The not approvable letter outlines major deficiencies in the submission and often requires substantial additional testing or information for the FDA to reconsider the application. Even with submission of this additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval.
The Pediatric Research Equity Act, or PREA, requires NDAs (or NDA supplements) for a new active ingredient, new indication, new dosage form, new dosing regimen or new route of administration to contain results assessing the safety and efficacy for the claimed indication in all relevant pediatric subpopulations. Data to support dosing and administration also must be provided for each pediatric subpopulation for which the drug is safe and effective. The FDA may grant deferrals for the submission of results or full or partial waivers from the PREA requirements (for example, if the product is ready for approval in adults before pediatric studies are complete, if additional safety data is needed, among others).
Post-Marketing Requirements
Once an NDA or BLA is approved, the drug sponsor will be subject to certain post-approval requirements, including requirements for adverse event reporting, submission of periodic reports, manufacturing, labeling, packaging, advertising, promotion, distribution, record-keeping and other requirements. For example, the approval may be subject to limitations on the uses for which the product may be marketed or conditions of approval, or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product or require the adoption of risk evaluation and mitigation strategies. In addition, the FDA requires the reporting of any adverse effects observed after the approval or marketing of a therapeutic candidate and such events could result in limitations on the use of such approved product or its withdrawal from the marketplace. Also, some types of changes to the approved product, such as manufacturing changes and labeling claims, are subject to further FDA review and approval. Additionally, the FDA strictly regulates the promotional claims that may be made about prescription drug products. In particular, the FDA requires substantiation of any claims of superiority of one product over another including, in many cases, requirements that such claims be proven by adequate and well controlled head-to-head clinical trials. To the extent that market acceptance of our therapeutic candidates may depend on their superiority over existing products, any restriction on our ability to advertise or otherwise promote claims of superiority, or any requirements to conduct additional expensive clinical trials to provide proof of such claims, could negatively affect the sales of our therapeutic candidates and our costs.
Generic Competition
Once an NDA, including a 505(b)(2) NDA, is approved, the product covered thereby becomes a “listed drug” which can, in turn, be cited by potential competitors in support of approval of an ANDA, which relies on bioequivalence studies that compare the generic drug to a reference listed drug to support approval. Currently, ANDAs are not eligible for drugs covered by BLAs. Specifically, a generic drug that is the subject of an ANDA must be bioequivalent and have the same active ingredient(s), route of administration, dosage form, and strength, as well as the same labeling, with certain exceptions, as the listed drug. If the FDA deems that any of these requirements are not met, additional results may be necessary to seek approval.
ANDA applicants do not have to conduct extensive clinical trials to prove the safety or efficacy of the drug product. Rather, they are required to show that their drug is pharmaceutically equivalent to the innovator’s drug and also conduct “bioequivalence” testing to show that the rate and extent by which the ANDA applicant’s drug is absorbed does not differ significantly from the innovator product. Bioequivalence tests are typically in vivo studies in humans but they are smaller and less costly than the types of phase 3 trials required to obtain initial approval of a new drug. Drugs approved in this way are commonly referred to as “generic equivalents” to the listed drug, are listed as such by the FDA, and can often be substituted by pharmacists under prescriptions written for the original listed drug.
With respect to NDAs, U.S. federal law provides for a period of three years of non-patent market exclusivity following the approval of a listed drug that contains previously approved active ingredients but is approved in a new dosage, dosage form, route of administration or combination, or for a new use, the approval of which was required to be supported by new clinical trials, other than bioavailability studies, conducted by or for the sponsor. During this three-year period the FDA cannot grant effective approval of an ANDA or a 505(b)(2) NDA for the same conditions of approval under which the NDA was approved.
U.S. federal law also provides a period of five years following approval of a new chemical entity that is a drug containing no previously approved active ingredients, during which ANDAs for generic versions of such drugs, as well as 505(b)(2) NDAs, cannot be submitted unless the submission contains a certification that the listed patent is invalid or will not be infringed, in which case the submission may be made four years following the original product approval. If an ANDA or 505(b)(2) NDA applicant certifies that it believes one or more listed patents is invalid or not infringed, it is required to provide notice of its filing to the NDA sponsor and the patent holder. If the patent holder or exclusive patent licensee then initiates a suit for patent infringement against the ANDA or 505(b)(2) NDA sponsor within 45 days of receipt of the notice, the FDA cannot grant effective approval of the ANDA or 505(b)(2) NDA until either 30 months have passed or there has been a court decision holding that the patents in question are invalid or not infringed. If an infringement action is not brought within 45 days, the ANDA or 505(b)(2) NDA applicant may bring a declaratory judgment action to determine patent issues prior to marketing. If the ANDA or 505(b)(2) NDA applicant certifies as to the date on which the listed patents will expire, then the FDA cannot grant effective approval of the ANDA or 505(b)(2) NDA until those patents expire. The first ANDA(s) submitting substantially complete application(s) certifying that listed patents for a particular product are invalid or not infringed may qualify for a period of 180 days of marketing exclusivity, starting from the date of the first commercial marketing of the drug by the applicant, during which subsequently submitted ANDAs cannot be granted effective approval. The first ANDA applicant can forfeit its exclusivity under certain circumstances; for example, if it fails to market its product or meet other regulatory requirements within specified time periods.
From time to time, including presently, legislation is drafted and introduced in the U.S. Congress that could significantly change the statutory provisions governing the approval, manufacturing and marketing of drug products. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our therapeutic candidates. It is impossible to predict whether legislative changes will be enacted, or FDA regulations, guidance or interpretations changed, or what the impact of such changes, if any, may be.
FDA Approval or Clearance of Medical Devices
In the United States, medical devices are subject to varying degrees of regulatory control and are classified in one of three classes depending on the controls the FDA determines necessary to reasonably ensure their safety and efficacy:
Class I: general controls, such as labeling and adherence to Quality System Regulations, or QSRs;
| ● | Class I: general controls, such as labeling and adherence to Quality System Regulations, or QSRs; |
Class II: general controls, pre-market notification (510(k)), and specific controls such as performance standards, patient registries, and postmarket surveillance; and
| ● | Class II: general controls, pre-market notification (510(k)), and specific controls such as performance standards, patient registries, and postmarket surveillance; and |
Class III: general controls and approval of a PMA.
| ● | Class III: general controls and approval of a PMA. |
A PMA application must provide a demonstration of safety and effectiveness, which generally requires extensive preclinical and clinical trial data. Information about the device and its components, device design, manufacturing and labeling, among other information, must also be included in the PMA. As part of the PMA review, the FDA will typically inspect the manufacturer’s facilities for compliance with QSR requirements, which govern testing, control, documentation and other aspects of quality assurance with respect to manufacturing. During the review period, an FDA advisory committee, typically a panel of clinicians, is likely to be convened to review the application and recommend to the FDA whether, or upon what conditions, the device should be approved. The FDA is not bound by the advisory panel decision, but the FDA often follows the panel’s recommendation. If the FDA finds the information satisfactory, it will approve the PMA. The PMA can include post-approval conditions including, among other things, restrictions on labeling, promotion, sale and distribution, or requirements to do additional clinical studies post-approval. Even after approval of a PMA, a new PMA or PMA supplement is required to authorize certain modifications to the device, its labeling or its manufacturing process. Supplements to a PMA often require the submission of the same type of information required for an original PMA, except that the supplement is generally limited to that information needed to support the proposed change from the product covered by the original PMA. During the review of a PMA, the FDA may request more information or additional studies and may decide that the indications for which we seek approval or clearance should be limited.
If human clinical trials of a medical device are required and the device presents a significant risk, the sponsor of the trial must file an investigational device exemption, or IDE, application prior to commencing human clinical trials. The IDE application must be supported by data, typically including the results of animal and/or laboratory testing. If the IDE application is approved by the FDA and one or more institutional review boards, human clinical trials may begin at a specific number of investigational sites with a specific number of patients, as approved by the FDA. If the device presents a non-significant risk to the patient, a sponsor may begin the clinical trial after obtaining approval for the trial by one or more institutional review boards without separate approval from the FDA. Submission of an IDE does not give assurance that the FDA will approve the IDE and, if it is approved, the FDA may determine that the data derived from the trials do not support the safety and effectiveness of the device or warrant the continuation of clinical trials. An IDE supplement must be submitted to, and approved by, the FDA before a sponsor or investigator may make a change to the investigational plan that may affect its scientific soundness, study indication or the rights, safety or welfare of human subjects. The trial also must comply with the FDA’s IDE regulations and informed consent must be obtained from each subject.
European Economic Area
A medicinal product may only be placed on the market in the European Economic Area, or EEA, composed of the 27 EU member states, plus Norway, Iceland and Lichtenstein, when a marketing authorization has been issued by the competent authority of a member state pursuant to Directive 2001/83/EC, (as recentlyas amended, by Directive 2004/27/EC), or an authorization has been granted under the centralized procedure in accordance with Regulation (EC) No. 726/2004 or its predecessor, Regulation 2309/93. There are essentially three EU procedures created under prevailing European pharmaceutical legislation that, if successfully completed, allow an applicant to place a medicinal product on the market in the EEA.
Centralized Procedure
Regulation 726/2004/EC now governs the centralized procedure when a marketing authorization is granted by the European Commission, acting in its capacity as the European Licensing Authority on the advice of the European Medicines Agency, or EMA. That authorization is valid throughout the entire EEA and directly or (as to Norway, Iceland and Liechtenstein) indirectly allows the applicant to place the product on the market in all member states of the EEA. The EMA is the administrative body responsible for coordinating the existing scientific resources available in the member states for evaluation, supervision and pharmacovigilance of medicinal products. Certain medicinal products, as described in the Annex to Regulation 726/2004, must be authorized centrally. These are products that are developed by means of a biotechnological process in accordance with Paragraph 1 to the Annex to the Regulation. MedicinalRegulation or veterinary products designed to promote animal growth or increase yield in accordance with Paragraph 2. The mandatory centralized procedure is applicable to: (a) medicinal products for human use containing a new active substance for which the therapeutic indication is the treatment of acquired immune deficiency syndrome, or AIDS, cancer, neurodegenerative disorder or diabetes must also be authorized centrally. Starting on May 20, 2008, the mandatory centralized procedure was extended todiabetes;. (b) autoimmune diseases and other immune dysfunctions and viral diseases. Finally,diseases; all medicinal products that are designated as orphan medicinal products pursuant to Regulation 141/2000 must be authorized under the centralized procedure.2000; and (c) advanced therapy medicinal products, such as gene therapy, tissue engineered and somatic cell therapy products. An applicant may also opt for assessment through the centralized procedure if it can show that the medicinal product constitutes a significant therapeutic, scientific or technical innovation or that the granting of authorization centrally is in the interests of patients at the EU level. For each application submitted to the EMA for scientific assessment, the EMA is required to ensure that the opinion of the Committee for Medicinal Products for Human Use, or CHMP, is given within 210 days after receipt of a valid application. If the opinion is positive, the EMA is required to send the opinion to the European Commission, which is responsible for preparing the decision granting a marketing authorization. If the initial opinion of the CHMP is negative, the applicant is afforded an opportunity to seek a re-examination of the opinion. The CHMP is required to re-examine its opinion within 60 days following receipt of the request by the applicant. A refusal of a centralized marketing authorization constitutes a prohibition on placing the given medicinal product on the market in the EU.
Mutual Recognition and Decentralized Procedures. With the exception of products that are authorized centrally, the competent authorities of the member states are responsible for granting marketing authorizations for medicinal products placed on their markets. If the applicant for a marketing authorization intends to market the same medicinal product in more than one member state, the applicant may seek an authorization progressively in the EU under the mutual recognition or decentralized procedure. Mutual recognition is used if the medicinal product has already been authorized in a member state. In this case, the holder of this marketing authorization requests the member state where the authorization has been granted to act as reference member state by preparing an updated assessment report that is then used to facilitate mutual recognition of the existing authorization in the other member states in which approval is sought (the so-called concerned member state(s)). in accordance with Article 28 of Directive 2001/83/EC. The reference member state must prepare an updated assessment report within 90 days of receipt of a valid application. This report together with the approved Summary of Product Characteristics, or SmPC (which sets out the conditions of use of the product), and a labeling and package leaflet are sent to the concerned member states for their consideration. The concerned member states are required to approve the assessment report, the SmPC and the labeling and package leaflet within 90 days of receipt of these documents. The total procedural time is 180 days.
The decentralized procedure is used in cases where the medicinal product has not received a marketing authorization in the EU at the time of application. The applicant requests a member state of its choice to act as reference member state to prepare an assessment report that is then used to facilitate agreement with the concerned member states and the grant of a national marketing authorization in all of these member states. In this procedure, the reference member state must prepare, for consideration by the concerned member states, the draft assessment report, a draft SmPC and a draft of the labeling and package leaflet within 120 days after receipt of a valid application. As in the case of mutual recognition, the concerned member states are required to approve these documents within 90 days of their receipt. In both procedures, national marketing authorizations shall be granted within 30 days after acknowledgement of the agreement.
For both mutual recognition and decentralized procedures, if a concerned member state objects to the grant of a marketing authorization on the grounds of a potential serious risk to public health, it may raise a reasoned objection with the reference member state. The points of disagreement are in the first instance referred to the Co-ordination Group on Mutual Recognition and Decentralized Procedures, or CMD, to reach an agreement within 60 days of the communication of the points of disagreement. If member states fail to reach an agreement, then the matter is referred to the EMA’s scientific committee and CHMP for arbitration. The CHMP is required to deliver a reasoned opinion within 60 days of the date on which the matter is referred. The scientific opinion adopted by the CHMP forms the basis for a binding European Commission decision.
Irrespective of whether the medicinal product is assessed centrally, de-centrally or through a process of mutual recognition, the medicinal product must be manufactured in accordance with the principles of good manufacturing practice as set out in Directive 2003/94/EC and Volume 4 of the “Rules Governing Medicinal Products in the European Community.” Moreover, EU law requires the clinical results in support of clinical safety and efficacy to be based upon clinical trials conducted in the EU in compliance with the requirements of Directive 2001/20/EC, which implements good clinical practice in the conduct of clinical trials on medicinal products for human use. Clinical trials conducted outside the EU and used to support applications for marketing within the EU must have been conducted in a way consistent with the principles set out in Directive 2001/20/EC. The conduct of a clinical trial in the EU requires, pursuant to Directive 2001/20/EC, authorization by the relevant national competent authority where a trial takes place, and an ethics committee to have issued a favorable opinion in relation to the arrangements for the trial. It also requires that the sponsor of the trial, or a person authorized to act on his behalf in relation to the trial, be established in the EU.
There are various types of applications for marketing authorizations:authorizations. The legal basis for all types of application is set out in Directive 2001/83/EC and in Regulation (EC) No726/2004.
Full Applications. A full application is one that is made under any of the EU procedures described above and “stands alone” in the sense that it contains all of the particulars and information required by Article 8(3) of Directive 2001/83 (as amended) to allow the competent authority to assess the quality, safety and efficacy of the product and in particular the balance between benefit and risk. Article 8(3)(l) in particular refers to the need to present the results of the applicant’s research on (1) pharmaceutical (physical-chemical, biological or microbiological) tests, (2) preclinical (toxicological and pharmacological) studies and (3) clinical trials in humans. The nature of these tests, studies and trials is explained in more detail in Annex I to Directive 2001/83/EC, currently set forth in Directive 2003/63/EC of 25 June 2003.as amended. Full applications would be required for products containing new active substances not previously approved by the competent authority, but may also be made for other products.
Abridged Applications. Article 10 of Directive 2001/83/EC contains exemptions from the requirement that the applicant provide the results of its own preclinical and clinical research. There are three regulatory routes for an applicant to seek an exemption from providing such results, namely (1) cross-referral to an innovator’s results without consent of the innovator (used for generic medicines or similar biological medicinal products as well as for new fixed combination products), (2) well established use according to published literature and (3) consent to refer to an existing dossier of research results filed by a previous applicant.
Cross-referral to Innovator’s Data
Articles 10(1) and 10(2)(b) of Directive 2001/83/EC provide the legal basis for an applicant to seek a marketing authorization on the basis that its product is a generic medicinal product (a copy) of a reference medicinal product that has already been authorized, in accordance with EU provisions. A reference product is, in principle, an original product granted an authorization on the basis of a full dossier of particulars and information. This is the main exemption used by generic manufacturers for obtaining a marketing authorization for a copy product. The generic applicant is not required to provide the results of preclinical studies and of clinical trials if its product meets the definition of a generic medicinal product and the applicable regulatory results protection period for the results submitted by the innovator has expired. A generic medicinal product is defined as a medicinal product:
having the same qualitative and quantitative composition in active substance as the reference medicinal product;
| ● | having the same qualitative and quantitative composition in active substance as the reference medicinal product; |
having the same pharmaceutical form as the reference medicinal product; and
| ● | having the same pharmaceutical form as the reference medicinal product; and |
whose bioequivalence with the reference medicinal product has been demonstrated by appropriate bioavailability studies.
| ● | whose bioequivalence with the reference medicinal product has been demonstrated by appropriate bioavailability studies. |
Applications in respect of a generic medicinal product cannot be made before the expiry of the protection period. For applications made after either October 30 or November 20, 2005 (depending on the approval route used), Regulation 726/2004 and amendments to Directive 2001/83/EC provide for a harmonized protection period regardless of the approval route utilized. The harmonized protection period is in total 10 years, including eight years of research data protection and two years of marketing protection. The effect is that the originator’s results can be the subject of a cross-referral application after eight years, but any resulting authorization cannot be exploited for a further two years. The rationale of this procedure is not that the competent authority does not have before it relevant tests and trials upon which to assess the efficacy and safety of the generic product, but that the relevant particulars can, if the research data protection period has expired, be found on the originator’s file and used for assessment of the generic medicinal product. The 10-year protection period can be extended to 11 years where, in the first eight years post-authorization, the holder of the authorization obtains approval for a new indication assessed as offering a significant clinical benefit in comparison with existing products.
If the copy product does not meet the definition of a generic medicinal product or if certain types of changes occur in the active substance(s) or in the therapeutic indications, strength, pharmaceutical form or route of administration in relation to the reference medicinal product, Article 10(3) of Directive 2001/83/EC provides that the results of the appropriate preclinical studies or clinical trials must be provided by the applicant.
Well-established Medicinal Use
Under Article 10a of Directive 2001/83/EC, an applicant may, in substitution for the results of its own preclinical and clinical research, present detailed references to published literature demonstrating that the active substance(s) of a product have a well-established medicinal use within the EU with recognized efficacy and an acceptable level of safety. The applicant is entitled to refer to a variety of different types of literature, including reports of clinical trials with the same active substance(s) and epidemiological studies that indicate that the constituent or constituents of the product have an acceptable safety/efficacy profile for a particular indication. However, use of the published literature exemption is restricted by stating that in no circumstances will constituents be treated as having a well-established use if they have been used for less than 10 years from the first systematic and documented use of the substance as a medicinal product in the EU. Even after 10 years’ systematic use, the threshold for well-established medicinal use might not be met. European pharmaceutical law requires the competent authorities to consider the period over which a substance has been used, the amount of patient use of the substance, the degree of scientific interest in the use of the substance (as reflected in the scientific literature) and the coherence (consistency) of all the scientific assessments made in the literature. For this reason, different substances may reach the threshold for well-established use after different periods, but the minimum period is 10 years. If the applicant seeks approval of an entirely new therapeutic use compared with that to which the published literature refers, additional preclinical and/or clinical results would have to be provided.
Informed Consent
Under Article 10c of Directive 2001/83/EC, following the grant of a marketing authorization the holder of such authorization may consent to a competent authority utilizing the pharmaceutical, preclinical and clinical documentation that it submitted to obtain approval for a medicinal product to assess a subsequent application relating to a medicinal product possessing the same qualitative and quantitative composition with respect to the active substances and the same pharmaceutical form.
Law Relating to Pediatric Research
Regulation (EC) 1901/2006 (as amended by Regulation (EC) 1902/2006) was adopted on December 12, 2006. This Regulation governs the development of medicinal products for human use in order to meet the specific therapeutic needs of the pediatric population. It requires any application for marketing authorization made after July 26, 2008 in respect of a product not authorized in the EU on January 26, 2007 (the time the Regulation entered into force), to include studies in children conducted in accordance with a pediatric investigation plan agreed to by the relevant European authorities, unless the product is subject to an agreed waiver or deferral. Waivers can be granted in certain circumstances where pediatric studies are not required or desirable. Deferrals can be granted in certain circumstances where the initiation or completion of pediatric studies should be deferred until appropriate studies in adults have been performed. Moreover, this regulation imposes the same obligation from January 26, 2009 on an applicant seeking approval of a new indication, pharmaceutical form or route of administration for a product already authorized and still protected by a supplementary protection certificate granted under Regulation (EEC) 1768/92 or by a patent that qualifies for the granting of such a supplementary protection certificate. The pediatric Regulation 1901/2006 also provides, subject to certain conditions, a reward for performing such pediatric studies, regardless of whether the pediatric results provided resulted in the grant of a pediatric indication. This reward comes in the form of an extension of six months to the supplementary protection certificate granted in respect of the product, unless the product is subject to orphan drug designation, in which case the 10-year market exclusivity period for such orphan products is extended to 12 years. Where the product is no longer covered by a patent or supplementary protection certificate, the applicant may make a separate application for a Pediatric Use Marketing Authorization, which, on approval, will provide eight years’ protection for data and 10 years’ marketing protection for the pediatric results.
In June 2013, the European Commission published a report on the first five years of implementation of the Regulation. The report concludes that pediatric development has become a more integral part of the overall development of medicinal products in the EU, with the Regulation working as a major catalyst to improve the situation for young patients
Post-authorization Obligations
An authorization to market a medicinal product in the EU carries with it an obligation to comply with many post-authorization regulations relating to the marketing and other activities of authorization holders. These include requirements relating to adverse event reporting and other pharmacovigilance requirements, advertising, packaging and labeling, patient package leaflets, distribution and wholesale dealing. The regulations frequently operate within a criminal law framework and failure to comply with the requirements may not only affect the authorization, but also can lead to financial and other sanctions levied on the company in question and responsible officers.
Approval of Medical Devices
In the EEA there is a consolidated system for the authorization of medical devices as provided for in the Medical Device Directive 93/42/EEC as amended by Directive 93/68/EEC.EEC on CE marking. The European Union requires that manufacturers of medical devices obtain the right to affix the CE mark to their products, which shows that the device has a Declaration of Conformity, before selling them in European Union member countries. The CE mark is an international symbol of adherence to quality assurance standards and compliance with applicable European medical device directives. In order to obtain the right to affix the CE mark to products, a manufacturer must obtain certification that its processes meet certain European quality standards, which vary according to the nature of the device. Compliance with the Medical Device Directive, as certified by a recognized European Notified Body, permits the manufacturer to affix the CE mark on its products and commercially distribute those products throughout the European Union without further conformance tests being required in other member states.
Israel
Israel Ministry of the Environment — Toxin Permit
In accordance with the Israeli Dangerous Substances Law - 1993, the Ministry of the Environment is required to grant a permit in order to use toxic materials. Because we utilize toxic materials in the course of operation of our laboratories, we were required to apply for a permit to use these materials. Our current toxin permit will remain in effect until January 2015.
Clinical Testing in Israel
In order to conduct clinical testing on humans in Israel, special authorization must first be obtained from the ethics committee and general manager of the institution in which the clinical studies are scheduled to be conducted, as required under the Guidelines for Clinical Trials in Human Subjects implemented pursuant to the Israeli Public Health Regulations (Clinical Trials in Human Subjects), as amended from time to time, and other applicable legislation. These regulations require authorization by the institutional ethics committee and general manager as well as from the Israeli Ministry of Health, except in certain circumstances, and in the case of genetic trials, special fertility trials and complex clinical trials, an additional authorization of the Ministry of Health’s overseeing ethics committee. The institutional ethics committee must, among other things, evaluate the anticipated benefits that are likely to be derived from the project to determine if it justifies the risks and inconvenience to be inflicted on the human subjects, and the committee must ensure that adequate protection exists for the rights and safety of the participants as well as the accuracy of the information gathered in the course of the clinical testing. Since we intend to perform a portion of the clinical studies on certain of our therapeutic candidates in Israel, we will be required to obtain authorization from the ethics committee and general manager of each institution in which we intend to conduct our clinical trials, and in most cases, from the Israeli Ministry of Health.
Other Countries
In addition to regulations in the United States, the EU and Israel, we are subject to a variety of other regulations governing clinical trials and commercial sales and distribution of drugs in other countries. Whether or not our products receive approval from the FDA, approval of such products must be obtained by the comparable regulatory authorities of countries other than the United States before we can commence clinical trials or marketing of the product in those countries. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval. The requirements governing the conduct of clinical trials and product licensing vary greatly from country to country.
Related Matters
From time to time, legislation is drafted, introduced and passed in governmental bodies that could significantly change the statutory provisions governing the approval, manufacturing and marketing of products regulated by the FDA or EMA and other applicable regulatory bodies to which we are subject. In addition, regulations and guidance are often revised or reinterpreted by the national agency in ways that may significantly affect our business and our therapeutic candidates. It is impossible to predict whether such legislative changes will be enacted, whether FDA or EMA regulations, guidance or interpretations will change, or what the impact of such changes, if any, may be. We may need to adapt our business and therapeutic candidates and products to changes that occur in the future.
Israeli Government Programs
Israel Office of the Chief Scientist
Research and Development Grants. A number of our therapeutic products have been financed, in part, through funding from the OCS in accordance with the Israeli Law for the Encouragement of Industrial Research and Development, 1984 and related regulations, or the Research Law. As of December 31, 2012,2013 we received approximately NIS 75.976.1 million ($20.321.9 million) million in aggregate funding from the OCS, which amount includes approximately NIS 22.222.4 million ($5.96.5 million) of funding for particular projects, and approximately NIS 53.7 million ($14.415.5 million) of funding in the framework of our biotechnology incubator. The aggregate funding amount includes approximately NIS 34.165.6 ($9.118.9 million) of funding received in connection with terminated programs. We are not required to repay funding for terminated programs. Under the Research Law and the terms of the grants, royalties on the revenues derived from sales of products developed with the support of the OCS are payable to the Israeli government, generally at the rate of 3% during the first three years of repayment, 4% during the subsequent three years and 5% from the seventh year onwards, although these terms are different in the event we out-license the products orif receive the OCS approval for the transfer the manufacture or to transfer the rights to manufacture our products developed with OCS grants outside of Israel. The obligation to make these payments terminates upon repayment of the amount of the received grants as adjusted for fluctuation in the U.S. dollar/shekel exchange rate, plus interest and any additional amounts as described below. However, we may be required to pay an increased total amount of royalties (possibly up to 300% of the grant amounts plus interest) if we receive approval to manufacture or to transfer the rights to manufacture our products developed with OCS grants outside of Israel, depending on the portion of total manufacturing that is performed outside of Israel, as further described below, and we may be required to pay additional amounts in respect of the technology developed under these projects that is otherwise transferred outside of Israel, as further described below. The amounts received bear interest equal to the 12-month London Interbank Offered Rate applicable to dollar deposits that is published on the first business day of each calendar year.
Pursuant to the Research Law, recipients of funding from the OCS are prohibited from manufacturing products developed using OCS grants or derived from technology developed with OCS grants outside of the State of Israel and from transferring rights to manufacture such products outside of Israel. However, the OCS may, in special cases, approve the transfer of manufacture or of manufacturing rights of a product developed in an approved program or which results therefrom, outside of Israel. If we were to receive approval to manufacture or to transfer the rights to manufacture our products developed with OCS grants outside of Israel, we would be required to pay an increased total amount of royalties (possibly up to 300% of the grant amounts plus interest), depending on the portion of total manufacturing that is performed outside of Israel. In addition, the royalty rate applicable to us could possibly increase. Such increased royalties constitute the total repayment amount required in connection with the transfer of manufacturing rights of OCS funded products outside Israel. The Research Law does enable companies to seek prior approval for conducting manufacturing activities outside of Israel without being subject to increased royalties (but resulting in a lower grant amount); however, the OCS rarely grants such prior approval.
In addition, under the Research Law, we are prohibited from transferring our OCS financed technologies, technologies derived therefrom and related intellectual property rights outside of Israel except under limited circumstances and only with the approval of the OCS and upon making a payment to the OCS. We may not receive the required approvals for any proposed transfer and, if received, we may be required to pay the OCS a portion ofan amount calculated in accordance with the consideration that we receive upon any sale or transfer of such technology to a non-Israeli entity.applicable formula set out in the Research Law. The scope of the support received, the royalties that we may have already paid to the OCS, the amount of time that has elapsed between the date on which the technology was transferred and the date on which the OCS grants were received and the sale price and the form of transaction will be taken into account in order to calculate the amount of the payment to the OCS. The repayment amount is now subject to a maximum limit calculated in accordance with a formula set forth in regulations enacted during 2012. In addition, approval of the transfer of technology to residents of Israel is required, and may be granted in specific circumstances, only if the recipient agrees to abide by the provisions of applicable laws, including the restrictions on the transfer of know-how and the obligation to pay royalties. No assurances can be made that approval to any such transfer, if requested, will be granted.
The State of Israel does not own intellectual property rights in technology developed with OCS funding and there is no restriction on the export of products manufactured using technology developed with OCS funding. The technology is, however, subject to transfer of technology and manufacturing rights restrictions as described above. For a description of such restrictions, please see “Item 3. Risk Factors — Risks Relating to Our Operations in Israel.” OCS approval is not required for the export of any products resulting from the research or development.
Biotechnology Incubator Program. In 2001, the OCS launched a biotechnology incubator program for advancing Israel’s biotechnology industry. The program was significantly changed by the OCS in May 2004, pursuant to which the OCS invited companies to submit proposals to establish and operate OCS-funded biotechnology incubators to provide a physical, organized and professional platform for commercializing biotechnological research and development projects. We submitted a proposal to operate a biotechnology incubator, and our proposal was accepted by the OCS. Accordingly, we entered into the incubator agreement with the OCS in January 2005. The initial agreement was scheduled to expire on December 31, 2010 but at the end of 2010, the OCS agreed to renew the agreement for an additional two years, with an option to renew for another one-year period at the same terms and conditions, subject to OCS approval. In 2012, the OCS approved our exercise of the option to extend the incubator agreement for the final one-year period through December 31, 2013, as of which date the agreement expired. We formed BIJ L.P. to act as the incubator entity. Our wholly-owned subsidiary, BIJ Ltd., is the general partner of BIJ L.P., also referred to as the incubator, and owns 1% of BIJ L.P.’s partnership interests, while BioLineRx is a limited partner of BIJ L.P. and owns the remaining 99% of BIJ L.P.’s partnership interests. In light of the expiry of the incubator agreement and in order to streamline our operations, we decided to transfer all the employees, activities and assets from the incubator to BioLineRx Ltd., and are currently in the process of winding down the incubator.
As of December 31, 2012,2013, we received approximately $14.4$ 15.5 million from the OCS under the incubator agreement to fund 23 different development projects, 1822 of which have terminated. Of our 12nine current development projects, three haveBL-1040 is the only project that has been or will be funded under the incubator agreement: BL-1021, BL-1040 and BL-5040. Other projects may also be funded by the OCS outside of the incubator agreement. As of March 5, 2013, one request is on file to fund an additional project outside of the incubator agreement but such request has not yet been approved by the OCS.
Israel Ministry of Health
Israel’s Ministry of Health, which regulates medical testing, has adopted protocols that correspond, generally, to those of the FDA and the European Medicines Agency, making it comparatively straightforward for studies conducted in Israel to satisfy FDA and the European Medicines Agency requirements, thereby enabling medical technologies subjected to clinical trials in Israel to reach U.S. and EU commercial markets in an expedited fashion. Many members of Israel’s medical community have earned international prestige in their chosen fields of expertise and routinely collaborate, teach and lecture at leading medical centers throughout the world. Israel also has free trade agreements with the United States and the EU.
C. Organizational Structure
Our corporate structure consists of BioLineRx and three wholly-owned entities: BioLine Innovations Jerusalem Limited Partnership, or BIJ L.P.; BioLine Innovations Jerusalem Ltd., or BIJ Ltd.; and BioLineRx USA Inc. BIJ Ltd. and BIJ L.P. arewere engaged in the operation of our biotechnology incubator. Our incubator agreement with the OCS expired at the end of 2013. As a result, we decided to transfer all the employees, activities and assets from the incubator to BioLineRx Ltd., and are currently in the process of winding down the incubator. See “Item 10. Additional Information — Material Contracts — Incubator Agreement.” BioLineRx USA Inc. has been inactive since the beginning of 2011, as a result of a decision by our Board of Directors to transfer all business development functions back to Israel, in order to reorganize our business development efforts and administer such efforts from our headquarters.
D. Property, Plant, and Equipment
We are headquartered in Jerusalem, Israel. We lease one facility pursuant to a lease agreement with Caps-Pharma Ltd. that expires on December 15, 2014, with an option to renew through December 2016. The Jerusalem headquarters consists of approximately 1,700 square meters of space and lease payments are approximately $21,600 per month. This facility houses both our administrative and research operations and our central laboratory. The central laboratory consists of approximately 600 square meters and includes an analytical chemistry laboratory, a formulation laboratory and a tissue culture laboratory. Our central laboratory is compliant with both cGMP and GLP, which allows us to manufacture therapeutic supplies for our current clinical trials. We are currently outfitting a section of the central laboratory as a Class 1000 Clean Room for the synthesis of compounds that require a clean environment for development. All of our employees are based in this facility.
Not applicable.
None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this annual report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this annual report, particularly those in “Item 3. Key Information — Risk Factors.”U.S. dollar amounts herein (other than amounts that were originally receivable or payable in dollars) have been translated for the convenience of the reader from the original NIS amounts at the representative rate of exchange as of December 31, 20122013 ($1 = NIS 3.733)3.471). The dollar amounts presented should not be construed as representing amounts that are receivable or payable in dollars or convertible into dollars, unless otherwise indicated.
We are a clinical stage biopharmaceutical development company dedicated to identifying, in-licensing and developing therapeutic candidates that have advantages over currently available therapies or address unmet medical needs. Our current development pipeline consists of six clinical therapeutic candidates: BL-1020, BL-1040, BL-8040, BL-7010, BL-5010, BL-7040 BL-8040 and BL-1021.BL-8020. In addition, we have sixthree therapeutic candidates in pre-clinical development. We generate our pipeline by systematically identifying, rigorously validating and in-licensing therapeutic candidates that we believe exhibit a relatively high probability of therapeutic and commercial success. WeUntil December 31, 2013, we also operate,operated, with substantial financial support of the Office of the Chief Scientist of the Israeli Ministry of Trade and Industry (OCS), a biotechnology incubator to evaluate therapeutic candidates. As of December 31, 2012,2013, we received approximately NIS 53.7 million53.7million ($14.4)15.5) million in funding from the OCS to operate the incubator, which does not include NIS 22.222.4 million ($5.96.5 million) in funding we have received from the OCS outside of the incubator agreement as of that date. Such amounts include aggregate funding of approximately NIS 34.165.6 million ($9.118.9 million) for terminated programs. We are not required to repay funds received for terminated programs. Our strategy includes commercializing our therapeutic candidates through out-licensing arrangements with biotechnology and pharmaceutical companies and evaluating, on a case by case basis, the commercialization of our therapeutic candidates independently.
The following is a description of our six clinical therapeutic candidates:
BL-1020 is an orally available drug in development for the treatment of schizophrenia. In September 2009, we announced positive topline results from the phase 2b EAGLE trial of BL-1020. In June 2011, we commenced the CLARITY trial of BL-1020, which is currently being carried out at 31 clinical sites in Romania, India and Moldova.
| ● | BL-1040 is a novel, resorbable polymer solution for use in the prevention of ventricular remodeling that may occur in patients who have suffered an acute myocardial infarction, or AMI. BL-1040 is being developed as a medical device. In March 2010, we announced encouraging results from a phase 1/2 clinical trial. We have entered into an exclusive, worldwide, royalty-bearing out-licensing arrangement with Bellerophon with respect to the development, manufacture and commercialization of BL-1040. In December 2011, Bellerophon commenced PRESERVATION I, a CE Mark registration clinical trial of BL-1040 (initially called IK-5001, and now called “Bioabsorbable Cardiac Matrix” device, or BCM device). There are currently over 75 sites activated for this trial, 13 of which are in the U.S. |
BL-1040 is a novel resorbable polymer solution for use in the prevention of ventricular remodeling that may occur in patients who have suffered an acute myocardial infarction, or AMI. BL-1040 is being developed as a medical device. In March 2010, we announced encouraging results from a phase 1/2 clinical trial. We have entered into an exclusive, worldwide, royalty-bearing out-licensing arrangement with Ikaria, Inc., or Ikaria, with respect to the development, manufacture and commercialization of BL-1040. In December 2011, Ikaria commenced PRESERVATION 1, a CE Mark registration clinical trial of BL-1040 (now called “Bioabsorbable Cardiac Matrix,” or BCM, by Ikaria).
| ● | BL-8040 is a novel, short peptide that functions as a high-affinity antagonist for CXCR4, which we intend to develop for acute myeloid leukemia, or AML, stem cell mobilization and other hematological indications. In June 2013, we commenced a phase 2 trial for the treatment of AML, which is currently being conducted at three world-leading cancer research centers in the U.S. and at five premier sites in Israel. In August 2013, we announced that BL-8040 has been shown in pre-clinical trials to be effective for the treatment of thrombocytopenia, or reduced platelet production. In September 2013, the U.S. Food & Drug Administration, or FDA, granted an Orphan Drug Designation to BL-8040 as a therapeutic for the treatment of AML; and in January 2014, the FDA granted an Orphan Drug Designation to BL-8040 as a treatment for stem cell mobilization. |
BL-5010 comprises a customized, proprietary pen-like applicator containing a novel formulation of two acids, which is being developed for the non-surgical removal of skin lesions. In December 2010, we announced positive results from a phase 1/2 clinical trial of BL-5010. We have received European confirmation from the British Standards Institution Notified Body in the UK of the regulatory pathway classification of BL-5010 as a Class IIa medical device. We are planning to commence a pivotal CE-Mark registration trial for European approval in the second half of 2013.
| ● | BL-7010 is a novel, non-absorbable, orally available, high-molecular-weight co-polymer intended for the treatment of celiac disease. In December 2013, we announced the enrollment of the first patient in a Phase 1/2 trial for BL-7010 being conducted at Tampere Hospital in Finland. Results are expected in mid-2014. In March 2014, we announced that BL-7010 successfully completed the single administration, dose-escalation stage of this study. Based on the positive safety and tolerability results, we will proceed with the repeated administration stage of the study. |
BL-7040 is an orally available synthetic oligonucleotide which we are developing for the treatment of inflammatory bowel disease, or IBD. We are currently conducting a phase 2 proof-of-concept study to evaluate the effectiveness of BL-7040 for the treatment of IBD at five sites in Israel.
| ● | BL-5010 comprises a customized, proprietary pen-like applicator (BL-5010) containing a novel formulation of two acids, which is being developed for the non-surgical removal of skin lesions. In December 2010, we announced positive results from a phase 1/2 clinical trial of BL-5010. We have received European confirmation from the British Standards Institution Notified Body in the UK of the regulatory pathway classification of both BL-5010 and BL-5010P as a Class 2a medical device. We are planning to commence a pivotal CE-Mark registration trial for European approval in the first half of 2014 and expect to have results in the second half of 2014. In January 2014, we received the necessary regulatory approval to commence the trial. Our future development plans for this product include expansion into additional therapeutic indications, including actinic keratosis and warts. We are also currently engaged in meaningful discussions with potential partners for this asset. |
BL-8040 is a short peptide that functions as a high-affinity antagonist for CXCR4, which we intend to develop for acute myeloid leukemia, or AML, and other hematological cancers. We plan to commence a phase 2 clinical trial in the first half of 2013.
| ● | BL-7040 is an orally available synthetic oligonucleotide which we are developing for the treatment of inflammatory bowel disease, or IBD. In April 2013, we announced positive results from a phase 2a proof-of-concept study to evaluate the effectiveness of BL-7040 for the treatment of IBD at five sites in Israel. In November 2013, we announced additional results from this study showing significant improvement of disease measurements in biopsies taken from IBD patients treated with BL-7040. We are currently discussing this therapeutic candidate with a number of potential co-development partners, as well as planning the next stages of development. |
BL-1021 is a new chemical entity in development for the treatment of neuropathic pain. We are currently evaluating potential development collaborations with other parties in order to continue development of this compound.
| ● | BL-8020 is an orally available treatment for the hepatitis C virus, or HCV, with a unique mechanism of action involving the inhibition of HCV-induced autophagy in host cells. In April 2013, we commenced a phase 1/2 clinical trial to evaluate the safety, tolerability and effectiveness of BL-8020 at two sites in France. In January 2014, we entered into a collaboration agreement whereby, among other things, the licensors agreed to take over the development of the drug and we agreed to supply, at the licensors’ request, the drug needed for a clinical trial to be administered by the licensors. |
In 2009, we entered into an exclusive, worldwide, royalty-bearing licensing arrangement with Ikaria.Bellerophon. Under the agreement, we granted IkariaBellerophon an exclusive, worldwide license to develop, manufacture and commercialize BL-1040 for use in the prevention, mitigation and treatment of injuries to the myocardial tissue of the heart. Under the arrangement, IkariaBellerophon is obligated to use commercially reasonable efforts to complete clinical development of, and to commercialize, BL-1040 or products related thereto. We received an upfront payment of $7.0 million upon the execution of the license agreement. Upon successful completion of the phase 1/2 clinical trial, IkariaBellerophon paid us a milestone payment of $10.0 million in March 2010, and we are entitled to receive additional milestone and royalty payments upon the occurrence of certain events.
In June 2010,2013, we entered intosigned an exclusive, royalty-bearing out-licensing arrangementagreement with Cypress Bioscience with regard to BL-1020, coveringCTTQ, the United States, Canadaleading Chinese pharmaceutical company in the liver disease therapeutic area, for the development and Mexico, which became effective in August 2010. We receivedcommercialization of BL-8030, an upfront fee of $30.0 million from Cypress Bioscience uponorally available treatment for HCV. Under the effectivenessterms of the agreement.agreement, we granted CTTQ exclusive rights to develop, manufacture and commercialize BL-8030 in China and Hong Kong. CTTQ paid us a small upfront license fee, and is obligated to pay future development, regulatory and commercialization milestones, for a total potential deal value of approximately $30 million. In May 2011, followingaddition, we have the acquisition of Cypress Bioscience by Royalty Pharma earlier in the year, we reacquired allright to receive high single-digit royalties on future sales of the rightsdrug. We have retained the right to develop and commercialize BL-1020 from Cypress Bioscience and currently hold full global rights to the product. We are continuing to develop BL-1020, and commenced the phase 2/3 CLARITY trialBL-8030 in June 2011, which is currently being carried out at clinical sites in Romania, India and Moldova. Concurrent with the conductother parts of the trialworld.
In January 2014, we signed a collaboration agreement with JHL Biotech, or JHL, a biopharmaceutical company that develops, manufactures, and commercializes biologic medicines, pursuant to which we will collaborate with JHL in accordance with our business strategy, we have continued to hold discussions with potential out-licensing partners for the further development and commercialization of BL-1020 atBL-9020, a novel monoclonal antibody in the preclinical development stage for the treatment of Type 1 diabetes. JHL Biotech will be responsible for all process development and manufacturing of BL-9020 during its more advanced stages.pre-clinical and clinical development stages, and we will be responsible for all pre-clinical development of BL-9020. JHL will have global manufacturing rights to BL-9020, along with development and commercialization rights in China and Southeast Asia, and we will have development and commercialization rights in the rest of the world. In all development and manufacturing of BL-9020, JHL will adhere to FDA guidelines and regulations. Each party will have rights to all development and regulatory data generated under the agreement in order to commercialize BL-9020 in its respective territory. Each party will also be entitled to single-digit royalties on the sale of BL-9020 in the other party’s respective territory.
History of Losses
Since inception in 2003, we have generated significant losses in connection with our research and development, including the clinical development of BL-1020. As of December 31, 2012,2013, we had an accumulated deficit of NIS 444.3505.8 million. Although we have previously recognized revenues in connection with our out-licensing arrangement with IkariaBellerophon for BL-1040 and our former out-licensing arrangement with Cypress Bioscience for BL-1020, we may continue to generate losses in connection with the research and development activities relating to our pipeline of therapeutic candidates. Such research and development activities are budgeted to expand over time and will require further resources if we are to be successful. As a result, we may continue to incur operating losses, which may be substantial over the next several years, and we may need to obtain additional funds to further pursue our research and development programs.
We have funded our operations primarily through the sale of equity securities (both in public and private and direct placements and in three public offerings on the TASE)offerings), funding received from the OCS, payments received under the licensing arrangements with IkariaBellerophon and Cypress Bioscience, and interest earned on investments. We expect to continue to fund our operations over the next several years through our existing cash resources, potential future milestone payments that we expect to receive from Ikaria,Bellerophon, potential future upfront or milestone payments that we may receive from out-licensing transactions for our other therapeutic candidates, interest earned on our investments and additional capital to be raised through public or private equity offerings or debt financings. As of December 31, 2012,2013, we held approximately $21.4$18.2 million of cash, cash equivalents and short-term bank deposits, based on the exchange rate reported by the Bank of Israel as of December 31, 2012.2013. In February 2013,March 2014, we completed a direct placementan underwritten public offering for netgross proceeds of $7.7approximately $24.1 million. See “Item 5. Operating and Financial Review and Prospects –“– Liquidity and Capital Resources.”
Revenues
Our revenues to date have been generated primarily from milestone payments under our licensing arrangementsarrangement with IkariaBellerophon and the amounts we received from Cypress Bioscience. We entered into a license and collaboration agreement with IkariaBellerophon in 2009, in respect of which IkariaBellerophon paid us an up-front payment of $7.0 million. In addition, upon successful completion of the phase 1/2 clinical trial, IkariaBellerophon paid us a milestone payment of $10.0 million, which was subject to a 15% withholding tax in the United States. We received a full refund of the tax withheld from the U.S. Internal Revenue Service in the third quarter of 2011. In June 2010, we entered into a license agreement with Cypress Bioscience. Under the terms of the license agreement, we received an upfront fee of $30.0 million. The license agreement with Cypress Bioscience was terminated, effective as of May 31, 2011.
Under the terms of our agreement with Ikaria,Bellerophon, in addition to the payments mentioned above, the maximum future development-related payments to which we are entitled is $115.5 million. We are also entitled to maximum commercialization milestone payments of $150.0 million, subject to the terms and conditions of the license agreement. Certain payments we have received from IkariaBellerophon have been subject to a 15% withholding tax in the United States, and certain payments we may receive in the future, if at all, may also be subject to a 15% withholding tax in the United States. Receipt of any milestone payment under the IkariaBellerophon agreement depends on many factors, some of which are beyond our control. We cannot assure you that we will receive any of these future payments. We believe that we may be entitled to a refund of withholding taxes paid in connection with future payments from the U.S. government but there can be no assurance that we will be able to obtain such a refund. In addition, we may be able to use U.S. taxes withheld from future payments to us as credits against Israeli corporate income tax when we have income, if at all, but there can be no assurance that we will be able to realize the credits. Our payments to our in-licensors are to be made from the net consideration received from our out-licensees.
We expect our revenues for the next several years to be derived primarily from payments under our current agreement with Ikaria, as well as additional collaborations that we may enter into in theout-licensing and other collaboration arrangements, including future including with regard to BL-1020, BL-5010, BL-7040, BL-8040, BL-1021 or other therapeutic candidates.royalties on product sales. Furthermore, we may receive payments under future royalties on product sales, if any, under our agreement with Ikaria, as well as under any future agreement relating to BL-1020, BL-5010, BL-7040, BL-8040, BL-1021 or other compounds.out-licensing and collaboration agreements.
Research and Development
Our research and development expenses consist primarily of salaries and related personnel expenses, fees paid to external service providers, up-front and milestone payments under our license agreements, patent-related legal fees, costs of preclinical studies and clinical trials, drug and laboratory supplies and costs for facilities and equipment. We primarily use external service providers to manufacture our product candidates for clinical trials and for the majority of our preclinical and clinical development work. We charge all research and development expenses to operations as they are incurred. We expect our research and development expense to remain our primary expense in the near future as we continue to develop our therapeutic candidates.
The following table identifies our current major research and development projects:
Project | | Status | | Expected or Recent Near Term Milestone |
| | | | |
BL-1020BL-1040 | | Phase 2/3 CLARITYCE registration pivotal trial (conducted by Bellerophon) | | CLARITYPRESERVATION 1 study interim results – week of March 18, 2013; CLARITY study final results – second half of 2013expected in 2014 |
| | | | |
BL-1040BL-8040 | | CE registration pivotal trialPhase 2 study for AML; regulatory submission made for phase 1 study in stem cell mobilization | | PRESERVATIONCommencement of phase 1 study for stem cell mobilization in first half of 2014; final results of phase 1 study for stem cell mobilization in second half of 2014; final results of phase 2 AML study towards end of 2014/beginning of 2015 |
| | | | |
BL-7010 | | Phase 1/2 study | | Results expected mid-2014; randomized, controlled efficacy study expected to commence by end of 2014 |
| | | | |
BL-5010 | | Completed phase 1/2 pilot study; received regulatory approval for pivotal CE Mark registration trial | | Completion of unique applicator prototype by second quarter of 2013; commencementCommencement of pivotal CE Mark registration trial in first half of 2014; results expected in second half of 20132014 |
| | | | |
BL-7040 | | Phase 2 trial completed | | Study results – April 2013Potential co-development collaboration or licensing transaction; additional pre-clinical development to support further clinical studies |
| | | | |
BL-8040 | | Completed phase 1/2BL-8020 | | Phase 1/2 study expected to commence during the second quarter of 2013 |
(collaboration with Genoscience and Panmed) | | | | |
BL-1021 | | Completed phase 1a | | Potential co-development collaborationDecision by Genoscience and Panmed on direction of current study and indication, as well as determination of potential additional indications |
In addition to the projects set forth above, we have sixthree projects that are in the preclinical stages of development. Such projects have significantly lower costs due to their stage of development. See “Item 4. Information on the Company — Business Overview — Therapeutic Candidates in Preclinical Development.”
We recordPrior to 2013, we recorded costs for each development project on a “direct cost” basis only. Direct costs, which include contract research organization expenses, consulting expenses, patent expenses, materials, and other, similar expenses, arewere recorded to the project for which such expenses are incurred. However, salary and overhead costs, including, but not limited to, salary expenses (including salaries for research and development personnel), facilities, depreciation, and stock-based compensation, are considered overhead, and arewere shared among all of our projects and arewere not recorded on a project-by-project basis. We dodid not allocate direct salaries to projects due to the fact that our project managers arewere generally involved in several projects at different stages of development, and the related salary expense iswas not significant to the overall cost of the applicable projects. In addition, indirect labor costs relating to our departments that support the research and development process, such as chemistry, manufacturing and controls (CMC), pre-clinical analysis, laboratory testing and initial drug sample production, as well as rent and other administrative overhead costs, arewere shared by many different projects and havewere never been considered by management to be of significance in its decision-making process with respect to any specific project. Accordingly, such costs havewere not been specifically allocated to individual projects. Beginning in 2013, as the result of a decision to reduce the total number of development projects in our pipeline, along with the fact that the number of more advanced clinical projects in our pipeline has increased on a proportionate basis, we decided to record costs for each development project on a “full cost” basis. Accordingly, beginning in 2013, costs for each development project included salary and overhead costs, as well as direct costs.
Set forth below is a summary of the gross direct costs allocated to our main projects on an individual basis, as well as the gross direct costs allocated to our less significant projects on an aggregate basis, for the years ended December 31, 2010, 2011, 2012 and 20122013, and on an aggregate basis since project inception. Certain of such costs are covered by OCS funding, although OCS funds received have not been deducted from the direct project costs in the table.
| | Year Ended December 31, | | | Total Costs Since Project | |
| | 2011 | | | 2012 | | | 2013 | | | Inception | |
| | (U.S. $ in thousands) | |
| | | | | | | | | | | | |
BL-1040 | | | 3 | | | | – | | | | – | | | | 10,227 | |
BL-8040 | | | – | | | | 723 | | | | 3,910 | | | | 4,633 | |
BL-7010 | | | 274 | | | | 560 | | | | 1,905 | | | | 2,739 | |
BL-5010 | | | 94 | | | | 132 | | | | 251 | | | | 2,387 | |
BL-7040 | | | 465 | | | | 500 | | | | 650 | | | | 1,615 | |
BL-8020 | | | – | | | | 794 | | | | 918 | | | | 1,712 | |
BL-1020 | | | 2,765 | | | | 7,448 | | | | 3,328 | | | | 54,886 | |
Other projects | | | 3,454 | | | | 2,569 | | | | 201 | | | | 31,439 | |
Total project costs(1) | | | 7,055 | | | | 12,726 | | | | 11,163 | | | | 109,638 | |
| | Year Ended December 31, | | | Total Costs Since Project | |
| | 2010 | | | 2011 | | | 2012 | | | Inception | |
| | (U.S. $ in thousands) | |
| | | | | | | | | | | | |
BL-1020 | | | 450 | | | | 2,765 | | | | 7,448 | | | | 51,558 | |
BL-1040 | | | 167 | | | | 3 | | | | – | | | | 10,227 | |
BL-5010 | | | 384 | | | | 94 | | | | 132 | | | | 2,136 | |
BL-1021 | | | 924 | | | | 466 | | | | 68 | | | | 7,127 | |
BL-7040 | | | – | | | | 465 | | | | 500 | | | | 965 | |
BL-8040 | | | – | | | | – | | | | 723 | | | | 723 | |
Other projects | | | 1,704 | | | | 3,262 | | | | 3,855 | | | | 25,739 | |
Total gross direct project costs(1) | | | 3,629 | | | | 7,055 | | | | 12,726 | | | | 98,475 | |
| |
(1) | Does not include indirect project costs and overhead for years prior to 2013, including payroll and related expenses (including stock-based compensation), facilities, depreciation and impairment of intellectual property, which are included in total research and development expenses in our financial statements.statements for such years |
As indicated in the table above, a significant portion of our research and development costs have been incurred in connection with the BL-1020 project. We expect to continue to incur significant additional costs on the BL-1020 project through 2013, as a result of the phase 2/3 CLARITY study that we are currently conducting.
The costs and expenses of our projects have been partially financed by funds we have received from the OCS. Such funds are deducted from the related research and development expenses as the costs are incurred. For additional information regarding the OCS funding process, see “Government Regulation and Funding — Israeli Government Programs.” There can be no assurance that we will continue to receive funds from the OCS in amounts sufficient to fund our operations, if at all. In addition, under our licensing agreement with Ikaria, IkariaBellerophon, Bellerophon is responsible for the costs associated with conducting all future development activities for BL-1040. See “Item 4. Information on the Company — Business Overview —Out-Licensing Agreement with Ikaria Holdings.Bellerophon.”
From our inception through December 31, 2012,2013, we have incurred research and development expense of approximately NIS 514.1558.2 million ($137.7160.9 million). We expect that a large percentage of our research and development expense in the future will be incurred in support of our current and future preclinical and clinical development projects. Due to the inherently unpredictable nature of preclinical and clinical development processes and given the early stage of our preclinical product development projects, we are unable to estimate with any certainty the costs we will incur in the continued development of the therapeutic candidates in our pipeline for potential commercialization. Clinical development timelines, the probability of success and development costs can differ materially from expectations. We expect to continue to test our product candidates in preclinical studies for toxicology, safety and efficacy, and to conduct additional clinical trials for each product candidate. If we are not able to enter into an out-licensing arrangement with respect to any therapeutic candidate prior to the commencement of later stage clinical trials, we may fund the trials for the therapeutic candidate ourselves.
While we are currently focused on advancing each of our product development projects, our future research and development expenses will depend on the clinical success of each therapeutic candidate, as well as ongoing assessments of each therapeutic candidate’s commercial potential. In addition, we cannot forecast with any degree of certainty which therapeutic candidates may be subject to future out-licensing arrangements, when such out-licensing arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements. See “Item 3. Key Information — Risk Factors — If we or our licensees are unable to obtain U.S. and/or foreign regulatory approval for our therapeutic candidates, we will be unable to commercialize our therapeutic candidates.”
As we obtain results from clinical trials, we may elect to discontinue or delay clinical trials for certain therapeutic candidates or projects in order to focus our resources on more promising therapeutic candidates or projects. Completion of clinical trials by us or our licensees may take several years or more, but the length of time generally varies according to the type, complexity, novelty and intended use of a therapeutic candidate.
The cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical development, including, among others:
the number of sites included in the clinical trials;
| ● | the number of sites included in the clinical trials; |
the length of time required to enroll suitable patients;
| ● | the length of time required to enroll suitable patients; |
the number of patients that participate in the clinical trials;
| ● | the number of patients that participate in the clinical trials; |
the duration of patient follow-up;
| ● | the duration of patient follow-up; |
whether the patients require hospitalization or can be treated on an out-patient basis;
| ● | whether the patients require hospitalization or can be treated on an out-patient basis; |
the development stage of the therapeutic candidate; and
| ● | the development stage of the therapeutic candidate; and |
the efficacy and safety profile of the therapeutic candidate.
| ● | the efficacy and safety profile of the therapeutic candidate. |
We expect our research and development expenses to remain our most significant cost as we continue the advancement of our clinical trials and preclinical product development projects and place significant emphasis on in-licensing new product candidates. The lengthy process of completing clinical trials and seeking regulatory approval for our product candidates requires expenditure of substantial resources. Any failure or delay in completing clinical trials, or in obtaining regulatory approvals, could cause a delay in generating product revenue and cause our research and development expenses to increase and, in turn, have a material adverse effect on our operations. Due to the factors set forth above, we are not able to estimate with any certainty when we would recognize any net cash inflows from our projects.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of compensation for employees in business development and marketing functions. Other significant sales and marketing costs include costs for marketing and communication materials, professional fees for outside market research and consulting, legal services related to partnering transactions and travel costs.
General and Administrative Expenses
General and administrative expenses consist primarily of compensation for employees in executive and operational functions, including accounting, finance, legal, investor relations, information technology and human resources. Other significant general and administration costs include facilities costs, professional fees for outside accounting and legal services, travel costs, insurance premiums and depreciation.
Non-Operating Expense and Income
Non-operating expense and income includes fair-value adjustments of derivative liabilities on account of the warrants issued in the private placementand direct placements which we conducted in February 2012.2012 and 2013. These fair-value adjustments are highly influenced by our share price at each period end (revaluation date). Non-operating expense and income also includes the pro-rata share of issuance expenses from the private placementand direct placements related to the warrants. In addition, non-operating expense and income includes the initial commitment and finder’s fees, as well as other one-time expenses, associated with the initial set-up of the LPC share purchase agreement.agreement with LPC and an at-the-market equity offering sales agreement with Stifel, Nicolaus & Company, Incorporated. The at-the-market equity offering sales agreement was terminated in March 2014.
Financial Expense and Income
Financial expense and income consist of interest earned on our cash, cash equivalents and short-term bank deposits; bank fees and other transactional costs; and expense or income resulting from fluctuations of the dollar and other currencies, in which a portion of our assets and liabilities are denominated, against the NIS (our functional currency).
Critical Accounting Policies and Estimates
We describe our significant accounting policies more fully in Note 2 to our consolidated financial statements for the year ended December 31, 2012.2013. We believe that the accounting policies below are critical for one to fully understand and evaluate our financial condition and results of operations.
The discussion and analysis of our financial condition and results of operations is based on our financial statements, which we prepare in accordance with IFRS. The preparation of these financial statements requires us to make estimates using assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate such estimates, including those described in greater detail below. We base our estimates on historical experience and on various assumptions that we believe are reasonable under the circumstances, the results of which impact the carrying value of our assets and liabilities that are not readily apparent from other sources. Actual results will differ from these estimates and such differences may be significant.
Functional Currency
The currency of the primary economic environment in which our operations are conducted is the NIS. As we have not recorded significant recurring revenues since our inception, we consider the currency of the primary economic environment to be the currency in which we expend cash. A significant portion of our expenses and capital expenditures are incurred in NIS, and a significant portion of our financing has been provided in NIS.
Revenue Recognition
We recognize revenues in accordance with International Accounting Standard No. 18, or IAS 18. Under IAS 18, revenues incurred in connection with the out-licensing of our patents and other intellectual property are recognized when all of the following criteria have been met as of the applicable balance sheet date:
we have transferred to the licensee the significant risks and rewards of the rights to the patents and intellectual property;
| ● | we have transferred to the licensee the significant risks and rewards of the rights to the patents and intellectual property; |
we do not retain either the continuing managerial involvement to the degree usually associated with ownership or the effective control over the patents and intellectual property;
| ● | we do not retain either the continuing managerial involvement to the degree usually associated with ownership or the effective control over the patents and intellectual property; |
we can reliably measure the amount of revenue to be recognized;
| ● | we can reliably measure the amount of revenue to be recognized; |
it is probable that the economic benefits associated with the transaction will flow to us; and
| ● | it is probable that the economic benefits associated with the transaction will flow to us; and |
we can reliably measure the costs incurred or to be incurred in respect of the out-licensing.
| ● | we can reliably measure the costs incurred or to be incurred in respect of the out-licensing. |
We recognize revenues incurred in connection with the rendering of services by reference to the stage of completion of the transaction at the balance sheet date, if and when the outcome of the transaction can be estimated reliably.
We recognize revenues from royalties on an accrual basis when they become probable in accordance with the substance of the relevant agreement.
Accrued Expenses
We are required to estimate accrued expenses as part of our process of preparing financial statements. This process involves estimating the level of service performed on our behalf and the associated cost incurred in instances where we have not been invoiced or otherwise notified of actual costs. Examples of areas in which subjective judgments may be required include costs associated with services provided by contract organizations for preclinical development, clinical trials and manufacturing of clinical materials. We account for expenses associated with these external services by determining the total cost of a given study based on the terms of the related contract. We accrue for costs incurred as the services are being provided by monitoring the status of the trials and the invoices received from our external service providers. In the case of clinical trials, the estimated cost normally relates to the projected costs of treating the patients in our trials, which we recognize over the estimated term of the trial according to the number of patients enrolled in the trial on an ongoing basis, beginning with patient enrollment. As actual costs become known to us, we adjust our accruals.
Investments in Financial Assets
The primary objective of our investment activities is to preserve principal while maximizing the income that we receive from our investments without significantly increasing risk and loss. Our investments are exposed to market risk due to fluctuations in interest rates, which may affect our interest income and the fair market value of our investments. We manage this exposure by performing ongoing evaluations of our investments. Due to the short-term maturities of our investments to date, their carrying value has always approximated their fair value.
A financial asset is classified in this category if our management has designated it as a financial asset upon initial recognition, because it is managed and its performance is evaluated on a fair-value basis in accordance with a documented risk management or investment strategy. Our investment policy with regard to excess cash, as adopted by our Board of Directors, is composed of the following objectives: (i) preserving investment principal; (ii) providing liquidity; and (iii) providing optimum yields pursuant to the policy guidelines and market conditions. The policy provides detailed guidelines as to the securities and other financial instruments in which we are allowed to invest. In addition, in order to maintain liquidity, investments are structured to provide flexibility to liquidate at least 50% of all investments within 15 business days. Information about these assets, including details of the portfolio and income earned, is provided internally on a quarterly basis to our key management personnel and on a semi-annual basis to the Investment Monitoring Committee of our Board of Directors. Any divergence from this investment policy requires approval from our Board of Directors.
Government Participation in Research and Development Expenses
We receivehave received research and development funding from the State of Israel through the OCS, both in the form of loans extended to our biotechnology incubator, as well as in the form of grants. As described in Item 4. Business Overview — Government Regulation and Funding — Israel Government Programs — Israel Office of the Chief Scientist, the activities of our biotechnology incubator have been terminated; however, we may still be eligible for funding from the OCS in the form of grants. In accordance with the OCS programs, we are entitled to a specific grant or loanfunding with respect to a development project only after we incur development costs related to the project. Such loans and grants qualifyfunding qualifies as “forgivable loans” in accordance with IAS 20, “Accounting for Government Grants and Disclosure of Government Assistance,” since they areit is repayable only if we generate revenues related to the underlying project.
In accordance with IAS 20, we account for each forgivable loan as a liability unless it is more likely than not that we will meet the terms of forgiveness of the loan, in which case the forgivable loan is accounted for as a government grant and carried to income as a reduction of the research and development expenses. Upon the initiation of any project for which we have received a loan, we consider it more likely than not that the project will not reach the revenue-generating stage during the entire development phase of the project when determining the accounting treatment of the related loan. Our determination is based on the high risk nature of pharmaceutical development generally and specifically on our strategy of initializing projects in the earliestearly stages of development. Therefore, we record a liability in respect of forgivable loans on a project only when it becomes probable that we will repay the loan.
Liabilities to the OCS in respect of out-licensing transactions are generally discussed and negotiated with the OCS, due to the fact that such licensing transactions do not fit into the standard development funding model contemplated by the Israeli Research and Development Law. In June 2010, we received a notification regarding the payment due in connection with the BL-1040 project, which we have paid in full. Accordingly, we have no further liabilities to the OCS with respect to BL-1040. We have accrued a liability of $1.6 million to the OCS in connection with the BL-1020 out-licensing transaction ($3.0 million was paid in August 2010), representing the full amount of the grants received from the OCS in respect of the BL-1020 project. This represents our best estimate of the liability to the OCS related to BL-1020. We may incur additional liabilities to the OCS, depending on the portion of total manufacturing that is performed outside of Israel in respect of BL-1020. Such liabilities will only accrue, if at all, with respect to any payment received in connection with BL-1020, when we determine that it is more likely than not that the payment will become payable.
Stock-based Compensation
We account for stock-based compensation arrangements in accordance with the provisions of IFRS 2. IFRS 2 requires companies to recognize stock compensation expense for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions). The cost is recognized as compensation expense over the life of the instruments, based upon the grant-date fair value of the equity or liability instruments issued. The fair value of our option grants is computed as of the grant date based on the Black-Scholes model, using the standard parameters established in that model including estimates relating to volatility of our stock, risk-free interest rates, estimated life of the equity instruments issued and the market price of our stock. As our ordinary shares are publicly traded on the TASE, we do not need to estimate their fair market value. Rather, we use the actual closing market price of our ordinary shares on the date of grant, as reported by the TASE.
Warrants
In December 2009, we issued Series 2 Warrants exercisable for 7,528,946 ordinary shares. The Series 2 Warrants had a fixed exercise price and were classified as shareholders’ equity. All Series 2 warrants expired in December 2011 without exercise.
In connection with the private placement of approximately 5.25 million of our ADSs in February 2012, we issued warrants to purchase approximately 2.6 million of our ADSs at an exercise price of $3.57, subject to typical adjustments. The warrants are exercisable for a period of five years from the date of issuance. Since the exercise price was not deemed to be fixed, the warrants are not qualified for classification as an equity instrument and have therefore been classified as a non-current financial liability.
In connection with the direct placement to Orbimed of approximately 2.67 million of our ADSs in February 2013, we issued warrants to purchase 1.6 million of our ADSs at an exercise price of $3.94, subject to typical adjustments. The warrants are exercisable for a period of five years from the date of issuance. Since the exercise price was not deemed to be fixed, the warrants are not qualified for classification as an equity instrument and willhave therefore been classified as a non-current financial liability commencing with our March 31, 2013 quarterly financial statements.
Recent Accounting Changes and Pronouncements
A number of new standards and amendments to standards and interpretations are effectiveWe adopted the following standard for annual periodsthe first time for the fiscal year beginning after January 1, 2012, and have not been applied in preparing these consolidated financial statements. None of these is expected to have a significant effect on our consolidated financial statements, except the following set out below, for which the impact has not been fully assessed.
Amendment to IAS 1, “Financial Statement Presentation.” This amendment, regarding other comprehensive income, is effective for annual financial statement periods commencing on or after July 1, 2012. The main change resulting from this amendment is a requirement for entities to group items presented in other comprehensive income on the basis of whether they are potentially re-classifiable to profit or loss subsequently (reclassification adjustments).2013:
IFRS 13, “Fair Value Measurement.” This standard effective for financial statement periods commencing on or after January 1, 2013, aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs. The requirements, which are largely aligned between IFRSs and U.S. GAAP, do not extend the use of fair value accounting, but rather provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRSs or U.S. GAAP.IFRSs.
AmendmentA number of new standards and amendments to IAS 19, “Employee Benefits.” This amendment,standards and interpretations are effective for financial statementannual periods commencing on orbeginning after January 1, 2013, changesand have not been applied in preparing these consolidated financial statements. None of these is expected to have a significant effect on our consolidated financial statements, except the methodologyfollowing set out below, for calculating long-term employee benefit liabilities. Thewhich the impact on the Company will be to immediately recognize all past service costs, and to replace interest cost and expected return on plan assets with a net interest amount that is calculated by applying the discount rate to the net defined benefit liability (asset). Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are to be charged to equity.
has not been fully assessed.
IFRS 9, “Financial instruments.” This standard effective for financial statement periods commencing on or after January 1, 2015, addresses the classification, measurement and recognition of financial assets and financial liabilities. IFRS 9 was issued in November 2009 and October 2010. It replaces the parts of IAS 39 that relate to the classification and measurement of financial instruments. IFRS 9 requires financial assets to be classified into two measurement categories: those measured at fair value and those measured at amortized cost. The determination is made at initial recognition. The classification depends on the entity’s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the IAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity’s own credit risk is recorded in other comprehensive income rather than the income statement, unless this creates an accounting mismatch. The Company has not yet assessed the full impact of IFRS 9. The Company will also consider the impact of the remaining phases of IFRS 9 when completed.
IFRS 10, “Consolidated Financial Statements.” This standard, effective for financial statement periods commencing on or after January 1, 2013, builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess. The Company has not yet assessed the full impact of IFRS 10.
Results of Operations -- Overview
Revenues
In August 2010, we received a payment of $30.0 million in connection with our out-licensing arrangement with Cypress Bioscience, which was recorded as revenue in the third quarter of 2010. We did not record any revenues duringfor the years ended December 31, 2011, 2012 and 2012.2013.
Cost of revenues
Cost of revenues consists of payments due to the licensors under the in-licensing agreement related to BL-1020. We did not record any cost of revenues duringfor the years ended December 31, 2011, 2012 and 2012.2013.
Research and development expenses
At December 31, 2010, our drug development pipeline consisted of 10 therapeutic candidates. During 2011, we added six new compounds to our pipeline and discontinued the development of one compound from the pipeline, so that our drug development pipeline as of December 31, 2011 consisted of 15 therapeutic candidates. During 2012, we added four new compounds to our pipeline and discontinued the development of five compounds from the pipeline, so that our drug development pipeline as of December 31, 2012 consisted of 14 therapeutic candidates. Subsequent to December 31, 2012,During 2013, we added onetwo new compoundcompounds to our pipeline and discontinued the development of threesix additional compounds from the pipeline, so that our drug development pipeline as of December 31, 2013 consisted of 10 therapeutic candidates. Subsequent to December 31, 2013, we discontinued the development on additional compound from the pipeline, so that our drug development pipeline as of the date of this report consists of 12nine therapeutic candidates.
Comparison of the Year Ended December 31, 2013 to the Year Ended December 31, 2012
Research and development expenses
Research and development expenses for the year ended December 31, 2013 were NIS 44.1 million ($12.7 million), a decrease of NIS 20.2 million ($5.8 million), or 31%, compared to NIS 64.3 million ($18.5 million) for the year ended December 31, 2012. Without regard to a NIS 6.0 million one-time reversal of amounts previously accrued to the OCS in respect of BL-1020, research and development expenses decreased by NIS 14.2 million ($4.1 million). The decrease resulted primarily from lower expenses in 2013 associated with BL-1020, due to termination of the CLARITY clinical trial in March 2013, which was partially offset by a ramp-up in spending on other clinical-stage projects introduced during 2011 and 2012.
Sales and marketing expenses
Sales and marketing expenses for the year ended December 31, 2013 were NIS 4.1 million ($1.2 million), an increase of NIS 0.9 million ($0.3 million), or 28%, compared to NIS 3.2 million ($0.9 million) for the year ended December 31, 2012. The increase resulted primarily from increased business development activities, as well as professional services incurred in connection with the collaboration agreement signed with JHL Biotech.
General and administrative expenses
General and administrative expenses for the year ended December 31, 2013 were NIS 13.2 million ($3.8 million), a decrease of NIS 0.8 million ($0.2 million) or 6%, compared to NIS 14.0 million ($4.0 million) for the year ended December 31, 2012. The small decrease resulted primarily from one-time expenses for professional services incurred in 2012.
Non-operating income (expense), net
We recognized net non-operating income of NIS 4.2 million ($1.2 million) for the year ended December, 2013, an increase of NIS 0.2 million ($0.1 million), compared to net non-operating income of NIS 4.0 million ($1.1 million) for the year ended December 31, 2012. Non-operating income for both periods primarily relates to fair-value adjustments of liabilities on account of warrants. These fair-value adjustments were highly influenced by our share price at each period end (revaluation date).
Financial income (expense), net
We recognized net financial expenses of NIS 4.2 million ($1.2 million) for the year ended December 31, 2013, a change of NIS 5.5 million ($1.6 million), compared to net financial income of NIS 1.3 million ($0.4 million) for the year ended December 31, 2012. Net financial income and expenses result primarily from changes in the average exchange rate of the dollar in relation to the NIS during the respective periods, which have a direct effect on our net assets denominated in dollars.
Comparison of the Year Ended December 31, 2012 to the Year Ended December 31, 2011
Research and development expenses
Research and development expenses for the year ended December 31, 2012 were NIS 64.3 million, ($17.2 million), an increase of NIS 21.7 million, ($5.8 million), or 51%, compared to NIS 42.6 million ($11.4 million) for the year ended December 31, 2011. The increase resulted primarily from significantly higher expenses in 2012 associated with the CLARITY clinical trial in respect of BL-1020, which commenced at the end of June 2011 and was still in its initial ramp-up stages during the third and fourth quarters of 2011, as well as a ramp-up in spending on other clinical-stage projects introduced during the second half of 2011 and in 2012.
Sales and marketing expenses
Sales and marketing expenses for the year ended December 31, 2012 were NIS 3.2 million, ($0.9 million), a negligible decrease compared to NIS 3.3 million ($0.9 million) for the year ended December 31, 2011. We invested additional resources in our overall business development efforts in 2012, which were primarily offset by savings from efficiencies realized this year due to the reorganization of our business development team, as well as professional services incurred last year related to the reacquisition of the rights to BL-1020 from Cypress Bioscience. Sales and marketing expenses are expected to increase in the foreseeable future, as we continue to increase our business development efforts in respect of BL-1020, as well as a number of our other assets.
General and administrative expenses
General and administrative expenses for the year ended December 31, 2012 were NIS 14.0 million, ($3.8 million), an increase of NIS 1.3 million ($0.4 million) or 10%, compared to NIS 12.7 million ($3.4 million) for the year ended December 31, 2011. The increase resulted primarily from professional fees and other expenses associated with being a listed company on Nasdaq for a full year in 2012 compared to only five months in 2011, as well as an increase in excise taxes recorded in 2012 in respect of certain non-deductible expenses.expenses
Non-operating income (expense), net
Non-operating income, net, for the year ended December 31, 2012 consists of a NIS 7.3 million ($2.0 million) fair-value adjustment of derivative liabilities on account of the warrants issued in the private placement which we conducted in February 2012, offset by issuance expenses in the amount of NIS 1.2 million ($0.3 million) from the private placement related to the warrants, as well as the initial commitment and finder’s fees and other one-time expenses in the aggregate amount of NIS 2.1 million ($0.5 million) associated with the LPC share purchase agreement.
Financial income (expense), net
We recognized net financial income of NIS 1.3 million ($0.4 million) for the year ended December 31, 2012, a decrease of NIS 7.2 million, ($1.9 million), compared to net financial income of NIS 8.5 million ($2.3 million) for the year ended December 31, 2011. Net financial income for both years results primarily from changes in the average exchange rate of the dollar in relation to the NIS, which were much more pronounced in 2011 than in 2012, and had a positive effect on our net assets denominated in dollars.
Comparison of the Year Ended December 31, 2011 to the Year Ended December 31, 2010
Research and development expenses
Research and development expenses for the year ended December 31, 2011 were NIS 42.6 million, a decrease of NIS 12.4 million, or 23%, compared to NIS 55.0 million for the year ended December 31, 2010. Research and development expenses for the 2010 period included payments to the OCS of NIS 17.4 million, which were a repayment of funds previously received from the OCS in respect of BL-1020. Those funds had been previously reflected in prior periods as a reduction in research and development expenses. Without regard to these non-recurring payments, research and development expenses for the year ended December 31, 2011 increased by NIS 5.1 million, or 14%, over the year ended December 31, 2010. The increase resulted primarily from the commencement of the CLARITY clinical trial in respect of BL-1020 at the end of June 2011.
Sales and marketing expenses
Sales and marketing expenses for the year ended December 31, 2011 were NIS 3.3 million, a decrease of NIS 1.3 million, or 28%, compared to NIS 4.6 million for the year ended December 31, 2010. The decrease resulted primarily from a shorter period of time devoted to strategic partnering efforts in connection with BL-1020 during 2011 as compared to 2010, as well as from a reduction in expenses due to the transfer of our business development activities from the U.S. to Israel during the first half of 2011 and the resulting closure of our U.S. office.
General and administrative expenses
General and administrative expenses for the year ended December 31, 2011 were NIS 12.7 million, a decrease of NIS 2.2 million, or 15%, compared to NIS 14.9 million for the year ended December 31, 2010. The decrease resulted primarily from expenses associated with our proposed initial public offering in 2010.
Financial income (expense), net
We recognized net financial income of NIS 8.5 million for the year ended December 31, 2011, an increase of NIS 14.2 million, compared to net financial expense of NIS 5.7 million for the year ended December 31, 2010. The increase in net financial income resulted primarily from the increase in the average exchange rate of foreign currencies in relation to the NIS during the year ended December 31, 2011, which had a positive effect on our net assets denominated in such foreign currencies during that period.
Quarterly Results of Operations
The following tables show our unaudited quarterly statements of operations for the periods indicated. We have prepared this quarterly information on a basis consistent with our audited consolidated financial statements and we believe it includes all adjustments, consisting of normal recurring adjustments necessary for a fair presentation of the information shown. Operating results for any quarter are not necessarily indicative of results for a full fiscal year.
| | Three Months Ended | | | Three Months Ended | |
| | March 31 | | | June 30 | | | Sept. 30 | | | Dec. 31 | | | March 31 | | | June 30 | | | Sept. 30 | | | Dec. 31 | | | March 31 | | | June 30 | | | Sept. 30 | | | Dec. 31 | | | March 31 | | | June 30 | | | Sept. 30 | | | Dec. 31 | |
| | 2011 | | | 2012 | | | 2012 | | | 2013 | |
| | (in thousands of NIS) | | | (in thousands of NIS) | |
Consolidated Statements of Operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | |
Cost of revenues | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sales and marketing expenses | | | (750 | ) | | | (1,323 | ) | | | (358 | ) | | | (877 | ) | | | (766 | ) | | | (948 | ) | | | (912 | ) | | | (601 | ) | | | (766 | ) | | | (948 | ) | | | (912 | ) | | | (601 | ) | | | (771 | ) | | | (1,063 | ) | | | (731 | ) | | | (1,536 | ) |
Research and development expenses, net | | | (6,384 | ) | | | (10,405 | ) | | | (13,255 | ) | | | (12,579 | ) | | | (14,675 | ) | | | (16,000 | ) | | | (15,848 | ) | | | (17,781 | ) | | | (14,675 | ) | | | (16,000 | ) | | | (15,848 | ) | | | (17,781 | ) | | | (19,443 | ) | | | (12,087 | ) | | | (8,190 | ) | | | (4,337 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
General and administrative expenses | | | (2,926 | ) | | | (3,348 | ) | | | (3,272 | ) | | | (3,176 | ) | | | (3,525 | ) | | | (2,956 | ) | | | (2,834 | ) | | | (4,711 | ) | | | (3,525 | ) | | | (2,956 | ) | | | (2,834 | ) | | | (4,711 | ) | | | (3,522 | ) | | | (3,604 | ) | | | (2,663 | ) | | | (3,436 | ) |
Operating income (loss) | | | (10,060 | ) | | | (15,076 | ) | | | (16,885 | ) | | | (16,632 | ) | | | (18,966 | ) | | | (19,904 | ) | | | (19,594 | ) | | | (23,093 | ) | | | (18,966 | ) | | | (19,904 | ) | | | (19,594 | ) | | | (23,093 | ) | | | (23,736 | ) | | | (16,754 | ) | | | (11,584 | ) | | | (9,309 | ) |
Non-operating income (expenses), net | | | – | | | | – | | | | – | | | | – | | | | 2,819 | | | | 2,712 | | | | (3,180 | ) | | | 1,607 | | | | 2,819 | | | | 2,712 | | | | (3,180 | ) | | | 1,607 | | | | 12,262 | | | | 1,579 | | | | (4,627 | ) | | | (5,023 | ) |
Financial income, net | | | 1,183 | | | | 637 | | | | 8,965 | | | | 2,432 | | | | 446 | | | | 6,050 | | | | 1,827 | | | | 496 | | | | 446 | | | | 6,050 | | | | 1,827 | | | | 496 | | | | 663 | | | | 1,320 | | | | 501 | | | | 116 | |
Financial expenses, net | | | (2,767 | ) | | | (1,965 | ) | | | (18 | ) | | | – | | | | (2,231 | ) | | | (172 | ) | | | (1,649 | ) | | | (3,438 | ) | | | (2,231 | ) | | | (172 | ) | | | (1,649 | ) | | | (3,438 | ) | | | (2,029 | ) | | | (1,713 | ) | | | (1,956 | ) | | | (1,148 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | | (11,644 | ) | | | (16,404 | ) | | | (7,938 | ) | | | (14,200 | ) | | | (17,932 | ) | | | (11,314 | ) | | | (22,596 | ) | | | (24,428 | ) | | | (17,932 | ) | | | (11,314 | ) | | | (22,596 | ) | | | (24,428 | ) | | | (12,840 | ) | | | (15,568 | ) | | | (17,666 | ) | | | (15,364 | ) |
Our quarterly revenues and operating results of operations have varied in the past and can be expected to vary in the future due to numerous factors. We believe that period-to-period comparisons of our operating results are not necessarily meaningful and should not be relied upon as indications of future performance.
Liquidity and Capital Resources
Since inception, we have funded our operations primarily through public (in Israel),and private and direct offerings of our equity securities, grants and loans from the OCS, and payments received under our strategic licensing arrangements. At December 31, 2012,2013, we held approximately NIS 79.863.2 million ($21.418.2 million) in cash, cash equivalents and short-term bank deposits, anddeposits. In March 2014, we closed an underwritten public offering of our ADSs for gross proceeds of $24.1 million. We have invested substantially all of our available cash funds in short-term bank deposits.
In February 2013, we completed a direct placement to a leading healthcare investor, OrbiMed Israel Partners Limited Partnership, an affiliate of OrbiMed Advisors LLC. The placement consisted of 2,666,667 ADSs and warrants to purchase an additional 1,600,000 ADSs, at a unit price of $3.00. The warrants have an exercise price of $3.94 per ADS and are exercisable for a term of five years. The offering raised a total of $8,000,000, with net proceeds of approximately $7,700,000, after deducting fees and expenses.
Pursuant to the share purchase agreement with LPC signed in September 2012, we may sell, from time to time, and at our discretion, up to $15 million of our ADSs to LPC during the 36-month term of the purchase agreement. From the effective date of the purchase agreement through March 5, 2013,14, 2014, we have sold an aggregate of approximately $4.7$9.5 million of our ADSs to LPC, leaving an available balance under the facility of approximately $10.3$5.5 million.
Net cash used in operating activities was NIS 70.5 million for the year ended December 31, 2013, NIS 75.1 million for the year ended December 31, 2012, and NIS 42.7 million for the year ended December 31, 2011, compared with cash provided by operating activities of NIS 40.7 million for the year ended December 31, 2010.2011. The NIS 32.44.6 million increase($1.3 million) decrease in net cash used in operating activities during 2012 was2013 resulted primarily from the result of increaseddecrease in research and development spending. The net cash provided by operating activities in 2010 primarily reflects the $30.0 million upfront payment we received from Cypress Bioscience.
Net cash provided byused in investing activities for the year ended December 31, 20122013 was NIS 19.8 million, compared to net cash provided by investing activities of NIS 51.3 million compared tofor the year ended December 31, 2012 and net cash used in investing activities of NIS 37.6 million for the year ended December 31, 2011 and NIS 29.5 million for the year ended December 31, 2010.2011. The changes in cash flows from investing activities relate primarily to investments in, and maturities of, short-term bank deposits and other investments during the respective periods.
Net cash provided by financing activities for the year ended December 31, 20122013 was NIS 55.2 million, compared to net cash provided by financing activities of NIS 58.9 million compared tofor the year ended December 31, 2012 and insignificant amounts of cash flows related to financing activities for the yearsyear ended December 31, 2011 and 2010. The net2011.The cash provided byflows from financing activities relates primarilyin 2013 reflect the direct placement to OrbiMed completed in February 2013, as well as funding under the share purchase agreement with LPC. The cash flows from financing activities in 2012 reflect the private placement we completed in February 2012.
Developing drugs, conducting clinical trials and commercializing products is expensive and we will need to raise substantial additional funds to achieve our strategic objectives. Although we believe our existing cash and other resources will be sufficient to fund our projected cash requirements through the end of 2014, we will require significant additional financing in the future to fund our operations. Additional financing may not be available on acceptable terms, if at all. Our future capital requirements will depend on many factors, including:
the progress and costs of our preclinical studies, clinical trials and other research and development activities;
| ● | the progress and costs of our preclinical studies, clinical trials and other research and development activities; |
the scope, prioritization and number of our clinical trials and other research and development programs;
| ● | the scope, prioritization and number of our clinical trials and other research and development programs; |
the amount of revenues we receive under our collaboration or licensing arrangements;
| ● | the amount of revenues we receive under our collaboration or licensing arrangements; |
the costs of the development and expansion of our operational infrastructure;
| ● | the costs of the development and expansion of our operational infrastructure; |
the costs and timing of obtaining regulatory approval of our therapeutic candidates;
| ● | the costs and timing of obtaining regulatory approval of our therapeutic candidates; |
the ability of our collaborators to achieve development milestones, marketing approval and other events or developments under our collaboration agreements;
| ● | the ability of our collaborators to achieve development milestones, marketing approval and other events or developments under our collaboration agreements; |
the costs of filing, prosecuting, enforcing and defending patent claims and other intellectual property rights;
| ● | the costs of filing, prosecuting, enforcing and defending patent claims and other intellectual property rights; |
the costs and timing of securing manufacturing arrangements for clinical or commercial production;
| ● | the costs and timing of securing manufacturing arrangements for clinical or commercial production; |
the costs of establishing sales and marketing capabilities or contracting with third parties to provide these capabilities for us;
| ● | the costs of establishing sales and marketing capabilities or contracting with third parties to provide these capabilities for us; |
the costs of acquiring or undertaking development and commercialization efforts for any future product candidates;
| ● | the costs of acquiring or undertaking development and commercialization efforts for any future product candidates; |
the magnitude of our general and administrative expenses;
| ● | the magnitude of our general and administrative expenses; |
any cost that we may incur under current and future licensing arrangements relating to our therapeutic candidates; and
| ● | any cost that we may incur under current and future licensing arrangements relating to our therapeutic candidates; and |
Until we can generate significant continuing revenues, we expect to satisfy our future cash needs through payments received under our collaborations, debt or equity financings, or by out-licensing other product candidates. We cannot be certain that additional funding will be available to us on acceptable terms, or at all.
If funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our research or development programs or our commercialization efforts.
Off-Balance Sheet Arrangements
Since inception, we have not entered into any transactions with unconsolidated entities whereby we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose us to material continuing risks, contingent liabilities, or any other obligations under a variable interest in an unconsolidated entity that provides us with financing, liquidity, market risk or credit risk support.
Contractual Obligations
The following table summarizes our significant contractual obligations at December 31, 2012:2013:
| | Total | | | Less than 1 year | | | 1-3 years | | | 3-5 years | | | More than 5 years | | | Total | | | Less than 1 year | | | 1-3 years | | | 3-5 years | | | More than 5 years | |
| | (in thousands of NIS) | | | (in thousands of NIS) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Car leasing obligations | | | 1,326 | | | | 885 | | | | 441 | | | | – | | | | – | | | | 1,076 | | | | 604 | | | | 472 | | | | – | | | | – | |
Premises leasing obligations | | | 2,285 | | | | 916 | | | | 1,369 | | | | – | | | | – | | | | 826 | | | | 826 | | | | – | | | | – | | | | – | |
Purchase commitments | | | 5,973 | | | | 5,973 | | | | - | | | | – | | | | – | | | | 5,081 | | | | 5,081 | | | | – | | | | – | | | | – | |
Total | | | 9,584 | | | | 7,774 | | | | 1,810 | | | | – | | | | – | | | | 6,983 | | | | 6,511 | | | | 472 | | | | – | | | | – | |
The foregoing table does not include our in-licensing agreements. Under our in-licensing agreements, we are obligated to make certain payments to our licensors upon the achievement of agreed upon milestones. We are unable at this time to estimate the actual amount or timing of the costs we will incur in the future under these agreements; however, we do not expect any material milestones to be achieved within the next 12 months. If all of the milestones are achieved over the life of each in-licensing agreement, we will be required to pay approximately $8.0 million, in the aggregate, to the applicable licensors. Some of the in-licensing agreements are accompanied by consulting, support and cooperation agreements, pursuant to which we are required to pay the licensors a fixed monthly amount, over a period stipulated in the applicable agreement, for their assistance in the continued research and development under the applicable license. All of our in-licensing agreements are terminable at-will by us upon prior written notice of 30 to 90 days. We are unable at this time to estimate the actual amount or timing of the costs we will incur in the future under these agreements. See “Item 4. Information on the Company — Business Overview — In-Licensing Agreements.”
A. Directors and Senior Management
The following table sets forth information for our executive officers and directors as of March 5, 2013.*14, 2014. Unless otherwise stated, the address for our directors and officers is c/o BioLineRx Ltd., P.O. Box 45158, 19 Hartum Street, Jerusalem 9777518, Israel.
Name | | Age | | Position(s) |
| | | | |
Kinneret Savitsky, Ph.D. | | 4647 | | Chief Executive Officer |
| | | | |
Philip Serlin, CPA, MBA | | 5253 | | Chief Financial and Operating Officer |
| | | | |
Moshe Phillip, M.D. | | 58 | | Vice President of Medical Affairs and Senior Clinical Advisor |
| | | | |
Leah Klapper, Ph.D. | | 4849 | | General Manager, BioLine Innovations JerusalemChief Scientific Officer |
| | | | |
Arnon Aharon, M.D. | | 45 | | Vice President of Medical Affairs |
| | | | |
David Malek, MBA | | 3536 | | Vice President of Business Development |
| | | | |
Aharon Schwartz, Ph.D. | | 7071 | | Chairman of the Board |
| | | | |
Michael J. Anghel, Ph.D. | | 7374 | | Director |
| | | | |
Nurit Benjamini, MBA | | 4647 | | External Director |
| | | | |
B.J. Bormann, Ph.D. | | 55 | | Director |
| | | | |
Raphael Hofstein, Ph.D. | | 63 | | Director |
| | | | |
Avraham Molcho, M.D. | | 5556 | | External Director |
| * | From 2007 until March 4, 2013, Yakov Friedman served as a director. On that date, Mr. Friedman gave notice of his resignation, effective immediately. | | |
Sandra Panem, Ph.D. | | 67 | | Director |
Kinneret Savitsky, Ph.D., has served as our Chief Executive Officer since January 2010. Prior to becoming our Chief Executive Officer, from 2004 through 2005, she served as our Vice President Drug Development and from 2005 through 2010 she served as the General Manager of BIJ, our wholly-owned subsidiary. Prior to joining BIJ, Dr. Savitsky served as the Vice President of Biology of Compugen Ltd. (Nasdaq: CGEN), from 2000 to 2004, and held other senior positions at Compugen from 1997 through 2000. During 2010 and 2011, Dr. Savitsky served as a director on our Board of Directors; she currently serves as an external director at Evogene Ltd. (TASE:(Nasdaq:EVGN, TASE:EVGN). Dr. Savitsky received her Ph.D. in Human Geneticshuman genetics from Tel Aviv University, a Master’s degree in Human Geneticshuman genetics from Tel Aviv University and a B.Sc. in Biologybiology from The Hebrew University of Jerusalem.
Philip Serlin, CPA, MBA, has beenserved as our Chief Financial and Operating Officer since May 2009. From January 2008 to August 2008, Mr. Serlin served as the Chief Financial Officer and Chief Operating Officer of Kayote Networks Inc. From January 2006 to December 2007, he served as the Chief Financial Officer of Tescom Software Systems Testing Ltd. (TASE:TSCM), an IT services company publicly traded in both Tel Aviv and London. His background also includes senior positions at Chiaro Networks Ltd. and at Deloitte, where he was head of the SEC and U.S. Accounting Department at the National Office in Tel Aviv, as well as seven years at the SEC at its Washington, D.C., headquarters. Mr. Serlin currently serves as a director at Kitov Pharmaceuticals Holdings Ltd. (TASE:KTOV). Mr. Serlin is a CPA and holds a B.Sc. in Accountingaccounting from Yeshiva University and a Master’s degree in Economicseconomics and Public Policypublic policy from The George Washington University.
Moshe Phillip, M.D., has been our Vice President of Medical Affairs and Senior Clinical Advisor and a member of our Scientific Advisory Board since 2004. Professor Phillip is the Director of the Institute for Endocrinology and Diabetes of the Israel National Center for Childhood Diabetes at the Schneider Children’s Medical Center of Israel, has served as the Vice Dean and Head of School for Continuing Medical Education and currently is the Vice Dean for Research and Development at the Sackler School of Medical Education at Tel Aviv University. Professor Phillip served as the Chairman of the Israel Diabetes Association’s Committee for Type 1 Diabetes, serves as the Chair of Type 1 Diabetes in the Diabetes National Councils of Health and as a member of the Pediatric National Council of Health. Professor Phillip is also on the editorial board of three medical journals, including Pediatric Diabetes and Hormone Research. Since 2008, Professor Phillip has served as a director of CGU3, a privately-held company. Professor Phillip holds an M.D. from the Ben Gurion University of the Negev and received a fellowship in pediatric endocrinology at the University of Maryland School of Medicine.
Leah Klapper, Ph.D., has served as our Chief Scientific Officer since January 1, 2014. From 2010 to 2013, Dr. Klapper served as the General Manager of BIJ since January 2010.BIJ. Prior to that, from 2005 through 2010,2009, she served as Vice President of Preclinical Development of BIJ. From 2001 through 2005, Dr. Klapper served as Vice President of Research and Development at CureTech Ltd., a biotechnology company developing novel immune-modulating molecules, where she founded the research laboratory and led the company from the bench to clinical studies. Dr. Klapper gained extensive post-doctoral training at the Fred Hutchinson Cancer Research Center in Seattle, Washington. Dr. Klapper received her Ph.D. from the Weizmann Institute, her M.Sc. from the Department of Pharmacology at Tel Aviv University and a B.Sc. in Life Scienceslife sciences from Tel Aviv University.
Arnon Aharon, M.D., has served as our Vice President of Medical Affairs since January 2014. Prior to joining the Company, Dr. Aharon served as Clinical Director, Medical Director or VP of Development at several biotechnology companies, the most recent being Thrombotech Ltd. (from 2009 to 2012) and LycoRed Ltd. (from 2009 to 2013). In addition, Dr. Aharon was a partner in R&D Integrative Solutions, a firm that provides consulting services to the biotechnology industry and academic centers. Dr. Aharon holds a B.Sc. in medical sciences and an M.D. from Tel Aviv University.
David Malek, MBA, has served as our Vice President of Business Development since October 2011. Prior to joining the Company, from 20072006 to 2011 Mr. Malek served at Sanofi-Aventis in a number of management positions, including Marketing, Finance and Business Development. Most recently, he served as Director of Oncology - New Products and Business Development. Mr. Malek received an MBA from the Tuck Business School at Dartmouth University and a BAB.A. in Statisticsstatistics and Political Sciencepolitical science from the University of Haifa.
Aharon Schwartz, Ph.D., has served as the Chairman of our Board of Directors since 2004. He served in a number of positions in Teva from 1975 through 2011, the most recent being Vice President, Head of Teva Innovative Ventures from 2008. Dr.Dr Schwartz also served as Chairman of DenX Ltd. and Immudar. He is currently a non-executive memberchairman of the boards of numerous life science companies, including Yissum, DPharm Ltd, BioCancell Ltd, CureTech Ltd and Biomas Ltd. Dr Schwartz also serves as a consultant to Clal Biotechnology Industries Ltd. (TASE:CBI), Proteologic Ltd. and Mediwound Ltd. Dr. Schwartz received his Ph.D. in organic chemistry from the Weizmann Institute, his M.Sc. in organic chemistry from the Technion and a B.Sc. in chemistry and physics from the Hebrew University of Jerusalem. Dr. Schwartz recently received a second Ph.D. from the Hebrew University of Jerusalem in the history and philosophy of science.
Michael J. Anghel, Ph.D., has served on our Board of Directors since 2010 and on our Investment Monitoring Committee since 2010. From 1977 to 1999, he led the Discount Investment Corporation Ltd. (of the IDB Group) activities in the fields of technology and communications. Dr. Anghel was instrumental in founding Tevel, one of the first Israeli cable television operators and later in founding Cellcom Israel Ltd. (NYSE:CEL), the second Israeli cellular operator. In 1999, he founded CAP Ventures, an advanced technology investment company. From 2004 to 2005, Dr. Anghel served as CEO of DCM, the investment banking arm of the Israel Discount Bank (TASE:DSCT). He has been involved in various technology enterprises and has served on the Boards of Directors of various major Israeli corporations and financial institutions including Elron Electronic Industries Ltd. (TASE:ELRN), Elbit Systems Ltd. (Nasdaq:ESLT, TASE:ESLT), Nice Systems (Nasdaq:NICE), Gilat Satellite Networks Ltd. (Nasdaq:GILT), American Israeli Paper Mills (now Hadera Paper Ltd. (AMEX:AIP)), Maalot (the Israeli affiliate of Standard and Poor’s) and Hapoalim Capital Markets. He currently serves on the Boards of Directors of Partner Communications Company, Ltd. (Nasdaq:PTNR, TASE:PTNR), Syneron Medical Ltd. (Nasdaq:ELOS), Evogene Ltd. (TASE:(Nasdaq:EVGN, TASE:EVGN), Gravity Visual Effects and Design Ltd., Dan Hotels Ltd. (TASE:DANH), Orbotech Ltd. (Nasdaq:ORBK, GSM:ORBK) and the Strauss Group Ltd. (TASE:STRS). He is also the chairman of the Center for Educational Technology. Prior to launching his business career, Dr. Anghel served as a full-time member of the Recanati Graduate School of Business Administration of the Tel Aviv University, where he taught finance and corporate strategy. He currently serves as Chairman of the Tel Aviv University’s Executive Program. Dr. Anghel holds a B.A. (Economics) from the Hebrew University in Jerusalem and an MBA. and Ph.D. (Finance) from Columbia University, New York.
Nurit Benjamini, MBA, has served as an external director on our Board of Directors and as the chairperson of our Audit Committee of our Board of Directors since 2010. In addition, Ms. Benjamini has served on our Investment Monitoring Committee since 2010 and on our Compensation Committee since 2012. Since May 2011,December 2013, Ms. Benjamini has served as the Chief Financial Officer of TabTale Ltd. a company that develops, designs and manufactures interactive digital content to be displayed on electronic devices and websites. From 2011 to 2013, Ms. Benjamini served as the Chief Financial Officer of Wixpress Ltd. Prior to that,; from 2007 through 2011, she served as the Chief Financial Officer of CopperGate Communications Ltd. From; and from 2000 through 2007, Ms. Benjaminishe served as the Chief Financial Officer of Compugen Ltd. (Nasdaq: CGEN). Prior to that, from 1998 through 2000, Ms. Benjamini served as the Chief Financial Officer of Phone-Or Ltd. and from 1993 through 1998, Ms. Benjamini served as the Chief Financial Officer of Aladdin Knowledge Systems Ltd., and from 1998 through 2000, as the Chief Financial Officer of Phone-Or Ltd. and Ms. Benjamini serves on the board of directors, and as chairperson of the audit committee, of Allot Communications Ltd. (Nasdaq:ALLT, TASE:ALLT). Ms. Benjamini holds a B.A. in Economicseconomics and Businessbusiness and an M.B.A. in Finance,finance, both from Bar Ilan University, Israel.
BJ Bormann, Ph.D., has served on our Board of Directors since August 2013. Dr. Bormann currently serves as the CEO of Harbour Antibodies BV, a Netherlands based company that licenses transgenic mice that generate human antibodies. Dr. Bormann also serves as the Chief Business Advisor for NanoMedical Systems, Inc. of Austin, Texas that licenses a unique implantable drug delivery device. Prior to these current engagements, Dr. Bormann was Senior Vice President responsible for world-wide alliances, licensing and business development at Boehringer Ingelheim Pharmaceuticals, Inc. from 2007 to 2013. From 1996 to 2007, she served in a number of positions at Pfizer, Inc., the last one being Vice President of Pfizer Global Research and Development and world-wide Head of Strategic Alliances. Dr. Bormann serves on the board of directors of various companies, including Supportive Therapeutics, LLC, Harbour Antibodies and the Institute for Pediatric Innovation. Dr. Bormann received her Ph.D. in biomedical science from the University of Connecticut Health Center and her B.Sc. from Fairfield University in biology. Dr. Bormann completed postdoctoral training at Yale Medical School in the department of pathology.
Raphael Hofstein, Ph.D., has served on our Board of Directors since 2003, our Audit Committee since 2007 and our Compensation Committee since 2012. Dr. Hofstein has served as the President and Chief Executive Officer of MaRS Innovation (a commercialization company of the University of Toronto and 10 affiliated hospitals) since June 2009. From 2000 through June 2009, Dr. Hofstein was the President and Chief Executive Officer of Hadasit Medical Research Services and Development Ltd., or Hadasit, the technology transfer company of Hadassah Hospital.University Hospitals. He has served as chairman of the board of directors of Hadasit since 2006. Prior to joining Hadasit, Dr. Hofstein was the President of Mindsense Biosystems Ltd. and the Business Unit Director of Ecogen Inc. and has held a variety of other positions, including manager of R&D and chief of immunochemistry at the International Genetic Science Partnership. Dr. Hofstein serves on the board of directors of numerous companies, including Hadasit Bio-Holdings Ltd. (TASE:HDST). Dr. Hofstein received his Ph.D. and M.Sc. from the Weizmann Institute of Science, and his B.Sc. in chemistry and physics from the Hebrew University in Jerusalem. Dr. Hofstein completed postdoctoral training at Harvard Medical School in both the departments of biological chemistry and neurobiology.
Avraham Molcho, M.D., MBA, has served as an external director on our Board of Directors and on our Audit Committee since 2010. In addition, Dr. Molcho has served on our Compensation Committee since 2012. Dr. Molcho is the Founder and Chairman of Biologic Design, a technology platform that encourages human antibody discoveries, and is a venture partner at Forbion Capital Partners, a Dutch life sciences venture capital firm. In 2012, he became the co-founder, CEO and director of DoxoCure,Ayana Pharma Ltd. (formerly DoxoCure), a privately-held company engaged in the manufacturing of liposome-based therapeutics. He currently serves on the board of directors of Circulite Inc. and NovoGI. From 2006 through 2008, Dr. Molcho served as the Chief Executive Officer and Chairman of Neovasc Medical, a privately-held Israeli medical device company. From 2001 through 2006, Dr. Molcho was a managing director and the head of life sciences of Giza Venture Capital and, in that capacity, was involved in the founding of our company. He was also the Deputy Director General of Abarbanel Mental Health Center, the largest acute psychiatric hospital in Israel, from 1999 to 2001. Dr. Molcho holds an M.D. from Tel-Aviv University School of Medicine and an MBA from Tel-Aviv University Recanati Business School.
Sandra Panem, Ph.D., has been a member of our Board since February 2014. She is currently a managing partner at Cross Atlantic Partners, which she joined in 2000. From 1994 to 1999, Dr. Panem was President of Vector Fund Management, the then asset management affiliate of Vector Securities International. Prior thereto, Dr. Panem served as Vice President and Portfolio Manager for the Oppenheimer Global BioTech Fund, a mutual fund that invested in public and private biotechnology companies. Previously, she was Vice President at Salomon Brothers Venture Capital, a fund focused on early and later-stage life sciences and technology investments. Dr. Panem was also a Science and Public Policy Fellow in economic studies at the Brookings Institution, and an Assistant Professor of Pathology at the University of Chicago. Dr. Panem currently serves on the boards of directors of Acorda Therapeutics, Inc. (NASDAQ:ACOR), Labcyte, Inc., GenomeQuest, Inc. and MDx Medical, Inc. Previously, Dr. Panem served on numerous boards of public and private companies, including Martek Biosciences (Nasdaq:MATK), IBAH Pharmaceuticals (Nasdaq:IBAH), Confluent Surgical and Molecular Informatics. She received a B.S. in biochemistry and a Ph.D. in microbiology from the University of Chicago.
B. Compensation
Employment Agreements
We have entered into written employment agreements with each of our executive officers.officers, the terms of which are consistent with the provisions of the Executive Compensation Policy of the Company which was approved by our shareholders in December 2013 (the “Compensation Policy”). All of these agreements contain customary provisions regarding noncompetition, confidentiality of information and assignment of inventions. However, the enforceability of the noncompetition provisions may be limited under applicable law.
In addition, we have entered into agreements with each executive officer and director pursuant to which we have agreed to indemnify each of them to the fullest extent permitted by law to the extent that these liabilities are not covered by directors and officers’ insurance.
The terms of these agreements and of our directors and officers’ insurance are consistent with the provisions of the Compensation Policy.
Compensation of Directors and Senior Management
The following table presents all compensation we paid to all of our directors and senior management as a group for the year ended December 31, 2012.2013. The table does not include any amounts we paid to reimburse any of such persons for costs incurred in providing us with services during this period.
| | Salaries, fees, commissions and bonuses (NIS) | | | Pension, retirement, options and other similar benefits (NIS) | |
All directors and senior management as a group, consisting of 9 persons | | | 3,960,000 | | | | 1,943,000 | |
| | Salaries, fees, commissions and bonuses (NIS) | | | Pension, retirement, options and other similar benefits (NIS) | |
All directors and senior management as a group, consisting of 12 persons | | | 4,037,000 | | | | 2,393,000 | |
For additional information concerning our equity compensation plans, see “— Beneficial Ownership of Executive Officers and Directors — Stock Option Plans.”
C. Board Practices
Board of Directors
According to the Companies Law, the management of our business is vested in our Board of Directors. Our Board of Directors may exercise all powers and may take all actions that are not specifically granted to our shareholders. Our executive officers are responsible for our day-to-day management and have individual responsibilities established by our Board of Directors. Executive officers are appointed by and serve at the discretion of our Board of Directors, subject to any applicable employment agreements we have entered into with the executive officers.
Under the Companies Law, we are not required to have a majority of independent directors. We are required to appoint at least two external directors. See “— External Directors.” The audit committee of a publicly-traded company must consist of a majority of unaffiliated directors. See “— Audit Committee.”
According to our Articles of Association, our Board of Directors must consist of at least five and not more than 10 directors, including external directors. Currently, our Board of Directors consists of sixseven directors, including two external directors as required by the Companies Law. Pursuant to our Articles of Association, other than the external directors, for whom special election requirements apply under the Companies Law as detailed below, our directors are elected at a general or special meeting of our shareholders and serve on the Board of Directors until they are removed by the majority of our shareholders at a general or special meeting of our shareholders or upon the occurrence of certain events, in accordance with the Companies Law and our Articles of Association. In addition, our Articles of Association allow our Board of Directors to appoint directors to fill vacancies on the Board of Directors to serve until the next general meeting or special meeting, or earlier if required by our Articles of Association or applicable law. We have held elections for each of our non-external directors at each annual meeting of our shareholders since our initial public offering in Israel. External directors are elected for an initial term of three years and may be elected, under certain conditions, to two additional terms. External directors may be removed from office only pursuant to the terms of the Companies Law. Our last annual meeting of shareholders was held in May 2012.August 2013. See “— External Directors.”
The Companies Law provides that an Israeli company may, under certain circumstances, exculpate an office holder from liability with respect to a breach of his duty of care toward the company if appropriate provisions allowing such exculpation are included in its articles of association. See “— Exculpation, insurance and indemnification of office holders.” Our Articles of Association contain such provisions, and we have entered into agreements with each of our office holders undertaking to indemnify them to the fullest extent permitted by law, including with respect to liabilities resulting from this offering to the extent that these liabilities are not covered by insurance.
In accordance with the exemption available to foreign private issuers under applicable Nasdaq rules, we do not follow the requirements of the Nasdaq rules with regard to the process of nominating directors, and instead will follow Israeli law and practice, in accordance with which our Board of Directors is authorized to recommend to our shareholders director nominees for election, and, in some circumstances, our shareholders may nominate candidates for election as directors by the shareholders’ general meeting.
In addition, under the Companies Law, our Board of Directors must determine the minimum number of directors who are required to have financial and accounting expertise. Under applicable regulations, a director with financial and accounting expertise is a director who, by reason of his or her education, professional experience and skill, has a high level of proficiency in and understanding of business accounting matters and financial statements. He or she must be able to thoroughly comprehend the financial statements of the listed company and initiate debate regarding the manner in which financial information is presented. In determining the number of directors required to have such expertise, a company’s board of directors must consider, among other things, the type and size of the company and the scope and complexity of its operations. Our Board of Directors has determined that we require at least one director with the requisite financial and accounting expertise. Ms. Nurit Benjamini and Dr. Michael J. Anghel have such financial and accounting expertise.
The term office holder is defined in the Companies Law as a director, general manager, chief business manager, deputy general manager, vice general manager, executive vice president, vice president, any other manager directly subordinate to the general manager or any other person assuming the responsibilities of any of the foregoing positions, without regard to such person’s title.title, or a director or any other manager directly subordinate to the general manager. Each person listed above under “Executive Officers and Directors” is an office holder.holder under the Companies Law.
Chairman of the Board. Under the Companies Law, a person cannot hold the role of both chairman of the board of directors and chief executive officer of a company, without shareholder approval.approval by special majority and for periods of time not exceeding three years each. Furthermore, a person who is directly or indirectly subordinate to a chief executive officer of a company may not serve as the chairman of the board of directors of that company and the chairman of the board of directors may not otherwise serve in any other capacity in a company or in a subsidiary of that company other than as the chairman of the board of directors of such a subsidiary.
External Directors
Under Israeli law, the boards of directors of companies whose shares are publicly traded are required to include at least two members who qualify as external directors. Each of our current external directors, Dr. Avraham Molcho and Ms. Nurit Benjamini, was elected as an external director by our shareholders in July 2010. Their initial terms expireexpired in July 2013.2013, at which time they were each re-elected by the shareholders of the Company for a second three-year term as external directors.
External directors must be elected by majority vote of the shares present and voting at a shareholders meeting, provided that either:
| ● | the majority of the shares that are voted at the meeting, including at least a majority of the shares held by non-controlling shareholders who do not have a personal interest in the election of the external director (other than a personal interest not deriving from a relationship with a controlling shareholder) who voted at the meeting, excluding abstentions, vote in favor of the election of the external director; or |
the majority of the shares that are voted at the meeting, including at least a majority of the shares held by non-controlling shareholders who do not have a personal interest in the election of the external director (other than a personal interest not deriving from a relationship with a controlling shareholder) who voted at the meeting, excluding abstentions, vote in favor of the election of the external director; or
| ● | the total number of shares held by non-controlling, disinterested shareholders (as described in the preceding bullet point) that are voted against the election of the external director does not exceed 2% of the aggregate voting rights in the company. |
the total number of shares held by non-controlling, disinterested shareholders (as described in the preceding bullet point) that are voted against the election of the external director does not exceed 2% of the aggregate voting rights in the company.
After an initial term of three years, external directors may be reelectedre-elected to serve in that capacity for up to two additional terms of three years provided that either (a) the board of directors has recommended such reelectionre-election and such reelectionre-election is approved by a majority vote at a shareholders’ meeting, subject to the conditions described above for election of external directors, or (b) (1) the reelectionre-election has been recommended by one or more shareholders holding at least 1% of the company’s voting rights and is approved by a majority of non-controlling, disinterested shareholders who hold among them at least 2% of the company’s voting rights.rights; and (2) pursuant to a recently enacted amendment to the Companies Law (“Amendment 22”), effective as of January 10, 2014, the external director who has been nominated in such fashion by the shareholders is not a linked or competing shareholder, and does not have or has not had, on or within the two years preceding the date of such person’s appointment to serve as another term as external director, any affiliation with a linked or competing shareholder. The term “linked or competing shareholder” means the shareholder(s) who nominated the external director for reappointment or a material shareholder of the company holding more than 5% of the shares in the company, provided that at the time of the reappointment, such shareholder(s) of the company, the controlling shareholder of such shareholder(s) of the company, or a company under such shareholder(s) of the company’s control, has a business relationship with the company or are competitors of the company; the Israeli Minister of Justice, in consultation with the Israeli Securities Authority, may determine that certain matters will not constitute a business relationship or competition with the company. The term of office for external directors for Israeli companies traded on certain foreign stock exchanges, including the Nasdaq Capital Market, may be extended beyond the initial three terms permitted under the Companies Law indefinitely in increments of additional three-year terms, provided in each case that the following conditions are met: (a) the audit committee and the board of directors confirm that, in light of the external director’s expertise and special contribution to the work of the board of directors and its committees, the reelectionre-election for such additional period(s) is beneficial to the company; (b) the reelectionre-election is approved by the shareholders by a special majority required for the electionre-election of external directors; and (c) the proposed termsterm of compensationoffice of the external directors,director, and the considerations of the audit committee and the Board of Directors in deciding to recommend reelectionre-election of the external directors,director for such additional term of office, are presented to the shareholders prior to the vote on reelection.re-election. External directors may be removed from office by the same percentage of shareholders required for their election or by a court, in each case, only under limited circumstances, including ceasing to meet the statutory qualification for appointment or violating the duty of loyalty to the company. If an external directorship becomes vacant and there are less than two external directors on the board of directors at the time, then the board of directors is required under the Companies Law to call a shareholders’ meeting immediately to appoint a replacement external director. Each committee of the board of directors that exercises the powers of the board of directors must include at least one external director, except that the audit committee must include all external directors then serving on the board of directors.director. Under the Companies Law external directors of a company are prohibited from receiving, directly or indirectly, any compensation from the company other than for their services as external directors pursuant to the provisions and limitations set forth in regulations promulgated under the Companies Law.
A person may not serve as an external director if (a) the person is a relative of a controlling shareholder of a company or (b) at the date of the person’s appointment or within the prior two years, the person, the person’s relatives, entities under the person’s control, the person’s partner, the person’s employer, or anyone to whom that person is subordinate, whether directly or indirectly, have or have had any affiliation with (1) a company, (2) a company’s controlling shareholder at the time of such person’s appointment or (3) any entity that is either controlled by the company or under common control with the company at the time of such appointment or during the prior two years. If a company does not have a controlling shareholder or a shareholder who holds company shares entitling him to vote at least 25% of the votes in a shareholders meeting, then a person may not serve as an external director if, such person or such person’s relative, partner, employer or any entity under the person’s control, has or had, on or within the two years preceding the date of the person’s appointment to serve as external director, any affiliation with the chairman of the company’s board, chief executive officer, a substantial shareholder who holds at least 5% of the issued and outstanding shares of the company or voting rights which entitle him to vote at least 5% of the votes in a shareholders meeting, or the chief financial officer of the company.
The term affiliation“affiliation” includes:
| ● | an employment relationship; |
| ● | a business or professional relationship even if not maintained on a regular basis (excluding insignificant relationships); |
| ● | service as an office holder, excluding service as a director in a private company prior to the first offering of its shares to the public if such director was appointed as a director of the private company in order to serve as an external director following the public offering. |
an employment relationship;
a business or professional relationship even if not maintained on a regular basis (excluding insignificant relationships);
service as an office holder, excluding service as a director in a private company prior to the first offering of its shares to the public if such director was appointed as a director of the private company in order to serve as an external director following the public offering.
The term relative“relative” is defined as a spouse, sibling, parent, grandparent or descendant; a spouse’s sibling, parent or descendant; and the spouse of each of such persons.
In addition, no person may serve as an external director if that person’s professional activities create, or may create, a conflict of interest with that person’s responsibilities as a director or otherwise interfere with that person’s ability to serve as an external director or if the person is an employee of the Israel Securities Authority or of an Israeli stock exchange. Furthermore, a person may not continue to serve as an external director if he or she received direct or indirect compensation from us for his or her role as a director. This prohibition does not apply to compensation paid or given for service as an external director in accordance with regulations promulgated under the Companies Law or amounts paid pursuant to indemnification and/or exculpation contracts or commitments and insurance coverage. If at the time an external director is appointed all current members of the board of directors not otherwise affiliated with the company are of the same gender, then that external director must be of the other gender. In addition, a director of a company may not be elected as an external director of another company if, at that time, a director of the other company is acting as an external director of the first company.
Following the termination of an external director’s service on a board of directors, such former external director and his or her spouse and children may not be provided a direct or indirect benefit by the company, its controlling shareholder or any entity under its controlling shareholder’s control. This includes engagement to serve as an executive officer or director of the company or a company controlled by its controlling shareholder or employment by, or providing services to, any such company for consideration, either directly or indirectly, including through a corporation controlled by the former external director, for a period of two years (and for a period of one year with respect to relatives of the former external director).
If at the time an external director is appointed all members of the board of directors are of the same gender, the external director must be of the other gender. A director of one company may not be appointed as an external director of another company if a director of the other company is acting as an external director of the first company at such time.
The Companies Law provides that an external director must meet certain professional qualifications or have financial and accounting expertise and that at least one external director must have financial and accounting expertise. However, if at least one of our other directors (1) meets the independence requirements of the Exchange Act, (2) meets the standards of the Nasdaq Marketplace Rules for membership on the audit committee and (3) has financial and accounting expertise as defined in the Companies Law and applicable regulations, then neither of our external directors is required to possess financial and accounting expertise as long as both possess other requisite professional qualifications. Our Board of Directors is required to determine whether a director possesses financial and accounting expertise by examining whether, due to the director’s education, experience and qualifications, the director is highly proficient and knowledgeable with regard to business-accounting issues and financial statements, to the extent that the director is able to engage in a discussion concerning the presentation of financial information in the company’s financial statements, among others. The regulations define a director with the requisite professional qualifications as a director who satisfies one of the following requirements: (1) the director holds an academic degree in either economics, business administration, accounting, law or public administration; (2) the director either holds an academic degree in any other field or has completed another form of higher education in the company’s primary field of business or in an area which is relevant to the office of an external director; or (3) the director has at least five years of experience serving in any one of the following, or at least five years of cumulative experience serving in two or more of the following capacities: (1) a senior business management position in a corporation with a substantial scope of business; (2) a senior position in the company’s primary field of business; or (3) a senior position in public administration. Our Board of Directors has determined that Nurit Benjamini possesses “accounting and financial” expertise, and that both of our external directors possess the requisite professional qualifications.
Audit Committee
Under the Companies Law, the board of directors of a public company must appoint an audit committee. The audit committee must be comprised of at least three directors, including all of the external directors, and one of the external directors must serve as chairperson of the committee. The audit committee of a company may not include:
| ● | the chairman of the company’s board of directors; |
the chairman of the company’s board of directors;
| ● | a controlling shareholder or a relative of a controlling shareholder of the company (as each such term is defined in the Companies Law); or |
| ● | any director employed by the company, by a controlling shareholder of the company or by any other entity controlled by a controlling shareholder of the company, or any director who provides services to the company, to a controlling shareholder of the company or to any other entity controlled by a controlling shareholder of the company on a regular basis (other than as a member of the board of directors), or any other director whose main source of income derives from a controlling shareholder of the company. |
a controlling shareholder or a relative of a controlling shareholder of the company (as each such term is defined in the Companies Law); or
any director employed by the company, by a controlling shareholder of the company or by any other entity controlled by a controlling shareholder of the company, or any director who provides services to the company, to a controlling shareholder of the company or to any other entity controlled by a controlling shareholder of the company on a regular basis (other than as a member of the board of directors), or any other director whose main source of income derives from a controlling shareholder of the company.
The term controlling shareholder“controlling shareholder” is defined in the Companies Law as a shareholder with the ability to direct the activities of the company, other than by virtue of being an office holder. A shareholder is presumed to be a controlling shareholder if the shareholder holds 50% or more of the voting rights in a company or has the right to appoint the majority of the directors of the company or its general manager.
A majority of the total number of then-serving members of an audit committee shall constitute a quorum for the transaction of business at the audit committee meetings, provided, that the majority of the members present at such meeting are unaffiliated directors and at least one of such members is an external director.
The audit committee of a publicly-traded company must consist of a majority of unaffiliated directors. An “unaffiliated director” is defined as either an external director or as a director who meets the following criteria:
he or she meets the qualifications for being appointed as an external director, except for (i) the requirement that the director be an Israeli resident (which does not apply to companies such as ours whose securities have been offered outside of Israel or are listed outside of Israel) and (ii) the requirement for accounting and financial expertise or professional qualifications; and
| ● | he or she meets the qualifications for being appointed as an external director, except for (i) the requirement that the director be an Israeli resident (which does not apply to companies such as ours whose securities have been offered outside of Israel or are listed outside of Israel) and (ii) the requirement for accounting and financial expertise or professional qualifications; and |
he or she has not served as a director of the company for a period exceeding nine consecutive years. For this purpose, a break of less than two years in the service shall not be deemed to interrupt the continuation of the service.
| ● | he or she has not served as a director of the company for a period exceeding nine consecutive years. For this purpose, a break of less than two years in the service shall not be deemed to interrupt the continuation of the service. |
Any person who is not eligible to serve on the audit committee is further restricted from participating in its meetings and votes, unless the chairman of the audit committee determines that such person’s presence is necessary in order to present a certain matter, provided however, that company employees who are not controlling shareholders or relatives of such shareholders may be present in the meetings but not for the actual votes, and likewise, company counsel andor company secretary who are not controlling shareholders or relatives of such shareholders may be present in the meetings and for the decisions if such presence is requested by the audit committee.
The members of our Audit Committee are Nurit Benjamini (Chairman), Dr. Avraham Molcho and Dr. Raphael Hofstein. Pursuant to the Marketplace Rules of the Nasdaq Stock Market, our Board of Directors may appoint one director to our Audit Committee who (1) is not an Independent Director as defined in Nasdaq Marketplace Rule 5605(a)(2), (2) meets the criteria set forth in Section 10A(m)(3) under the Exchange Act, and (3) is not one of our current officers or employees or “family member,” as defined in Nasdaq Marketplace Rule 5605(a)(2), of an officer or employee, if our Board of Directors, under exceptional and limited circumstances, determines that the appointment is in our best interests and the best interest of our shareholders, and our Board of Directors discloses, in our next annual report subsequent to the determination, the nature of the relationship and the reasons for that determination.
Our Board of Directors has determined that Nurit Benjamini (Chairman) qualifies as an audit committee financial expert as defined by rules of the SEC.
In November 2012, our Board of Directors adopted an audit committee charter that added to the responsibilities of the audit committeeour Audit Committee under the Companies Law, setting forth the responsibilities of the audit committee consistent with the rules of the SEC and the Marketplace Rules of the Nasdaq Stock Market, including the following:
oversight of the company’s independent registered public accounting firm and recommending the engagement, compensation or termination of engagement of the our independent registered public accounting firm to the board of directors in accordance with Israeli law;
| ● | oversight of the company’s independent registered public accounting firm and recommending the engagement, compensation or termination of engagement of the our independent registered public accounting firm to our Board of Directors in accordance with Israeli law; |
recommending the engagement or termination of the office of the our internal auditor; and
| ● | recommending the engagement or termination of the office of the our internal auditor; and |
recommending the terms of audit and non-audit services provided by the independent registered public accounting firm for pre-approval by the board of directors.
| ● | reviewing and pre-approving the terms of audit and non-audit services provided by our independent auditors. |
Our audit committeeAudit Committee provides assistance to our Board of Directors in fulfilling its legal and fiduciary obligations in matters involving our accounting, auditing, financial reporting, internal control and legal compliance functions by pre-approving the services performed by our independent accountants and reviewing their reports regarding our accounting practices and systems of internal control over financial reporting. The audit committeeOur Audit Committee also oversees the audit efforts of our independent accountants and takes those actions as it deems necessary to satisfy itself that the accountants are independent of management. Pursuant to the Companies Law, the audit committee of a company shall be responsible for: (i) determining whether there are delinquencies in the business management practices of a company, including in consultation with an internal auditor or independent auditor, and making recommendations to the company’s board of directors to improve such practices; (ii) determining whether to approve certain related party transactions (including compensation of office holders or transactions in which an office holder has a personal interest and whether such transaction is material or otherwise an extraordinary transaction); (iii) where the company’s board of directors approves the working plan of the internal auditor, examining such working plan before its submission to the board and proposing amendments thereto; (iv) examining internal controls and the internal auditor’s performance, including whether the internal auditor has sufficient resources and tools to dispose of his responsibilities (taking into consideration the special needs and size of a company); (v) examining the scope of the auditor’s work and compensation and submitting its recommendation with respect thereto to the corporate body considering the appointment thereof (either the board or the general meeting of shareholders); and (vi) establishing procedures for the handling of employees’ complaints as to the management of the business and the protection to be provided to such employees. Pursuant to Amendment 22, effective as of January 10, 2014, the responsibilities of the audit committee under the Companies Law also include the following matters: (i) the establishment of procedures to be followed in respect of related party transactions with a controlling shareholder (where such are not extraordinary transactions), which may include, where applicable, the establishment of a competitive process for such transaction, under the supervision of the audit committee, or individual, or other committee or body selected by the audit committee, in accordance with criteria determined by the audit committee; and (ii) to determine procedures for approving certain related party transactions with a controlling shareholder, which having been determined by the audit committee not to be extraordinary transactions, were also determined by the audit committee not to be negligible transactions. Under the Companies Law, the approval of the audit committee is required for specified actions and transactions with office holders and controlling shareholders. See “— Approval of Related Party Transactions under Israeli Law.”
Compensation Committee
In December 2012, the recently adopted Amendment 20 to the Companies Law, or Amendment 20, went into effect. Amendment 20 requires, among other things, that the board of directors of Israeli publicly-traded companies appoint a compensation committee comprised of at least three members, including all of the external directors of a company, and one of the external directors must serve as chairman of the committee. Such compensation committee may not include:
the chairman of the company’s board of directors;
| ● | the chairman of the company’s board of directors; |
a controlling shareholder or a relative of a controlling shareholder of the company (as each such term is defined in the Companies Law); or
| ● | a controlling shareholder or a relative of a controlling shareholder of the company (as each such term is defined in the Companies Law); or |
| ● | any director employed by the company, by a controlling shareholder of the company or by any other entity controlled by a controlling shareholder of the company, or any director who provides services to the company on a permanent basis, to a controlling shareholder of the company or to any other entity controlled by a controlling shareholder of the company on a regular basis (other than as a member of the board of directors), or any other director whose main source of income derives from a controlling shareholder of the company. |
The term “controlling shareholder” is defined in the Companies Law as a shareholder with the ability to direct the activities of the company, other than by virtue of being an office holder. A shareholder is presumed to be a controlling shareholder if the shareholder holds 50% or more of the voting rights in a company or has the right to appoint the majority of the directors of the company or its general manager.
A majority of the total number of then-serving members of a compensation committee shall constitute a quorum for the transaction of business at the compensation committee meetings, provided, that themeetings. The compensation committee of a publicly-traded company must consist of a majority of the members present at such meeting are unaffiliated directors, as such term “unaffiliated director” is defined under the Companies Law, as described in the section discussing the Company’s Audit Committee above, and at least one of such members is an external director.directors.
Any person who is not eligible to serve on the compensation committee is further restricted from participating in its meetings and votes, unless the chairman of the compensation committee determines that such person’s presence is necessary in order to present a certain matter, provided however, that company employees who are not controlling shareholders or relatives of such shareholders may be present in the meetings but not for the actual votes, and likewise, company counsel and secretary who are not controlling shareholders or relatives of such shareholders may be present in the meetings and for the decisions if such presence is requested by the compensation committee.
The responsibilities of the compensation committee include the following:
to recommend to the board of directors as to a compensation policy for officers, as well as to recommend, once every three years to extend the compensation policy, subject to receipt of the required corporate approvals;
| ● | to make recommendations to the board of directors as to a compensation policy for officers, as well as to recommend once every three years to extend the compensation policy, subject to receipt of the required corporate approvals; |
to recommend to the board of directors as to a compensation policy for officers, as well as to recommend, once every three years to extend the compensation policy, subject to receipt of the required corporate approvals;
| ● | to make recommendations to the board of directors as to any updates to the compensation policy which may be required; |
to recommend to the board of directors as to a compensation policy for officers, as well as to recommend, once every three years to extend the compensation policy, subject to receipt of the required corporate approvals;
| ● | to review the implementation of the compensation policy by the company; |
to recommend to the Board of Directors as to any updates to the compensation policy which may be required;
| ● | to approve transactions relating to terms of office and employment of certain company office holders, which require the approval of the compensation committee pursuant to the Companies Law; |
to review the implementation of the compensation policy by the company;
| ● | to exempt, under certain circumstances, a transaction relating to terms of office and employment from the requirement of approval of the shareholders meeting; and |
to approve transactions relating to terms of office and employment of certain company office holders, which require the approval of the compensation committee pursuant to the Companies Law; and
to exempt, under certain circumstances, a transaction relating to terms of office and employment from the requirement of approval of the shareholders meeting.
| ● | to administer our share incentive plan. |
In November 2012, in order to comply with the requirements of Amendment 20, theour Board of Directors established a Compensation Committee, comprised of Nurit Benjamini and Dr. Avraham Molcho, our two external directors, and Dr. Raphael Hofstein. Nurit Benjamini serves as the Chairperson of our Compensation Committee.
Under Amendment 20, a board of directors of an Israeli publicly-traded company, following the recommendation of the compensation committee, is required to establish a compensation policy, to be approved by the shareholders of the company, and pursuant to which the terms of office and compensation of the company’s officer holders will be decided.
A company’s compensation policy shall be determined based on, and take into account, certain parameters set forth in Section 267B(a) and Parts A and B of Annex 1A of the Companies Law, which were legislated as part of Amendment 20.
The board of directors of a company is obligated to adopt a compensation policy after considering the recommendations of the compensation committee. The final adoption of the compensation policy is subject to the approval of the shareholders of the company, which such approval is subject to certain special majority requirements, as set forth in Amendment 20, pursuant to which one of the following must be met:
| (i) | the majority of the votes includes at least a majority of all the votes of shareholders who are not controlling shareholders of the company or who do not have a personal interest in the compensation policy and participating in the vote; abstentions shall not be included in the total of the votes of the aforesaid shareholders; or |
| (ii) | the total of opposing votes from among the shareholders described in subsection (i) above does not exceed 2% of all the voting rights in the company. |
Nonetheless, even if the shareholders of the company do not approve the compensation policy, the board of directors of a company may approve the compensation policy, provided that the compensation committee and, thereafter, the board of directors resolved, based on detailed, documented, reasons and after a second review of the compensation policy, that the approval of the compensation policy is for the benefit of the company.
Public Israeli companies are required to complyIn December 2013, a general meeting of our shareholders approved the Compensation Policy which had been recommended by our Compensation Committee and approved by our Board of Directors. The Compensation Policy governs the terms of compensation for our directors and office holders, in accordance with the requirements of Amendment 20the Companies Law. Below is a summary discussion of the provisions of the Compensation Policy:
The Compensation Policy includes, among other issues prescribed by the Companies Law, a framework for establishing the terms of office and employment of our office holders, a recoupment policy, and guidelines with respect to the structure of the variable pay of our office holders.
Compensation is considered performance-based to the extent that a direct link is maintained between compensation and performance and that rewards are consistent with long-term stakeholder value creation.
At the company level, we analyze the overall compensation trends of the market in order to make informed decisions about our compensation approach. With specific reference to our office holders, we have used a benchmarking analysis based on an internally developed list of publicly traded companies that represent, as closely as possible, our peer group, and as further set out in the Compensation Policy.
According to the Compensation Policy, the fixed components of our office holder compensation will be examined at least every two years and compared to the market. Our Board of Directors may change the amount of the fixed components for one or more of our office holders after receiving a recommendation for such from our compensation committee. The change may be made if our Board of Directors concludes that such a change would promote our goals, operating plans and objectives and after taking into account the business and legal implications of the proposed change and its impact on our internal labor relations. Any such changes are subject to formal approval by the relevant parties. The fixed component of compensation remunerates the specific role covered and scope of responsibilities. It also reflects the experience and skills required for each position, as well as the level of excellence demonstrated and the overall quality of the office holder’s contribution to our business. The weighting of fixed compensation within the overall package is designed to reduce the risk of excessively risk-oriented behavior, to discourage initiatives focused on short-term results which might jeopardize our mid and long-term business sustainability and value creation, and to adoptallow us a flexible compensation approach. We offer our employees benefit plans based on common practice in the local labor market of the office holder.
As for the variable components of compensation, the types and amounts of such components will be determined with an aim at creating maximum matching between the Compensation Policy and our operating plan and objectives. Variable components of compensation will be primarily based on measurable long-term criteria. Nevertheless, we are allowed to base a non-material part of variable compensation on qualitative non-measurable criteria which focus on the office holder’s contribution to the Company. Our variable compensation aims to remunerate for achievements by directly linking pay to performance outcomes in the short and long term. To strengthen the alignment of shareholder interests and the interests of management and employees, performance measurements reflect our actual results overall, as well as of the individual office holder. To support the aforementioned principles, we provide two types of variable compensation: Short-term - annual bonus; and Long-term - stock option plans.
Annual bonuses will be based on achievement of the business goals set out in our annual operating plan approved by the board of directors at the beginning of each year. The operating plan encompasses all aspects of our activities and as such sets the business targets for each member of the management team. Consequently, our compensation committee and board should be able to judge the suitability of a bonus payment by deliberating retrospectively at year end and comparing actual performance and target achievements against the forecasted operating plan. The annual bonus mechanism will be directly tied to meeting objectives - both our business objectives and the office holder’s personal objectives. The board’s satisfaction with the officer’s performance will also affect the bonus amount. Annual bonus payments are subject to the limitations set out in the Compensation Policy and also subject to the discretion of our compensation committee and approval by the board of directors. In order to maintain some measure of flexibility, after calculating the compensation amount, the board of directors may exercise discretion about the final amount of the bonus.
Equity-based compensation may be granted in any form permitted under our share incentive plan in effect from time to time and shall be made in accordance with the terms of such share incentive plan. Equity-based compensation to office holders shall be granted from time to time and be individually determined and awarded according to the performance, educational background, prior business experience, qualifications, role and the personal responsibilities of each officer. The vesting period will generally be four years, with the vesting schedule to be determined in accordance with market compensation trends. Our policy is to grant equity-based compensation with exercise prices at market value. Furthermore, in order to create a ceiling for the variable compensation: (1) the aggregate value of annual grants to any one office holder (based on the Black Scholes calculation on the date of grant) will be no more than the higher of 2% of our market capitalization at the end of the measurement period or $1.5 million; and (2) it is our intention that the maximum outstanding equity awards under its share incentive plan will not exceed 12% of our total fully-diluted share capital. Our board of directors may, following approval by no later than September 12, 2013. Untilour compensation committee, make provisions with respect to the acceleration of the vesting period of any office holder’s awards, including, without limitation, in connection with a corporate transaction involving a change of control.
We will also establish a defined ratio between the variable and the fixed components of compensation, as well as a maximum amount for all variable components as of the date on which they are paid (or as of the grant date for non-cash variable equity components), and subject to the limitations on variable compensation components which are set out in the Compensation Policy.
We will also establish guidelines under which an office holder will refund to us part of the compensation received, if it was paid based on information that was retroactively restated in our financial reports. Office holders shall be required to make restitution for any payments made based on our operating performance, if such payments were based on false or restated financial statements prepared at any time that a company adopts aduring the three years preceding discovery of the error.
All compensation policy, compensationarrangements of officers mustoffice holders are to be approved in accordance with transition rules set forth in Amendment 20 which applythe manner prescribed by applicable law. Our Compensation Committee will review the Compensation Policy on an annual basis, and monitor its implementation, and recommend to our Board of Directors and shareholders to amend the approvalPolicy as it deems necessary from time to time. The term of officer compensation prior to the Compensation Policy shall be three years as of the date of its adoption and approval of a compensation policyon December 19, 2013. Following such three year term, the Compensation Policy, including any revisions recommended by a company, as such are detailed above.
We are currently preparing a compensation policy applicable to all of our officers, with the aim of having our Compensation Committee and approved by our Board of Directors, reviewas applicable, will be brought once again to the terms of compensation of our officers and approve such a policy and bringing such policyshareholders for approval of our shareholders prior to September 12, 2013 as required under Amendment 20.approval.
Nominating Committee
Our Board of Directors does not currently have a nominating committee, having availed BioLineRx of the exemption available to foreign private issuers under the Marketplace Rules of the Nasdaq Stock Market. See “Item 16G. Corporate Governance.”
Financial Statement ExaminationReview Committee
Under the Companies Law, the boardOur Board of directors ofDirectors appointed a public company must appoint a financial statement examination committee,Financial Statement Review Committee, which consists of members with accounting and financial expertise or the ability to read and understand financial statements. According to a resolution of our Board of Directors, the Audit Committee has been assigned the responsibilities and duties of a financial statements examinationstatement review committee, as permitted under relevant regulations promulgated under the Companies Law. From time to time as necessary and required to approve our financial statements, the Audit Committee holds separate meetings, prior to the scheduled meetings of the entire Board of Directors regarding financial statement approval. The function of a financial statements examinationstatement review committee is to discuss and provide recommendations to its board of directors (including the report of any deficiency found) with respect to the following issues: (1) estimations and assessments made in connection with the preparation of financial statements; (2) internal controls related to the financial statements; (3) completeness and propriety of the disclosure in the financial statements; (4) the accounting policies adopted and the accounting treatments implemented in material matters of the company; (5) value evaluations, including the assumptions and assessments on which evaluations are based and the supporting data in the financial statements. Our independent auditors and our internal auditorsauditor are invited to attend all meetings of the Audit Committee when it is acting in the role of the Financial Statement Review Committee or at which matters concerning the financial statements examination committee.are discussed. Our internal auditoris invited to attend all meetings of our Audit Committee.
Investment Monitoring Committee
Our Board of Directors has established an Investment Monitoring Committee consisting of four members: Directors Michael Anghel and Nurit Benjamini; Philip Serlin, our Chief Financial Officer and Chief Operating Officer; and Raziel Fried, our Budget Control Manager and Treasurer. The function of the Investment Monitoring Committee includes providing recommendations to theour Board of Directors regarding investment guidelines and performing an on-going review of the fulfillment of established investment guidelines. The Investment Monitoring Committee convenes for a meeting in accordance with our needs, but in any event at least twice per year. The Investment Monitoring Committee reports to theour Board of Directors on a semi-annual basis.basis
Internal Auditor
Under the Companies Law, the board of directors of an Israeli public company must appoint an internal auditor recommended by the audit committee and nominated by the board of directors. An internal auditor may not be:
a person (or a relative of a person) who holds more than 5% of the company’s shares;
| ● | a person (or a relative of a person) who holds more than 5% of the company’s shares; |
a person (or a relative of a person) who has the power to appoint a director or the general manager of the company;
| ● | a person (or a relative of a person) who has the power to appoint a director or the general manager of the company; |
an executive officer or director of the company; or
| ● | an executive officer or director of the company; or |
a member of the company’s independent accounting firm.
| ● | a member of the company’s independent accounting firm. |
The role of the internal auditor is to examine, among other things, our compliance with applicable law and orderly business procedures. Our internal auditor is Linur Dloomy, CPA (Israel) a partner of Brightman Almagor Zohar & Co. (a member firm of Deloitte).
Approval of Related Party Transactions under Israeli Law
Fiduciary duties of office holders
The Companies Law imposes a duty of care and a duty of loyalty on all office holders of a company. The duty of care of an office holder is based on the duty of care set forth in connection with the tort of negligence under the Israeli Torts Ordinance (New Version) 5728-1968. This duty of care requires an office holder to act with the degree of proficiency with which a reasonable office holder in the same position would have acted under the same circumstances. The duty of care includes a duty to use reasonable means, in light of the circumstances, to obtain:
information on the advisability of a given action brought for his or her approval or performed by virtue of his or her position; and
| ● | information on the advisability of a given action brought for his or her approval or performed by virtue of his or her position; and |
all other important information pertaining to these actions.
| ● | all other important information pertaining to these actions. |
The duty of loyalty requires an office holder to act in good faith and for the benefit of the company, and includes the duty to:
refrain from any act involving a conflict of interest between the performance of his or her duties in the company and his or her other duties or personal affairs;
| ● | refrain from any act involving a conflict of interest between the performance of his or her duties in the company and his or her other duties or personal affairs; |
refrain from any activity that is competitive with the business of the company;
| ● | refrain from any activity that is competitive with the business of the company; |
refrain from exploiting any business opportunity of the company for the purpose of gaining a personal advantage for himself or herself or others; and
| ● | refrain from exploiting any business opportunity of the company for the purpose of gaining a personal advantage for himself or herself or others; and |
| ● | disclose to the company any information or documents relating to the company’s affairs which the office holder received as a result of his or her position as an office holder. |
We may approve an act performed in breach of the duty of loyalty of an office holder provided that the office holder acted in good faith, the act or its approval does not harm the company, and the office holder discloses his or her personal interest, as described below.
Disclosure of personal interests of an office holder and approval of acts and transactions
The Companies Law requires that an office holder promptly disclose to the company any personal interest that he or she may have and all related material information or documents relating to any existing or proposed transaction by the company. An interested office holder’s disclosure must be made promptly and in any event no later than the first meeting of the board of directors at which the transaction is considered. An office holder is not obliged to disclose such information if the personal interest of the office holder derives solely from the personal interest of his or her relative in a transaction that is not considered as an extraordinary transaction.
The term personal interest is defined under the Companies Law to include the personal interest of a person in an action or in the business of a company, including the personal interest of such person’s relative or the interest of any corporation in which the person is an interested party, but excluding a personal interest stemming solely from the fact of holding shares in the company. A personal interest furthermore includes the personal interest of a person for whom the office holder holds a voting proxy or the interest of the office holder with respect to his or her vote on behalf of the shareholder for whom he or she holds a proxy even if such shareholder itself has no personal interest in the approval of the matter. An office holder is not, however, obliged to disclose a personal interest if it derives solely from the personal interest of his or her relative in a transaction that is not considered an extraordinary transaction.
Under the Companies Law, an extraordinary transaction which requires approval is defined as any of the following:
a transaction other than in the ordinary course of business;
| ● | a transaction other than in the ordinary course of business; |
a transaction that is not on market terms; or
| ● | a transaction that is not on market terms; or |
a transaction that may have a material impact on the company’s profitability, assets or liabilities.
| ● | a transaction that may have a material impact on the company’s profitability, assets or liabilities. |
Under the Companies Law, once an office holder has complied with the disclosure requirement described above, a company may approve a transaction between the company and the office holder or a third party in which the office holder has a personal interest, or approve an action by the office holder that would otherwise be deemed a breach of duty of loyalty. However, a company may not approve a transaction or action that is adverse to the company’s interest or that is not performed by the office holder in good faith.
Under the Companies Law, unless the articles of association of a company provide otherwise, a transaction with an office holder, a transaction with a third party in which the office holder has a personal interest, and an action of an office holder that would otherwise be deemed a breach of duty of loyalty requires approval by the board of directors. Our Articles of Association do not provide otherwise. If the transaction or action considered is (i) an extraordinary transaction or (ii) an action of an office holder that would otherwise be deemed a breach of duty of loyalty and may have a material impact on a company’s profitability, assets or liabilities, then audit committee approval is required prior to approval by the board of directors.
Under Amendment 20, a transaction with an office holder in a public company regarding his or her terms of office and employment should be determined in accordance with the company’s compensation policy. Nonetheless, provisions were established that allow a company, under special circumstances, to approve terms of office and employment that are not in line with the approved compensation policy. Accordingly, pursuant to Amendment 20, the approval requirements for the compensation and/or terms of office of a specific office holder may require the approval of each of the compensation committee, board of directors and the shareholders, in that order. As such, under Amendment 20, the following approvals are required for the following transactions:
A transaction with an office holder in a public company that is neither a director nor the Chief Executive Officer regarding his or her terms of office and employment requires approval by the (i) compensation committee; and (ii) the board of directors. Approval of terms of office and employment for such officers which do not comply with the compensation policy may nonetheless be approved subject to two cumulative conditions: (i) the compensation committee and thereafter the board of directors, approved the terms after having taken into account the various considerations and mandatory requirements set forth in Amendment 20 with respect to office holder compensation, and (ii) the shareholders of the company have approved the terms by means of the following special majority requirements (the “Special Majority Requirements”), as set forth in Amendment 20, pursuant to which the shareholder approval must either include at least one-half of the shares held by non-controlling and disinterested shareholders who actively participate in the voting process (without taking abstaining votes into account), or, alternatively, the total shareholdings of the non-controlling and disinterested shareholders who vote against the transaction must not represent more than two percent of the voting rights in the company.
A transaction with the chief executive officer in a public company regarding his or her terms of office and employment requires approval by the (i) compensation committee; (ii) the board of directors and (iii) the shareholders of the company by means of the special majority required for approving the compensation policy (as detailed above).Special Majority Requirements. Approval of terms of office and employment for the chief executive officer which do not comply with the compensation policy may nonetheless be approved subject to two cumulative conditions: (i) the compensation committee and thereafter the board of directors, approved the terms after having taken into account the various considerations and mandatory requirements set forth in Amendment 20 with respect to office holder compensation, and (ii) the shareholders of the company have approved the terms by means of the Special Majority Requirements, as detailed above.
A transaction with an office holder in a public company (including the CEO) that is not a director regarding his or her terms of office and employment may be approved despite shareholder rejection, provided that a company’s compensation committee and thereafter the board of directors have determined to approve the proposal, based on detailed reasoning, after having re-examined the terms of office and employment, and taken the shareholder rejection into consideration, that the terms are beneficial to the company.consideration. In addition, the compensation committee may exempt the transaction regarding terms of office and employment with a CEO who has no relationship with the controlling shareholder or the company from shareholder approval if it has found, based on detailed reasons, that bringing the transaction to the approval of the shareholders meeting shall prevent the employment of such candidate by the company. Such approval may be given only in respect of terms of office and employment which are in accordance with the company’s compensation policy.
A transaction with a director in a public company regarding his or her terms of office and employment requires approval by the (i) compensation committee; (ii) the board of directors and (iii) the shareholders of the company. Approval of terms of office and employment for directors of a company which do not comply with the compensation policy may nonetheless be approved subject to two cumulative conditions: (i) the compensation committee and thereafter the board of directors, approved the terms after having taken into account the various considerations and mandatory requirements set forth in Amendment 20 with respect to office holder compensation, and (ii) the shareholders of the company have approved the terms by means of the Special Majority Requirements, as detailed above.
A director who has a personal interest in a matter that is considered at a meeting of the board of directors or the audit committee may generally not be present at the meeting or vote on the matter unless a majority of the directors or members of the audit committee have a personal interest in the matter, or, unless the chairman of the audit committee or board of directors (as applicable) determines that he or she should be present to present the transaction that is subject to approval. If a majority of the directors have a personal interest in the matter, such matter also requires approval of the shareholders of the company.
Disclosure of personal interests of a controlling shareholder and approval of transactions
Under the Companies Law, the disclosure requirements that apply to an office holder also apply to a controlling shareholder of a public company. See “— Audit Committee” for athe general definition of controlling shareholder. shareholder under the Companies Law. The definition of “controlling shareholder” in connection with matters governing: (i) extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, (ii) certain private placements in which the controlling shareholder has a personal interest, (iii) certain transactions with a controlling shareholder or relative with respect to services provided to or employment by the company, (iv) the terms of employment and compensation of the general manager, and (v) the terms of employment and compensation of office holders of the company when such terms deviate from the compensation policy previously approved by the company’s shareholders, also includes shareholders that hold 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights in the company (and the holdings of two or more shareholders which each have a personal interest in such matter will be aggregated for the purposes of determining such threshold).
Under Amendment 20, extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, including a private placement in which a controlling shareholder has a personal interest, as well as transactions for the provision of services whether directly or indirectly by a controlling shareholder or his or her relative, or a company such controlling shareholder controls, require the approval of the audit committee, the board of directors and the shareholders, in that order. Extraordinary Transactions concerning the terms of engagement of a controlling shareholder or a controlling shareholder’s relative, whether as an office holder or an employee, require the approval of the compensation committee, the board of directors and the shareholders, in that order. In addition, the approval of such extraordinary transactions by the shareholders require at least a majority of the shares voted by the shareholders of the company participating and voting in a shareholders’ meeting, provided that one of the following requirements is fulfilled:
at least a majority of the shares held by shareholders who have no personal interest in the transaction and are voting at the meeting must be voted in favor of approving the transaction, excluding abstentions; or
| ● | at least a majority of the shares held by shareholders who have no personal interest in the transaction and are voting at the meeting must be voted in favor of approving the transaction, excluding abstentions; or |
the shares voted by shareholders who have no personal interest in the transaction who vote against the transaction represent no more than 2% of the voting rights in the company.
| ● | the shares voted by shareholders who have no personal interest in the transaction who vote against the transaction represent no more than 2% of the voting rights in the company. |
If such extraordinary transaction concerns the terms of office and employment of such controlling shareholder, in his capacity as an office holder or an employee of the company, such terms of office and employment approved by the compensation committee and board of directors shall be in accordance with the compensation policy of the company. Nonetheless, the compensation committee and the board of directors may approve terms of office and compensation of a controlling shareholder and which do not comply with the company’s compensation policy, provided that the compensation committee and, thereafter, the board of directors approve such terms, based on, among other things, the considerations listed under Section 267B(a) and Parts A and B of Annex 1A of the Companies Law, as those are described above. Following such approval by the compensation committee and board of directors, shareholder approval would be required.
To the extent that any such transaction with a controlling shareholder is for a period extending beyond three years, approval, in the same manner described above, is required once every three years, unless, with respect to extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, the audit committee determines that the duration of the transaction is reasonable given the circumstances related thereto.
Duties of shareholders
Under the Companies Law, a shareholder has a duty to refrain from abusing its power in the company and to act in good faith and in an acceptable manner in exercising its rights and performing its obligations to the company and other shareholders, including, among other things, voting at general meetings of shareholders on the following matters:
an amendment to the articles of association;
| ● | an amendment to the articles of association; |
an increase in the company’s authorized share capital;
| ● | an increase in the company’s authorized share capital; |
the approval of related party transactions and acts of office holders that require shareholder approval.
| ● | the approval of related party transactions and acts of office holders that require shareholder approval. |
A shareholder also has a general duty to refrain from discriminating against other shareholders.
The remedies generally available upon a breach of contract will also apply to a breach of the above mentioned duties, and in the event of discrimination against other shareholders, additional remedies are available to the injured shareholder.
In addition, any controlling shareholder, any shareholder that knows that its vote can determine the outcome of a shareholder vote and any shareholder that, under a company’s articles of association, has the power to appoint or prevent the appointment of an office holder, or has another power with respect to a company, is under a duty to act with fairness towards the company. The Companies Law does not describe the substance of this duty except to state that the remedies generally available upon a breach of contract will also apply in the event of a breach of the duty to act with fairness, taking the shareholder’s position in the company into account.
Exculpation, insurance and indemnification of office holders
Under the Companies Law, a company may not exculpate an office holder from liability for a breach of the duty of loyalty. An Israeli company may exculpate an office holder in advance from liability to the company, in whole or in part, for damages caused to the company as a result of a breach of duty of care but only if a provision authorizing such exculpation is insertedincluded in its articles of association. Our Articles of Association include such a provision. An Israeli company may not exculpate a director from liability arising out of a prohibited dividend or distribution to shareholders.
An Israeli company may indemnify an office holder in respect of the following liabilities and expenses incurred for acts performed as an office holder, either in advance of an event or following an event, provided a provision authorizing such indemnification is contained in its articles of association:
financial liability imposed on him or her in favor of another person pursuant to a judgment, settlement or arbitrator’s award approved by a court. However, if an undertaking to indemnify an office holder with respect to such liability is provided in advance, then such an undertaking must be limited to events which, in the opinion of the board of directors, can be foreseen based on the company’s activities when the undertaking to indemnify is given, and to an amount or according to criteria determined by the board of directors as reasonable under the circumstances, and such undertaking shall detail the abovementioned events and amount or criteria;
| ● | financial liability imposed on him or her in favor of another person pursuant to a judgment, settlement or arbitrator’s award approved by a court. However, if an undertaking to indemnify an office holder with respect to such liability is provided in advance, then such an undertaking must be limited to events which, in the opinion of the board of directors, can be foreseen based on the company’s activities when the undertaking to indemnify is given, and to an amount or according to criteria determined by the board of directors as reasonable under the circumstances, and such undertaking shall detail the abovementioned events and amount or criteria; |
reasonable litigation expenses, including attorneys’ fees, incurred by the office holder as a result of an investigation or proceeding instituted against him or her by an authority authorized to conduct such investigation or proceeding, provided that (1) no indictment was filed against such office holder as a result of such investigation or proceeding; and (2) no financial liability, such as a criminal penalty, was imposed upon him or her as a substitute for the criminal proceeding as a result of such investigation or proceeding or, if such financial liability was imposed, it was imposed with respect to an offense that does not require proof of criminal intent; and
| ● | reasonable litigation expenses, including attorneys’ fees, incurred by the office holder as a result of an investigation or proceeding instituted against him or her by an authority authorized to conduct such investigation or proceeding, provided that (1) no indictment was filed against such office holder as a result of such investigation or proceeding; and (2) no financial liability, such as a criminal penalty, was imposed upon him or her as a substitute for the criminal proceeding as a result of such investigation or proceeding or, if such financial liability was imposed, it was imposed with respect to an offense that does not require proof of criminal intent; and |
reasonable litigation expenses, including attorneys’ fees, incurred by the office holder or imposed by a court in proceedings instituted against him or her by the company, on its behalf or by a third party or in connection with criminal proceedings in which the office holder was acquitted or as a result of a conviction for an offense that does not require proof of criminal intent.
| ● | reasonable litigation expenses, including attorneys’ fees, incurred by the office holder or imposed by a court in proceedings instituted against him or her by the company, on its behalf or by a third party or in connection with criminal proceedings in which the office holder was acquitted or as a result of a conviction for an offense that does not require proof of criminal intent. |
An Israeli company may insure an office holder against the following liabilities incurred for acts performed as an office holder if and to the extent provided in the company’s articles of association:
a breach of duty of loyalty to the company, to the extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;
| ● | a breach of duty of loyalty to the company, to the extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company; |
a breach of duty of care to the company or to a third party, including a breach arising out of the negligent conduct of the office holder; and
| ● | a breach of duty of care to the company or to a third party, including a breach arising out of the negligent conduct of the office holder; and |
a financial liability imposed on the office holder in favor of a third party.
| ● | a financial liability imposed on the office holder in favor of a third party. |
An Israeli company may not indemnify or insure an office holder against any of the following:
a breach of duty of loyalty, except to the extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;
| ● | a breach of duty of loyalty, except to the extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company; |
a breach of duty of care committed intentionally or recklessly, excluding a breach arising out of the negligent conduct of the office holder;
| ● | a breach of duty of care committed intentionally or recklessly, excluding a breach arising out of the negligent conduct of the office holder; |
an act or omission committed with intent to derive illegal personal benefit; or
| ● | an act or omission committed with intent to derive illegal personal benefit; or |
| ● | a fine or forfeit levied against the office holder. |
Under the Companies Law, exculpation, indemnification and insurance of office holders must be approved by the audit committee and the board of directors and, with respect to directors, by shareholders.
A recent amendment to the Israeli Securities Law, 5728-1968 (the “Israeli Securities Law”), and a corresponding amendment to the Companies Law, authorizes the Israeli Securities Authority to impose administrative sanctions against companies like ours, and their office holders for certain violations of the Israeli Securities Law or the Companies Law. These sanctions include monetary sanctions and certain restrictions on serving as a director or senior officer of a public company for certain periods of time. The amendments to the Israeli Securities Law and to the Companies Law provide that only certain types of such liabilities may be reimbursed by indemnification and insurance. Specifically, legal expenses (including attorneys’ fees) incurred by an individual in the applicable administrative enforcement proceeding and certain compensation payable to injured parties for damages suffered by them are permitted to be reimbursed via indemnification or insurance, provided that such indemnification and insurance are authorized by the company’s articles of association, and receive the requisite corporate approvals.
Our Articles of Association allow us to indemnify and insure our office holders for any liability imposed on them as a consequence of an act (including any omission) which was performed by virtue of being an office holder. In November 2011, our shareholders approved (i) the amendment of our Articles of Association to authorize indemnification and insurance in connection with administrative enforcement proceedings, including without limitation, the specific amendments to the Israeli Securities Law and the Companies Law described above; and (ii) a new form of indemnification letter for our directors and officers so as to reflect the amendment to our Articles of Association, which new form of letter was also approved (subject to shareholder approval), in October 2011 by our audit committee and board of directors.directors, and in November 2011 by our shareholders. The terms of such agreements are consistent with the provisions of the Compensation Policy which was approved by our shareholders in December 2013.
Our office holders are currently covered by a directors and officers’ liability insurance policy. The terms of such directors and officers insurance are consistent with the provisions of the Compensation Policy which was approved by our shareholders in December 2013. As of the date of this Annual Report on Form 20-F, no claims for directors and officers’ liability insurance have been filed under this policy and we are not aware of any pending or threatened litigation or proceeding involving any of our directors or officers in which indemnification is sought. Pursuant to the approval of our shareholders which was obtained on November 5, 2009,in August 2011, we carry directorsdirectors’ and officers’ insurance covering each of our directors and executive officers for acts and omissions. See also “Certain Transactions and Related Party Transactions — Indemnification Agreements.”
There is no pending litigation or proceeding against any of our directors or officers as to which indemnification is being sought, nor are we aware of any pending or threatened litigation that may result in claims for indemnification by any director or officer.
For significant ways in which our corporate governance practices differ from those required by the Marketplace Rules of the Nasdaq Stock Market, see “Item 16G. Corporate Governance.”
As of December 31, 2012,2013, we had 5243 employees, all of whom are employed in Israel. Of our employees, 2216 hold M.D. or Ph.D. degrees.
| | December 31, | | | December 31, | |
| | 2010 | | | 2011 | | | 2012 | | | 2011 | | | 2012 | | | 2013 | |
| | | | | | | | | | | | | | | | | | |
Management and administration | | | 12 | | | | 12 | | | | 13 | | | | 12 | | | | 13 | | | | 13 | |
Research and development | | | 34 | | | | 37 | | | | 37 | | | | 37 | | | | 37 | | | | 27 | |
Sales and marketing | | | 3 | | | | 3 | | | | 2 | | | | 3 | | | | 2 | | | | 3 | |
While none of our employees are party to any collective bargaining agreements, in Israel we are subject to certain labor statutes and national labor court precedent rulings, as well as to 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 ordervirtue of expansion orders issued in accordance with relevant labor laws by the Israel Ministry of Labor. TheseLabor and Welfare, and which apply such agreement provisions primarilyto our employees even though they are not directly part of a union that has signed a collective bargaining agreement. The laws and labor court rulings that apply to our employees principally concern the length of the workday, minimum daily wages for professional workers, pension fund benefits for all employees, insurance for work-related accidents,wage laws, procedures for dismissing employees, determination of severance pay, leaves of absence (such as annual vacation or maternity leave), sick pay and other conditions for employment. The expansion orders which apply to our employees principally concern the requirement for length of the work day and work week, mandatory contributions to a pension fund, annual recreation allowance, travel expenses payment and other conditions of employment. 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.
E. Beneficial Ownership of Executive Officers and Directors
The following table sets forth information regarding the beneficial ownership of our outstanding ordinary shares as of March 5, 201314, 2014 of each of our directors and executive officers individually and as a group.
| | Number of | | | | |
| | Shares | | | | |
| | Beneficially | | | Percent of | |
| | Held | | | Class | |
| | | | | | |
Directors | | | | | | |
| | | | | | |
Aharon Schwartz | | | – | | | | – | |
Michael J. Anghel | | | – | | | | – | |
Nurit Benjamini(1) | | | 45,837 | | | | * | |
Raphael Hofstein(2) | | | 162,500 | | | | * | |
Avraham Molcho(3) | | | 45,837 | | | | * | |
| | | | | | | | |
Executive officers | | | | | | | | |
Kinneret Savitsky(4) | | | 1,422,202 | | | | * | |
Philip Serlin(5) | | | 277,100 | | | | * | |
Leah Klapper(6) | | | 340,779 | | | | * | |
David Malek(7) | | | – | | | | * | |
Moshe Phillip(8) | | | 978,799 | | | | * | |
All directors and executive officers as a group (11 persons)(9) | | | 3,273,054 | | | | 1.5 | % |
| | Number of | | | | |
| | Shares | | | | |
| | Beneficially | | | Percent of | |
| | Held | | | Class | |
| | | | | | |
Directors | | | | | | |
| | | | | | |
Aharon Schwartz(1) | | | 25,000 | | | | * | |
Michael J. Anghel(2) | | | 25,000 | | | | * | |
Nurit Benjamini(3) | | | 87,500 | | | | * | |
B.J. Bormann(4) | | | 12,500 | | | | * | |
Raphael Hofstein(5) | | | 225,000 | | | | * | |
Avraham Molcho(6) | | | 87,500 | | | | * | |
Sandra Panem | | | – | | | | | |
| | | | | | | | |
Executive officers | | | | | | | | |
Kinneret Savitsky(7) | | | 1,547,202 | | | | * | |
Philip Serlin(8) | | | 415,650 | | | | * | |
Leah Klapper(9) | | | 406,769 | | | | * | |
David Malek(10) | | | 125,000 | | | | * | |
Arnon Aharon(11) | | | – | | | | * | |
All directors and executive officers as a group (12 persons)(12) | | | 2,957,121 | | | | 1.2 | % |
| |
* | Less than 1.0%. |
| | |
(1) | Includes 45,83725,000 ordinary shares issuable upon exercise of outstanding options within 60 days of March 5, 2013.14, 2014. Does not include 4,163125,000 ordinary shares issuable upon exercise of outstanding options that are not exercisable within 60 days of March 5, 2013.14, 2014. |
| | |
(2) | Includes 162,50025,000 ordinary shares issuable upon exercise of outstanding options within 60 days of March 5, 2013.14, 2014. Does not include 37,500125,000 ordinary shares issuable upon exercise of outstanding options that are not exercisable within 60 days of March 5, 2013.14, 2014. |
| | |
(3) | Includes 45,83787,500 ordinary shares issuable upon exercise of outstanding options within 60 days of March 5, 2013.14, 2014. Does not include 4,163112,500 ordinary shares issuable upon exercise of outstanding options that are not exercisable within 60 days of March 5, 2013.14, 2014. |
| | |
(4) | Includes 506,17012,500 ordinary shares issuable upon exercise of outstanding options within 60 days of March 5, 2013.14, 2014. Does not include 1,150,000137,500 ordinary shares issuable upon exercise of outstanding options that are not exercisable within 60 days of March 5, 2013.14, 2014. |
| | |
(5) | Includes 277,100225,000 ordinary shares issuable upon exercise of outstanding options within 60 days of March 5, 2013.14, 2014. Does not include 777,100125,000 ordinary shares issuable upon exercise of outstanding options that are not exercisable within 60 days of March 5, 2013.14, 2014. |
| | |
(6) | Includes 149,50587,500 ordinary shares issuable upon exercise of outstanding options within 60 days of March 5, 2013.14, 2014. Does not include 571,980112,500 ordinary shares issuable upon exercise of outstanding options that are not exercisable within 60 days of March 5, 2013.14, 2014. |
| | |
(7) | Includes 631,170 ordinary shares issuable upon exercise of outstanding options within 60 days of March 14, 2014. Does not include 550,0001,925,000 ordinary shares issuable upon exercise of outstanding options that are not exercisable within 60 days of March 5, 2013.14, 2014. |
| | |
(8) | Includes 393,836415,650 ordinary shares issuable upon exercise of outstanding options within 60 days of March 5, 2013.14, 2014. Does not include 485,6751,138,550 ordinary shares issuable upon exercise of outstanding options that are not exercisable within 60 days of March 5, 2013.14, 2014. |
| | |
(9) | Includes 1,580,785215,495 ordinary shares issuable upon exercise of outstanding options within 60 days of March 5, 2013.14, 2014. Does not include 3,580,581985,990 ordinary shares issuable upon exercise of outstanding options that are not exercisable within 60 days of March 5, 2013.14, 2014. |
| |
(10) | Includes 125,000 ordinary shares issuable upon exercise of outstanding options within 60 days of March 14, 2014. Does not include 885,000 ordinary shares issuable upon exercise of outstanding options that are not exercisable within 60 days of March 14, 2014. |
| |
(11) | Does not include 300,000 ordinary shares issuable upon exercise of outstanding options that are not exercisable within 60 days of March 14, 2014. |
| |
(12) | Includes 1,849,815 ordinary shares issuable upon exercise of outstanding options within 60 days of March 14, 2014. Does not include 5,972,040 ordinary shares issuable upon exercise of outstanding options that are not exercisable within 60 days of March 14, 2014. |
Stock Option Plans
2003 Share Option Plan
In 2003, we adopted the BioLineRx Ltd. 2003 Share OptionIncentive Plan, or the Plan. The Plan provides for the granting of options and ordinary shares to our directors, employees, consultants and service providers, and to the directors, employees, consultants and service providers of our subsidiaries and affiliates. The Plan provides for options to be issued at the determination of our Board of Directors in accordance with applicable law. As of December 31, 2012,2013, there were 13,575,81118,892,594 ordinary shares issuable upon the exercise of outstanding options under the Plan.
In November 2011, our Board of Directors approved the re-pricing of approximately 3,700,000 outstanding “underwater” employee stock options (out of a total of approximately 6,200,000 stock options outstanding). The weighted average remaining vesting period of the options subject to re-pricing was 1.1 years, with a weighted average exercise price of NIS 4.07 per share. The terms of the re-pricing were as follows: (i) the exercise price of the options was reduced to NIS 1.80 per share and (ii) one additional year of vesting was added to the remaining vesting period of the options. The re-pricing was not applicable to options which were already vested, and it did not apply to options held by Directors or consultants. With respect to each eligible optionee, the re-pricing terms applied only if the eligible optionee consented to the new terms. Without such consent, the terms remained unchanged (in respect of that optionee).
In November 2012, our Board of Directors approved a two-year extension to the exercise period for 3,867,910 previously issued and outstanding employee stock options. This extension brought the total exercise period of such options in line with the seven-year exercise period generally used for most employee stock options that were previously granted.
In August 2013, our Board of Directors approved amendments to the Plan to take into account changes in laws and regulations that had occurred since its adoption and to extend the term of the plan until November 2023.
Administration of Our Share OptionIncentive Plan
Our share option planPlan is administered by our AuditCompensation Committee, which makes recommendations to our Board of Directors regarding the granting of options and the terms of option grants, including exercise price, method of payment, vesting schedule, acceleration of vesting and the other matters necessary in the administration of these plans. Options granted under the Plan to eligible employees and office holders are granted under Section 102 of the Israel Income Tax Ordinance pursuant to which the options or the ordinary shares issued upon their exercise must be allocated or issued to a trustee and be held in trust for two years from the date upon which such options were granted, provided that options granted prior to January 1, 2006, or the ordinary shares issued upon their exercise, are subject to being held in trust for two years from the end of the year in which the options are granted. Under Section 102, any tax payable by an employee from the grant or exercise of the options is deferred until the transfer of the options or ordinary shares by the trustee to the employee or upon the sale of the options or ordinary shares, and gains may qualify to be taxed as capital gains at a rate equal to 25%, subject to compliance with specified conditions.
Options granted under our share option planthe Plan generally vest over four years, and they expire between seven to 10 years from the grant date. If we terminate an employee for cause, all of the employee’s vested and unvested options expire immediately from the time of delivery of the notice of discharge, unless determined otherwise by the Audit Committee or the Board of Directors. Upon termination of employment for any other reason, including due to death or disability of the employee, vested options may be exercised within three months of the termination date, unless otherwise determined by the Audit Committee or the Board of Directors. Vested options which are not exercised and unvested options return to the pool of reserved ordinary shares under the Plan for reissuance.
In the event of a merger, consolidation, reorganization or similar transaction or our voluntary liquidation or dissolution, all of our unexercised vested options and any unvested options will be automatically terminated. However, in the event of a change of control, or merger, consolidation, reorganization or similar transaction resulting in the acquisition of at least 50% of our voting power, or the sale of all or substantially all of our assets, each option holder will be entitled to purchase the number of shares of the other corporation the option holder would have received if he or she had exercised the options immediately prior to such transaction or may sell or exchange their shares received pursuant to the exercise of an option.
A. Major Shareholders
The following table sets forth certain information regarding the beneficial ownership of our outstanding ordinary shares as of March 5, 2013,14, 2014, by each person who we know beneficially owns 5.0% or more of the outstanding ordinary shares. Each of our shareholders has identical voting rights with respect to its shares. All of the information with respect to beneficial ownership of the ordinary shares is given to the best of our knowledge.
The beneficial ownership of ordinary shares is based on the 218,650,038338,812,199 ordinary shares outstanding as of March 5, 201314, 2014 and is determined in accordance with the rules of the SEC and generally includes any ordinary shares over which a person exercises sole or shared voting or investment power. For purposes of the table below, we deem shares subject to options or warrants that are currently exercisable or exercisable within 60 days of March 5,14, 2014, to be outstanding and to be beneficially owned by the person holding the options or warrants for the purposes of computing the percentage ownership of that person but we do not treat them as outstanding for the purpose of computing the percentage ownership of any other person. Except where otherwise indicated, we believe, based on information furnished to us by such owners, that the beneficial owners of the ordinary shares listed below have sole investment and voting power with respect to such ordinary shares. To our knowledge, none of our shareholders of record are U.S. holders. Our principal shareholders do not have different or special voting rights.
| | Number of Shares Beneficially Held | | | Percent of Class | | Number of Shares Beneficially Held | | Percent of Class |
| | | | | | | | | | |
Pan Atlantic Bank and Trust Limited(1) | | | 28,703,966 | | | | 12.7 | | 34,803,965 | | 10.1 | |
OrbiMed Israel Partners Limited Partnership(2) | | | 26,666,670 | | | | 12.2 | | 27,350,000 | | 8.0 | |
Ayer Capital Management, LP(3) | | | 15,734,270 | | | | 7.0 | | |
Teva Pharmaceutical Industries Ltd.(4) | | | 11,889,535 | | | | 5.4 | | |
Sabby Healthcare Volatility Master Fund, Ltd. (3) | | 17,000,000 | | 5.0 | |
(1) | Includes 7,000,000 ordinary shares issuable upon exercise of outstanding warrants within 60 days of March 14, 2014. Based upon information provided by the shareholder in its Schedule 13D/A filed with the SEC on March 8, 2013.10, 2014. Pan Atlantic Bank and Trust Limited is a wholly owned subsidiary of FCMI Financial Corporation (FCMI). All of the outstanding shares of FCMI are owned by Albert D. Friedberg, members of his family and trusts for the benefit of members of his family. Mr. Friedberg retains possession of the voting and dispositive power over the FCMI shares held by members of the Friedberg family and trusts for the benefit of members of his family and, as a result, controls and may be deemed the beneficial owner of 100% of the outstanding shares of and sole controlling person of FCMI. By virtue of his control of FCMI, Mr. Friedberg may be deemed to possess voting and dispositive power over the shares owned directly by its wholly-owned subsidiary, Pan Atlantic Bank and Trust Limited. The principal executive offices of Pan Atlantic Bank and Trust Limited are at “Whitepark House,” 1st Floor, Whitepark Road, St. Michael BB11135, Barbados, West Indies. |
(2) | Includes 16,000,000 ordinary shares issuable upon exercise of outstanding options within 60 days of March 14, 2014. Based upon information provided by the shareholder in its Schedule 13G13G/A filed with the SEC on February 15, 2013.February13, 2014. OrbiMed Israel GP Ltd. (“OrbiMed Israel”) is the general partner of OrbiMed Israel BioFund GP Limited Partnership (“OrbiMed BioFund”), which is the general partner of the shareholder, OrbiMed Israel Partners Limited Partnership, an Israel limited partnership (“OrbiMed Partners”). OrbiMed Israel, as the general partner of OrbiMed BioFund, and OrbiMed BioFund, as the general partner of OrbiMed Partners, may be deemed to share voting and investment power with respect to the ordinary shares underlying the securities held by OrbiMed Partners. |
(3) | Includes the securities held by Ayer Capital Partners(i) Sabby Healthcare Volatility Master Fund, L.P.Ltd. beneficially owns 1,700,000 of our ADSs, representing approximately 5.02% of the ADSs , Ayer Capital Partners Kestrel Fund, LP and Epworth-Ayer Capital. Ayer Capital(ii) Sabby Management, LP isLLC and Hal Mintz each beneficially own 1,700,000 ADSs, representing approximately 5.02% of the ADS. Sabby Management, LLC and Hal Mintz do not directly own any ADSs, but each indirectly owns 1,700,000 ADS. Sabby Management, LLC, a Delaware limited liability company, indirectly owns 1,700,000 ADSs because it serves as the investment manager of and may be deemed to have beneficial ownership (as determined under Section 13(d)Sabby Healthcare Volatility Master Fund, Ltd. Mr. Mintz indirectly owns 1,700,000 ADSs in his capacity as manager of the Securities Exchange Act of 1934, as amended) of, the securities held by each of these entities. ACM Capital Partners, LLC and Jay Venkatesan each have voting control over Ayer CapitalSabby Management, LP. As a result, each of ACM Capital Partners, LLC and Jay Venkatesan, may be deemed to have beneficial ownership of the securities held by Ayer Capital Management, LP. |
(4) | Based upon information provided by the shareholder in its Schedule 13G filed with the SEC on February 14, 2012. Teva is a publicly-traded Israeli company. Its principal executive offices are at 5 Basel Street, PO Box 3190, Petach Tikva 49131, Israel.LLC. |
B. Related Party Transactions
Early Development Program Agreement
We entered into an agreement with Pan Atlantic pursuant to which Pan Atlantic committed to provide up to $5.0 million of funding for us to in-license and develop early development stage therapeutic candidates. Pursuant to this early development program, we were entitled to request from Pan Atlantic twice a year up to $625,000 for an aggregate of up to approximately $1.25 million per year, unless otherwise agreed by Pan Atlantic, for our early development research projects, provided that we match the program funds at a rate of $0.20 per every dollar invested by Pan Atlantic. Pan Atlantic fulfilled its entire $5,000,000 funding obligation under this program during 2012. Pan Atlantic does not have any rights to any products developed through our early development projects. As part of the agreement, Pan Atlantic will havehad the right to invest up to $5.0 million in our first public offering outside of Israel. See “Item 10. Additional Information — Material Contracts — Early Development Program Agreement.”Israel, which right it exercised by participating in the public offering we carried out in March 2014. The full $6,000,000 of funds earmarked for the EDP program were completely utilized as of December 31, 2013. Pan Atlantic does not have any rights to any products developed through the EDP program.
Agreements with Directors and Officers
Employment Agreements
We have entered into employment agreements with each of our executive officers. See “Item 6. Directors, Senior Management and Employees — Compensation of Directors and Senior Management.”
Indemnification Agreements
Our Articles of Association and Executive Compensation Policy approved by our shareholders permit us to exculpate, indemnify and insure our directors and officeholders to the fullest extent permitted by the Companies Law. We have entered into agreements with each of our office holders undertaking to indemnify them to the fullest extent permitted by law, including with respect to liabilities resulting from this offering to the extent that these liabilities are not covered by insurance. We have obtained directors and officers’ insurance for each of our officers and directors. See “Item 6. Directors, Senior Management and Employees — Board Practices — Exculpation, insurance and indemnification of office holders.”
C. Interests of Experts and Counsel
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. Consolidated Statements and other Financial Information
See Item 18.
Legal Proceedings
We are not involved in any material legal proceedings.
Dividend Distributions
We have never declared or paid cash dividends to our shareholders. Currently we do not intend to pay cash dividends. We currently intend to reinvest any future earnings in developing and expanding our business. Any future determination relating to our dividend policy will be at the discretion of our Board of Directors and will depend on a number of factors, including future earnings, our financial condition, operating results, contractual restrictions, capital requirements, business prospects, applicable Israeli law and other factors our Board of Directors may deem relevant.
B. Significant Changes
None.
ITEM 9. THE OFFER AND LISTING
A. Offer and Listing Details
Price Range of our Ordinary Shares
Our ordinary shares have been trading on the TASE under the symbol “BLRX” since February 2007.
The following table sets forth, for the periods indicated, the reported high and low closing sale prices of our ordinary shares on the TASE in NIS and U.S. dollars. U.S. dollar per ordinary share amounts are calculated using the U.S. dollar representative rate of exchange on the date to which the high or low market price is applicable, as reported by the Bank of Israel.
| | | | | | |
| | | | | | |
| | | | | | | | | | | | |
Annual: | | | | | | | | | | | | |
2012 | | | 2.12 | | | | 0.89 | | | | 0.56 | | | | 0.23 | |
2011 | | | 3.24 | | | | 1.13 | | | | 0.91 | | | | 0.30 | |
2010 | | | 4.75 | | | | 2.86 | | | | 1.26 | | | | 0.80 | |
2009 | | | 5.68 | | | | 0.86 | | | | 1.53 | | | | 0.23 | |
2008 | | | 4.25 | | | | 0.69 | | | | 1.10 | | | | 0.17 | |
| | | | | | | | | | | | | | | | |
Quarterly: | | | | | | | | | | | | | | | | |
Fourth Quarter 2012 | | | 1.34 | | | | 0.94 | | | | 0.34 | | | | 0.25 | |
Third Quarter 2012 | | | 1.18 | | | | 0.91 | | | | 0.30 | | | | 0.23 | |
Second Quarter 2012 | | | 1.12 | | | | 0.89 | | | | 0.30 | | | | 0.23 | |
First Quarter 2012 | | | 2.12 | | | | 1.06 | | | | 0.56 | | | | 0.28 | |
Fourth Quarter 2011 | | | 1.48 | | | | 1.14 | | | | 0.41 | | | | 0.30 | |
Third Quarter 2011 | | | 1.92 | | | | 1.13 | | | | 0.56 | | | | 0.30 | |
Second Quarter 2011 | | | 2.54 | | | | 1.58 | | | | 0.74 | | | | 0.45 | |
First Quarter 2011 | | | 3.24 | | | | 2.15 | | | | 0.91 | | | | 0.60 | |
| | | | | | | | | | | | | | | | |
Most Recent Six Months: | | | | | | | | | | | | | | | | |
March 2013 (through March 5, 2013) | | | 1.43 | | | | 1.37 | | | | 0.38 | | | | 0.37 | |
February 2013 | | | 1.80 | | | | 1.38 | | | | 0.49 | | | | 0.37 | |
January 2013 | | | 1.73 | | | | 0.97 | | | | 0.41 | | | | 0.26 | |
December 2012 | | | 1.13 | | | | 0.94 | | | | 0.30 | | | | 0.25 | |
November 2012 | | | 1.23 | | | | 1.04 | | | | 0.32 | | | | 0.27 | |
October 2012 | | | 1.34 | | | | 0.97 | | | | 0.34 | | | | 0.25 | |
September 2012 | | | 1.04 | | | | 0.92 | | | | 0.28 | | | | 0.22 | |
| | | | | | |
| | | | | | |
| | | | | | | | | | | | |
Annual: | | | | | | | | | | | | |
2013 | | | 1.79 | | | | 0.59 | | | | 0.49 | | | | 0.16 | |
2012 | | | 2.12 | | | | 0.89 | | | | 0.56 | | | | 0.23 | |
2011 | | | 3.24 | | | | 1.13 | | | | 0.91 | | | | 0.30 | |
2010 | | | 4.75 | | | | 2.86 | | | | 1.26 | | | | 0.80 | |
2009 | | | 5.68 | | | | 0.86 | | | | 1.53 | | | | 0.23 | |
| | | | | | | | | | | | | | | | |
Quarterly: | | | | | | | | | | | | | | | | |
Fourth Quarter 2013 | | | 1.08 | | | | 0.80 | | | | 0.30 | | | | 0.23 | |
Third Quarter 2013 | | | 0.85 | | | | 0.60 | | | | 0.24 | | | | 0.17 | |
Second Quarter 2013 | | | 0.73 | | | | 0.59 | | | | 0.20 | | | | 0.16 | |
First Quarter 2013 | | | 1.79 | | | | 0.63 | | | | 0.49 | | | | 0.17 | |
Fourth Quarter 2012 | | | 1.39 | | | | 0.94 | | | | 0.36 | | | | 0.25 | |
Third Quarter 2012 | | | 1.18 | | | | 0.90 | | | | 0.30 | | | | 0.22 | |
Second Quarter 2012 | | | 1.12 | | | | 0.89 | | | | 0.30 | | | | 0.23 | |
First Quarter 2012 | | | 2.12 | | | | 1.06 | | | | 0.56 | | | | 0.28 | |
| | | | | | | | | | | | | | | | |
Most Recent Six Months: | | | | | | | | | | | | | | | | |
March 2014 (through March 14, 2014) | | | 1.03 | | | | 0.88 | | | | 0.29 | | | | 0.25 | |
February 2014 | | | 1.03 | | | | 0.98 | | | | 0.29 | | | | 0.28 | |
January 2014 | | | 1.05 | | | | 0.99 | | | | 0.30 | | | | 0.29 | |
December 2013 | | | 1.05 | | | | 0.91 | | | | 0.30 | | | | 0.23 | |
November 2013 | | | 1.00 | | | | 0.89 | | | | 0.28 | | | | 0.25 | |
October 2013 | | | 1.08 | | | | 0.80 | | | | 0.30 | | | | 0.23 | |
September 2013 | | | 0.85 | | | | 0.73 | | | | 0.24 | | | | 0.17 | |
On March 11, 2013,13, 2014, the last reported sales price of our ordinary shares on the TASE was NIS 1.420.88 per share, or $0.38$0.0.25 per share (based on the exchange rate reported by the Bank of Israel for such date). On March 11, 2013,13, 2014, the exchange rate of the NIS to the dollar was $1.00 = NIS 3.690,3.465, as reported by the Bank of Israel. As of March 11, 201313, 2014 there were three shareholders of record of our ordinary shares. The number of record holders is not representative of the number of beneficial holders of our ordinary shares.
Price Range of our ADSs
Our ADSs have been trading on the Nasdaq Capital Market under the symbol “BLRX” since July 2011.
The following table sets forth, for the periods indicated, the reported high and low closing sale prices of our ADSs on the Nasdaq Capital Market in U.S. dollars.
| | | | | | |
| | | | | | |
| | | | | | | | | | | | |
Annual: | | | | | | | | | | | | |
2013 | | | | 4.75 | | | | 1.58 | |
2012 | | | 5.55 | | | | 2.23 | | | | 5.55 | | | | 2.23 | |
2011 (from July 25, 2011) | | | 5.59 | | | | 2.75 | | | | 5.59 | | | | 2.75 | |
| | | | | | | | | | | | | | | | |
Quarterly: | | | | | | | | | | | | | | | | |
Fourth Quarter 2013 | | | | 2.96 | | | | 2.20 | |
Third Quarter 2013 | | | | 2.29 | | | | 1.62 | |
Second Quarter 2013 | | | | 1.91 | | | | 1.58 | |
First Quarter 2013 | | | | 4.75 | | | | 1.68 | |
Fourth Quarter 2012 | | | 3.35 | | | | 2.47 | | | | 3.35 | | | | 2.47 | |
Third Quarter 2012 | | | 3.00 | | | | 2.23 | | | | 3.00 | | | | 2.23 | |
Second Quarter 2012 | | | 2.85 | | | | 2.30 | | | | 2.85 | | | | 2.30 | |
First Quarter 2012 | | | 5.55 | | | | 2.75 | | | | 5.55 | | | | 2.75 | |
Fourth Quarter 2011 | | | 4.21 | | | | 3.01 | | |
Third Quarter 2011(from July 25, 2011) | | | 5.59 | | | | 2.75 | | |
| | | | | | | | | | | | | | | | |
Most Recent Six Months: | | | | | | | | | | | | | | | | |
March 2013 (through March 5, 2013) | | | 3.79 | | | | 3.68 | | |
February 2013 | | | 4.75 | | | | 3.66 | | |
January 2013 | | | 4.74 | | | | 3.94 | | |
December 2012 | | | 3.05 | | | | 2.47 | | |
November 2012 | | | 3.16 | | | | 2.55 | | |
October 2012 | | | 3.35 | | | | 2.55 | | |
September 2012 | | | 2.76 | | | | 2.25 | | |
March 2014 (through March 14, 2014) | | | | 2.92 | | | | 2.48 | |
February 2014 | | | | 3.01 | | | | 2.76 | |
January 2014 | | | | 3.07 | | | | 2.78 | |
December 2013 | | | | 2.96 | | | | 2.53 | |
November 2013 | | | | 2.82 | | | | 2.38 | |
October 2013 | | | | 2.90 | | | | 2.20 | |
September 2013 | | | | 2.27 | | | | 1.94 | |
On March 11, 2013,14, 2014, the last reported sales price of our ADSs on the Nasdaq Capital Market was $3.92$2.48 per ADS. As of March 11, 201314, 2014 there was one shareholder of record of our ADSs. The number of record holders is not representative of the number of beneficial holders of our ADSs.
B. Plan of Distribution
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable
B. Memorandum and Articles of Association
Our number with the Israeli Registrar of Companies is 513398750. Our purpose is set forth in Section 2 of our Articles of Association and includes every lawful purpose.
Our ordinary shares that are fully paid for are issued in registered form and may be freely transferred under our Articles of Association, unless the transfer is restricted or prohibited by applicable law or the rules of a stock exchange on which the shares are traded. The ownership or voting of our ordinary shares by non-residents of Israel is not restricted in any way by our Articles of Association or the laws of the State of Israel, except for ownership by nationals of some countries that are, or have been, in a state of war with Israel.
Pursuant to the Companies Law and our Articles of Association, our Board of Directors may exercise all powers and take all actions that are not required under law or under our Articles of Association to be exercised or taken by our shareholders, including the power to borrow money for company purposes.
Our Articles of Association enable us to increase or reduce our share capital. Any such changes are subject to the provisions of the Companies Law and must be approved by a resolution duly passed by our shareholders at a general or special meeting by voting on such change in the capital. In addition, transactions that have the effect of reducing capital, such as the declaration and payment of dividends in the absence of sufficient retained earnings and profits and an issuance of shares for less than their nominal value (under certain circumstances), require a resolution of our Board of Directors and court approval.
Dividends
We may declare a dividend to be paid to the holders of our ordinary shares in proportion to their respective shareholdings. Under the Companies Law, dividend distributions are determined by the board of directors and do not require the approval of the shareholders of a company unless the company’s articles of association provide otherwise. Our Articles of Association do not require shareholder approval of a dividend distribution and provide that dividend distributions may be determined by our Board of Directors.
Pursuant to the Companies Law, we may only distribute dividends from our profits accrued over the previous two years, as defined in the Companies Law, according to our then last reviewed or audited financial reports, provided that the date of the financial reports is not more than six months prior to the date of distribution, or we may distribute dividends with court approval. In each case, we are only permitted to pay a dividend if there is no reasonable concern that payment of the dividend will prevent us from satisfying our existing and foreseeable obligations as they become due.
Election of Directors
Our ordinary shares do not have cumulative voting rights in the election of directors. As a result, the holders of a majority of the voting power represented at a shareholders meeting have the power to elect all of our directors, subjectother than with respect to the special approval requirements for the election of external directors described under “Item 6. Directors, Senior Management and Employees — Board Practices — External Directors.”
Pursuant to our Articles of Association, other than the external directors, for whom special election requirements apply under the Companies Law, our directors are elected at a general or special meeting of our shareholders and serve on the Board of Directors until they are removed by the majority of our shareholders at a general or special meeting of our shareholders or upon the occurrence of certain events, in accordance with the Companies Law and our Articles of Association. In addition, our Articles of Association allow our Board of Directors to appoint directors to fill vacancies on the Board of Directors to serve until the next general meeting or special meeting, or earlier if required by our Articles of Association or applicable law. We have held elections for each of our non-external directors at each annual meeting of our shareholders since our initial public offering in Israel. External directors are elected for an initial term of three years and may be removed from office pursuant to the terms of the Companies Law. See “Item 6. Directors, Senior Management and Employees — Board Practices — External Directors.”
Shareholder Meetings
Under Israeli law, we are required to hold an annual general meeting of our shareholders once every calendar year that must be no later than 15 months after the date of the previous annual general meeting. All meetings other than the annual general meeting of shareholders are referred to as special meetings. Our Board of Directors may call special meetings whenever it sees fit, at such time and place, within or outside of Israel, as it may determine. In addition, the Companies Law and our Articles of Association provide that our Board of Directors is required to convene a special meeting upon the written request of (a) any two of our directors or one quarter of our Board of Directors or (b) one or more shareholders holding, in the aggregate, either (1) 5% of our outstanding shares and 1% of our outstanding voting power or (2) 5% of our outstanding voting power.
Subject to the provisions of the Companies Law and the regulations promulgated thereunder, shareholders entitled to participate and vote at general meetings are the shareholders of record on a date to be decided by the board of directors, which may be between four and 40 days prior to the date of the meeting. Furthermore, the Companies Law and our Articles of Association require that resolutions regarding the following matters must be passed at a general meeting of our shareholders:
amendments to our Articles of Association;
| ● | amendments to our Articles of Association; |
appointment or termination of our auditors;
| ● | appointment or termination of our auditors; |
appointment of directors and appointment and dismissal of external directors;
| ● | appointment of directors and appointment and dismissal of external directors; |
approval of acts and transactions requiring general meeting approval pursuant to the Companies Law;
| ● | approval of acts and transactions requiring general meeting approval pursuant to the Companies Law; |
director compensation, indemnification and change of the principal executive officer;
| ● | director compensation, indemnification and change of the principal executive officer; |
increases or reductions of our authorized share capital;
| ● | increases or reductions of our authorized share capital; |
the exercise of our Board of Director’s powers by a general meeting, if our Board of Directors is unable to exercise its powers and the exercise of any of its powers is required for our proper management.
| ● | the exercise of our Board of Director’s powers by a general meeting, if our Board of Directors is unable to exercise its powers and the exercise of any of its powers is required for our proper management. |
The Companies Law requires that a notice of any annual or special shareholders meeting be provided at least 21 days prior to the meeting and if the agenda of the meeting includes the appointment or removal of directors, the approval of transactions with office holders or interested or related parties, the approval of a compensation policy with respect to office holders or an approval of a merger, notice must be provided at least 35 days prior to the meeting.
The Companies Law does not allow shareholders of publicly traded companies to approve corporate matters by written consent. Consequently, our Articles of Association does not allow shareholders to approve corporate matters by written consent.
Pursuant to our Articles of Association, holders of our ordinary shares have one vote for each ordinary share held on all matters submitted to a vote before the shareholders at a general meeting.
Quorum
The quorum required for our general meetings of shareholders consists of at least two shareholders present in person, by proxy or written ballot who hold or represent between them at least 25% of the total outstanding voting rights.
A meeting adjourned for lack of a quorum is adjourned to the same day in the following week at the same time and place or on a later date if so specified in the summons or notice of the meeting. At the reconvened meeting, any number of our shareholders present in person or by proxy shall constitute a lawful quorum.
Resolutions
Our Articles of Association provide that all resolutions of our shareholders require a simple majority vote, unless otherwise required by applicable law.
Israeli law provides that a shareholder of a public company may vote in a meeting and in a class meeting by means of a written ballot in which the shareholder indicates how he or she votes on resolutions relating to the following matters:
an appointment or removal of directors;
| ● | an appointment or removal of directors; |
an approval of transactions with office holders or interested or related parties;
| ● | an approval of transactions with office holders or interested or related parties; |
an approval of a merger or any other matter in respect of which there is a provision in the articles of association providing that decisions of the general meeting may also be passed by written ballot;
| ● | an approval of a merger or any other matter in respect of which there is a provision in the articles of association providing that decisions of the general meeting may also be passed by written ballot; |
authorizing the chairman of the board of directors or his relative to act as the company’s chief executive officer or act with such authority; or authorize the company’s chief executive officer or his relative to act as the chairman of the board of directors or act with such authority; and
| ● | authorizing the chairman of the board of directors or his relative to act as the company’s chief executive officer or act with such authority; or authorize the company’s chief executive officer or his relative to act as the chairman of the board of directors or act with such authority; and |
other matters which may be prescribed by Israel’s Minister of Justice.
| ● | other matters which may be prescribed by Israel’s Minister of Justice. |
The provision allowing the vote by written ballot does not apply where the voting power of the controlling shareholder is sufficient to determine the vote. Our Articles of Association provides that our Board of Directors may prevent voting by means of a written ballot and this determination is required to be stated in the notice convening the general meeting.
The Companies Law provides that a shareholder, in exercising his or her rights and performing his or her obligations toward the company and its other shareholders, must act in good faith and in a customary manner, and avoid abusing his or her power. This is required when voting at general meetings on matters such as changes to the articles of association, increasing the company’s registered capital, mergers and approval of related party transactions. A shareholder also has a general duty to refrain from depriving any other shareholder of its rights as a shareholder. In addition, any controlling shareholder, any shareholder who knows that its vote can determine the outcome of a shareholder vote and any shareholder who, under the company’s articles of association, can appoint or prevent the appointment of an office holder, is required to act with fairness towards the company. The Companies Law does not describe the substance of this duty except to state that the remedies generally available upon a breach of contract will also apply to a breach of the duty to act with fairness, and, to the best of our knowledge, there is no binding case law that addresses this subject directly.
Unless otherwise stated under the Companies Law, or provided in a company’s articles of association a resolution at a shareholders meeting requires approval by a simple majority of the voting rights represented at the meeting, in person, by proxy or written ballot, and voting on the resolution. Under the Companies Law, unless otherwise provided in a company’s articles of association or under applicable law, all resolutions of the shareholders of a company require a simple majority. A resolution for the voluntary winding up of the company requires the approval of holders of 75% of the voting rights represented at the meeting, in person, by proxy or by written ballot and voting on the resolution.
Under Amendment 20, the board of directors of an Israeli publicly traded company is required to establish a compensation policy, to be approved by the shareholders of the company, pursuant to which the terms of office and compensation of the company’s officer holders will be decided. The final adoption of such compensation policy is subject to the approval of the shareholders, which approval is subject to certain special majority requirements, as set forth in Amendment 20,the Companies Law, pursuant to which one of the following must be met:
| (i) | the majority of the votes includes at least a majority of all the votes of shareholders who are not controlling shareholders of the company or who do not have a personal interest in the compensation policy and participating in the vote; abstentions shall not be included in the total of the votes of the aforesaid shareholders; or |
| (ii) | the total of opposing votes from among the shareholders described in subsection (i) above does not exceed 2% of all the voting rights in the company. |
For this purpose, under the Companies Law “personal interest” is defined as: (1) a shareholder’s personal interest in the approval of an act or a transaction of the company, including (i) the personal interest of his or her relative (which includes for these purposes any members of his/her (or his/her spouse’s) immediate family or the spouses of any such members of his or her (or his/her spouse’s) immediate family); and (ii) a personal interest of a body corporate in which a shareholder or any of his/her aforementioned relatives serves as a director or the chief executive officer, owns at least 5% of its issued share capital or its voting rights or has the right to appoint a director or chief executive officer, but (2) excluding a personal interest arising solely from the fact of holding shares in the company or in a body corporate.
In addition, pursuant to Amendment 20,the Companies Law, terms of office and employment of office holders in a public company, and terms of employment and/or terms of office of a controlling shareholder in a public company, require the approval of the shareholders, which such approval is subject to the special majority required for approving the compensation policy (as detailed above). See “Item 6. Directors, Senior Management and Employees — Approval of Related Party Transactions under Israeli Law” for information regarding the shareholders’ approval, and any additional approvals that might be required, with respect to the approval of terms of office and employment of office holders in a public company, pursuant to the Companies Law, as set forth under Amendment 20.Law.
In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of our ordinary shares in proportion to their shareholdings. This right, as well as the right to receive dividends, may be affected by the grant of preferential dividend or distribution rights to the holders of a class of shares with preferential dividend or distribution rights that may be authorized in the future.
Access to Corporate Records
Under the Companies Law, all shareholders of a company generally have the right to review minutes of the company’s general meetings, its shareholders register and principal shareholders register, articles of association, financial statements and any document it is required by law to file publicly with the Israeli Companies Registrar and the Israeli Securities Authority. AnyFurthermore, any of our shareholders may request access to review any document in our possession that relates to any action or transaction with a related party, interested party or office holder that requires shareholder approval under the Companies Law. WeHowever, we may deny such a request to review a document if we determine that the request was not made in good faith, that the document contains a commercial secret or a patent or that the document’s disclosure may otherwise prejudice our interests.
Acquisitions under Israeli Law
Full Tender Offer
A person wishing to acquire shares of a public Israeli company and who would as a result hold over 90% of the target company’s issued and outstanding share capital is required by the Companies Law to make a tender offer to all of the company’s shareholders for the purchase of all of the issued and outstanding shares of the company. A person wishing to acquire shares of a public Israeli company and who would as a result hold over 90% of the issued and outstanding share capital of a certain class of shares is required to make a tender offer to all of the shareholders who hold shares of the same class for the purchase of all of the issued and outstanding shares of the same class. If the shareholders who do not accept the offer hold less than 5% of the issued and outstanding share capital of the company or of the applicable class, all of the shares that the acquirer offered to purchase will be transferred to the acquirer by operation of law (provided that a majority of the offerees that do not have a personal interest in such tender offer shall have approved the tender offer except that if the total votes to reject the tender offer represent less than 2% of the company’s issued and outstanding share capital, in the aggregate, approval by a majority of the offerees that do not have a personal interest in such tender offer is not required to complete the tender offer). However, a shareholder that had its shares so transferred may petition the court within six months from the date of acceptance of the full tender offer, whether or not such shareholder agreed to the tender, to determine whether the tender offer was for less than fair value and whether the fair value should be paid as determined by the court unless the acquirer stipulated in the tender offer that a shareholder that accepts the offer may not seek appraisal rights. If the shareholders who did not accept the tender offer hold 5% or more of the issued and outstanding share capital of the company or of the applicable class, the acquirer may not acquire shares of the company that will increase its holdings to more than 90% of the company’s issued and outstanding share capital or of the applicable class from shareholders who accepted the tender offer.
Special Tender Offer
The Companies Law provides that an acquisition of shares of a public Israeli company must be made by means of a special tender offer if as a result of the acquisition the purchaser would become a holder of 25% or more of the voting rights in the company, unless one of the exemptions in the Companies Law is met. This rule does not apply if there is already another holder of at least 25% of the voting rights in the company. Similarly, the Companies Law provides that an acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a holder of 45% or more of the voting rights in the company, if there is no other shareholder of the company who holds 45% or more of the voting rights in the company, unless one of the exemptions in the Companies Law is met.
A special tender offer must be extended to all shareholders of a company but the offeror is not required to purchase shares representing more than 5% of the voting power attached to the company’s outstanding shares, regardless of how many shares are tendered by shareholders. A special tender offer may be consummated only if (i) at least 5% of the voting power attached to the company’s outstanding shares will be acquired by the offeror and (ii) the number of shares tendered in the offer exceeds the number of shares whose holders objected to the offer.
If a special tender offer is accepted, then the purchaser or any person or entity controlling it or under common control with the purchaser or such controlling person or entity may not make a subsequent tender offer for the purchase of shares of the target company and may not enter into a merger with the target company for a period of one year from the date of the offer, unless the purchaser or such person or entity undertook to effect such an offer or merger in the initial special tender offer.
Merger
The Companies Law permits merger transactions if approved by each party’s board of directors and, unless certain requirements described under the Companies Law are met, a majority of each party’s shares voted on the proposed merger at a shareholders’ meeting called with at least 35 days’ prior notice.
For purposes of the shareholder vote, unless a court rules otherwise, the merger will not be deemed approved if a majority of the shares represented at the shareholders meeting that are held by parties other than the other party to the merger, or by any person who holds 25% or more of the outstanding shares or the right to appoint 25% or more of the directors of the other party, vote against the merger. If the transaction would have been approved but for the separate approval of each class or the exclusion of the votes of certain shareholders as provided above, a court may still approve the merger upon the request of holders of at least 25% of the voting rights of a company, if the court holds that the merger is fair and reasonable, taking into account the value of the parties to the merger and the consideration offered to the shareholders.
Upon the request of a creditor of either party to the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that, as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties to the merger, and may further give instructions to secure the rights of creditors.
In addition, a merger may not be completed unless at least 50 days have passed from the date that a proposal for approval of the merger was filed by each party with the Israeli Registrar of Companies and 30 days have passed from the date the merger was approved by the shareholders of each party.
Antitakeover Measures
The Companies Law allows us to create and issue shares having rights different from those attached to our ordinary shares, including shares providing certain preferred rights, distributions or other matters and shares having preemptive rights. As of the date of this annual report, we do not have any authorized or issued shares other than our ordinary shares. In the future, if we do create and issue a class of shares other than ordinary shares, such class of shares, depending on the specific rights that may be attached to them, may delay or prevent a takeover or otherwise prevent our shareholders from realizing a potential premium over the market value of their ordinary shares. The authorization of a new class of shares will require an amendment to our Articles of Association which requires the prior approval of the holders of a majority of our shares at a general meeting. Shareholders voting in such meeting will be subject to the restrictions provided in the Companies Law as described above. In addition, the Israeli Securities Law and the rules and regulations of the TASE also limit the terms permitted with respect to a new class of shares created by a public company whose shares are traded on the TASE, and prohibit any such new class of shares from having voting rights. Shareholders voting in such meeting will be subject to the restrictions provided in the Companies Law as described above.
C. Material Contracts
For a discussion of our out-licensing and in-licensing agreements, see Item 4. The following are summary descriptions of certain other material contracts to which we are a party. The descriptions provided below do not purport to be complete and are qualified in their entirety by the complete agreements, which are attached as exhibits to this Annual Report on Form 20-F.
Incubator Agreement
We entered into an incubator agreement with the OCS in January 2005 to operate a biotechnology incubator. Our wholly-owned subsidiaries, BIJ Ltd. and BIJ L.P., operateoperated the incubator. Under the arrangement, the OCS agreed to loan funds to the incubator in connection with in-licensing the rights to the therapeutic candidates. We in-license,in-licensed, through the incubator, certain, but not all, of the therapeutic candidates that we eventually incorporateincorporated into our pipeline. As of December 31, 2012,2013, we received approximately $14.4$15.5 million of funding from the OCS under the incubator agreement, which does not include $5.9$ 6.5 million we have received from the OCS outside of the incubator agreement, as of that date. The OCS funds have been used to initiate 23 different development projects, 1822 of which have been terminated. Three ofOf our nine current development projects, haveBL-1040 is the only project that has been or will be funded under the incubator agreement: BL-1021, BL-1040 and BL-5040. Other projects may be funded by the OCS outside of the incubator agreement.
The incubator agreement had an initial six-year term ending on December 31, 2010. At the end of 2010, the OCS agreed to renew the agreement for an additional two years, with an option to renew for another one-year period at the same terms and conditions, subject to OCS approval. In 2012, the OCS approved our exercise of the option to extend the incubator agreement for the final one-year period through December 31, 2013. WhenNow that the incubator agreement or expires,has expired, we will no longer be eligible for funding from the OCS through the incubator for new projects in the incubator, but projects and the terms of any outstanding funding at the time of expiration or termination will not be affected by the termination or expiration. In light of the expiry of the incubator agreement and in order to streamline our operations, we decided to transfer all the employees, activities and assets from the incubator to BioLineRx Ltd., and are currently in the process of winding down the incubator.
Under the incubator program, the Biotechnology Incubators Committee of the OCS iswas required to approve each project we intendintended to perform through the incubator and hashad broad discretionary powers with respect to approving equipment purchases and the general operation of the incubator. All of the restrictions placed on OCS-funded technology apply as well to all intellectual property derived from the incubator project. See “Item 4. Information on the Company — Business Overview — Government Funding for Development Programs — Israel Office of the Chief Scientist — Research and Development Grants.”
If we elect to terminate an incubator project for drug development, we are required to provide to the OCS the reasons that led to the termination of the project together with a financial and technical report relating to the drug development. We are also obligated to send notice to the entity that in-licensed to us the technology used for developing the drug. If the licensor is interested in continuing the development of the therapeutic candidate, the licensor is required to execute an agreement with the OCS and us to assume all rights and obligations relating to the funding received from the OCS. We expect that upon termination of a project and fulfillment of all OCS requirements for such termination, all loans associated with such project will be forgiven by the OCS.
The funding provided to us under the incubator agreement iswas in the form of a separate loan for each project, which is to be repaid solely out of the revenues generated by such project, with interest, until the full repayment of the loan. Revenue derived from a product developed in the incubator is subject to royalty payments at the same rates as set forth in the Research Law, as described in this annual report, and until the loans provided for that project are repaid. However, if a loan is not repaid within two years following the completion of the applicable incubator project the interest rate for that loan will be doubled for the third through fifth years after completion of the project. The loan and all accrued interest isare repayable upon demand if we violate the terms of the incubator agreement, with accrued interest. We initially provided the OCS with a bank guarantee in the sum of approximately NIS 8.1 million to cover all of our undertakings made under the agreement. Following the expiration of the initial term of the incubator agreement, that guarantee expired as well and has now beenwas replaced by two guarantees. The first guarantee (associated with the first renewal of the incubator agreement) iswas in the amount of NIS 1.5 million and will expireexpired on March 31, 2013. The second guarantee (associated with the second renewal of the incubator agreement) is in the amount of approximately NIS 1.4 million and will expire on March 31, 2014. In addition, all intellectual property held or developed by the incubator in connection with the incubator program is pledged as security for our obligations under the agreement. The intellectual property rights pledged may be realized by the State of Israel eight years after the date of approval of the relevant incubator program, or earlier in the event of a breach of the incubator agreement by us, or in the event liquidation or dissolution of our biotechnology incubator.
Early Development Program Agreement
We entered into an agreement with our shareholder, Pan Atlantic Bank and Trust Limited, or Pan Atlantic, pursuant to which Pan Atlantic committed to provide us with up to $5.0 million to be used in connection with the in-licensing and development of early development stage therapeutic candidates, our Early Development Program. At least 70% of the research projects performed under the Early Development Program must originate inside Israel. We operate our Early Development Program independently from our biotechnology incubator. Pursuant to our Early Development Program, we were entitled to request from Pan Atlantic, twice a year, up to $625,000 for an aggregate of up to $1.25 million per year, unless otherwise agreed by Pan Atlantic, for our early development research projects, provided that we match the program funds at a rate of $0.20 per every dollar invested by Pan Atlantic. Pan Atlantic fulfilled its entire $5.0 million funding commitment under the program during 2012. As part of the agreement, Pan Atlantic has the right to invest up to $5.0 million in our first public offering outside of Israel. Currently, there is a liability on our balance sheet of approximately $0.7 million, representing cumulative amounts received from Pan Atlantic in excess of the cumulative amounts spent on our Early Development Program as of December 31, 2012.
The term of the Early Development Program Agreement continues through the earlier of (i) the completion of the disbursement of all of the funds provided in the agreement and the completion of all research programs funded thereby and (ii) the termination of the agreement by either party. Each party to the agreement may terminate the agreement due to the default of the other party with respect to a material term of the agreement, which default is not cured within 30 days of the defaulting party’s receipt of notice of default, or to the occurrence of specified bankruptcy events with respect to the other party to the agreement or if the other party engages in a sale of all or substantially all of its assets as would cause that party to be unwilling to fulfill its obligations under the agreement.
Share Purchase Agreement with LPC
On September 21, 2012, we entered into a purchase agreement with LPC, pursuant to which LPC agreed to purchase from us up to $15 million of our ADSs (subject to certain limitations) from time to time over a 36-month period. Also on September 21, 2012, we entered into a registration rights agreement with LPC, pursuant to which we filed a registration statement on October 2, 2012 with the SEC for 4,198,598 of our ADSs, covering the ADSs that have been issued or may be issued to LPC under the purchase agreement. The registration statement was declared effective on October 12, 1012.
In consideration for entering into the purchase agreement, we issued to 98,598 ADSs to LPC upon execution of the purchase agreement as an initial commitment fee, and we will issue additional ADSs to LPC as an additional commitment fee in connection with each purchase by LPC under the purchase agreement equal to 2.5% of the amount of ADSs issued on each applicable purchase date. We will issue these additional commitment ADSs only when, and if, we elect to sell ADSs to LPC under the purchase agreement.
We can sell up to $200,000 worth of ADSs to LPC (which amount may be increased based on the trading price of our ADSs on the applicable purchase date), so long as at least one business day has passed between (i) the date on which LPC received all of the purchased ADSs in connection with the most recent prior purchase and (ii) the date we direct LPC to make a purchase. We control the timing and amount of any sales of our ADSs to LPC. Each time we direct LPC to purchase ADSs, subject to the terms of the purchase agreement, LPC will be obligated to purchase such amounts directed by us. LPC does not have the right to require us to sell any ADSs to them under the purchase agreement and we have no obligation to sell any shares under the purchase agreement.
The purchase price of the ADSs sold to LPC under the purchase agreement will be based on the market price of our ADSs immediately preceding the time of sale as computed under the purchase agreement, without any fixed discount and as more fully described in the purchase agreement. In addition, on any business day on which we have properly directed LPC to make a regular purchase, we can also accelerate the amount of our ADSs to be purchased under certain circumstances. Accelerated purchases may be made in amounts of up to the lesser of (i) 25% of the aggregate ADSs traded on Nasdaq during normal trading hours on the accelerated purchase date and (ii) three times the number of ADSs purchased pursuant to the corresponding regular purchase.
LPC may not assign or transfer its rights and obligations under the purchase agreement. We may at any time in our sole discretion terminate the purchase agreement without fee, penalty or cost. The purchase agreement will automatically terminate on November 1, 2015.
Cumulatively, as of March 5, 2013,14, 2014, we have issued 1,568,8113,904,211 ADSs under the LPC agreement (including the initial and additional commitment fees), raising approximately $4.7$9.5 million in gross proceeds.
D. Exchange Controls
There are no Israeli government laws, decrees or regulations that restrict or that affect our export or import of capital or the remittance of dividends, interest or other payments to non-resident holders of our securities, including the availability of cash and cash equivalents for use by us and our wholly-owned subsidiaries, except or otherwise as set forth under “Item 10E. Additional Information — Taxation.”
E. Taxation
The following description is not intended to constitute a complete analysis of all tax consequences relating to the ownership or disposition of our ordinary shares or ADSs, both referred to in this Item 10E as the Shares. You should consult your own tax advisor concerning the tax consequences of your particular situation, as well as any tax consequences that may arise under the laws of any state, local, foreign, including Israeli, or other taxing jurisdiction.
Israeli Tax Considerations
The following is a summary of the material Israeli tax laws applicable to us. This section also contains a discussion of material Israeli tax consequences concerning the ownership and disposition of our Shares. This summary does not discuss all the aspects of Israeli tax law that may be relevant to a particular investor in light of his or her personal investment circumstances or to some types of investors subject to special treatment under Israeli law. Examples of this kind of investor include residents of Israel or traders in securities who are subject to special tax regimes not covered in this discussion. Because certain parts of this discussion are based on new tax legislation that has not yet been subject to judicial or administrative interpretation, we cannot assure you that the appropriate tax authorities or the courts will accept the views expressed in this discussion.
General Corporate Tax Structure in Israel
Israeli companies are generally subject to corporate tax at the rate of 25%26.5% of their taxable income for 2012beginning in 2014 and thereafter. Capital gains derived by an Israeli company are now generally subject to tax at the same rate as the corporate tax rate.
In May 2012, the Israeli Tax Authority, or ITA, approved our eligibility for tax benefits as a “Benefited Enterprise” under the Law for the Encouragement of Capital Investments, 5719-1959,, as amended, or Investments Law, with respect to a portion of the consideration deriving from certain of our development programs, or Eligible Projects. Subject to compliance with the applicable requirements, the portion of our undistributed income derived from our Benefited Enterprise programs will be entitled to a tax exemption for a period of ten years commencing in the first year in which we generate taxable income after setting off our losses for Israeli tax purposes from prior years in the amount of approximately $100 million. The ten-year period may not extend beyond 14 years from the beginning of the Benefited Enterprise’s election year. We received Benefited Enterprise status with respect to the Eligible Projects beginning in the 2009 tax year, so depending on when the Benefited Enterprise programs begin to generate taxable income, the benefit period could continue through 2022. However, any distribution of income derived from our Benefited Enterprise programs will result in such income being subject to a rate of corporate tax no greater than 25%.
Beginning with tax year 2013,2014, we have the option to transition to a “Preferred Enterprise” regime under the Investments Law, according to which all of our income which is eligible for benefits under the regime would be subject to flat corporate tax rates of 7%9% in 2013 and 2014 and 6% in 2015 and thereafter, whether or not distributed. If we were to move our operations to a different part of the country, these rates may be increased. A transition to a Preferred Enterprise regime may not be reversed.
In addition, the ITA approved certain of our operations as an “Industrial Enterprise” under the Investments Law, meaning that we are eligible for accelerated depreciation with respect to certain tangible assets belonging to our Benefited Enterprise.
Should we not meet the requirements for maintaining these benefits, they may be reduced or cancelled and, among other things, our income deriving from the Eligible Projects (assuming we are profitable after offsetting losses) would be subject to Israeli corporate tax at the standard rate, which is currently set at 25%26.5% for 20122014 and onwards. If these tax benefits are reduced or eliminated, the amount of taxes that we pay would likely increase, as all of our operations would consequently be subject to corporate tax at the standard rate, which could adversely affect our results of operations.
Taxation of Israeli Individual Shareholders on Receipt of Dividends. Israeli residents who are individuals are generally subject to Israeli income tax for dividends paid on our ordinary sharesOrdinary Shares (other than bonus shares or share dividends) at a rate of 25%, or 30% if the recipient of such dividend is a substantial shareholder (as defined below) at the time of distribution or at any time during the preceding 12-month period.
Taxation of Israeli Resident Corporations on Receipt of DividendsDividends.. Israeli resident corporations are generally exempt from Israeli corporate tax for dividends paid on our ordinary shares.Ordinary Shares.
However, in the case of both Israeli individual shareholders and Israeli resident corporations, under the Investments Law, dividends distributed from taxable income accrued during the period of benefit of a Benefited Enterprise and which are attributable to a Benefited Enterprise are subject to tax at the rate of 15%, if the dividend is distributed during the tax benefit period under the Investment Law or within 12 years after that period. A weighted average rate may be set if the dividend is distributed from mixed types of income (regular and Benefited Enterprise income). This 15% tax rate similarly applies to dividends sourced from profits attributable to a Preferred Enterprise which are paid to Israeli resident individual shareholders, while such dividends paid to Israeli resident corporations are generally tax-exempt.
Taxation of Non-Israeli Shareholders on Receipt of DividendsDividends.. Non-residents of Israel are generally subject to Israeli income tax on the receipt of dividends paid on our Shares at the rate of 25% (or 30% if such person is a “substantial shareholder” at the time receiving the dividend or on any date in the 12 months preceding such date), which tax will be withheld at the source, unless a differentlower rate is provided in a tax treaty between Israel and the shareholder’s country of residence. If the income out of which the dividend is being paid is sourced from profits attributable to a Benefited Enterprise under the Investments Law, the rate is generally not more than 15%.
Under the US-Israel Tax Treaty, Israeli withholding tax on dividends paid to a US resident for treaty purposes may not, in general, exceed 25%, or 15% in the case of dividends paid out of the profits of a Benefited Enterprise, subject to certain conditions. Where the recipient is a US corporation owning 10% or more of the voting stock of the paying corporation during the part of the paying corporation’s taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any) and the dividend is not paid from the profits of a Benefited Enterprise, the Israeli tax withheld may not exceed 12.5%, subject to certain conditions.
A “substantial shareholder” is generally a person who alone, or together with his relative or another person who collaborates with him on a regular basis, holds, directly or indirectly, at least 10% of any of the “means of control” of the corporation. “Means of control” generally include the right to vote, receive profits, nominate a director or an officer, receive assets upon liquidation, or instruct someone who holds any of the aforesaid rights regarding the manner in which he or she is to exercise such right(s), and all regardless of the source of such right.
A non-resident of Israel who receives dividends from which tax was withheld is generally exempt from the duty to file returns in Israel in respect of such income, provided such income was not derived from a business conducted in Israel by the taxpayer, and the taxpayer has no other taxable sources of income in Israel.
Capital Gains Taxes Applicable to Non-Israeli Resident Shareholders. Shareholders that are not Israeli residents are generally exempt from Israeli capital gains tax on any gains derived from the sale, exchange or disposition of our Shares, provided that such shareholders did not acquire their Shares prior to our initial public offering on the TASE and such gains were not derived from a permanent establishment or business activity of such shareholders in Israel. However, non-Israeli corporations will not be entitled to the foregoing exemptions if one or more Israeli residents (a) have a controlling interest of 25% or more in such non-Israeli corporation or (b) are the beneficiaries of or are entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.
In addition, under the U.S.-Israel Tax Treaty, the sale, exchange or disposition of our Shares by a shareholder who is a U.S. resident (for purposes of the U.S.-Israel Tax Treaty) holding the Shares as a capital asset is exempt from Israeli capital gains tax unless (1) the shareholder holds, directly or indirectly, shares representing 10% or more of our voting capital during any part of the 12-month period preceding such sale, exchange or disposition; (2) the capital gains arising from such sale are attributable to a permanent establishment of the shareholder located in Israel; (3) a shareholder who is an individual is present in Israel for a period or periods aggregating 183 days or more during a taxable year. In either case, the sale, exchange or disposition of Shares would be subject to Israeli tax, to the extent applicable; however, under the U.S.-Israel Tax Treaty, the U.S. resident would be permitted to claim a credit for the tax against the U.S. federal income tax imposed with respect to the sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel Tax Treaty does not relate to U.S. state or local taxes.
Shareholders may be required to demonstrate that they are exempt from tax on their capital gains in order to avoid withholding at source at the time of sale.
U.S. Federal Income Tax Considerations
The following is a general summary of the material U.S. federal income tax considerations relating to the purchase, ownership and disposition of our Shares by U.S. Investors (as defined below) that hold such Shares as capital assets. This summary is based on the Internal Revenue Code of 1986, as amended, or the Code, the regulations of the U.S. Department of the Treasury issued pursuant to the Code, or the Treasury Regulations, and administrative and judicial interpretations thereof, all as in effect on the date hereof and all of which are subject to change, possibly with retroactive effect, or to different interpretation. This summary is for general information only and does not address all of the tax considerations that may be relevant to specific U.S. Investors in light of their particular circumstances or to U.S. Investors subject to special treatment under U.S. federal income tax law (such as banks, insurance companies, tax-exempt entities, retirement plans, regulated investment companies, partnerships, dealers in securities, brokers, real estate investment trusts, certain former citizens or residents of the United States, persons who acquire Shares as part of a straddle, hedge, conversion transaction or other integrated investment, persons that have a “functional currency” other than the U.S. dollar, persons that own (or are deemed to own, indirectly or by attribution) 10% or more of our shares or persons that generally mark their securities to market for U.S. federal income tax purposes). This summary does not address any U.S. state or local or non-U.S. tax considerations or any U.S. federal estate, gift or alternative minimum tax considerations.
As used in this summary, the term “U.S. Investor” means a beneficial owner of Shares that is, for U.S. federal income tax purposes, (i) an individual citizen or resident of the United States, (ii) a corporation, or other entity taxable as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United States, any state thereof, or the District of Columbia, (iii) an estate the income of which is subject to U.S. federal income tax regardless of its source or (iv) a trust with respect to which a court within the United States is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all of its substantial decisions, or an electing trust that was in existence on August 19, 1996 and was treated as a domestic trust on that date.
If an entity treated as a partnership for U.S. federal income tax purposes holds Shares, the tax treatment of such partnership and each partner thereof will generally depend upon the status and activities of the partnership and such partner. A holder that is treated as a partnership for U.S. federal income tax purposes should consult its own tax advisor regarding the U.S. federal income tax considerations applicable to it and its partners of the purchase, ownership and disposition of Shares.
Prospective investors should be aware that this summary does not address the tax consequences to investors who are not U.S. Investors. Prospective investors should consult their own tax advisors as to the particular tax considerations applicable to them relating to the purchase, ownership and disposition of Shares, including the applicability of U.S. federal, state and local tax laws and non-U.S. tax laws.
Taxation of U.S. Investors
The discussions under “— Distributions” and under “— Sale, Exchange or Other Disposition of Ordinary Shares” below assumes that we will not be treated as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes. However, we have not determined whether we will be a PFIC in 2013,2014, and it is possible that we will be a PFIC in 20132014 or in any subsequent year. For a discussion of the rules that would apply if we are treated as a PFIC, see the discussion under “— Passive Foreign Investment Company.”
Distributions. We have no current plans to pay dividends. To the extent we pay any dividends, a U.S. Investor will be required to include in gross income as a taxable dividend the amount of any distributions made on the Shares, including the amount of any Israeli taxes withheld, to the extent that those distributions are paid out of our current or accumulated earnings and profits as determined for U.S. federal income tax purposes. Any distributions in excess of our earnings and profits will be applied against and will reduce the U.S. Investor’s tax basis in its Shares and to the extent they exceed that tax basis, will be treated as gain from the sale or exchange of those Shares. If we were to pay dividends, we expect to pay such dividends in NIS; however, dividends paid to holders of our ADSs will be paid in U.S. Dollars. A dividend paid in NIS, including the amount of any Israeli taxes withheld, will be includible in a U.S. Investor’s income as a U.S. dollar amount calculated by reference to the exchange rate in effect on the date such dividend is received, regardless of whether the payment is in fact converted into U.S. dollars. If the dividend is converted to U.S. dollars on the date of receipt, a U.S. Investor generally will not recognize a foreign currency gain or loss. However, if the U.S. Investor converts the NIS into U.S. dollars on a later date, the U.S. Investor must include, in computing its income, any gain or loss resulting from any exchange rate fluctuations. The gain or loss will be equal to the difference between (i) the U.S. dollar value of the amount included in income when the dividend was received and (ii) the amount received on the conversion of the NIS into U.S. dollars. Such gain or loss will generally be ordinary income or loss and United States source for U.S. foreign tax credit purposes. U.S. Investors should consult their own tax advisors regarding the tax consequences to them if we pay dividends in NIS or any other non-U.S. currency.
Subject to certain significant conditions and limitations, including potential limitations under the United States-Israel income tax treaty, any Israeli taxes paid on or withheld from distributions from us and not refundable to a U.S. Investor may be credited against the investor’s U.S. federal income tax liability or, alternatively, may be deducted from the investor’s taxable income. This election is made on a year-by-year basis and applies to all foreign taxes paid by a U.S. Investor or withheld from a U.S. Investor that year. Dividends paid on the Shares generally will constitute income from sources outside the United States and be categorized as “passive category income” or, in the case of some U.S. Investors, as “general category income” for U.S. foreign tax credit purposes.
Since the rules governing foreign tax credits are complex, U.S. Investors should consult their own tax advisor regarding the availability of foreign tax credits in their particular circumstances. In addition, the U.S. Treasury Department has expressed concerns that parties to whom ADSs are pre-released may be taking actions that are inconsistent with the claiming of foreign tax credits by U.S. holders of ADSs. Accordingly, the creditability of Israeli taxes could be affected by future actions that may be taken by the U.S. Treasury Department or parties to whom ADSs are pre-released.
Dividends paid on the Shares will not be eligible for the “dividends-received” deduction generally allowed to corporate U.S. Investors with respect to dividends received from U.S. corporations.
Distributions treated as dividends that are received by an individual U.S. Investor from “qualified foreign corporations” generally qualify for a reduced maximum tax rate so long as certain holding period and other requirements are met. Dividends paid by us in a taxable year in which we are not a PFIC are expected to be eligible for the reduced maximum tax rate. However, any dividend paid by us in a taxable year in which we are a PFIC will be subject to tax at regular ordinary income rates. As mentioned above, we have not determined whether we are currently a PFIC or not.
Sale, Exchange or Other Disposition of Ordinary Shares. Subject to the discussion under “— Passive Foreign Investment Company” below, a U.S. Investor generally will recognize capital gain or loss upon the sale, exchange or other disposition of Shares in an amount equal to the difference between the amount realized on the sale, exchange or other disposition and the U.S. Investor’s adjusted tax basis in such Shares. This capital gain or loss will be long-term capital gain or loss if the U.S. Investor’s holding period in the Shares exceeds one year. Preferential tax rates for long-term capital gain will apply to individual U.S. Investors. The deductibility of capital losses is subject to limitations. The gain or loss will generally be income or loss from sources within the United States for U.S. foreign tax credit purposes.
Medicare Tax. In addition, with respect to taxable years beginning after December 31, 2012, certain U.S. persons, including individuals, estates and trusts, will be subject to an additional 3.8% Medicare tax on unearned income. For individuals, the additional Medicare tax applies to the lesser of (i) “net investment income” or (ii) the excess of “modified adjusted gross income” over $200,000 ($250,000 if married and filing jointly or $125,000 if married and filing separately). “Net investment income” generally equals the taxpayer’s gross investment income reduced by the deductions that are allocable to such income. Investment income generally includes passive income such as interest, dividends, annuities, royalties, rents, and capital gains. U.S. Investors are urged to consult their own tax advisors regarding the implications of the additional Medicare tax resulting from their ownership and disposition of Shares.
U.S. Investors should consult their own tax advisors regarding the U.S. federal income tax consequences of receiving currency other than U.S. dollars upon the disposition of Shares.
Passive Foreign Investment Company
In general, a corporation organized outside the United States will be treated as a PFIC for U.S. federal income tax purposes in any taxable year in which either (i) at least 75% of its gross income is “passive income” or (ii) on average at least 50% of its assets by value produce passive income or are held for the production of passive income. Passive income for this purpose generally includes, among other things, certain dividends, interest, royalties, rents and gains from commodities and securities transactions and from the sale or exchange of property that gives rise to passive income. Passive income also includes amounts derived by reason of the temporary investment of funds, including those raised in the public offering. In determining whether a non-U.S. corporation is a PFIC, a proportionate share of the income and assets of each corporation in which it owns, directly or indirectly, at least a 25% interest (by value) is taken into account.
Under the tests described above, whether or not we are a PFIC will be determined annually based upon the composition of our income and the composition and valuation of our assets, all of which are subject to change.
We believe that we were a PFIC for U.S. federal income tax purposes for years prior to 2009 and in 2011.2011 and 2012. We were not a PFIC in 2009, 2010 and 2010,2013, and we have not yet determined whether we were a PFIC in 2012 or whether will be a PFIC in 2013.2014. Because the PFIC determination is highly fact intensive and made at the end of each taxable year, there can be no assurance that we will not be a PFIC in 20132014 or in any subsequent year. Upon request, we will annually inform U.S. Investors if we and any of our subsidiaries were a PFIC with respect to the preceding year.
U.S. Investors should be aware of certain tax consequences of investing directly or indirectly in us if we are a PFIC. A U.S. Investor is subject to different rules depending on whether the U.S. Investor makes an election to treat us as a “qualified electing fund,” known as a QEF election, for the first taxable year that the U.S. Investor holds Shares, which is referred to in this disclosure as a “timely QEF election,” makes a “mark-to-market” election with respect to the Shares (if such election is available) or makes neither election.
QEF Election. A U.S. Investor who makes a timely QEF election, referred to in this disclosure as an “Electing U.S. Investor,” with respect to us must report for U.S. federal income tax purposes his pro rata share of our ordinary earnings and net capital gain, if any, for our taxable year that ends with or within the taxable year of the Electing U.S. Investor. The “net capital gain” of a PFIC is the excess, if any, of the PFIC’s net long-term capital gains over its net short-term capital losses. The amount so included in income generally will be treated as ordinary income to the extent of such Electing U.S. Investor’s allocable share of the PFIC’s ordinary earnings and as long-term capital gain to the extent of such Electing U.S. Investor’s allocable share of the PFIC’s net capital gains. Such Electing U.S. Investor generally will be required to translate such income into U.S. dollars based on the average exchange rate for the PFIC’s taxable year with respect to the PFIC’s functional currency. Such income generally will be treated as income from sources outside the United States for U.S. foreign tax credit purposes. Amounts previously included in income by such Electing U.S. Investor under the QEF rules generally will not be subject to tax when they are distributed to such Electing U.S. Investor. The Electing U.S. Investor’s tax basis in Shares generally will increase by any amounts so included under the QEF rules and decrease by any amounts not included in income when distributed.
An Electing U.S. Investor will be subject to U.S. federal income tax on such amounts for each taxable year in which we are a PFIC, regardless of whether such amounts are actually distributed to such Electing U.S. Investor. However, an Electing U.S. Investor may, subject to certain limitations, elect to defer payment of current U.S. federal income tax on such amounts, subject to an interest charge. If an Electing U.S. Investor is an individual, any such interest will be treated as non-deductible “personal interest.”
Any net operating losses or net capital losses of a PFIC will not pass through to the Electing U.S. Investor and will not offset any ordinary earnings or net capital gain of a PFIC recognized by Electing U.S. Investors in subsequent years (although such losses would ultimately reduce the gain, or increase the loss, recognized by the Electing U.S. Investor on its disposition of the Shares).
So long as an Electing U.S. Investor’s QEF election with respect to us is in effect with respect to the entire holding period for Shares, any gain or loss recognized by such Electing U.S. Investor on the sale, exchange or other disposition of such Shares generally will be long-term capital gain or loss if such Electing U.S. Investor has held such Shares for more than one year at the time of such sale, exchange or other disposition. Preferential tax rates for long-term capital gain will apply to individual U.S. Investors. The deductibility of capital losses is subject to limitations.
A U.S. Investor makes a QEF election by completing the relevant portions of and filing IRS Form 8621 in accordance with the instructions thereto. Upon request, we will annually furnish U.S. Investors with information needed in order to complete IRS Form 8621 (which form would be required to be filed with the IRS on an annual basis by the U.S. Investor) and to make and maintain a valid QEF election for any year in which we or any of our subsidiaries are a PFIC. A QEF election will not apply to any taxable year during which we are not a PFIC, but will remain in effect with respect to any subsequent taxable year in which we become a PFIC. Each U.S. Investor is encouraged to consult its own tax advisor with respect to tax consequences of a QEF election with respect to us.
Mark-to-Market Election. Alternatively, if our Shares are treated as “marketable stock,” a U.S. Investor would be allowed to make a “mark-to-market” election with respect to our Shares, provided the U.S. Investor completes and files IRS Form 8621 in accordance with the relevant instructions and related Treasury Regulations. If that election is made, the U.S. Investor generally would include as ordinary income in each taxable year the excess, if any, of the fair market value of the Shares at the end of the taxable year over such holder’s adjusted tax basis in the Shares. The U.S. Investor would also be permitted an ordinary loss in respect of the excess, if any, of the U.S. Investor’s adjusted tax basis in the Shares over their fair market value at the end of the taxable year, but only to the extent of the net amount previously included in income as a result of the mark-to-market election. A U.S. Investor’s tax basis in the Shares would be adjusted to reflect any such income or loss amount. Gain realized on the sale, exchange or other disposition of the Shares would be treated as ordinary income, and any loss realized on the sale, exchange or other disposition of the Shares would be treated as ordinary loss to the extent that such loss does not exceed the net mark-to-market gains previously included in income by the U.S. Investor, and any loss in excess of such amount will be treated as capital loss. Amounts treated as ordinary income will not be eligible for the favorable tax rates applicable to qualified dividend income or long-term capital gains.
Generally, stock will be considered marketable stock if it is “regularly traded” on a “qualified exchange” within the meaning of applicable Treasury regulations. A class of stock is regularly traded on an exchange during any calendar year during which such class of stock is traded, other than in de minimis quantities, on at least 15 days during each calendar quarter. Our ADSs will be marketable stock as long as they remain listed on the Nasdaq Capital Market and are regularly traded. A mark-to-market election will not apply to our ADSs held by a U.S. Investor for any taxable year during which we are not a PFIC, but will remain in effect with respect to any subsequent taxable year in which we become a PFIC. Such election will not apply to any PFIC subsidiary that we own. Each U.S. Investor is encouraged to consult its own tax advisor with respect to the availability and tax consequences of a mark-to-market election with respect to our ADSs.
Default PFIC Rules. A U.S. Investor who does not make a timely QEF election or a mark-to-market election, referred to in this disclosure as a “Non-Electing U.S. Investor,” will be subject to special rules with respect to (a) any “excess distribution” (generally, the portion of any distributions received by the Non-Electing U.S. Investor on the Shares in a taxable year in excess of 125% of the average annual distributions received by the Non-Electing U.S. Investor in the three preceding taxable years, or, if shorter, the Non-Electing U.S. Investor’s holding period for his Shares), and (b) any gain realized on the sale or other disposition of such Shares. Under these rules:
the excess distribution or gain would be allocated ratably over the Non-Electing U.S. Investor’s holding period for the Shares;
| ● | the excess distribution or gain would be allocated ratably over the Non-Electing U.S. Investor’s holding period for the Shares; |
the amount allocated to the current taxable year and any year prior to us becoming a PFIC would be taxed as ordinary income; and
| ● | the amount allocated to the current taxable year and any year prior to us becoming a PFIC would be taxed as ordinary income; and |
the amount allocated to each of the other taxable years would be subject to tax at the highest rate of tax in effect for the applicable class of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed with respect to the resulting tax attributable to each such other taxable year.
| ● | the amount allocated to each of the other taxable years would be subject to tax at the highest rate of tax in effect for the applicable class of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed with respect to the resulting tax attributable to each such other taxable year. |
If a Non-Electing U.S. Investor who is an individual dies while owning our Shares, the Non-Electing U.S. Investor’s successor would be ineligible to receive a step-up in tax basis of the Shares. Non-Electing U.S. Investors are encouraged to consult their tax advisors regarding the application of the PFIC rules to their specific situation.
A Non-Electing U.S. Investor who wishes to make a QEF election for a subsequent year may be able to make a special “purging election” pursuant to Section 1291(d) of the Code. Pursuant to this election, a Non-Electing U.S. Investor would be treated as selling his or her stock for fair market value on the first day of the taxable year for which the QEF election is made. Any gain on such deemed sale would be subject to tax under the rules for Non-Electing U.S. Investors as discussed above. Non-Electing U.S. Investors are encouraged to consult their tax advisors regarding the availability of a “purging election” as well as other available elections.
To the extent a distribution on our Shares does not constitute an excess distribution to a Non-Electing U.S. Investor, such Non-Electing U.S. Investor generally will be required to include the amount of such distribution in gross income as a dividend to the extent of our current or accumulated earnings and profits (as determined for U.S. federal income tax purposes) that are not allocated to excess distributions. The tax consequences of such distributions are discussed above under “— Taxation of U.S. Investors — Distributions.” Each U.S. HolderInvestor is encouraged to consult its own tax advisor with respect to the appropriate U.S. federal income tax treatment of any distribution on our Shares.
If we are treated as a PFIC for any taxable year during the holding period of a Non-Electing U.S. Investor, we will continue to be treated as a PFIC for all succeeding years during which the Non-Electing U.S. Investor is treated as a direct or indirect Non-Electing U.S. Investor even if we are not a PFIC for such years. A U.S. Investor is encouraged to consult its tax advisor with respect to any available elections that may be applicable in such a situation, including the “deemed sale” election of Code Section 1298(b)(1). In addition, U.S. Investors should consult their tax advisors regarding the IRS information reporting and filing obligations that may arise as a result of the ownership of shares in a PFIC.
We may invest in the equity of foreign corporations that are PFICs or may own subsidiaries that own PFICs. U.S. Investors will be subject to the PFIC rules with respect to their indirect ownership interests in such PFICs, such that a disposition of the shares of the PFIC or receipt by us of a distribution from the PFIC generally will be treated as a deemed disposition of such shares or the deemed receipt of such distribution by the U.S. Investor, subject to taxation under the PFIC rules. There can be no assurance that a U.S. Investor will be able to make a QEF election or a mark-to-market election with respect to PFICs in which we invest. Each U.S. Investor is encouraged to consult its own tax advisor with respect to tax consequences of an investment by us in a corporation that is a PFIC.
The U.S. federal income tax rules relating to PFICs are complex. U.S. Investors are urged to consult their own tax advisors with respect to the purchase, ownership and disposition of Shares, any elections available with respect to such Shares and the IRS information reporting obligations with respect to the purchase, ownership and disposition of Shares.
Certain Reporting Requirements
Certain U.S. Investors are required to file IRS Form 926, Return by U.S. Transferor of Property to a Foreign Corporation, and certain U.S. Investors may be required to file IRS Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, reporting transfers of cash or other property to us and information relating to the U.S. Investor and us. Substantial penalties may be imposed upon a U.S. Investor that fails to comply. Each U.S. Investor should consult its own tax advisor regarding these requirements.
In addition, recently enacted legislation imposes new reporting requirements for the holder of certain foreign financial assets, including equity of foreign entities, if the aggregate value of all of these assets exceeds $50,000. The Shares are expected to be subject to these new reporting requirements unless the Shares are held in an account at a domestic financial institution. The requirement to file a report is effective for taxable years beginning after March 18, 2010. Penalties apply to any failure to file a required report. U.S. Investors should consult their own tax advisors regarding the application of this legislation.
Backup Withholding Tax and Information Reporting Requirements
Generally, information reporting requirements will apply to distributions on our Shares or proceeds on the disposition of our Shares paid within the United States (and, in certain cases, outside the United States) to U.S. Investors other than certain exempt recipients, such as corporations. Furthermore, backup withholding (currently at 28%) may apply to such amounts if the U.S. Investor fails to (i) provide a correct taxpayer identification number, (ii) report interest and dividends required to be shown on its U.S. federal income tax return, or (iii) make other appropriate certifications in the required manner. U.S. Investors who are required to establish their exempt status generally must provide such certification on IRS Form W-9.
Backup withholding is not an additional tax. Amounts withheld as backup withholding from a payment may be credited against a U.S. Investor’s U.S. federal income tax liability and such U.S. Investor may obtain a refund of any excess amounts withheld by filing the appropriate claim for refund with the IRS and furnishing any required information in a timely manner.
U.S. Investors should consult their own tax advisors concerning the tax consequences relating to the purchase, ownership and disposition of the Shares.
F. Dividends and Paying Agents
Not applicable
G. Statement by Experts
Not applicable.
H. Documents on Display
We are currently subject to the information and periodic reporting requirements of the Exchange Act, and file periodic reports and other information with the SEC through its electronic data gathering, analysis and retrieval (EDGAR) system. Our securities filings, including this Annual Report and the exhibits thereto, are available for inspection and copying at the public reference facilities of the SEC located at 100 F Street, N.E., Washington, D.C. 20549. You may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. The SEC also maintains a website at http://www.sec.gov from which certain filings may be accessed.
As a foreign private issuer, we are exempt from the rules under the Exchange Act related to the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file annual, quarterly and current reports and financial statements with the SEC as frequently or as promptly as United States companies whose securities are registered under the Exchange Act.
In addition, since our ordinary shares are traded on the TASE, we have filed Hebrew languagealso file periodic and immediate reports with, and furnish information to, the TASE and the Israel Securities Authority, or the ISA, as required under Chapter Six of the Israel Securities Law, 1968.1968 and the regulations enacted pursuant thereof, as applicable to a public company which also trades on the Nasdaq Capital Market. Copies of our filings with the Israeli Securities Authority can be retrieved electronically through the MAGNA distribution site of the Israeli Securities Authority (www.magna.isa.gov.il) and the TASE website (www.maya.tase.co.il).
We maintain a corporate website at www.biolinerx.com. Information contained on, or that can be accessed through, our website does not constitute a part of this Annual Report on Form 20-F. We have included our website address in this Annual Report on Form 20-F solely as an inactive textual reference.
I. Subsidiary Information
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ON MARKET RISK
Market risk is the risk of loss related to changes in market prices, including interest rates and foreign exchange rates, of financial instruments that may adversely impact our consolidated financial position, results of operations or cash flows. We do not use derivative financial instruments for trading purposes. Accordingly, we have concluded that there is no material market risk exposure of the type contemplated by Item 11, and that no quantitative tabular disclosures are required. We are exposed to certain other types of market risks, as described below.
Risk of Interest Rate Fluctuation
Our investments consist primarily of cash, cash equivalents and short-term bank deposits. We may also invest in investment-grade marketable securities with maturities of up to three years, including commercial paper, money market funds, and government/non-government debt securities. The primary objective of our investment activities is to preserve principal while maximizing the income that we receive from our investments without significantly increasing risk and loss. Our investments are exposed to market risk due to fluctuation in interest rates, which may affect our interest income and the fair market value of our investments. We manage this exposure by performing ongoing evaluations of our investments. Due to the short-term maturities of our investments to date, their carrying value has always approximated their fair value. It will be our policy to hold investments to maturity in order to limit our exposure to interest rate fluctuations.
Foreign Currency Exchange Risk
Our foreign currency exposures give rise to market risk associated with exchange rate movements of the NIS, our functional and reporting currency, mainly against the dollar and the euro. Although the NIS is our functional currency, a significant portion of our expenses are denominated in both dollars and euros and our revenues have been, and can be expected in the future to be, denominated in either dollars or euros, or both. Our dollar and euro expenses consist principally of payments made to sub-contractors and consultants for preclinical studies, clinical trials and other research and development activities. We anticipate that a sizable portion of our expenses will continue to be denominated in currencies other than the NIS. If the NIS fluctuates significantly against either the dollar or the euro, it may have a negative impact on our results of operations. To date, fluctuations in the exchange rates have not materially affected our results of operations or financial condition for the periods under review.
To date, we have not engaged in hedging transactions. In the future, we may enter into currency hedging transactions to decrease the risk of financial exposure from fluctuations in the exchange rates of our principal operating currencies. These measures, however, may not adequately protect us from the material adverse effects of such fluctuations.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depositary Shares
Set forth below is a summary of the material terms of the deposit agreement, as amended, among our company, The Bank of New York Mellon as depositary, or the Depositary, and the owners and holders from time to time of our ADSs.
Description of the ADSs
Each of our ADSs represents 10 of our ordinary shares. Our ADSs trade on the Nasdaq Capital Market.
The form of the deposit agreement for the ADS and the form of American Depositary Receipt (ADR) that represents an ADS have been incorporated by reference as exhibits to this Annual Report on Form 20-F. Copies of the deposit agreement are available for inspection at the principal office of The Bank of New York Mellon, located at 101 Barclay Street, New York, New York 10286, and at the principal office of our custodians, Bank Leumi Le-Israel, 34 Yehuda Halevi St., Tel-Aviv 65546, Israel and Bank Hapoalim B.M., 104 Hayarkon Street, Tel Aviv 63432, Israel.
Dividends, Other Distributions and Rights
Amounts distributed to ADS holders will be reduced by any taxes or other governmental charges required to be withheld by the custodian or the Depositary. If the Depositary determines that any distribution in cash or property is subject to any tax or governmental charges that the Depositary or the custodian is obligated to withhold, the Depositary may use the cash or sell or otherwise dispose of all or a portion of that property to pay the taxes or governmental charges. The Depositary will then distribute the balance of the cash and/or property to the ADS holders entitled to the distribution, in proportion to their holdings.
Cash dividends and cash distributions. The Depositary will convert into dollars all cash dividends and other cash distributions that it or the custodian receives in a foreign currency. The Depositary will distribute to the ADS holders the amount it receives, after deducting any currency conversion expenses. If the Depositary determines that any foreign currency it receives cannot be converted and transferred on a reasonable basis, it may distribute the foreign currency (or an appropriate document evidencing the right to receive the currency), or hold that foreign currency uninvested, without liability for interest, for the accounts of the ADS holders entitled to receive it.
Distributions of ordinary shares. If we distribute ordinary shares as a dividend or free distribution, the Depositary may, with our approval, and will, at our request, distribute to ADS holders new ADSs representing the ordinary shares. The Depositary will distribute only whole ADSs. It will sell the ordinary shares that would have required it to use fractional ADSs and then distribute the proceeds in the same way it distributes cash. If the Depositary deposits the ordinary shares but does not distribute additional ADSs, the existing ADSs will also represent the new ordinary shares.
If holders of ordinary shares have the option of receiving a dividend in cash or in shares, we may also grant that option to ADS holders.
Other distributions. If the Depositary or the custodian receives a distribution of anything other than cash or shares, the Depositary will distribute the property or securities to the ADS holder, in proportion to such holder’s holdings upon payment of its fees. If the Depositary determines that it cannot distribute the property or securities in this manner or that it is not feasible to do so, then, after consultation with us, it may distribute the property or securities by any means it thinks isare equitable and practical, or it may sell the property or securities and distribute the net proceeds of the sale to the ADS holders. The Depositary may sell a portion of any distributed property that is sufficient to pay its fees.
Rights to subscribe for additional ordinary shares and other rights. If we offer our holders of ordinary shares any rights to subscribe for additional ordinary shares or any other rights, the Depositary will, if requested by us:
make the rights available to all or certain holders of ADSs, by means of warrants or otherwise, if lawful and practically feasible; or
| ● | make the rights available to all or certain holders of ADSs, by means of warrants or otherwise, if lawful and practically feasible; or |
if it is not lawful or practically feasible to make the rights available, attempt to sell those rights or warrants or other instruments.
| ● | if it is not lawful or practically feasible to make the rights available, attempt to sell those rights or warrants or other instruments. |
In that case, the Depositary will allocate the net proceeds of the sales to the account of the ADS holders entitled to the rights. The allocation will be made on an averaged or other practicable basis without regard to any distinctions among holders.
If registration under the Securities Act of 1933, as amended, is required in order to offer or sell to the ADS holders the securities represented by any rights, the Depositary will not make the rights available to ADS holders unless a registration statement is in effect or such securities are exempt from registration. We do not, however, have any obligation to file a registration statement or to have a registration statement declared effective. If the Depositary cannot make any rights available to ADS holders and cannot dispose of the rights and make the net proceeds available to ADS holders, then it will allow the rights to lapse, and the ADS holders will not receive any value for them.
Voting of the underlying shares. Under the deposit agreement, an ADS holder is entitled, subject to any applicable provisions of Israeli law, our Articles of Association and bylaws and the deposited securities, to exercise voting rights pertaining to the shares represented by its ADSs. If we so request, the Depositary will send to ADS holders such information as is contained in the notice of meeting that the Depositary receives from us, as well as a statement that holders of as the close of business on the specified record date will be entitled to instruct the Depositary as to the exercise of voting rights and a statement as to the manner in which the such instructions may be given. Under the terms of the Deposit Agreement, the Depositary shall endeavor (insofar as is practicable and in accordance with the applicable law and the articles of association of the Company) to vote or cause to be voted the number of shares represented by ADSs in accordance with the instructions provided by the holders of ADSs to the Depositary. If no instructions are received by the Depositary from any holder of ADSs with respect to any of the shares represented by the ADSs evidenced by such holder’s receipts on or before the date established by the Depositary for such purpose, then the Depositary will deem the holder of the shares to have instructed the Depositary to give a discretionary proxy to a person designated by us with respect to the shares represented by such ADSs, and the Depositary will give such instruction. In such case, the restrictions of the Israeli Companies Law with respect to “personal interest,” as described elsewhere in this annual report, would apply as well.
Changes affecting deposited securities. If there is any change in nominal value or any split-up, consolidation, cancellation or other reclassification of deposited securities, or any recapitalization, reorganization, business combination or consolidation or sale of assets involving us, then any securities that the Depositary receives in respect of deposited securities will become new deposited securities. Each ADS will automatically represent its share of the new deposited securities, unless the Depositary delivers new ADSs as described in the following sentence. The Depositary may distribute new ADSs or ask ADS holders to surrender their outstanding ADRs in exchange for new ADRs describing the new deposited securities.
Amendment of the deposit agreement. The Depositary and we may agree to amend the form of the ADSs and the deposit agreement at any time, without the consent of the ADS holders. If the amendment adds or increases any fees or charges (other than taxes or other governmental charges) or prejudices an important right of ADS holders, it will not take effect as to outstanding ADSs until 30 days after the Depositary has sent the ADS holders a notice of the amendment. At the expiration of that 30-day period, each ADS holder will be considered by continuing to hold its ADSs to agree to the amendment and to be bound by the deposit agreement as so amended. The Depositary and we may not amend the deposit agreement or the form of ADRs to impair the ADS holder’s right to surrender its ADSs and receive the ordinary shares and any other property represented by the ADRs, except to comply with mandatory provisions of applicable law.
Termination of the deposit agreement. The Depositary will terminate the deposit agreement if we ask it to do so and will notify the ADS holders at least 30 days before the date of termination. The Depositary may also terminate the deposit agreement if it resigns and a successor depositary has not been appointed by us and accepted its appointment within 60 days after the Depositary has given us notice of its resignation. After termination of the deposit agreement, the Depositary will no longer register transfers of ADSs, distribute dividends to the ADS holders, accept deposits of ordinary shares, give any notices, or perform any other acts under the deposit agreement whatsoever, except that the Depositary will continue to:
| ● | collect dividends and other distributions pertaining to deposited securities; |
collect dividends and other distributions pertaining to deposited securities; | ● | sell rights as described under the heading “Dividends, Other Distributions and Rights — Rights to subscribe for additional shares and other rights” above; and |
sell rights as described under the heading “Dividends, other distributions and rights — Rights to subscribe for additional shares and other rights” above; and
deliver deposited securities, together with any dividends or other distributions received with respect thereto and the net proceeds of the sale of any rights or other property, in exchange for surrendered ADRs.
| ● | deliver deposited securities, together with any dividends or other distributions received with respect thereto and the net proceeds of the sale of any rights or other property, in exchange for surrendered ADRs. |
Four months after termination, the Depositary may sell the deposited securities and hold the proceeds of the sale, together with any other cash then held by it, for the pro rata benefit of ADS holders that have not surrendered their ADSs. The Depositary will not have liability for interest on the sale proceeds or any cash it holds.
Charges of Depositary
We will pay the fees, reasonable expenses and out-of-pocket charges of the Depositary and those of any registrar only in accordance with agreements in writing entered into between us and the Depositary from time to time. The following charges shall be incurred by any party depositing or withdrawing ordinary shares or by any party surrendering ADRs or to whom ADRs are issued (including, without limitation, issuance pursuant to a stock dividend or stock split declared by us or an exchange of stock regarding the ADRs or deposited ordinary shares or a distribution of ADRs pursuant to the terms of the deposit agreement):
taxes and other governmental charges;
| ● | taxes and other governmental charges; |
any applicable transfer or registration fees;
| ● | any applicable transfer or registration fees; |
certain cable, telex and facsimile transmission charges as provided in the Deposit Agreement;
| ● | certain cable, telex and facsimile transmission charges as provided in the Deposit Agreement; |
any expenses incurred in the conversion of foreign currency;
| ● | any expenses incurred in the conversion of foreign currency; |
a fee of $5.00 or less per 100 ADSs (or a portion thereof) for the execution and delivery of ADRs and the surrender of ADRs;
| ● | a fee of $5.00 or less per 100 ADSs (or a portion thereof) for the execution and delivery of ADRs and the surrender of ADRs; |
| ● | a fee of $.05 or less per ADS (or portion thereof) for any cash distribution made pursuant to the Deposit Agreement; |
a fee of $.05 or less per ADS (or portion thereof) for any cash distribution made pursuant to the Deposit Agreement;
| ● | a fee for the distribution of securities pursuant to the Deposit Agreement; |
a fee for the distribution of securities pursuant to the Deposit Agreement;
| ● | in addition to any fee charged for a cash distribution, a fee of $.05 or less per ADS (or portion thereof) per annum for depositary services; |
in addition to any fee charged for a cash distribution, a fee of $.05 or less per ADS (or portion thereof) per annum for depositary services;
| ● | a fee for the distribution of proceeds of rights that the Depositary sells pursuant to the Deposit Agreement; and |
a fee for the distribution of proceeds of rights that the Depositary sells pursuant to the Deposit Agreement; and
any other charges payable by the Depositary, any of the Depositary’s agents, or the agents of the Depositary’s agents in connection with the servicing of Shares or other Deposited Securities.
| ● | any other charges payable by the Depositary, any of the Depositary’s agents, or the agents of the Depositary’s agents in connection with the servicing of Shares or other Deposited Securities. |
The Depositary may own and deal in our securities and in our ADRs.
Liability of Holders for Taxes, Duties or Other Charges
Any tax or other governmental charge with respect to ADRs or any deposited ordinary shares represented by any ADR shall be payable by the holder of such ADR to the Depositary. The Depositary may refuse to effect transfer of such ADR or any withdrawal of deposited ordinary shares represented by such ADR until such payment is made, and may withhold any dividends or other distributions or may sell for the account of the holder any part or all of the deposited ordinary shares represented by such ADR and may apply such dividends or distributions or the proceeds of any such sale in payment of any such tax or other governmental charge and the holder of such ADR shall remain liable for any deficiency.
Not applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures
We have performed an evaluation of the effectiveness of our disclosure controls and procedures that are designed to ensure that the material financial and non-financial information required to be disclosed to the SEC is recorded, processed, summarized and reported timely. Based on our evaluation, our management, including the CEO and CFO, has concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report are effective. Notwithstanding the foregoing, there can be no assurance that our disclosure controls and procedures will detect or uncover all failures of persons within the Company to disclose material information otherwise required to be set forth in our reports.
(b) Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) promulgated under the Exchange Act. Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the reliability of financial reporting and the preparation and fair presentation of published financial statements for external purposes in accordance with generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
Our management, including the CEO and CFO, conducted an evaluation, pursuant to Rule 13a-15(c) promulgated under the Exchange Act, of the effectiveness, as of the end of the period covered by this Annual Report, of its internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the results of this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2012.2013.
(c) Attestation Report of Registered Public Accounting Firm
Not applicable.
(d) Changes in Internal Controls over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the year ended December 31, 20122013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERTS
Our boardBoard of directorsDirectors has determined that Nurit Benjamini is the audit committee financial expert. Ms. Benjamini is one of our independent directors for the purposes of the Nasdaq rules.
In July 2011, our Board of Directors adopted a Code of Business Conduct and Ethics (the “Code”) that applies to all our employees, including without limitation our chief executive officer, chief financial officer and controller. Our Code may be viewed on our website at www.biolinerx.com. A copy of our Code may be obtained, without charge, upon a written request addressed to our investor relations department, P.O. Box 45158, 19 Hartum Street, Jerusalem 9777518, Israel (Telephone no. +972-2-548-9100) (e-mail: info@BioLineRx.com).
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees Paid to Independent Registered Public Accounting Firm
The following table sets forth, for each of the years indicated, the fees billed by our independent registered public accounting firm.firms (members of PricewaterhouseCoopers International Ltd.).
| | Year Ended December 31, |
| | 2011 | | 2012 |
Services Rendered | | (in NIS 000’s) |
Audit (1) | | | 407 | | 394 |
Audit related services (2) | | | 16 | | 40 |
Tax (3) | | | 249 | | 154 |
Total | | | 672 | | 588 |
| | Year Ended December 31, | |
| | 2012 | | | 2013 | |
Services Rendered | | (in NIS 000’s) | |
| | | 394 | | | | 352 | |
| | | 40 | | | | 48 | |
| | | 154 | | | | 259 | |
All Other Fees | | | - | | | | - | |
Total | | | 588 | | | | 659 | |
(1) | Audit fees consist of services that would normally be provided in connection with statutory and regulatory filings or engagements, including services that generally only the independent accountant can reasonably provide. |
(2) | Audit related services relate to reports to the OCS and work regarding a public listing or offering. |
(3) | Tax fees relate to tax compliance, planning and advice. |
Our Audit Committee, in accordance with its charter, reviews and pre-approves all audit services and permitted non-audit services (including the fees and other terms) to be provided by our independent auditors.