delays between our expenditures to develop and market new or enhanced products and the generation of sales from those products;
changes in the amounts that we spend to develop, acquire or license new products, technologies or businesses;
changes in our expenditures to promote our products;
variancevariances in our financial performance from the expectations of market analysts;
the limited trading volume of our Ordinary Shares and IPO Warrants; and
general economic and market conditions, including factors unrelated to our industry or operating performance.
In addition, the stock market in general has recently experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of individual companies. Broad market and industry factors may materially affect the market price of companies’ stock, including ours, regardless of actual operating performance.
We do not know whether a market for our Ordinary Shares or IPO Warrants will be sustained and as a result, it may be difficult for holders of our Ordinary Shares to sell their shares.
Although our Ordinary Shares and IPO Warrants are listed on Nasdaq, an active trading market for our Ordinary Shares and IPO Warrants may not be sustained. The lack of an active market may impair the ability of holders of our Ordinary Shares or IPO Warrants to sell their Ordinary Shares or IPO Warrants at the time they wish to sell them or at a price that they consider reasonable. The lack of an active market may also reduce the value of our Ordinary Shares or IPO Warrants, and may cause the trading price of our Ordinary Shares or IPO Warrants to be more volatile. An inactive market may also impair our ability to raise capital by selling Ordinary Shares or IPO Warrants and may impair our ability to acquire other companies by using our Ordinary Shares or IPO Warrants as consideration.
Our stock price may continue to be volatile, and securities class action litigation has often been instituted against companies following periods of volatility of their stock price. Any such litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.
In the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. Although there is no such shareholder litigation currently pending or threatened against the Company, such litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.
The IPO Warrants are speculative in nature and are a risky investment. You may not be able to recover your investment in the IPO Warrants, and the IPO Warrants may expire worthless.
The value of the IPO Warrants will depend on the value of our Ordinary Shares, which will depend on factors related and unrelated to the success of our clinical development program or other factors as detailed above and cannot be predicted at this time.
If the price per share of our Ordinary Shares does not increase to an amount sufficiently above the applicable exercise price of the IPO Warrants during the period the IPO Warrants are exercisable, and if a public market for our IPO Warrants does not develop, the IPO Warrants may not have any value, and you may be unable to recover any or all of your investment in the IPO Warrants. There can be no assurance that the market price of the Ordinary Shares will ever equal or exceed the exercise price of the IPO Warrants, and consequently, whether it will ever be profitable for holders of the IPO Warrants to exercise the IPO Warrants.
Holders of the IPO Warrants will have no rights as shareholders until they acquire our Ordinary Shares.
Until you acquire our Ordinary Shares upon exercise of the IPO Warrants, you will have no rights with respect to our Ordinary Shares issuable upon exercise of the IPO Warrants, except as set forth in the IPO Warrants. Upon exercise of your IPO Warrants, you will be entitled to exercise the rights of a shareholder only as to matters for which the record date occurs on or after the exercise date, unless the IPO Warrants are settled via “cashless exercise” in which case you will be entitled to exercise such rights only after the end of the relevant calculation period as defined in our Registration Statement on Form F-1 (File No. 333-221472) filed with the SEC on June 27, 2018, under “Description of IPO Warrants - Exercisability, Exercise Price and Term.”
Future sales by our shareholders may adversely affect our stock price and our ability to raise funds in new stock offerings.
Sales of our Ordinary Shares or IPO Warrants in the public market could lower the market price of our Ordinary Shares or IPO Warrants. Sales may also make it more difficult for us to sell equity securities or equity-related securities in the future at a time and price that our management deems acceptable or at all. Most of our outstanding Ordinary Shares and IPO Warrants are not restricted from resale. In the event of a sale of Ordinary Shares or IPO Warrants offered by selling shareholders, the price of our Ordinary Shares or IPO Warrants could decline, and such decline could be material.
The significant share ownership position of D.N.A Biomedical Solutions Ltd. that beneficially owns approximately 20.67%15.14% of our Ordinary Shares may significantly influence the outcome of matters requiring shareholder approval.
D.N.A Biomedical Solutions Ltd. (“D.N.A Biomedical”), beneficially owns approximately 20.48%15.14% of our outstanding shares, as of March 15, 2020.16, 2021. Accordingly, D.N.A Biomedical may be able to influence matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions, which could have the effect of delaying or preventing either a third party from acquiring control over us or engaging in other purchases of our Ordinary Shares that might otherwise give our shareholders the opportunity to realize a premium over the then-prevailing market price for our Ordinary Shares or any changes, or from making any changes to our management or board of directors. D.N.A Biomedical could also sell its stake in our company and effectively transfer a significant stake of our company to another party without your consent. D.N.A Biomedical’s interests may not be consistent with those of our other shareholders. In addition, this significant interest in us may discourage third parties from seeking to acquire control of us, which may adversely affect the market price of our Ordinary Shares.
The market price of our Ordinary Shares and IPO Warrants could be negatively affected by future sales of our securities.
If our shareholders, particularly our directors or our executive officers and their affiliates, that in aggregate, beneficially own approximately 28.29%18.17% of our Ordinary Shares as of March 15, 2020,16, 2021, sell substantial amounts of our Ordinary Shares or IPO Warrants in the public market, or if there is a public perception that these sales may occur in the future, the market price of our Ordinary Shares or IPO Warrants may decline. The perception in the public market that our shareholders might sell our Ordinary Shares or IPO Warrants could also depress the market price of our Ordinary Shares or IPO Warrants and could impair our future ability to obtain capital, especially through an offering of equity securities. In addition, our sale of additional Ordinary Shares or IPO Warrants or other similar securities in order to raise capital might have a similar negative impact on the share price of our Ordinary Shares or IPO Warrants. A decline in the price of our Ordinary Shares may impede our ability to raise capital through the issuance of additional Ordinary Shares, IPO Warrants or other equity securities, and may cause holders of our Ordinary Shares or IPO Warrants to lose part or all of their investment.
We have never paid, and we currently do not intend to pay dividends.
We have never declared or paid any cash dividends on our Ordinary Shares. We currently intend to retain any future earnings to finance operations and to expand our business and, therefore, do not expect to pay any cash dividends in the foreseeable future. As a result, capital appreciation, if any, of our Ordinary Shares will be investors’ sole source of gain for the foreseeable future. In addition, Israeli law may limit our declaration or payment of dividends, and may subject our dividends to Israeli withholding taxes.
We are currently a foreign private issuer and, as a result, we are not subject to U.S. proxy rules and are subject to Exchange Act reporting obligations that, to some extent, are more lenient and less frequent than those of a U.S. domestic public company.
We report under the Exchange Act as a non-U.S. company with foreign private issuer status. Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the Exchange Act that are applicable to U.S. domestic public companies, including (i) the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act, (ii) the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time and (iii) the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing unaudited financial and other specified information, or current reports on Form 8-K, upon the occurrence of specified significant events. We are, however, making available to our shareholders quarterly reports containing unaudited financial information for each of the first three quarters of each fiscal year. In addition, foreign private issuers are not required to file their annual report on Form 20-F until four months after the end of each fiscal year, while U.S. domestic issuers that are not accelerated filers are required to file their annual report on Form 10-K within 90 days after the end of each fiscal year. Foreign private issuers are also exempt from the Regulation Fair Disclosure, aimed at preventing issuers from making selective disclosures of material information. As a result of the above, while we are generally filing public reports in accordance with U.S. SEC regulations, you may not have the same protections afforded to shareholders of companies that are not foreign private issuers.
As a foreign private issuer and as permitted by Nasdaq rules, we follow certain home country governance practices rather than the corporate governance requirements of Nasdaq.
As a foreign private issuer, we have the option to follow certain Israeli corporate governance practices rather than those of Nasdaq, except to the extent that such laws would be contrary to U.S. securities laws, and provided that we disclose the requirements we are not following and describe the home country practices we follow instead. We rely on this foreign private issuer exemption, or Foreign Private Issuer Exemption, with respect to Nasdaq shareholder approval requirements in respect of additional issuances of equity in either a public or private offering and equity-based compensation plans and the quorum requirement for meetings of our shareholders. In addition, we rely on the Foreign Private Issuer Exemption with respect to Nasdaq compensation committee requirements, independent approval of board nominations, the requirement to have a majority of independent directors on our board, third party compensation of directors and director nominees and the requirement for independent directors to hold executive sessions. We may in the future, as long as we are considered a foreign private issuer, elect to follow home country practices in Israel with regard to other matters. As a result, our shareholders may not have the same protections afforded to shareholders of companies that are subject to all Nasdaq corporate governance requirements.
We may lose our status as a foreign private issuer, which would increase our compliance costs and could thereby negatively impact our results of operations.
We may no longer be a foreign private issuer as of June 30, 20202021, the end of our second fiscal quarter in our current fiscal year, which would require us to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act applicable to U.S. domestic issuers as of January 1, 2021.2022. We will not maintain our current status as a foreign private issuer, if as of June 30, 2020 (a)2021(a) a majority of our Ordinary Shares is not either directly or indirectly owned of record by non-residents of the United States and (b) one of the following applies: (i) a majority of our executive officers or directors are United States citizens or residents, (ii) more than 50 percent of our assets are located in the United States or (iii) our business is administered principally inside the United States. The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer may be significantly higher. If we are not a foreign private issuer, we will be required to file periodic reports and registration statements on U.S. domestic issuer forms with the SEC, which are more detailed and extensive than the forms available to a foreign private issuer. We may also be required to modify certain of our policies to comply with governance practices associated with U.S. domestic issuers. Such modifications will involve additional costs. In addition, we may lose our ability to rely upon exemptions from certain corporate governance requirements on Nasdaq that are available to foreign private issuers. As a result, we expect that a loss of foreign private issuer status would increase our legal and financial compliance costs and would make some activities highly time consuming and costly. We also expect that if we were required to comply with the rules and regulations applicable to U.S. domestic issuers, it would make it more difficult and expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These rules and regulations could also make it more difficult for us to attract and retain qualified members of our board of directors.
We may not have sufficient insurance to cover our liability in any current or future litigation claims either due to coverage limits or as a result of insurance carriers seeking to deny coverage of such claims.
We may face a variety of litigation-related liability risks. Our amended Articles of Association, or Articles, other applicable agreements and/or Israeli law may require us to indemnify (and advance expenses to) our current and past directors and officers and employees from reasonable expenses related to the defense of any action arising from their service to us, including circumstances under which indemnification is otherwise discretionary. While our directors and officers are included in a director and officer liability insurance policy, which covers all our directors and officers in some circumstances, our insurance coverage does not cover all of our indemnification obligations and may not be adequate to cover any indemnification or other claims against us. In addition, the underwriters of our present coverage may seek to avoid coverage in certain circumstances based upon the terms of the respective policies. If we incur liabilities that exceed our coverage under our directors and officers insurance policy or incur liabilities not covered by our insurance, we would have to self-fund any indemnification amounts owed to our directors and officers and employees in which case our results of operations and financial condition could be materially adversely affected. Further, if D&O insurance becomes prohibitively expensive to maintain in the future, we may be unable to renew such insurance on economic terms or unable renew such insurance at all. The lack of D&O insurance may make it difficult for us to retain and attract talented and skilled directors and officers to serve our company, which could adversely affect our business.
There is a risk that we may be a passive foreign investment company, for U.S. federal income tax purposes for any taxable year, which generally would result in certain adverse U.S. federal income tax consequences to our U.S. investors.
There is a risk that we may be treated as a passive foreign investment company, or PFIC, for any taxable year. Although the application of the PFIC rules to a company like us is subject to uncertainties in some respects, we believe that it is reasonable to take the position that we were not a PFIC for 2019,2020, but there can be no assurance that the Internal Revenue Service will agree or that a court will uphold this position. For the reasons described below, we cannot express a view as to whether we will be a PFIC for the current or any future taxable year. In general, a non-U.S. corporation is a PFIC for any taxable year in which (i) 75% or more of its gross income consists of passive income, or the income test, or (ii) 50% or more of the average value of its assets consists of assets (generally determined on a quarterly basis) that produce, or are held for the production of, passive income, or the assets test. Generally, passive income includes interest, dividends, rents, royalties and certain gains, and cash is generally a passive asset for PFIC purposes. The assets shown on our balance sheet consist, and are expected to continue to consist, primarily of cash and cash equivalents for the foreseeable future. Therefore, whether we will satisfy the assets test for the current or any future taxable year will depend largely on the quarterly value of our goodwill and on how quickly we utilize our cash in our business. Because (i) the value of our goodwill may be determined by reference to the market price of our Ordinary Shares, which has been, and may continue to be volatile given the nature and early stage of our business, (ii) we hold, and expect to continue to hold, a significant amount of cash, and (iii) a company’s annual PFIC status can be determined only after the end of each taxable year, we cannot express a view as to whether we will be a PFIC for the current or any future taxable year. In addition, it is not clear how to apply the income test to a company like us, which is still developing its key intangible assets and whose overall losses from research activities significantly exceed the amount of its income (including passive income). If our losses from research and development activities are disregarded for purposes of the income test, we may be a PFIC for any taxable year if 75% or more of our gross income (as determined for U.S. federal income tax purposes) for the relevant year is from interest and financial investments. Because the revenue shown on our financial statements is not calculated based on U.S. tax principles, and because for any taxable year we may not have sufficient (or any) non-passive revenue, there is a risk that we may be or become a PFIC under the income test for any taxable year. If we were a PFIC for any taxable year during which a U.S. investor owned our Ordinary Shares (or under proposed Treasury regulations, IPO Warrants), such U.S. shareholder generally will be subject to certain adverse U.S. federal income tax consequences, including increased tax liability on gains from dispositions of the Ordinary Shares (or IPO Warrants) and certain distributions and a requirement to file annual reports with the Internal Revenue Service. See “Item 10.E.—Taxation—Material U.S. Federal Income Tax Considerations for U.S. Holders—Passive Foreign Investment Company Rules” for more information.
We are an Emerging Growth Company and we cannot be certain whether the reduced requirements applicable to Emerging Growth Companies will make our Ordinary Shares less attractive to investors.
We are an Emerging Growth Company, and we may take advantage of certain exemptions from various requirements that are applicable to other public companies that are not Emerging Growth Companies. For instance, for as long as we remain an Emerging Growth Company, we will not be subject to the provision of Section 404(b) of the Sarbanes-Oxley Act that requires our independent registered public accounting firm to provide an attestation report on the effectiveness of our internal control over financial reporting. This may increase the risk that we will fail to detect and remedy any weaknesses or deficiencies in our internal control over financial reporting. We have elected to include three years of selected financial data compared to five years for comparable data reported by other public companies. In general, these reduced reporting requirements may allow us to refrain from disclosing information that you may find important.
We can qualify as an Emerging Growth Company for up to five years, although circumstances could cause us to lose that status earlier, including, inter alia, if the market value of our Ordinary Shares held by non-affiliates exceeds $700 million as of any June 30 (the end of our second fiscal quarter) before that time,, in which case we would no longer be an Emerging Growth Company as of the following December 31 (our fiscal year end). When we are no longer deemed to be an Emerging Growth Company, we will not be entitled to the exemptions provided in the JOBS Act. We cannot predict if investors will find our Ordinary Shares less attractive as a result of our reliance on exemptions under the JOBS Act. If some investors find our Ordinary Shares less attractive as a result, there may be a less active trading market for our Ordinary Shares and our share price may be more volatile.
Our ordinary shares may be delisted from the Nasdaq Capital Market if we are unable to maintain compliance with Nasdaq’s continued listing standards.
Nasdaq imposes, among other requirements, continued listing standards including a minimum bid requirement. The price of our ordinary shares must trade at or above $1.00 to comply with the minimum bid requirement for continued listing on the Nasdaq Capital Market. If the closing bid price of our ordinary shares fails to meet Nasdaq’s minimum closing bid price requirement for a period in excess of 30 consecutive days, or if we otherwise fail to meet any other applicable requirements of the Nasdaq Capital Market and we are unable to regain compliance, Nasdaq may make a determination to delist our ordinary shares. Any delisting of our ordinary shares would likely adversely affect the market liquidity and market price of our ordinary shares and our ability to obtain financing for the continuation of our operations or result in the loss of confidence by investors.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, shareholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our common shares.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud among other objectives. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. In addition, any testing by us conducted in connection with Section 404 of the Sarbanes-Oxley Act of 2002, or any subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our financial statements or identify other areas for further attention or improvement. Inferior internal controls could also subject us to regulatory scrutiny and sanctions, impair our ability to raise revenue and cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common shares.
We are required to disclose changes made in our internal controls and procedures and our management is required to assess the effectiveness of these controls annually. However, for as long as we are an “emerging growth company” under the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal controls over financial reporting pursuant to Section 404. An independent assessment of the effectiveness of our internal controls could detect problems that our management’s assessment might not. Undetected material weaknesses in our internal controls could lead to financial statement restatements and require us to incur the expense of remediation.
If securities or industry analysts do not publish research or reports or publish unfavorable research about our business, our share price and trading volume could decline.
The trading market for our Ordinary Shares depends in part on the research and reports that securities or industry analysts publish about us or our business. We do not have control over these analysts and we do not have commitments from them to write research reports about us. If securities or industry analysts do not commence coverage of our company, the trading price for our shares may be negatively affected. In the event we obtain securities or industry analyst coverage, if one or more of the analysts who covers us downgrades our shares, our shares price would likely decline. If one or more of these analysts ceases to cover us or fails to publish regular reports on us, interest in the purchase of our shares could decrease, which could cause our share price or trading volume to decline.
Risks Relating to Our Incorporation and Location in Israel
The Israeli government grants we have received for research and development expenditures restrict our ability to manufacture products and transfer technologies outside of Israel and require us to satisfy specified conditions. If we fail to satisfy these conditions, we may be required to refund grants previously received together with interest and penalties or to pay other amounts according to the formulas set out in the relevant laws.
Our research and development efforts have been financed, in part, through the grants that we have received from the Israeli Innovation Authority (formerly known as the Office of Chief Scientist of the Israeli Ministry of Economy), or the IIA. Pursuant to these grants, we must comply with the requirements of the Encouragement of Industrial Research, Development and Technological Innovation in Industry Law 5744-1984 and the IIA regulations, or the Research Law. Until the grants are repaid with interest, royalties are payable to the IIA in the amount of 3% on revenues derived from sales of products or services developed in whole or in part using the IIA grants, including EB612, EB613 and any other oral PTH product candidates we may develop. The royalty rate may increase to 5%, with respect to approved applications filed following any year in which we achieve sales of over $70 million.
Under the Research Law, we are prohibited from manufacturing products developed using these grants outside of the State of Israel without special approvals. We may not receive the required approvals for any proposed transfer of manufacturing activities. Even if we do receive approval to manufacture products developed with government grants outside of Israel, the royalty rate may be increased and we may be required to pay up to three times the grant amounts and the interest, depending on the manufacturing volume that is performed outside of Israel. This restriction may impair our ability to outsource manufacturing or engage in our own manufacturing operations for those products or technologies. For additional information, see “Item 4.B.—Business Overview—The Israeli Innovation Authority Grant.”
Additionally, under the Research Law, we are prohibited from transferring in any manner (including by way of license), the IIA-financed technologies and related rights (including know-how and other intellectual property rights) in or outside of the State of Israel, except under limited circumstances and only with the approval of the IIA. We may not receive the required approvals for any proposed transfer and, even if received, we may be required to pay the IIA a portion of the consideration that we receive upon any transfer of such technology to a non-Israeli entity up to 600% of the grant amounts and the interest. The scope of the IIA support received, the royalties that we have already paid to the IIA, the amount of time that has elapsed between the date on which the know-how or other intellectual property rights were transferred and the date on which the IIA 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 IIA. Approval to transfer the technology to residents of the State of Israel is also required, and may be granted in specific circumstances only if the recipient abides by the provisions of applicable laws, including the restrictions on the transfer of know-how and the obligation to pay royalties. No assurance can be made that approval to any such transfer, if requested, will be granted. Transfer of know-how or rights outside of the state of Israel without IIA approval is a criminal offense.
These restrictions may impair our ability to sell our technology assets or to perform or outsource manufacturing outside of Israel, engage in change of control transactions or otherwise transfer our know-how outside of Israel and may require us to obtain the approval of the IIA for certain actions and transactions and pay additional royalties and other amounts to the IIA. In addition, any change of control and any change of ownership of our Ordinary Shares that would make a non-Israeli citizen or resident an interested party, as defined in the Israeli Securities Law, 5728-1968, as amended, requires written notice to the IIA, and our failure to comply with this requirement could result in monetary fines. Such non-Israeli interested parties, which include 5% shareholders and shareholders who have the right to appoint a director to our board of directors, are required to sign an undertaking towards the IIA in which they would undertake to comply with the Research Law. Shareholders that purchase shares in an IPO would not be required to sign such an undertaking.
These restrictions will continue to apply even after we have repaid the full amount of the grants and the interest. If we fail to satisfy the conditions of the Research Law, we may be required to refund grants previously received together with interest and penalties, to make other payments to the IIA or become subject to criminal charges.
Security, political and economic instability in the Middle East may harm our business.
Our principal research and development facilities are located in Israel. In addition, part of our key employees, officers and directors are residents of Israel. Accordingly, political, economic and military conditions in the Middle East may affect our business directly. Since the establishment of the State of Israel in 1948, a number of armed conflicts have occurred between Israel and its neighboring countries, Hamas (an Islamist militia and political group in the Gaza Strip) and Hezbollah (an Islamist militia and political group in Lebanon). Recent political uprisings, social unrest and violence in various countries in the Middle East, including Israel’s neighbor Syria, are affecting the political stability of those countries. This instability may lead to deterioration of the political relationships that exist between Israel and certain countries and have raised concerns regarding security in the region and the potential for armed conflict. In addition, Iran has threatened to attack Israel. Iran is also believed to have a strong influence among the Syrian government, Hamas and Hezbollah. These situations may potentially escalate in the future into more violent events which may affect Israel and us. These situations, including conflicts which involved missile strikes against civilian targets in various parts of Israel have in the past negatively affected business conditions in Israel.
Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could have a material adverse effect on our business. Although such hostilities did not in the past have a material adverse impact on our business in the past, we cannot guarantee that hostilities will not be renewed and have such an effect in the future. The political and security situation in Israel may result in parties with whom we have contracts claiming that they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions. These or other Israeli political or economic factors could harm our operations and product development. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could adversely affect our operations and could make it more difficult for us to raise capital. We could experience disruptions if acts associated with this conflict result in any serious damage to our facilities. Furthermore, several countries, as well as certain companies and organizations, continue to restrict business with Israel and Israeli companies, which could have an adverse effect on our business and financial condition in the future. Our business interruption insurance may not adequately compensate us for losses, if at all, that may occur as a result of an event associated with a security situation in the Middle East, and any losses or damages incurred by us could have a material adverse effect on our business.
Our operations may be disrupted by the obligations of personnel to perform military service.
Our employees in Israel, including executive officers, generally, may be called upon to perform up to 42 days (and in some cases more) of annual military reserve duty until they generally reach the age of 45 (or older in some cases) and, in emergency circumstances, could be called to active duty. In response to increased tension and hostilities, since September 2000 there have been occasional call-ups of military reservists, including in connection with the mid-2006 war in Lebanon and the December 2008, November 2012 and July 2014 conflicts with Hamas, and it is possible that there will be additional call-ups in the future. Our operations could be disrupted by the absence of a significant number of our employees related to military service or the absence for extended periods of one or more of our key employees for military service. Such disruption could materially adversely affect our operations, business and results of operations.
Our business is subject to currency exchange risk and fluctuations between the U.S. dollar and other currencies may negatively affect our earnings and results of operations.
The U.S. dollar is both our functional and reporting currency. As a result, our results of operations may be adversely affected by exchange rate fluctuations between the U.S. dollar and the NIS. A significant portion of the expenses associated with our Israeli operations, including personnel and facilities related expenses, are incurred in NIS. Consequently, inflation in Israel will have the effect of increasing the cost of our operations in Israel unless it is offset on a timely basis by a devaluation of the NIS relative to the U.S. dollar. In addition, if the value of the U.S. dollar decreases against the NIS, our earnings may be negatively impacted. Moreover, exchange rate fluctuations in currency exchange rates in countries other than Israel where we operate, perform our clinical trials or conduct business may also negatively affect our earnings and results of operations. We cannot predict any future trends in the rate of inflation or deflation in Israel or the rate of devaluation or appreciation of the NIS against the U.S. dollar. If the dollar cost of our operations in Israel increases, our dollar-measured results of operations will be adversely affected. For example, in 2020, the value of the NIS appreciated against the U.S. dollar by 6.97%, which appreciation was partially offset by inflation in Israel of 0.7%. In 2019, the value of the NIS appreciated against the U.S. dollar by 7.8%, which appreciation was partially offset by inflation in Israel of 0.3%. In 2018, the value of the NIS depreciated against the U.S. dollar by 8.1%7.79%, the effect of which was partlypartially offset by inflation in Israel at a rate of approximately 0.8%0.3%. As a result of these fluctuations, our NIS denominated expenses were affected.
Potential future revenue may be derived from abroad, including outside of the United States. As a result, our business and share price may be affected by fluctuations in foreign exchange rates with these other currencies, which may also have a significant impact on our reported results of operations and cash flows from period to period. Currently, we do not have any exchange rate hedging arrangements in place. Foreign currency fluctuations could materially adversely affect our results of operations or could positively affect our results of operations in ways that may not necessarily be repeated in future periods.
It may be difficult to enforce a U.S. judgment against us or our officers and directors, to assert U.S. securities laws claims in Israel or to serve process on our officers and directors.
We are incorporated under the laws of the State of Israel. Service of process upon us, our directors and officers and the Israeli experts, if any, a significant number of whom reside outside the United States, may be difficult to obtain within the United States. Furthermore, because the majority of our assets and investments, and substantially all of our directors, officers and such Israeli experts, if any, are located outside the United States, any judgment obtained in the United States against us or any of them may be difficult to collect within the United States. In addition, such judgment may not be enforced by an Israeli court.
In addition, it may also be difficult for an investor to effect service of process on these persons in the U.S. or to assert U.S. securities law claims in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on an alleged violation of U.S. securities laws reasoning that Israel is not the most appropriate forum to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel addressing the matters described above. See the section in our Registration Statement on Form F-1 filed under the Securities Act with the SEC on June 27, 2018, entitled “Enforceability of Civil Liabilities.” As a result of the difficulty associated with enforcing a judgment against us in Israel, holders of our Ordinary Shares may not be able to collect any damages awarded by either a U.S. or foreign court.
Provisions of Israeli law and our amended Articles may give rise to withholding obligations or delay, prevent or make difficult a change of control and therefore depress the price of our shares.
Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to these types of transactions. For example, under the Companies Law, upon the request of a creditor of either party to a 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. Additionally, a tender offer for all of a company’s issued and outstanding shares can only be completed if the acquirer receives positive responses from the holders of at least 95% of the issued share capital. Completion of the tender offer also requires approval of a majority of the offerees that do not have a personal interest in the tender offer unless, following consummation of the tender offer, the acquirer would hold more than 98% of the company’s outstanding shares. Furthermore, the shareholders, including those who indicated their acceptance of the tender offer, may, at any time within six months following the completion of the tender offer, petition an Israeli court to alter the consideration for the acquisition, unless the acquirer stipulated in its tender offer that a shareholder that accepts the offer may not seek such appraisal rights. For additional information regarding the regulation of mergers and tender offers under the Israeli Companies Law, see “Item 16.G.–Corporate Governance— Anti-Takeover Measures under Israeli Law; Acquisitions under Israeli Law.”
Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to our shareholders whose country of residence does not have a tax treaty with Israel exempting such shareholders from Israeli tax. For example, Israeli tax law does not recognize tax-free share exchanges to the same extent as U.S. tax law. With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances that makes the deferral contingent on the fulfillment of numerous conditions, including a holding period of two years from the date of the transaction during which sales and dispositions of shares of the participating companies are, subject to certain exceptions, restricted. Moreover, with respect to certain share swap transactions, the tax deferral is limited in time, and when the time expires, tax then becomes payable even if no actual disposition of the shares has occurred.
Our amended Articles of Association, or Articles provide that our directors (other than external directors) are elected on a staggered basis such that a potential acquirer cannot readily replace our entire board of directors at a single general shareholders meeting.
These provisions could cause our Ordinary Shares to trade at prices below the price for which third parties might be willing to pay to gain control of us. Third parties who are otherwise willing to pay a premium over prevailing market prices to gain control of us may be unable or unwilling to do so because of these provisions of Israeli law and our amended Articles.
Your rights and responsibilities as a shareholder are governed by Israeli law, which may differ in some respects from the rights and responsibilities of shareholders of U.S. companies.
We are incorporated under Israeli law. The rights and responsibilities of the holders of our Ordinary Shares are governed by our Articles and Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S.-based corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith and in a customary manner in exercising its rights and performing its obligations towards the company and other shareholders and to refrain from abusing its power in the company, including, among other things, in voting at the general meeting of shareholders on matters such as amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers and acquisitions and interested party transactions requiring shareholder approval. In addition, a shareholder who knows that it possesses the power to determine the outcome of a shareholder vote or to appoint or prevent the appointment of a director or executive officer in the company has a duty of fairness toward the company with regard to such vote or appointment. There is limited case law available to assist us in understanding the implications of these provisions that govern shareholders’ actions, and these provisions may be interpreted to impose additional obligations and liabilities on holders of our Ordinary Shares that are not typically imposed on shareholders of U.S. corporations.
Our business could be negatively affected as a result of actions of activist shareholders, and such activism could impact the trading value of our securities.
In recent years, certain Israeli issuers listed on United States exchanges have been faced with governance-related demands from activist shareholders, unsolicited tender offers and proxy contests. Responding to these types of actions by activist shareholders could be costly and time-consuming, disrupting our operations and diverting the attention of management and our employees. Such activities could interfere with our ability to execute our strategic plan. In addition, a proxy contest for the election of directors at our annual meeting would require us to incur significant legal fees and proxy solicitation expenses and require significant time and attention by management and our board of directors. The perceived uncertainties as to our future direction also could affect the market price and volatility of our securities.
ITEM 4. INFORMATION ON THE COMPANY
4.A. History and Development
Our legal and commercial name is Entera Bio Ltd. We were incorporated as a limited liability company under the laws of the State of Israel on September 30, 2009. We commenced operations in June 2010 as a joint venture of D.N.A Biomedical and Oramed Ltd. (“Oramed”) to pursue the development of pharmaceutical products for the oral delivery of proteins. In connection with our founding, Oramed licensed to us the use of certain of its patent rights relating to the oral delivery of proteins. In February 2011, Oramed sold the majority of its holdings in us to D.N.A. Biomedical. In connection with the sale, Oramed assigned to us the patent rights that it had previously licensed to us, in exchange for an exclusive license to use the assigned patent rights in the fields of diabetes and influenza and for a 3% royalty on net revenues generated from our use or other exploitation of the assigned patent rights. In March 2011, D.N.A Biomedical and Oramed terminated the joint venture. To date, we have focused our operations on the development of our drug delivery technology for the oral administration of proteins and large molecules, in particular our oral PTH (1-34) product candidates.
We are registered with the Israeli Registrar of Companies. Our registration number is 51-433060-4. Article 3 of our Articles generally provides that our objectives are to engage in any lawful activity.
Our principal executive offices are located at Kiryat Hadassah Minrav Building, 5th Floor, Jerusalem 9122002, Israel. Our corporate offices in the United States are located at 37 Walnut Street, Suite 300, Wellesley Hills, MA. Our website is https://www.enterabio.com/. The information contained on, or that can be accessed through, our website does not constitute a part of this form and is not incorporated by reference herein. The SEC also maintains a website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The address of this website is http://www.sec.gov and you can access our filings on that website.
We have one wholly-owned subsidiary, Entera Bio, Inc., which was incorporated on January 8, 2018 under the laws of the State of Delaware. While our operations were initially conducted in our research and development facilities in Israel, in 2018 we started to expand our clinical and medical teams in the United States. In 2019, we hired a U.S.-based CEO and CFO and established corporate offices in Boston, Massachusetts.
We are an Emerging Growth Company. As such, we are eligible to, and intend to, take advantage, for up to five years, of certain exemptions from various reporting requirements applicable to other public companies that are not Emerging Growth Companies, such as not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. We will remain an Emerging Growth Company until the earliest of: (i) the last day of our fiscal year during which we have total annual gross revenues of at least $1.07 billion; (ii) the last day of our fiscal year following the fifth anniversary of the closing of our IPO; (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; (iv) the date on which we are deemed to be a Large Accelerated Filer under the Exchange Act, with at least $700 million of equity securities held by non-affiliates.
Further, under the JOBS act, Emerging Growth Companies can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an Emerging Growth Company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. However, given that we currently report under IFRS as required by the IASB, we will not be able to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required by the IASB.
For information regarding our capital expenditures, see “Item 5.B.–Liquidity and Capital Resources.”
4.B. Business Overview
Who We Are
We are a clinical-stage biopharmaceutical company focused on the development and commercialization of orally delivered macromoleculelarge molecule therapeutics for use in areas with significant unmet medical need and where adoption of injectable therapies is limited due to cost, convenience and compliance challenges for patients. Our current strategy for our lead product candidates is to use our technology to develop an oral formulation of human parathyroid hormone (1-34), or PTH, which has been approved in the United States in injectable form for over a decade.
Our lead oral PTH product candidates are EB613 for the treatment of osteoporosis and EB612 for the treatment of hypoparathyroidism. InBoth EB613 and EB612 are oral formulations of human parathyroid hormone (1-34), or PTH. An injectable formulation of PTH has been approved in the U.S. for more than a decade and in both of these indications, (PTH 1-34 for Osteoporosis and PTH 1-84 for Hypoparathyroidism), the leading products are daily injectable formulations of PTH.taken via injection. In total, more than 180260 healthy volunteers and patients, have received multiple doses of various formulations of our oral PTH (1-34).
Osteoporosis is a systemic skeletal disease characterized by low bone mass and structural deterioration of bone tissue, which leads to greater fragility of bones and increased bone fragility and susceptibility to fracture.an increase in fracture risk. Forteo® is a once-daily subcutaneous injectable form of PTH (1-34), marketed by Eli Lilly and Company (“Eli Lilly”), that was approved in 2002 for the treatment of osteoporosis in the United StatesU.S. and is widely considered one of the most effective treatments due to its ability to build bone. Because our product candidate EB613 is delivered orally,in a patient friendly oral formulation, we believe it will reduce the treatment and cost burden on patients and lead to significantly higher patient and physician acceptance compared to injectable PTH. In 2020, we engaged a third-party firm to conduct two primary market research studies with clinicians who treat osteoporosis patients. In these two studies, the responses to the prospect of prescribing an injectable formoral PTH with demonstrated safety and efficacy were overwhelmingly positive and driven by expected improvements in patient compliance, ease of PTH. Between 2013administration and 2015, we conducted areduced costs.
We have completed two, multi-stage Phase 1b, open label, crossover design, pharmacokinetic or PK study, with nine to ten healthy male volunteers in three cohorts that received either 20 microgram Forteo injections, or EB613. The pharmacokinetic profile1 clinical trials of EB613 was characterized by rapid absorption and disappearance rates, resulting in a short pharmacokinetic exposure toare expecting final bone mineral density, or BMD, results from the drug (see graph below).
Pharmacokinetic profiles following the administration of an oral formulation of PTH (1-34) versus Forteo ®
injections. Each data point represents the mean of observations in nine to ten volunteers.
With our current formulation of oral EB613, the total systemic exposure as measured by the area under the curve, or AUC, of 188pgm*hr/ml following the administration of oral EB613 was similar to the AUC of the Forteo injection of 182 pgm*hr/ml, while the maximal plasma concentrations, also known as Cmax, of the oral EB613 formulation was approximately two-fold higher than the Cmax of the injection. In addition, the duration of the exposure above the upper limit of the reference range of endogenous parathyroid hormone, (equivalent to ≥28 pg/mL PTH(1-34), if adjusted on a molar basis), was approximately one hour or two-fold less following the administration of oral EB613 in comparison to more than two hours for subjects receiving Forteo . Lower exposure to the drug is believed to be preferable as extended exposure above the upper limit of the reference range may lead to an increased incidence of hypercalcemia, an undesired side effect, observed in some patients treated with subcutaneous injections of Forteo. As a result, the sharper and shorter duration of exposure, may be preferable for the treatment of osteoporosis.
In an additional treatment arm of the above study, a lower dose was used to achieve a Cmax similar to the Cmax following a Forteo injection with a lower AUC. Each data point below represents the mean of observations in nine to ten volunteers. The activation of the various biological pathways is believed to be triggered by PTH levels above a specific threshold. It is possible that a similar Cmax associated with a lower AUC and shorter exposure time may not only be sufficient to activate the anabolic pathways, but may also reduce the risk of hypercalcemia adverse events.
Pharmacokinetic profiles following the administration of an oral formulation of PTH (1-34) versus commercial
Forteo® injection in Phase 1b. Each data point represents the mean of observations in nine to ten volunteers.
Based on our Phase 1 studies, and our ongoing Phase 2 double-blind, placebo-controlled, dose-ranging trial of EB613 in the second quarter of 2021. Based on these trials, which were conducted in Israel, EB613 appears to be safe and well tolerated with no serious drug-related adverse events reported. In a single volunteer, two mild unrelatedFurthermore, the adverse events (cough and dyspepsia) were reported one day after the oral drug administration.seen in these trials are consistent with those seen in other trials of PTH (1-34). In contrast, three cases of transient increases in serum calcium above the upper limit of normal, and a single case of vomiting, were observed following injections of Forteo.
Based on changes in general guidance issued by the FDA inNovember 2018, and the similarity of our product’s PK profile to that of Forteo, we requested and heldhad a pre-IND meeting with the FDA to discuss our development plan of our oral PTH candidate,the EB613 for the treatment of osteoporosis. In addition to discussingprogram including various aspects of the nonclinical and clinical development plan, the meeting focused on the use of the 505(b)(2) regulatory pathway and the use of bone mineral density, or BMD, rather than fracture incidence as the primary endpoint to support an NDA. Based on the FDA’s response, we believe that we may be able to use BMD as the primary efficacy endpoint for a Phase 3 trial and that a fracture endpoint trial will not be required.
In July 2019,December 2020, we initiated a dose rangingannounced that the FDA had reviewed our Investigational New Drug (IND) application for EB613 and informed us that we may proceed with our initial U.S. clinical trial. Subject to the successful completion of the ongoing Phase 2 multi-centerclinical trial, in approximately 160 postmenopausal women with osteoporosis, or low BMD. Following the analysis of the data from this study, we intend to enter into a dialogue with the FDA in order to reach agreement on the design and executeof a pivotal Phase 3 pivotal trial(s) in approximately 600-700 osteoporosis patients.clinical trial and requirements for potential approval under the 505 (b)(2) regulatory pathway. We believe that the study design to achieve the BMD endpoint of the alternative pathway, as discussed with the FDA, will have a much smaller number of patients and will be significantly shorter in duration than a pathwaystudy that utilizes a placebo-controlled bone fracture endpoint. Based on directives from the Israeli Ministry of Health and our affiliated medical institutions implemented in March 2020 due to COVID-19, we have temporarily suspended enrollment of new patients in our ongoing Phase 2 clinical trial. At this time, we have 97 patients currently enrolled in this trial. As of March 23, 2020, we are continuing to collect patient data from the currently enrolled patients in this trial through various monitoring means established by the regulatory authorities.
Hypoparathyroidism is a rare condition in which the body fails to produce sufficient amounts of PTH or the PTH produced lacks biologic activity. Historically, the treatments for hypoparathyroidism have been calcium supplements, active vitamin D analogs (calcitriol or similar drugs) and occasionally phosphate binders, the chronic use of which results in serious side effects withand significant costs to patients and the healthcare system. A once-daily injectable form of PTH (1-84), ormarketed as Natpara, has been approved for the treatment of hypoparathyroidism. Our lead product candidate for hypoparathyroidism, EB612, is also delivered orally and can be administered in customized doses several times a day. Studies performed by researchers at the National Institutes of Health, or NIH have shown that dosing PTH multiple times per day significantly increases the efficacy of therapy and may be more effective for treating hypoparathyroidism. These studies found that the total daily PTH dose required to maintain serum calcium in the normal or near-normal range was reduced by 50% with twice-daily PTH (1-34) and also demonstrated that twice-daily dosing achieved better control over serum calcium and urinary calcium excretion as compared to once-daily dosing. In addition, based on the market research we conducted in osteoporosis we believe patients generally prefer orally-administered drugs. For these reasons, we believe EB612 dosed two or more times during the day may be clinically superior to the existing daily therapy and has the potential to become the standard of care, if approved, for hypoparathyroidism.
In 2015, we successfully completed a Phase 2a trial for EB612. Although our Phase 2a trial involved a smaller number of patients, was conducted for a shorter duration and did not include an initial dose optimization period in comparison to the design of the pivotal trial used for regulatory approval of Natpara (the REPLACE trial), our Phase 2a trial showed the potential for similar efficacy. In the third quarter of 2019, we reported the results of a second Phase 2 clinical trial that included one day of dosing with EB612 to evaluate the pharmacokinetic/pharmacodynamics, or PK/PD, profile of various EB612 dose regimens compared with Natpara. The results from this study demonstrated that EB612 was effectively delivered into the blood stream and activated PTH-dependent biological pathways that are inadequately activated in patients with hypoparathyroidism. In addition, the various dosing regimens demonstrated positive impacts on serum calcium, urine calcium and serum phosphate levels. No serious adverse events were reported. We are evaluating additional formulations of EB612 and believe this Phase 2 trial will help determine the design of a definitive long-term Phase 2b or Phase 3 trial of EB612 in patients with hypoparathyroidism in which the dose frequency would be titrated to control hypocalcemia, normalize serum phosphate and reduce renal calcium excretion.
In the future, after the completion of additional formulation and development activities and subject to available funds, we expect to initiate a multi-site Phase 2b/3 clinical trial of EB612 for the treatment of hypoparathyroidism, which will further evaluate the dosage, effectiveness and safety profile of EB612 in an expanded population of patients with hypoparathyroidism. We expect that this Phase 2b/3 trial, when initiated, will be designed to replicate the REPLACE trial in many aspects and to achieve a significant reduction in urinary calcium. The phase 2b/3 clinical trial of EB612 in hypoparathyroidism may potentially support a submission for regulatory approval of EB612, if successful.
In addition to the utilization of our technology to develop our own internal drug candidates, we intend to use our technology as a platform for the oral delivery of other novel protein and large molecule therapeutics. OurWe believe our proprietary technology has potential advantages over alternative delivery options, and may enable us to create a potential pipeline of products across a range of therapeutic indications. We have generated data on a number of additional proteins and peptides in molecules as large as 150 kDa, and may develop these candidates further internally, or explore potential researchbusiness development collaborations to advance these therapies through clinical development and generate funding.
In December 2018, we entered into a research collaboration and license agreement with Amgen, Inc, or Amgen. Under the agreement, the parties will collaborate on the development and discovery of clinical candidates in the field of inflammatory disease and other serious illnesses. Specifically, we and Amgen will use our proprietary drug delivery platform to help Amgen develop oral formulations for up to three large molecule drug candidates within Amgen’s pipeline. Further, under the terms of the agreement, we will conduct preclinical development activities, at Amgen’s expense and Amgen will be responsible for research, clinical development, manufacturing and commercialization of any of the resulting programs, at its expense. We will be eligible to receive from Amgen aggregate payments of up to $270 million upon achievement of various clinical and commercial milestones or Amgen’s exercise of optionsits option to select anup to two additional programprograms to include in the collaboration as,as well as tiered royalty payments ranging from the low to mid-single digits based on the level of Amgen’s net sales of any applicable products, if approved. We will retain all intellectual property rights to our drug delivery technology, which under this collaboration will be licensed to Amgen exclusively for Amgen’s nominatedselected drug targets. Amgen will retain all rights to its large molecules, andincluding any subsequent improvements.
In February 2021, we announced that we initiated a new research program for an oral glucagon-like peptide-2 (GLP-2) analog based on the Company’s platform technology. GLP-2, a peptide produced in the intestine and the central nervous system via the brainstem and hypothalamus, is known to enhance intestinal absorption, specifically the increased absorption of nutrients. The only GLP-2 analog currently on the market, teduglutide, was approved in 2012 as a once daily injection for the treatment of short bowel syndrome in the U.S. and Europe, registering global sales of $574 million in 2019. In preclinical models, our oral formulation of a GLP-2 analog has shown a comparable pharmacokinetic profile to a subcutaneous injection. In addition, GLP-2 analogs are an important category of new therapies for many metabolic diseases and therefore we believe this product candidate is well positioned for partnering opportunities.
Our Pipeline
Drug development has shifted towards the use of biologics such as peptides, proteins and other large molecules for the treatment of various diseases including orphan indications. For example, approximately 30% of the drugs approved by the FDA between 2015 and 20182019 were biologics. Currently, most large molecule therapeutics can only be delivered via injections and other non-oral pathways because oral administration typically leads to poor absorption into the blood stream as well as enzymatic degradation within the gastrointestinal tract. Oral drug delivery has the potential to reduce the treatment burden on patientsby providing a more patient friendly alternative relative to injectable drugs and may provide significantly more flexibility, both in size and number of doses per day, than injectable drugs. Our proprietary oral drug delivery technology is designed to address the issues of poor absorption, high variability, and difficulties delivering such large molecules to the targeted location in the body by utilizing a combination of a synthetic absorption enhancer, to facilitate the enhanced absorption of large molecules, and protease inhibitors to prevent enzymatic degradation.
We have initially focused on the development of products which are based on previously approved therapeutic agents. We believe this will allow us to more efficiently and predictably advance product candidates through the development cycle based on well-defined clinical and regulatory pathways. We have conducted initial feasibility studies with a number of candidates including human growth hormone, or HGH, among others, and intend, subject to the availability of resources, to commence preclinical and clinical development for our next, non-PTH product candidate in the future.
The following chart summarizes the current stage of development of each of our current product candidates, as well as their indications.
Our Strategy
Our goal is to become a leading biopharmaceutical company focused on the development and commercialization of orally delivered large molecule therapeutics in indications with significant unmet medical needs. The key elements of our strategy to achieve this goal are to:
Advance EB613 into a Phase 3 clinical trial for the treatment of osteoporosis: We are currently conducting a dose ranging Phase 2 clinical trial of EB613 for the treatment of osteoporosis. Basedosteoporosis and expect to report final BMD data from this trial in the second quarter of 2021.Based on FDA guidance received at our pre-IND meeting in November 2018, we intend to further develop EB613 and conduct the required non-clinical and clinical trials independently or with a partner in order to attain regulatory approval. We intend to conduct a single Phase 3, multicenter trial with a BMD endpoint comparing Oraloral PTH with Forteo over a 12-month treatment period.Forteo. We believe this Phase 3 trial could be initiated as early as 2021 or 2022, based on athe successful outcome of the ongoing Phase 2 trial pendingand the determinationavailability of the impact of COVID-19 on our clinical trial enrollment, on our ability to collect sufficient data to proceed with a Phase 3 clinical trial and on the design of any such Phase 3 clinical trial, as well as on whether we will have adequate financial resources.
Advance EB612 through clinical development for the treatment of hypoparathyroidism: To date we have completed two Phase 2 clinical trials of EB612 for the treatment of hypoparathyroidism. We reported positive results from the first trial in the third quarter of 2015, and then conducted a Phase 2PK/PD trial in 2019 to evaluate the profile of various EB612 dose regimens. After the completion of additional formulation and development activities to determine our final formulations, and subject to available funds, we expect to initiate a Phase 2b/3 clinical trial of EB612 for the treatment of hypoparathyroidism. The FDA and the EMA have granted EB612 orphan drug designation for the treatment of hypoparathyroidism.
Leverage our expertise in the oral delivery of PTH to develop product candidates in additional indications: In the future, we may conduct exploratory Phase 2 studies for the use of our oral PTH candidates in additional indications in which the anabolic effects of pulsatile PTH to stimulate bone formation may play a key pharmacologic role, including in delayed union of fractures, an indication within the field of bone healing after a fracture. We plan to use EB613, or a further modified formulation, if studies suggest we could achieve a PK profile that is more efficacious, for these indications.
Identify and develop products based on FDA-approved injectable large molecule therapeutics: We intend to leverage our technology platform by applying it to the development of known large molecule therapeutics and believe we can reduce the development and regulatory risks by working on FDA-approved large molecule therapeutic agents with known mechanisms of action. We believe this will allow us to advance our product candidates efficiently and predictably through the development cycle thereby offering us the option to either develop these products on our own or to collaborate with the innovator companies.
58Establish global and regional commercial partnerships, or selectively develop commercial capabilities for our lead oral PTH product candidates
: For our oral PTH product candidates that target orphan indications, we may determine to retain commercialization rights within key territories, including the United States, because of the ability to commercialize efficiently with a small sales and marketing organization. For product candidates that target indications with larger patient populations such as Osteoporosis, we may choose to partner with larger biopharmaceutical companies ahead of late stage development and commercialization, or to license our technology to third parties for additional indications, pending our Phase 2 trial results and the potential impact of COVID-19 on those results or on our discussions with potential collaboration or other business partners. We are building a corporate and business development capability to determine the appropriate development and commercial strategies for our current and future product candidates.
DevelopLeverage our technology to develop more effective novel large molecule therapeutics through collaborations and partnerships with other biotechnology or pharmaceutical companies: Oral drug delivery lowers the treatment burden on patients relative to injectable drugs, leading to higher patient and physician acceptance and compliance, and at a lower cost to patients. However, certain peptides, proteins and other large molecule therapeutics can currently only be delivered via injections and other non-oral pathways because oral administration leads to negligible absorption into the blood stream as well as enzymatic degradation within the gastrointestinal tract. Our technology is designed to overcome both of these issues by enabling enhanced systemic absorption of large molecules and slowing their enzymatic degradation while in the gastrointestinal tract. For example, inIn December 2018, we entered into a research collaboration and license agreement with Amgen and we intend to explore additional collaborations to further validate our technology and potentially generate value through funding from such collaborations. COVID-19 may impact our ability to conduct research and development activities or to develop data that may lead to potential future collaborations (see “Risk Factors—The outbreak of COVID-19 in the United States, Israel and elsewhere has created significant business disruptions and will adversely affect our business”).
Establish globalIdentify and regional commercial partnerships, or selectively develop commercial capabilities foradditional products based on FDA-approved injectable large molecule therapeutics: We intend to leverage our lead oral PTH product candidates: Fortechnology platform by applying it to the development of known large molecule therapeutics and believe we can reduce the development and regulatory risks by working on FDA-approved large molecule therapeutic agents with known mechanisms of action. We believe this will allow us to advance our oral PTH product candidates that target orphan indications, we may determineefficiently and predictably through the development cycle thereby offering us the option either to retain commercialization rights within key territories, including the United States, because of the ability to commercialize efficiently with a small sales force or other contract selling organizations. For product candidates that target indications with larger patient populations such as Osteoporosis, we may choose to partner with larger biopharmaceutical companies ahead of late stage development and commercialization,develop these products on our own or to license our technology to third partiescollaborate with the innovator companies. For example, In February 2021, we announced that we initiated a new research program for their additional indications, pending our Phase 2 trial results andan oral glucagon-like peptide-2 (GLP-2) analog based on the potential impact of COVID-19 on those results or on our discussions with potential collaboration or other business partners. We are building a corporate and business development capability to determine the appropriate development and commercial strategies for our current and future product candidates.
Company’s platform technology.
Our Technology
We are focused on the development and commercialization of product candidates that leverage our proprietary platform technology for the oral delivery of large molecule therapeutics. In recent years, drug development has shifted towards the use of peptides, proteins and other large molecules for the treatment of various diseases. By lowering the treatment burden on patients, oral drug delivery leads to higher patient and physician acceptance. In addition, oral drug delivery provides significantly more flexibility, both in size of dose and number of doses per day, than injectable drugs, which are frequently administered by preset injection pen and only once per day. Oral tablets are also less costly to manufacture than injectable biologics, which we expect will lower the cost of our therapies to patients, thereby expanding access to a greater population of patients who can afford these therapies.
Currently,Historically peptides, proteins and other large molecule therapeutics arehave typically been delivered via injections and other non-oral pathways because oral administration leads to poor absorption into the blood stream (bioavailability) due to enzymatic degradation within the gastrointestinal tract and poor permeability though the intestinal wall. Most oral drug delivery technologies attempting to overcome this hurdle only manage to attain very low bioavailability (less than 1%), which generally results in high variability of dose exposure, both between patients and within the same patient at different times of administration. These variability issues are due to the fact that small changes in the level of absorption lead to significant changes in the bioavailability. As a result, absorption variability generally decreases as drug bioavailability increases.
Oral formulations of large molecules must therefore ensure that the large molecule is able to pass through the intestinal wall so that it can be absorbed into the bloodstream and that the large molecule therapeutic is not exposed to enzymatic degradation in order to protect its biological activity and availability for absorption.
Our proprietary technology is designed to address both of these issues by utilizing a combination of a synthetic absorption enhancer, or carrier molecule, to facilitate the enhanced absorption of large molecules, and protease inhibitors to prevent enzymatic degradation. By designing our product candidates to address both the issues of absorption and degradation, we have been able to significantly increase bioavailability and decrease the variability of the PTH dose delivered in our clinical trials to date.
Our carrier molecule is designed to create a weak association with our chosen large molecule therapeutic agents, leaving the therapeutic agent chemically unmodified. The carrier molecule enables transport across the intestinal membrane via transcellular absorption without compromising the integrity of the intestinal wall. Because of the weak association between the carrier molecule and the therapeutic agent, the interaction is designed to be reversible and occurs spontaneously by simple dilution on entering the blood. We selectedselect protease inhibitors that act by specifically inhibiting a number of gastrointestinal enzymes designed to assist in the degradation and digestion of proteins without interfering with normal gastrointestinal activity.
In order for large molecule therapeutics to benefit from the use of our oral delivery technology, they must demonstrate a number of specific characteristics, including:
having the appropriate size, as measured by molecular weight, and other chemical/physical characteristics;
having a mechanism of action that favors delivery through the gastrointestinal tract rather than through injections, and;
having a dosing schedule that requires dosing one or more times per day for at least three months.
Based on these criteria, we chose to focus initially on product candidates related to oral delivery of PTH molecules, which have the potential for therapeutic use in a number of indications including hypoparathyroidism osteoporosis and non-union fractures.osteoporosis. We have also explored the use of our technology in other molecules such as HGHa GLP-2 analog and a number of other macromolecules, up to approximately 150kDa in size. We believe our platform technology has the potential for use in biologics which represented approximately 30% of all U.S. FDA drug approvals between 2015 and 2018, and $20 billion in annual sales.
Based on the strength of our technology platform, in December 2018, we entered into a research collaboration and license agreement with Amgen, under which, the parties will collaborate for the development and discovery of up to three clinical candidates in the field of inflammatory disease and other serious illnesses. We will retain all intellectual property rights to our drug delivery technology, which under this collaboration will be licensed to Amgen, exclusively for Amgen’s nominated drug targets. Amgen will retain all rights to its certain large molecules and any subsequent improvements.59
Our Product Candidates
The following table summarizes important information about each of our current oral PTH product candidates, including their indications and their current stage of development. We have not out-licensed any intellectual property rights to our oral PTH product candidates listed below, and, therefore, have retained the ability to pursue their worldwide commercialization, or potential commercial partnerships.collaborations.
| | | | | | Stage of | | |
Program | | Indication | | Description | | Stage of
Development | | Status |
| | | | | | | | |
EB613 | | Osteoporosis | | Oral PTH (1-34) | | Phase 2 | | Pre-IND meeting conducted in Q4 2018 2018; IND opened in Dec 2020 |
| | | | | | | Phase 2 dose ranging clinical trial initiatedfinal BMD results expected in 2019 Q2 2021 Phase 3 initiation expected in 2021 or 2022.2022 |
| | | | | | | |
EB612 | | Hypoparathyroidism | | Oral PTH (1-34) | | Phase 2 | | Phase 2a successfully completed (results reported 2015) |
| | | | | | | Phase 2b PK/PD clinical trial head to head with Natpara in hypoparathyroid patients results reported in Q3 2019 |
| | | | | | | Final formulation(s) to be selected in 20202021 subject to sufficient funding |
Oral PTH Therapeutics
PTH is a hormone that regulates the levels of calcium and phosphorus in the blood. The naturally occurring form of PTH that is found in the human body is composed of 84 amino acids, although only the first 34 amino acids are believed to be responsible for its biological effects. A recombinant injectable form of PTH that is comprised of only the first 34 amino acids, or PTH (1-34), is used as a treatment for a number of indications, including hypoparathyroidism, osteoporosis and non-union fractures. A subcutaneous injectable form of human PTH (1-34), marketed under the name Forteo®, has been approved in the United States since 2002 and has been used by more than one million patients for the treatment of osteoporosis. An injectable form of full length human PTH (1-84), marketed under the name Natpara®, has also been approved for the treatment of hypoparathyroidism. We are developing multiple oral formulations of PTH (1-34) tablet candidates that can be used for a number of proposed indications. We believe that our oral PTH product candidates, EB613 and EB612, if approved, have the potential to become the standard of care for patients with osteoporosis, hypoparathyroidism and non-union fractures.
PTH regulates calcium and phosphate homeostasis and bone metabolism in the body. In normal healthy individuals, PTH is generally produced at very low basal levels that produce a blood concentration of 15 - 25 pg/mL. On top of the basal PTH levels, there are physiological pulses two to three times per day that result in transient increases in PTH levels reaching up to 65 pg/mL. The changes in PTH secretion are in response to ionized calcium concentration in blood plasma that result from the entry of calcium from nutrients in the intestine and resorption of calcium from bone. The pulses help encourage bone turnover through activation of both osteoblasts and osteoclasts, the two main types of cells that are responsible for the process through which bones are remodeled. In the absence of adequate parathyroid function producing these pulses in response to decreasing blood calcium, it is difficult for the body to regulate normal homeostatic processes.
EB613 for Osteoporosis
Osteoporosis
We are developing an oral PTH program, EB613, for the treatment of osteoporosis. Osteoporosis is a systemic skeletal disease characterized by low bone mass, deterioration of the microarchitecture of bone tissue and increased bone fragility and susceptibility to fracture. It most commonly affects older populations, primarily postmenopausal women. All bones are subject to an ongoing process of formation and degradation, whereby bone tissue is removed from the skeleton and new bone tissue is formed. Two main types of cells are responsible for this process: osteoclasts, which break down bone tissue, and osteoblasts, which secrete new bone tissue. In healthy individuals, bone resorption is matched by new bone formation. Osteoporosis develops as the delicate balance between bone resorption by osteoclasts and bone formation by osteoblasts is not maintained, and not enough bone tissue is formed, leading to frail and fracture-prone bones. Moreover, in many types of osteoporosis, the overall rate of bone turnover is accelerated, increasing the rate of bone loss. TheseThe weak and brittle bones become susceptible to fractures caused by fall, mild stress or even a cough, that would cause no harm to normal bones. The complications of fractures and treatment in frail elderly individuals can evenin limited instances be fatal (for example, due to pulmonary embolism, pneumonia or urosepsis).
Osteoporosis often leads to loss of mobility, admission to nursing homes and dependence on caregivers resulting in substantial costs to the healthcare system. The prevalence of osteoporosis is growing due to the aging of populations in developed countries, and, according to the National Osteoporosis Foundation, or NOF, is significantly under-recognized and under-treated. While the aging of the population is a primary driver of an increase in prevalence, osteoporosis is also increasing from the use of drugs that induce bone loss, such as the chronic use of glucocorticoids and aromatase inhibitors that are increasingly used for breast cancer and the hormone deprivation therapies used for prostate cancer.
Market opportunity
The NOF has estimated that over 50eight million peoplewomen in the United StatesU.S. already have osteoporosis orand another approximately 44 million may have low bone mass placing them at increased risk for osteoporosis. In addition,U.S. women 55 years of age and older, the NOF has estimatedhospitalization burden of osteoporotic fractures and population facility-related hospital cost is greater than that osteoporosis is responsible for more than two million fractures inof myocardial infarction, stroke, or breast cancer. Furthermore, the United States each year resulting in an estimated $19 billion in costs annually. The NOF expects that the number of fractures in the United StatesU.S. due to osteoporosis will rise to three million by 2025, resulting in an estimated $25.3 billion in costs each year. Worldwide, osteoporosis affects an estimated 200 million women according to the International Osteoporosis Foundation, or IOF, and causes more than 8.9 million fractures annually, which is equivalent to an osteoporotic fracture occurring approximately every three seconds. The IOF has estimated that 1.6 million hip fractures occur worldwide each year, and by 2050 this number could reach between 4.5 million and 6.3 million. The IOF estimates that in Europe alone, the annual cost of osteoporotic fractures could surpass €76 billion by 2050.
Limitations of current treatments for osteoporosis
The goal of pharmacological treatment of osteoporosis is to maintain or increase bone strength, to prevent factures and to minimize osteoporosis-related morbidity and mortality caused by fractures throughout the patient’s life. Current treatments for osteoporosis generally fall into two categories: antiresorptive medications that prevent bone loss but do not restore normal bone mass and anabolic medications that increase the rate of bone formation, and at least in part, restore lost bone. The global osteoporosis drug market was dominated for many years by bisphosphonates that inhibit bone resorption, although bisphosphonates’ market share in the United States has declined over recent years due to fear of the occurrence of rare but potentially serious side effects. In addition, anabolic drugs like Forteo (human PTH (1-34)), and the most recent new drug abaloparatide (Tymlos ®) which is a synthetic PTH receptor agonist, have become more frequently used. Both anabolicof these drugs requireare taken via subcutaneous injection and are used for limitedonly 1 to 2 year periods followed by transitionwith patients subsequently transitioned to an antiresorptive drug. More recently, the market has seen the introduction of newly developed pharmacological treatments that also inhibit bone resorption, including the RANK-ligand inhibitor denosumab (Prolia ®).
The primary current treatments for osteoporosis are summarized in the table below:
| | | | | | | | | | 2019 |
| | | | | | | | | | Branded |
| | Name | | | | | | | | Sales |
Class of Drug | | Name
(Producer) | | Method of Action | | Known Side Effects | | 2019
Branded
Sales
(in millions) |
Injectable PTH | | Forteo (Eli Lilly) | | Increases bone mineral density by, increasing bone formation. | | Decrease in blood pressure, increase in serum, calcium in the blood; nausea, joint aches, pain, leg cramps, injection site reactions | |
$1,404 |
|
| |
Monoclonal antibody | | Prolia (Amgen) | | Blocks bone resorption by osteoclasts by binding RANK-L a protein that is essential to activate osteoclasts | | Hypocalcemia, serious infections, dermatologic adverse reactions, osteonecrosis of the jaw, atypical femoral fractures, back pain, pain in extremity, musculoskeletal pain, hypercholesterolemia, and cystitis | | $2,672 |
| | EVENITY® (Amgen) | | Increases bone formation and, to a lesser extent, decreases bone resorption by inhibiting the action of sclerostin, a regulatory factor in bone metabolism. Note: limited duration of use to 12 monthly doses. | | Hypersensitivity reactions, including angioedema, erythema multiforme, dermatitis, rash, and urticaria; hypocalcemia; osteonecrosis of the jaw; atypical femoral fracture; | | $350 |
Injectable abaloparatide | | Tymlos (Radius Health) | | Similar to PTH, binds to PTH receptors and results in bone formation and increased bone mineral density | | Osteosarcoma, orthostaticOrthostatic hypotension, hypercalcemia, hypercalciuria, dizziness, nausea, headache, palpitations, fatigue, upper abdominal pain and vertigo | | $172 |
Bisphosphonate | | Fosamax (Merck) Actonel, Boniva
Zometa (IV) (Novartis)
| | Prevent bone loss by inhibiting osteoclasts. Effects reversible at low doses but high intravenous causes apoptosis. | | Irritation of the gastrointestinal mucosa, hypocalcemia, severe musculoskeletal pain, osteonecrosis of the jaw, atypical femoral fractures | | |
Zometa (IV) |
(Novartis) |
In osteoporosis patients, who have normal basal levels of PTH, therapeutic administration of PTH initially activates osteoblasts, but eventually activates osteoclasts after several months of treatment. While both types of cells are activated when PTH is administered, osteoblasts are activated to a greater extent, increasing net bone formation and bone mass. Injectable PTH (1-34), in the form of Eli Lilly’s Forteo, is therefore one of the most effective osteoporosis medications on the market today and demonstrably more efficacious in reducing the risk of spine fractures than bisphosphonates. However, there have not been adequate head-to-head comparisons on the risk of non-vertebral fracture risk. Forteo is particularly advantageous in glucocorticoid-induced osteoporosis, produced bya known side effect of drugs like prednisone. A study published in the New England Journal of Medicine found that over a period of 18 months bone mineral density in the lumbar spine in a group of patients with glucocorticoid-induced osteoporosis treated with Forteo increased twice as much as that in the group treated with a bisphosphonate.
Unlike our oral delivery system, Forteo is administered by subcutaneous injection, which has significant drawbacks. Patients may reject this treatment due todrawbacks including the discomfort and local irritation associated with a daily injectable regimen. Additionally, subcutaneous injection of Forteo has been shown to induce antibodies to the drug in approximately 3% of the patient population. WeBased on our market research, we believe an oral form of PTH (1-34) would significantly improve patient and physician acceptance. We also believe that the desire for a more patient friendly route of administration is why Eli Lilly has evaluated several collaborations with developers of alternative transdermal delivery systems, including a micro needle patch system and an intranasal delivery system. However, these collaborations have yet to result in a nasal delivery system, none of which were successful.successful commercial product. While a patch technology may reduce the discomfort associated with an injection, we believe patients will prefer an oral form of PTH (1-34) over a patch form of delivery. In addition, several pharmaceutical companies have previously attempted to develop an orally administered form of PTH, although none have been successful to date due to issues including variability and low bioavailability.
Other oral delivery technologies for the treatment of osteoporosis
We believe that our oral delivery technology is superior to other oral peptide delivery technologies that were and still may be in development for osteoporosis patients. The table below presents a comparison and integration of available clinical trial results to date:
Company/Technology | | Molecule | | API MW (g/mole) | | Bioavailability (F) |
Entera Bio | | PTH (1-34) | | 4118 | | 1.5% |
Novartis/Emisphere (Eligen - CNAC) (1) | | PTH (1-34) | | 4118 | | 0.2 - 0.5% |
Enteris Biopharma - Unigen (Peptelligence) (2) | | PTH (1-31) | | 3719 | | 0.52% |
Multiple manufacturers(3) | | Desmopressin | | 1069 | | 0.16% |
Chiasma (TPE)(4) | | Octreotide | | 1019 (Cyclic peptide) | | 0.67% |
Proxima Concepts (AXCESS)(5) | | Insulin | | 5733 | | 0.7% |
(1) | Source: The single dose pharmacokinetic profile of a novel oral human parathyroid hormone formulation in healthy postmenopausal women Sibylle P. Hämmerle, et al. Bone. 2012 Apr;50(4):965-73. doi: 10.1016/j.bone.2012.01.009. Epub 2012 Jan 25. |
(2) | Source: Pharmacokinetics of oral recombinant human parathyroid hormone rhPTH (1-31)NH2 in postmenopausal women with osteoporosis. Sturmer A1 et el. Clin Pharmacokinet. 2013 Nov;52(11):995-1004. doi: 10.1007/s40262-013-0083-4. |
(3) | Source: Public Assessment Report, Desmopressin Acetate 100 Microgram Tablet PL 24668/0177 and Desmopressin Acetate 200 Microgram Tablet PL 24668/0178. Medicines and Healthcare Products Regulatory Agency. |
(4) | Source: Pharmacokinetic Modeling of Oral Octreotide (Octreolin™) in Healthy Volunteers and Dosing Regimen Optimization for Acromegaly Patients. Shmuel Tuvia et al. Endocrine Society’s 94th Annual Meeting June 2012, OR29-6-OR29-6. Source: The glucose lowering effect of an oral insulin (Capsulin) during an isoglycaemic clamp study in persons with type 2 diabetes S. D. Luzio et al. Diabetes Obes Metab. 2010 Jan;12(1):82-7. doi: 10.1111/ j.1463-1326.2009.01146.x. Epub 2009 Sep 25. |
Preclinical and Clinical Development of EB613
In preclinical and Phase 1multiple clinical development in whichtrials conducted to date more than 70 healthy volunteers participated,260 subjects have received formulations of EB613. Furthermore, in these trials EB613 exhibited no serious drug related adverse events and displayed compelling PK and PD properties in particular compared toalthough different than the published data from Forteo. In total,Forteo and other PTH products. Adverse events across all trials in subjects received more than 350 administrations of various doses and formulations of oral PTH. The Phase 1 studiesreceiving EB613 were consistent with EB613 took place over a 6 year period and, at each and every visit, vital signs and blood samples were taken over an 8 hour period post administration of drug. In the totality of these administrations there were less than 3% transient mild to moderate drug-related adverse events. These adverse events were expected and typical for PTH administration and usually occur at an equal or higher ratethose seen in theother clinical trials performed with Forteo (injectableof PTH 1-34). Typical adverse events for PTH treatment in our Phase 1b studyand included: mild hypercalcemia, tachycardia and headache. Other adverse events observed were typical of those observed in the placebo groupgroups of our studystudies and other clinical trials, which includeand included anemia, musculoskeletal and connective tissue event of knee cramps, nausea, muscle aches, and dizziness.
Phase 1a Clinical Trial
Following proof-of-concept and safety studies in various animal models, we conducted a Phase 1a clinical trial with our initial formulations to assess the safety and pharmacokinetic profile of our oral PTH formulations. This trial began in August 2011 and was completed in early 2013 as multiple formulations of oral PTH (1-34) were tested.
The clinical trial was designed as a three-stage trial in 42 healthy volunteers. The first stage, in which 24 healthy volunteers participated, was blinded and placebo-controlled for the study drug and placebo, and open label for subcutaneous injection of Forteo. In the second, dose-escalation stage, six new volunteers were administered different formulations with modifications in PTH dose and ratios of PTH to excipients, with doses up to 1.5 mg. The various formulations evaluated throughout the clinical trial were all based on the same components and within a predefined range. In the third stage, the best formulation of our oral PTH, selected based on data from the second stage, was compared to placebo and subcutaneous injection of Forteo in 12 healthy volunteers. The primary endpoint of the clinical trial was safety. Bioavailability was also evaluated, and in the second and third stages PK and PD data were also collected. In typical Phase 1 clinical trials, one formulation is tested for safety and, in certain cases, PK and PD profile. Therefore, we believe the results from our Phase 1a clinical trial effectively represent the equivalent of nine separate Phase 1 clinical trials. By combining these nine clinical trials into one protocol, we were able to achieve significant economies of scale and time.
Phase 1b Clinical Trial
In order to continually improve our formulations and evaluate different manufacturing technologies, between 2014 and 2017 we conducted an extended Phase 1b clinical trial that was designed to emulate multiple Phase 1b clinical trials. In this trial, we evaluated different production methods, and multiple formulations and administration regimens of our oral PTH formulations for safety, bioavailability, PK and PD data. This open-label clinical trial was designed to compare our various oral PTH formulations to injectable Forteo in 30 healthy male volunteers. In this trial, each subject was administered a 20 µg dose of subcutaneous injectable Forteo during the first visit to establish a baseline for comparison.
Subsequently, different formulations of our oral PTH were administered during eight to 14 successive visits, each separated by at least a 48-hour washout period. The different formulations include various PTH doses (0.5mg - 3.0mg) and ratios of PTH to excipients, as well as changes in production method and administration parameters. The primary purpose of this clinical trial was to allow us to test a variety of manufacturing technologies. As a result of this clinical trial we have been able to further optimize the formulation and achieve an increased bioavailability and reduced variability. The optimized formulation and the various formulations evaluated throughout the clinical trial were all based on the same components and within a predefined range.
Low inter-patient variability observed in EB612 Phase 1b [x patients x dose]
Formulation | | Participants | | Cmax (pg/ml) | | Tmax (min) | | Coefficient of Variation (%) |
EB612 Oral PTH | | 10 | | 235.6 ± 36 | | 16.5 ± 1.2 | | 48 |
Injectable PTH | | 10 | | 184.2 ± 26 | | 16 ± 1.8 | | 45 |
The PK and PD data indicated that our oral PTH formulations can successfully mimic injectable Forteo’s peak serum concentration levels, or Cmax, after a single dose, as well as time to maximal concentration, or Tmax. The PK profile of the absorbed PTH (1-34) was characterized by a sharp increase in concentration, forming a peak concentration within 60 minutes post-drug administration, followed by a rapid decrease, which leads to the anabolic, or bone-building effect of PTH. In the optimized formulations of oral PTH the average Cmax achieved by our oral PTH formulation was similar to the Cmax following injectable Forteo or greater. There was a significant inter-patient and intra-patient variability, which is believed to be associated with the variability of the gastric state of the volunteers on various treatment visit days and with some of the early formulations used in the trial. However, in later visits of the clinical trial we were able to decrease the variability through optimization of our formulation.
Analysis of the PD profile of our oral PTH formulation indicated that a biomarker of PTH activity, cyclic AMP, was activated in a similar manner to that of injectable Forteo. Furthermore, analysis of serum calcium indicated that an increase can be obtained by a single dose of our oral PTH formulation as indicated in the graph below:
Change in serum concentrations of albumin corrected calcium (green line) and the plasma concentrations of PTH (1-34)
(blue line) following the administration of oral PTH (1-34) (0.75mg) in ten healthy volunteers.
These indicate that our oral PTH formulation reaches the circulation, remains intact and has biological potency similar to that observed with injectable Forteo. At present, we estimate that there are at least four million patient years’ experience with injectable Forteo. We believe that reaching a similar peak plasma concentration and PD profile as Forteo significantly decreases the risk that our oral PTH formulation will not have the desired clinical effect.
The graph below shows a linear dose/response relationship of oral PTH. An increase in absorption variability was observed with the dose increase in Phase 1 studies.
EB613: Favorable Pharmacodynamic Profile
Cyclic AMP, or cAMP, is a known indicator of PTH activity. It is part of the signaling pathway activated by the PTH binding to its cellular receptors. cAMP can be measured in the plasma and used as a biological marker of PTH activity. The graph below shows a similar activation profile following dosing of both commercial Forteo and EB613.
In addition, the graph below shows the PK profile of injectable Forteo, EB613 and placebo from our Phase 1 clinical trial. Both the injectable Forteo and our oral PTH formulation have a rapid increase in plasma concentrations followed by a fast elimination phase. This is significant in attaining the desired anabolic effect by transiently activating the biological pathways. Furthermore, because the PK profile of our oral PTH is sharper than the injection (a more rapid return to baseline) it may result in a greater anabolic effect as it is believed that the prolonged increase in PTH levels may reduce the desired anabolic effect. Based on the data we have generated to date, we believe that EB613 produces a blood level profile similar to Forteo (teriparatide), which was approved by the FDA in 2002 for the treatment of osteoporosis in men and postmenopausal women who are at high risk for fractures.
Ongoing Phase 2 Trial and Planned Clinical Development
In November 2018, we held a pre-IND meeting with the FDA to discuss our development plan for oral PTH for the treatment of osteoporosis. In addition to discussing various aspects of the nonclinical and clinical development plan, the meeting focused on the potential use of the 505b(2) regulatory pathway and the use of BMD, rather than fracture incidence as the primary endpoint to support a BLA. Following the FDA’s feedback, we initiated a Phase 2 multi-center dose-ranging trial of EB613 in approximately 160 osteoporosis patients, at four leading osteoporosis centers in Israel. This trial, which was initiated in July 2019 and includes a treatment period of six months, is being conducted to evaluate both the safety of EB613 and to identify the optimal dose that we will select to advance into a single Phase 3 pivotal trial. In this trial, we are evaluating, multiple bone markers, such as P1NP – a bone formation marker, CTX – a bone resorption marker, BMD, and various additional safety endpoints. As of March 16, 2020, we have enrolled approximately 60% of the patients in the Phase 2 trial of EB613, and to date, there have no drug related serious adverse events reported. Based on directives from the Israeli Ministry of Health and our affiliated medical institutions implemented in March 2020 due to COVID-19, we have temporarily suspended enrollment of new patients in our ongoing Phase 2 clinical trial. At this time, we have 97 patients currently enrolled in this trial. As of March 23, 2020, we are continuing to collect patient data from the currently enrolled patients in this trial through various monitoring means established by the regulatory authorities.
In parallel, we are conducting several nonclinical safety assessment studies to support our regulatory filings, including a planned IND in 2020, with the FDA to facilitate various IND-opening trials, and subsequently, to enable the start of a single Phase 3 clinical trial in 2021 or 2022 using sites in the United States, Israel and other territories, subject to positive data from our ongoing Phase 2 trial of EB613, pending the determination of the impact of COVID-19 on our clinical trial enrollment, on our ability to collect sufficient data to proceed with a Phase 3 clinical trial and on the design of any such Phase 3 clinical trial. If further governmental actions are taken in Israel, we may not be able to collect further data on our enrolled patients, or may not be able to restart enrollment of the Phase 2 trial. While we believe the existing enrolled patient population may allow us to proceed directly to a Phase 3 study, we will need to confirm these expectations about our future clinical trials with the FDA. For further information on the potential impact of COVID-19, see “Risk Factors—The outbreak of COVID-19 in the United States, Israel and elsewhere has created significant business disruptions and will adversely affect our business.”
Developers of osteoporosis drugs that contain new chemical entities are required to conduct extensive clinical studies that employ an endpoint which measures the reduction in fractures. These trials often require thousands of patients over a multi-year period, and typically cost hundreds of millions of dollars. However, once fracture risk reduction has been demonstrated, the FDA and other regulatory agencies have allowed new formulations or treatment regimens of the same active ingredient to be approved using BMD as the primary efficacy endpoint under the 505(b)(2) regulatory pathway in the United States or the comparable regulation in other countries. BasedIn November 2018, we held a pre-IND meeting with the FDA to discuss our development plan for oral PTH for the treatment of osteoporosis. In addition to discussing various aspects of the nonclinical and clinical development plan, the meeting focused on the FDA’s response inpotential use of the November 2018 meeting, we believe that in our planned Phase 3 trial,505(b)(2) regulatory pathway and the use of BMD, may be usedrather than fracture incidence as the primary efficacy endpoint and thatto support a fracture endpoint trial will not be required.
BLA.
In July 2019, we initiated a six-month Phase 2 trial of EB613 in Israel with a target enrollment of 160 subjects. The Phase 2 clinical trial is designed to evaluate both the safety of EB613 and to identify the optimal dose that we will select to advance into a single Phase 3 pivotal trial. Based on the pre-IND meeting and the interim data from the Phase 2 trial of EB613, we submitted an IND for EB613 to the FDA in November 2020. In December 2020, we announced that the FDA had reviewed our IND application for EB613 and informed us that we may proceed with our initial U.S. clinical trial. Subject to the successful completion of the ongoing Phase 2 clinical trial, we intend to enter into a dialogue with the FDA to discuss the design of a potential pivotal Phase 3 clinical trial in order to ensure we meet all of the FDA’s requirements for potential approval under the 505 (b)(2) regulatory pathway.
The Phase 2 clinical trial of EB613 is a dose-ranging, placebo-controlled study in postmenopausal female subjects with osteoporosis, or low BMD, and is being conducted at four leading medical centers in Israel. In this trial, we are evaluating, BMD, multiple bone markers, including P1NP and Osteocalcin - bone formation markers, CTX – a bone resorption marker, and various safety endpoints. We completed enrollment in this trial in November 2020 upon the randomization of the 161st subject. The demographics for the EB613 Phase 2 clinical trial such as age, BMI and baseline levels of bone markers were generally consistent with demographics from similar osteoporosis studies in the literature.
| N | Mean | Median |
Age | 161 | 61 | 61 |
Weight (Kg) | 161 | 67 | 66 |
BMI | 161 | 26 | 26 |
The trial was designed based on data from our Phase 1 trials and included a placebo group as well as treatment groups of 0.5mg, 1.0mg and 1.5mg of EB613. In July 2020 based on a review of the three-month interim biochemical marker and safety data from the first 80 subjects randomized, we amended the Phase 2 protocol with the discontinuation of the two lower doses (0.5 mg and 1.0 mg) of EB613 and the addition of a 2.5 mg dose.
In August 2020, we announced the 6-month interim biomarker and BMD data from the first 50%, or 80 patients, enrolled in this trial. In summary, the data indicated that EB613 has a meaningful and positive impact on lumbar spine BMD in a dose dependent manner. EB613 generated a mean placebo adjusted increase in lumbar spine BMD of 2.15% (p = 0.08) for the 14 patients in the 1.5 mg treatment arm, as compared to the 16 patients in the placebo arm. The placebo-adjusted increase was comprised of a mean BMD increase of 1.44% in the 1.5 mg treatment arm compared to a mean decrease of 0.71% in the placebo arm. An additional analysis of BMD changes in all EB613 treatment groups showed a significant dose-dependent trend in the percentage change in lumbar spine BMD. The 6-month Placebo Adjusted Lumbar Spine BMD results are summarized below (mean, standard error):
In March 2021, we announced complete 3-month biomarker data from this trial. The complete 3-month results from the trial showed a significant increase in the P1NP biomarker in the 2.5 mg dose group after 3 months of treatment (P <0.04) as compared to placebo. The change in P1NP at 3-months is the primary endpoint the Phase 2 trial. Similar to the increase in P1NP, a significant increase in Osteocalcin was also observed in the 2.5 mg group after 3 months (P <0.01). In line with a potential anabolic effect, a significant decrease in CTX was observed after 3 months of treatment (P <0.015). The decrease in CTX taken together with the increase in P1NP and Osteocalcin would indicate a potential positive impact on BMD.
Biomarker data from the Placebo and EB613 2.5mg dose group are summarized below:
A significant increase in P1NP from baseline versus placebo at month 3 (P <0.04) as well as significant increases at months 1 (P <0.0001) and 2 (P <0.003);
A significant increase in Osteocalcin from baseline versus placebo at month 3 (P<0.006) as well as significant increases at months 1 (P<0.0001) and 2 (P<0.0001);
A significant decrease in CTX from baseline versus placebo at month 3 (P <0.015) as well as a significant decrease at month 1 (P <0.001)
Study Medication, EB613 or placebo, was generally well tolerated through 3 months of treatment. Common adverse events resembled those known to be associated with teriparatide by subcutaneous injection including dizziness, headache, palpitations, and nausea. There were no adverse events that were severe in intensity in any treatment group and no serious drug-related adverse events. Complete safety evaluations of the fully unblinded data will be conducted with the full 6-month data analyses.
We are also conducting several nonclinical safety assessment studies to support our regulatory filings and to enable the start of a single Phase 3 clinical trial in 2022 using sites in the United States, Israel and other territories, subject to positive data from our ongoing Phase 2 trial of EB613, pending the determination of the impact of COVID-19 on our ability to collect sufficient data to proceed with a Phase 3 clinical trial and on the design of any such Phase 3 clinical trial see “Risk Factors—The outbreak of COVID-19 in the United States, Israel and elsewhere has created significant business disruptions and will adversely affect our business.”
EB612 for Hypoparathyroidism
Hypoparathyroidism
Our lead product candidate for hypoparathyroidism, EB612, is an oral formulation of PTH (1-34). We believe that EB612, if approved, has the potential to become the standard of care for hypoparathyroidism. Hypoparathyroidism is a rare condition in which the parathyroid glands fail to produce sufficient amounts of PTH. In addition, there are rare genetic diseases where mutations in the PTH gene results in PTH that lacks biologic activity. Individuals with a deficiency of parathyroid hormone may exhibit hypocalcemia and hyperphosphatemia. Hypocalcemia can cause one or more of a variety of symptoms, including weakness, muscle cramps, excessive nervousness, headaches and uncontrollable twitching and cramping spasms of muscles such as those of the hands, feet, arms, legs and face, which is known as tetany. Numbness and tingling around the mouth and in the fingers and toes can also occur. Acute hypocalcemia can result in cardiac failure, failure of nervous system functions and death. Hyperphosphatemia can result in soft tissue calcium deposition, which may lead to severe issues, including damage to the circulatory and central nervous systems. The most common cause of hypoparathyroidism is damage to, or removal of, the parathyroid glands due to surgery for another condition. Hypoparathyroidism can also be caused by an autoimmune process idiopathic reasons or occur in association with a number of different underlying disorders. In rare cases, hypoparathyroidism may occur as a genetic disorder where mutations in the PTH gene results in the production of PTH that lacks biologic activity.
Market opportunity
The prevalence of hypoparathyroidism is estimated to be 37 per 100,000 in the United States, with 70% of cases caused by surgery, 8% due to genetic disorder and 7% due to idiopathic origin. Although incidence rates have been difficult to quantify, it is estimated that chronic hypoparathyroidism, which affects patients for more than six months, affects approximately 58,700 insured individuals in the United States, with an estimated 43% of these chronic cases characterized as mild, 39% characterized as moderate, and 18% characterized as severe. The FDA has granted orphan drug designation to our oral PTH for the treatment of hypoparathyroidism.
Limitations of current treatments for hypoparathyroidism
Historically, the treatments for hypoparathyroidism have been calcium supplements, vitamin D supplements and phosphate binders. Although calcium and vitamin D can help alleviate hypocalcemia, their chronic use results in many serious side effects with significant costs to the healthcare system. Hypoparathyroid patients often need to take large doses of calcium throughout the day in order to maintain serum calcium near the lower limit of the normal range. Moreover, ordinary vitamin D is generally insufficient as the body cannot produce adequate quantities of 1,25-dihydroxyvitamin D, the active hormone derived from vitamin D. Drugs like calcitriol and alfacalcitol must be prescribed to stimulate calcium absorption. If excess calcium is absorbed, it then falls upon the kidneys to dispose of excess calcium. Endogenous PTH normally regulates renal calcium excretion, but this regulation is defective in patients with hypoparathyroidism. Over potentiallymany years of treatment, kidney stones may develop, and ultimately kidney failure may occur due to either kidney stones or deposition of calcium phosphate in kidney tissue (called nephrocalcinosis). Even withDespite the use of calcium and vitamin D supplements and other medications, many patients with hypoparathyroidism continue to experience physical and cognitive symptoms.
Until recently, hypoparathyroidism was the only hormonal insufficiency state that did not have an approved hormone replacement therapy. Natpara, which is administered once daily with a pre-set injection pen, was approved by the FDA in January 2015 and launched commercially in the United States later that year.U.S in 2015. Natpara was originally developed by NPS Pharmaceuticals, Inc., which was acquired by Shire plc in 2015 and is now a part of Takeda Pharmaceuticals throughas a result of its 2019 acquisition of Shire. Natpara is a recombinant form of human PTH (1-84) that was developed as an injectable hormone replacement therapy for the underlying cause of hypoparathyroidism, which is a lack of PTH. In the FDA’s advisory committee meeting for Natpara, a number of observations were highlighted including that Natpara had limited clinical benefit in controlling excessive calcium in the urine, or hypercalciuria, a condition commonly associated with hypoparathyroidism and the most commonly identifiable cause of calcium kidney stone disease. Additional analysis by the FDA also noted that, due to a change in trial protocol that was made after the initiation of the trial, the responder rate for the pivotal single-dose trial’s primary efficacy endpoint was 32.1% under the original trial protocol versus the 54.8% that was ultimately reported. The FDA stated in its briefing report that the results of this alternate analysis may be more clinically relevant, particularly if a clinician’s goal is to keep a patient’s serum calcium in the lower half of the normal range.
EB612 for the treatment of hypoparathyroidism
We believe EB612 may offer several advantages over Natpara for the following reasons:
EB612 is designed to be dosed multiple times a day. Studies performed by the NIH have shown that dosing PTH multiple times per day significantly increases the efficacy of therapy and would be more effective for treating hypoparathyroidism. These studies found that the total daily PTH dose required to maintain serum calcium in the normal or near-normal range was reduced by 50% with twice-daily PTH (1-34) and also demonstrated that twice-daily dosing achieved better control over serum calcium and urinary calcium excretion as compared to once-daily dosing.
EB612 is designed to be dosed according to patient needs. The hypoparathyroid population is heterogeneous and patients have highly variable responsiveness to PTH. Therefore, the ability to customize PTH dosing throughout the day with an oral tablet is an advantage over a once-daily preset injection pen.
EB612 is expected to have fewer adverse events of hypercalcemia. Our planned treatment regimen would be increased gradually and in parallel to increases in serum calcium. As a result, calcium supplements and active vitamin D metabolites (e.g., calcitriol) would be reduced gradually, while maintaining a relatively stable level of serum calcium. This is in contrast with Natpara’s initial high dose, which requires an immediate reduction in supplements in anticipation of a rapid increase in serum calcium levels. Furthermore, this immediate and prolonged increase in serum calcium increases the risk of prolonged hypercalcemia compared to EB612. Moreover, the target serum calcium level would be the lower end of the normal range. If serum calcium were at, or greater than, the middle of the normal range, calcium supplements, active vitamin D metabolites and oral PTH dose would be reduced.
EB612 can be administered in a more convenient manner. Natpara is administered by subcutaneous injection, must be stored under restrictive conditions (refrigeration required with no freezing or shaking) and has a multi-step preparation that must be performed every two weeks. EB612 will not require such additional preparations and will have no significant storage restrictions.
As a result of its dose flexibility and the greater patient acceptance of oral formulations, we believe EB612, if approved, will address a larger segment of the hypoparathyroid population than Natpara. For these reasons, we believe that EB612, if approved, has the potential to become the standard of care for patients with hypoparathyroidism.
To date, no oral PTH formulation has been successfully developed because PTH, like many other hormonally active peptides, degrades rapidly in the intestinal tract when taken orally. EB612 is a synthetic form of the first 34 amino acids of human PTH to which we have applied our proprietary technology for the oral delivery of large molecule therapeutics.technology. This technology permits oral administration, enabling more frequent dosing throughout the day and greater sensitivity and flexibility in dosing than injectable formulations of PTH. The carrier molecule and selection of protease inhibitors that are used in our technology are well-characterized and have been used in large clinical trials. We have attempted to optimize EB612 to enable the most cost effective and safest formulation while maintaining the required effect. These components, when used separately, have been shown to be safe in doses significantly higher than those used in the clinical trials for our current product candidates.
We believe that EB612 will have inherent advantages compared to injectable forms, including convenience of application, that noadministration without any special preparation is requiredof the medication and that it can be stored under convenientconvenience of storage conditions (room temperature or refrigeration for long term storage). Additionally, based on the results of our preliminary studies, we believe that EB612 will have an enhanced clinical profile as compared to Natpara, with an additional positive effect on elevated urinary calcium, as well as reduced side effects. If our preliminary results are borne out in additional clinical trials, we believe this combination of advantages and long term clinical benefits will be compelling to both patients and physicians.
EB612 Hypoparathyroidism Clinical Trials
We demonstrated with earlier formulations of what now is EB613 a large body of evidence in Phase 1 studies, which included a Phase 1a clinical trial with multiple formulations of our oral PTH to evaluate safety and collect bioavailability, PK and PD data in 42 healthy volunteers, and an extended Phase 1b clinical trial in an additional 30 volunteers to test a variety of manufacturing technologies with multiple formulations, administration parameters and dosing regimens of our oral PTH. These earlier data and oral PTH formulations led to several Phase 2 studies evaluating a number of EB612 formulations in hypoparathyroidism patients.
Phase 2a Clinical Trial
In 2015, we successfully completed a multicenter Phase 2a clinical trial of EB612 in hypoparathyroidism patients. The endpoints in
This study demonstrated the safety and tolerability of EB612 administered four times daily for 16 weeks to patients with hypoprathyroidism. In this study, patients were titrated up to a maximum of 12 EB612 0.75 mg tablets a day (total daily dose of 9 mg) by the investigator, according to each subject’s albumin-adjusted serum calcium (ACa), and supplement treatment regimen. Of the 19 enrolled subjects, 17 completed the trial (of which 15 were met, and 17 patients completed the four-month trial and reported no relatedper protocol). No drug-related serious adverse events.events were reported and most of the adverse events were not considered study drug-related.
The study achieved its primary and secondary endpoints, including a reduction in calcium supplements, reductions in serum phosphate and 24-hour urine calcium excretion, maintenance of ACa within the reference range, and an improvement in quality of life. Specific results of this trial included:
A significant reduction of 42% (p=0.001) from baseline in median calcium supplement use;
| • | Maintenance of median ACa levels above the lower target level for HypoPT patients (>7.5 mg/dL) throughout the study; |
A rapid decline of 23% (p=0.0003) in median serum phosphate levels 2 hours following the first dose that was maintained within the normal range for the duration of the study;
A notable median decrease of 21% (p=0.07) in 24-hour urine calcium excretion between the first and last treatment days; and
An increase in quality of life score of 5% (p=0.03) from baseline by the end of the treatment period.
Based on a review of the clinical data presented in Natpara’s REPLACE trial and our Phase 2a results, we believe EB612 potentially provides a more favorable therapy for hypoparathyroidism patients. Although our Phase 2a trial involved a smaller number of patients (N=1715 vs. N=84 + 40 placebo), lasted for a shorter duration (four months vs. six months) and did not include a dose optimization period of ~2 - 16 weeks prior to treatment initiation, our results showed a greater absolute reduction in calcium supplements (1278 ±880mg vs. 1152 ±1219mg) while the patients’ albumin adjusted serum calcium increased slightly as opposed to a slight decrease in the REPLACE trial (baseline vs. end of treatment). In addition, serum phosphate levelsThe results of this trial were significantly reduced into their normal range an hour afterpublished in the Journal of Bone and Mineral Research in the first study drug was taken (11% reduction, p<0.01), and lower serum phosphate levels were maintained for the durationquarter of the study and until the final treatment day (14% reduction, p<0.01).
Primary endpoints: Calcium intake reduced while serum levels were maintained or improved during Phase 2a
Secondary endpoints: decrease in phosphate levels observed during Phase 2a
2021.
Phase 2 PK/PD Clinical Trial
We initiated a two-part Phase 2 PK/PD trial in 2014. This trial was designed to provide a bridge from our completed Phase 2a trial, which was conducted prior to the marketing approval of Natpara, and our planned Phase 2b/3 trial,future clinical trials, and to also allow us to better understand the relative strength and dose of our product as compared to the marketed product, Natpara. This trial was also intended to provide valuable comparative data to Natpara that will further inform ourthe design of a potential Phase 2b/3 trial design.clinical trial. The relevant endpoints for the PK/PD trial included an examination of levels of PTH (1-34), PTH (1-84) (Natpara), serum calcium, serum phosphate, urinary calcium and urinary phosphate.
In November 2018 we announced the completion of part I of this Phase 2 PK/PD trial to evaluate the PK/PD profile of various EB612 dose regimens, while comparing such various dose regimens with Natpara. In Part I of the Trial,trial, ten patients with hypoparathyroidism completed two three-day in-patient visits. Throughout each of these three-day visits, patients remained on their current standard medications. On the first day of each visit (baseline) patients received no additional treatments. On day two, patients were randomized to receive one of three treatments: EB612 twice a day (BID), four times a day (QID), or Natpara* once a day (QD). On day three, patients did not receive any additional treatments. In the second three-day visit, patients were again randomized on day two to receive one of the treatment regimens they had not received previously. Throughout the three-day visits, patients were continuously monitored clinically, and PTH, calcium, phosphate, and the hormonal metabolite of vitamin D (1,25- dihydroxyvitamin D) levels were measured. PTH has several well-known physiological effects. It increases serum calcium, decreases serum phosphate, increases reabsorption of calcium in the kidney, where it also increases 1,25-dihydroxyvitamin D synthesis.
Results from Part 1 of the PK/PD trial of Oral PTH (1-34) four times a day (QID) treatment included: (i) an increase in the serum calcium by an average of approximately 0.3 mg/dL over baseline, with such increase maintained over a 24-hour period; (ii) a decrease in serum phosphate by an average of 0.5 mg/dL below baseline with such decrease maintained over a 24-hour period; (iii) an increase in average levels of serum active vitamin D of approximately 90% on the day of treatment as compared to baseline; and (iv) a decrease in average levels of 24-hour urinary calcium of approximately 30% on the day of treatment as compared to baseline. An initial analysis of the Part 1 data suggestssuggested that the QID regimen provided a greater effect on all of the parameters measured as compared to the BID regimen. The concentration of PTH (1-34) in blood after administration of Oral PTH (1-34) in the current trial was sufficient to produce the observed pharmacodynamic effects and did not induce hypercalcemia. No serious adverse events were reported in the trial.
The second and final part of this PK/PD trial evaluated a variety of dosing treatment regimens with a high and low dose of EB612 as well as Natpara with patients also receiving calcium supplements and either alfacalcidol or calcitriol. In September 2019 we presented the results of Part 2 of this PK/PD trial at the American Society for Bone and Mineral Research (ASBMR) Annual Meeting. The trial conclusions noted that EB612 2.25 mg QID for one day is associated with an increase in serum albumin-corrected calcium and 1,25(OH)2D (1,25-dihydroxyvitamin D), a decrease in serum phosphate, and a decrease in urinary calcium in patients with hypoparathyroidism. EB612 produced similar biological effects to Natpara 100 µg QD, the highest dose of hPTH (1-84) currently indicated for use in patients with hypoparathyroidism, on serum calcium, phosphate and vitamin D. Additionally, EB612 effectedresulted in a decrease in urinary calcium. These changes in serum PD parameters were sustained over the 24-hour period of observation from time zero. BID, TID and QID regimens showed a dose-dependent increase in 1,25(OH)2D indicating that the long-term treatment, even with the less frequent dosing regimens, may be an effective treatment option for those patients suffering from less severe hypoparathyroidism. TreatmentFurthermore treatment with Oral hPTH (1-34) dosed at multiple times during the day has the potential to reduce calciuria generally associated with maintenance of serum calcium within the normal range using calcium supplements and calcitriol analogs alone. There were no treatment-emergent adverse events of hypercalcemia, as well as no treatment-emergent Serious Adverse Events reported in the trial.
Planned Additional Clinical Development and Regulatory Pathway
In the future, after the completion of additional formulation and development activities to inform our final formulations, and subject to available funds, we expect to initiate a Phase 2b/3 clinical trial of EB612 for the treatment of hypoparathyroidism, which will further evaluate the dosage, effectiveness and safety profile of EB612 in an expanded population of patients with hypoparathyroidism conducted at multiple trial sites. We expect that this Phase 2b/3 trial, when initiated, will be designed to replicate the REPLACE trial in many aspects and to achieve a significant reduction in urinary calcium. The phase 2b/3 clinical trial of EB612 in hypoparathyroidism may potentially support a submission for regulatory approval of EB612, if successful.
The Phase 2b/3 trial wouldwill likely be designed as a placebo controlled trial with a “rescue” provision for patients who have substantial persistent symptoms, hyperphosphatemia, hypocalcemia or hypercalciuria. The planned primary endpoints will be the proportion of patients obtaining a serum calcium and phosphate within a “target” range, reducing hypercalciuria and from a safety perspective, the incidence of clinically important hypercalcemia and decreased renal function adverse events. The trial will also compare the reduction in calcium intake, reduction in active vitamin D in each treatment group. Secondary endpoints include mean absolute levels of serum calcium and serum phosphate.
In April 2014, we received orphan drug designation from the FDA for our oral PTH in hypoparathyroidism. If a product receives the first FDA approval of human PTH (1-34) for the indication for which it has orphan designation, the product is entitled to orphan drug exclusivity, which means that FDA may not approve any other application to market the same drug for the same indication for a period of seven years, except in limited circumstances, such as a showing of clinical superiority over the product with orphan exclusivity or where the manufacturer is unable to assure sufficient product quantity. In January 2015, the FDA approved Natpara, an injectable form of PTH, for hypoparathyroidism, and awarded Natpara orphan drug exclusivity until January 23, 2022. While Natpara has orphan drug exclusivity for hypoparathyroidism, we believe that we will be able to demonstrate that our oral formulation of PTH is clinically superior to Natpara in that it demonstrates greater effectiveness or safetyis safer than Natpara or that it otherwise makes a major contribution to patient care. Therefore, we believe that Natpara’s orphan drug exclusivity will not prevent the FDA from approving our BLA for EB612. In June 2016, we received approval from the EMA granting orphan status to our oral PTH in Europe.
Development and License Agreements
In addition to the development of our product candidates, we have a research collaboration and license agreement with Amgen, combining our proprietary drug delivery platform with drugs selected by Amgen to create new products. Pursuant to the agreement, in January 2019, we received a non-refundable and non-creditable initial technology access fee of $725,000 from Amgen of which $500,000 was attributed to the right to use the intellectual property and $225,000 was attributed to the pre-clinical R&D services that we are obligated to perform under the agreement. We are eligible to receive from Amgen aggregate payments of up to $270 million upon achievement of various clinical and commercial milestones or Amgen’s exercise of options to select anup to two additional programprograms to include in the collaboration, as well as tiered royalty payments ranging from the low to mid single digits based on the level of Amgen’s net sales of the applicable products. During 2020 through March 16, 2021, we received an additional aggregate amount of $518,000 from Amgen for research and development services. The agreement is exclusive only to the specific drug candidates that are developed and discovered under the collaboration program, leaving us the rights to commercialize and develop products with other drugs using our proprietary technology while also allowing Amgen to retain all rights to its certain large molecules and any subsequent improvements. The first prospective product under the agreement with Amgen is currently in the preclinical and research and development phase. Amgen also has options, limited in time, to select up to two additional programs to include in the collaboration. Under the agreement, we will engage in preclinical development at Amgen’s expense and Amgen will conduct all research, clinical development, manufacturing and commercialization activities.
Additional Research and Development
Future Development of Orally Delivered Large Molecule Therapeutics
We intend to use our technology as a platform for the oral delivery of low-bioavailability therapeutics, which may include proteins and other large molecule therapeutics as well as small molecules with very low absorption due to poor permeability properties (BCS class 3 drugs). We have conducted initial feasibility studies with a number of candidates, including HGH, and intend to commence clinical development for our next, non-PTH, product candidate in the future. For example, in initial rodent studies utilizing our drug delivery technology, an oral formulation of HGH obtained significant concentrations of intact HGH throughout the blood stream.
We expect that the key criteria in selecting our next clinical candidate will include: the size of the molecule and other chemical characteristics that would benefit from our technology, whether the molecule is best delivered through the intestinal tract rather than through injection, and the drug’s dosing schedule, more specifically, whether it is prescribed for at least three months and would likely be best administered at least once a day. Additionally, we may target large proteins that are prone to inducing damaging immune responses when injected subcutaneously. In some cases, the immune response to the injection is so severe as to reduce or eliminate all physiological effect of the drug upon the illness. We are also considering whether to partner the development of any such additional product candidates and are in early stage discussions with a number of external parties.
Bone Healing/Non-Union Fractures
Currently, no pharmacological treatments are available that have been approved to either stimulate bone healing, treat delayed union fractures or treat patients with non-union following a fracture. A number of studies suggest that PTH could be beneficial in the treatment of such fractures, to potentially speed union and/or reduce the risk of non-union. This is due to the fact that PTH increases the activity and number of osteoblasts, which are responsible for bone formation, making it a potential treatment when bone healing is delayed. While surgery is generally required to treat patients with established fracture non-union, PTH might improve likelihood of a favorable surgical outcome. PTH could thus be a potentially new treatment option for the induction of bone healing after a fracture. Non-union fractures occur when the normal process of bone healing fails or is greatly delayed. Note the fracture malunion refers to a fracture that heals, but with an important abnormal structure or alignment of the bone fragments. By definition, a non-union fracture will not heal on its own. Most non-union fractures require surgery, which can involve bone grafts or stabilizing the affected bone by affixing rods, plates or screws. Risks of surgery include neurovascular injury, infection and hemorrhage.
In the United States, there are approximately seven million new fractures each year, with approximately 300,000 delayed union or non-union fractures. Estimates for the average non-union treatment costs vary from approximately $25,000 to $45,000.
Depending on the nature of the fracture, non-surgical solutions can include electrical stimulation or fitting external braces. Other more experimental techniques exist as well, including ultrasound stimulation, which has been approved by the FDA for treating fresh fracture since the 1990s. Unlike the rigorous requirements for new drug approval, the FDA has not required the same level of evidence for the efficacy of devices used to treat a medical condition. The major drawbacks of the more traditional methods are invasiveness and the risks inherent with surgery. In addition, bone grafting is associated with considerable morbidity, including chronic pain, injury to nerves and muscles and blood loss. Surgical cost is another significant concern. Experimental techniques, such as stimulation of the bone with electricity or sound show some promise for healing, but data demonstrating its effectiveness remains limited.
Our Potential Solution for Non-union or Delayed-Union of Fractures
Studies have suggested that PTH can accelerate bone healing. PTH increases the activity and number of osteoblasts, which are responsible for bone formation, making it a potential treatment when bone healing is delayed.
We intend to investigate the efficacy of EB613 for delayed-union or non-union fractures. We may either pursue fracture treatment as an additional use of EB613 or further modify the formulation if studies suggest we could achieve a PK profile that is more efficacious for bone fractures. As treatment of non-union fractures and bone healing may entail three to six months of treatment, we believe the acceptance of oral PTH will be higher than other potential pharmacological alternatives that require injections. We believe we will be able to use the PK data generated with EB613 in Phase 1 clinical trials relating to osteoporosis to progress directly to a Phase 2a clinical trial of our oral PTH product candidates for non-union or delayed-union of bone fractures.
Intellectual Property
Our success depends in part on our ability to protect the proprietary nature of our product candidates, technology, and know-how; operate without infringing on the proprietary rights of others; and prevent others from infringing on our proprietary rights. We seek to protect our proprietary position by, among other methods, seeking patent protection in the United States and in certain other jurisdictions for our product candidates and other technology that we consider important to the development of our business, where such protection is available. We believe that our success will depend in part on our ability to obtain patent protection for our intellectual property. We also intend to rely on trade secret protection, know-how and the exploitation of in-licensing opportunities to develop our proprietary position.
Patent Rights
As of December 31, 2019,2020, our global patent portfolio included the following patents and patent applications:
Patents claiming compositions comprising a protein, an absorption enhancer and a protease inhibitor as well as methods for oral administration of a protein with an enzymatic activity, which compositions cover EB612 and EB613, have been issued in the United States, the EU, Australia, Japan, China, Israel, Canada, New Zealand and Russia. Related patent applications are pending in the United States, the European Union,EU, Hong Kong, Brazil, China and India. Specifically, in the United States, Australia, Japan, China, Hong Kong, Israel and Russia divisional or continuation patent applicationapplications have been filed to specifically cover PTH. Patents specifically covering PTH (1-34). Such patents have already been granted in the United States, the EU, Australia, Israel, Russia and Japan. Applications in the remaining jurisdictions are pending. The current issued patents in the United States and China are limited to insulin. These issued patents and any patents that may issue from the pending patent applications are currently expected to expire in August 2029, assuming all annuity and maintenance payments are paid thereon. Rights to these patents and patent applications were assigned to us pursuant to the Patent Transfer Agreement with Oramed.
Three patent applications filed in various jurisdictions, which we believe, if issued as patents containing substantially the same claims as those in the applications, would cover certain oral administration technologies. The mentioned technologies include compositions and drug delivery devices which utilize an absorption enhancer to enable the absorption of a therapeutically active agent in a controlled manner. We believe that certain of the pending claims contained in these patent applications, if issued in substantially the same form, would cover the formulations of EB612 and EB613. An application covering certain formulations with a controlled absorption profile was filed in the United States, European Union,the EU, Canada, Hong Kong, Israel and Mexico. Another application covering certain formulations for co-administration with an antacid or protease inhibitor was filed in the United States, European Union,the EU, Canada and Hong Kong (the application in the United States has been granted, and a divisional application has been filed therein). Any patents that issue from these patent applications are expected to expire in February 2036, assuming all annuity and maintenance payments are paid thereon. Another application covering certain formulations and regimens was filed in the United States, European Union,the EU, Australia, Brazil, Canada, China, Hong Kong, India, Israel, Japan, Mexico, New Zealand, Singapore, South Africa and South Korea. Any patents that issue from this patent application isare expected to expire in August 2037, assuming all annuity and maintenance payments are paid thereon.
Three patent applications filed in various jurisdictions, which we believe, if issued as patents containing substantially the same claims as those in the applications, would contain method of treatment claims covering the use of orally administered PTH for the treatment of osteoporosis (filed in the United States, European Union,the EU, Canada, China, Hong Kong, Israel and Japan), hypoparathyroidism (filed in the United States, European Union,the EU, Brazil, Canada, Hong Kong, Israel and Japan) and bone fractures and related conditions (filed in the United States, European Union,the EU, Canada and Hong Kong). Any patents that issue from these patent applications are expected to expire in February 2036, assuming all annuity and maintenance payments are paid thereon.
Three patent applications, which we believe, if issued as national stage patents containing substantially the same claims as those in the applications, would cover certain oral administration technologies. The mentioned technologies include compositions and drug delivery devices which utilize an absorption enhancer to enable the absorption of a therapeutically active agent in a controlled manner. We believe that certain of the pending claims contained in these patent applications, if issued in substantially the same form, would cover the formulations of EB612 and EB613. Any patents that issue from these patent applications are expected to expire in February 2036 or August 2037, as described hereinabove, assuming all annuity and maintenance payments are paid thereon.
The term of individual patents depends upon the legal term for patents in the countries in which they are granted. In most countries, including the United States, the patent term is generally 20 years from the earliest claimed filing date of a non-provisional patent application in the applicable country. In the United States, a patent’s term may, in certain cases, be lengthened by patent term adjustment, which compensates a patentee for administrative delays by the U.S. Patent and Trademark Office, or USPTO in examining and granting a patent, or may be shortened if a patent is terminally disclaimed over a commonly owned patent or a patent naming a common inventor and having an earlier expiration date. The Drug Price Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman Act, permits a patent term extension of up to five years beyond the expiration date of a U.S. patent as partial compensation for the useful patent term lost, if any, during the FDA regulatory review process. However, a patent term extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of the product’s approval by the FDA. The patent term extension period is generally one-half the time between the effective date of the IND and the submission date of the NDA for the product, plus the time between the submission date of the NDA and the approval of the application. Only one patent applicable to an approved drug is eligible for the extension and the application for the extension must be submitted prior to the expiration of the patent. Only those claims covering the approved drug, a method for using it or a method for manufacturing it may be extended. Moreover, we may not receive an extension because of, for example, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. Similar provisions are available in the European UnionEU and certain other foreign jurisdictions to extend the term of a patent that covers an approved drug. However, the length of any extension, if granted, could be less than we request.
Trade Secrets
In addition to patent rights, we also rely on unpatented trade secrets and know-how to protect our proprietary technology. However, trade secrets can be difficult to protect. We seek to protect our proprietary technology, in part, by entering into confidentiality agreements with our employees, consultants, contractors, manufacturers, outside scientific collaborators and sponsored researchers, members of our board of directors, technical review board and other advisors upon their engagement. These agreements generally provide that all confidential information developed or made known to the individual during the course of the individual’s relationship with us is to be kept confidential and not to be disclosed to third parties except in specific limited circumstances. We also generally require signed confidentiality or material transfer agreements from any company that is to receive our confidential information. In the case of employees, consultants, and contractors, the agreements also generally provide that all inventions conceived by the individual while rendering services to us shall be assigned to us as our exclusive property. There can be no assurance, however, that we have entered into agreements with all applicable parties, that all persons who we desire to sign such agreements will sign, or if they do, that such agreements will not be breached, that we would have adequate remedies for any breach, or that our unpatented trade secrets or know-how will not otherwise become known or be independently developed by competitors. Additionally, to the extent that our commercial partners, collaborators, employees, and consultants use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. For this and a more comprehensive discussion of risks related to our intellectual property, see “Item 3.D.–Risk Factors—Risks Related to Our Intellectual Property.”
Commercialization Strategy
Our current main focus is developing an oral PTH (1-34) for the treatment of osteoporosis and orphan indications, and specifically, EB613 for the treatment of osteoporosis and EB612 for the treatment of hypoparathyroidism. EB613 and EB612 are two drug candidates based on oral PTH (1-34), with significantly distinct treatment approaches. In the future, we plan tomay also conduct clinical trials of EB613 for the treatment of non-union fractures. We are also investigating the application of our oral drug delivery platform to other FDA-approved proteins or large molecule therapeutics where oral dosing could either increase the total addressable market or capture a large share of an existing market due to the potential improvements in convenience, compliance and cost resulting from an orally delivered drug relative to an injectable product. In addition, we have recently entered into a researchintend to explore additional collaborations that leverage our technology platform such as our collaboration and license agreement with Amgen. Under the agreement with Amgen, the parties will collaborate for the development and discovery of clinical candidates in the field of inflammatory disease and other serious illnesses. Further, under the terms of the agreement, we will use our proprietary drug delivery platform to develop oral formulations for up to three large molecule biological drug candidates currently being developed by Amgen. We are also investigating applying our oral drug delivery platform to other FDA-approved proteins or large molecule therapeutics, including human growth hormone.
We have not yet established sales, marketing or product distribution operations because our product candidates are in clinical development. We may seek a partner to develop EB613 and EB612, and anticipate that any such partner would be responsible for, or substantially support, late stage clinical trials of both of these lead clinical candidates as well as submitting applications for regulatory approvals and registrations. In our collaboration with Amgen, Amgen is responsible for the research, clinical development, manufacturing and commercialization of any of the resulting programs.
Competition
The medical and pharmaceutical industries in which we operate are highly competitive and subject to rapid and significant technological change and changes in practice. While we believe that our technology, knowledge, experience and scientific resources provide us with competitive advantages, we face competition from many different sources, including large pharmaceutical, specialty pharmaceutical, biotechnology, and generic drug companies and academic and government institutions. We believe that the key competitive factors that will affect the development and commercial success of our oral PTH product candidates for hypoparathyroidism, osteoporosis and non-union fractures, and any other product candidates that we develop, are the efficacy, safety and tolerability profile, convenience in dosing, product labeling, price and availability of reimbursement from the government and other third-parties. Our commercial opportunity could be reduced or eliminated if our competitors have products that are better in one or more of these categories.
We expect that, if approved, our oral PTH product candidates for hypoparathyroidism, osteoporosis and non-union fractures, and other product candidates that we develop, would compete with a number of existing products. Furthermore, we believe that we face competition with regard to our oral drug delivery platform, as we believe that other non-invasive medical drug delivery technologies, including alternative oral delivery systems as well as transdermal patches, are being developed by other parties. Many of our potential competitors have substantially greater financial, technical, commercial and human resources than we do and significantly more experience in the discovery, development and regulatory approvals of product candidates, and the commercialization of those products. Accordingly, our competitors may be more successful than us in obtaining FDA approval for product candidates and achieving widespread market acceptance. See “Item 3.D.–Risk Factors—Risks Related to Commercialization of Our Product Candidates.”
EB613 for Osteoporosis
Current treatments for osteoporosis generally fall into two categories: antiresorptive medications to slow bone loss and anabolic medications to increase the rate of bone formation. The global osteoporosis drug market has traditionally been dominated by bisphosphonates, which slow bone loss. Although bisphosphonates’ market share has declined due to the occurrence of serious side effects, as well as the introduction of newly developed pharmacological treatments, many of the new drugs have serious side effects of their own. Eli Lilly’s Forteo, is one of the most effective osteoporosis medications, and newer products such as Prolia® and EVENITY® have been launched by Amgen. We anticipate that our product candidate EB613 if approved, will compete with Forteo, Prolia and EVENITY. We believe that EB613 may prove to be superior to Forteo due to its oral administration, potentially leading to greater patient acceptance and its sharper pharmacokinetic profile which is expected to have more potent anabolic effect. However, our competitors in this market are large pharmaceutical companies with greater resources than us and the alternatives therapies have been on the market for many years and have widespread market acceptance.
EB612 for Hypoparathyroidism
Historically, the treatments for hypoparathyroidism have been calcium supplements, vitamin D supplements and phosphate binders, howeverbinders. However there are many serious side effects that result from the chronic use of high doses of these products. Our product candidate EB612 is designed to deliver PTH to hypoparathyroid patients to directly address the underlying PTH deficiency. Because our product would be a branded pharmaceutical, in contrast to the over-the-counter supplements currently used by those with the condition, we believe that the market acceptance will be strongest among patients whose disease is not well-controlled by over-the-counter supplements, or in those patients who continue to suffer from side effects associated with therapy or symptoms associated with poor management of their condition.
We believe that our key competitor in hypoparathyroidism treatment is Takeda, which is now marketing Natpara, an injectable bioengineered recombinant form of PTH (1-84) that was approved by the FDA in January 2015. Natpara has been granted orphan drug designation for hypoparathyroidism by the FDA as the first approved product for this indication and has orphan drug market exclusivity for seven years in the United States.U.S. Orphan drug market exclusivity means that the FDA may not approve any other application to market the same drug for the same indication for a period of seven years, except in limited circumstances, such as a showing of clinical superiority over the product with orphan exclusivity or where the manufacturer is unable to assure sufficient product quantity. Therefore, we will only be able to obtain regulatory approval for EB612, which also has orphan drug designation for hypoparathyroidism, if we demonstrate EB612’s clinical superiority over Natpara. For example, EB612 would need to demonstrate either greater effectiveness or safety than Natpara or that it otherwise makes a major contribution to patient care. We believe that we will be able to demonstrate that our oral formulation of PTH is clinically superior to Natpara in terms of efficacy and safety, and therefore, that Natpara’s orphan drug exclusivity will not prevent the FDA from approving our NDA for oral PTH prior to the expiration of Natpara’s market exclusivity period. Inperiod and subject to the successful completion of clinical development and acceptance of our NDA.In 2019, Natpara was recalled due to certain product format issues, and is not anticipated to fully return to the market until later in 2020.2021.
In addition, Ascendis Pharma has reported that it is developing a long-acting, oral prodrug formulation of PTH for the treatment of hypoparathyroidism. In 2019,2020, Ascendis reported that it expects top-line results from a global Phase 2 trial in 2020 that indicated potential use of its product, TransCon PTH, demonstrated normalization of quality of life, and anticipated initiatingits potential as a hormone replacement therapy for hypoparathyroidism. Ascendis Pharma also indicated its intention to advance Transcon PTH into Phase 3 trial by the end of 2021 or 2022.clinical development. Other companies and groups that are developing or commercializing therapies for hypoparathyroidism, include Chugai Pharmaceutical Co., Ltd., Extend Biosciences Inc., Massachusetts General Hospital, Alizé Pharma and Eli Lilly.
The Israeli Innovation Authority (IIA) Grants
We have received grants of approximately $0.5 million from the IIA to partially fund our research and development. The grants are subject to certain requirements and restrictions in the Research Law. In general, until the grants are repaid with interest, royalties are payable to the Israeli government in the amount of 3% on revenues derived from sales of products or services developed in whole or in part using the IIA grants, including EB612, EB613 and any other oral PTH product candidates we may develop. The royalty rate may increase to 5%, with respect to approved applications filed following any year in which we achieve sales of over $70 million.
The amount that must be repaid may be increased to three times the amount of the grant received, and the rate of royalties may be accelerated if manufacturing of the products developed with the grant money is transferred outside of the State of Israel. As of December 31, 2018,2020, the total royalty amounts payable to the IIA, including accrued interest, was approximately $0.5 million. As of December 31, 2019,2020, we paid royalties in the amount of $27,000$54,000 to the IIA.
In addition to paying any royalties due, we must abide by other restrictions associated with receiving such grants under the Research Law that continue to apply even following repayment to the IIA. These restrictions may impair our ability to outsource manufacturing, engage in change of control transactions or otherwise transfer our “know-how” (in its meaning under the Research Law) in or outside of Israel, and may require us to obtain the approval of the IIA for certain actions and transactions and pay additional royalties and other amounts to the IIA. We may not receive the required approvals for any proposed transfer and, even if received, we may be required to pay the IIA a portion of the consideration that we receive upon any transfer of such technology to a non-Israeli entity up to 600% of the grant amounts and the interest. The IIA approved the Company’s Research Collaboration and License Agreement with Amgen Inc. as of December 2018, subject to payments to the IIA in the rate of 5.38% out of any payment received from Amgen for the license and up to a total amount of six times the amount of the IIA funding and the interest. In addition, as disclosed under “Item 4.B.–Business overview - Manufacturing,” we have signed a contract with a U.K.-based contract manufacturing organization, to produce and supply pills for trials performed worldwide. We believe that, because production is not being done for commercial purposes, the entry into the production agreement in the U.K. will not affect the royalty rates to be paid to the IIA. Should it turn out that this position is not acceptable to the IIA, the maximum royalties to be paid to the IIA will be three times the amount of the grants and the interest. In addition, any change of control and any change of ownership of our Ordinary Shares that would cause a non-Israeli citizen or resident to become an interested party as defined in the Research Law (which includes any person who holds 5% or more of our outstanding shares), requires written notice to the IIA. Such a non-Israeli interested party is required to sign an undertaking towards the IIA in which it undertakes to comply with the Research Law. If we fail to comply with the Research Law, we may be forced to return the grants and/or be subject to other payments to the IIA, monetary fines and/or criminal charges.
Oramed Patent Transfer Agreement
In 2010, in connection with our establishment as a joint venture between D.N.A Biomedical and Oramed, a subsidiary of Oramed Pharmaceuticals, Inc., we entered into a patent license agreement with Oramed pursuant to which Oramed granted us a worldwide, royalty-bearing, exclusive, irrevocable, perpetual and sub-licensable license under certain Oramed patent rights, to develop, manufacture and commercialize products for certain indications to be specified by us and Oramed, other than diabetes, obesity and influenza. In February 2011, D.N.A Biomedical and Oramed entered into a share purchase agreement for the sale by Oramed to D.N.A Biomedical of 47% of our Ordinary Shares. In connection with this transaction, in February 2011 we entered into a Patent Transfer Agreement with Oramed, to replace the original 2010 license agreement.
Pursuant to the terms of the Patent Transfer Agreement, Oramed assigned to us all of its right, title and interest in the previously licensed patent rights, and in return we granted to Oramed a worldwide, royalty-free, exclusive, irrevocable, perpetual and sublicensable license under the assigned patent rights to develop, manufacture and commercialize products or otherwise exploit such patent rights in the fields of diabetes and influenza. Additionally, we agreed not to engage, directly or indirectly, in any activities in the fields of diabetes and influenza. In consideration for such assignment, we agreed to pay Oramed royalties equal to 3% of our net revenues generated, directly or indirectly, from exploitation of the assigned patent rights, including the sale, lease or transfer of the assigned patent rights or sales of products or services covered by the assigned patent rights. Either party may terminate the Patent Transfer Agreement for the other party’s uncured material breach upon 45 days’ written notice (and immediately upon written notice in the event of an incurable breach), or if the other party undergoes certain insolvency-related events. The royalty obligations imposed on us will survive termination of the Patent Transfer Agreement.
Manufacturing
We do not own or operate facilities for large scale product manufacturing, storage and distribution, or testing, nor do we expect to in the future. Our current facility is limited to small-mid scale manufacturing, storage and distribution of materials and oral drug formulations for clinical studies. Our facility has ISO:9001:2015 quality management systems accreditation from The Standards Institution of Israel for the production and development of functional excipients andfor oral drug formulations to be used in clinical trials. The facility includes a dedicated Class D clean room for tablet production and a dedicated chemical synthesis room designed to meet ISO 8 specifications.
Our manufacturing activities include the chemical synthesis of one of our non-active but functional drug components as well as thein our facility. In addition, we have a contract with a U.K.-based contract manufacturing organization, to produce and supply pills for trials performed worldwide including formulation and production of the final drug, packaging, storage and distribution. The UK facility is an FDA/EMA inspected-GMP site and we expect future clinical studies with our oral PTH (1-34) tablets, as well as the potential commercial supply, if approved, will be provided by the same subcontractor. This contract is not exclusive and we may enter into additional contracts. Our QA/QC analytical laboratory performs part of the release and stability testing for PTH tablets manufactured by the U.K.-based contract manufacturing facility. In addition, our research and development team supports the manufacturing activities and develop/optimizedevelops/optimizes analytical methods used by the contract manufacturer in order to meet regulatory requirements for our clinical trials. We have signed a contract with a U.K.-based contract manufacturing organization, to produce and supply pills for trials performed worldwide. This contract is not exclusive and we may enter into additional contracts. Various materials included in the drug formulation and materials procured for the chemical synthesis are commercially available from various accredited suppliers. We do not have supply contracts with all such vendors and are not bound to any specific vendor at this point in time. However, it is our intention to complete such contracts in anticipation of commercial manufacturing activities, so that if approved, we will have such contracts in place.
In March 2017, we contracted with an FDA/EMA inspected-GMP subcontractor in the U.K. to outsource activities for technical transfer and tablet production for our international clinical trials including the clinical drug supply for the Phase 2 PK/PD trial. We expect future clinical studies with our oral PTH (1-34) tablets, as well as the potential commercial supply, if approved, will be provided by the same subcontractor.
Government Regulation and Product Approval
Government authorities in the United States, at the federal, state and local level, and in other countries and jurisdictions, including the European Union,EU, extensively regulate, inter alia, the research, development, testing, manufacture, pricing, quality control, approval, packaging, storage, recordkeeping, labeling, advertising, promotion, distribution, marketing, post-approval monitoring and reporting, and import and export of pharmaceutical products. The processes for obtaining regulatory approvals in the United States and in other countries and jurisdictions, along with subsequent compliance with applicable statutes and regulations and other regulatory authorities, require the expenditure of substantial time and financial resources.
Review and Approval of Drugs in the United States
In the United States, our product candidates are regulated by the FDA as drugs under the Federal Food, Drug, and Cosmetic Act, or the FDCA, the Public Health Service Act, or the PHSA, and regulations implemented by the agency. The failure to comply with the applicable requirements at any time during the product development process, including preclinical testing, clinical testing, the approval process or post-approval process, may subject an applicant to delays in the conduct of clinical trials, regulatory review and approval, and/or administrative or judicial sanctions. These sanctions may include, but are not limited to, the FDA’s refusal to allow an applicant to proceed with clinical testing, refusal to approve pending applications, license suspension or revocation, withdrawal of an approval, warning letters, adverse publicity, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, and civil or criminal investigations and penalties brought by the FDA or Department of Justice, or other governmental entities.
The process required by the FDA before a biologic may be marketed in the United States generally involves satisfactorily completing each of the following steps:
preclinical laboratory tests, animal studies and formulation studies all performed in accordance with the FDA’s Good Laboratory Practice regulations;
submission to the FDA of an IND application for human clinical testing, which must become effective before human clinical trials may begin;
approval by an independent IRB, representing each clinical site before each clinical trial may be initiated;
performance of adequate and well-controlled clinical trials to establish the safety and efficacy of the product candidate for each proposed indication and conducted in accordance with GCP requirements;
submission of data supporting safety and efficacy as well as detailed information on the manufacture and composition of the product in clinical development and proposed labeling;
preparation and submission to the FDA of a NDA;
review of the product by an FDA advisory committee, where appropriate or if applicable;
satisfactory completion of one or more FDA inspections of the manufacturing facility or facilities, including those of third parties, at which the product, or components thereof, are produced to assess compliance with cGMP requirements and to assure that the facilities, methods and controls are adequate to preserve the product’s identity, strength, quality and purity;
satisfactory completion of any FDA audits of the non-clinical and clinical trial sites to assure compliance with GCP requirements and the integrity of clinical data in support of the NDA;
payment of user fees and securing FDA approval of the NDA for the proposed indication; and
compliance with any post-approval requirements, including risk evaluation and mitigation strategies, or REMS, and any post-approval studies required by the FDA.
Preclinical Studies and Investigational New Drug Application
Preclinical tests include laboratory evaluations of product chemistry, formulation and stability, as well as studies to evaluate the potential for efficacy and toxicity in animals. The conduct of the preclinical tests and formulation of the compounds for testing must comply with federal regulations and requirements. The results of the preclinical tests, together with manufacturing information and analytical data, are submitted to the FDA as part of an IND application. Some preclinical tests may continue even after submission of the IND application. The IND automatically becomes effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions about the product or conduct of the proposed clinical trial, including concerns that human research volunteers will be exposed to unreasonable health risks. In that case, the IND sponsor and the FDA must resolve any outstanding FDA concerns before the clinical trial can begin.
As a result, submission of the IND may result in the FDA not allowing the clinical trials to commence or allowing the clinical trial to commence on the terms originally specified by the sponsor in the IND. If the FDA raises concerns or questions either during this initial 30-day period, or at any time during the IND process, it may choose to impose a partial or complete clinical hold. This order issued by the FDA would delay either a proposed clinical trial or cause suspension of an ongoing clinical trial, until all outstanding concerns have been adequately addressed and the FDA has notified the company that investigations may proceed. This could cause significant delays or difficulties in completing planned clinical trials in a timely manner.
Clinical Trials
Clinical trials involve the administration of the investigational product candidate to healthy volunteers or patients with the disease to be treated under the supervision of a qualified principal investigator in accordance with cGCP requirements. Clinical trials are conducted under trial protocols detailing, among other things, the objectives of the clinical trial, inclusion and exclusion criteria, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. A protocol for each clinical trial and any subsequent protocol amendments must be submitted to the FDA as part of the IND.
A sponsor who wishes to conduct a clinical trial outside the United States may, but need not, obtain FDA authorization to conduct the clinical trial under an IND. If a clinical trial outside the United States is not conducted under an IND, the sponsor may submit data from the clinical trial to the FDA in support of a NDA so long as the clinical trial is conducted consistent with the spirit of GCP and in compliance with an international guideline for the ethical conduct of clinical research known as the Declaration of Helsinki and/or the laws and regulations of the country or countries in which the clinical trial is performed, whichever provides the greater protection to the participants in the clinical trial.
Further, each clinical trial must be reviewed and approved by an IRB either centrally or individually at each institution at which the clinical trial will be conducted. The IRB will consider, among other things, clinical trial design, patient informed consent, ethical factors, the safety of human subjects and the possible liability of the institution. An IRB must operate in compliance with the FDA regulations. The FDA, IRB or the clinical trial sponsor may suspend or discontinue a clinical trial at any time for various reasons, including a finding that the clinical trial is not being conducted in accordance with FDA requirements or the subjects or patients are being exposed to an unacceptable health risk. Clinical testing also must satisfy extensive GCP rules and the requirements for informed consent. Additionally, some clinical trials are overseen by an independent group of qualified experts organized by the clinical trial sponsor, known as a data safety monitoring board or committee. This group may recommend continuing the clinical trial as planned, make changes in clinical trial conduct, or cessation of the clinical trial at designated check points based on access to certain data from the clinical trial.
Clinical trials typically are conducted in three sequential phases, but the phases may overlap or be combined. Annual progress reports detailing the results of the clinical trials must be submitted to the FDA. Additional studies may be required after approval.
Phase 1 clinical trials are initially conducted in a limited population to test the product candidate for safety, including adverse effects, dose tolerance, absorption, metabolism, distribution, excretion and pharmacodynamics in healthy humans or, on occasion, in patients, such as cancer patients.
Phase 2 clinical trials are generally conducted in a limited patient population to identify possible adverse effects and safety risks, evaluate the efficacy of the product candidate for specific targeted indications and determine dose tolerance and optimal dosage. Multiple Phase 2 clinical trials may be conducted by the sponsor to obtain information prior to beginning larger and more costly Phase 3 clinical trials.
Phase 3 clinical trials proceed if the Phase 2 clinical trials demonstrate that a dose range of the product candidate is potentially effective and has an acceptable safety profile. Phase 3 clinical trials are undertaken to further evaluate, in a larger number of patients, dosage, provide substantial evidence of clinical efficacy and further test for safety in an expanded and diverse patient population at multiple, geographically dispersed clinical trial sites. A well-controlled, statistically robust Phase 3 trial may be designed to deliver the data that regulatory authorities will use to decide whether or not to approve, and, if approved, how to appropriately label a drug: such Phase 3 studies are referred to as “pivotal.”
In some cases, the FDA may approve a NDA for a product candidate but require the sponsor to conduct additional clinical trials to further assess the drug’s safety and effectiveness after NDA approval. Such post-approval trials are typically referred to as Phase 4 clinical trials. These studies are used to gain additional experience from the treatment of patients in the intended therapeutic indication and to document a clinical benefit in the case of drugs or biologics approved under accelerated approval regulations. If the FDA approves a product while a company has ongoing clinical trials that were not necessary for approval, a company may be able to use the data from these clinical trials to meet all or part of any Phase 4 clinical trial requirement or to request a change in the product labeling. Failure to exhibit due diligence with regard to conducting Phase 4 clinical trials could result in withdrawal of approval for products.
Compliance with Current Good Manufacturing Practice Requirements
Before approving a NDA, the FDA typically will inspect the facility or facilities where the product is manufactured. The FDA will not approve an application unless it determines that the manufacturing processes and facilities are in full compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. The PHSA emphasizes the importance of manufacturing control for products like biologics whose attributes cannot be precisely defined.
Manufacturers and others involved in the manufacture and distribution of products must also register their establishments with the FDA and certain state agencies. Both U.S. and non-U.S. manufacturing establishments must register and provide additional information to the FDA upon their initial participation in the manufacturing process. Any product manufactured by or imported from a facility that has not registered, whether U.S. or non-U.S., is deemed misbranded under the FDCA. Establishments may be subject to periodic unannounced inspections by government authorities to ensure compliance with cGMPs and other laws. Inspections must follow a “risk-based schedule” that may result in certain establishments being inspected more frequently. Manufacturers may also have to provide, on request, electronic or physical records regarding their establishments. Delaying, denying, limiting, or refusing inspection by the FDA may lead to a product being deemed to be adulterated.
Review and Approval of a New Drug Application
The results of product candidate development, preclinical testing and clinical trials, including negative or ambiguous results as well as positive findings, are submitted to the FDA as part of a NDA requesting approval to market the product. The NDA also must contain extensive manufacturing information and detailed information on the composition of the product and proposed labeling as well as payment of a user fee. According to the FDA’s fee schedule, the user fee for an application requiring clinical data, such as a NDA, is $2.9 million for 2020. However, we believe that we may apply for, and be granted, a waiver as a small business for the first filing of a NDA for approval.
The FDA has 60 days after submission of the application to conduct an initial review to determine whether it is sufficient to accept for filing based on the agency’s threshold determination that it is sufficiently complete to permit substantive review. Once the submission has been accepted for filing, the FDA begins an in-depth review of the application. Under the goals and policies under the Prescription Drug User Fee Act, or the PDUFA, the FDA has ten months from the filing date in which to complete its initial review of a standard application and respond to the applicant, and six months for a priority review of the application. The FDA does not always meet its PDUFA goal dates for standard and priority applications. The review process may often be significantly extended by FDA requests for additional information or clarification. The review process and the PDUFA goal date may be extended by three months if the FDA requests, or the applicant otherwise provides additional information or clarification regarding information already provided in the submission within the last three months before the PDUFA goal date.
Under the FDCA and the PHSA, the FDA may approve a NDA if it determines that the product is safe, pure and potent and the facility where the product will be manufactured meets standards designed to ensure that it continues to be safe, pure and potent.
On the basis of the FDA’s evaluation of the application and accompanying information, including the results of the inspection of the manufacturing facilities, the FDA may issue an approval letter or a complete response letter. An approval letter authorizes commercial marketing of the product with specific prescribing information for specific indications. If the application is not approved, the FDA will issue a complete response letter, which will contain the conditions that must be met in order to secure final approval of the application, and when possible will outline recommended actions the sponsor might take to obtain approval of the application. Sponsors that receive a complete response letter may submit to the FDA information that represents a complete response to the issues identified by the FDA. Such resubmissions are classified under PDUFA as either Class 1 or Class 2. The classification of a resubmission is based on the information submitted by an applicant in response to an action letter. Under the goals and policies agreed to by the FDA under PDUFA, the FDA has two months to review a Class 1 resubmission and six months to review a Class 2 resubmission from the date of receipt. The FDA will not approve an application until issues identified in the complete response letter have been addressed.
The FDA may also refer the application to an advisory committee for review, evaluation and recommendation as to whether the application should be approved. Typically, an advisory committee is a panel of independent experts, including clinicians and other scientific experts, that reviews, evaluates and provides a recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions.
If the FDA approves a new product, it may limit the approved indications for use of the product. It may also require that contraindications, warnings or precautions be included in the product labeling. In addition, the FDA may call for post-approval studies, including Phase 4 clinical trials, to further assess the product’s safety after approval. The agency may also require testing and surveillance programs to monitor the product after commercialization, or impose other conditions, including distribution restrictions or other risk management mechanisms, including a REMS, to help ensure that the benefits of the product outweigh the potential risks. A REMS can include medication guides, communication plans for healthcare professionals, and elements to assure safe use, or ETASU. ETASU can include, but are not limited to, special training or certification for prescribing or dispensing, dispensing only under certain circumstances, special monitoring, and the use of patent registries. The FDA may prevent or limit further marketing of a product based on the results of post-market studies or surveillance programs. After approval, many types of changes to the approved product, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further testing requirements and FDA review and approval.
Fast Track, Breakthrough Therapy and Priority Review Designations
The FDA is authorized to designate certain products for expedited review if they are intended to address an unmet medical need in the treatment of a serious or life-threatening disease or condition. These programs are fast track designation, breakthrough therapy designation and priority review designation.
Specifically, the FDA may designate a product for fast track review if it is intended, whether alone or in combination with one or more other products, for the treatment of a serious or life-threatening disease or condition, and it demonstrates the potential to address unmet medical needs for such a disease or condition. For fast track products, sponsors may have greater interactions with the FDA and the FDA may initiate review of sections of a fast track product’s application before the application is complete. This rolling review may be available if the FDA determines, after preliminary evaluation of clinical data submitted by the sponsor, that a fast track product may be effective. The sponsor must also provide, and the FDA must approve, a schedule for the submission of the remaining information and the sponsor must pay applicable user fees. However, the FDA’s time period goal for reviewing a fast track application does not begin until the last section of the application is submitted. In addition, the fast track designation may be withdrawn by the FDA if the FDA believes that the designation is no longer supported by data emerging in the clinical trial process.
Second, in 2012, Congress enacted the Food and Drug Administration Safety and Innovation Act, or FDASIA. This law established a new regulatory scheme allowing for expedited review of products designated as “breakthrough therapies.” A product may be designated as a breakthrough therapy if it is intended, either alone or in combination with one or more other products, to treat a serious or life-threatening disease or condition and preliminary clinical evidence indicates that the product may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. The FDA may take certain actions with respect to breakthrough therapies, including holding meetings with the sponsor throughout the development process; providing timely advice to the product sponsor regarding development and approval; involving more senior staff in the review process; assigning a cross-disciplinary project lead for the review team; and taking other steps to design the clinical trials in an efficient manner.
Third, the FDA may designate a product for priority review if it is a product that treats a serious condition and, if approved, would provide a significant improvement in safety or effectiveness. The FDA determines, on a case-by-case basis, whether the proposed product represents a significant improvement when compared with other available therapies. Significant improvement may be illustrated by evidence of increased effectiveness in the treatment of a condition, elimination or substantial reduction of a treatment-limiting product reaction, documented enhancement of patient compliance that may lead to improvement in serious outcomes, and evidence of safety and effectiveness in a new subpopulation. A priority designation is intended to direct overall attention and resources to the evaluation of such applications, and to shorten the FDA’s goal for taking action on a marketing application from ten months to six months.
Accelerated Approval Pathway
The FDA may grant accelerated approval to a product for a serious or life-threatening condition that provides meaningful therapeutic advantage to patients over existing treatments based upon a determination that the product has an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit. The FDA may also grant accelerated approval for such a condition when the product has an effect on an intermediate clinical endpoint that can be measured earlier than an effect on irreversible morbidity or mortality, or IMM, and that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity, or prevalence of the condition and the availability or lack of alternative treatments. Products granted accelerated approval must meet the same statutory standards for safety and effectiveness as those granted traditional approval.
For the purposes of accelerated approval, a surrogate endpoint is a marker, such as a laboratory measurement, radiographic image, physical sign, or other measure that is thought to predict clinical benefit, but is not itself a measure of clinical benefit. Surrogate endpoints can often be measured more easily or more rapidly than clinical endpoints. An intermediate clinical endpoint is a measurement of a therapeutic effect that is considered reasonably likely to predict the clinical benefit of a product, such as an effect on IMM. The FDA has limited experience with accelerated approvals based on intermediate clinical endpoints, but has indicated that such endpoints generally may support accelerated approval where the therapeutic effect measured by the endpoint is not itself a clinical benefit and basis for traditional approval, if there is a basis for concluding that the therapeutic effect is reasonably likely to predict the ultimate clinical benefit of a product.
The accelerated approval pathway is most often used in settings in which the course of a disease is long and an extended period of time is required to measure the intended clinical benefit of a product, even if the effect on the surrogate or intermediate clinical endpoint occurs rapidly. Thus, accelerated approval has been used extensively in the development and approval of products for treatment of a variety of cancers in which the goal of therapy is generally to improve survival or decrease morbidity and the duration of the typical disease course requires lengthy and sometimes large clinical trials to demonstrate a clinical or survival benefit.
The accelerated approval pathway is usually contingent on a sponsor’s agreement to conduct, in a diligent manner, additional post-approval confirmatory studies to verify and describe the product’s clinical benefit. As a result, a product candidate approved on this basis is subject to rigorous post-marketing compliance requirements, including the completion of Phase 4 or post-approval clinical trials to confirm the effect on the clinical endpoint. Failure to conduct required post-approval studies, or confirm a clinical benefit during post-marketing studies, would allow the FDA to withdraw the product from the market on an expedited basis. All promotional materials for product candidates approved under accelerated regulations are subject to prior review by the FDA.
Post-Approval Regulation
If regulatory approval for marketing of a product or new indication for an existing product is obtained, the sponsor will be required to comply with post-approval regulatory requirements, including any post-approval requirements that the FDA may have imposed as a condition of approval. The sponsor will be required to report certain adverse reactions and production problems to the FDA, provide updated safety and efficacy information and comply with requirements concerning advertising and promotional labeling requirements. Drug manufacturers and certain of their subcontractors are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with ongoing regulatory requirements, including cGMP regulations, which impose certain procedural and documentation requirements upon drug manufacturers. Accordingly, the sponsor and its third-party manufacturers must continue to expend time, money and effort in the areas of production and quality control to maintain compliance with cGMP regulations and other regulatory requirements.
A product may also be subject to official lot release, meaning that the manufacturer is required to perform certain tests on each lot of the product before it is released for distribution. If the product is subject to official release, the manufacturer must submit samples of each lot, together with a release protocol showing a summary of the history of manufacture of the lot and the results of all of the manufacturer’s tests performed on the lot, to the FDA. The FDA may in addition perform certain confirmatory tests on lots of some products before releasing the lots for distribution. Finally, the FDA will conduct laboratory research related to the safety, purity, potency, and effectiveness of pharmaceutical products.
Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and standards is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in revisions to the approved labeling to add new safety information; imposition of post-market studies or clinical trials to assess new safety risks; or imposition of distribution or other restrictions under a REMS program. Other potential consequences include, among other things:
restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls;
fines, warning letters or holds on post-approval clinical trials;
refusal of the FDA to approve pending NDAs or supplements to approved NDAs, or suspension or revocation of product license approvals;
product seizure or detention, or refusal to permit the import or export of products; or
injunctions or the imposition of civil or criminal penalties.
The FDA strictly regulates marketing, labeling, advertising and promotion of products that are placed on the market. Biologics may be promoted only for the approved indications and in accordance with the provisions of the approved label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability.
Orphan Drug Designation
Orphan drug designation in the United States is designed to encourage sponsors to develop drugs intended for rare diseases or conditions. In the United States, a rare disease or condition is statutorily defined as a condition that affects fewer than 200,000 individuals in the United States, or that affects more than 200,000 individuals in the United States and for which there is no reasonable expectation that the cost of developing and making available the drug for the disease or condition will be recovered from sales of the drug in the United States.
Orphan drug designation qualifies a company for tax credits, waiver of the NDA user fee and may confer market exclusivity for seven years following the date of the drug’s marketing approval, if granted by the FDA, if a product that has orphan designation subsequently receives the first FDA approval of that drug for the disease for which it has such designation. This means that the FDA may not approve any other applications, including NDA to market the same biologic even in a different formulation for the same indication for seven years, except in limited circumstances such as a showing of clinical superiority over the product with orphan drug exclusivity or where the manufacturer is unable to assure sufficient product quantity. An application for designation as an orphan product can be made any time prior to the filing of an application for approval to market the product. A product becomes an orphan product when it receives orphan drug designation from the Office of Orphan Products Development, or OOPD, at the FDA based on acceptable confidential requests made under the regulatory provisions. The product must then go through the review and approval process like any other product.
A sponsor may request orphan drug designation of a previously unapproved product or new orphan indication for an already marketed product. In addition, a sponsor of a product that is otherwise the same product as an already approved orphan drug may seek and obtain orphan drug designation for the subsequent product for the same rare disease or condition if it can present a plausible hypothesis that its product may be clinically superior to the first, approved product. More than one sponsor may receive orphan drug designation for the same product for the same rare disease or condition, but each sponsor seeking orphan drug designation must file a complete request for designation, and only the first sponsor that obtains approval for that drug for the orphan indication will obtain market exclusivity, effectively preventing the FDA from approving products under development by competitors for the same drug and same indication, unless the competitor is able to demonstrate that the product under development is clinically superior to the approved product or the approved product is not available in sufficient quantities. To permit the FDA to end another manufacturer’s orphan exclusivity period, the FDA must determine that the manufacturer has demonstrated clinical superiority by showing the later drug is safer, more effective, or otherwise makes a major contribution to patient care.
The period of exclusivity begins on the date that the marketing application is approved by the FDA and applies only to the indication for which the product has been designated. The FDA may approve a second application for the same product for a different use or a subsequent application for a different drug for the same indication. Orphan drug designation neither shortens the development time or regulatory review time of a drug nor gives the drug any advantage in the regulatory review or approval process.
Biosimilars and Exclusivity
The ACA, which was signed into law on March 23, 2010, included a subtitle called the Biologics Price Competition and Innovation Act of 2009 or BPCIA. The BPCIA established a regulatory scheme authorizing the FDA to approve biosimilars and interchangeable biosimilars. To date, five biosimilars have been licensed under the BPCIA, although numerous biosimilars have been approved in Europe. The FDA has issued several draft guidance documents outlining an approach to review and approval of biosimilars. Complexities associated with the larger, and often more complex, structures of biological products, as well as the processes by which such products are manufactured, pose significant hurdles to implementation, which are still being worked out by the FDA.
Under the BPCIA, a manufacturer may submit an application for licensure of a biologic product that is “biosimilar to” or “interchangeable with” a previously approved biological product or “reference product.” In order for the FDA to approve a biosimilar product, it must find that there are no clinically meaningful differences between the reference product and proposed biosimilar product in terms of safety, purity, and potency. For the FDA to approve a biosimilar product as interchangeable with a reference product, the agency must find that the biosimilar product can be expected to produce the same clinical results as the reference product, and (for products administered multiple times) that the biologic and the reference biologic may be switched after one has been previously administered without increasing safety risks or risks of diminished efficacy relative to exclusive use of the reference biologic.
Under the BPCIA, an application for a biosimilar product may not be submitted to the FDA until four years following the date of approval of the reference product. The FDA may not approve a biosimilar product until 12 years from the date on which the reference product was approved. Even if a product is considered to be a reference product eligible for exclusivity, another company could market a competing version of that product if the FDA approves a full NDA for such product containing the sponsor’s own preclinical data and data from adequate and well-controlled clinical trials to demonstrate the safety, purity and potency of their product. The BPCIA also created certain exclusivity periods for biosimilars approved as interchangeable products.
Patent Term Extension
A patent claiming a new drug or biologic product may be eligible for a limited patent term extension under the Hatch-Waxman Act, which permits a patent extension of up to five years beyond the expiration date of a U.S. patent as partial compensation for the useful patent term lost, if any, during the FDA regulatory review process. However, a patent term extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of the product’s approval by the FDA. The patent term extension period granted is typically one-half the time between the effective date of the first IND and the submission date of the NDA for the product, plus the time between the submission date of the NDA and the approval of that application. Only one patent applicable to an approved product is eligible for the extension, and the application for the extension must be submitted prior to the expiration of the patent in question. A patent that covers multiple products for which approval is sought can only be extended in connection with one of the products. The USPTO reviews and approves the application for any patent term extension or restoration in consultation with the FDA.
Regulation Outside the United States
In order to market any product outside of the United States, a company must also comply with numerous and varying regulatory requirements of other countries and jurisdictions regarding quality, safety and efficacy and governing, among other things, clinical trials, marketing authorization, commercial sales and distribution of drug products. Whether or not it obtains FDA approval for a product, the company would need to obtain the necessary approvals by the comparable non-U.S. regulatory authorities before it can commence clinical trials or marketing of the product in those countries or jurisdictions. The approval process ultimately varies between countries and jurisdictions and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries and jurisdictions might differ from and be longer than that required to obtain FDA approval. Regulatory approval in one country or jurisdiction does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country or jurisdiction may negatively impact the regulatory process in others.
Regulation and Marketing Authorization in the European Union
The EMA is the scientific agency of the European UnionEU that coordinates the evaluation and monitoring of new and approved medicinal products. It is responsible for the scientific evaluation of applications for EU marketing authorizations, as well as the development of technical guidance and the provision of scientific advice to sponsors. The EMA decentralizes its scientific assessment of medicines by working through a network of about 4,500 experts throughout the European Union,EU, nominated by the member states. The EMA draws on resources of over 40 National Competent Authorities of EU member states.
The process regarding approval of medicinal products in the European UnionEU follows roughly the same lines as in the United States and likewise generally involves satisfactorily completing each of the following:
preclinical laboratory tests, animal studies and formulation studies all performed in accordance with the applicable EU Good Laboratory Practice regulations;
submission to the relevant national authorities of a clinical trial application, or CTA, for each clinical trial, which must be approved before human clinical trials may begin;
performance of adequate and well-controlled clinical trials to establish the safety and efficacy of the product for each proposed indication;
submission to the relevant competent authorities of a marketing authorization application, or MAA, which includes the data supporting safety and efficacy as well as detailed information on the manufacture and composition of the product in clinical development and proposed labeling;
satisfactory completion of an inspection by the relevant national authorities of the manufacturing facility or facilities, including those of third parties, at which the product is produced to assess compliance with strictly enforced cGMP;
potential audits of the non-clinical and clinical trial sites that generated the data in support of the MAA; and
review and approval by the relevant competent authority of the MAA before any commercial marketing, sale or shipment of the product.
Preclinical Studies
Preclinical tests include laboratory evaluations of product chemistry, formulation and stability, as well as studies to evaluate the potential efficacy and toxicity in animals. The conduct of the preclinical tests and formulation of the compounds for testing must comply with the relevant EU regulations and requirements. The results of the preclinical tests, together with relevant manufacturing information and analytical data, are submitted as part of the CTA when seeking approval to start a clinical trial, and with the MAA when seeking marketing authorization.
Clinical Trial Approval
Requirements for the conduct of clinical trials in the European UnionEU including cGCP, are implemented in the currently Clinical Trials Directive 2001/20/EC and the GCP Directive 2005/28/EC. Pursuant to Directive 2001/20/EC and Directive 2005/28/EC, as amended, a system for the approval of clinical trials in the European UnionEU has been implemented through national legislation of the EU member states. Under this system, approval must be obtained from the competent national authority of a EU member state in which a trial is planned to be conducted, or in multiple member states if the clinical trial is to be conducted in a number of member states. To this end, a CTA is submitted, which must be supported by an investigational medicinal product dossier, or IMPD, and further supporting information prescribed by Directive 2001/20/EC and Directive 2005/28/EC and other applicable guidance documents. Furthermore, a clinical trial may only be started after a competent ethics committee has issued a favorable opinion on the clinical trial application in that country.
In April 2014, the European UnionEU legislative body passed the new Clinical Trials Regulation (EU) No 536/2014 which is set to replace the current Clinical Trials Directive 2001/20/EC. To ensure that the rules for clinical trials are identical throughout the EU, the new EU clinical trials legislation was passed as a regulation which is directly applicable in all EU member states. All clinical trials performed in the European UnionEU are required to be conducted in accordance with the Clinical Trials Directive 2001/20/EC until the new Clinical Trials Regulation (EU) No 536/2014 will become applicable. According to the current plans of the EMA, the new Clinical Trials Regulation will become applicable later this year. The Clinical Trials Directive 2001/20/EC will, however, still apply three years from the date of entry into application of the Clinical Trials Regulation to (i) clinical trials applications submitted before the entry into application and (ii) clinical trials applications submitted within one year after the entry into application if the sponsor opts for the old system.
Regulation (EU) No 536/2014 aims to simplify and streamline the approval of clinical trial in the European Union.EU. The main characteristics of the regulation include:
A streamlined application procedure via a single entry point, the EU portal;
A single set of documents to be prepared and submitted for the application as well as simplified reporting procedures which will spare sponsors from submitting broadly identical information separately to various bodies and different Member States;
A harmonized procedure for the assessment of applications for clinical trials, which is divided in two parts. Part I is jointly assessed by all Member States concerned. Part II is assessed by each Member State concerned separately;
Strictly defined deadlines for the assessment of clinical trial application; and
The involvement of the ethics committees in the assessment procedure in accordance with the national law of the Member State concerned but within the overall timelines defined by the Regulation (EU) No 536/2014.
Marketing Authorization
Authorization to market a product in the member states of the European UnionEU proceeds under one of four procedures: a centralized authorization procedure, a mutual recognition procedure, a decentralized procedure or a national procedure.
Centralized Authorization Procedure
The centralized procedure enables applicants to obtain a marketing authorization that is valid in all EU member states based on a single application. Certain medicinal products, including products developed by means of biotechnological processes must undergo the centralized authorization procedure for marketing authorization, which, if granted by the European Commission, is automatically valid in all - currently 28 - European UnionEU member states. Sponsors may elect to file an MAA through the centralized procedures for other classes of products. The EMA and the European Commission administer this centralized authorization procedure pursuant to Regulation (EC) No 726/2004. The other European Economic Area member states (namely Norway, Iceland and Liechtenstein) are also obligated to recognize the Commission decision.
Pursuant to Regulation (EC) No 726/2004, this procedure is mandatory for:
medicinal products developed by means of one of the following biotechnological processes:
recombinant DNA technology;
controlled expression of genes coding for biologically active proteins in prokaryotes and eukaryotes including transformed mammalian cells;
hybridoma and monoclonal antibody methods;
advanced therapy medicinal products as defined in Article 2 of Regulation (EC) No 1394/2007 on advanced therapy medicinal products;
medicinal products for human use containing a new active substance which, on the date of entry into force of this Regulation, was not authorized in the European Union,EU, for which the therapeutic indication is the treatment of any of the following diseases:
acquired immune deficiency syndrome;
neurodegenerative disorder;
neurodegenerative disorder;
diabetes;
auto-immune diseases and other immune dysfunctions;
medicinal products that are designated as orphan medicinal products pursuant to Regulation (EC) No 141/2000.
The centralized authorization procedure is optional for other medicinal products if they contain a new active substance or if the applicant shows that the medicinal product concerned constitutes a significant therapeutic, scientific or technical innovation or that the granting of authorization is in the interest of patients in the European Union.EU.
Administrative Procedure
Under the centralized authorization procedure, the EMA’s Committee for Human Medicinal Products, or CHMP serves as the scientific committee that renders opinions about the safety, efficacy and quality of medicinal products for human use on behalf of the EMA. The CHMP is composed of experts nominated by each member state’s national authority for medicinal products, with one of them appointed to act as Rapporteur for the co-ordination of the evaluation with the possible assistance of a further member of the Committee acting as a Co-Rapporteur. After approval, the Rapporteur(s) continue to monitor the product throughout its life cycle. The CHMP has 210 days, to adopt an opinion as to whether a marketing authorization should be granted. The process usually takes longer in case additional information is requested, which triggers clock-stops in the procedural timelines. The process is complex and involves extensive consultation with the regulatory authorities of member states and a number of experts. When an application is submitted for a marketing authorization in respect of a drug which is of major interest from the point of view of public health and in particular from the viewpoint of therapeutic innovation, the applicant may pursuant to Article 14(9) Regulation (EC) No 726/2004 request an accelerated assessment procedure. If the CHMP accepts such request, the time-limit of 210 days will be reduced to 150 days but it is possible that the CHMP can revert to the standard time-limit for the centralized procedure if it considers that it is no longer appropriate to conduct an accelerated assessment. Once the procedure is completed, a European Public Assessment Report, or EPAR, is produced. If the opinion is negative, information is given as to the grounds on which this conclusion was reached. After the adoption of the CHMP opinion, a decision on the MAA must be adopted by the European Commission, after consulting the European UnionEU member states, which in total can take more than 60 days. After a drug has been authorized and launched, it is a condition of maintaining the marketing authorization that all aspects relating to its quality, safety and efficacy must be kept under review.
Conditional Approval
In specific circumstances, EU legislation (Article 14(7) Regulation (EC) No 726/2004 and Regulation (EC) No 507/2006 on Conditional Marketing Authorizations for Medicinal Products for Human Use) enables applicants to obtain a conditional marketing authorization prior to obtaining the comprehensive clinical data required for an application for a full marketing authorization. Such conditional approvals may be granted for products (including medicines designated as orphan medicinal products), if (1) the risk-benefit balance of the product is positive, (2) it is likely that the applicant will be in a position to provide the required comprehensive clinical trial data, (3) the product fulfills unmet medical needs, and (4) the benefit to public health of the immediate availability on the market of the medicinal product concerned outweighs the risk inherent in the fact that additional data are still required. A conditional marketing authorization may contain specific obligations to be fulfilled by the marketing authorization holder, including obligations with respect to the completion of ongoing or new studies, and with respect to the collection of pharmacovigilance data. Conditional marketing authorizations are valid for one year, and may be renewed annually, if the risk-benefit balance remains positive, and after an assessment of the need for additional or modified conditions and/or specific obligations. The timelines for the centralized procedure described above also apply with respect to the review by the CHMP of applications for a conditional marketing authorization.
Marketing Authorization Under Exceptional Circumstances
As per Article 14(8) Regulation (EC) No 726/2004, products for which the applicant can demonstrate that comprehensive data (in line with the requirements laid down in Annex I of Directive 2001/83/EC, as amended) cannot be provided (due to specific reasons foreseen in the legislation) might be eligible for marketing authorization under exceptional circumstances. This type of authorization is reviewed annually to reassess the risk-benefit balance. The fulfillment of any specific procedures/obligations imposed as part of the marketing authorization under exceptional circumstances is aimed at the provision of information on the safe and effective use of the product and will normally not lead to the completion of a full dossier/approval.
Market Authorizations Granted by Authorities of EU Member States
In general, if the centralized procedure is not followed, there are three alternative procedures to obtain a marketing authorization in (one or several) EU member states as prescribed in Directive 2001/83/EC:
The decentralized procedure allows applicants to file identical applications to several EU member states and receive simultaneous national approvals based on the recognition by EU member states of an assessment by a reference member state.
The national procedure is only available for products intended to be authorized in a single EU member state.
A mutual recognition procedure similar to the decentralized procedure is available when a marketing authorization has already been obtained in at least one European UnionEU member state.
A marketing authorization may be granted only to an applicant established in the European Union.EU.
Pediatric Studies
Prior to obtaining a marketing authorization in the European Union,EU, applicants have to demonstrate compliance with all measures included in an EMA-approved Pediatric Investigation Plan, or PIP, covering all subsets of the pediatric population, unless the EMA has granted (1) a product-specific waiver, (2) a class waiver, or (3) a deferral for one or more of the measures included in the PIP. The respective requirements for all marketing authorization procedures are laid down in Regulation (EC) No 1901/2006, the so called Pediatric Regulation. This requirement also applies when a company wants to add a new indication, pharmaceutical form or route of administration for a medicine that is already authorized. The Pediatric Committee of the EMA, or PDCO, may grant deferrals for some medicines, allowing a company to delay development of the medicine in children until there is enough information to demonstrate its effectiveness and safety in adults. The PDCO may also grant waivers when development of a medicine in children is not needed or is not appropriate, such as for diseases that only affect the elderly population.
Before a marketing authorization application can be filed, or an existing marketing authorization can be amended, the EMA determines that companies actually comply with the agreed studies and measures listed in each relevant PIP.
Period of Authorization and Renewals
A marketing authorization will be valid for five years in principle, and the marketing authorization may be renewed after five years on the basis of a re-evaluation of the risk-benefit balance by the EMA or by the competent authority of the authorizing member state. To this end, the marketing authorization holder must provide the EMA or the competent authority with a consolidated version of the file in respect of quality, safety and efficacy, including all variations introduced since the marketing authorization was granted, at least six months before the marketing authorization ceases to be valid. Once renewed, the marketing authorization will be valid for an unlimited period, unless the Commission or the competent authority decides, on justified grounds relating to pharmacovigilance, to proceed with one additional five-year renewal. Any authorization that is not followed by the actual placing of the drug on the EU market (in case of centralized procedure) or on the market of the authorizing member state within three years after authorization will cease to be valid, the so-called “sunset clause.”
Orphan Drug Designation and Exclusivity
Pursuant to Regulation (EC) No 141/2000 and Regulation (EC) No. 847/2000 the European Commission can grant such orphan medicinal product designation to products for which the sponsor can establish that it is intended for the diagnosis, prevention, or treatment of (1) a life-threatening or chronically debilitating condition affecting not more than five in 10,000 people in the European Union,EU, or (2) a life threatening, seriously debilitating or serious and chronic condition in the European UnionEU and that without incentives it is unlikely that sales of the drug in the European UnionEU would generate a sufficient return to justify the necessary investment. In addition, the sponsor must establish that there is no other satisfactory method approved in the European UnionEU of diagnosing, preventing or treating the condition, or if such a method exists, the proposed orphan drug will be of significant benefit to patients.
Orphan drug designation provides a number of benefits, including fee reductions, regulatory assistance, and the possibility to apply for a centralized EU marketing authorization (see “Item 4.B—Government Regulation and Product Approval—Centralized Authorization Procedure”), as well as 10 years of market exclusivity following a marketing authorization. During this market exclusivity period, neither the EMA, nor the European Commission nor the Member States can accept an application or grant a marketing authorization for a “similar medicinal product.” A “similar medicinal product” is defined as a medicinal product containing a similar active substance or substances as contained in an authorized orphan medicinal product, and which is intended for the same therapeutic indication. The market exclusivity period for the authorized therapeutic indication may be reduced to six years if, at the end of the fifth year, it is established that the orphan drug designation criteria are no longer met, including where it is shown that the product is sufficiently profitable not to justify maintenance of market exclusivity. In addition, a competing similar medicinal product may be authorized prior to the expiration of the market exclusivity period, including if it is shown to be safer, more effective or otherwise clinically superior to the already approved orphan drug or if the holder of the marketing authorization for the already approved orphan drug is unable to supply sufficient quantities of the product.
If the MAA of a medicinal product designated as an orphan drug includes the results of all studies conducted in compliance with an agreed PIP, and a corresponding statement is subsequently included in the marketing authorization granted, the ten-year period of market exclusivity will be extended to twelve years.
Regulatory Data Protection
European UnionEU legislation also provides for a system of regulatory data and market exclusivity. According to Article 14(11) of Regulation (EC) No 726/2004, as amended, and Article 10(1) of Directive 2001/83/EC, as amended, upon receiving marketing authorization, new chemical entities approved on the basis of complete independent data package benefit from eight years of data exclusivity and an additional two years of market exclusivity. Data exclusivity prevents regulatory authorities in the European UnionEU from referencing the innovator’s data to assess a generic (abbreviated) application. During the additional two-year period of market exclusivity, a generic marketing authorization can be submitted, and the innovator’s data may be referenced, but no generic medicinal product can be marketed until the expiration of the market exclusivity. The overall ten-year period will be extended to a maximum of eleven years if, during the first eight years of those 10 years, the marketing authorization holder, or MAH, obtains an authorization for one or more new therapeutic indications which, during the scientific evaluation prior to their authorization, are held to bring a significant clinical benefit in comparison with existing therapies. Even if a compound is considered to be a new chemical entity and the innovator is able to gain the period of data exclusivity, another company nevertheless could also market another version of the drug if such company obtained marketing authorization based on an MAA with a complete independent data package of pharmaceutical test, pre-clinical tests and clinical trials. However, products designated as orphan medicinal products enjoy, upon receiving marketing authorization, a period of 10 years of orphan market exclusivity (see also “Item 4.B—Government Regulation and Product Approval—Regulation and Marketing Authorization in the European Union—Orphan Drug Designation and Exclusivity”). Depending upon the timing and duration of the EU marketing authorization process, products may be eligible for up to five years’ supplementary protection certificates, or SPCs, pursuant to Regulation (EC) No 469/2009. Such SPCs extend the rights under the basic patent for the drug.
Regulatory Requirements After a Marketing Authorization Has Been Obtained
If we obtain authorization for a medicinal product in the European Union,EU, we will be required to comply with a range of requirements applicable to the manufacturing, marketing, promotion and sale of medicinal products:
Pharmacovigilance and Other Requirements
We will, for example, have to comply with the EU’s stringent pharmacovigilance or safety reporting rules, pursuant to which post-authorization studies and additional monitoring obligations can be imposed.
Other requirements relate to, for example, the manufacturing of products and APIs in accordance with good manufacturing practice standards. EU regulators may conduct inspections to verify our compliance with applicable requirements, and we will have to continue to expend time, money and effort to remain compliant. Non-compliance with EU requirements regarding safety monitoring or pharmacovigilance, and with requirements related to the development of products for the pediatric population, can also result in significant financial penalties in the European Union.EU. Similarly, failure to comply with the EU’s requirements regarding the protection of individual personal data can also lead to significant penalties and sanctions. Individual European UnionEU member states may also impose various sanctions and penalties in case we do not comply with locally applicable requirements.
Manufacturing
The manufacturing of authorized drugs, for which a separate manufacturer’s license is mandatory, must be conducted in strict compliance with the EMA’s cGMP requirements and comparable requirements of other regulatory bodies in the European Union,EU, which mandate the methods, facilities and controls used in manufacturing, processing and packing of drugs to assure their safety and identity. The EMA enforces its cGMP requirements through mandatory registration of facilities and inspections of those facilities. The EMA may have a coordinating role for these inspections while the responsibility for carrying them out rests with the member states competent authority under whose responsibility the manufacturer falls. Failure to comply with these requirements could interrupt supply and result in delays, unanticipated costs and lost revenues, and could subject the applicant to potential legal or regulatory action, including but not limited to warning letters, suspension of manufacturing, seizure of product, injunctive action or possible civil and criminal penalties.
Marketing and Promotion
The marketing and promotion of authorized drugs, including industry-sponsored continuing medical education and advertising directed toward the prescribers of drugs and/or the general public, are strictly regulated in the European UnionEU notably under Directive 2001/83/EC, as amended. The applicable regulations aim to ensure that information provided by holders of marketing authorizations regarding their products is truthful, balanced and accurately reflects the safety and efficacy claims authorized by the EMA or by the competent authority of the authorizing member state. Failure to comply with these requirements can result in adverse publicity, warning letters, corrective advertising and potential civil and criminal penalties.
Clinical Testing in Israel
In order to conduct clinical trials on humans in Israel, prior authorization must be obtained (depending on the nature of the trial) from either the medical director of the institution in which the clinical trials are scheduled to be conducted, or from the general manager of the Israeli Ministry of Health, as required under the Guidelines for Clinical Trials in Human Subjects implemented pursuant to the Israeli Public Health Regulations (Clinical Trials in Human Subjects), 5740-1980, as amended from time to time. Pursuant to the Israeli Public Health Regulations, such authorization generally cannot be granted unless, among other things, the relevant institutions ethics committee has provided its prior approval of the testing and that the trial complies with the standards set forth by the Declaration of Helsinki. In certain circumstances, such as in the cases of genetic trials or special fertility trials, a written opinion provided by the Ministry of Health’s ethics committee is also required in order to receive such authorization. The Ministry of Health has provided emergency guidance associated with COVID-19 in March 2020 for ongoing clinical trials, which we are complying with, and may issue additional guidance that may impact our ability to complete our ongoing clinical trials of EB613 in Osteoporosis.
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 participating human subjects, and it must also 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.
Other Healthcare Laws
Health care providers, physicians and third-party payers play a primary role in the recommendation and prescription of drug products that are granted marketing approval. Arrangements with third-party payers and customers are subject to broadly applicable fraud and abuse and other health care laws and regulations. In the United States, such restrictions under applicable federal and state healthcare laws and regulations, include the following:
the federal Anti-Kickback Statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made, in whole or in part, under a federal health care program such as Medicare and Medicaid. A person or entity does not need to have actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it to have committed a violation; in addition, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act;
the federal False Claims Act imposes civil penalties, and provides for civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government;
HIPAA imposes criminal and civil liability for executing a scheme to defraud any health care benefit program or making false statements relating to health care matters. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation;
the federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for health care benefits, items or services;
the federal transparency requirements under the ACA require certain manufacturers of drugs, devices, biologics and medical supplies to report to the Department of Health and Human Services information related to payments and other transfers of value to physicians and teaching hospitals and the ownership and investment interests of such physicians and their immediate family members;
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, which governs the conduct of certain electronic healthcare transactions and protects the security and privacy of protected health information;
the Physician Payments Sunshine Act, created under the ACA, and its implementing regulations, which requires specified manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program, with specific exceptions, to report annually to the Centers for Medicare & Medicaid Services, or CMS, information related to payments or other “transfers of value” made to physicians. All such reported information is publicly available;
analogous state and non-U.S. laws and regulations, such as state anti-kickback and false claims laws which may apply to items or services reimbursed by any payer, including commercial insurers; state laws that require pharmaceutical companies to comply with the industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state laws that require pharmaceutical manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts; and
regulation by the Centers for Medicare and Medicaid Services and enforcement by the U.S. Department of Health and Human Services (Office of Inspector General) or the U.S. Department of Justice.
Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that some of our future business activities could be subject to challenge under one or more of such laws. Efforts to ensure that our business arrangements with third parties will comply with applicable laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other health care laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion from government funded health care programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. If any of the physicians or other providers or entities with whom we expect to do business are found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded health care programs.
Environmental, Health and Safety
We are further subject to various foreign, national, federal, state and local laws and regulations relating to environmental, health and safety matters, in a number of jurisdictions, governing, inter alia, (i) the use, storage, registration, handling, emission and disposal of chemicals, waste materials and sewage; and (ii) chemical, air, water and ground contamination, air emissions and the cleanup of contaminated sites, including any contamination that results from spills due to our failure to properly dispose of chemicals, waste materials and sewage. Our operations at our Jerusalem research and development facility use chemicals and produce waste materials and sewage. Our activities require permits from various governmental authorities including, local municipal authorities, the Ministry of Environmental Protection and the Ministry of Health. The Ministry of Environmental Protection and the Ministry of Health, local authorities and the municipal water and sewage company conduct periodic inspections in order to review and ensure our compliance with the various regulations.
Although we do not believe that we will be required to make material operating or capital expenditures in connection with such laws and regulations, we may be required to incur significant costs to comply with these laws and regulations in the future, and complying with these laws and regulations may result in a material adverse effect upon our business, financial condition and results of operations. Further, our failure to comply with such laws and regulations could have a material adverse effect on our business and reputation, result in an interruption or delay in the development or manufacture of our products, or increase the costs for the development or manufacture of our products.
In addition, laws and regulations relating to environmental, health and safety matters are often subject to change. In the event of any changes or new laws or regulations, we could be subject to new compliance measures or to penalties for activities which were previously permitted. For instance, Israeli regulations were promulgated in 2011 relating to the discharge of industrial sewage into the sewer system. These regulations establish new and potentially significant fees for discharging forbidden or irregular sewage into the sewage system.
Pharmaceutical Pricing and Reimbursement
Significant uncertainty exists as to the coverage and reimbursement status of any drug products for which we plan to seek regulatory approval. Sales of any of our product candidates, if approved, will depend, in part, on the extent to which the costs of the products will be covered by third-party payors, including government health programs such as Medicare and Medicaid, commercial health insurers and managed care organizations. Concerns about drug pricing have been expressed by both members of the United States Congress and the administration. The process for determining whether a payer will provide coverage for a drug product may be separate from the process for setting the price or reimbursement rate that the payer will pay for the drug product once coverage is approved. Third-party payers may limit coverage to specific drug products on an approved list, or formulary, which might not include all of the approved drugs for a particular indication.
In order to secure coverage and reimbursement for any product that might be approved for sale, we may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of the product, in addition to the costs required to obtain FDA, EMA or other comparable regulatory approvals. Our product candidates may not be considered medically necessary or cost-effective. A payer’s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will be approved. Third-party reimbursement may not be sufficient to enable us to maintain price levels high enough to realize an appropriate return on our investment in product development.
The containment of healthcare costs has become a priority of governments, and the prices of drugs have been a focus in this effort. Third-party payers are increasingly challenging the prices charged for medical products and services and examining the medical necessity and cost effectiveness of medical products in addition to their safety and efficacy. If these third-party payors do not consider our products to be cost-effective compared to other available therapies, they may not cover our products if approved under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our products at a profit. The U.S. government, state legislatures and non-U.S. governments have shown significant interest in implementing cost containment programs to limit the growth of government-paid health care costs, including price controls, restrictions on reimbursement and requirements for substitution of generic products for branded prescription drugs. Adoption of such controls and measures, and tightening of restrictive policies in jurisdictions with existing controls and measures, could limit payments for pharmaceuticals such as the product candidates that we are developing and could adversely affect our net revenue and results.
Pricing and reimbursement schemes vary widely from country to country. Some countries provide that drug products may be marketed only after a reimbursement price has been agreed. Some countries may require the completion of additional studies that compare the cost-effectiveness of a particular product candidate to currently available therapies. The conduct of such studies could be expensive and result in delays in our commercializing efforts. The European UnionEU provides options for its member states to restrict the range of drug products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. European UnionEU member states may approve a specific price for a drug product or may instead adopt a system of direct or indirect controls on the profitability of the company placing the drug product on the market. Other member states allow companies to fix their own prices for drug products, but monitor and control company profits. The downward pressure on health care costs in general, particularly prescription drugs, has become very intense. As a result, increasingly high barriers are being erected to the entry of new products. In addition, in some countries, cross-border imports from low-priced markets exert competitive pressure that may reduce pricing within a country. There can be no assurance that any country that has price controls or reimbursement limitations for drug products will allow favorable reimbursement and pricing arrangements for any of our products.
The marketability of any products for which we receive regulatory approval for commercial sale may suffer if the government and third-party payors fail to provide adequate coverage and reimbursement. In addition, emphasis on managed care in the United States has increased and we expect will continue to increase the pressure on drug pricing. Coverage policies, third-party reimbursement rates and drug pricing regulation may change at any time. Even if favorable coverage and reimbursement status is attained for one or more products for which we receive regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future.
Health Care Reform
In the United States, there have been and continue to be a number of significant legislative initiatives to contain healthcare costs. The ACA was enacted in the United States in March 2010 and contains provisions that may reduce the profitability of drug products, including, for example, increased rebates for drugs subject to the Medicaid Drug Rebate Program, extension of Medicaid rebates to Medicaid managed care plans, mandatory discounts for certain Medicare Part D beneficiaries and annual fees based on pharmaceutical companies’ share of sales to federal health care programs.
In addition, other legislative changes have been proposed and adopted since the ACA was enacted. These changes included aggregate reductions to Medicare payments to providers of 2% per fiscal year, effective April 1, 2013 and, due to subsequent legislative amendments to the statute, will stay in effect through 2027, unless additional Congressional action is taken.taken; however, pursuant to the CARES Act, and subsequent legislation, these reductions are suspended from May 1, 2020 through March 31, 2021 due to the COVID-19 pandemic. In January 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, reduced Medicare payments to several providers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. These new laws may result in additional reductions in Medicare and other healthcare funding, which could have a material adverse effect on customers for our drugs, if approved, and, accordingly, our financial operations.
There have been judicial and Congressional challenges to certain aspects of the ACA, as well as recent efforts by the Trump administration to repeal and replace certain aspects of the ACA, and we expect such challenges to continue. Since January 2017, President Trump has signed two Executive Orders and other directives designed to delay the implementation of certain provisions of the ACA or otherwise circumvent some of the requirements for health insurance mandated by the ACA. In 2017, the U.S. Congress enacted the 2017 Tax Act, which eliminated the tax-based shared responsibility payment imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” On January 22, 2018, President Trump signed a continuing resolution on appropriations for fiscal year 2018 that delayed the implementation of certain fees mandated by the ACA, including the so-called “Cadillac” tax on certain high cost employer-sponsored insurance plans and the annual fee imposed on certain health insurance providers based on market share. The Bipartisan Budget Act of 2018, or the BBA, among other things, amends the ACA, effective January 1, 2019, to close the coverage gap in most Medicare drug plans. In July 2018, CMS published a final rule permitting further collections and payments to and from certain ACA qualified health plans and health insurance issuers under the ACA risk adjustment program in response to the outcome of federal district court litigation, regarding the method CMS uses to determine this risk adjustment. On December 14, 2018, a federal judge in Texas ruled that the ACA is unconstitutional in its entirety because the “individual mandate” was repealed by Congress as part of the 2017 Tax Act. While the judge, as well as the Trump administration and CMS, have stated that the ruling will have no immediate effect pending appeal of the decision, it is unclear how this decision, subsequent appeals, and other efforts to repeal and replace the ACA, will impact our business. On December 18, 2019, the Fifth Circuit Court of Appeals upheld the lower court’s decision that the ACA was unconstitutional. On March 2, 2020, the U.S. Supreme Court granted certiorari to review the case withand heard oral arguments on November 10, 2020. Although the U.S. Supreme Court has not yet ruled on the constitutionality of the ACA, , on January 28, 2021, President Biden issued an outcome expected in summer 2020.executive order to initiate a special enrollment period from February 15, 2021 through May 15, 2021 for purposes of obtaining health insurance coverage through the ACA marketplace. The executive order also instructs certain governmental agencies to review and reconsider their existing policies and rules that limit access to healthcare, including among others, reexamining Medicaid demonstration projects and waiver programs that include work requirements, and policies that create unnecessary barriers to obtaining access to health insurance coverage through Medicaid or the ACA.
Moreover, recently there has been heightened governmental scrutiny over the manner in which manufacturers set prices for their commercial products. There have been several recent U.S. Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, reduce the cost of drugs under Medicare, and reform government program reimbursement methodologies for drugs. TheOn March 10, 2020, the Trump administration’s budget proposaladministration sent “principles” for fiscal year 2019 contains additional drug price control measurespricing to Congress, calling for legislation that could be enacted during the 2019 budget process or inwould, among other future legislation, including, for example, measures to permitthings, cap Medicare Part D plansbeneficiary out-of-pocket pharmacy expenses, provide an option to negotiate the price of certain drugs undercap Medicare Part B, to allow some states to negotiate drug prices under MedicaidD beneficiary monthly out-of-pocket expenses, and to eliminate cost sharing for generic drugs for low-income patients.
place limits on pharmaceutical price increases. Additionally, the Trump administration released a “Blueprint” to lower drug prices and reduce out of pocket costs of drugs that contains additional proposals to increase manufacturer competition, increase the negotiating power of certain federal healthcare programs, incentivize manufacturers to lower the list price of their products and reduce the out of pocket costs of drug products paid by consumers. On July 24, 2020 and September 13, 2020, the Trump administration announced several executive orders related to prescription drug pricing that attempt to implement several of the administration’s proposals. As a result, the FDA released a final rule on September 24, 2020, effective November 30, 2020, providing guidance for states to build and submit importation plans for drugs from Canada. Further, on November 20, 2020, the U.S. Department of Health and Human Services, or HHS, finalized a regulation removing safe harbor protection for price reductions from pharmaceutical manufacturers to plan sponsors under Part D, either directly or through pharmacy benefit managers, unless the price reduction is required by law. The rule also creates a new safe harbor for price reductions reflected at the point-of-sale, as well as a safe harbor for certain fixed fee arrangements between pharmacy benefit managers and manufacturers. On November 20, 2020, CMS issued an interim final rule implementing President Trump’s Most Favored Nation executive order, which would tie Medicare Part B payments for certain physician-administered drugs to the lowest price paid in other economically advanced countries, effective January 1, 2021. On December 28, 2020, the U.S. District Court in Northern California issued a nationwide preliminary injunction against implementation of the interim final rule. It is unclear whether the Biden administration will work to reverse these measures or pursue similar policy initiatives. At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.
Additionally, on November 20, 2020, CMS issued an Interim Final Rule implementing the Most Favored Nation, or MFN, Model under which Medicare Part B reimbursement rates will be calculated for certain drugs and biologicals based on the lowest price drug manufacturers receive in Organization for Economic Cooperation and Development countries with a similar gross domestic product per capita. The MFN Model regulations mandate participation by identified Part B providers and will apply in all U.S. states and territories for a seven-year period beginning January 1, 2021 and ending December 31, 2019,2027. The Interim Final Rule has not been finalized and is subject to revision and challenge, including legal challenges from industry advocacy groups and participants. On November 20, 2020, HHS finalized a regulation removing safe harbor protection for price reductions from pharmaceutical manufacturers to plan sponsors under Part D, either directly or through pharmacy benefit managers, unless the price reduction is required by law. The rule also creates a new safe harbor for price reductions reflected at the point-of-sale, as well as a safe harbor for certain fixed fee arrangements between pharmacy benefit managers and manufacturers. Although a number of these, and other proposed measures may require authorization through additional legislation to become effective, and the Biden administration may reverse or otherwise change these measures, Congress has indicated that it will continue to seek new legislative measures to control drug costs.
On November 20, 2020, the HHS Office of Inspector General, proposedfinalized further modifications to the federal Anti-Kickback Statute. Under the final rules, the HHS Office of Inspector General added safe harbor protections under the Anti-Kickback Statute for certain coordinated care and value-based arrangements among clinicians, providers, and others, yet removed safe harbors, which, among other things, may affect rebates paid byharbor protection for price reductions from pharmaceutical manufacturers to Medicareplan sponsors under Part D, plans,either directly or through pharmacy benefit managers, unless the purpose of whichprice reduction is required by law. The rule also creates a new safe harbor for price reductions reflected at the point-of-sale, as well as a safe harbor for certain fixed fee arrangements between pharmacy benefit managers and manufacturers. This rule (with exceptions) became effective January 19, 2021. We continue to further reduce the cost of drug products to consumers. In addition,evaluate what effect, if any, these rules will have on our business. CMS issued a final rule, effective on July 9, 2019, that requires direct-to-consumer advertisements of prescription drugs and biological products, for which payment is available through or under Medicare or Medicaid, to include in the advertisement the Wholesale Acquisition Cost, or list price, of that drug or biological product if it is equal to or greater than $35 for a monthly supply or usual course of treatment.
Prescription drugs and biological products that are in violation of these requirements will be included on a public list. Any adopted health reform measure could reduce the ultimate demand for our products, if approved, or put pressure on our product pricing. Individual states in the United States have also become increasingly active in passing legislation and implementing regulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. In addition, regional healthcare authorities and individual hospitals are increasingly using bidding procedures to determine what pharmaceutical products and which suppliers will be included in their prescription drug and other healthcare programs. We expect that additional state and federal healthcare reform measures will be adopted in the future.
We expect that additional state and federal healthcare reform measures, as well as legal changes by foreign governments, will be adopted in the future, any of which could limit the amounts that governments will pay for healthcare products and services, which could result in reduced demand for our product candidates or additional pricing pressures.
Legal Proceedings
We are not currently a party to any material legal proceedings. Emisphere has notified us that it believes that it is the exclusive owner of certain U.S. and related foreign patents and patent applications we acquired from Oramed Ltd.; however, Emisphere has not initiated a legal proceeding against us regarding its claim. The matter is still in its early stages. If Emisphere were to initiate a legal proceeding, we would vigorously defend against such claim and believe that Emisphere’s notification is without merit. For more information on the risks related to Emisphere’s claim, see “Item 3.D.–Risk Factors—Risks Related to Our Intellectual Property—We may become involved in proceedings to protect or enforce our proprietary rights, which could be expensive and time consuming, and may ultimately be unsuccessful.”
4.C. Organizational Structure
We were formed as a company in the State of Israel on September 30, 2009.
Our corporate structure consists of Entera Bio Ltd. and Entera Bio, Inc., our wholly-owned U.S. subsidiary.
4.D. Property, Plants and Equipment
Our facilities in Israel, which house our research and developments, clinical development, clinical operations, regulatory and management functions are located in Jerusalem, Israel. Under a Lease Agreement with Unihead Biopark Ltd. as of December 31, 2019,2020, we are leasing approximately 622 square meters of office and laboratory space pursuant to a lease agreement that will expire on June 30, 2023, with a one-time option for early termination by us on December 31, 2021, subject to a notice period of six months.
Our corporate offices in the United States are located just outside of Boston in Wellesley, Massachusetts. We currently lease approximately 1,390 square feet of office space under a short-term lease that expires in October 2020, if not renewed for successive periods.
We believe that our current officesoffice and laboratory space in Israel and our corporate headquarters in the United States is sufficient to meet our anticipated needs for the foreseeable future and is suitable for the conduct of our business. We believe that suitable additional space would be available if required in the future on commercially reasonable terms.
ITEM 4A.UNRESOLVED STAFF COMMENTS
None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
5.A. Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this Annual Report. This discussion contains forward-looking statements that are subject to known and unknown risks and uncertainties. Actual results and the timing of events may differ significantly from those expressed or implied in such forward-looking statements due to a number of factors, including those set forth in the section entitled “Risk Factors” and elsewhere in this Annual Report. You should read the following discussion in conjunction with “Special Note Regarding Forward-Looking Statements” and “Risk Factors” included elsewhere in this Annual Report. We have prepared our consolidated financial statements in accordance with IFRS as issued by IASB.
Overview
We are a clinical-stage biopharmaceutical company focused on the development and commercialization of orally delivered macromolecule therapeutics for use in areas with significant unmet medical need where adoption of injectable therapies is limited due to cost, convenience and compliance challenges for patients. Our current strategy for our lead product candidates is to use our technology to develop an oral formulation of human parathyroid hormone (1-34), or PTH, which has been approved in the United States in injectable form for over a decade. Our lead oral PTH product candidates are EB613 for the treatment of osteoporosis and EB612 for the treatment of hypoparathyroidism. In both of these indications, the leading products are daily injectable formulations of PTH. In total, more than 180260 healthy volunteers and patients, have received multiple doses of various formulations of our oral PTH (1-34).
We met with the Food and Drug Administration (FDA)FDA in the fourth quarter of 2018 to discuss the development and regulatory pathway for EB613 for the treatment of osteoporosis. In addition to discussing various aspects of the nonclinical and clinical development plan, the meeting focused on the use of the 505(b)(2) regulatory pathway and the use of BMD rather than fracture incidence as the primary endpoint to support an NDA. Based on the FDA’s response, we believe that we may be able to use BMD as the primary efficacy endpoint for a Phase 3 trial and that a fracture endpoint trial will not be required. In July 2019, we initiated a Phase 2 multi-center, placebo-controlled dose-ranging trial of EB613 in approximately 160 osteoporosis patients, at 4 leading osteoporosis centers in Israel. This trial, which includes a treatment period of 6 months, is being conducted to evaluate both the safety of EB613 and to identify the optimal dose that we will select to advance into a single Phase 3 pivotal trial. In this trial, we are evaluating, multiple bone markers, such as P1NP – a bone formation marker, CTX – a bone resorption marker, BMD, and various additional safety endpoints. Based on directives
In May 2020 we announced limited interim biomarker data from the Israeli Ministry of Health and our affiliated medical institutions implemented in March 2020 due to COVID-19, we have temporarily suspended enrollment of new patients in our ongoing Phase 2 clinical trial. At this time,trial of EB613. Based on the interim biomarker data, EB613 demonstrated statistically significant effects on the P1NP biomarker after one month of treatment (p<0.001) compared to the placebo, and meaningful increases at months two and three compared to the placebo with the highest EB613 dose (1.5 mg). There was also a dose response at one month, with those trends continuing at two months. Based on the interim data, we have 97 patients currently enrolledamended the Phase 2 protocol in this trial. AsJuly 2020 and discontinued the two lower doses (0.5mg and 1.0mg) and added a 2.5mg dose of March 23,EB613. In November 2020, we are continuingcompleted the enrollment in the trial with 161 patients, including the new high-dose group. We continue to collect patient data fromfollow the currently enrolled patients in this trialsubjects through various monitoring means established by the regulatory authorities.authorities in compliance with COVID-19 restrictions.
In parallel, we are conducting several nonclinical safety assessment studies to support our regulatory filings, including a plannedour Investigational New Drug Application, or IND, with the FDA to facilitate various IND-enabling trials, and subsequently, to enable the start of a single Phase 3 clinical trial in approximately 600-700 osteoporosis patients using sites in, the United States, Israel and other territories, subject to positive data from our ongoing Phase 2 trial of EB613, pending the determination of theany impact of COVID-19 on our ability to collect sufficient data from the trial enrollment and its impact on such data.trial. We believe that the study design to achieve the BMD endpoint, as discussed with the FDA, will have a much smaller number of patients and be significantly shorter in duration than a pathway that utilizes a placebo-controlled bone fracture endpoint. See “Item 4.B.–Business Overview—EB613 for Osteoporosis.”
Our lead product candidate for hypoparathyroidism, EB612, is an oral formulation of PTH (1-34). We believe that EB612, if approved, has the potential to become the standard of care for hypoparathyroidism. We have tested several formulations of our oral PTH (1-34) in multiple Phase 1 clinical trials to test different manufacturing technologies, formulations, administration parameters and dosing regimens. TheseThis data led to a number of Phase 2 studies evaluating different formulations of EB612 in hypoparathyroidism patients including a multicenter Phase 2a clinical trial of EB612 in hypoparathyroidism patients. The endpoints in these trials,the Phase 2trials, included examination of the PK/PD levels of EB612, as well as serum calcium, serum phosphate, urinary calcium and urinary phosphate. In these trials, EB612 was generally well tolerated and achieved the targeted blood levels of PTH, serum calcium, serum phosphate, and the hormonal metabolite of vitamin D (1,25- dihydroxyvitamin D). See “Item 4.B.–Business Overview— EB612 for Hypoparathyroidism.”
In addition, we intend to use our technology as a platform for the oral delivery of other protein and large molecule therapeutics as well as novel therapeutics. For example, in the fourth quarter of 2018, we signed a license agreement with Amgen and may sign additional licensing or collaboration agreements in the future. We intend to utilize future funds, as available, to advance EB613 and EB612 through clinical development and ultimately towards regulatory approval. To date, we have funded our operations through our sales of our Ordinary Shares under our Equity Distribution Agreement with Canaccord Genuity LLC in connection with the Company's ATM Program (as defined below in Item 10.C “Material Contracts”), sales of Ordinary Shares in our IPO, private placements of our ordinary sharesOrdinary Shares and preferred shares, warrants, convertible debts,debt, government grants and through revenues generated from research collaboration and our license agreement with Amgen. We have no products that have received regulatory approval and have never generated revenue from sales of any product.
Since our inception, we have raised a total of $56.9$70.2 million, including $13.3 million through our ATM Program, of which $9.8 million was raised in 2021, $14.3 million in our December 2019 private placement, $11.2 in our IPO in 2018 and $31.3 in funding from grants, private placements of Ordinary Shares, preferred shares and debt prior to our IPO.
Since inception, we have incurred significant losses. For the years ended December 31, 2017,2020, 2019 and 2018, and 2019, our operating losses were $11.3$11.1 million, $10.9$11.5 million and $11.5$10.9 million, respectively and we expect to continue to incur significant expenses and losses for the next several years. As of December 31, 2019,2020, we had an accumulated deficit of $62.9$72.9 million. Our losses may fluctuate significantly from quarter to quarter and year to year, depending on the timing of our clinical trials, our expenditures on any other research and development activities, the receipt of government grants and payments under the collaboration with Amgen or any future collaborations into which we may enter.
As a result of our recurring losses from operations, negative cash flows and lack of liquidity, management is of the opinion that there is substantial doubt as to the Company's ability to continue as a going concern. Our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements as of, and for the year ended, December 31, 2019,2020, expressing the existence of substantial doubt about our ability to continue as a going concern. The audited consolidated financial statements included herein have been prepared assuming that we will continue as a going concern and do not include adjustments that might result from the outcome of this uncertainty. If we are unable to raise the requisite funds, we will need to curtail or cease operations. See “Item 3.D.–Risk Factors—Risks Related to Our Financial Position and Need for Additional Capital.”
As of March, 15, 2020,16, 2021, we had cash and cash equivalents of $13.7$15.4 million. In order to fund further operations, we will need to raise additional capital. We may raise these funds through private and/or public equity offerings, debt financings, government grants, strategic collaborations and licensing arrangements. Additional financing may not be available when we need it or may not be available on terms that are favorable to us.
As of March 15, 2020,16, 2021, we had 2119 employees and five consultants who provide consulting services to us on a part-time basis. Our operations are located in Jerusalem, Israel and in the United States, just outside of Boston in Wellesley Massachusetts.Israel.
Patent Transfer, Licensing Agreements and Grant Funding
Oramed Patent Transfer Agreement
In 2011, we entered into a patent transfer agreement with Oramed, or the Patent Transfer Agreement, pursuant to which Oramed assigned to us all of its rights, title and interest in the patent rights Oramed licensed to us when we were originally capitalized, subject to a worldwide, royalty-free, exclusive, irrevocable, perpetual and sub-licensable license granted to Oramed under the assigned patent rights to develop, manufacture and commercialize products or otherwise exploit such patent rights in the fields of diabetes and influenza. Additionally, we agreed not to engage, directly or indirectly, in any activities in the fields of diabetes and influenza. Under the terms of the Patent Transfer Agreement, we agreed to pay Oramed royalties equal to 3% of our net revenues generated, directly or indirectly, from exploitation of the assigned patent rights, including the sale, lease or transfer of the assigned patent rights or sales of products or services covered by the assigned patent rights. See “Item 4.B.— Business Overview—Patent Transfer, Licensing Agreements and Grant Funding—Oramed Patent Transfer Agreement.”
Amgen Research Collaboration and License Agreement
On December 10, 2018, we entered into a research collaboration and license agreement with Amgen, or the Amgen Agreement in inflammatory disease and other serious illnesses. Pursuant to the Amgen Agreement, we and Amgen will use our proprietary drug delivery platform to develop oral formulations for one preclinical large molecule program that Amgen has selected. In exchange for entering into the agreement, Amgen paid us a non-refundable and non-creditable initial access fee of $725,000 in the first quarter of 2019, of which $500,000 was attributed to the right to use the intellectual property and $225,000 was attributed to the pre-clinical R&D services that we are obligated to perform under the Amgen Agreement. Thus far during our collaboration, Amgen has paid $503,000 for pre-clinical R&D services performed by us and will pay an additional $225,000 upon completion of services in the second year of the collaboration, In addition, under the Amgen Agreement, Amgen reimburses us for additional expenses that we incur for any work we do under the collaboration.
Thus far during our collaboration, Amgen has paid $518,000 for pre-clinical R&D services.
Amgen also has options, limited in time, to select up to two additional programs to include in the collaboration. Amgen is responsible for the clinical development, regulatory approval, manufacturing and worldwide commercialization of the programs. Pursuant to the terms of the Amgen Agreement, Amgen is required to make aggregate payments of up to $270 million upon achievement of various clinical and commercial milestones or its exercise of options to select the additional two programs to include in the collaboration. In addition, Amgen is required to make tiered royalty payments ranging from the low to mid-single digits based on the level of Amgen’s net sales of the applicable products covered by the Amgen Agreement. Amgen’s obligation to pay royalties with respect to a product in a particular country commences upon the first commercial sale of such product in such country and expires on a country-by-country and product-by-product basis on the later of (a) the date on which the sale of the product is no longer covered by a valid claim of a patent licensed to Amgen under the Amgen Agreement, and (b) the tenth anniversary of the first commercial sale of such product in such country.
Under the Amgen Agreement, we granted Amgen an exclusive, worldwide, sub-licensable license under certain of our intellectual property relating to our drug delivery technology to develop, manufacture and commercialize the applicable products. We will retain all intellectual property rights to our drug delivery technology, Amgen will retain all rights to its large molecules and any subsequent improvements, and ownership of certain intellectual property developed through the performance of the collaboration is to be determined by U.S. patent law. Each party is responsible for the filing and prosecution of patents relating to its owned developments and, with respect to any jointly-owned developments, we are responsible for the filing and prosecution of patents solely claiming improvements to our drug delivery technology and Amgen is responsible for the filing and prosecution of any other jointly-owned developments. Amgen has the primary right to enforce any such patents against third-party infringement with respect to a product that has the same mechanism of action as one of the collaboration programs, subject to involvement by us in certain circumstances.
During certain periods covered by the Amgen Agreement, we may not alone, or with a third party, research, develop, manufacture or commercialize certain products that interact with the targets of the applicable collaboration programs. The collaboration is governed by a joint research committee, or JRC, made up of equal representatives of us and Amgen. The JRC may establish additional subcommittees to oversee particular projects or activities. Subject to certain limitations, if the JRC is unable to make a decision by consensus, the disagreement is to be resolved through escalation to specified senior executive officers of the parties, although Amgen has the final decision-making ability with respect to certain pre-defined issues.
The term of the Amgen Agreement commenced on December 10, 2018, and unless earlier terminated, shall continue in full force and effect, on a product-by-product basis, until expiration of the last-to-expire royalty term with respect to such product. At any point in the research, development or commercialization process, subject to certain conditions, Amgen can terminate the Amgen Agreement in its entirety or with respect to a specific development program. Both parties can terminate the agreement for a material breach by the other party that goes uncured, subject to a 90-day notice period.
The Israeli Innovation Authority Grant (formerly: The Office of the Chief Scientist)
We have received grants of approximately $0.5 million from the IIA to partially fund our research and development. The grants are subject to certain requirements and restrictions under the Israeli Encouragement of Research, Development and Technological Innovation in Industry Law 5477-1984, or the Research Law. In general, until the grants are repaid with interest, royalties are payable to the Israeli government in the amount of 3% on revenues derived from sales of products or services developed in whole or in part using the IIA grants, including EB613, EB612 and any other oral PTH product candidates we may develop. The royalty rate may increase to 5%, with respect to approved applications filed following any year in which we achieve sales of over $70 million.
The amount that must be repaid may be increased to three times the amount of the grant received, and the rate of royalties may be accelerated, if manufacturing of the products developed with the grant money is transferred outside of the State of Israel. Moreover, a payment of up to 600% of the grant received may be required upon the transfer of any IIA-funded know-how to a non-Israeli entity. We signed a contract with a U.K.-based contract manufacturing organization (See “Item 4.B.–Business overview—Manufacturing”), to produce and supply pills for trials performed worldwide. We believe that, because production is not being done for commercial purposes, the entry into the production agreement in the U.K. will not affect the royalty rates to be paid to the IIA. Should it turn out that this position is not acceptable to the IIA, the maximum royalties to be paid to the IIA will be approximately $1.5 million, which is three times the amount of the original grant. Following the signing of the Amgen Agreement, we are required to pay 5.38% of each payment by Amgen and up to 600% of the grant received. In February 2019,As of March 16, 2021 we have paid royalties to the IIA $27,000in the amount of $67,000 related to the Amgen Agreement.
In addition to paying any royalties due, we must abide by other restrictions associated with receiving such grants under the Research Law that continue to apply following repayment to the IIA. See “Item 4.B.–Business Overview—The Israeli Innovation Authority Grant.”
Financial Overview
Revenue
To date, we have not generated any revenue from sales of our products and we do not expect to receive any revenue from any product candidates that we develop unless and until we obtain regulatory approval and successfully commercialize our products.
On December 10, 2018, we entered into the Amgen Agreement in inflammatory disease and other serious illnesses. As of December 31, 2019, we received a non-refundable and non-creditable initial access payment of $725,000 from Amgen, of which $500,000 related to a license fee and the remaining $225,000 related to the research and development services we provided to Amgen in the first year of the Amgen Agreement. On January 24,During 2020 through March 16, 2021, we received $278,000an additional aggregate amount of $518,000 from Amgen for research and development services to be provided in 2020, the second-year of the Amgen Agreement and we are eligible to receive in the first quarter of 2021 an additional $225,000 upon completion of the research and development services we provide in 2020.services.
Revenues including revenues under the Amgen Agreement are recognized according to IFRS 15 – “Revenues from Contracts with Customers.”
In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under our agreement, we perform the following steps:
| 1. | Identification of the contract, or contracts, with a customer. |
| 2. | Identification of the performance obligations in the contract. |
| 3. | Determination of the transaction price. |
| 4. | Allocation of the transaction price to the performance obligations in the contract. |
| 5. | Recognition of revenue. |
We identified two distinct performance obligations in Amgen Agreement: a license to use our proprietary drug delivery platform and preclinical R&D services. The preclinical R&D services include discovery and certain preclinical activities related to the programs selected by Amgen.
We determined the license to our intellectual property to be a right to use that has significant standalone functionality separately from the preclinical services, since we are not required to continue to support, develop or maintain the intellectual property transferred and will not undertake any activities to change the standalone functionality of the intellectual property. Therefore, the license to the intellectual property is a distinct performance obligation, and as such, we recognized the revenues related to this performance obligation in December 2018 at the point in time that control of the license was transferred to Amgen. We evaluated the selling price of the first-year preclinical services at $225,000, and the right to use the intellectual property at $500,000.
Revenues attributed to the preclinical R&D services are recognized during the period the pre-clinical R&D services are provided according to the input model method on a cost-to-cost basis
Under IFRS 15, the consideration that we would be entitled to upon the achievement of contractual milestones, which are contingent upon the occurrence of future events of development and commercial progress, are a form of variable consideration. When assessing the portion, if any, of such milestone-related consideration to be included in the transaction price, we first assess the most likely outcome for each milestone, and exclude the consideration related to milestones of which the occurrence is not considered the most likely outcome. We then evaluate if any of the variable consideration determined in the first step is constrained. Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available. We did not recognize any revenues from milestone payments.
Under IFRS-15, an entity should recognize revenue for a sales-based or usage-based royalty promised in exchange for a license of intellectual property only when (or as) the later of the following events occurs:
The subsequent sale or usage occurs; and
The performance obligation to which some or all of the sales-based or usage-based royalty has been allocated has been satisfied (or partially satisfied).
We did not recognize any revenues from royalties since royalties are payable based on future commercial sales, as defined in the Amgen Agreement and there were no commercial sales as of the date of the financial statements
As ofFor the years ended December 31, 20192020 and 2018,2019, we recognized revenues from the Amgen agreement in the total amount of $365,000 and $236,000, and $500,000, respectively.
Research and Development Expenses
Research and development expenses consist of costs incurred for the development of our drug delivery technology and our product candidates. Those expenses include:
employee-related expenses, including salaries, bonuses and share-based compensation expenses for employees and service providers in the research and development function;
expenses incurred in operating our laboratories including our small-scale manufacturing facility;
expenses incurred under agreements with CROs, and investigative sites that conduct our clinical trials;
expenses related to outsourced and contracted services, such as external laboratories, consulting and advisory services;
supply, development and manufacturing costs relating to clinical trial materials; and
other costs associated with pre-clinical and clinical activities.
Research and development activities are the primary focus of our business. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect that our research and development expenses will increase significantly in future periods as we advance EB613 and EB612 into later stages of clinical development and invest in additional preclinical candidates.
Research expenses are generally recognized as incurred. An intangible asset arising from the development of our product candidates is recognized if certain capitalization conditions are met. During the years ended December 31, 2017,2020, 2019 and 2018, and 2019, we did not capitalize any development costs.
Our research and development expenses may vary substantially from period to period based on the timing of our research and development activities, including due to the timing of initiation of clinical trials and the enrollment of patients in clinical trials. For the years ended December 31, 2017,2020, 2019 and 2018, and 2019, our research and development expenses were $2.8$6.4 million, $8.5$7.2 million and $7.2$8.5 million, respectively. Research and development expenses for the years ended December 31, 2017,2020, 2019 and 2018 and 2019 were primarily for the development of EB613 and EB612. The successful development of our product candidates is highly uncertain. At this time we cannot reasonably estimate the nature, timing and estimated costs of the efforts that will be necessary to complete the development of, or the period, if any, in which material net cash inflows may commence from, any of our product candidates. This is due to numerous risks and uncertainties associated with developing drugs, including:
the uncertainty of the scope, rate of progress, results and cost of our clinical trials, nonclinical testing and other related activities;
the cost of manufacturing clinical supplies and establishing commercial supplies of our product candidates and any products that we may develop;
the number and characteristics of product candidates that we pursue;
the cost, timing and outcomes of regulatory approvals;
the cost and timing of establishing any sales, marketing, and distribution capabilities; and
the terms and timing of any collaborative, licensing and other arrangements that we may establish, including any milestone and royalty payments thereunder.
A change in the outcome of any of these variables with respect to the development of EB613, EB612 or any other product candidate that we may develop could mean a significant change in the costs and timing associated with the development of such product candidate. For example, if the FDA or other regulatory authority were to require us to conduct preclinical and/or clinical studies beyond those which we currently anticipate will be required for the completion of clinical development, if we experience significant delays in enrollment in any clinical trials or if we encounter difficulties in manufacturing our clinical supplies, we could be required to expend significant additional financial resources and time on the completion of the clinical development.
General and Administrative Expenses
General and administrative expenses consist principally of salaries and related costs for directors and personnel in executive and finance functions, such as salaries, benefits and share-based compensation. Other general and administrative expenses include D&O insurance and other insurance, communication expenses, professional fees for legal and accounting services, patent counseling and portfolio maintenance and business development expenses.
During 2017 and 2018, our general and administrative expenses increased in connection with becoming a public company and maintaining compliance with Nasdaq and SEC rules and regulations, higher insurance, legal, accounting, transfer agent, printing and director’s fees, as well as the addition of headcount to support compliance.
We expect that our general and administrative expenses will continue to increase in the future as we increase our headcount and expand our administrative function to support our operations. In addition, if we lose our status as a foreign private issuer, we will be subject to additional SEC reporting requirements that will likely result in additional costs, see “Risk Factors—Risks Related to Our Ordinary Shares, and IPO Warrants.”
Financial Income
Financial income was comprised mainly of gains resulting from the re-measurement of equity linked instruments that were liability classified and measured at fair value through profit and loss.
In 2018, we recorded adjustments to the estimated fair value of the convertible loans, preferred shares, warrants to issue preferred shares and shares until each were converted into our Ordinary Shares or IPO Warrants and options to purchase our Ordinary Shares as part of our initial public offering. Subsequent to our IPO we stopped recording any related periodic fair value adjustments with regard to these components. The IPO Warrants issued in the initial public offering and the Investor Warrants (as defined below in Item 10.C “Material Contracts—Investor Warrants) issued in our December 2019 and February 2020 private placement were classified as a financial liability since their exercise price and number of shares issuable upon exercise of each Investor Warrant are subject to certain adjustments as described in the underlying warrant agreements. In 2019 and 2020, changes in the fair value of the IPO Warrants and the Investor Warrants resulted in net financial income in our consolidated statement of comprehensive loss. We will continue to record fair value adjustments on these IPO Warrants until they expire, are repurchased by us or exercised and converted into our Ordinary Shares.
Upon the consummation of our IPO, we adjusted our convertible loan liability, preferred shares and our warrants to issue preferred shares to their fair value, which was evaluated based on the quoted closing price of our Ordinary Shares on Nasdaq. We recorded additional financial expenses from the revaluation of our convertible loan liability, preferred shares and warrants. Under the terms of the applicable agreements and pursuant to certain IPO transactions, the convertible loans and preferred shares were automatically converted into our Ordinary Shares, and the warrants to purchase preferred shares were automatically converted into warrants to purchase Ordinary Shares. The fair value of the IPO Warrants as of the IPO date, July 2, 2018 and as of December 31, 2018 was based on the quoted price per warrant on Nasdaq as of the respective date.
Other financial expenses are comprised mainly of interest income and exchange rate differences of certain currencies against our Functional Currency.
Taxes on Income
Entera Bio Ltd. has not generated taxable income since our inception, and as of December 31, 20192020 had carry-forward tax losses of $31$43 million. We anticipate that we will be able to carry forward these tax losses indefinitely to future tax years. Accordingly, we do not expect to pay taxes in Israel until we have taxable income after the full utilization of our carryforward tax losses.
As of December 31, 2019,2020, Entera Bio Inc. has no carry forward tax losses.
We have not created deferred tax assets on our tax loss carryforwards because their utilization is not expected in the foreseeable future. We recognize deferred tax assets on losses for tax purposes carried forward to subsequent years if utilization of the related tax benefit against a future taxable income is probable.
Critical Accounting Policies and Estimates
We describe our significant accounting policies more fully in Note 2 to our audited consolidated financial statements included elsewhere in this Annual Report. We believe that the accounting policies below are critical in order to fully understand and evaluate our financial condition and results of operations. The preparation of our consolidated financial statements requires us to make estimates and assumptions that impact the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements and accompanying notes. The most significant estimates in our consolidated financial statements relate to the valuation of equity awards, warrant liability and the recoverability of deferred tax assets. We evaluate our estimates and assumptions on an ongoing basis and base such estimates and assumptions on historical experience – when available – and on various factors – including expectations of future events – that we believe to be reasonable under the circumstances. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.
Revenue Recognition
With respect to the Amgen Agreement, we used our judgement to identify our deliverables in the agreement and whether the deliverables are distinct performance obligation. In addition, we use our judgement to determine the allocation of the transaction price between our identified distinct performance obligations. We also used significant judgment in order to determine the R&D services period. For a description of our revenue recognition policy see “Note 2—Summary of Significant Accounting Policies—P. Revenue Recognition” of our audited consolidated financial statements for the year ended December 31, 2019,2020, included elsewhere in this Annual Report.
Share-Based Compensation
In 2013 and in 2018, we adopted share-based compensation plans for employees, directors and service providers. Our share-based compensation plan adopted in 2013 governs the issuance of equity incentive awards prior to our initial public offering, and the share-based compensation plan adopted in 2018 governs the issuance of equity incentive awards from and after the closing of our initial public offering. As part of the plans, we grant employees, directors and service providers, from time to time and at our discretion, options to purchase our Ordinary Shares. The fair value of the services received in exchange for the grant of the options is recognized as an expense in our statements of comprehensive loss with a corresponding adjustment to equity in our statements of financial position. The total amount is recognized as an expense ratably over the service period of the options, which is the period during which all vesting conditions are expected to be met.
We estimate the fair value of our share-based compensation to employees, directors and service providers using the Black-Scholes option pricing model, which requires the input of highly subjective assumptions, including (a) the expected volatility of our shares, (b) the expected term of the award, (c) the risk-free interest rate, (d) expected dividends and (e) the fair value of our Ordinary Shares at the date of grant. Due to the lacklimited amount of a public market for the trading oftime since our shares prior to the initial public offering and a lack of company-specific historical and implied volatility data, we have based our estimate of expected volatility on the historic volatility of comparable companies that are publicly traded. We will continue to apply this process until a sufficient amount of historical information regarding the volatility of our own share price becomes available.
For options granted in 2018, prior to the IPO, the fair value per Ordinary Share used in the Black-Scholes option pricing model was evaluated using a hybrid model that uses an option pricing model within each applicable exit scenario of our company. These valuations are highly subjective.
For the purpose of determining our enterprise value, prior to our IPO, we used the discounted cash flow, or DCF, method. Under the DCF method, our projected after-tax cash flows were discounted back to present value, using the discount rate. The discount rate, known as the weighted average cost of capital, or WACC, accounts for the time value of money and the appropriate degree of risk inherent in our business. The DCF method requires significant assumptions, in particular, regarding our projected cash flows and the discount rate applicable to our business.
Following the IPO, the fair value of our Ordinary Shares and IPO Warrants is determined based on the closing price of our Ordinary Shares and IPO Warrants on Nasdaq.
We are also required to estimate forfeitures at the time of grant, and we revise those estimates in subsequent periods if actual forfeitures differ from the estimates. Vesting conditions are included in assumptions about the number of options that are expected to vest. At the end of each reporting period, we revise our estimates of the number of options that are expected to vest based on the nonmarket vesting conditions. We recognize the impact of the revision to original estimates, if any, in profit or loss, with a corresponding adjustment to equity.
The following table summarizes the allocation of our share-based compensation expense:
| | Year ended December 31, | | | Year ended December 31, | |
| | 2019 | | | 2018 (1) | | | 2017 | | | 2020 (2) | | | 2019 | | | 2018 (1) | |
| | (in thousands) | | | (in thousands) | |
Research and development | | $ | 701 | | | $ | 1,333 | | | $ | 323 | | | $ | 565 | | | $ | 701 | | | $ | 1,333 | |
General and administrative | | | 782 | | | | (100 | ) | | | 4,562 | | | | 336 | | | | 782 | | | | (100 | ) |
Total | | $ | 1,483 | | | $ | 1,233 | | | $ | 4,885 | | | $ | 901 | | | $ | 1,483 | | | $ | 1,233 | |
| (1) | The resignation of Mr. Beshar, the previous Chairman of our board of directors took effect on June 27, 2018. According to Mr. Beshar'sBeshar’s options terms, options which had yet to fully vest were forfeited, therefore 453,050 options forfeited and were recognized in the consolidated statement of comprehensive loss as a reverse of expense under the General and administrative line item in the amount of $1.3 million.
|
| (2) | The resignation of Mr. Gridley, our Former CEO, took effect on September 7, 2020. According to the terms of Mr. Gridley’s options, options which had yet to fully vest expired, therefore 553,942 options expired and were recognized in the consolidated statement of comprehensive loss as a reverse of expense under the General and administrative line item in the amount of $0.3 million. |
Fair Value of Financial Liabilities Through Profit or Loss
Prior to our IPO, the Series A preferred shares and warrants to purchase Series A preferred shares, Series B preferred shares, Series B-1 preferred shares, warrants to purchase Series B preferred shares and liability to issue preferred shares and warrants were classified as financial liabilities because of the liquidation preference rights and conversion rights associated with the preferred shares and were measured at fair value through profit or loss at each balance sheet date. To determine the fair value of the convertible loans, preferred shares, and warrants, we used our judgment to select a variety of methods and made assumptions that were mainly based on market conditions existing at the end of each reporting period prior to the IPO. The estimated fair value of these liabilities might have been different if we had used different estimates and assumptions.
To determine the fair value of the convertible loans, which was a valuation that was not based on observable market data, or a level 3 valuation, the debt component was evaluated based on the discounting of future payments of the debt. The convertible components of the loans (the option to convert the principal amount of the loans and accrued interest into our Ordinary Shares, subject to adjustment), were evaluated based on a combination of the probability weighted expected return method and the back solveBlack and Scholes option pricing method model.
To determine the fair value of the preferred shares, warrants to purchase Series A preferred shares and warrants to purchase Series B preferred shares and Series B-1 preferred shares, we prepared a valuation of the fair value of each of these components. The components were evaluated using a combination of the probability weighted expected return method and a back solveBlack and Scholes option pricing method model.
As of December 31, 2019 and 2018, there were no convertible loans, preferred shares and warrants to preferred shares outstanding. The convertible loans, preferred shares and warrants to preferred shares were converted into Ordinary Shares or warrants to purchase Ordinary Shares of the Company upon the closing of the Company’s IPO in July 2018.
The fair value of our IPO Warrants at December 31, 20192020 and 2018,2019, is based on the quoted price on Nasdaq (Level 1 valuation) as of the respective date.
The fair value of the Investor Warrants and the Broker Warrants, which is a valuation that is not based on observable market data, or a level 3 valuation, was determined based on the on the Monte-Carlo pricing model as of the issuance date and as of December 31, 2020.and 2019.
The following parameters were used:
| | December
31, 2019
| �� | | July 2,
2018 | |
Price per share* | |
| $1.84-$2.07 | | | | 865 | |
Volatility | | | 62%-63% |
| | | 62% |
|
| | | 1.63%-1.71% |
| | | N/A | |
Risk free rate | | | | | | | - | |
Probability for IPO/shares registration | | | N/A | | | | 100% |
|
| | December 31, 2020 | | | December 31, 2019 | | | July 2, 2018 | |
Price per share* | |
| $1.08 | | |
| $1.84-$2.07 | | | | 865 | |
Volatility | | | 66% |
| | | 62%-63% |
| | | 62% |
|
Risk free rate | | | 0.1%-0.13% |
| | | 1.63%-1.71% |
| | | N/A | �� |
Probability for IPO/shares registration | | | N/A | | | | N/A | | | | 100% |
|
⁎ | The price per share as of July 2, 2018 was based on the quoted price on Nasdaq prior to the share split. |
Results of Operations
Comparison of Years Ended December 31, 20192020 and 20182019
| | Year Ended December 31,
| | | Increase (Decrease) | |
| | 2019
| | | 2018
| | | $
| | | %
| |
| | (In thousands, except for percentage information) | |
Revenues | | $ | 236 | | | $ | 500 | | | $ | (264 | ) | | | (53.0 | ) |
Cost of revenues | | | 210 | | | | | | | | 210 | | | | 100 | |
Operating expenses: | | | | | | | | | | | | | | | |
Research and development expenses, net | | $ | 7,199 | | | $ | 8,518 | | | $ | (1,319 | ) | | | (15.5 | ) |
General and administrative expenses | | | 4,281 | | | | 2,843 | | | | 1,438 | | | | (50.6 | ) |
Operating loss | | | 11,454 | | | | 10,861 | | | | 593 | | | | 5.5 | |
Financial income, net | | | (659 | ) | | | (557 | ) | | | 102 | | | | 18.3 | |
Net loss | | $ | 10,795 | | | $ | 10,304 | | | $ | 491 | | | | 4.7 | |
| | Year Ended December 31, | | | Increase (Decrease) | |
| | 2020 | | | 2019 | | | $
| | |
| % | |
| | (In thousands, except for percentage information) | |
Revenues | | $ | 365 | | | $ | 236 | | | $ | 129 | | | | 54.6 | % |
Cost of revenues | | | 209 | | | | 210 | | | | (1 | ) | | | (0.01 | )% |
Operating expenses: | | | | | | | | | | | | | | | |
Research and development expenses, net | | $ | 6,398 | | | $ | 7,199 | | | $ | (801 | ) | | | (11.1 | )% |
General and administrative expenses | | | 4,891 | | | | 4,281 | | | | 610 | | | | 14.2 | % |
Operating loss | | | 11,133 | | | | 11,454 | | | | (321 | ) | | | (0.03 | )% |
Financial income, net | | | (1,170 | ) | | | (659 | ) | | | (511 | ) | | | 77.5 | % |
Taxes on income | | | 20 | | | | - | | | | 20 | | | | 100 | % |
Net loss | | $ | 9,983 | | | $ | 10,795 | | | $ | (812 | ) | | | (0.08 | )% |
Revenue
Revenues for the year ended December 31, 2020 and 2019 were 365,000 and 2018 were $0.2 million and $0.5 million,$236,000, respectively. In 2020 and 2019, the majority of our revenues were attributable to research and development, or R&D services provided to Amgen whereas inunder our 2018 revenues were attributable to the right to use our intellectual property granted to Amgen pursuant to the Amgen Agreement.collaboration agreement. For the accounting treatment see above “—[“—Financial Overview—Critical Accounting Policies and Estimates—Revenue Recognition.Recognition.” We did not generate any revenues prior to the signing of the Amgen Agreement.Agreement].
Cost of Revenues
The cost of revenues for the year ended December 31, 2020 were $209,000 compared to $210,000 for the year ended December 31, 2019 and were primarily attributed to salaries and related expenses in connection with the R&D services provided to Amgen.
Research and Development Expenses, Net
Research and development expenses for the year ended December 31, 20192020 were $7.2$6.4 million, compared to $8.5$7.2 million for the year ended December 31, 2018,2019, a decrease of $1.3$0.8 million. The decrease was primarily due to decreases of $0.5 million in professional and consulting services expenses and other expenses, $0.5 million in compensation-related expenses due to a reduction of $1.4in headcount, and $0.4 million in materials and production costs and a decreasedue to the timing of $0.6 million in share-based compensation. The decline in materials and production costs was driven primarily by significant manufacturing activities in 2018runs to support our clinical trials and related pre-clinical activities that were not repeated in 2019. The decline in share-based compensation was due to the fact that there were no significant option grants to R&D personnel in 2019.trials. These decreases were partially offset by an increase of $0.6 million in consulting expenses and fees relateddue to the preparation of our IND application and the initiation of the Phase 2increased EB613 clinical trial of EB613 as well as an increase of $0.2 millionactivities in depreciation and amortization expense due2020 relative to IPR&D amortization commencing in December 2018 and the implementation of IFRS 16, “leases” commencing January 1, 2019.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 20192020 were $4.2$4.9 million, compared to $2.8$4.3 million for the year ended December 31, 2018.2019. The increase of $1.4$0.6 million was primarily due to net increases of $0.9$0.2 million in compensation related expenses, $0.3$0.1 million in directors’legal fees and $0.2$0.4 million in other expenses including insurance costs.and board costs, which were partially offset by a decrease of $0.1 million in investor relations related expenses. The increase in compensation-related expenses was primarily due to an increase in headcount related to executive hires in the hiringsecond half of our new CEO2020, which was partially offset by a decrease in August 2019 and options granted during 2019 to our directors and executive officers, whereas in 2018 there was a reverse of expenseshare-based compensation due to options forfeited. The increase in directors’ fees in 2019 was generally duethe reversal of expenses related to hiring new directors after our IPO in 2018 and the increaseexpiration of $0.2 million in insurance costs was due to a significant increase in the cost of Directors and Officers insurance.
former CEO’s unvested options.
Financial Income, (Expenses), Net
Financial income, net for the year ended December 31, 20192020 was $0.7$1.2 million, compared to $0.6$0.7 million for the year ended December 31, 2018.2019. Our financial income is comprised mainly of gains resulting from the re-measurement of equity linked instruments that were liability classified and measured at fair value through profit and loss. Financial income, net for the year ended December 31, 2019 is comprised of financial income of $1.1 million related to a decrease in the fair value of the IPO Warrants, partially offset by financial expenses of $0.4 million due to the increase of the fair value of the Investor Warrants.
Financial income, net for the year ended December 31, 2018 resulted mainly from financial income of $0.4 million related to the change in the fair value of convertible loans, preferred shares and warrants to purchase preferred shares and income of $0.1 million related to an increase in the fair value of the IPO Warrants.
For the assumptions used in the valuation of the convertible loans, preferred shares components and warrants see above “—Financial Overview—Critical Accounting Policies and Estimate—Fair Value of Financial Liabilities Through Profit or Loss.”
A discussion with respect to a comparison of the results of operations of 20182019 and 20172018 is contained under “Item 5.A.– Results of Operations” our Annual Report on Form 20-F (File No. 001-38556) filed with the SEC on March 28, 2019.26, 2020.
5.B. Liquidity and Capital Resources
Since inception, we have incurred significant losses. As a result of our recurring losses from operations, negative cash flows and lack of liquidity, our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements as of, and for the year ended, December 31, 2019,2020, expressing the existence of substantial doubt about our ability to continue as a going concern. For the years ended December 31, 2017,2020, 2019 and 2018, and 2019, our operating losses were $11.3$11.1 million, $10.9$11.5 million and $11.5$10.9 million, respectively. We expect to continue to incur significant expenses and losses for the next several years as we advance our products through development and provide administrative support for our operations. As of December 31, 2019,2020, we had an accumulated deficit of $62.9$72.9 million. Since our inception and through December 31, 2019,March 16, 2021, we have raised a total of $56.9$70.2 million, including $13.3 million from Ordinary Shares offered and sold under our ATM Program (as defined below in Item 10.C “Material Contracts”), of which $2.2 million was raised in 2021, $14.3 million from our Private Placement in December 2019 (of which $0.8 million were received inand February 2020, as part of a separate closing with our shareholder D.N.A Biomedical), $11.2 million from our initial public offering and $31.3 million from sales of our Ordinary Shares, preferred shares, warrants, convertible loans and grants from IIA prior to our initial public offering. In addition, through March 16, 2021, we have received $1.0approximately $1.2 million under the Amgen Agreement. As of March 15, 2020,16, 2021, we had cash and cash equivalents of $13.7$15.4 million. Our primary uses of cash have been to fund research and development, general and administrative and working capital requirements, and we expect these will continue to be our primary uses of cash.
Pursuant to the provisions of the subscription agreements entered into by the Company as part of the Private Placement (as defined above), on June 5, 2020 we filed a registration statement on a Form F-3 with the SEC for the resale of the Ordinary Shares of such applicable selling shareholders that were issued in the Private Placement (including those issued upon exercise of the Investor Warrants), and such selling shareholders may, from time to time, offer and sell in one or more offerings or privately-negotiated transactions.
On July 13, 2020, we filed with the SEC an additional "shelf" registration statement on a Form F-3 for the registration of our Ordinary Shares that we may, from time to time, offer and sell in one or more offerings with an aggregate offering price of up to $100 million. In addition, certain Ordinary Shares under such Form F-3 are offered, issued and sold pursuant to that certain Equity Distribution Agreement with Canaccord Genuity LLC and pursuant to the ATM Program (as defined below in Item 10.C “Material Contracts”).
Funding Requirements
We believe that our existing capital resources, not including potential milestone payments, will be sufficient to meet our projected operating requirements into the second quarter of 2021.
2022.
We have based these estimates on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development of our product candidates, and the extent to which we may enter into collaborations with third parties for development of these or other product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenses associated with completing the development of our current and future product candidates. Our future capital requirements will depend on many factors, including:
the costs, timing and outcome of clinical trials for, and regulatory review of, EB613, EB612 and any other product candidates we may develop;
the costs of development activities for any other product candidates we may pursue;
the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;
the impact of COVID-19, once known, on our clinical trials, regulatory timelines, business operations and financial stability; and
our ability to establish collaborations on favorable terms, if at all.
We are in the process of evaluating various financing alternatives in the public or private equity markets, government grants or through license of our technology to additional external parties through partnerships or research collaborations as we will need to finance future research and development activities, general and administrative expenses and working capital through fund raising. However, there is no certainty about our ability to obtain such funding.
We do not have any committed external sources of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our then-existing shareholders will be diluted, and the terms of these securities may include liquidation or other preferences that may adversely affect your rights as a shareholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends and may include requirements to hold minimum levels of funding. If we raise additional funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams or research programs or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or collaborations, when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market our oral PTH product candidates and any other product candidates that we would otherwise prefer to develop and market ourselves.
Our audited consolidated financial statements for the year ended December 31, 2019,2020, included elsewhere in this Annual Report, note that there is substantial doubt about our ability to continue as a going concern as of such date; and in its report accompanying our audited consolidated financial statements included herein, our independent registered public accounting firm included an explanatory paragraph stating that our recurring losses from operations and lack of sufficient working capital raise substantial doubt as to our ability to continue as a going concern. This means that our management and our independent registered public accounting firm have expressed substantial doubt about our ability to continue our operations without an additional infusion of capital from external sources. The audited consolidated financial statements have been prepared on a going concern basis and do not include any adjustments that may be necessary should we be unable to continue as a going concern. If we are unable to finance our operations, our business would be in jeopardy and we might not be able to continue operations and might have to liquidate our assets. In that case, investors might receive less than the value at which those assets are carried on our financial statements, and it is likely that investors would lose all or a part of their investment.
Cash Flows
Year Ended December 31, 20192020 Compared to Year Ended December 31, 20182019
The following table sets forth the primary sources and uses of cash for each of the periods set forth below:
| | (audited) Year ended December 31, | | | (audited) Year ended December 31, | |
| | 2019 | | | 2018 | | | 2020 | | | 2019 | |
| | (in thousands) | | | (in thousands) | |
Cash used in operating activities | | $ | (8,919 | ) | | $ | (9,796 | ) | | $ | (10,423 | ) | | $ | (8,919 | ) |
Cash provided by (used in) investing activities | | | 3.946 | | | | (4,068 | ) | |
Cash (used in) provided by investing activities | | | | (86 | ) | | | 3,946 | |
Cash provided by financing activities | | | 12,652 | | | | 9,624 | | | | 3,917 | | | | 12,652 | |
Net increase (decrease) in cash and cash equivalents | | $ | 7,679 | | | $ | (4,240 | ) | |
Net (decrease) increase in cash and cash equivalents | | | $ | (6,592 | ) | | $ | 7,679 | |
Net Cash Used in Operating Activities
Net Cash used in operating activities for the year ended December 31, 2020 was $10.4 million consisting primarily of our operating loss of $11.1 million and a $0.4 million decrease in our working capital which was partially offset by share-based compensation of $0.9 million and $0.2 million of depreciation expenses.
Net Cash used in operating activities for the year ended December 31, 2019 was $8.9 million consisting primarily of our operating loss of $11.5 million which was partially offset by $1.5 million of share-based compensation, $0.3$0.2 million of depreciation and amortization expenses and a $0.7 million increase in our working capital.
Net Cash used in operating activities for the year ended December 31, 2018 was $9.8 million consisting primarily of our operating loss of $10.9 million which was partially offset by $1.2 million of share-based compensation and $0.3 million of issuance costs related to our initial public offering both of which were offset by anThe increase of $0.5 million in working capital.
The decrease in cash used in operating activities from 20182019 to 20192020 was mainly due to a decrease of $1.4$1.1 million in materials, clinical manufacturingworking capital and production capabilities,a decrease of $0.6 million in share-based compensation, which were partially offset by an increasea decrease of $0.5$0.4 million in D&O insurance costs, directors fees and payments for working capital.operating loss.
Net Cash Used in Investing Activities
Net Cash used in investing activities for the year ended December 31, 2020 consisted primarily from the purchase of property and equipment and a restricted deposit in such regard.
Net Cash provided by investing activities for the year ended December 31, 2019 consisted primarily of the withdrawal of short-term bank deposits.
Net Cash used in investingProvided by Financing Activities
Net Cash provided by financing activities for the year ended December 31, 2018 consisted primarily2020 mainly resulted from net proceeds of $0.8 million from the issuance of the Ordinary Shares and Warrants in the final closing of our investment in short-term bank deposits.
Net Cash Provided by Financing Activities
NetDecember 2019 private placement offering and net proceeds of $3.5 million from the issuance of Ordinary shares under our ATM Program.Net Cash provided by financing activities for the year ended December 31, 2019 mainly resulted from net proceeds of $12.5 million from issuance of the Ordinary Shares and IPO Warrants in our private placement offering which was completed in December 2019.
Net Cash provided by financing activities for the year ended December 31, 2018 mainly resulted from net proceeds of $9.6 million from issuance of the Ordinary Shares and IPO Warrants in our initial public offering which was completed on July 2, 2018.
A discussion with respect to a comparison of the results of operations of 20182019 and 20172018 is contained under “Item 5.B.– Liquidity and Capital Resources” our Annual Report on Form 20-F (File No. 001-38556) filed with the SEC on March 28, 2019.26, 2020.
5.C. [Reserved]
5.D. Trend Information.
We are currently in a development stage and we expect to remain in that stage for the upcoming year, and therefore trends relating to production, sales, inventory, backlog and selling prices are not applicable. See “Item 5.–Operating and Financial Review and Prospects” for a summary of recent trends.
5.E. Off-Balance Sheet Arrangements
Since our inception, we have not engaged in any off-balance sheet arrangements.
5.F Contractual Obligations
The following tables summarize our contractual obligations and commitments as of December 31, 20192020 that will affect our future liquidity:
| | Payments due by period | | | Payments due by period | |
Contractual Obligations | | 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) | | | (In thousands) | |
Operating leases for facility and vehicles | | $ | 513 | | | $ | 175 | | | $ | 338 | | | $ | - | | | $ | - | | | $ | 510 | | | $ | 205 | | | $ | 305 | | | $ | - | | | $ | - | |
Total | | $ | 513 | | | $ | 175 | | | $ | 338 | | | $ | - | | | $ | - | | | $ | 510 | | | $ | 205 | | | $ | 305 | | | $ | - | | | $ | - | |
Severance Obligations
We have long-term liabilities for severance pay that are calculated pursuant to Israeli law generally based on the most recent salary of the relevant employees multiplied by the number of years of employment to the extent not covered by our regular deposits with defined contribution plans. As of December 31, 2019,2020, our severance pay liability, net was immaterial. Because the timing of any such payments is not fixed and determinable, we have not included these liabilities in the table above.
Contingencies
We also have obligations to make future payments to third parties that become due and payable on the achievement of certain milestones, such as royalties upon sale of products or revenues from the Amgen Agreement. We have not included these commitments in our statements of financial position or in the table above because the achievement and timing of these milestones is not fixed and determinable. These potential future commitments include:
a commitment to pay Oramed royalties equal to 3% of our net revenues pursuant to the terms of the Patent Transfer Agreement between us and Oramed; and
a commitment to pay royalties to the IIA. See “Item 4.B.—Business Overview—Patent Transfer, Licensing Agreement and Grant Funding.”
ITEM 6.DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
6.A. Directors and Senior Management
The following table sets forth information relating to our executive officers and directors as of the date of this report. Unless otherwise stated, the address for our directors and executive officers is c/o Entera Bio Ltd., Kiryat Hadassah, Minrav Building - Fifth Floor, Jerusalem, Israel and 37 Walnut Street, Suite 300 Wellesley Hills, Massachusetts, U.S.
Israel.
Name | Age
| Age | | Position |
Executive Officers | | | | |
Adam GridleyDr. Spiros Jamas | 47 | 60 | | Chief Executive Officer and Director |
Jonathan Lieber | 50 | 51 | | U.S.-based Chief Financial Officer |
Dana Yaacov-Garbeli | 36 | 37 | | Israel-based Chief Financial Officer |
Dr. Phillip Schwartz | 58 | 59 | | President of Research and Development and Director |
Dr. Hillel Galitzer | 41 | 42 | | Chief Operating Officer |
Dr. Arthur Santora | 69 | 70 | | Chief Medical Officer |
Non-Employee Directors | | | | |
Gerald Lieberman(2) | 73 | 74 | | Director, Chairman of the Board of Directors |
Dr. Roger J. Garceau | 66 | 67 | | Director, Chief Development Advisor |
Zeev Bronfeld | 68 | 69 | | Director |
Yonatan Malca | 53 | 54 | | Director |
Faith L. Charles(1) (2) (3) (4) | 58 | 59 | | Director, Chairman of the Compensation Committee |
Miranda J. Toledano(1) (2) (3) (4) | 43 | 44 | | Director, Chairman of the Audit Committee |
Gerald M. Ostrov(2) (3) (4) | 70 | 71 | | Director |
Sean Ellis | 45 | 46 | | Director |
_____________________________
(1) External Director under Israeli law.
(2) Independent director in accordance with SEC regulations and Nasdaq rules requirements applicable to us.
(3) Member of the Compensation Committee.
(4) Member of the Audit Committee.
Our Senior Management
Adam Gridley Dr. Spiros Jamashas served as our Chief Executive Officer, or CEO, and director since AugustJanuary 4, 2021. Dr. Jamas is a biotech entrepreneur with over 30 years of senior management experience in the biopharmaceutical industry. He has served as CEO and/or founder of multiple high growth, innovation-driven companies including: as founding CEO of AOBiome Therapeutics, Inc. from 2013 to 2019, as CEO and Director of Tempero Pharmaceuticals, Inc. from 2008 to 2012, as CEO and Director of Enanta Pharmaceuticals, Inc. (NASDAQ: ENTA) from 2001 to 2004 and as CEO and Director of Alpha-Beta Technology, Inc. from 1988 to 1999. He has assembled high-performance teams to grow these organizations and led first-in-class R&D programs from early discovery through Investigative New Drug Application (IND) submissions and into advanced clinical development. As founding CEO of AOBiome, he created a director since November 2019. Mr. Gridley is currently a directorleading skin microbiome company that launched the breakthrough skin probiotic AO+ Mist and Executive Chairman at LifeSproutMother Dirt Consumer Brand and a memberled the effort to file six IND’s. At Enanta he led the initiation of the boardHepatitis C drug development program. Over the course of advisors for Life Science Careshis career, Dr. Jamas has raised over $300 million in Boston. From May 2014 to September 2019, Mr. Gridley previously served as the President and CEO, and a director of Histogenics Corporation (NASDAQ: HSGX), a cell therapy company developing products for the orthopedics market. Before joining Histogenics, Mr. Gridley served in several senior roles at Merz, a privately-held specialty healthcare company. As Senior Vice President, Technical Operations at Merz, he ledfunding from a variety of functions,sources including R&D, Manufacturing, Quality Operations, Financepublic and IT for a portfolio of aesthetics, dermatology, neurologyprivate equity and OTC products that generated annual revenues of over $300 million. Previously, Mr. Gridleydebt. In addition to his significant experience in building biopharma companies, Dr. Jamas was Senior Vice President of Corporate Development for BioForm Medical, which was acquired by Merzthe Global Healthcare Analyst in 2010. His responsibilities included all business development, investor relations, strategic planning,the Global Fundamental Strategies group at State Street Global Advisors, the world’s second largest asset management firm. He is an author and R&D functions,co-inventor on numerous papers and he was part of the executive leadership team who led the Company’s $90 million IPO and subsequent acquisition by Merz for approximately $250 million in 2010. Mr. Gridleypatents. Dr. Jamas holds a B.S.Doctor of Science in Biotechnology from M.I.T., a M.Sc. also from M.I.T. and a M.B.A.B.Sc. in Chemical Engineering from the University of Denver.
UMIST, England
Jonathan Lieber has served as our U.S based Chief Financial Officer since November 2019. Mr. Lieber currently serves as a managing director of Danforth Advisors LLC. From July 2015 through September 2019, Mr. Lieber was Chief Financial Officer of Histogenics Corporation (NASDAQ: HSGX) a cell therapy company developing products for the orthopedics market. Prior to Histogenics, Mr. Lieber was Senior Vice President and Chief Financial Officer of Metamark Genetics, Inc., a privately held, urology-focused, molecular diagnostics company, from January 2014 to June 2015. From September 2012 to September 2013, Mr. Lieber served as the Chief Financial Officer and Treasurer of Repligen Corporation, a manufacturer and supplier of high-value consumables to the life sciences industry. From June 2009 to May 2012, Mr. Lieber served as Chief Financial Officer and Treasurer of Xcellerex, Inc., a privately held company engaged in the manufacture and sale of capital equipment and related consumables to the biopharmaceutical industry. Mr. Lieber received an M.B.A. in finance from the Stern School of Business of New York University and a B.S. in business administration from Boston University.
Dana Yaacov-Garbeli has served as our Israel-based Chief Financial Officer since June 2019. Ms. Yaacov-Garbeli is currently a partner at A2Z Finance Ltd, where she serves as an outsourced CFO to both private and publicly traded companies and provides additional consulting and accounting services. Ms.Ms. Yaacov-Garbeli previously served at PricewaterhouseCoopers Israel, including a short secondment to PricewaterhouseCoopers New York as a Senior Manager on audits of both public and privately held multi-national companies based in Israel, US and Europe, mainly in the pharmaceutical and biotech sectors. Ms. Yaacov-Garbeli holds a B.A in accounting and business management and an MBA in financial management from The College of Management and Academic studies. Ms. Yaacov-Garbeli is a Certified Public Accountant in Israel.
Dr. Phillip Schwartz has served as our President of Research and Development since August 2019, and as our director since our inception in 2010. Dr. Schwartz has previously served as our Chief Executive Officer from our inception in 2010 to August 2019. Dr. Schwartz has more than 20 years of biotech and pharmaceutical industry experience. He previously served as the manager of clinical affairs at Endo Pharmaceuticals plc from 2005 to 2010 and at Serono from 2002 to 2005, and held multiple positions in medical affairs, business development and clinical trial development at each of Endo Pharmaceuticals plc and Serono. He has also worked as an external consultant for a number of venture capital firms. He has also consulted privately and served as an associate of Health Advances, LLC for more than 20 large biotech and pharmaceutical companies from 2000 to 2002. He has multiple publications in tier one peer-reviewed journals and has presented papers at numerous international conferences. He has also worked in the neurobiology laboratory of Nobel Laureate Professor Torsten Wiesel of the Rockefeller University. Dr. Schwartz holds a B.A. in psychology and architecture from Columbia University, an M.Sc. in immunology while studying under Professor Irun Cohen at the Weizmann Institute, and a Ph.D. in neurobiology/development/oncology from Harvard Medical School. In addition to his scientific training, Dr. Schwartz completed numerous clinical courses as part of his program at Harvard Medical School. After completing his Ph.D., Dr. Schwartz was a fellow in pediatric oncology at the Dana Farber Cancer Institute and an officer of Harvard University Medical School.
Dr. Hillel Galitzer has served as our Chief Operating Officer since February 2014, and prior to that served as our Director of Scientific Development from July 2012. Dr. Galitzer has more than ten years of experience in medical research and molecular biology. Between August 2010 and February 2014, Dr. Galitzer was an analyst and the chief operating officer for Hadasit Bio Holdings Ltd., a publicly traded company on the Tel Aviv Stock Exchange (TASE: HDST) and OTC markets. He has more than 10 years of experience in medical research and molecular biology. He is the co-founder and former chief operating officer of Optivasive Inc. He has written numerous publications in peer-reviewed journals and has lectured and presented in international conferences and universities. Dr. Galitzer received his Ph.D. from the Hebrew University Medical School in Jerusalem, where he was mentored by two world renowned researchers in the areas of parathyroid hormone and calcium regulation, his M.B.A. from Bar Ilan University in Israel and his B.Med.Sc. from the Hebrew University Medical School in Jerusalem.
Dr. Arthur Santora has served as our Chief Medical Officer since September 2018. Dr. Santora has more than 30 years of experience in the biopharmaceutical industry. He spent the majority of his career in the clinical research team at Merck & Co., Inc., from June 1989 to March 2017, where he was the lead clinical research physician responsible for much of the clinical development of Fosamax® (alendronate sodium), one of the world’sworld’s most prescribed osteoporosis treatments. He was closely involved in the clinical development of Merck’s once-weekly Fosamax Plus D (alendronate sodium/ vitamin D3 combination tablets), the first drug/vitamin combination tablet in the US. His position at Merck immediately prior to his termination of services in 2017 was Scientific Associate Vice President of Clinical Research, where he was directly responsible for the technical and scientific support for all clinical research of Fosamax/Fosamax plus D and contributed to the development of many other osteoporosis and endocrine marketed and investigational drugs. Prior to joining Merck, he served as a Medical Officer at the US FDA and subsequently was a faculty member at Wayne State University Medical School in Detroit. Dr. Santora is a Clinical Associate Professor at the clinical faculty of Rutgers Robert Wood Johnson Medical School in New Brunswick, New Jersey. He has graduate training in Internal Medicine at Emory, and its Endocrinology and Metabolism subspecialty at the NIH in Bethesda. Dr. Santora received his M.D. and Ph.D. in biochemistry from Emory University in Atlanta.
Our Directors
Gerald Lieberman Mr. Lieberman has served as a member of our board of directors since April 2014 and became our Chairman in July 2019. Mr. Lieberman is also a member of the board of directors of Teva Pharmaceutical Industries Ltd. (NYSE and TASE: TEVA), a global leader in pharmaceuticals and the world’s largest generic drug developer and manufacturer, where he chairs the Audit Committee and serves on both the Human Resources and Compensation Committee and the Finance Committee. He also serves as Chairman of the Board of Directors of DosenRx, Ltd., a Digital health company that has developed a personalized, patient-controlled device for delivering medication. He is also currently a special advisor at Reverence Capital Partners, a private investment firm focused on the middle-market financial services industry. From 2000 to 2009, Mr. Lieberman was an executive at Alliance Bernstein L.P., where he served as President and Chief Operating Officer from 2004 to 2009, as Chief Operating Officer from 2003 to 2004 and as Executive Vice President, Finance and Operations from 2000 to 2003. From 1998 to 2000, he served as Senior Vice President, Finance and Administration at Sanford C. Bernstein & Co., Inc., until it was acquired by Alliance Capital in 2000, forming AllianceBernstein L.P. Prior to that, he served in various executive positions at Fidelity Investments and at Citicorp. Prior to joining Citicorp he was a certified public accountant with Arthur Andersen. He previously served on the board of directors of Forest Laboratories, LLC from 2011 to 2014, Computershare Ltd. from 2010 to 2012 and AllianceBernstein L.P. from 2004 to 2009. Mr. Lieberman received a B.S. Beta Gamma Sigma with honors in business from the University of Connecticut.
Dr. Roger J. Garceau has served as a member of our board of directors since March 2016, and as our Chief Development Advisor since December 2016. From August 2020 to January 4, 2021, Dr. Garceau has also served as our interim Chief Executive Officer. Dr. Garceau has more than 30 years of broad pharmaceutical industry experience.experience. He has been a director of Enterome SA since December 2016, and a director of ArTara Therapeutics since January 2019.2019. Prior to joining Entera, Dr. Garceau served as Chief Medical Officer and Executive Vice President of NPS Pharmaceuticals, Inc. since December 2008 and January 2013 respectively, until February 2015, when NPS Pharmaceuticals, Inc., then traded on Nasdaq, was acquired by Shire plc. (NASDAQ: SHPG). Previously, Dr. Garceau served in several managerial positions with Sanofi-Aventis (NYSE: SNY) from 2002 until 2008, and Pharmacia Corporation from 1986 until 2002. Dr. Garceau is a board-certified pediatrician and is a Fellow of the American Academy of Pediatrics. Dr. Garceau holds a B.S. in Biology from Fairfield University in Fairfield, Connecticut and an M.D. from the University of Massachusetts Medical School.
Zeev Bronfeld has served as a member of our board of directors since 2010 and as chairman of our board of directors from September 2014 until November 2016. Mr. Bronfeld has vast experience in the management and value building of biotechnology companies. Mr. Bronfeld currently serves on the board of directors of D.N.A Biomedical, Electreon Wireless Ltd. and The Trendlines Group Ltd. as well as on the board of director of a number of privately-held companies, including, Contipi Medical Ltd. and as the chairman of the board of TransBiodiesel Ltd. Furthermore, since 2003, Mr. Bronfeld serves as the chief executive officer of M.B.R.T Development and Investments Ltd. Until January 2017, he served as a director of Macrocure Ltd. and until December 2016, he served as a director of D. Medical Industries Ltd. and Nasvax Ltd. Mr. Bronfeld, is a co-founder of Bio-Cell Ltd., an Israeli publicly traded holding company specializing in biotechnology companies, and served as its chief executive officer from 1986 until December 2014. Between 2010 through July 2014, he served as the chairman of the board of Protalix BioTherapeutics, Inc. (NYSE: PLX) and has served as a member of its board of directors since 2006. Mr. Bronfeld holds a B.A. in Economics from the Hebrew University of Jerusalem.
Yonatan Malca has served as a member of our board of directors since 2011. Mr. Malca currently serves as a Chief Executive Officer and director of D.N.A Biomedical, a position he has held since 2010. Mr. Malca also serves as a director of Arko Holdings Ltd. (TASE: ARKO), Nextgen-Biomed LTD. (TASE: NXGN) and of Tamda Ltd. (TASE: TMDA), all of which are Israeli public companies. Mr. Malca also serves on the board of directors of a number of private companies, including as chairman of the board of directors of Cardioart Technologies Ltd., a medical device company, and Beamed Ltd., a medical device company (a subsidiary of D.N.A Biomedical). Mr. Malca holds a B.A. in Economics and Statistics from Bar-Ilan University and an M.A. in Economics and Finance from Bar Ilan University, Israel.
Faith L. Charles has served as a member of our board of directors since September 2018.2018. Ms. Charles is a partner in the Corporate Transactions and Securities Practice, and the chair of the Life Sciences Group at Thompson Hine, LLP. since 2010. In March 2019, Ms. Charles, joined the board of Amydis Inc., a private pharmaceutical company developing compounds and tests for the early detection of Alzheimer’s and other Amyloid associate diseases. Since September 2018, Ms. Charles serves as a member of the board of Sandstone Diagnostics, Inc., a private technology and healthcare company focused on using centrifugal testing to improve healthcare. Since 2016, Ms. Charles serves as a member of the board of AgilVax Inc., a private biotechnology company focused on cancer immunotherapies and targeted infectious vaccines, and as a member of the board of Gilda’sGilda’s Club New York City, an organization that provides medical, emotional and support services to cancer patients and their families. Ms. Charles also serves as steering committee member and Co- Founder, and has previously served as chair, of Metro NY Women in Bio, an organization of professionals committed to promoting careers, leadership and entrepreneurship for women in the life sciences industry, since 2013. From 2000 until 2010, Ms. Charles served as partner at Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, P.C. Prior to that, starting in 1986, Ms. Charles served as partner and associate at other law firms, where she focused on capital markets, licensing and other strategic collaborations and mergers and acquisitions for emerging and public companies. Ms. Charles holds a J.D. degree from The George Washington University Law School and a B.A. in Psychology from Barnard College, Columbia University. Ms. Charles is also a graduate of Women in Bio’s Boardroom Ready Program, an Executive Education Program taught by The George Washington University School of Business.
Miranda J. Toledano has served as a member of our board of directors since September 2018. Ms. Toledano serves as Chief Operating Officer / Chief Financial Officer of TRIGR Therapeutics, a clinical stage immuno-oncology company focused on bispecific antibodies. Previously, from September 2016 until August 2017, Ms. Toledano served on the executive management team of Sorrento Therapeutics (Nasdaq: SRNE) as EVP Corporate Development. From 2012 to 2016, Ms. Toledano served as Head of Healthcare Investment Banking at MLV & Co. (acquired by B. Riley FBR & Co.), where she completed equity capital market transactions totaling over $4 billion in aggregate value. Prior to joining MLV, from 2004 until 2010, Ms. Toledano served in the investment group of Royalty Pharma, a leading investment firm with over $15 billion in biotherapeutic royalty assets. From 1998 to 2003, Ms. Toledano led the Life Sciences Corporate Finance group at Ernst & Young (Israel). Ms. Toledano holds a BA in Economics from Tufts University and an MBA in Finance and Entrepreneurship from the NYU Stern School of Business.
Gerald M. Ostrov has served as a member of our board of directors since January 2019. Mr. Ostrov consults and invests in new technologies in the medical device and consumer products fields. Mr. Ostrov currently serves on the board of directors of several privately held companies, including Mother’s Choice, a natural products company working with industry giants, Addon Optics, an innovative technology company, and Nuvo, a developer of next generation baby and mother health monitoring for both hospital and home use. From 2008 to 2010, he served as Chairman and CEO of Bausch & Lomb. There Mr. Ostrov led the stabilization, streamlining and pipeline building of Bausch & Lomb following its going-private transaction. From 1998 until 2006, Mr. Ostrov very successfully served as Company Group Chairman for Johnson & Johnson’s Worldwide Vision Care businesses. From 1991 to 1998, Mr. Ostrov worked for Johnson & Johnson and quickly rose to serve as Company Group Chairman of the Consumer and Personal Care businesses in North America. From 1982 to 1991, he served as President of CIBA Consumer Pharmaceuticals Company. From 1976 to 1982, he worked for the Health Care Division of Johnson & Johnson. From 1973 to 1976, Mr. Ostrov worked at Procter & Gamble. Mr. Ostrov holds a B.S. from Cornell and an M.B.A. from Harvard.
Sean Ellis has served as a member of our board of directors since June 2019. Mr. Ellis brings extensive knowledge of both life science industries and the U.S. financial markets, with a longstanding history in asset management. Mr. Ellis is a fund manager of Centillion Fund, a venture capital fund dedicated to Israeli investments, with a primary focus on investments in the biotech and healthcare industries. Centillion is one of Entera Bio’s earliest investors and largest shareholders. Mr. Ellis is also the Managing Partner and founder of Redstone Capital, a technology venture capital fund operating in Eastern Europe and funded by SBI Japan and others. He holds a BA from New York University and MBA from Columbia University.
Arrangements Concerning Election of Directors; Family Relationships
We are not a party to, and are not aware of, any voting agreements among our shareholders. In addition, there are no family relationships among our executive officers and directors.
6.B. Compensation
Compensation of Executive Officers and Directors
The following table summarizes the compensation awarded to, earned by, or paid to each of our five most highly compensated directors and executive officers during the twelve months ended on December 31, 20192020 (in U.S. dollars), excluding amounts paid to reimburse costs incurred in providing us services during such period:
Name
| | Position | | | Annual 2019 Compensation | | | | | |
| |
| | | Base Salary and Related Benefits ($) (1) | | | | Bonus ($) | | | | Retirement, Service Fees and Other Similar Benefits ($) | | | | Share Based Compensation ($) (2) | | | | Total ($) | |
Dr. Phillip Schwartz (3) | | President of Research and development and Director | |
| 367,408 | | | | - | | |
| 7,809 | | | $ | 346,797 | | |
| 722,014 | |
Mr. Adam Gridley (4) | | Chief Executive Officer and Director | |
| 218,402 | | | | - | | | | | | | $ | 249,576 | | |
| | |
Dr. Arthur Santora (5) | | Chief Medical Officer | |
| 395,793 | | | | - | | | | | | | $ | 49,686 | | |
| 445,479 | |
Dr. Hillel Galitzer (6) | | Chief Operating Officer | |
| 221,577 | | | | - | | |
| 16,209 | | | $ | 129,607 | | |
| 367,393 | |
Mrs, Faith Charles (7) | | Director | |
| 59,702 | | | | | | | | | | | $ | 67,283 | | |
| 126,985 | |
Name | | Position | | Annual 2020 Compensation | | |
| |
| | | | Base Salary and Related Benefits ($) (1) | | | Bonus ($) | | | Retirement, Service Fees and Other Similar Benefits ($) | | | Share Based Compensation ($) (2) | | | Total ($) | |
Dr. Phillip Schwartz (3) | | President of Research and development and Director | | | 384 | | | | 30 | | | | 27 | | | $ | 169 | | | | 610 | |
Mr. Adam Gridley (4) | | Former Chief Executive Officer and Director | | | 380 | | | | 110 | | | | 32 | | | $ | 19 | | | | 541 | |
Dr. Hillel Galitzer (5) | | Chief Operating Officer | | | 292 | | | | 50 | | | | 17 | | | $ | 168 | | | | 527 | |
Dr. Arthur Santora (6) | | Chief Medical Officer | | | 355 | | | | - | | | | - | | | $ | 34 | | | | 389 | |
Mr. Jonathan Lieber (7) | | U.S based Chief Financial Officer | | | 240 | | | | - | | | | - | | | | 45 | | | | 285 | |
(1) | Includes base salary, social benefits and car allowances. The amounts shown in this column represent expenses recorded or to be recorded by the Company, calculated using the average monthly exchange rates of the relevant month in which the salary was recorded. |
(2) | Reflects the associated annual expense recorded in our financial statements for the year ended December 31, 2019,2020, based on the grant date fair value of the share-based compensation granted in exchange for the directors’ and officers’ services. The fair value amount is recognized as an expense over the course of the vesting period of the options (subject to any applicable accounting adjustments during that period). |
(3) | Dr. Schwartz, who previously served as the Chief Executive Officer from January 1, 2019inception through August 4, 2019, has served in his current position, effectivesince August 5, 2019. In November 2017, Dr. Schwartz was granted options to purchase 367,500357,500 Ordinary Shares (with an exercise price of $6.31 per share) under our 2013 Equity Incentive Plan, of which 201,094290,469 were vested as of March 15, 2020.16, 2021. The fair value of these options as of the grant date was $1,442,474. |
(4) | Mr. Gridley was appointed as our Chief Executive Officer effectiveon August 5, 2019.2019 and resigned on August 7, 2020 with effect as of September 7, 2020. In connection with his appointment, Mr. Gridley was granted options to purchase 696,587 Ordinary Shares (with an exercise price of $2.75 per share) under our 2018 Equity Incentive Plan, or the 2018 Plan, none of which were vested as of March 15, 2020.Plan. The options will expire within 10 years from the grant date. This grant was ratified by our shareholders on October 3, 2019. The fair value of these options as of the grant date was $1,074,186. In April 2020 he was granted an additional 31,502 options to purchase 31,502 Ordinary Shares (with an exercise price of $1.98 per share) under our 2018 Plan, none of which were vested as of March 16, 2021. The options will expire within 10 years from the grant date. This grant was ratified by our shareholders on June 25, 2020. The fair value of these options as of the grant date was $37,176. Due to the termination of his employment, 553,942 of his options have yet to fully vest, and have therefore expired. and 174,147 of his option that were fully vested have been expired in December 2020. |
(5) | In November 2017, Dr. Galitzer was granted options to purchase 143,000 Ordinary Shares (with an exercise price of $6.31 per share) under our 2013 Equity Incentive Plan, of which 116,188 were vested as of March 16, 2021. The options will expire within 10 years from the grant date. The fair value of these options as of the grant date was $547,002. In March 2020, Dr. Galitzer was further granted options to purchase 175,000 Ordinary Shares (with an exercise price of $2.14 per share) under our 2018 Plan, of which 43,750 were vested as of March 16, 2021. The options will expire within 10 years from the grant date. The fair value of these options as of the grant date was $229,631. |
(6) | In January 2019, Dr. Santora was granted options to purchase 25,000 Ordinary Shares (with an exercise price of $3.97 per share) under our 2018 Plan, of which 12,50018,750 were vested as of March 15, 2020.16, 2021. The options will expire within 10 years from the grant date. This grant was ratified by our shareholders on May 20, 2019. The fair value of these options as of the grant date was $67,078. |
(6) | In November 2017,March 2020, Dr. GalitzerSantora was further granted options to purchase 143,00040,000 Ordinary Shares (with an exercise price of $6.31 per share) under our 2013 Equity Incentive Plan, of which 80,438 were vested as of March 15, 2020.The options will expire within 10 years from the grant date. The fair value of these options as of the grant date was $547,002. |
(7) | In January 2019, Mrs. Charles was granted options to purchase 33,638 Ordinary Shares (with an exercise price of $3.97$2.14 per share) under our 2018 Plan,of which 14,01510,000 were vested as of March 15, 2020.March16, 2021. The options will expire within 10 years from the grant date. This grant was ratified by our shareholders on May 20, 2019.June 25 2020. The fair value of these options as of the grant date was $88,414.$46,067.
|
(7) | In November 2019, Mr. Lieber was granted options to purchase 30,385 Ordinary Shares (with an exercise price of $2.53 per share) under our 2018 Plan, of which 18,991 were vested as of March 16, 2021. The options will expire within 10 years from the grant date. This grant was ratified by our shareholders on February 18, 2020. The fair value of these options as of the grant date was $59,797. |
The aggregate compensation paid and the associated annual expense relating to equity-based compensation and other payments expensed by us to all of our directors and executive officers with respect to the year ended December 31, 20192020 was $2.9$3.3 million. This amount does not include business travel, professional and business association dues and expenses reimbursed to office holders, and other benefits commonly reimbursed or paid by companies in our industry.
As of December 31, 2019,2020, options to purchase a total of 2,030,6181,544,971 Ordinary Shares granted to our current directors and executive officers were outstanding under our Share Incentive Plan, or the 2013 Plan, and under our 2018 Plan, including options to purchase 33,638 Ordinary Shares granted to Mr. Sean Ellis and 30,385 Ordinary Shares granted to Mr. Jonathan Lieber, each approved by our shareholders on February 18, 2020.Plan. The weighted average exercise price of options as of December 31, 2019,2020, was $4.19$5.0 per share. For more information regarding our 2013 Plan and 2018 Plan, see “Item 6.E.—Share Ownership—Equity Incentive Plans.”
Under the Companies Law, a shareholder-approved compensation policy must serve as the basis for decisions concerning the terms of employment or engagement of our executive officers. For more information, please see “Item 6.C.—Board Practices—Compensation Policy.”
The total amounts set aside or accrued by the company or its subsidiary to provide pension, retirement or similar benefits for our executive officers and directors in 2019with respect to the year ended December 31, 2020 amounted to approximately $70,000.$81,000
Compensation of Directors
The aggregate amount paid by us to our directors for the year ended December 31, 2019,2020, was approximately $367,000. $472,000. This amount does not include reimbursements or coverage of expenses.
Each non-executive (including non-employee) director is entitled to receive an annual cash payment as well as participation fees for attendance at board meetings and service on one or more board committees. Such amounts are equal to the maximum fixed statutory amounts set forth in the Companies Regulations (Rules Regarding the Compensation and Expenses of an External Director), 5760-2000, or the Compensation Regulations, for companies with equity size and value similar to ours, subject to certain reliefs included in the Companies Regulations (Relief for Public Companies with Shares Listed for Trading on a Stock Market Outside of Israel), 5760-2000, and further subject to adjustments. Each non-executive director is also entitled to reimbursements or coverage of expenses (including travel expenses).
In the event that a non-executive director serves as a member of the board of directors during only part of a year, a pro rata portion of the annual fee will be paid. Participation fees are paid, as applicable, by virtue of participation on one or more committees in which the non-executive directors are members, and for participation in meetings of the board of directors or written resolutions of such committee or the board of directors. The annual fee and the participation fees are paid on a quarterly basis.
On May 20, 2019, our shareholders also approved the grant of options to purchase 33,638 Ordinary Shares under the Company’s 2018 Plan, with an exercise price of $3.97, to each non-executive director then in office. Such options vest over three years in twelve quarterly installments starting on September 27, 2018, except that the vesting period of the options granted to Mr. Ostrov commenced on January 8, 2019, following his appointment. In addition, on February 18, 2020, our shareholders approved the grant of options to Mr. Ellis to purchase 33,638 Ordinary Shares under the Company’s 2018 Plan,, with an exercise price of $2.53, which vest over three years in twelve equal quarterly installments starting June 24, 2019, following his appointment.
113On March 3, 2021, our shareholders approved the grant of options to Dr. Jamas to purchase 1,314,218 Ordinary Shares under the Company’s 2018 Plan, with an exercise price of $1.24, which vest over four years, with twenty-five percent (25%) of the options vesting on January 4, 2022 and the remaining seventy-five percent (75%) vesting in twelve equal quarterly installments over the next three (3) years in addition to such other terms as further reflected in his employment agreement filed as an exhibit to this Annual Report.
In addition, we have entered into service agreements with one of our non-executive directors. For information with respect to compensation arrangements with our directors that are also executive officers or employees, see “Item 7.B.—Related Party Transaction—Service and Employment Agreements.”
Exculpation, Insurance and Indemnification of Directors and Officers
We have obtained, subject to shareholder approval, directors and officers liability insurance for the benefit of our office holders. In addition, we have entered into agreements with each of our directors and executive officers exculpating them from liability to us for damages caused to us as a result of a breach of duty of care and undertaking to indemnify them, in each case, to the fullest extent permitted by our Articles and Israeli Law. For more information, please see “Item 6.C.—Board Practices—Exculpation, Insurance and Indemnification of Directors and Officers”.
6.C. Board Practices
Board of Directors
Under the Companies Law, our board of directors is responsible for setting our general policies and supervising the performance of management. Our board of directors may exercise all powers and may take all actions that are not specifically granted to our shareholders or to management. Our executive officers are responsible for our day-to-day management and have individual responsibilities established by our board of directors. Our chief executive officer is appointed by, and serves at the discretion of, our board of directors, subject to the terms of the employment agreement that we have entered into with him. All other executive officers are also appointed by our board of directors (unless the board of directors has delegated the ability to appoint such other executive officers to the chief executive officer, either alone or together with other persons designated by the Board), and are subject to the terms of any applicable employment agreements that we may enter into with them.
Our board of directors currently consists of ten directors, including our two external directors, Ms. Faith L. Charles and Ms. Miranda J. Toledano, whose appointment fulfills the requirements of the Companies Law. See “—External Directors.” In addition, these two directors qualify as independent directors under the corporate governance standards of the Nasdaq rules and the audit committee independence requirements of Rule 10A-3 of the Exchange Act. Mr. Gerald Lieberman and Mr. Gerald M. Ostrov also satisfy the independence requirements of the Nasdaq rules and the Exchange Act.
According to our Articles, the number of members of our board of directors must be at least three and cannot be more than ten. Our board of directors, other than external directors, is divided into three classes, with staggered three-year terms and one director class coming up for election each year. The Class I directors were re-elected at our 2018 annual meeting of shareholders towill serve until our annual meeting of shareholders in 2021. The Class II directors were re-elected at our 2019 annual meeting of shareholders to serve until our annual meeting of shareholders in 2022. Our Class III directors willwere re-elected at our 2020 annual meeting of shareholders to serve until our 2020 annual meetingsmeeting of shareholders.shareholders in 2023. The members of the classes as of the date hereof isare divided as follows:
the Class I directors are Zeev Bronfeld and Roger Garceau;
the Class II directors are Phillip Schwartz and Yonatan Malca; and
the Class III director isdirectors are Gerald Lieberman.andLieberman, Gerald M. Ostrov.
Ostrov and Mr. Sean Ellis.
Mr. Sean Ellis and Mr. Adam Gridley wereDr. Spiros Jamas was also appointed by our board to serve as our director in June and November 2019, respectively. Mr. Ellis and Mr. Gridley January 2021. Dr. Spiros Jamas will serve until our annual meeting of shareholders in 2020.2021.
External Directors are elected at shareholder meetings as described under “—External Directors” below.
At each annual meeting of shareholders, directors will be elected to succeed the class of directors whose term has expired. This classification of our board of directors could have the effect of increasing the length of time necessary to change the composition of a majority of the board of directors. In general, at least two annual meetings of shareholders will be necessary for shareholders to effect a change in a majority of the members of the board of directors.
In accordance with the exemption available to foreign private issuers, we do not follow the requirements of the Nasdaq rules with regard to the process of nominating directors, and instead, follow Israeli law and practice, in accordance with which our board of directors (or a committee thereof) is authorized to recommend to our shareholders director nominees for election.
Under the Companies Law and our Articles, nominees for directors may also be proposed by any shareholder holding at least one percent (1%) of our outstanding voting power. However, any such shareholder may propose a nominee only if a written notice of such shareholder’s intent to propose a nominee has been given to our Secretary (or, if we have no such Secretary, our Chief Executive Officer). Any such notice must include certain information, including, inter alia, a description of all arrangements between the nominating shareholder and the proposed director nominee and any other person pursuant to which the nomination is to be made by the nominating shareholder, the consent of the proposed director nominee to serve as our director if elected and a declaration signed by the nominee declaring that there is no limitation under the Companies Law preventing his or her election, and that all of the information that is required under the Companies Law to be provided to us in connection with such election has been provided.
Our board of directors is also authorized to appoint directors in order to fill vacancies, including filling empty board seats if the number of directors is below the maximum number permitted under our Articles. Each of our directors, other than our external directors, will serve from the date of election or appointment until the next annual meeting of shareholders for which such director’s class is due for reelection. The approval of at least a majority of the voting power in the Company is generally required to remove any of our directors from office (other than external directors).
Under the Companies Law, our board of directors must also determine the minimum number of directors who are required to have accounting and financial expertise (regardless of the requirement to appoint an external director with accounting and financial expertise, as provided below under “—External Directors”). In determining the number of directors required to have such expertise, our board of directors must consider, among other things, the type and size of the company and the scope and complexity of its operations. Our board of directors has determined that the minimum number of directors of our company who are required to have accounting and financial expertise is one. Our board of directors has determined that Mr. Gerald Lieberman has financial and accounting expertise as defined in the regulations promulgated under the Companies Law, or Financial and Accounting Expertise.Expertise.
Our board has further determined that Ms. Miranda J. Toledano, an external director, also has Financial and Accounting Expertise. In addition, our board of directors has determined that Ms. Toledano, who has been nominated to serve on our audit committee, is financially literate as determined in accordance with the Nasdaq rules and is qualified to serve as an audit committee financial expert as defined by SEC rules, or Audit Committee Financial Expert.
Other than with respect to our directors that are also executive officers or employees, there are no arrangements or understandings between us, on the one hand, and any of our directors, on the other hand, providing for benefits upon termination of their service as directors of our Company. For information with respect to compensation arrangements with our directors that are also executive officers or employees, see “Item 7.B.—Related Party Transactions—Service and Employment Agreements,” “Item 7.B.—Related Party Transactions—Indemnification Agreements and Directors’ and Officers’ Liability Insurance,” and “Item 7.B.—Related Party Transactions—Employment Agreements with Executive Officers.”
Chairman of the Board
In accordance with our Articles, our board of directors is required to appoint one or more of its members to serve as chairman of the board of directors. Our board of directors has appointed Mr. Gerald Lieberman to serve as chairman of our board of directors.
Arrangements for Election of Directors
Pursuant to the terms of the Amended and Restated Investors’ Rights Agreement among us, the Centillion Fund, or Centillion, and the other parties thereto, for as long as Centillion and its affiliates hold an aggregate of at least 10% of our issued and outstanding Ordinary Shares, we will nominate, if so requested by Centillion and as permitted by applicable law, a designee of Centillion for election by our shareholders as a member of our board of directors and will recommend that our shareholders vote in favor of such election. As of December 31, 2019,2020, Centillion holds approximately 7.70%5.37% of our issued and outstanding Ordinary Shares.
Alternate Directors
Our Articles provide that, as permitted under Israeli law, any director may appoint another person, who is qualified to be appointed as a director and who is not a director or an alternate director, to serve as his or her alternate director, subject to the approval of a majority of the members of the board of directors, excluding such director. The term of an alternate director could be terminated at any time by the appointing director or our board of directors and would terminate under circumstances in which, according to our Articles, the term of any director shall terminate or automatically terminate upon the termination of the term of the appointing director. The Companies Law stipulates that an external director may not appoint an alternate director, except under very limited circumstances. An alternate director has the same rights and responsibilities as a director, except for the right to appoint an alternate director.
External Directors
Under the Companies Law, companies incorporated under the laws of the States of Israel that are “public companies,” including companies with shares listed on Nasdaq, are generally required to have at least two external directors who meet certain independence criteria to ensure that they are unaffiliated with the company and its controlling shareholder(s).
An external director must also have either Financial and Accounting Expertise or professional qualifications, as defined in regulations promulgated under the Companies Law, while at least one of the external directors is required to have Financial and Accounting Expertise. An external director is entitled to reimbursement of expenses and compensation as provided in regulations promulgated under the Companies Law, but is otherwise prohibited from receiving any other compensation from us, directly or indirectly, during his term and for two years thereafter, other than exculpation, insurance, an undertaking to indemnify or indemnification.
Under the Companies Law, external directors must be elected at a shareholder meeting by a simple majority of the votes cast on the matter, provided that (i) such majority includes a majority of the votes cast by non-controlling shareholders and shareholders who do not have a personal interest in the election (excluding a personal interest that did not result from the shareholder’s relationship with the controlling shareholder), or (ii) the total number of shares held by shareholders who do not have a personal interest (as described herein, in sub-section (i)) who voted against the election did not exceed 2% of our aggregate voting rights in the Company. External directors serve for up to three terms of three years each. Even if an external director is not nominated by our board of directors for re-election for a second or third term, the external director may be nominated for re-election by either (i) one or more shareholders holding at least 1% of our voting rights, or (ii) the external director itself. If nominated by our board of directors, the re-election should be approved by the same process for initial election as described hereinabove. If nominated by one or more shareholders holding at least 1% or by the external director itself, the re-election can be approved by a simple majority, provided that (i) votes cast by controlling shareholders and shareholders who have a personal interest in the election (excluding a personal interest that did not result from the shareholder’s relationship with the controlling shareholder) and abstentions are not taken into account, (ii) the votes cast by such non-controlling and disinterested shareholders for approval of the election exceed 2% of our aggregate voting rights, and (iii) the external director has no affiliations listed in Section 245(a1)(1)(c) of the Companies Law. A term of an external director may be terminated prior to expiration only by a shareholder vote (by the same threshold required for election), or by a court, but in each case only if the external director ceases to meet the statutory qualifications for election or if the external director violates his duty of loyalty to us.
Each committee of a company’s board of directors that is authorized to exercise powers of the board of directors is required to include at least one external director, and all external directors must be members of the company’s audit committee and compensation committee. Ms. Faith L. Charles and Ms. Miranda J. Toledano were elected to serve as our external directors in our 2018 annual meeting of shareholders. The term of office of each of Ms. Charles and Ms. Toledano as an external director will expire in September 2021.
Board Committees
Our board of directors has established the following committees:
Audit Committee
Composition and Quorum
Under the Companies Law, the board of directors of a public company must establish an audit committee. The audit committee must consist of at least three directors who meet certain independence criteria and must include all of the company’s external directors, one of whom must serve as chairperson of the committee. The audit committee may not include the chairman of the board, a controlling shareholder of the company, a relative of a controlling shareholder, a director employed by or providing services on a regular basis to the company, to a controlling shareholder or to an entity controlled by a controlling shareholder, or a director who derives most of his or her income from a controlling shareholder. In addition, under the Companies Law, the majority of the directors serving on the audit committee of a publicly traded company must be unaffiliated directors. In general, an “unaffiliated director” under the Companies Law for “public companies,” including companies with shares listed on Nasdaq, is defined as either an external director or as a director who meets the following criteria:
he or she meets the primary qualifications for being appointed as an external director, except for the requirements that the director possess 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, subject to extension for additional terms under certain circumstances. For this purpose, a break of less than two years in the service shall not be deemed to interrupt the continuation of the service.
Under Nasdaq rules and SEC regulations applicable to foreign private issuers, we are required to maintain an audit committee consisting of independent directors, one of whom has accounting or related financial management expertise and qualifies as an Audit Committee Financial Expert as such term is defined in Item 407(d)(5) of Regulation S-K of the Securities and Exchange Act of 1934.
In order for a director to be designated as “independent” under general Nasdaq rules and SEC regulations, he or she must not have a material relationship with the company that would impair his or her independence, such as, inter alia, a commercial, consulting, legal, accounting or familial relationships. However, ownership of a significant amount of shares or affiliation with a major shareholder should not, in and of itself, preclude the board from determining that a director is independent, nor is the board precluded from appointing its chairman as a member of the audit committee or as chairman of the committee.
In order for a director to be designated as “financially literate” under Nasdaq rules and SEC regulations, he or she is required to have sufficient understanding of the language of accounting and corporate finance to act as an effective overseer of the integrity of a company’s financial reporting process and its financial statements, including the selection and oversight of the performance of the external and internal auditors.
In order for a director to qualify as an Audit Committee Financial Expert under SEC regulations he or she must have education and experience as chief financial officer, chief accounting officer, controller, public accountant or auditor, or experience in one or more positions that involve the performance of similar functions or in actively supervising such positions. If no audit committee member qualifies, the company must state why its audit committee lacks a financial expert.
Our audit committee consists of Miranda J. Toledano (Chairman), Faith L. Charles and Gerald M. Ostrov.Ostrov. Each of the members of our audit committee is eligible to be classified as an independent director in accordance with SEC regulations and satisfies the independent director requirements under Nasdaq rules applicable to us. All designated members of our audit committee meet the requirements for financial literacy Nasdaq rules and SEC regulations. Our board has determined that Ms. Miranda J. Toledano is an Audit Committee Financial Expert, as such term is defined under applicable SEC rules. Ms. Faith L. Charles and Ms. Miranda J. Toledano, members of our audit committee, serve as our external directors.
Roles, Responsibilities and Procedures
Our audit committee provides assistance to our board of directors in fulfilling its legal and fiduciary obligations in matters involving our accounting, auditing, financial reporting, internal control and legal compliance functions by pre-approving the services performed by our independent accountants and reviewing their reports regarding our accounting practices. Our audit committee also oversees the audit efforts of our independent accountants and takes those actions that it deems necessary to satisfy itself that the accountants are independent of management.
Our board of directors has adopted an audit committee charter that sets forth the responsibilities of the audit committee consistent with the rules and regulations of the SEC and the Nasdaq, as well as the requirements for such committee under the Israeli Companies Law, including: (a) oversight of our independent auditor and appointment, pre-approval of the engagement, compensation, retention or termination of engagement of our independent auditor (subject to shareholder ratification), and examination of the scope of work and fees of the independent auditor and submission of recommendations to our shareholders; (b) review of the independence and quality control procedures of the independent auditor and the experience and qualifications of the independent auditor’s senior personnel that are providing audit services to the Company; (c) meeting with the Company’s management and independent auditor to discuss certain issues regarding the annual audit, separately meeting the independent auditor to discuss certain other audit issues regarding the annual audit, reviewing our annual audited financial statements and quarterly financial statements with management and the independent auditor, including a review of our disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and with respect to the annual audit, determining whether to recommend to the board of directors that the audited financial statements be included in the Company’s Annual Report for the fiscal year subject to the audit; (d) discuss with management and the independent auditor the Company’s earnings press releases, as well as financial information and earnings outlook provided to analysts and rating agencies; (e) reviewing any impairment in the management of the Company’s business, and suggesting an appropriate course of action to the board of directors; (f) to the extent required under applicable law, (i) conduct an appropriate review and oversight of all “related party transactions” for potential conflict of interest situations on an ongoing basis, as required under applicable law, and approve such transactions, where required; (ii) decide if an action of an officer is “material”; and (iii) decide if a transaction of the Company with an officer or controlling shareholder (or in which they have a personal interest) is an extraordinary transaction, or Extraordinary Transaction, and the way in which a non-redundant transaction, or Non-redundant Transaction, shall be approved, including such type of Non-redundant Transaction which shall require the approval of the Committee; (g) discuss with the independent auditor and any other organ of the Company as the committee deems appropriate at its sole discretion, any correspondence from or with regulators or governmental agencies, any employee complaints or any published reports that raise material issues regarding the Company’s financial statements, financial reporting process, accounting policies or internal audit function; (h) establish procedures for the receipt, retention and treatment of complaints received by the Company regarding impairment in the business management, accounting, internal accounting controls or auditing matters and establish procedures for the confidential and anonymous submission by employees regarding questionable accounting or auditing matters; (i) providing the Company with the report with respect to the audited financial statements for inclusion in each of the Company’s annual proxy statements; (j) reporting regularly to, and review with the board of directors any issues that arise with respect to the quality or integrity of the Company’s financial statements, the Company’s compliance with legal or regulatory requirements, the performance and independence of the Company’s independent auditor, the performance of the Company’s internal audit function, the internal auditor’s work plan or any other matter the committee determines necessary or advisable to report to the board of directors, including any new or proposed accounting policies to be adopted by the Company or any new standards promulgated by the SEC or other regulatory body; (k) at least annually, performing an evaluation of the performance of the committee and its members, and, annually reviewing and re-assessing the committee’s charter and submitting any recommended changes to the board of directors for its consideration; (l) without otherwise limiting or impacting the responsibilities of any other committee of the board of directors pursuant to applicable law, proposing the appointment, termination and replacement of the internal auditor to the board of directors as required under the Companies Law; (m) examining the internal audit function and performance and if he/she has reasonably sufficient resources and tools in order to perform his or her role, taking into account the Company’s special needs and size; (n) setting clear hiring policies for employees or former employees of the Company’s independent auditor; (o) discussing the Company’s information security, business continuity programs and controls and systems to monitor and manage business risk; and (p) any other responsibilities which may be assigned from time to time by the Company’s board of directors.
The responsibilities of an audit committee under the Companies Law include (a) identifying and addressing deficiencies in the business management practices of the company, including, inter alia, in consultation with our internal auditor or the independent auditor, and making recommendations to the board of directors as to how to correct such practices; (b) determining whether certain related party transactions are extraordinary or material under the Israeli Companies Law, including transactions in which an office holder has a personal interest, and whether to approve such transactions; (c) establishing the approval process for certain transactions with a controlling shareholder or in which the controlling shareholder has a personal interest; (d) examining and approving the work plan of the internal auditor, subject to any modifications in its discretion; (e) examining our internal audit controls and internal auditor’s performance, including whether the internal auditor has sufficient resources and tools to fulfill his responsibilities; (f) examining the scope of our independent auditor’s work and compensation and submitting its recommendation with respect thereto to our board of directors or shareholders, depending on which of them is considering the appointment of our auditor; and (g) establishing procedures for the handling of employees’ complaints as to the management of our business and the protection to be provided to such employees.
Our audit committee is also responsible for assisting our board of directors in monitoring our financial statements and our compliance with legal and regulatory requirements.
A “personal interest” includes an interest of any person in an action or transaction of a company, excluding any interest arising solely from holding the Company’sCompany’s shares, but including the personal interest of such person’s spouse, siblings, parents, grandparents, descendants, spouse’s descendants, siblings or parents or the spouse of any of such persons, and the personal interest of any entity in which such person or one of the aforementioned relatives of such person serves as a director or chief executive officer, owns 5% or more of such entity’s outstanding shares or voting rights or has the right to appoint one or more directors or the chief executive officer. Further, in the case of a person voting by proxy at a shareholder meeting, “personal interest” includes the personal interest of either the proxy holder or the shareholder granting the proxy, whether or not the proxy holder has discretion how to vote.
Under the Israeli Companies Law, an Extraordinary Transaction is defined as any of the following:
a transaction other than in the ordinary course of business;
a transaction that is not on market terms; or
a transaction that may have a material impact on a company’s profitability, assets or liabilities.
Our audit committee may not approve any actions requiring its approval, unless, at the time of the approval, a majority of the committee’scommittee’s members are present, which majority consists of independent directors.
Compensation Committee
Composition and quorum
Under the Companies Law, the board of directors of a public company must establish a compensation committee. The compensation committee must consist of at least three directors who meet certain independence criteria and must include all of the company’s external directors.
Our compensation committee consists of Faith L. Charles (Chairman), Miranda J. Toledano and Gerald M. Ostrov.Ostrov. Our compensation committee satisfies the requirements of the Companies Law, but not Nasdaq rules applicable to compensation committees, which the Company has chosen to opt out of as a foreign private issuer. Nevertheless, each member of our compensation committee is independent under Nasdaq rules. Ms. Faith L. Charles and Ms. Miranda J. Toledano, members of our compensation committee, serve as our external directors. See “Item 16.G.—Corporate Governance Practices” below.
Roles, responsibilities and procedures
Our board of directors has established a compensation committee and adopted a charter setting forth its purpose, which includes: (a) assisting the board of directors in discharging its responsibilities relating to (i) the compensation of the Company’s directors, chief executive officer and other executive officers, and (ii) the overall Company’s compensation programs; (b) recommending the approval of a compensation policy to the board, in accordance with the requirements of the Companies Law, and any other incentive-based compensation plans and equity-based plans (collectively, the “Compensation Plans and Policies”); (c) oversight of the development and implementation of the Compensation Plans and Policies that are appropriate for the Company in light of all relevant circumstances, and recommend to the board of directors any amendments or modifications to the Compensation Plans and Policies that the committee deems appropriate, including the extension of Compensation Plans and Policies as required by the Companies Law; (d) determining whether to approve transactions concerning the terms of engagement and employment of the Company’s chief executive officer, other executive officers and directors that require the Committee approval under the Companies Law or the Compensation Plans and Policies; (e) taking any further actions as the committee is required or allowed to under the Companies Law or the Compensation Plans and Policies; (f) reviewing and approving, or if required by law, approving and recommending the board of directors to approve grants and awards under the Company’s equity incentive plans; and (g) reviewing the adequacy of the committee’s charter on an annual basis, and recommending the board of directors any amendments or modifications to the charter that the committee deems appropriate.
Compensation Policy
Under the Israeli Companies Law, a compensation policy must be adopted by the board of directors after considering the recommendations of the compensation committee and needs to be further brought before the company’s shareholders for approval, referred to herein as the Special Majority Approval for Compensation. A Special Majority Approval for Compensation requires shareholder approval by a majority vote of the shares present and voting at a meeting of shareholders called for such purpose, provided that either: (a) such majority includes at least a majority of the shares held by all shareholders who are not controlling shareholders and do not have a personal interest in such compensation arrangement; or (b) the total number of shares of non-controlling shareholders and shareholders who do not have a personal interest in the compensation arrangement and who vote against the arrangement does not exceed 2% of the company’s aggregate voting rights.
The compensation policy must serve as the basis for decisions concerning the terms of employment or engagement of office holders, including exculpation, insurance, indemnification, indemnification undertakings and any monetary payment and obligation of payment in respect of employment or engagement. The compensation policy must relate to certain factors, including advancement of the company’s objectives, the company’s business plan and its long-term strategy, and creation of appropriate incentives for office holders. It must also consider, inter alia, the company’s risk management, size and the nature of its operations.
The compensation policy must furthermore consider additional factors, as follows: (a) the knowledge, skills, expertise and accomplishments of the relevant office holder; (b) the office holder’s roles and responsibilities and prior compensation agreements with him or her; (c) the ratio between the terms offered and the average compensation of the other employees of the company, including those employed through manpower companies; (d) the impact of disparities in salary upon work relationships in the company; (e) the possibility of reducing variable compensation at the discretion of the board of directors; (f) as to variable compensation, the possibility of setting a limit on the exercise value of non-cash variable equity-based compensation; and (g) as to severance compensation, the period of service of the office holder, the terms of his or her compensation during such service period, the company’s performance during that period of service, the person’s contribution towards the company’s achievement of its goals and the maximization of its profits, and the circumstances of termination of service.
A compensation policy must also include the following principles: (a) the link between variable compensation and long-term performance and measurable criteria; (b) the ratio between variable and fixed compensation, and the ceiling for the value of variable compensation; (c) the conditions under which an office holder would be required to repay compensation paid to him or her if it was later shown that the data upon which such compensation was based was inaccurate and was required to be restated in the company’s financial statements; (d) the minimum holding or vesting period for variable, equity-based compensation; and (e) maximum limits for severance.
Under the Israeli Companies Law, every three years we are required to re-obtain the approval of our compensation committee, board of directors and shareholders for either the continuation of our existing compensation policy or adoption of a new compensation policy, provided however that the compensation policy adopted within nine months from the closing of our initial public offering is valid for five years, specifically July 2, 2023. Our compensation policy was adopted by our shareholders on September 27, 2018 (following our initial public offering dated July 2, 2018), after having been recommended by our compensation committee and approved by our board of directors, and will therefore need to be either re-approved, amended, or replaced by a new policy only in 2023, and every three years thereafter.
Our compensation committee may conduct or authorize investigations into, or studies of, matters within its scope of responsibilities, and may retain or obtain the advice of a compensation consultant, legal counsel or other advisor in its sole discretion. The compensation committee is directly responsible for the appointment, compensation and oversight of the work of any compensation consultant, legal counsel or other advisor that it retains, at the expense of the Company. The compensation committee may select, or receive advice from, a compensation consultant, legal counsel or other advisor to the compensation committee, other than in-house legal counsel, only after conducting an assessment of, and determining, the advisor’s independence, including whether the advisor’s work has raised any questions of independence or conflicts of interest, taking into consideration the Exchange Act, the factors set forth in Nasdaq rules and any other factors that the committee deems relevant.
In 2017, in determining the compensation of certain executive officers, including bonus amounts, in 2018 in determining our compensation policy and in 2019 in determining the compensation of our chief executive officer the compensation committee retained the services of a compensation consultant, Brightman Almagor Zohar & co., or Deloitte, to conduct a comparative survey of the compensation of such office holders. The 2017 and 2018 surveys examined the publicly-reported cash and equity compensation of chief executive officers and other executive officers, of 8 comparable Israeli pharmaceutical and biotechnology companies. The 2019 comparative survey examined the publicly-reported cash and equity compensation of board members of 9 comparable U.S., and 6 comparable Israeli pharmaceutical and biotechnology companies.
Internal Auditor
Under the Companies Law, the board of directors is required to appoint an internal auditor recommended by the audit committee. The role of the internal auditor is to examine, inter alia, whether the company’s actions comply with applicable law and proper business procedures. The internal auditor may not be an interested party, an officer or director of the company, or a relative of any of the foregoing, nor may the internal auditor be our independent accountant or any person on its behalf. An “interested party” means any person who serves as a director or chief executive officer, owns 5% or more of such entity’s outstanding shares or voting rights or has the right to appoint one or more directors or the chief executive officer. In January 2019, Ms. Irena Ben-Yakar from Deloitte was appointed as the Company’s internal auditor.
Exculpation, Insurance and Indemnification of Directors and Officers
Under the Companies Law, a company may not exculpate an office holder (including director) 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 included in its articles of association. Our Articles include such a provision. Notwithstanding, a company may not exculpate in advance a director from liability arising out of a breach of duty of care caused by dividend or distribution to shareholders.
Under the Companies Law, a company may indemnify an office holder in respect of the following liabilities and expenses incurred for acts performed by him or her as an office holder, either pursuant to an undertaking made in advance or following the indemnified event, if its articles of association includes a provision allowing such indemnification:
financial liability imposed on him or her in favor of another person pursuant to a judgment, including a 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 such foreseen events and amount or criteria;
reasonable litigation expenses, including attorneys’ fees, incurred by the office holder (1) 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 (i) no indictment was filed against such office holder as a result of such investigation or proceeding, and (ii) no financial liability 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 (2) in connection with a forfeit; 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.
Under the Companies Law, a company may insure an office holder against the following liabilities incurred for acts performed by him or her as an office holder, if and to the extent provided in the company’s articles of association:
a breach of the duty of loyalty to the company, provided that the office holder acted in good faith and had reasonable grounds to believe that the act would not harm the company;
a breach of the duty of care to the company or to a third party; and
a financial liability imposed on the office holder in favor of a third party.
However, under the Companies Law, a company may not indemnify, exculpate or insure an office holder against any of the following:
a breach of the duty of loyalty, except for indemnification and insurance for a breach of the duty of loyalty to the company to the extent that the office holder acted in good faith and had a reasonable grounds to believe that the act would not harm the company;
a breach of the 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
a fine, monetary sanction, forfeit or penalty levied against, or imposed upon, the office holder.
Under the Companies Law, exculpation, indemnification and insurance of office holders in a public company must be approved by the compensation committee and the board of directors, and with respect to certain office holders or under certain circumstances, also by the shareholders.
Our Articles permit us to exculpate, indemnify and insure our office holders to the fullest extent permitted or to be permitted by the Companies Law.
We have obtained, subject to shareholder approval, directors and officers liability insurance for the benefit of our office holders of $15$12.5 million per annum. We intend to maintain such coverage and pay all premiums thereunder to the fullest extent permitted by the Companies Law. In addition, we have entered into agreements with each of our directors and executive officers exculpating them from liability to us for damages caused to us as a result of a breach of duty of care and undertaking to indemnify them, in each case, to the fullest extent permitted by our Articles and Israeli Law.
6.D. Employees
As of December 31, 2019,2020, we had 2418 employees and consultants based in Israel, including 2016 full-time employees, threeparttwo part time employees, and one part-time consultant who serves as our Israel-based CFO. In addition, we had six employees andfour part time consultants based in the U.S., including one full time employee, our CEO, and five additional part-time consultants, including our CMO and U.S-based CFO. Six of our employees and consultants have either PhDs or MDs. The distribution of our full-time employees according to main areas of activity is set forth in the following table:
| | Employees | |
Area of Activity: | | | |
Research and development | | | 1514 | |
General and administrative | | | 62 | |
Total | | | 2116 | |
Israeli labor laws govern the length of the workday and workweek, minimum wages for employees, procedures for hiring and dismissing employees, determination of severance pay, annual leave, sick days, advance notice of termination, payments to the National Insurance Institute, and other conditions of employment and include equal opportunity and anti-discrimination laws. While we are not, and none of our employees is, party to any collective bargaining agreements, certain provisions of the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations (including the Industrialists’ Associations) are applicable to our employees in Israel by order of the Israeli Ministry of the Economy. These provisions primarily concern pension fund benefits for all employees, insurance for work-related accidents, recuperation pay and travel expenses. 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 relationships with our employees are good.
6.E. Share Ownership
The following table provides information with respect to our securities held by our directors and executive officers as of March 15, 2020:
16, 2021:
Name | | Type of Security | | Number of Securities(1) | | Options/warrants Exercise Price ($) | | Options/ warrants Exercise Date | | Expiration Date | | Percent of Shares Outstanding(2) | | | Type of Security | | Number of Securities(1) | | Options/warrants Exercise Price ($) | | Options/ warrants Exercise Date | | Expiration Date | | Percent of Shares Outstanding(2) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Dr. Phillip Schwartz | | Shares | | 578,630 | | | | - | | | | | | | Shares | | 579,410 | | - | | - | | - | | | |
Dr. Phillip Schwartz | | | Options | | 357,500 | | 6.31 | | 11/23/2021 | | 11/23/2023 | | | |
| | | | | | | | | | | | 3.62% | |
| Options | | 357,500 | | 6.31 | | 11/23/2021 | | 11/23/2023 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | 4.36% | | |
Mr. Adam Gridley | | Options | | 696,598 | | 2.75 | | 08/05/2023 | | 08/05/2029 | | - | | |
Dr. Arthur Sentora | | Options | | 25,000 | | 3.97 | | 1/16/2022 | | 1/17/2029 | | * | | |
Dr. Hillel Galitzer | | | Shares | | 36,010 | | - | | - | | - | | | |
| | Options | | 143,000 | | 6.31 | | 11/15/2021 | | 11/15/2023 | | | |
| Shares | | | | | | | | | | | | | Options | | 175,000 | | 2.14 | | 3/16/2024 | | 16/3/2030 | | | |
| | Options | | 143,000 | | 6.31 | | 11/15/2021 | | 11/15/2023 | | | | | | | | | | | | | | | * | |
Dr. Arthur Sentora | | | Options | | 25,000 | | 3.97 | | 1/16/2022 | | 1/17/2029 | | | |
| | Options | | 40,000 | | 2.14 | | 03/1/2024 | | 16/3/2030 | | | |
| | | | | | | | | | | | * | | | | | | | | | | | | | * | |
Mrs. Faith Charles | | Options | | | | 3.97 | | 09/27/2021 | | 1/17/2029 | | * | | |
Jonatan Lieber | | | Options | | 30,385 | | 2.53 | | 11/17/2021 | | 11/17/2029 | | * | |
* Less than 1%
(1) As of March 15, 2020.16, 2021.
(2) The percent of shares outstanding held by each beneficial ownership of our Ordinary Shares is determined in accordance with the rules of the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership, generally, includes any shares over which a person exercises sole or shared voting or investment power, or the right to receive the economic benefit of ownership. For purposes of the table and the related footnotes, unless described otherwise within the footnotes, we deem Ordinary Shares issuable pursuant to options or warrants that are currently exercisable or exercisable within 60 days as of March 15, 202016, 2021 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.
On May 20, 2019,June 25, 2020 and on February 18, 2020,March 3, 2021, our shareholders approved the grant of options to certain of our non-executive directors.executive officers. See “Item 6.B.—Compensation—Compensation of Executive Officers and Directors—Compensation of Directors.”
Equity Incentive Plans
Share Incentive Plan
On March 17, 2013, our board of directors approved our 2013 Plan for the granting of stock options, restricted share units, restricted share awards and performance-based awards, in order to provide incentives to our employees, directors, consultants and/or service providers. As of December 31, 2019, 1,680,4692020, 1,604,419 Ordinary Shares were issuable upon the exercise of outstanding awards under the 2013 Plan, at a weighted-average exercise price of $5.89$5.69 per share. Of the foregoing outstanding awards, options to purchase 1,481,7641,453,823 Ordinary Shares, in the aggregate, had vested under the 2013 Plan as of that date, with a weighted-average exercise price of $5.82$5.89 per share.
Awards granted under the 2013 Plan are subject to vesting schedules and generally vest over a four-year period commencing from the applicable grant date, such that 25% of the awards vest on the first anniversary of the applicable grant date and 75% of the awards vest in 12 equal installments upon the lapse of each three-month period following the first anniversary of the applicable grant date. Subject to the discretion of the 2013 Plan administrator, if an award has not been exercised within six years after the date of the grant, the award expires. Any period in which a grantee is not our employee or has taken a leave of absence will not be included in such vesting period.
The 2013 Plan provides for granting awards in compliance with Section 102 of the Israeli Income Tax Ordinance, 5721-1961, or the Ordinance, which provides to employees, directors and officers, who are not controlling shareholders (as defined in the Ordinance) and are Israeli residents, favorable tax treatment for compensation in the form of shares or equity awards issued or granted, as applicable, to a trustee under the capital gains track, or Capital Gains Track, for the benefit of the relevant employee, director or officer and are, or were, to be held by the trustee for at least two years after the date of grant or issuance. Under the Capital Gains Track, any accounting expense with respect to the grant or issuance of such shares or awards which relates to gain taxed as capital gains is not allowed as a deduction for tax purposes.
The 2013 Plan addresses the treatment of vested and unvested awards upon the cessation of employment or engagement of the award holder as well as upon consummation of a merger, consolidation or similar transaction, or sale of all or substantially all of our assets or sale of at least 80% of our outstanding securities. The 2013 Plan also provides for certain lock-up arrangements upon consummation of a public offering.
The 2013 Plan is administered by our board of directors or by a committee appointed by our board of directors. Upon the completion of our initial public offering, the remaining pool of reserved Ordinary Shares under the 2013 Plan was cancelled, and the only reserved Ordinary Shares available for grants to our employees, directors, consultants and service providers in the future are those under the 2018 Plan.
2018 Equity Incentive Plan
On July 2, 2018, in connection with the consummation of our initial public offering, our board of directors approved our 2018 Plan, with the purpose of advancing the interests of our shareholders by enhancing our ability to attract, retain and motivate individuals to perform at the highest level. The 2018 Plan governs issuances of equity incentive awards from and after the closing of our initial public offering. The maximum number of Ordinary Shares initially available for issuance under equity incentive awards granted pursuant to the 2018 Plan could not exceed 12% of the total outstanding Ordinary Shares as of the time of adoption. On January 1, 2019 and on January 1 of each calendar year thereafter, an additional number of shares equal to 5% of the total outstanding Ordinary Shares on such date (or any lower number of shares as determined by our board of directors) have and will become available for issuance under the 2018 Plan. As of December 31, 2019,2020, a total of 207,563 Ordinary1,304,043Ordinary Shares representing 6.53%6.19% of the total outstanding shares as of that date remained available for issuance under the 2018 Plan. In January 2020,2021, pursuant to the annual evergreen provision and following the approval of our board of directors, an additional 893,2341,052,896 Ordinary Shares, equal to 5% of the total outstanding shares as of January 1, 2020,2021, became available for issuance under the 2018 Plan.
Equity incentive awards may be granted to our employees, non-employee directors, consultants or other advisors, as well as holders of equity compensation awards granted by a company that may be acquired by us in the future. Awards under the 2018 Plan may be granted in the form of options, share appreciation rights, restricted shares, restricted share units, performance awards or other share-based awards. Options and share appreciation rights will have an exercise price determined by the administrator but that is no less than fair market value of the underlying Ordinary Shares on the date of grant.
As of December 31, 2020, 1,002,229 Ordinary Shares were issuable upon the exercise of outstanding awards under the 2018 Plan, at a weighted-average exercise price of $2.73 per share. Of the foregoing outstanding awards, as of December 31, 2020, options to purchase 367,196 Ordinary Shares, in the aggregate, had vested under the 2018 Plan as of that date, with a weighted-average exercise price of $3.28 per share.
The vesting conditions for grants under the 2018 Plan will be determined by the administrator and, in the case of restricted shares and restricted share units, will be set forth in the applicable award documentation.
In the event of a participant’s termination of employment, the administrator may, in its discretion, determine the extent to which an equity incentive award may be exercised, settled, vested, paid or forfeited. In the event of a change in control (as defined in the 2018 Plan) of the Company, the compensation committee may, in its discretion, take a number of actions with respect to awards outstanding under the 2018 Plan, including the following: (i) continuing awards or converting such awards into an award or right with respect to shares of the successor or surviving corporation; (ii) immediately vesting and settling awards (or in the case of options and share appreciation rights, providing that such awards will become fully exercisable); (iii) cancelling unvested awards for no consideration; (iv) terminating or cancelling awards in exchange for a cash payment; and (v) providing that awards may be assumed, exchanged, replaced or continued by the successor or surviving corporation with cash, securities, rights or other property. In the event of a structural change of the Company (i.e., a transaction in which the Company’s shares immediately prior to the transaction are converted into or exchanged for shares that represent at least a majority of the share capital of the surviving corporation, such as a re-domestication of the Company or a share flip), outstanding awards will be exchanged or converted into awards to acquire shares of the company (if it is the surviving corporation) or the successor company in accordance with the applicable exchange ratio.
The 2018 Plan is administered by the board of directors, provided that the board of directors may delegate its authority to the compensation committee to administer the 2018 Plan.
The 2018 Plan provides for granting awards in compliance with Section 102 of the Ordinance, which provides to employees, directors and officers of the Company, who are not controlling shareholders (as defined in the Ordinance) of the Company and are Israeli residents, potential favorable tax treatment for compensation in the form of shares or equity awards issued or granted, as applicable, to a trustee under the Capital Gains Track for the benefit of the relevant employee, director or officer, subject to compliance with the terms and conditions of such tax track. Under the Capital Gains Track, any accounting expense with respect to the grant or issuance of such shares or awards which relates to gain taxed as capital gains is not allowed as a deduction for tax purposes.
ITEM 7.MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
7.A. Major Shareholders
The following table sets forth information with respect to the beneficial ownership of our Ordinary Shares (i) each person or entity known by us to own beneficially 5% or more of our outstanding Ordinary Shares (as of the date of such shareholder’s Schedule 13G filing for Entera Bio Ltd. with the SEC); (ii) each of our directors and executive officers individually; and (iii) all of our executive officers and directors as a group.
According to our transfer agent, as of March 15, 2020,16, 2021, there were 9283 record holders of our Ordinary Shares, among whom 75 are U.S. holders who beneficially own lessmore than 50% of our Ordinary Shares. None of our shareholders has different voting rights from other shareholders.
The beneficial ownership of our Ordinary Shares is determined in accordance with the rules of the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership, generally, includes any shares over which a person exercises sole or shared voting or investment power, or the right to receive the economic benefit of ownership. For purposes of the table and the related footnotes, unless described otherwise within the footnotes, we deem Ordinary Shares issuable pursuant to options or warrants that are currently exercisable or exercisable within 60 days as of March 15, 202016, 2021 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 with respect to the percentage ownership of all executive officers and directors as a group. The percentage of Ordinary Shares beneficially owned is based on 18,202,23723,738,642 Ordinary Shares outstanding as of March 15, 2020.16, 2021. The beneficial ownership data provided below is based solely on information available to our Company and, in the case of major shareholders, has not been verified further. 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 shares.
Unless otherwise noted below, each shareholder’s address is c/o Entera Bio Ltd., Kiryat Hadassah, Minrav Building - Fifth Floor, Jerusalem, Israel and 37 Walnut Street, Suite 300 Wellesley Hills Massachusetts, U.S.Israel.
Name | | Number and Percentage of Ordinary Shares | | | Number and Percentage of Ordinary Shares | |
| | Number | | | Percent | | | Number | | | Percent | |
5% or Greater Shareholders (other than directors and executive officers) | | | | | | | | | | | | |
D.N.A Biomedical Solutions Ltd.(1) | | 3,762,959 | | | 20.48 | % | | 3,762,959 | | | 15.74 | % |
Gakasa Holdings LLC(2) | | 2,374,275 | | | 12.61 | % | | | 2,374,275 | | | | 9.74 | % |
Capital Point Ltd.(3) | | 1,604,820 | | | 8.78 | % | | 1,147,385 | | | 4/82 | % |
Centillion Fund, Inc.(4) | | 1,402,310 | | | 7.59 | % | | | 1,131,130 | | | | 4.77 | % |
Menachem Ehud Raphael(5) | | 1,475,237 | | | 7.89 | % | | 1,390,997 | | | 5.79 | % |
Executive Officers and Directors: | | | | | | | | | | | | | | |
Zeev Bronfeld(6) | | 3,779,778 | | | 20.56 | % | | 28,032 | | | * | |
Yonatan Malca(7) | | 3,779,778 | | | 20.56 | % | | | 3,790,992 | | | | 15.84 | % |
Dr. Phillip Schwartz(8) | | 802,848 | | | 4.36 | % | | 869,879 | | | 3.62 | % |
Gerald Lieberman(9) | | 312,737 | | | 1.70 | % | | | 304,840 | | | | 1.27 | % |
Dr. Roger J. Garceau(10) | | 363,220 | | | 1.96 | % | | 361,270 | | | 1.50 | % |
Dr. Hillel Galitzer(11) | | 125,385 | | | * | | | | 195,948 | | | | * | |
Jonathan Lieber(12) | | 7,596 | | | * | | | 21,523 | | | * | |
Dr. Arthur Santora(13) | | 14,065 | | | * | | | | 30,317 | | | | * | |
Faith L. Charles(14) | | 16,819 | | | * | | | 28,032 | | | * | |
Miranda J. Toledano(15) | | 16,819 | | | * | | | | 28,032 | | | | * | |
Gerald M. Ostrov(16) | | 14,016 | | | * | | | 25,229 | | | * | |
Sean Ellis(17) | | 8,410 | | | * | | | | 19,622 | | | | * | |
Adam Gridley | | - | | | - | | |
Dana Yaacov-Garbeli | | - | | | - | | |
All Directors and Executive Officers as a Group (14 persons)(18) | | 1,715,552 | | | 8.94 | % | |
Spiros Jamas | | | - | | | - | |
Dana Yaacov-Garbeli(18) | | | | 8,750 | | | | * | |
All Directors and Executive Officers as a Group (14 persons)(19) | | | 1,949,506 | | | 8.81 | % |
* Less than 1%
(1) | Based partly on the Schedule 13G/A filed by D.N.A Biomedical with the SEC on February 18, 2020 regarding its holdings. Zeev Bronfeld is the controlling shareholder of D.N.A Biomedical. By reason of such control, Zeev Bronfeld may be deemed to be beneficial owner of, and to share the power to vote and dispose of, the shares beneficially owned by D.N.A Biomedical. Mr. Bronfeld disclaims beneficial ownership of the shares held by D.N.A Biomedical. D.N.A’s holdings consisted of: (i) 3,256,630 3,594,183 Ordinary Shares as reported, (ii) 337,553 Ordinary Shares and (iii) Investor Warrants to purchase 168,776 Ordinary Shares exercisable within 60 days as of March 15, 2020, issued to D.N.A on February 18, 2020 following our shareholders’ approval of D.N.A’s participation in our Private Placement.16, 2021, D.N.A’s address is at Shimon Hatarsi 43 St., Tel Aviv, Israel.
|
(2) | ConsistsBased on the Schedule 13G/A filed by Gakasa Holdings LLC. with the SEC on February 16, 2021 regarding its holdings as of (i) 1,741,363 Ordinary Shares and (ii)December 31, 2020. Gakasa Holdings LLC. also holds warrants to purchase 632,912 Ordinary Shares, exercisable within 60 days as of March 15, 2020.16, 2021. Gakasa Holdings LLC’s address is 201 S. Biscayne Blvd., Suite 800, Miami, Florida. |
(3) | Based solely on the Schedule 13G/A filed by Capital Point Ltd. with the SEC on February 13, 202016, 2021 regarding its holdings as of December 31, 2019. 2020. Capital Point Ltd. reported that its holdings comprised of (i) 1,521,520 1,077,621 Ordinary Shares, and (ii) warrants to purchase 83,30069,764 Ordinary Shares exercisable within 60 days as of March 15, 2020.16, 2021. Capital Point Ltd.’s address is at 1 Azrieli Towers Tel Aviv, 67021 Israel. |
(4) | Based on solely the Schedule 13G/A filed by Centillion Fund, Inc. with the SEC on March 11, 2020February 10, 2021 regarding its holdings as of December 31, 2019.2020. Centillion Fund Inc. reported that its holdings comprised of i) 1,131,130 Ordinary Shares and (ii) warrants to purchase 271,180 Ordinary Shares, exercisable within 60 days as of March 15, 2020.Shares. Centillion Fund, Inc.’s address is at 10 Manoel Street, Castries, Saint Lucia. |
(5) | Based solely on the Schedule 13G filed by Menachem Ehud Raphael with the SEC on March 9, 2020February 16, 2021 regarding its holdings as of December 31, 2019. Menachem Ehud Raphael further reported that its holdings consist of (i) 975,258 Ordinary Shares, and (ii) 499,979 Ordinary Shares underlying options to acquire Ordinary Shares, exercisable within 60 days as of December 31, 2019.2020.. Menachem Raphael’s address is at 12 Ha’seora, Tel Aviv, Israel. |
(6) | Based on the Schedule 13G/A filed by Mr. Zeev Bronfeld with the SEC on February 18, 2020 regarding its holdings asConsists of December 31, 2018. Mr. Bronfeld is the controlling shareholder of D.N.A Biomedical. By reason of such control, Mr. Bronfeld may be deemed to be beneficial owner of, and to share the power to vote and dispose of, the shares beneficially owned by D.N.A Biomedical. Mr. Bronfeld disclaims beneficial ownership of the shares held by D.N.A Biomedical. D.N.A holdings comprised of: (1) 3,256,630 Ordinary Shares as reported, and (ii) on February 18, 2020 following our shareholders’ approval of D.N.A investment, we issued to D.N.A 337,553 Ordinary Shares and warrants to purchase 168,776 Ordinary Shares exercisable within 60 days as of March 15, 2020. In addition, his holdings consist of 16,81928,032 Ordinary Shares underlying options to acquire Ordinary Shares, exercisable within 60 days of March 15, 2020.16, 2021. Mr. Bronfeld notified to the Company that he is no longer a beneficial owner of D.N.A Biomedical Solutions Ltd. |
(7) | Mr. Yonatan Malca is the CEO and a director of D.N.A Biomedical. In addition, his holdings consists of 16,81928,032 Ordinary Shares underlying options to acquire Ordinary Shares, exercisable within 60 days of March 15, 2020.16, 2021. |
(8) | Consists of (i) 579,410 Ordinary Shares and (ii) 223,438290,469 Ordinary Shares underlying options to acquire Ordinary Shares, exercisable within 60 days of March 15, 2020.16, 2021. |
(9) | Consists of (i) 97,872 Ordinary Shares, (ii) 175,159175,322 Ordinary Shares underlying options to acquire Ordinary Shares, exercisable within 60 days of March 15, 2020,16, 2021, and (iii) warrants to purchase 39,70631,646 Ordinary Shares. |
(10) | Consists of (i) 4,940 Ordinary Shares (ii) 356,330 Ordinary Shares underlying options to acquire Ordinary Shares, exercisable within 60 days of March 15, 2020, and (iii) warrants to purchase 1,950 Ordinary Shares.16, 2021 |
(11) | Consists of (i) 36,010 Ordinary Shares and (ii) 53,625159,938 Ordinary Shares underlying options to acquire Ordinary Shares, exercisable within 60 days of March 15, 2020.16, 2021. |
(12) | Consists of 7,59621,523 Ordinary Shares underlying options to acquire Ordinary Shares, exercisable within 60 days of March 15, 2020.16, 2021. |
(13) | Consists of 14,06530,317 Ordinary Shares underlying options to acquire Ordinary Shares, exercisable within 60 days of March 15, 2020.16, 2021. |
(14) | Consists of 16,81928,032 Ordinary Shares underlying options to acquire Ordinary Shares, exercisable within 60 days of March 15, 2020.16, 2021. |
(15) | Consists of 16,81928,032 Ordinary Shares underlying options to acquire Ordinary Shares, exercisable within 60 days of March 15, 2020.16, 2021. |
(16) | Consists of 14,01625,229 Ordinary Shares underlying options to acquire Ordinary Shares, exercisable within 60 days of March 15, 2020.16, 2021. |
(17) | Consists of: 8,410of 19,622 Ordinary Shares underlying options to acquire Ordinary Shares, exercisable within 60 days of March 15, 2020.16, 2021. |
(18) | Consists of 8,750 Ordinary Shares underlying options to acquire Ordinary Shares, exercisable within 60 days of March 16, 2021. |
(19) | Consists of (i) 718,232 Ordinary Shares, (ii) options to acquire 955,6641,199,628 Ordinary Shares, exercisable within 60 days of December 31, 2019,March 16, 2021, and (iii) warrants to purchase 41,65631,646 Ordinary Shares. |
Changes in Ownership of Major Shareholderss
During the last three years, there were significant changes in percentage ownership by major shareholders (i.e., holders of 5% or more of our Ordinary Shares), including as detailed below:
D.N.A Biomedical, a major shareholder, beneficially owned 34.8% of the Company at the time of our IPO, but owned 18.23%17.07% as of December 31, 2019.
2020.
Gakasa Holdings LLC, a new major shareholder, beneficially owned 13.04%of the Company as of December 11, 2019.
31, 2020.
| • | Centillion Fund, Inc., a major shareholder, beneficially owned 17.3% of the Company at the time of our IPO, but owned 7.59% as of December 31, 2019.6 |
Pontifax Management 4 GP (2015) Ltd., a former significant shareholder, ceased to beneficially own more than 5% of the Company in 2019, andat the time of our IPO, but owned 1.3%5.37% as of December 31, 2019.
2020.
Phillip Schwartz, a former significant shareholder, ceased to beneficially own more than 5% of the Company in 2019, having dropped to 4.32%2.75% as of December 31, 2019.2020.
Form F-3 Registration Statements
Pursuant to the provisions of the subscription agreements entered into by the Company as part of the Private Placement (as defined above), on June 5, 2020 we filed a registration statement on a Form F-3 with the SEC for the resale of the Ordinary Shares of such applicable selling shareholders that were issued in the Private Placement (including those issued upon exercise of the Investor Warrants), and such selling shareholders may, from time to time, offer and sell in one or more offerings or privately-negotiated transactions.
On July 13, 2020, we filed with the SEC an additional "shelf" registration statement on a Form F-3 for the registration of our Ordinary Shares that we may, from time to time, offer and sell in one or more offerings with an aggregate offering price of up to $100 million. In addition, certain Ordinary Shares under such Form F-3 are offered, issued and sold pursuant to that certain equity distribution agreement with Canaccord Genuity LLC and pursuant to the ATM Program (as defined below in Item 10.C “Material Contracts”).
7.B. Related Party Transactions
For information regarding compensation of our directors and officers, see “Item 6.B.–Compensation.”
Private Placement
Between December 2019 and February 2020, we entered into a private placement offering (the “Private Placement”), with a group of accredited investors, or the Investors, including D.N.A Biomedical, our largest shareholder, Mr. Gerald Lieberman, the chairman of the board, Menachem Ehud Raphael and Gakasa Holdings LLC, both significant shareholders of the Company, for an aggregate gross proceeds of $14.3 million from the sale of an aggregate amount of 6,047,706 Ordinary Shares, at a price of $2.37 per share. In addition, we granted the Investors and certain finders an aggregate of 3,300,646 three-year Investor Warrants and Broker Warrants, respectively to purchase up to an additional 3,300,646 Ordinary Shares at an exercise price in the range of $2.37 and $2.96 per share. In 2020, the exercise price of such Investor Warrants and Broker warrants was adjusted to $1.05 in light of the issuance of Ordinary Shares under the ATM Program (as defined below in Item 10.C “Material Contracts”) and pursuant to underlying terms of the Investor Warrant and Broker Warrant agreements. Such anti-dilution adjustment mechanisms in the Investor Warrants and Broker Warrants have since expired pursuant to the terms of the original Investor Warrant and Broker Warrant agreements.
On the first closing, dated December 11, 2019, we received gross proceeds of $11.8 million from the sale of 4,982,301 Ordinary Shares. In addition, as part of the first closing of the Private Placement, we granted the Investors and certain finders an aggregate 2,693,573 warrants to purchase up to an additional 2,693,573 Ordinary Shares. As part of the first closing, Mr. Gerald Lieberman has invested an amount of $150,000 and was issued 63,292 Ordinary Shares and 31,646 Investor Warrants to purchase up to an additional 31,646 Ordinary Shares.
On the second closing, dated December 18, 2019, we received gross proceeds of $1.7 million from the sale of 727,852 Ordinary Shares. In addition, as part of the closing of the second closing, we granted the Investors and certain finders an aggregate 438,296 Investor Warrants to purchase up to an additional 438,296 Ordinary Shares.
On the final closing of the Private Placement, which occurred on February 18, 2020, we received gross proceeds of $0.8 million from D.N.A Biomedical, our principal shareholder, from the sale of 337,553 Ordinary Shares. In addition, as part of final closing, we granted D.N.A Biomedical an aggregate of 168,776 Investor Warrants to purchase up to an additional 168,776 Ordinary Shares.
For further information with respect to the Private Placement, see “Item 10. Additional Information—C. Material Contracts—Private Placement.” For further information with respect to the Investor Warrants, see “Item 10. Additional Information—A. Share Capital—Investor Warrants.”
Agreements and Arrangements with, and Compensation of, Directors and Executive Officers
Service and Employment Agreements
Mr. Adam Gridley
Our former CEO and director, Mr. Gridley was appointed as our Chief Executive Officer on August 5, 2019 and resigned in August 2020 with effect as of September 2020. In April 2020, Mr. Gridley was granted options to purchase 31,502 Ordinary Shares (with an exercise price of $1.98 per share) under our 2018 Plan. This grant was ratified by our shareholders on June 25, 2020. Due to the termination of Mr. Gridley’s contract, none of these options were vested and all of them expired. In addition, in April 2020, Mr. Gridley was granted a one-time cash bonus in the amount of $ 110,000 in consideration for his services to the Company as CEO in 2019. The cash bonus was ratified by our shareholders on June 25, 2020.
Dr. Spiros Jamas
We entered into an Employment Agreement, effective as of August 2019,January 2021, with Mr. Adam Gridley,Dr. Spiros Jamas, in connection with his appointment as our Chief Executive Officer and a member of our board of directors. Pursuant to the agreement, Mr. GridleyDr. Spiros Jamas is entitled to an annual base salary of $475,000$380,000 and an annual bonus of up to 50%60% of his base salary (up to $237,500)$228,000), subject to achieving key performance indicators as determined by the compensation committee and Mr. Gridley’sthe board of directors, as well as subject to managerial appraisal (up to 20% of the total bonus for such year, or, such other part of the total annual bonus as provided in the Compensation Policy, as amended from time to time), and Dr. Jamas’ continued employment through the payment date. Additionally, Mr. GridleyDr. Jamas is eligible to participate in the Company’s standard full-time employment benefits that are offered by the Company from time to time, which currently include medical, short term disability and 401(k) benefits. Mr. GridleyJamas is also generally entitled to reimbursement for travel and other business expenses and other benefits, including, vacation, holidays and sick leave. Subject to applicable law, as long as Mr. Gridley is employed by the Company, heDr. Jamas is also covered by our D&O insurance policy.
We have also granted Mr. GridleyDr. Jamas options to purchase 696,5911,314,218 Ordinary Shares under the 2018 Plan, effective as of August 2019,January 2021, at an exercise price of $2.75,$1.24, with 25% of the options vesting on the first anniversary of his employment commencement date, and the remaining 75% of the options vesting in equal quarterly increments over the following three (3) years, so long as he remains employed on a full time basis on each applicable vesting date (irrespectively if he continues to serve as our director). In the event of a Change in Control (as defined in the 2018 Plan) any outstanding unvested options shall vest and become fully exercisable (as long as Mr. GridleyDr. Jamas continues to provide services to the Company at that time).
Mr. Gridley’sDr. Jamas' employment can be terminated by either the Company or Mr. GridleyDr. Jamas for any reason (or for no reason), at any time, provided that if the termination is without Cause, thirty (30) days’ prior written notice will be required by either party. The Company may elect to pay the applicable portion of Mr. Gridley’sDr. Jamas’ annual base salary during the notice period in lieu of providing notice. In the event Mr. Gridley’sDr. Jamas’ employment is terminated by the Company without Cause, or if Mr. GridleyDr. Jamas resigns for Good Reason, he will be entitled to receive (i) a lump sum severance payment equal to one times his then-effective annual base salary and (ii) a pro-rata portionan extension of the then-applicable bonus payment.exercise period with respect to the vested options to purchase ordinary shares as of the date of termination for up to two (2) years post-termination (provided that in no event shall such extension extend beyond 10 years from the applicable grant date). For the definitions of “Cause” and “Resignation for Good Reason,” please see “Proposal 1”the Proposal under the Company’s Proxy Statement on Form 6-K (File No. 001-38556)001-38556) filed with the SEC on August 29, 2019.January 11, 2021.
In March 2020, the board of directors approved a one- time bonus in the amount of $110,000 to Mr. Gridley, subject to shareholders approval.126
Dr. Phillip Schwartz
In June 2019, we amended the terms of the compensation of Dr. Phillip Schwartz in connection with the termination of his office as our Chief Executive Officer and his appointment as President of Research and Development. Under the terms of the amendment, the 357,000 options granted to Dr. Schwartz in November 2017 that remained outstanding will continue to vest so long as Dr. Schwartz continues to be employed as an officer of the Company (irrespectively if he continues to serve as our director). If Dr. Schwartz’s employment with the Company is terminated either by him for Good Reason or by the Company for any reason other than for Cause, then 100% of such options will be accelerated and fully vested and exercisable as of such date of termination. In the case of his involuntary termination for Good Reason, the exercise window of the options will be extended by a twelve (12) month period. For the definitions of “Good Reason” and “Cause,” please see “Proposal 2” under the Company’s Proxy Statement on Form 6-K (File No. 001-38556) filed with the SEC on August 29, 2019. Further, under the terms of the amendment, in the event of a termination of Dr. Schwartz’s employment, Dr. Schwartz is required to give six (6) months’ prior notice to the Company, and the Company is required to provide Dr. Schwartz with advance notice of one (1) month. On the last day of Dr. Schwartz’s employment, the Company shall pay him severance in a lump sum in an amount equal to six (6) months of his then-current base salary, as well as all accrued and unused vacation days and any accrued and unpaid bonuses (to the extent that Dr. Schwartz is entitled to such bonus as of the termination date).
In March 2020, the board of directors determined to amend the terms of compensation of Dr. Schwartz, our President of Research and Development, subject to shareholders approval.Development. Under the amended terms, Dr. Schwartz will be entitleis entitled to an annual base salary of $293,164,$293,000, effective January 1, 2020. In addition, Dr. Schwartz is entitled to a one- timeone-time bonus in the amount of $30,000.
Mr. Jonathan Lieber
In November 2019, we entered into Consulting Agreement with Danforth Advisors, LLC, or Danforth, for the provision of certain investor relations activities, U.S. financing activities and support finance team services, including CFO services, to be rendered by Mr. Jonathan Lieber. The agreement is for an unlimited term, subject to a termination of Mr. Lieber’s services for Cause, which requires thirty (30) days’ prior written notice , or termination without Cause, which requires sixty (60) days’ prior written notice.“Cause,” includes (i) a breach of theamended compensation terms of the agreement which is not cured within thirty days of written notice of such default, or (ii) the commission of any act of fraud, embezzlement or deliberate disregard of a rule or policy of the Company.
Pursuant to the agreement, Danforth is entitled to a fee of $350 per hour for the provision of CFO services by Mr. Lieber. Mr. Lieber generally provides approximately 16 hours per week of service,Dr. Schwartz were ratified and we anticipate that Mr. Lieber will continue to provide the same number of hours per week. Danforth reserves the right to an annual increaseapproved in consultant rates of up to 4%, effective January 1 of each year, commencing on January 1, 2020. In January 2020, the fees per hour increased and are $364 per hour. Additionally, pursuant to the agreement, Danforth is entitled to reimbursement for reasonable out-of-pocket business expenses incurred by Danforth in performing the services hereunder, including but not limited to travel and parking.
The terms of compensation for the provision of CFO services by Mr. Lieber also include the grant of options to Danforth. Under the terms of the agreement, we granted Danforth options to purchase 30,385 Ordinary Shares of the Company, under the Company’s 2018 Plan, with an exercise price2020 annual general meeting of $2.53, which will vest over two years in 24 equal monthly installments starting November 18, 2019 (provided that no earlier termination has occurred). If the Company terminates the Consulting Agreement before November 18, 2020, other than for a Cause, all such options shall become fully vested.
shareholders on June 25, 2020.
Dr. Roger J. Garceau
In April 2017, and effective as of December 2016, the Company entered into a Service Agreement with our director, Dr. Roger J. Garceau, pursuant to which Dr. Garceau will be entitled to a monthly fee in the amount of $6,500 per month, and to reimbursements for certain expenses. On January 17, 2019, our board of directors approved an amendment to Dr. Garceau’s Service Agreement, which provided that the scope of services would be reduced to 20 hours per month and the monthly payment provided to Dr. Garceau was reduced to $4,000, effective as of November 1, 2018.
Mr. Chaim Davis
Pursuant Dr. Garceau was appointed as the Company’s interim CEO on August 9, 2020 and served as such up until January 4, 2021. In such period of time all services rendered to the Company in Dr. Garceau’s previous capacity were suspended and as interim CEO he was granted an arrangement between us and Mr. Chaim Davis, a former memberupdated set of our board of directors, Mr. Davis provided us with certain services relatedcompensation terms (effectively suspending the previous compensation he was entitled to). Under his CEO Services Agreement he was entitled to corporate business development in consideration for a one-time payment of $25,000 paid in April 2017 and a monthly feesalary of $6,500.$33,000. In addition, he may also be entitled to receive a special one-time bonus in November 2017, our boardthe amount of directorsup to US$ 84,000, subject to the approval of the Company and our shareholders approved a bonus of $35,000, which was paidsuch other approvals required pursuant to Mr. Davis in December 2017. Effective asthe Companies Law. As of January 1, 2019, Mr. Davis’ monthly payment for4, 2021, Dr. Garceau effectively resumed his services reducedprevious position as Chief Development Advisor and his compensation was reverted to $4,000.his previous compensation terms and benefits (as in effect immediately prior to August 9, 2020).
Dr. Arthur Santora
In September 2018, we entered into arrangements with Kinexum Services LLC, or Kinexum, for the provision of Chief Medical Officer services, to be rendered by Dr. Arthur Santora. Such arrangements include a Statement of Work for the term ending September 3, 2019, or the SOW, with an unlimited option to extend by mutual consent. Pursuant to the SOW, Kinexum is entitled to a monthly retainer fee in the amount of $17,812.50 for providing a minimum of fifty hours of Chief Medical Officer services (at a discounted rate). If Dr. Santora exceeds the monthly fifty-hour cap but does not exceed eighty hours, Kinexum shall be entitled to an hourly fee of $356.25 for any hour exceeding the fifty-hour cap. In addition, Kinexum is entitled to $475 per hour, for any hour exceeding eighty hours per month. In no event shall the amount of hours per each calendar month shall exceed 120 hours (maximum monthly fees are $47,500). Additionally, pursuant to the SOW, Kinexum is entitled to receive expenses and other costs such as travel, lodging, and production/shipping. In 2019, we and Kinexum have agreed to extend the terms of the SOW until further notice.
In addition, the Company and Dr. Santora entered into a direct arrangement for Dr. Santora’s services on behalf of Kinexum on September 20, 2018, under which the Company undertook, inter alia, to appoint Dr. Santora as an executive officer of the Company, and to grant Dr. Santora equity compensation to be determined by the Company. As of January 2019, we have granted Dr. Santora options to purchase 25,000 Ordinary Shares under the Company’s 2018 Plan, at an exercise price of $3.97, with 25% of the options vesting on March 1, 2019, and the remaining 75% of the options vesting equal quarterly increments over the following three (3) years starting January 17, 2020.
In March 2020, the board of directors approved to grant Dr. Santora 40,000 options to purchase 40,000 Ordinary Shares of the Company, under the Company’s 2018 Plan, with an exercise price of $2.14. The options vest over 4 years from the date of grant. 25% will vest on the first anniversary of the date of grant and the remaining 75% options shall vest in twelve equal quarterly installments following the first anniversary of the grant date. The options grant is subject to shareholder approval.was ratified and approved by our shareholders on June 25, 2020.
Kinexum also provides general regulatory services to the Company, in the ordinary course of business, in addition to the services provided by Dr. Santora as Chief Medical Officer.
Dr. Hillel Galitzer
In March 2020, the board of directors determined to amend the terms of compensation of Dr. Galitzer, our Chief Operating Officer. Under the amended terms, Dr. Galitzer will beis entitled to an annual base salary of $203,987, effective as of January 1, 2020. In addition, Dr. Galitzer is entitleentitled to a one- timeone-time bonus in the amount of $50,000.We$50,000. We also granted Dr. Galitzer 175,000 options to purchase 175,000 Ordinary Shares of the Company, under the Company’s 2018 Plan, with an exercise price of $2.14. The options vest over 4 years from the date of grant. 25% will vest on the first anniversary of the date of grant and the remaining 75% options shall vest in twelve equal quarterly installments following the first anniversary of the grant date.
Ms. Dana Yaacov-Garbeli
In March 2020, the board of directors determined to amend the terms of the consulting agreement with Ms. Yaacov- Garbeli, our Israeli-based CFO, subject to shareholder approval.CFO. Under the amended terms, Ms. Yaacov-Garbeli will beis entitled to a monthly fee of $14,000, effective January 1, 2020. We also granted Ms. Yaacov-Garbeli 35,000 options to purchase 35,000 Ordinary Shares of the Company, under the Company’s 2018 Plan, with an exercise price of $2.14. The options vest over 4 years from the date of grant. 25% will vest on the first anniversary of the date of grant and the remaining 75% options shall vest in twelve equal quarterly installments following the first anniversary of the grant date. The options grant was ratified and approved by our shareholders on June 25, 2020.
Pre-IPO Registration Rights
We, certain of our shareholders and certain lenders with which we entered into loan agreements in 2012, have entered into an Amended and Restated Investors’ Rights Agreement dated as of October 4, 2017, or the Investors’ Rights Agreement, pursuant to which these shareholders and lenders have the right, following the closing of our initial public offering, to demand that we file a registration statement or to request that their shares be covered by a registration statement that we are otherwise filing under the Securities Act. Registration of these shares would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon the registered sale of such securities.
Demand Registration Rights
Pursuant to the investors’ rights agreement, at any time beginning 180 days after the closing of our initial public offering and for so long as we are eligible to file a registration statement on Form F-3, any shareholder or group of shareholders holding an aggregate of at least 10% of the registrable securities under the investors’ rights agreement that are not held by D.N.A Biomedical, may request in writing that we effect the registration under the Securities Act of the sale or other transfer of such shareholder or shareholders’ Ordinary Shares, provided that we are not required to effect more than three such registrations.
Form F-3 Registration Statement
Any shareholder or group of shareholders holding an aggregate of at least 10% of the registrable securities under the investors’ rights agreement that are not held by D.N.A Biomedical may request in writing that we effect a registration of the sale or other transfer of such shares, provided that the aggregate anticipated proceeds from the sale of such shares equals at least $1.0 million and that we are not required to effect more than three such registrations.
We will not be obligated to file a registration statement on Form F-3 in certain cases including if in the good faith judgment of our board of directors (as reflected in a certificate delivered by our chief executive officer), such registration would be seriously detrimental to our company or its shareholders, provided that we do not use this exemption more than once in any 12-month period. We also have the right not to effect a Form F-3 registration statement during the period from 60 days prior to the filing of, to six months following the effective date of, a previous registration statements.
Piggyback Registration Rights
The investors’ rights agreement also provides our shareholders with “piggy back” registration rights in the event that we determine to register the sale of any of our securities following our initial public offering. With respect to such registration rights, we have committed to use our reasonable best efforts to include in a registration statement a prospectus relating to the resale of certain securities held by certain of our shareholders, or to file concurrently with a registration statement with respect to the resale under the Securities Act of such securities held by such shareholders, so as to permit their disposition (such securities held by such shareholders and the rights attached to such securities are freely transferable by such shareholders).
Private Placement Registration Rights
We also entered into a registration rights agreement with the Investors in the Private Placement (the “Private Placement Registration Rights Agreement”). The summary is not complete and is subject to, and qualified in its entirety by the provisions of, the Private Placement Registration Rights Agreement that has been filed as an exhibit to this Annual Report. Registration of these shares would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon the registered sale of such securities.
Form F-3 Registration Statement
Pursuant to the subscription agreements entered into by the Company as part of the Private Placement (as defined above), we are obligated to file a registration statement on Form F-3 with the SEC for the resale of the Ordinary Shares issued in the Private Placement (including those issued upon exercise of the Investor Warrants), or other additional securities, as we may find necessary and at our sole discretion. We are required to effect this registration within seven months of the final closing, subject to certain customary conditions. We are required to pay the Investors liquidated damages in the event that we do not meet any of the foregoing requirement in an amount equal to 1% per month of the aggregate purchase price paid in cash by such purchasers to us. The terms of the Private Placement Registration Rights Agreement will expire upon the second anniversary of the SEC declaring the F-3 resale shelf effective. Furthermore, the Company will use commercially reasonable efforts to ensure that the securities registered pursuant to the Private Placement Registration Rights Agreement are listed on Nasdaq Capital Market.
Director Designation Rights
Pursuant to the terms of the Investors’ Rights Agreement among us, Centillion and other parties thereto, following the consummation of our initial public offering, for as long as Centillion and its affiliates hold an aggregate of at least 10% of our issued and outstanding Ordinary Shares, we will nominate, if so requested by Centillion and as permitted by applicable law, a designee of Centillion for election by our shareholders as a member of our board of directors and will recommend that our shareholders vote in favor of such election. As of December 31, 2019,2020, Centillion hold approximately 6.33% of our issued and outstanding Ordinary Shares, and in the event that Centillion exercises in full all of the warrants to purchase our Ordinary Shares that we have issued to it, Centillion will hold approximately 7.73%5.37% of our issued and outstanding Ordinary Shares.
Indemnification Agreements and Directors’ and Officers’ Liability Insurance
We have entered into indemnification agreements with each of our executive officers and directors. We also maintain an insurance policy that covers liabilities of our directors and officers arising out of claims based on acts or omissions in their capacities as directors or officers.
Employment-Based Restrictive Covenants
Under the employment agreements entered into with our executive officers, each officer is subject to restrictions with respect to confidentiality, non-competition/non-solicitation and ownership of intellectual property. The non-competition provision applies for a period that is generally 12 months following termination of employment. The enforceability of covenants not to compete in Israel and the United States is subject to limitations. In addition, we are required to provide notice prior to terminating the employment of our executive officers, other than in the case of a termination under circumstances which deprive the executive officer of severance pay under Israeli law, a breach of trust, or the executive officer’s breach of the terms of confidentiality, non-competition/non-solicitation and ownership of intellectual property provisions of the relevant employment agreement.
7.C. Interests of Experts and Counsel
Not applicable.
ITEM 8.FINANCIAL INFORMATION
8.A. Consolidated Statements and Other Financial Information
See “Item 18.–Financial Statements.”
Legal proceedings
From time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business. We are not currently involved in any legal proceedings. However, we may become involved in material legal proceedings in the future. Emisphere has notified us that it believes that it is the exclusive owner of certain U.S. and related foreign patents and patent applications we acquired from Oramed; however, Emisphere has not initiated a legal proceeding against us regarding its claim. For more information on the risks related to Emisphere’s claim, see “Item 3.D.—Risk Factors—Risks Related to Our Intellectual Property—We may become involved in proceedings to protect or enforce our proprietary rights, which could be expensive and time consuming, and may ultimately be unsuccessful.”
Dividends
We have never declared or paid cash dividends to our shareholders and we do not intend to pay cash dividends in the foreseeable future. We intend to reinvest any 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, our strategic goals and plans to expand our business, applicable law and other factors that our board of directors may deem relevant.
The Companies Law imposes further restrictions on our ability to declare and pay dividends. According to the Companies Law, a company may generally distribute dividends out of its profits if there is no reasonable concern that the distribution may prevent the company from meeting its existing and expected obligations when they become due. The Companies Law defines profit as retained earnings or profits accrued in the last two years, whichever is greater, according to the last reviewed or audited financial statements of the company, provided that the end of the period to which the financial statements relate is not more than six months before the distribution. Declaration of dividends requires a resolution of our Board and does not require shareholder approval.
Payment of dividends may be subject to Israeli withholding taxes. See “Item 10.E.—Taxation” for additional information.
8.B. Significant changes
Except as disclosed elsewhere in this Annual Report, there have been no other significant changes since December 31, 2019.
2020.
ITEM 9. THE OFFER AND LISTING
9.A.4 Offer and Listing Details
Our Ordinary Shares and IPO Warrants have been listed on Nasdaq since June 28, 2018. Prior to this, no public market existed for our Ordinary Shares or IPO Warrants.
9.B. Plan of Distribution
Not applicable.
9.B. Plan of Distribution
Not applicable.
9.C. Market for Ordinary Shares and Warrants
Our Ordinary Shares and IPO Warrants have been listed on Nasdaq since June 28, 2018, under the symbol “ENTX” and “ENTXW,” respectively.
9.D. Selling Shareholders
Not applicable.
9.E. Dilution
Not applicable.
9.F. Expenses of the Issue
Not applicable.
ITEM 10.ADDITIONAL INFORMATION
10.A. Share Capital
Ordinary Shares and IPO Warrants
For a description of our listed Ordinary Shares and IPO Warrants, refer to Exhibit 4.29, “Description of Securities,” incorporated by reference into this Form 20-F.
The following section is a summary of our warrants issued prior to our initial public offering and pursuant to our Private Placement in 2019. Following the initial public offering, such pre-IPO warrants provide the applicable holder, subject to the terms and conditions of the applicable warrant, rights to acquire Ordinary Shares.
As of December 31, 2019,2020, we had 340,21068,380 outstanding warrants, or Series A Warrants, outstanding to purchase 340,210 of our Ordinary Shares, at an exercise price of $3.69.
Pursuant to the terms of the preferred share purchase agreements with Centillion and certain other previously preferred A shareholders, preferred A shareholders have the right to purchase 332,020 of our ordinary shares, at an exercise price of $3.69 up to July 20, 2019, or Preferred A Option, and to receive additional Series AB Warrants, to purchase 83,201 of our Ordinary Shares. In July 2019, one of the shareholders exercised his right to purchase 32,500 ordinary shares at an exercise price of $3.69 and received additional 8,190 Series A Warrants.
In addition, Centillion had a preemptive right to purchase 44,460 of our Ordinary Shares, at an exercise price of $3.69 up to July 20, 2019, and to receive additional Series A Warrants to purchase 11,180 of our Ordinary Shares. Further, upon exercise of the Preferred A Option by pre-IPO preferred A shareholders except Centillion, Centillion had the right to purchase additional 11,050 of our ordinary shares, at an exercise price of $3.69 up to July 20, 2019 and to receive additional Series A Warrants to purchase 2,730 of our Ordinary Shares.
The following summary is of certain material terms and provisions of our Series A warrants which after the completion of our initial public offering became warrants to purchase Ordinary Shares. The summary is not complete and is subject to, and qualified in its entirety by the provisions of, the form of the warrant, which is filed as an exhibit to this Annual Report.
Exercisability. The Series A Warrants are exercisable immediately from issuance, and at any time up to the date that is two years after our initial public offering, specifically, July 2, 2020. The Series A Warrants will be exercisable, at the option of each holder, in whole or in part by delivering to us a duly executed exercise notice accompanied by payment in full for the applicable number of our Ordinary Shares.
Applicable Shares. The class of shares that can be acquired upon exercise of the warrants will be our Ordinary Shares, and upon any conversion, exchange, reclassification or change, any security into which our Ordinary Shares may be converted, exchanged, reclassified or otherwise changed.
Exercise Price. $3.69 per share.
Transferability. Absent an effective registration statement filed with the SEC covering the disposition or sale of the Series A Warrants or the shares issued or issuable upon exercise of the Series A Warrants, and registration or qualification under applicable state securities laws, the holder cannot transfer any or all of the Series A Warrants or the applicable shares unless such transfer is exempt from the registration requirements of the Securities Act and any applicable state securities laws.
Rights as a Shareholder. Except as otherwise provided in the Series A Warrants or by virtue of such holder’s ownership of our Ordinary Shares, the holder of a Series A Warrants does not have the rights or privileges of a holder of Ordinary Shares, including any voting rights, until the holder exercises the Series A Warrants.
2016 Warrants
As of December 31, 2019, we had 687,960 2016 Warrants outstanding to purchase 687,960 of our68,380 Ordinary Shares, at an exercise price of $6.99 per Ordinary Share.
The following summary is of certain material terms and provisions of our 2016 Warrants. The summary is not complete and is subject to, and qualified in its entirety by the provisions of, the form of the 2016 Warrant, which is filed as an exhibit to this Annual Report.
Exercisability. The 2016 Warrants are exercisable until June 2020.
Applicable Securities. Ordinary shares.
Exercise Price. $6.99 per share.
Transferability. Absent an effective registration statement filed with the SEC covering the disposition or sale of the 2016 Warrants or the securities issued or issuable upon exercise of the 2016 Warrants, and registration or qualification under applicable state securities laws, the holder cannot transfer any or all of the 2016 Warrants or the applicable underlying shares unless such transfer is exempt from the registration requirements of the Securities Act and any applicable state securities laws.
Rights as a Shareholder. Except as otherwise provided in the 2016 Warrants or by virtue of such holder’s ownership of our Ordinary Shares, the holder of a 2016 Warrant does not have the rights or privileges of a holder of Ordinary Shares, including any voting rights, until the holder exercises the 2016 Warrant.
Series B Warrants
As of December 31, 2019, we had 68,380 outstanding warrants, or Series B Warrants, to purchase [68,380] Ordinary Shares, at an exercise price of $6.99 per Ordinary Share.
The following is a summary of certain material terms and provisions of the Series B Warrants, which following the completion of our initial public offering became warrants to purchase Ordinary Shares.
Exercisability. The Series B Warrants are exercisable on or before the earlier of: (i) expiration of five years from the date of the Series B Warrants, specifically, 59,800 Series B Warrants are exercisable until October 25, 2022, and 8,580 Series B Warrants are exercisable until December 18, 2022 or (ii) the occurrence of a liquidation, bankruptcy, reorganization, dissolution or winding up of the Company, whether voluntary or involuntary.
Applicable Securities. Ordinary Shares.
Exercise Price. $6.99 per share.
Transferability. The Series B Warrants cannot be transferred to a third party, other than an affiliate of the holder of such Series B Warrants (as defined and subject to the terms and conditions of the Series B Warrants) without (i) a registration under the Securities Act or (ii) an exemption from such registration and, if requested by the Company, a written opinion of legal counsel of the holder of the Series B Warrants, addressed to the Company stating that the proposed transfer of the Series B Warrants may be effected without registration under the Securities Act, which opinion will be in form reasonably satisfactory to the Company.
Rights as a Shareholder. Except as otherwise provided in the Series B Warrants or by virtue of such holder’s ownership of our Ordinary Shares, the holder of a Series B Warrants does not have the rights or privileges of a holder of Ordinary Shares, including any voting rights, until the holder exercises the Series B Warrants.
As of December 31, 2019,2020, we had 70,000 outstanding warrants, or Underwriter Warrants, granted to our initial public offering underwriters, to purchase 70,000 Ordinary Shares, at an exercise price of $8.80 per Ordinary Share.
The following is a summary of certain material terms and provisions of the Underwriter Warrants. The summary is not complete and is subject to, and qualified in its entirety by the provisions of, the form of the Underwriter Warrant, which is filed as an exhibit to this Annual Report.
Exercisability. The underwriter warrants will be exercisable on or before the expiration of five years from the date of the Underwriter Warrants, specifically, July 2, 2023. The Underwriter Warrants may be exercised on a cashless basis unless a registration statement covering the exercise of the underwriter warrants and sale of the underlying shares by the holder thereof is in effect and available.
The Underwriter Warrants are not redeemable by us. The underwriter warrants also provide for unlimited “piggyback” registration rights at our expense with respect to the underlying ordinary shares during the seven-year period commencing on July 2, 2018, and for one demand registration right at our expense and an additional demand registration right at the Underwriter Warrant holder’s expense during the five-year period commencing on July 2, 2018.
Exercise Price. $8.8 per share. The exercise price of the Underwriter Warrants (and the ordinary shares underlying such warrants) is subject to adjustment provided under the Underwriter Warrants, for dilutive events such as a stock dividend or stock split and for recapitalizations, mergers and other fundamental transactions.
Transferability. The Underwriter Warrants cannot be transferred to a third party, other than an affiliate of the holder of such Underwriter Warrants (as defined and subject to the terms and conditions of the Underwriter Warrants) without (i) a registration under the Securities Act or (ii) an exemption from such registration and, if requested by the Company, a written opinion of legal counsel of the holder of the Underwriter Warrants addressed to the Company stating that the proposed transfer of the Underwriter Warrants may be effected without registration under the Securities Act, which opinion will be in form reasonably satisfactory to the Company.
Rights as a Shareholder. Except as otherwise provided in the Underwriters Warrants or by virtue of such holder’s ownership of our Ordinary Shares, the holder of an Underwriters Warrant does not have the rights or privileges of a holder of our Ordinary Shares, including any voting rights, until the holder exercises the Underwriters Warrant.
As of December 31, 2019,2020, we had 2,855,0953,023,872 warrants, or Series Investor Warrants, outstanding to purchase 2,855,0953,023,872 of our Ordinary Shares, at an exercise price of $2.96.$1.05.
The following summary is of certain material terms and provisions of our Series Investor Warrants, Broker-A Warrants to purchase Ordinary Shares. The summary is not complete and is subject to, and qualified in its entirety by the provisions of, the form of Series Investor Warrants, which is filed as an exhibit to this Annual Report.
Exercisability. The Series Investor Warrants are exercisable immediately from issuance, and at any time up to the date that is three years after our Private Placement, specifically, December 11, 2022 and December 18, 2022. The Private PlacementSeries Investor Warrants will be exercisable, at the option of each holder, in whole or in part by delivering to us a duly executed exercise notice accompanied by payment in full for the applicable number of our Ordinary Shares.
Applicable Shares. The class of shares that can be acquired upon exercise of the warrants will be our Ordinary Shares, and upon any conversion, exchange, reclassification or change, any security into which our Ordinary Shares may be converted, exchanged, reclassified or otherwise changed.
Exercise Price. $2.96$1.05 per share.
Transferability. Absent an effective registration statement filed with the SEC covering the disposition or sale of the Series Investor Warrants or the shares issued or issuable upon exercise of the Series Investor Warrants, and registration or qualification under applicable state securities laws, the holder cannot transfer any or all of the Series Investor Warrants or the applicable shares unless such transfer is exempt from the registration requirements of the Securities Act and any applicable state securities laws.
Rights as a Shareholder. Except as otherwise provided in the Series Investor Warrants or by virtue of such holder’s ownership of our Ordinary Shares, the holder of a Series Investor Warrant does not have the rights or privileges of a holder of Ordinary Shares, including any voting rights, until the holder exercises the Series Investor Warrants.
As of December 31, 2019,2020, we had 184,515 warrants, or Broker-A Warrants, outstanding to purchase 184,515 of our Ordinary Shares, at an exercise price of $2.37,$1.05, and we had 92,258 warrants, or Broker-B Warrants, outstanding to purchase 92,258 of our Ordinary Shares, at an exercise price of $2.96$1.05 (the “Broker Warrants”).
The following summary is of certain material terms and provisions of our Broker warrants to purchase Ordinary Shares. The summary is not complete and is subject to, and qualified in its entirety by the provisions of, the form of Broker-A Warrants and Broker B Warrants, each of which is filed as an exhibit to this Annual Report.
Exercisability. The Broker-A Warrants and Broker-BBroker- Warrants are exercisable immediately from issuance, and at any time up to the date that is three years after our Private Placement, specifically, December 11, 2022. The Broker-A Warrants and Broker-BBroker Warrants will each be exercisable, at the option of each holder, in whole or in part by delivering to us a duly executed exercise notice accompanied by payment in full for the applicable number of our Ordinary Shares.
Applicable Shares. The class of shares that can be acquired upon exercise of the warrants will be our Ordinary Shares, and upon any conversion, exchange, reclassification or change, any security into which our Ordinary Shares may be converted, exchanged, reclassified or otherwise changed.
Exercise Price. $2.96$1.05 per share in the case of the Broker-A Warrants and $2.37 per share in the case of the Broker-A Warrants.share.
Transferability. Absent an effective registration statement filed with the SEC covering the disposition or sale of the Broker-A Warrants or Broker-BBroker- Warrants or the shares issued or issuable upon exercise of either of the Broker-A Warrants and Broker-BBroker Warrants, and registration or qualification under applicable state securities laws, the holder cannot transfer any or all of the Broker-A Warrants and Broker-BBroker Warrants or the applicable shares unless such transfer is exempt from the registration requirements of the Securities Act and any applicable state securities laws.
Rights as a Shareholder. Except as otherwise provided in the Broker-A Warrants and Broker-BBroker Warrants or by virtue of such holder’s ownership of our Ordinary Shares, the holder of a Broker-A Warrant or Broker-BBroker Warrant does not have the rights or privileges of a holder of Ordinary Shares, including any voting rights, until the holder exercises such Broker-A Warrant or Broker-B Warrant.
10.B. Memorandum and Articles of Association
We incorporate by reference into this Annual Report on Form 20-F the description of our Articles of Association effective upon the closing of our initial public offering contained in our F-1 Registration Statement (File No. 333-221472) under “Description of Share Capital” originally filed with the SEC on June 27, 2018. Such description sets forth a summary of certain provisions of our Articles, of Association, and certain descriptions of applicable Israeli law, each as currently in effect, except that on October 3, 2019, our shareholders approved an amendment to our Articles of Association to increase the maximum number of our directors to ten.
10.C. Material Contracts
Other than the Amgen Agreement, described above in “Item 5.A. Results of Operations—Patent Transfer, Licensing Agreements and Grant Funding—Amgen Research Collaboration and License Agreement” and except for the Private Placement described below,above, we are currently in the development stage and therefore we have not entered into any agreements, other than in the ordinary course of our business, that we deem material in the reporting period.
In July 2020, we entered into an equity distribution agreement with Canaccord Genuity LLC, as sales agent, to implement an ATM program under which we, from time to time, may offer and sell our Ordinary Shares, having an aggregate offering price of up to $13.9 million (the “ATM Program”). The sales agent was entitled to a fixed commission of 3% of the aggregate gross proceeds as well as and reimbursement of expenses. For the year ended December 31, 2020, we sold an aggregate of 2,802,731 Ordinary Shares under the ATM, the proceeds of which amounted to $3.5 million, net of issuance costs. From December 2021 to March 16, 2021, we sold an additional 2,546,265 Ordinary Shares under the ATM, the proceeds of which amounted to $9.8 million, net of issuance costs.
From December 2019 to February 2020, we entered into the Private Placement (as defined above) with the Investors (as defined above) for an aggregate gross proceeds of $14.3 million from the sale of an aggregate 6,047,706 Ordinary Shares, at a price of $2.37 per share. In addition, we granted the Investors and certain finders an aggregate of 3,300,646 three-year warrants to purchase up to an additional 3,300,646 Ordinary Shares at an exercise price in the range of $2.37 and $2.96 per share. For further information, see “Item 7.B. Related Party Transactions—Private Placement.”
Subscription Agreement
In the Subscription Agreement entered between the Company and the Investors in connection with the Private Placement, or the Subscription Agreement, the Company made customary representations and warranties and the investors made customary representations and warranties. Among the Investors’ representations and warranties, each Investor, which is a U.S. Person for purposes of the Securities Act, represents that it is an accredited Investor as defined in Rule 501(a) of Regulation D, as amended, under the Securities Act.
The terms of the Subscription Agreement with the Investors in the Private Placement, are similar in all material respects to the terms of the Subscription Agreement of D.N.A Biomedical, expect for non-material changes related to the relevant exemption under the Securities Act utilized by us to issue shares and warrants to D.N.A Biomedical, given their status as an affiliate and non-U.S. person under the Securities Act. The securities issued to D.N.A Biomedical, were issued pursuant to Regulation S under the Securities Act. The securities under the Private Placement were not registered under the Securities Act or any state or other jurisdiction’s securities laws and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act and applicable state or other jurisdictions’ securities laws.
In addition, under the Subscription Agreement, each Investor has the right to participate, pro rata based on its respective purchase amount under the Private Placement, in any future private placement offering of the Company of more than $2,500,000 that closes within one year following the final closing of the Private Placement, subject to the conditions thereto.
As a result of the closing of the Private Placement, the exercise price of the IPO Warrants listed on the Nasdaq has been adjusted pursuant to the terms of the IPO Warrants, and effective as of the final closing of the Private Placement, the exercise price of the IPO Warrants is equal to $5.85.
The following summary is of certain material terms and provisions of the warrants issued to the Investors in the Private Placement (the “Investor Warrants”). The Company also issued 276,773 warrants to certain finders in the Private Placement (the “Broker Warrants”). The terms of the Broker Warrants are substantially similar to those of the Investor Warrants. This summary is not complete and is subject to, and qualified in its entirety by the provisions of, the form of the warrant, which is filed as an exhibit to this Annual Report on Form 20-F.
Each Investor Warrant represents the right to purchase one Ordinary Share. As of December 31, 2019, 2,855,095 Investor Warrants are outstanding and represent the right to purchase an aggregate of up to 2,855,095 Ordinary Shares, and as of February 19, 2020, (following the final closing of the Private Placement), 3,023,872 Investor Warrants are outstanding and represent the right to purchase an aggregate of up to 3,023,872 Ordinary Shares. The exercise price of each 2019 Investor Warrant was adjusted in light of the Ordinary Shares offered and sold under the Company’s ATM and is $2.96now $1.05 per Ordinary Share. The Investor Warrants may be exercised for a period of three years from issuance. The Investor Warrant may be exercised on a cashless basis.
Prior to the exercise of the Investor Warrants and for the duration of their term, the number of Ordinary Shares issuable upon their exercise and the exercise price are subject to customary adjustments, including in the events of reorganizations or reclassifications of the Company’s capital stock, upon payment of dividends or distributions to the Company’s shareholders, and upon subsequent issuance of the Company’s capital stock at or below a price of $2.37.shareholders.
If we fail to timely effectuate an exercise under the terms of the Investor Warrants, the Investor Warrants provides for certain liquidated damages and customary buy-in provisions.
For further information with respect to the Investor Warrants, see Item 10.A “Share Capital—Investor Warrants,” and Item 10.A “Share Capital—Broker Warrants” with respect to the Broker Warrants.
For information with respect to the registration rights provided in connection with the Private Placement, see “Item 7.B. Related Party Transactions—Private Placement Registration Rights.”
10.D. Exchange Controls
There are currently no Israeli currency control restrictions on the import or export of capital or the remittances of dividends on our Ordinary Shares, proceeds from the sale of the shares or interest or other payments to non-residents of Israel, except for shareholders who are subjects of countries that are, or have been, in a state of war with Israel.
10.E. Taxation
The following description is not intended to constitute a complete analysis of all tax consequences relating to the acquisition, ownership and disposition of our Ordinary Shares and IPO Warrants. You are encouraged to consult your tax advisor concerning the tax consequences of your particular situation, as well as any tax consequences that may arise under the laws of any state, local, foreign or other taxing jurisdiction.
Israeli Tax Considerations
The following are material Israeli income tax consequences of the ownership and disposition of our Ordinary Shares and IPO Warrants. It does not purport to be a comprehensive description of all the tax considerations that may be relevant to a decision to own or dispose of our Ordinary Shares or IPO Warrants. This discussion does not address all the aspects of Israeli tax laws that may be relevant to an investor in light of its particular circumstances or to certain types of investors subject to special treatment under applicable law. The following discussion also contains an overview of the current tax regime applicable to companies in Israel, with specific reference to its effect on us. This discussion is based upon the tax laws of Israel and regulations promulgated thereunder as of the date hereof, which are subject to change. Some parts of this discussion are based on new tax legislation which has not been subject to judicial or administrative interpretation. The discussion should not be construed as legal or professional tax advice and does not cover all possible tax considerations.
General Corporate Tax Structure
Israeli companies are generally subject to corporate tax on their taxable income currently at the rate of 23%. However, the effective tax rate payable by a company that derives income from a “preferred enterprise,” “preferred technological enterprise” or “preferred special technological enterprise” (as discussed below) may be considerably lower. Israeli companies are generally subject to capital gains tax at the regular corporate tax rate.
Tax Benefits under the Law for the Encouragement of Industry (Taxes)
According to the Law for the Encouragement of Industry (Taxes), 5729-1969, or the Industry Encouragement Law, an “industrial company,” is an Israeli resident company that was incorporated in Israel, of which 90% or more of its income in any tax year, (other than income from certain government loans), is derived from an “industrial enterprise,” owned by it and located in Israel or in the “area,” as such term is defined under Section 3a of the Ordinance. An “industrial enterprise” is generally defined as an enterprise whose major activity in any tax year is industrial production.
Under the Industry Encouragement Law, industrial companies are entitled to the following tax-related benefits:
amortization over an eight-year period of the cost of purchased know-how and patents and rights to use a patent and know-how which are used for the development or advancement of the “industrial enterprise,” commencing on the year in which such rights were first exercised;
deductions over a three-year period of expenses incurred in connection with the issuance and listing of shares on a stock market;
the right to elect, under specified conditions, to file a consolidated tax return together with related Israeli industrial companies; and
accelerated depreciation rates on certain equipment and buildings.
Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority.
As we have not generated income yet, there is no assurance that we qualify as an “industrial company” or that the benefits described above will be available to us in the future.
Law for the Encouragement of Capital Investments, 5719-1959
Tax Benefits for Income from Preferred Enterprise
The Law for the Encouragement of Capital Investments, 5719-1959, generally referred to as the Investment Law, currently provides certain tax benefits, inter alia, for income generated by “Preferred Companies” from their “preferred enterprises.” The definition of a Preferred Company includes, inter alia, a company incorporated in Israel that (i) is not wholly-owned by a governmental entity; (ii) owns a preferred enterprise, which is defined as an “industrial enterprise” (as defined under the Investment Law); (iii) is controlled and managed from Israel; and (iv) satisfies further conditions set forth in the Investment Law.
A Preferred Company is entitled to a reduced corporate tax rate of 16% with respect to income attributable to its “preferred enterprise,” unless the “preferred enterprise” is located in a specified development zone, known as development zone A, in which case the rate is currently 7.5%.
Dividends paid out of income attributed to a “preferred enterprise” are generally subject to tax at the rate of 20% or such lower rate as may be provided in an applicable tax treaty. However, if such dividends are paid to an Israeli company, no tax is required to be withheld (although, if the funds are subsequently distributed to individuals or non-Israeli residents (individuals and corporations), the withholding tax would apply).
Moreover, an additional tax of 3% will be imposed on individuals whose annual taxable income exceeds a certain threshold (NIS 649,560651,600 for 2019,2020, amount is linked to the annual change in the Israeli consumer price index).
As we have not yet generated income, there is no assurance that we qualify as a Preferred Company or that the benefits described above will be available to us in the future.
Tax Benefits for Income from Preferred Technology Enterprise
An amendment to the Investment Law, or the 2017 Amendment, was enacted as part of the Economic Efficiency Law that was published on December 29, 2016, and became effective as of January 1, 2017. The 2017 Amendment provides new tax benefits to Preferred Companies for two types of technology enterprises, as described below, and is in addition to the other existing tax beneficial programs under the Investment Law.
The 2017 Amendment provides that a technology company satisfying certain conditions will qualify as a “preferred technology enterprise,” and may thereby enjoy a reduced corporate tax rate of 12% on income that qualifies as “preferred technology income,” as defined in the Investment Law. The tax rate is further reduced to 7.5% for a “preferred technology enterprise” located in development zone A. In addition, a “preferred technology enterprise” may enjoy a reduced corporate tax rate of 12% on capital gain derived from the sale of certain “benefitted intangible assets,” as defined in the Investment Law, to a related foreign company if the “benefitted intangible assets” were acquired from a foreign company on or after January 1, 2017 for at least NIS 200 million, and the sale receives prior approval from the IIA.
The 2017 Amendment further provides that a technology company satisfying certain conditions (including an annual turnover of NIS 10 billion or more of the group that the technology company is a part) will qualify as a “special preferred technology enterprise,” and may thereby enjoy a reduced corporate tax rate of 6% on Preferred Technology Income regardless of the company’s geographic location within Israel. In addition, “a special preferred technology enterprise” will enjoy a reduced corporate tax rate of 6% on capital gain derived from the sale of certain “benefitted intangible assets” to a related foreign company if the “benefitted intangible assets” were either developed by an Israeli company or acquired from a foreign company, in each case if the Benefited Intangible Assets were acquired on or after January 1, 2017, and the sale received prior approval from the IIA. A “special preferred technology enterprise” that acquires “benefitted intangible assets” from a foreign company for more than NIS 500 million will be eligible for these benefits for at least 10 years, subject to satisfying certain conditions and obtaining certain approvals as specified in the Investment Law.
The Income of a preferred Technological enterprise or a special preferred Technological enterprise needs to be segmented into three different types of income: Income attributed to production, Income from an intangible asset used for marketing purposes and technological income. Income attributable to production is determined by a Cost Plus 10% mechanism (This is the default rate, but may be subject to change pursuant to a transfer pricing study) on the direct production costs, and may be eligible for benefits as a preferred enterprise. Income from an intangible asset used for marketing, providing it is not immaterial (as defined in the investment law) is not eligible for benefits and is subject to full corporate income tax. The part of the Technological income that is considered Preferred Technological Income may be eligible for tax benefits as detailed above.
Dividends distributed by a “preferred technology enterprise” or a “special preferred technology enterprise,” paid out of Preferred Technology Income, are subject to tax at the rate of 20%, and if distributed to a foreign company and other conditions are met the tax rate may be 4%.
As we have not yet generated taxable income, there is no assurance that we qualify as a “preferred technology enterprise” or “special preferred technology enterprise” or that the benefits described above will be available to us in the future.
If in the future we generate taxable income, to the extent that we qualify as a Preferred Company, the benefits provided under the Investment Law could potentially reduce our corporate tax liabilities. Therefore, the termination or substantial reduction of the benefits available under the Investment Law could materially increase our tax liabilities.
Capital Gains Tax
The Ordinance generally imposes a capital gains tax on the sale of any capital assets including shares or warrants of Israeli companies by Israeli and non-Israeli residents (unless, with respect to non-Israeli residents, a specific exemption is available or unless a tax treaty between Israel and such non-Israeli resident’s country of residence provides otherwise, and subject to the receipt in advance of a valid certificate from the Israel Tax Authority). The Ordinance distinguishes between real capital gain and inflationary surplus. The inflationary surplus is a portion of the total capital gain that is attributable to the increase in the Israeli consumer price index or, in certain circumstances, a foreign currency exchange rate between the date of purchase and the date of sale. The real capital gain is the excess of the total capital gain over the inflationary surplus.
Israeli Resident Holders
Generally, the tax rate applicable to real capital gains derived from the sale of our Ordinary Shares or IPO Warrants for Israeli individuals is the ordinary tax rate/s applicable under Section 91 of the Ordinance, provided that such rate shall not exceed 25% (unless such holder claims a deduction for interest and linkage differentials expenses in connection with such securities, in which case the capital gain will generally be taxed at a rate of 30%, until the promulgation of regulations setting forth the rules and conditions for the deduction of real interest and linkage differentials under Section 101A(a)9 and 101A(b) of the Ordinance.
Additionally, if such holder is considered a “Significant Shareholder,” at the time of the sale or at any time during the 12-month period preceding such sale, the tax rate applicable to the real capital gains will be the ordinary tax rate/s applicable under Section 91 of the Ordinance, provided that such rate shall not exceed 30%. A Significant Shareholder is defined as a person who holds, directly or indirectly, alone or together with another, at least 10% of any of our means of control (including, among other things, the right to receive profits of the company, voting rights, the right to receive the company’s liquidation proceeds and the right to appoint a director).
An additional tax of 3% will be imposed on individuals whose annual taxable income exceeds a certain threshold (NIS 649,560651,600 for 2019,2020, the amount is linked to the annual change in the Israeli consumer price index).
Israeli companies are subject to the corporate tax rate on real capital gains derived from the sale of securities at the rate of 23%. Individual holders dealing in securities in Israel are taxed at their marginal tax rates applicable to business income: up to 47% for individuals, plus an additional tax of 3%, which is imposed on individuals whose annual taxable income exceeds a certain threshold (NIS 649,560651,600 for 2019,2020, the amount is linked to the annual change in the Israeli consumer price index).
Non-Israeli Resident Holders
Non-Israeli residents (individuals and corporations) are generally exempt from Israeli capital gains tax on any gains derived from the sale, exchange or disposition of our Ordinary Shares and IPO Warrants, provided, among other things, that such holders did not acquire their Ordinary Shares or IPO Warrants prior to the company’s initial public offering and the gains were not derived from a permanent establishment of such holders in Israel.
However, non-Israeli entity holders will not be entitled to such exemption if Israeli residents hold an interest of more than 25% in such non-Israeli entities or are the beneficiaries of or are entitled to 25% or more of the revenues or profits of such non-Israeli entity, whether directly or indirectly. This exemption is not applicable to a person whose gains from selling or otherwise disposing of the securities are deemed to be business income.
In addition, a sale of securities may be exempt from Israeli capital gains tax under the provisions of an applicable tax treaty. For example, pursuant to the Convention between the Government of the United States of America and the Government of Israel with respect to Taxes on Income, or the U.S.-Israel Tax Treaty, capital gains arising from the sale, exchange or disposition of Ordinary Shares by a person who qualifies as a resident of the United States within the meaning of the U.S.-Israel Tax Treaty and who holds the shares as a capital asset and is entitled to claim the benefits afforded to such person by the U.S.-Israel Tax Treaty generally will not be subject to the Israeli capital gains tax unless (i) such person holds, directly or indirectly, shares representing 10% or more of our voting power during any part of the 12-month period preceding such sale, exchange or disposition, subject to particular conditions, (ii) the capital gains from such sale, exchange or disposition can be allocated to a permanent establishment of the holder in Israel or (iii) such person is an individual and was present in Israel for a period or periods of 183 days or more in the aggregate during the relevant tax year. In any such case, the sale, exchange or disposition of such shares would be subject to Israeli tax, to the extent applicable. Eligibility to benefit from tax treaties is conditioned upon the holder presenting a withholding certificate issued by the Israel Tax Authority prior to the applicable payment.
Exercise and Lapse of IPO Warrants
The following discussion relating to our IPO Warrants is not applicable to holders of IPO Warrants who are deemed “controlling members” as defined in Section 3(i) of the Ordinance, which generally means a holder who holds or is entitled to acquire, directly or indirectly, alone or together with his relative, (i) at least 5% of our issued share capital; (ii) at least 5% of our voting power; (iii) the right to receive at least 5% of our profits or assets upon winding up; or (iv) the right to appoint a director. A relative for this purpose means a spouse, brother, sister, parent, parent’s parent, descendant, the spouse’s descendant and the spouse of any of the foresaid. Such holders should consult with their own tax advisors regarding the potential tax implications to them of the receipt or exercise of our IPO Warrants.
Holders of our IPO Warrants generally will not recognize gain or loss upon the exercise of our IPO Warrants for cash. An Ordinary Share acquired pursuant to the exercise of a Warrant for cash will generally have a tax basis equal to the holder’s tax basis in the Warrant, increased by the amount paid to exercise the Warrant. If a Warrant is allowed to lapse unexercised, the holder will generally recognize a capital loss equal to such holder’s tax basis in the Warrant.
It is possible that a cashless exercise of a Warrant would be treated as a taxable exchange in which gain or loss is recognized. In such event, a holder could be deemed to have surrendered a number of IPO Warrants with a fair market value equal to the exercise price for the number of IPO Warrants deemed exercised. For this purpose, the number of IPO Warrants deemed exercised would be equal to the number of IPO Warrants that would entitle the holder to receive upon exercise the number of Ordinary Shares issued pursuant to the cashless exercise of the IPO Warrants. In this situation, the holder would recognize capital gain or loss in an amount equal to the difference between the fair market value of the IPO Warrants deemed surrendered to pay the exercise price and the holder’s tax basis in the IPO Warrants deemed surrendered.
Holders of IPO Warrants should consult with their own tax advisors regarding the calculation of any tax basis adjustments and the calculation of capital gains upon the sale or other disposition of our IPO Warrants.
Withholding and Reporting
Either the purchaser, the Israeli stockbrokers or financial institutions through which the Ordinary Shares and IPO Warrants are held is obliged to withhold tax on the amount of consideration paid upon the sale of such securities (or on the capital gain realized on the sale, if known) at the Israeli corporate income tax rate for Israeli companies (currently 23%). In case the seller is an individual, the applicable withholding tax rate would be 25% of the amount of the capital gain realized on the sale.
In some instances where our holders may be liable for Israeli tax on the sale of their Ordinary Shares or IPO Warrants, the payment of the consideration may be subject to the withholding of Israeli tax at source. Holders, including non-Israeli resident holders, 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.
In transactions involving a sale of all of the securities of an Israeli resident company, in the form of a merger or otherwise, the Israel Tax Authority may require non-Israeli resident holders who are not liable for Israeli tax to sign a declaration in a form specified by the Israel Tax Authority or obtain a specific exemption from the Israel Tax Authority to confirm their status as a non-resident of Israel, and, in the absence of such declarations or exemptions, may require the purchaser of the securities to withhold taxes at source.
At the sale of securities traded on a stock exchange, a detailed return, including a computation of the tax due, must be filed and an advanced payment must be paid on January 31 and July 31 of every tax year in respect of sales of securities made within the previous six months. However, if all tax due was withheld at source according to applicable provisions of the Ordinance and the regulations promulgated thereunder, then the aforementioned return need not be filed and no advance payment must be made. Capital gain is also reportable on the annual income tax return.
Taxation of Dividend Distributions
Israeli Residents
Israeli resident individuals are generally subject to Israeli income tax on the receipt of dividends paid on our Ordinary Shares (other than bonus shares). The tax rate applicable to such dividends is 25%, or 30% for a holder that is considered a Significant Shareholder the time of distribution or at any time during the 12-month period preceding such distribution. Dividends paid from income attributed to “preferred enterprises” are generally subject to tax at the rate of 20%. Dividends distributed by a “preferred technology enterprise” or a “special preferred technology enterprise,” paid out of Preferred Technology Income, are generally subject to tax at the rate of 20%.
Israeli resident companies are generally exempt from tax on the receipt of dividends paid on our Ordinary Shares.
If the dividend is attributable partly to income derived from a “preferred enterprise” or to Preferred Technology Income of a “preferred technology enterprise” or a “special preferred technology enterprise” and partly to other sources of income, the tax rate will be a blended rate reflecting the relative portions of the two types of income. We cannot assure you that we will designate the profits that may be distributed in a way that will reduce holders’ tax liability.
Moreover, an additional tax of 3% will be imposed on individuals whose annual taxable income exceeds a certain threshold (NIS 649,560651,600 for 2019,2020, amount is linked to the annual change in the Israeli consumer price index).
Payers of dividends on our shares, including the Israeli stockbroker effectuating the transaction, or the financial institution through which the securities are held, are required, subject to any of the foregoing exemptions or reduced tax rates to withhold taxes upon the distribution of dividends at a rate of 25%, provided that the shares are registered with a nominee company.
Non-Israeli Residents
Non-residents of IsraelNon-Israeli residents (whether individuals or corporations) are generally subject to Israeli income tax on the receipt of dividends paid on Ordinary Shares at the rate of 25%, or 30% for a holder that is considered a Significant Shareholder at the time of distribution or any time during the 12-month period preceding such distribution, or 20% if the dividend is distributed from income attributable to a “preferred enterprise,” “preferred technology enterprise” or “special preferred technology enterprise,” which tax is to be withheld at source, unless a different rate is provided in a treaty between Israel and the holder’s country of residence. If the dividends paid out of Preferred Enterprise Technology Income are distributed to a foreign company and other conditions are met, the withholding tax rate may be 4%. Eligibility to benefit from tax treaties is conditioned upon the holder presenting a withholding certificate issued by the Israel Tax Authority prior to the applicable payment.
Payers of dividends on our shares, including the Israeli stockbroker effectuating the transaction, or the financial institution through which the securities are held, are required, subject to any of the foregoing exemptions, reduced tax rates and the demonstration of a shareholder of his, her or its foreign residency, to withhold taxes upon the distribution of dividends at a rate of 25%, provided that the shares are registered with a nominee company (for corporations and individuals and regardless of whether a recipient is a significant shareholder).
Under the U.S.-Israel Tax Treaty, the maximum rate of tax withheld in Israel on dividends paid to a holder of Ordinary Shares who qualifies as a resident of the United States within the meaning of the U.S.-Israel Tax Treaty is 25%. Such tax rate is generally reduced to 12.5% (forfor distribution of income that is not attributable to a “preferred enterprise,” “preferred technology enterprise” or “special preferred technology enterprise”) or 15% that is so attributable, if the shareholder is a U.S. corporation and holds at least 10% of our issued voting power during the tax year in which the dividend is distributed as well as during the whole of its prior tax year, provided that not more than 25% of the gross income for such preceding year consists of certain types of interest or dividends and a certificate for a reduced withholding tax rate is obtained in advance from the Israel Tax Authority.
The aforementioned rates under the U.S.-Israel Tax Treaty will not apply if the dividend income was derived through a permanent establishment of the U.S. resident in Israel.
A non-Israeli resident who receives dividend income derived from or accrued from Israel, from which the full amount of tax was withheld at source, is generally exempt from the obligation to file tax returns in Israel with respect to such income, provided that: (i) such income was not generated from business conducted in Israel by the taxpayer(ii) the taxpayer has no other taxable sources of income in Israel with respect to which tax return is required to be filed, and (iii) the taxpayer is not obliged to pay Excess Tax.
Eligibility to benefit from tax treaties is conditioned upon the holder presenting a withholding certificate issued by the Israel Tax Authority prior to the applicable dividend distribution.
Taxation of Distributions on IPO Warrants
We do not currently expect to make distributions on our Ordinary Shares. However, if we make any distributions on our Ordinary Shares (including cash distributions), we will be required to make distributions to holders of IPO Warrants. The gross amount of any such distributions to holders of IPO Warrants may be treated as ordinary income for Israeli income tax purposes and subject to ordinary income tax rates. Under applicable law, we will have withholding obligations and may be required to withhold from the gross amount of such distribution at rates which could be up to the highest tax rates applicable to ordinary income. Holders of our IPO Warrants should consult their own tax advisers concerning the Israeli income tax treatment of distributions on our IPO Warrants including, with respect to non-Israeli resident holders, the credibility of any Israeli taxes withheld on such distributions.
Material U.S. Federal Income Tax Considerations for U.S. Holders
The following are material U.S. federal income tax consequences to the U.S. Holders described below of owning and disposing of our Ordinary Shares or IPO Warrants, but it does not purport to be a comprehensive description of all the tax considerations that may be relevant to a particular person’s decision to own the Ordinary Shares or IPO Warrants. This discussion applies only to a U.S. Holder that holds our Ordinary Shares or IPO Warrants as capital assets for U.S. federal income tax purposes. This discussion does not address tax consequences of a fundamental transaction (as defined under the terms of the IPO Warrants) to U.S. Holders of IPO Warrants. In addition, it does not describe all of the tax consequences that may be relevant in light of a U.S. Holder’s particular circumstances, including alternative minimum tax consequences, any aspect of the provisions of the Internal Revenue Code of 1986, as amended, or the Code, commonly known as the Medicare tax, the application of any special tax accounting rules under Section 451 of the Code and tax consequences applicable to U.S. Holders subject to special rules, such as:
certain financial institutions;
dealers or traders in securities that use a mark-to-market method of tax accounting;
persons holding Ordinary Shares or IPO Warrants as part of a “straddle” or integrated transaction or persons entering into a constructive sale with respect to the Ordinary Shares or IPO Warrants;
persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar;
entities classified as partnerships for U.S. federal income tax purposes;
tax exempt entities, “individual retirement accounts” or “Roth IRAs”;
persons that own or are deemed to own 10% or more of our stock by vote or value; or
persons holding our Ordinary Shares or IPO Warrants in connection with a trade or business conducted outside of the United States.
If an entity that is classified as a partnership for U.S. federal income tax purposes owns our Ordinary Shares or IPO Warrants, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. Partnerships owning our Ordinary Shares or IPO Warrants and partners in such partnerships should consult their tax advisers as to the particular U.S. federal tax consequences of owning and disposing of the Ordinary Shares or IPO Warrants.
This discussion is based on the Code, administrative pronouncements, judicial decisions, and final and proposed Treasury regulations, changes to any of which subsequent to the date of this Annual Report may affect the tax consequences described herein.
For purposes of this discussion, a “U.S. Holder” is a person who, for U.S. federal income tax purposes, is a beneficial owner of Ordinary Shares or IPO Warrants, as the case may be, and is:
a citizen or individual resident of the United States;
a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, any state therein or the District of Columbia; or
an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.
U.S. Holders should consult their tax advisers concerning the U.S. federal, state, local and foreign tax consequences of owning and disposing of our Ordinary Shares or IPO Warrants in their particular circumstances.
Taxation of Distributions on Ordinary Shares
We currently do not expect to make distributions on our Ordinary Shares. Subject to the discussion below under “—Passive Foreign Investment Company Rules,” any distributions paid on our Ordinary Shares (other than certain pro-rata distributions of Ordinary Shares) will be treated as dividends to the extent paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Because we do not calculate our earnings and profits under U.S. federal income tax principles, it is expected that distributions generally will be reported to U.S. Holders as dividends. Subject to applicable limitations, dividends paid to certain non-corporate U.S. Holders may be taxable at the favorable tax rates applicable to “qualified dividend income.income,” provided that we are not a PFIC in our taxable year of the distribution or the preceding taxable year. Non-corporate U.S. Holders should consult their tax advisers regarding the availability of these favorable rates on dividends in their particular circumstances. Dividends will not be eligible for the dividends received deduction generally available to U.S. corporations under the Code and will generally be included in a U.S. Holder’s income on the date of receipt.
Dividend income will include any amounts withheld in respect of Israeli taxes, and will be treated as foreign source income for foreign tax credit purposes. Subject to applicable limitations, some of which vary depending upon the U.S. Holder’s circumstances, Israeli taxes withheld from dividends on our Ordinary Shares will be creditable against the U.S. Holder’s U.S. federal income tax liability. The rules governing foreign tax credits are complex and U.S. Holders should consult their tax advisers regarding the creditability of foreign taxes in their particular circumstances. In lieu of claiming a foreign tax credit, U.S. Holders may elect to deduct foreign taxes (including Israeli taxes) in computing their taxable income, subject to applicable limitations. An election to deduct foreign taxes instead of claiming foreign tax credits applies to all foreign taxes paid or accrued in the taxable year.
If any dividend is paid in foreign currency, the amount of dividend income will be the dividend’s U.S. dollar amount calculated by reference to the exchange rate in effect on the date of receipt, regardless of whether the payment is in fact converted into U.S. dollars. If the dividend is converted into U.S. dollars on the date of receipt, a U.S. Holder should not be required to recognize foreign currency gain or loss in respect of the dividend income. A U.S. Holder may have foreign currency gain or loss if the dividend is converted into U.S. dollars after the date of receipt. Such gain or loss would generally be treated as U.S.-source ordinary income or loss.
Sale or Other Taxable Disposition of Ordinary Shares
Subject to the discussion below under “Passive Foreign Investment Company Rules,” gain or loss realized on the sale or other taxable disposition of our Ordinary Shares will be capital gain or loss and will be long-term capital gain or loss if the U.S. Holder held the Ordinary Shares for more than one year. The amount of the gain or loss will equal the difference between the U.S. Holder’s tax basis in the Ordinary Shares disposed of and the amount realized on the disposition. See “—Sale or Other Taxable Disposition, Exercise or Expiration of IPO Warrants” below for a discussion regarding a U.S. Holder’s tax basis and holding period for Ordinary Shares acquired pursuant to an exercise of IPO Warrants. This gain or loss will generally be U.S. source gain or loss for foreign tax credit purposes. The deductibility of capital losses is subject to limitations.
Sale or Other Taxable Disposition, Exercise or Expiration of IPO Warrants
Subject to the discussion below under “—Passive Foreign Investment Company Rules,” gain or loss realized on the sale or other taxable disposition of a Warrant (other than by way of exercise) will be capital gain or loss and will be long-term capital gain or loss if the U.S. Holder held the Warrant for more than one year at the time of the sale or disposition. The amount of the gain or loss will equal the difference between the U.S. Holder’s tax basis in the IPO Warrants disposed of and the amount realized on the disposition.
In general, a U.S. Holder will not be required to recognize income, gain or loss upon the exercise of a Warrant by payment of the exercise price in cash. A U.S. Holder’s tax basis in Ordinary Shares received upon exercise of IPO Warrants will be equal to the sum of (1) the U.S. Holder’s tax basis in the Warrant and (2) the exercise price of the Warrant. AIt is not entirely clear if a U.S. Holder’s holding period in the Ordinary Shares received upon exercise will commence on the day the IPO Warrants are exercised.exercised or the day after.
Although there is no direct legal authority as to the U.S. federal income tax treatment of an exercise of a Warrant on a cashless basis, we believe that it is reasonable to take the position that such exercise will not be taxable (except with respect to cash received in lieu of a fractional Ordinary Share), either because the exercise is not a gain realization event or because it qualifies as a tax-free recapitalization. In the former case, subject to the discussion below under “—Passive Foreign Investment Company Rules,” the holding period of the Ordinary Shares should commence on the day the IPO Warrants are exercised.exercised (or possibly the day after). In the latter case, the holding period of the Ordinary Shares would include the holding period of the exercised IPO Warrants. In either case, the U.S. Holder’s tax basis in the Ordinary Shares (including any fractional Ordinary Share) received generally would equal the U.S. Holder’s tax basis in the IPO Warrants. However, such position regarding the treatment of a cashless exercise is not binding on the Internal Revenue Service, or the IRS, and the IRS may treat a cashless exercise of a Warrant as a taxable exchange. U.S. Holders are urged to consult their tax advisers as to the consequences of an exercise of a Warrant on a cashless basis. The receipt of cash in lieu of a fractional Ordinary Share should result in a capital gain or loss equal to the difference between the cash received and the U.S. Holder’s tax basis in the Ordinary Shares allocable to the fractional share.
If a Warrant expires without being exercised, a U.S. Holder will recognize a capital loss in an amount equal to such U.S. Holder’s tax basis in the Warrant. This loss will be long-term capital loss if, at the time of the expiration, the U.S. Holder’s holding period in the Warrant is more than one year. The deductibility of capital losses is subject to limitations.
Taxation of Distributions on IPO Warrants
We do not currently expect to make distributions on our Ordinary Shares. However, if we make any distributions on our Ordinary Shares (including cash distributions), we will be required to make distributions to holders of IPO Warrants. The gross amount of any such distributions to U.S. Holders of IPO Warrants (including any amounts withheld in respect of Israeli taxes) will be treated as ordinary income for U.S. federal income tax purposes. U.S. Holders should expect that any such distributions will not qualify for the preferential tax rates applicable to qualified dividend income of non-corporate shareholders. In addition, if we are a PFIC for any taxable year, under proposed Treasury regulations anythat have a retroactive effective date, such distributions could be subject to the adverse PFIC rules described in “—Passive Foreign Investment Company Rules.” U.S. Holders should consult their tax advisers concerning the U.S. federal income tax treatment of distributions on IPO Warrants, including the credibility of any Israeli taxes withheld on such distributions.
Passive Foreign Investment Company Rules
There is a risk that we may be treated as a PFIC for any taxable year. Although the application of the PFIC rules to a company like us is subject to uncertainties in some respects, based on our market capitalization value and our income (including governmental grants) for 2019,2020, we believe that it is reasonable to take the position that we were not a PFIC for 2019,2020, but there can be no assurance that the Internal Revenue Service will agree or that a court will uphold this position. For the reasons described below, we cannot express a view as to whether we will be a PFIC for the current or any future taxable year. In general, a non-U.S. corporation is a PFIC for any taxable year in which (i) 75% or more of its gross income consists of passive income, or the income test, or (ii) 50% or more of the average value of its assets consists of assets (generally determined on a quarterly basis) that produce, or are held for the production of, passive income, or the assets test. Generally, passive income includes interest, dividends, rents, royalties and certain gains, and cash is generally a passive asset for PFIC purposes.
The assets shown on our balance sheet consist, and are expected to continue to consist, primarily of cash and cash equivalents for the foreseeable future. Therefore, whether we will satisfy the assets test for the current or any future taxable year will depend largely on the quarterly value of our goodwill and on how quickly we utilize our cash in our business. Because (i) the value of our goodwill may be determined by reference to the market price of our Ordinary Shares, which has been, and may continue to be volatile given the nature and early stage of our business, (ii) we hold, and expect to continue to hold, a significant amount of cash, and (iii) a company’s annual PFIC status can be determined only after the end of each taxable year, we cannot express a view as to whether we will be a PFIC for the current or any future taxable year. In addition, it is not clear how to apply the income test to a company like us, which is still developing its key intangible assets and whose overall losses from research activities significantly exceed the amount of its income (including passive income). If our losses from research and development activities are disregarded for purposes of the income test, we may be a PFIC for any taxable year if 75% or more of our gross income (as determined for U.S. federal income tax purposes) for the relevant year is from interest and financial investments. Because the revenue shown on our financial statements is not calculated based on U.S. tax principles, and because for any taxable year we may not have sufficient (or any) non-passive revenue, there is a risk that we may be or become a PFIC under the income test for any taxable year.
For purposes of the PFIC rules for any taxable year, a non-U.S. corporation that directly or indirectly owns at least 25% by value of the shares of another corporation is treated as if it held its proportionate share of the assets of the other corporation and received directly its proportionate share of the income of the other corporation.
Under attribution rules, if we were a PFIC for any taxable year and had any subsidiaries or other entities in which we held a direct or indirect equity interest that are also PFICs, or Lower-tier PFICs, U.S. Holders would be deemed to own their proportionate share of any such Lower-tier PFICs and would be subject to U.S. federal income tax according to the rules described in the following paragraph on (i) certain distributions by a Lower-tier PFIC and (ii) a disposition of shares of a Lower-tier PFIC, in each case as if the U.S. Holders held such shares or equity interests directly, even if the U.S. Holders do not receive the proceeds of those distributions or dispositions.
If we were a PFIC for any taxable year during which a U.S. Holder held our Ordinary Shares (and, under proposed Treasury regulations that have a retroactive effective date, IPO Warrants), an adverse tax regime would apply to the U.S. Holder’s investment in our Ordinary Shares (or IPO Warrants). Generally, gain recognized upon a taxable disposition (including, under certain circumstances, a pledge) of Ordinary Shares (or, under the proposed Treasury regulations, IPO Warrants) by the U.S. Holder would be allocated ratably over the U.S. Holder’s holding period for such Ordinary Shares (or IPO Warrants). The amounts allocated to the taxable year of disposition and to taxable years prior to the first taxable year in which we were a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest tax rate in effect for that taxable year for individuals or corporations, as appropriate, and an interest charge would be imposed on the resulting tax liability for each such year. Further, to the extent that any distribution received by a U.S. Holder on Ordinary Shares (or, under the proposed Treasury regulations, IPO Warrants) exceeded 125% of the average of the annual distributions received on such Ordinary Shares (or IPO Warrants) during the preceding three years or the U.S. Holder’s holding period, whichever is shorter, that distribution would be subject to taxation in the same manner. Under proposed Treasury regulations, if we were a PFIC during any taxable year during which a U.S. Holder held our IPO Warrants, the holding period for the Ordinary Shares received upon exercise of such IPO Warrants would include the holding period of the IPO Warrants.
If we were a PFIC for any year during which a U.S. Holder owns Ordinary Shares (or, under the proposed Treasury regulations that have a retroactive effective date, IPO Warrants), we generally would continue to be treated as a PFIC with respect to such U.S. Holder’s Ordinary Shares (or IPO Warrants) unless (a) we ceased to be a PFIC and (b) the U.S. Holder has made a deemed sale election under the PFIC rules which may result in recognition of gain (but not loss), taxable under the PFIC rules described above, without the receipt of any corresponding cash.
Alternatively, if we were a PFIC and if the Ordinary Shares were regularly traded on a qualified exchange, a U.S. Holder might be able to make a mark-to-market election with respect to our Ordinary Shares (but generally not with respect to Lower-tier PFICs, if any) that would result in tax treatment different from the general tax treatment for PFICs described above. The Ordinary Shares would be treated as regularly traded in any calendar year in which more than a de minimis quantity of the Ordinary Shares were traded on a qualified exchange on at least 15 days during each calendar quarter. The Nasdaq, where our Ordinary Shares are listed, is a qualified exchange for this purpose. If a U.S. Holder makes the mark-to-market election, the U.S. Holder generally will recognize in each year that we are a PFIC as ordinary income any excess of the fair market value of the Ordinary Shares at the end of the taxable year over their adjusted tax basis, and will recognize an ordinary loss in respect of any excess of the adjusted tax basis of the Ordinary Shares over their fair market value at the end of the taxable year (but only to the extent of the net amount of income previously included as a result of the mark-to-market election). If a U.S. Holder makes the election, the U.S. Holder’s tax basis in the Ordinary Shares will be adjusted to reflect these income or loss amounts. In addition, if a U.S. Holder makes the mark-to-market election, any gain that the U.S. Holder recognizes on the sale or other disposition of Ordinary Shares in a year in which we are a PFIC will be treated as ordinary income and any loss will be treated as an ordinary loss (but only to the extent of the net amount of income previously included as a result of the mark-to-market election). Under current law, a mark-to-market election is not available with respect to the IPO Warrants and will likely not be available with respect to any lower-tier PFICs. U.S. Holders should consult their tax advisers regarding the availability and advisability of making a mark-to-market election in their particular circumstances.
We currently do not intend to provide information necessary for U.S. Holders to make qualified electing fund elections, which, if available, would result in a further alternative tax treatment.
If we were a PFIC or, with respect to a particular U.S. Holder, were treated as a PFIC for the taxable year in which we pay a dividend or the prior taxable year, the preferential rates discussed above with respect to dividends paid to certain non-corporate U.S. Holders of our Ordinary Shares would not apply. In addition, if we were a PFIC for any taxable year during which a U.S. Holder owns Ordinary Shares (or, under the proposed Treasury regulations, IPO Warrants), the U.S. Holder would be required to file annual reports with the IRS, subject to certain exceptions.
U.S. Holders should consult their tax advisers regarding the potential application of the PFIC rules to their ownership in our Ordinary Shares or IPO Warrants.
Information Reporting and Backup Withholding
Payments of distributions and sales proceeds that are made within the United States or through certain U.S. related financial intermediaries generally are subject to information reporting, and may be subject to backup withholding, unless (i) the U.S. Holder is a corporation or other exempt recipient or (ii) in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding. Backup withholding is not an additional tax. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder’s U.S. federal income tax liability and may entitle it to a refund, provided that the required information is timely furnished to the IRS.
Information with Respect to Foreign Financial Assets
Certain U.S. Holders who are individuals and certain specified entities may be required to report information relating to the Ordinary Shares or IPO Warrants, unless the Ordinary Shares or IPO Warrants are held in an account maintained by a financial institution (in which case the account itself may be reportable if maintained by a non-U.S. financial institution). U.S. Holders should consult their tax advisors regarding their reporting obligations with respect to their ownership and disposition of the Ordinary Shares and IPO Warrants.
10.F. Dividends and Paying Agents
Not applicable.
10.G. Statement by Experts
Not applicable.
10.H. Documents on Display
We are subject to certain of the information reporting requirements of the Exchange Act. As a foreign private issuer, we are exempt from the rules and regulations under the Exchange Act prescribing 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, with respect to their purchase and sale of our shares. Furthermore, as a foreign private issuer, we are also not subject to the requirements of Regulation FD (Fair Disclosure) promulgated under the Exchange Act. In addition, we are not required to file reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. However, we are required to file with the SEC, within four months after the end of each fiscal year, an annual report on Form 20-F containing financial statements audited by an independent accounting firm. We publish unaudited interim financial information after the end of each quarter. We furnish this quarterly financial information to the SEC under cover of a Form 6-K.
The SEC maintains a website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The address of this website is http://www.sec.gov. The company’s website is www.enterbio.com.www.enterbio.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.
10.I. Subsidiary Information
Not applicable.
ITEM 11.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of our operations, we are exposed to certain market risks. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of foreign currency exchange rates.
Foreign Currency Exchange Risk
Our functional currency and reporting currency is the U.S. dollar. Although a substantial portion of our expenses (mainly salaries and related costs) are denominated in NIS, accounting for 31%32%, 28%31% and 24%28% of our expenses in the years ended December 31, 2020, 2019 and 2018 and 2017,, respectively, our revenues were generated under agreement denominated in U.S. dollars and our proceeds from our public offerings, share issuance and convertible loan agreements, which are the main source of our financing, are denominated in U.S. dollars. Fluctuations in the NIS to U.S. dollar exchange rate may affect our results because some of our assets and liabilities are linked to the NIS and a portion of our operating expenses are denominated in NIS. In the future, we also may be exposed to additional currency fluctuations against the U.S. dollar. See “Item 3.D.—Risk Factors—Our business is subject to currency exchange risk and fluctuations between the U.S. dollar and other currencies may negatively affect our earnings and results of operations.”
A devaluation of the NIS in relation to the U.S. dollar has the effect of reducing the U.S. dollar amount of our expenses or payables that are payable in NIS, unless those expenses or payables are linked to the U.S. dollar. Conversely, any appreciation of the NIS in relation to the U.S. dollar has the effect of increasing the U.S. dollar value of our unlinked NIS expenses, which would have a negative impact on our profit margins. In 2020, the value of the NIS appreciated against the U.S. dollar by 6.97%, which appreciation was partially offset by inflation in Israel of 0.7%. In 2019, the value of the NIS appreciated against the U.S. dollar by 7.8%7.79%, which appreciation was partially offset by inflation in Israel of approximately 0.3%.In 2018, the value of the NIS depreciated against the U.S. dollar by approximately 8.1%, the effect of which was partly offset by inflation in Israel at a rate of approximately 0.8%.
Because exchange rates between the U.S. dollar and the NIS (as well as between the U.S. dollar and other currencies) fluctuate continuously, such fluctuations have an impact on our results and period-to-period comparisons of our results. The effects of foreign currency re-measurements are reported in our statements of operations.
We will continue to monitor exposure to currency fluctuations. We do not hedge our foreign currency exchange risk. In the future, we may enter into formal 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.
Inflation Risk
We do not believe that inflation had a material effect on our business, financial condition or results of operations in the last two fiscal years. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through hedging transactions. Our inability or failure to do so could harm our business, financial condition and results of operations.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
12.A-D.2.
Not applicable.
12D.3-4.
Not Applicable.
PART TWO
ITEM 13.DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
None.
ITEM 15. CONTROLS AND PROCEDURES
(a) | Disclosure Controls and Procedures |
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act and regulations promulgated thereunder) as of December 31, 2019,2020, or the Evaluation Date. Based on such evaluation, those officers have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be included in periodic filings under the Exchange Act and that such information is accumulated and communicated to management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.
(b) | Management’s Annual Report on Internal Control over Financial Reporting |
Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act of 1934, as amended.Act. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that:
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and asset dispositions;
provide reasonable assurance that transactions are recorded as necessary to permit the preparation of our financial statements in accordance with generally accepted accounting principles;
provide reasonable assurance that receipts and expenditures are made only in accordance with authorizations of our management and board of directors (as appropriate); and
provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on our financial statements.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, 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 the policies or procedures may deteriorate.
Our management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 20192020 based on criteria established in Internal Control-Integrated Framework (2013) by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on such assessment, our management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2019.2020.
(c) | Attestation Report of the Registered Public Accounting Firm |
As long as we are deemed to be an Emerging Growth Company, we will not be required to include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting, due to an exemption for emerging growth companies provided in the JOBS Act.
(d) | Changes in Internal Control over Financial Reporting |
There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this Annual Report that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16A.Audit Committee Financial Expert
Our board has determined that Ms. Miranda J. Toledano qualifies to serve as an Audit Committee Financial Expert, as defined under the SEC rules, and has Financial and Accounting Expertise, as defined in the regulations promulgated under the Companies Law. Ms. Miranda J. Toledano, also qualifies as an external director under the Companies Law and as an independent director under the corporate governance standards of the Nasdaq listing requirements and the audit committee independence requirements of Rule 10A-3 of the Exchange Act. For more information see “Item 6.C.—Board Practices—Board of Directors.”
Code of Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics applicable to all of our directors, executive officers and employees, including our Chief Executive Officer, Chief Financial Officer, controller or principal accounting officer, or other persons performing similar functions, which is a code of ethics as defined in Item 16B of Form 20-F promulgated by the SEC. The full text of the Code of Business Conduct and Ethics can be found on our website at www.enterabio.com. Information contained on, or that can be accessed through, our website does not constitute a part of this report and is not incorporated by reference herein. If we make any amendment to the Code of Business Conduct and Ethics or grant any waivers, including any implicit waiver, from a provision of the code of ethics, we will disclose the nature of such amendment or waiver on our website to the extent required by the rules and regulations of the SEC. Under Item 16B of Form 20-F, if a waiver or amendment of the Code of Business Conduct and Ethics applies to our principal executive officer, principal financial officer, principal accounting officer or controller and relates to standards promoting any of the values described in Item16B(b) of Form 20-F, we are required to disclose such waiver or amendment on our website in accordance with the requirements of Instruction 4 to such Item 16B.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Kesselman & Kesselman (a member firm of PricewaterhouseCoopers International Limited, or PwC), has served as our principal independent registered public accounting firm for each of the two years ended December 31, 20182019 and 2019.2020.
The following table provides information regarding fees paid by us to PwC for all services, for the years ended December 31, 20192020 and 2018:2019:
| | Year Ended December 31, | |
| | 2019 | | | 2018 | |
Audit fees (1) | | $ | 106,813 | | | $ | 397,721 | |
Tax fees(2) | | | 4,500 | | | | 5,000 | |
Other services | | | - | | | | - | |
Total fees | | $ | 111,313 | | | $ | 402,721 | |
__________________________
| | Year Ended December 31, | |
| | 2020 | | | 2019 | |
Audit fees (1) | | $ | 145,000 | | | $ | 106,813 | |
Tax fees(2) | | | 17,000 | | | | 4,500 | |
Other services | | | - | | | | - | |
Total fees | | $ | 162,000 | | | $ | 111,313 | |
______________________________(1) | Includes professional services rendered in connection with the audit of our annual financial statements and the review of our interim financial statements and services related to the company’s initial public offering and other registration statements. |
(2) | Tax consulting services. |
Pre-Approval of Auditors’ Compensation
Our audit committee is responsible for pre-approving audit and non-audit services provided to us by our independent registered public accounting firm. All of the non-audit services provided to us by the independent auditors following the formation of our audit committee were pre-approved by the audit committee.
ITEM 16D.EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
None.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
None.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
None.
ITEM 16G. CORPORATE GOVERNANCE
Corporate Governance Practices
We are incorporated in Israel and therefore are subject to various corporate governance practices under the Companies Law, relating to such matters as external directors, financial experts, our audit committee, our compensation committee and our internal auditor. These matters are in addition to the requirements of Nasdaq and other applicable provisions of U.S. securities laws. As a foreign private issuer whose securities are listed on Nasdaq, we have the option to follow certain Israeli corporate governance practices rather than those of Nasdaq, except to the extent that such laws would be contrary to U.S. securities laws and provided that we disclose the practices that we are not following and describe the home country practices we follow instead. Under Nasdaq rules, a foreign private issuer, such as us, may generally follow its home country rules of corporate governance in lieu of the comparable requirements of Nasdaq rules, except for certain matters including (among others) the composition and responsibilities of the audit committee and the independence of its members within the meaning of the rules and regulations of the SEC.
We rely on the Foreign Private Issuer Exemption with respect to the following Nasdaq requirements:
Shareholder Approval. Although Nasdaq rules generally require shareholder approval of equity compensation plans and material amendments thereto, we intend to follow Israeli practice, which is to have such plans and amendments approved only by the board of directors, unless such arrangements are for the compensation of executive officers or directors, in which case they also require the approval of the compensation committee, and in the case of directors and the chief executive officer (and under certain circumstances, other executive officers) the approval of the shareholders. In addition, rather than following Nasdaq rules requiring shareholder approval for the issuance of securities in certain circumstances, such as in private transactions exceeding 20% of the Company’s outstanding registered securities, we intend to follow Israeli law applicable to us, which requires shareholder approval in the event of issuances to certain related parties, as described below under “—Fiduciary Duties and Approval of Related Party Transactions—Approval of Related Party Transactions.”
Shareholder Quorum. Nasdaq rules require that an issuer have a quorum requirement for shareholder meetings of at least one-third of the outstanding shares of the issuer’s common voting stock. As permitted under the Companies Law, pursuant to our amended Articles, the quorum required for an ordinary meeting of shareholders will consist of at least two shareholders present in person or by proxy who hold in the aggregate at least 25% of the voting power of our issued and outstanding shares and, in an adjourned meeting, subject to certain exceptions, any two shareholders.
Compensation Committee. Nasdaq rules require a listed company to have a compensation committee composed entirely of independent directors that operates pursuant to a written charter addressing its purpose, responsibilities and membership qualifications and may receive counseling from independent consultants, after evaluating their independence. The purpose, responsibilities and membership qualifications of our compensation committee are governed by the Companies Law, rather than the Nasdaq rules. In addition, under the Companies Law, there are no specific independence evaluation requirements for outside consultants.
Independent Approval of Board Nominations. Nasdaq rules require a listed company to have independent control over the approval of board nominations, either through an independent nominating committee or through a vote by a majority of the company’s independent directors. Under the Companies Law, there is no requirement to have a nominating committee or that board nominees be approved by independent directors.
Independent Directors. Under Nasdaq rules, a majority of the board of directors must be independent. Under the Companies Law, there is no requirement that a majority of the board be independent, rather only that at least two directors meet certain independence requirements and be classified as external directors for purposes of the Companies Law. See “Item 6.C.—Board Practices—External Directors.”
Except as stated above, we intend to substantially comply with the rules applicable to U.S. companies listed on the Nasdaq. We may in the future decide to avail ourselves of other foreign private issuer exemptions with respect to some or all of the other Nasdaq rules from which exemptions are available to foreign private issuers. Following our home country governance practices, as opposed to the requirements that would otherwise apply to a company listed on Nasdaq, may provide less protection than is accorded to investors under Nasdaq rules applicable to domestic issuers.
Israeli law imposes a duty of care and a duty of loyalty on all directors and officers of a company. The duty of care requires a director or officer to act with the level of care with which a reasonable director or officer in the same position would have acted under the same circumstances. The duty of care includes, among other things, a duty to use reasonable means, under 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 other important information pertaining to such action. The duty of loyalty requires the director or officer to act in good faith and for the benefit of the company. The duty of loyalty includes a duty to:
The Companies Law requires that an office holder promptly disclose to the board of directors any personal interest that he or she may be aware of and all related material information or documents concerning any existing or proposed transaction with 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. Pursuant to Israeli law, the disclosure requirements regarding personal interests that apply to directors and executive officers also apply to a controlling shareholder of a public company. In the context of a transaction involving a shareholder of the company, a controlling shareholder also includes a shareholder who holds 25% or more of the voting rights in the company if no other shareholder holds more than 50% of the voting rights in the company. For this purpose, the holdings of all shareholders who have a personal interest in the same transaction will be aggregated. For a description regarding who is considered to have a personal interest, see “Item 6.C.—Board Practices—Board Committees.”
Under the Companies Law, a related party transaction may be approved only if it is for the benefit of the company. A transaction that is not an Extraordinary Transaction in which a director or officer has a personal interest requires the approval of the board of directors, unless the articles of association of the company provide otherwise. If the transaction is an Extraordinary Transaction, it must be approved by the audit committee and the board of directors, and, under certain circumstances, by the shareholders of the company, as well. An Extraordinary Transaction is a transaction other than in the ordinary course of business, other than on market terms or that is likely to have a material impact on the company’s profitability, assets or liabilities.
Extraordinary Transactions in which a controlling shareholder has a personal interest require the approval of the audit committee (or, in the case of compensation, indemnification or insurance of a controlling shareholder, the compensation committee), the board of directors and the shareholders of the company. The shareholder approval must be by a simple majority of all votes cast, provided that (i) such majority includes a simple majority of the votes cast by shareholders having no personal interest in the matter or (ii) the total number of votes of shareholders mentioned in clause (i) above who voted against such transaction does not exceed 2% of the total voting rights in the company. To the extent that any such transaction with a controlling shareholder is for a period extending beyond three years and under certain conditions, five years from a company’s initial public offering, approval is required at the end of such period unless, with respect to certain transactions, the audit committee determines that the duration of the transaction is reasonable given the circumstances related thereto.
The Companies Law generally prohibits any director who has a personal interest in an Extraordinary Transaction from being present for the discussion and voting pertaining to such transaction in the audit committee or board of directors, except in circumstances where the majority of the board of directors or the audit committee has a personal interest in the transaction, in which case such transaction also requires shareholder approval.
Pursuant to regulations promulgated under the Companies Law, certain transactions with a controlling shareholder or his or her relative, or with directors or other office holders, that would otherwise require approval of a company’s shareholders may be exempt from shareholder approval under certain conditions.
Under the Companies Law, we are required to adopt a compensation policy with respect to our directors and officers once every three years, provided however that the compensation policy adopted within nine months from the closing of the Company’s initial public offering is valid for five years. The compensation policy must serve as the basis for decisions concerning the financial terms of employment or engagement of office holders, including compensation, benefits, exculpation, insurance and indemnification. The compensation policy must take into account certain factors, including advancement of the company’s objectives, the company’s business plan and its long-term strategy, and creation of appropriate incentives. It must also consider, among other things, the company’s risk management, size and the nature of its operations. The compensation policy must include certain principles, such as: a link between variable compensation and long-term performance and measurable criteria; the relationship between variable and fixed compensation; and the minimum holding or vesting period for variable, equity-based compensation.
Following the recommendation of our compensation committee, the compensation policy must be approved by our board of directors and shareholders. The shareholder approval must be by a simple majority of all votes cast, provided that (i) such majority includes a simple majority of the votes cast by non-controlling shareholders having no personal interest in the matter or (ii) the total number of votes of shareholders mentioned in clause (i) above who voted against such transaction does not exceed 2% of the total voting rights in the company. Even if shareholders do not approve the compensation policy, the board of directors may resolve to approve the compensation policy, subject to certain conditions. We have adopted a compensation policy on September 27, 2018.
In general, the compensation terms of directors, the chief executive officer and any employee or service provider who is considered a controlling shareholder must be approved by the compensation committee, the board of directors and the shareholders. Shareholder approval is not required for director compensation payable in cash up to the maximum amount set forth in the regulations governing the compensation of external directors. The compensation terms of other officers who report directly to the chief executive officer require the approval of the compensation committee and the board of directors (subject to certain exceptions), and under certain circumstances may require shareholder approval.
Pursuant to the Companies Law, a shareholder has a duty to act in good faith and in a customary manner toward the company and other shareholders and to refrain from abusing his or her power in the company, including, among other things, in voting at a general meeting and at shareholder class meetings with respect to the following matters:
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.