F-1/A 1 df1a.htm AMENDMENT NO. 8 TO FORM F-1 Amendment No. 8 to Form F-1
Table of Contents

As filed with the Securities and Exchange Commission on August 2, 2010.

REGISTRATION No. 333-167079

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

AMENDMENT NO. 8

TO

 

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

D. MEDICAL INDUSTRIES LTD.

(Exact name of registrant as specified in its charter)

 

State of Israel   3841   Not Applicable

(State or other jurisdiction of

incorporation or organization)

  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)

7 Zabotinsky St.

Moshe Aviv Tower

Ramat-Gan 52520

Israel

+972 (3) 611-4514

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Corporation Service Company

1180 Avenue of the Americas, Suite 210

New York, NY 10036

(800) 927-9801

(Name, address, including zip code and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Cheryl V. Reicin, Esq.
Torys LLP
237 Park Avenue
New York, New York 10017.3142 U.S.A.
Tel: (212) 880-6000
Fax: (212) 682-0200
  Yoram L. Cohen, Adv.
Dana Livneh-Zemer, Adv.
Yoram L. Cohen, Ashlagi, Eshel
Amot Investments Tower
17th Floor – 2 Weizman St.
Tel-Aviv 64239
Israel
Tel: +972 (3) 6931900
Fax: +972 (3) 6931919
   C. Brophy Christensen, Jr., Esq.
O’Melveny & Myers LLP
Two Embarcadero Center
28th Floor
San Francisco 94111
California U.S.A
Tel: (415) 984-8793
Fax: (415) 984-8701
  Benjamin M. Sandler, Adv.
Barry P. Levenfeld, Adv.
Yigal Arnon & Co.
22 Rivlin St.
PO Box 69
Jerusalem 91000
Israel
Tel: +972 (2) 6239200
Fax: +972 (2) 6239233

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.  ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

 
Title of each class of
securities to be registered
  Proposed maximum aggregate
offering price (1)(2)
  Amount of registration fee

Ordinary shares, par value NIS 0.32 per share (3)

  $      25,875,000   $      1,844.89

Warrants to purchase ordinary shares (4)

  $                   100   $             0.01

Ordinary shares, par value NIS 0.32 per share (5)

  $        1,406,250   $         100.27

Total

 

$      27,281,350

        $      1,945.16 (6)
 
 
(1) Estimated solely for the purpose of determining the amount of registration fee.
(2) In accordance with Rule 457(o) under the Securities Act, the number of ordinary shares being registered and the proposed maximum offering price per share are not included in this table.
(3) Includes ordinary shares that the underwriters may purchase to cover over-allotments, if any.
(4) Warrants of the registrant to be issued to the underwriters, exercisable to purchase ordinary shares equal to 5% of the ordinary shares sold in the offering, excluding ordinary shares that the underwriters may purchase to cover over-allotments, if any.
(5) Ordinary shares issuable to the underwriters upon exercise of warrants of the registrant described in (4) above.
(6) Previously paid.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the Securities and Exchange Commission declares this registration statement effective. This prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

 

PRELIMINARY PROSPECTUS

SUBJECT TO COMPLETION, DATED AUGUST 2, 2010

 

 

LOGO

D. Medical Industries Ltd.

1,875,000 Ordinary Shares

 

 

We are offering ordinary shares, par value NIS 0.32 per share, or our ordinary shares.

This is the initial public offering of our ordinary shares in the United States. We currently expect the initial public offering price of our ordinary shares to be between US$10.00 and US$12.00 per ordinary share.

Our ordinary shares are listed in Israel on the Tel-Aviv Stock Exchange, or the TASE, under the symbol “DMDC.” On July 29, 2010, the closing price of our ordinary shares on the TASE was NIS 36.05 per ordinary share, or US$9.51 per ordinary share, based on the representative rate of exchange on July 29, 2010 as published by the Bank of Israel, being NIS 3.789 = US$1.00, and after giving effect to a 32-for-one reverse stock split of our ordinary shares that we effected on April 28, 2010.

We have applied to have our ordinary shares listed on The NASDAQ Capital Market under the symbol “DMED.”

 

 

Investing in our ordinary shares involves certain risks. See “Risk Factors” beginning on page 11 of this prospectus for a discussion of information that should be considered in connection with an investment in our securities. Neither the Securities and Exchange Commission nor any other regulatory body, including any state securities commission, has approved or disapproved of an investment in these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

     Per
Ordinary
Share
   Total

Public offering price

   US$    US$

Underwriting discounts and commissions(1)

   US$    US$

Proceeds, before expenses, to us

   US$    US$
(1) See “Underwriting” for a description of compensation payable to the underwriters.

We have granted a 45-day option to Rodman & Renshaw, LLC and ThinkEquity LLC, or the underwriters, to purchase up to an additional 281,250 ordinary shares, or the over-allotment shares, from us at the initial public offering price less the underwriting discounts and commissions to cover over-allotments, if any, on the same terms as set forth in this prospectus. If the underwriters exercise their right to purchase all of such additional ordinary shares, we estimate that we will receive additional gross proceeds of approximately US$3,094 thousand from the sale of our ordinary shares being offered and net proceeds of approximately US$2,837 thousand after deducting approximately US$257 thousand for underwriting discounts and commissions, based on an assumed public offering price of US$11.00 per ordinary share, the midpoint of the range shown above. The ordinary shares issuable upon exercise of the underwriters’ option are identical to those offered by this prospectus and have been registered under the registration statement of which this prospectus forms a part.

In connection with the offering of our ordinary shares under this prospectus, or this offering, we have also agreed to issue to the underwriters warrants to purchase a number of our ordinary shares equal to 5% of our ordinary shares sold in this offering, excluding the over-allotment shares, exercisable at a price per ordinary share equal to 125% of the initial public offering price per ordinary share and expiring five years from the effective date of the registration statement of which this prospectus forms a part. The ordinary shares issuable upon exercise of the underwriters’ warrants are identical to those offered by this prospectus and have been registered under the registration statement of which this prospectus forms a part.

 

 

The underwriters expect to deliver our ordinary shares to purchasers in this offering on or about                     , 2010.

 

 

          Rodman & Renshaw, LLC   ThinkEquity LLC          

 

The date of this prospectus is                     , 2010


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LOGO


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You should rely only on the information contained in this prospectus and any free writing prospectus which we file with the Securities and Exchange Commission, or the SEC. We have not, and the underwriters have not, authorized anyone to provide you with information different from that contained in this prospectus or any such free writing prospectus. We are offering to sell, and seeking offers to buy, our ordinary shares only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our ordinary shares.

 

 

TABLE OF CONTENTS

 

Prospectus Summary

   1

Risk Factors

   11

Forward-Looking Statements

   44

Reverse Stock Split

   46

Price Range of Our Ordinary Shares

   47

Exchange Rate Information

   48

Use of Proceeds

   49

Dividend Policy

   50

Capitalization

   51

Dilution

   52

Selected Consolidated Financial Data

   53

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   55

Industry

   75

Business

   82

Health, Regulatory, Environment and Pricing

   99

Management

   113

Related Party Transactions

   130

Principal Shareholders

   137

Description of Share Capital

   139

Shares Eligible for Future Sale

   146

Israeli Taxation and Government Programs

   148

Material United States Federal Income Tax Consequences

   153

Enforceability of Civil Liabilities

   157

Underwriting

   158

Other Expenses of Issuance and Distribution

   166

Legal Matters

   166

Experts

   166

Where You Can Find Additional Information

   167

Index to Audited Consolidated Financial Statements

   F-1

 

 

 

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PROSPECTUS SUMMARY

You should read the following summary together with the entire prospectus. This summary may not contain all of the information that you should consider before deciding to invest in our ordinary shares. You should read this entire prospectus carefully, including the risks of investing in our ordinary shares that we discuss under “Risk Factors” and including the more detailed information in “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” and our consolidated financial statements and related notes appearing elsewhere in this prospectus. In this prospectus, unless the context otherwise requires, the term “D. Medical” refers to D. Medical Industries Ltd., and the terms the “Company,” “we,” “us,” and “our” refer to D. Medical Industries Ltd. and its subsidiaries, Nilimedix Ltd., or Nilimedix, G-Sense Ltd., or G-Sense, and Medx-Set Ltd., or Medx-Set. The term “NIS” refers to new Israeli Shekels, and the terms “dollar,” “US$” or “$” refer to U.S. dollars. Unless otherwise indicated, U.S. dollar translations of NIS amounts presented in this prospectus are translated using the rate of NIS 3.713 to US$1.00, the representative rate of exchange as of March 31, 2010 as published by the Bank of Israel. Unless otherwise indicated, we have adjusted all of the numbers and prices relating to our ordinary shares in this prospectus to reflect a 32-for-one reverse stock split of our ordinary shares that we effected on April 28, 2010. See “Reverse Stock Split.”

D. Medical Industries Ltd.

We are a medical device company engaged through our subsidiaries in the research, development, manufacture and sale of innovative products for diabetes treatment and drug delivery. We have developed durable and semi-disposable insulin pumps, which continuously infuse insulin into a patient’s body using our proprietary spring-based delivery technology. We believe that our spring-based delivery mechanism is cost-effective compared to a motor and gear train and allows us to incorporate certain advantageous functions and design features in our insulin pumps.

The International Diabetes Federation, or the IDF, estimates that diabetes currently affects 6.4% of people worldwide and that by 2030, this percentage will have increased to 7.7%. If not treated correctly, diabetes can result in blindness, kidney failure, nervous system damage, lower-limb amputations and even death. According to various studies, including studies published in Diabetes Care’s November 1999, November 2002, June 2007 and October 2007 issues, insulin pump therapy is the most efficacious type of therapy for patients who take insulin daily. According to The Wall Street Journal, the worldwide market for insulin delivery systems (such as insulin pumps, syringes and pens) is estimated to be US$1.6 billion, with revenues increasing year-over-year.

Most currently available insulin pumps are costly and have what we believe are performance and design limitations related to their motor and gear train insulin delivery system. Our proprietary spring-based design, which eliminates the need for a motor and gear train, has allowed us to develop products that we believe offer a cost-effective treatment solution for governments and private payors. In addition, our spring-based delivery technology monitors the actual delivery of insulin and is able to detect and alert a patient to air bubbles and other adverse occurrences, such as occlusions, which could impair the accurate delivery of insulin. Furthermore, the design of our insulin pumps has allowed us to substantially reduce their size and weight and has enabled us to include all moving parts in a disposable element, which we believe reduces concerns relating to wear and tear.

We commenced sales and marketing operations in late 2009 and are currently selling our Adi durable insulin pump, or Adi insulin pump, to our distributors in the Netherlands, Belgium and the Czech Republic. During the fourth quarter of 2009, we commenced sales of our LightyDD insulin infusion sets, or LightyDD infusion sets, to our distributors in the Netherlands and Belgium. Our LightyDD infusion sets are compatible with most other manufacturers’ durable insulin pumps, but are not compatible with insulin pumps manufactured by Medtronic Inc., or Medtronic, which is the largest manufacturer of insulin pumps. During the first quarter of

 

 

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2010, we also commenced sales of our LightyDD infusion sets to our distributor in the Czech Republic. We have also engaged distributors in Sweden, Italy, Mexico and China to sell and market our products in those countries, and, subject to our receipt of the necessary regulatory approvals, we intend to begin selling our products in these markets in the near future. Our LightyDD infusion sets include unique features, such as our proprietary detach-detect mechanism, which alerts a patient when the infusion set detaches from the patient’s body. We have also developed a semi-disposable insulin patch pump, or Nilipatch insulin patch pump, and have commenced its commercialization process by transitioning it from a research and development product to a product that we can sell in large quantities. This process, which we expect to complete by the beginning of 2011, entails the finalization of our Nilipatch insulin patch pump’s commercial design and layout (which includes the incorporation of a user-friendly interface and casing into its design and the development of a manufacturing process that would allow us to manufacture it in large quantities), the launch of a marketing campaign, the identification, engagement and training of appropriate distributors, and the submission of applications for its initial regulatory approvals.

While we intend to roll out our products initially in Europe, we also plan to focus on our commercialization efforts in Brazil, Russia, India and China, or, collectively, the BRIC countries, and Mexico, and have already entered into distribution agreements with respect to Mexico and China. Although we have not obtained the required regulatory approvals and do not presently sell our products in the BRIC countries and Mexico, we believe that our spring-based design will enable us to provide a cost-effective treatment solution to governments and private payors in these markets.

Our research and development operations are ongoing and are focused on creating the next generation of our insulin pumps, including a simplified semi-disposable insulin pump specifically designed to treat Type 2 diabetes patients who typically do not begin using insulin until later in life and, therefore, are generally less amenable to complex insulin delivery technology. We are also focused on developing a device that will combine a continuous glucose monitoring system and an insulin pump on the same patch.

Additionally, through our subsidiary, NextGen Biomed Ltd., or NextGen, we hold an indirect controlling interest in Sindolor Medical Ltd., or Sindolor Medical, which is developing pain alleviation products. NextGen is a holding company, which is publicly traded on the TASE, and may invest in other medical device opportunities.

During 2009, we incurred net losses of NIS 19 million (US$5.1 million) and generated revenues of NIS 368 thousand (US$99 thousand), all of which revenues were generated during the fourth quarter of 2009. During the first quarter of 2010, we generated revenues of NIS 543 thousand (US$146 thousand) and incurred net losses of NIS 14.9 million (US$4 million), including registration costs of NIS 6 million (US$1.6 million) and fair value losses on warrants at fair value through profit or loss of NIS 2.5 million (US$0.7 million) as a component of our financial costs.

Industry Background

Diabetes is a chronic, life-threatening disease for which there is no known cure. Diabetes is caused by the body’s inability to produce or effectively utilize the hormone insulin, which prevents the body from adequately regulating blood glucose levels. The IDF estimates that diabetes currently affects 285 million people worldwide and that by 2030, diabetes will affect 438 million people worldwide.

According to the Diabetes Atlas, Fourth Edition, 2009, as published by the IDF, or the Diabetes Atlas, estimated global healthcare expenditures associated with the treatment and prevention of diabetes and its complications are expected to total at least US$376 billion in 2010 and in excess of US$490 billion by 2030. According to the Diabetes Atlas, there is a large disparity in spending for diabetes treatment among regions and countries with more than 80% of estimated global diabetes expenditures made in higher-income countries rather than in lower- and middle-income countries where over 70% of people with diabetes live.

 

 

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According to the American Diabetes Association, or the ADA, diabetes was the seventh leading cause of death listed on U.S. death certificates for adults in 2006 and can cause many short- and long-term complications if not treated properly. Diabetes is typically classified into two major groups: Type 1 diabetes and Type 2 diabetes, which account for 5 to 10% and 90 to 95%, respectively, of all diagnosed cases of diabetes in the United States. Type 1 diabetes patients must take insulin daily, while Type 2 diabetes patients may require diet and nutrition management, exercise, oral medications and/or the administration of insulin to regulate blood glucose levels. According to various studies, including studies published in Diabetes Care’s November 1999, November 2002, June 2007 and October 2007 issues, insulin pump therapy is the most efficacious type of therapy for patients who take insulin daily.

The insulin pumps currently offered by our competitors use a motor and a gear train to administer insulin. These motor and gear train insulin pumps have a long history of use and their users enjoy a familiar, well-established device. However, we believe that motor and gear train insulin pumps have certain limitations as discussed elsewhere in this prospectus. We believe that, as a result of these limitations, the utilization of insulin pump therapy still lags that of conventional insulin delivery therapies. To our knowledge, durable insulin pumps currently on the market are generally intended to be used over a period of four years, which is the standard warranty period for such devices.

Our Strengths

We are able to offer insulin pump therapy without a motor and gear train, which we believe provides us with the following competitive advantages:

Cost-Effectiveness

We believe that our spring-based design, which eliminates the need for a motor and gear train, results in a cost-effective treatment solution and will enable us to:

 

   

price our products competitively and provide governments and private payors, particularly in the BRIC countries and Mexico, with cost-effective treatment solutions; and

 

   

potentially develop a cost-effective insulin delivery device for Type 2 diabetes patients.

Since we have only recently begun sales of our Adi durable insulin pump and our LightyDD infusion sets in a limited number of countries in Europe, have not yet begun sales of our Nilipatch insulin patch pump, and have not yet executed a final manufacturing and supply agreement, we are not yet able to provide definitive information as to the costs or list prices of our products. Nevertheless, since our insulin pumps do not require a motor and gear train, we believe that we will be able to provide a cost-effective treatment solution to governments and private payors.

Ability to Monitor Delivery and Detect Adverse Events

Our proprietary spring-based delivery technology monitors the actual delivery of insulin and is able to detect and alert a patient to air bubbles and other adverse consequences, such as occlusions, which could impair the accurate delivery of insulin.

Flexibility of Design and Ease of Use and Maintenance

Our proprietary spring-based delivery technology provides us with flexibility in designing our products, allowing us to:

 

   

achieve substantial weight and size reduction in our insulin pumps, resulting in a device that is less obtrusive for patients;

 

 

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incorporate fewer movable components in our insulin pumps, resulting in greater ease of use for patients; and

 

   

design a disposable element incorporating all moving parts, which increases ease of maintenance and decreases the wear and tear on our durable insulin pumps.

Although our insulin pumps, like our competitors durable insulin pumps, are intended to be used over a four-year period (the standard warranty period for such devices), the moving parts of our insulin pumps are not susceptible to wear and tear since they are included in a disposable element which is replaced every three days.

In addition, our LightyDD infusion sets include unique features, such as our proprietary detach-detect mechanism that alerts a patient when an infusion set detaches from their body.

Our Strategy

Our goal is to gain a significant share of the worldwide market for insulin pump therapy and related disposables, primarily in the BRIC countries, Mexico and Europe. To achieve our goal, we intend to employ the following strategies:

 

   

leverage the cost-effectiveness of our spring-based design to penetrate markets in the BRIC countries and Mexico;

 

   

achieve higher margins by utilizing distributors and avoiding the costs associated with maintaining a direct sales force;

 

   

roll out our products initially in Europe;

 

   

continue our research and development efforts;

 

   

streamline our manufacturing capabilities to further minimize our material costs;

 

   

create a presence for our products in the United States; and

 

   

leverage our proprietary spring-based delivery technology for use in other drug therapies.

Our Challenges

Since we have only recently commenced sales of our products and have a limited operating history and manufacturing capabilities, we are subject to certain potential challenges, including:

 

   

we face intense competition in the medical devices industry;

 

   

our limited manufacturing capabilities may restrict or delay our ability to leverage the cost-effectiveness of our spring-based design;

 

   

our clinical trials have been limited;

 

   

our Adi insulin pump still lacks an information technology platform that will allow physicians and patients to download and manage information regarding the use of the Adi insulin pump, a feature viewed by physicians as important;

 

   

our lack of regulatory approvals in the BRIC countries and Mexico where we plan to focus our commercialization efforts; and

 

   

our current customer base is narrow and we have a limited history of the use of our products and, consequently, we may not be aware of problems and/or inefficiencies inherent in our products.

For further details and additional information regarding potential challenges we face, see “Risk Factors.”

 

 

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Reverse Stock Split

Our shareholders approved a 32-for-one reverse stock split of our ordinary shares that we effected on April 28, 2010. The 32-for-one reverse stock split also applied to our outstanding options and warrants and has been reflected in the respective exercise prices. No fractional ordinary shares, warrants or options were issued in connection with the stock split, and all such fractional interests were rounded to the nearest whole number of ordinary shares, warrants or options.

Corporate Information

Our registered office is located at 7 Zabotinsky St., Moshe Aviv Tower, Ramat-Gan 52520, Israel. Our telephone number is +972 (3) 611-4514. Our website address is www.dmedicalindustries.com and we have recently launched a new website, www.springnow.com, which is primarily intended for physicians and diabetes patients. The information on, or accessible through, our websites does not constitute part of this prospectus.

We have proprietary rights to the trademark “Nilimedix” and have applied to register the trademark “Spring” in the United States and the European Union. We reserve all rights to our trademarks, regardless of the manner in which we refer to them in this prospectus. All other trademarks, trade names and service marks appearing in this prospectus are the property of their respective owners.

Our agent for service of process in the United States is Corporation Service Company located at 1180 Avenue of the Americas, Suite 210, New York, NY 10036.

Industry and Market Data Information

This prospectus includes statistical data, market data and other industry data and forecasts, which we obtained from market research, publicly available information and independent industry publications and reports that we believe to be reliable sources. These industry publications generally state that they obtain their information from sources that they believe to be reliable, but they do not guarantee the accuracy and completeness of the information. Although we believe that these sources are reliable, we have not independently verified the information contained in such publications.

Our History and Corporate Structure

We were incorporated as a private company in the State of Israel in 1992 under the name Pe’er Lifts and Industries (92) Ltd. In January 1994, we changed our name to Ram Zur Industries Ltd. and, in August 1994, we became a public company by offering our ordinary shares to the public in Israel and listing our ordinary shares on the TASE. In January 2001, we changed our name to Arit Systems Ltd., and, in January 2005, we changed our name to our current name – D. Medical Industries Ltd.

We commenced operations as a medical device company in late 2004 through our investment in Nilimedix. We formed our subsidiaries, G-Sense and Medx-Set, in April 2005 and January 2008, respectively. Our subsidiary, NextGen, is a holding company, publicly traded on the TASE, which holds a controlling interest in Sindolor Medical through Sindolor Holdings Ltd., or Sindolor Holdings. Sindolor Medical is currently developing pain alleviation products. In May 2007, we purchased a direct interest in Sindolor Medical at the same time that Sindolor Medical acquired the intellectual property rights that it is currently using to develop pain alleviation products. As a company focused on diabetes treatment and drug delivery, we encountered difficulties raising capital for Sindolor Medical due to its focus on developing pain alleviation products. Therefore, in August 2009, we entered into agreements pursuant to which, in January 2010, we obtained a controlling interest

 

 

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in NextGen, an Israeli publicly-traded company, in consideration for, among other things, our holdings in Sindolor Medical. We believe that NextGen is better positioned than D. Medical to raise funds from the public for the activities of Sindolor Medical and potentially other companies that do not focus on diabetes treatment since investors can have a better indication as to the intended use of proceeds. NextGen may invest in other medical device opportunities in the future, but we expect that it will do so primarily as a holding company, which will allow it to maintain its ability to raise funds for different medical device companies. See “Business—Sindolor Medical” for a more detailed description of Sindolor Medical. All of our subsidiaries were incorporated in the State of Israel.

We operate mainly through our subsidiary, Nilimedix, which has developed our core proprietary technology, the spring-based delivery mechanism, and is now focused on manufacturing and marketing our Adi insulin pump, as well as the final stages of development of our Nilipatch insulin patch pump. Nilimedix also operates in conjunction with Medx-Set on manufacturing and marketing our LightyDD infusion sets. G-Sense focuses on researching and developing a continuous glucose monitoring system and intends to cooperate with Nilimedix to develop a combined continuous glucose monitoring and insulin pump device on one patch.

Our corporate structure is illustrated below:

LOGO

 

* The percentages in the chart above reflect our ownership percentages on a fully-diluted basis.
1. The other shareholders of Nilimedix are: three former employees, including Avraham Shkalim (one of Nilimedix’ founders), David Vita and Gal Eshed; Beteiligungs GmbH, a German company that performed services for Nilimedix; Art Modern Inc., a British Virgin Island’s company; Yosef Reich; and Einat Reich. These minority shareholders of Nilimedix have the right to convert their shares in Nilimedix into our ordinary shares. See “Related Party Transactions—Transactions with Our Affiliates and Associates.”
2. The other shareholder of Medx-Set is Mr. Shkalim.
3. Mr. Shkalim has the right to receive options in G-Sense as described in more detail under “Related Party Transactions—Transactions with Our Affiliates and Associates—Transactions with G-Sense.”
4. The remaining 41.8% interest in NextGen is publicly held.
5. Sindolor Medical’s minority shareholders consist of 18 shareholders, including the three former principal shareholders of Sindolor Medical who hold a combined 27.3% of Sindolor Medical on a fully-diluted basis.

 

 

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The Offering

 

Ordinary shares offered:

1,875,000 ordinary shares

 

Ordinary shares to be outstanding after this offering

7,946,367 ordinary shares

 

Over-allotment option

We have granted the underwriters a 45-day option to purchase up to an additional 281,250 ordinary shares from us at the initial public offering price less the underwriting discounts and commissions to cover over-allotments, if any, on the same terms as set forth in this prospectus.

 

Use of proceeds

We currently intend to use the net proceeds that we will receive from this offering to expand our sales and marketing operations, expand our manufacturing capabilities, finalize the research, development and commercialization of our Nilipatch insulin pump, and for working capital and general corporate purposes. We may also use a portion of the net proceeds to fund possible investments in, or acquisitions of, complementary businesses, products or technologies. We do not, however, have agreements or commitments with respect to any investment or acquisition at this time. See “Use of Proceeds.”

 

Risk factors

Investing in our ordinary shares involves a high degree of risk and purchasers of our ordinary shares may lose part or all of their investment. See “Risk Factors” and the other information included elsewhere in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our ordinary shares.

 

TASE symbol

“DMDC”

 

Proposed NASDAQ Capital Market symbol

“DMED”

 

Underwriters’ warrants

In connection with this offering, we have also agreed to issue to the underwriters warrants to purchase a number of our ordinary shares equal to 5% of our ordinary shares sold in this offering, excluding the over-allotment shares. These warrants will be exercisable for a period of four years commencing one year from the effective date of the registration statement of which this prospectus forms a part at a price per ordinary share equal to 125% of the initial public offering price per ordinary share. See “Underwriting.”

The number of ordinary shares that will be outstanding after this offering is based on 6,071,367 ordinary shares outstanding as of March 31, 2010.

The number of ordinary shares referred to above to be outstanding after this offering and, unless otherwise indicated, the other information in this prospectus excludes:

 

   

211,406 ordinary shares issuable upon the exercise of warrants outstanding as of March 31, 2010 at a weighted average exercise price of NIS 29.71 (US$8.00) per ordinary share;

 

 

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268,607 ordinary shares issuable upon the exercise of options granted to employees outstanding as of March 31, 2010 at a weighted average exercise price of NIS 28.21 (US$7.60); and

 

   

93,750 ordinary shares issuable upon the exercise of warrants to be issued to the underwriters in connection with this offering.

Unless otherwise indicated, the information in this prospectus:

 

   

reflects a 32-for-one reverse stock split of our ordinary shares that we effected on April 28, 2010; and

 

   

assumes no exercise of the underwriters’ over-allotment option to purchase up to 281,250 ordinary shares from us at the initial public offering price less the underwriting discount to cover over-allotments, if any.

 

 

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Summary Consolidated Financial Data

The following tables present our summary consolidated statements of comprehensive loss for the three years ended December 31, 2009 and our summary consolidated statements of financial position as of December 31, 2009. Our summary consolidated statements of comprehensive loss for the three years ended December 31, 2009 and our summary consolidated statements of financial position as of December 31, 2009 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. Our summary consolidated statements of comprehensive loss for the three months ended March 31, 2010 and 2009 and our summary consolidated statements of financial position as of March 31, 2010 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. We prepare our consolidated financial statements in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or the IASB. Our audited consolidated financial statements for the year ended December 31, 2008 were our first audited consolidated financial statements that were prepared in accordance with IFRS and in compliance with IFRS 1 “First Time Adoption of International Financial Reporting Standards.” Accordingly, the transition date for implementation of IFRS on our consolidated financial statements is January 1, 2007, and the comparative numbers for the year ended December 31, 2007, which are presented in our audited consolidated financial statements included elsewhere in this prospectus, were re-presented to reflect the retroactive adoption of IFRS as of the transition date. Prior to our adoption of IFRS, we prepared our consolidated financial statements in accordance with Israeli generally accepted accounting principles. Our historical results are not necessarily indicative of results to be expected in any future periods. You should read this information together with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and related notes included elsewhere in this prospectus.

Consolidated Statements of Comprehensive Loss

 

    Three months ended
March 31,
    Year ended December 31,  
    2010     2010     2009     2009     2009     2008     2007  
    (Unaudited)                          
    Convenience
translation
into US$
    NIS     Convenience
translation into  US$

(Note 1(c))
    NIS  
    (In thousands, except per share information)  

CONTINUING OPERATIONS:

             

Sales

  146      543      —        99      368      —        —     

Cost of sales

  349      1,298      —        177      657      —        —     
                                         

Gross loss

  203      755      —        78      289      —        —     

Research and development expenses, net

  607      2,252      3,056      3,553      13,193      *14,658      *8,759   

Selling and marketing expenses

  157      584      —        188      698      —        —     

General and administrative expenses

  694      2,577      816      1,498      5,563      *3,045      *2,720   

Other (income) expenses, net

  62      231      70      (192   (714   3,193      441   
                                         

Operating loss

  1,723      6,399      3,942      5,125      19,029      20,896      11,920   
                                         

Registration costs

  1,629      6,049      —        —        —        —        —     

Finance income

  (8   (29   (854   (65   (243   (1,035   (571

Fair value losses (gains) on warrants at fair value through profit or loss

  665      2,469      (390   (66   (244   (7,950   10,358   

Finance costs

  —        1      132      127      473      1,287      1,020   
                                         

Finance (income) costs, net

  657      2,441      (1,112   (4   (14   (7,698   10,807   
                                         

LOSS AND TOTAL COMPREHENSIVE LOSS FOR THE YEAR

  4,009      14,889      2,380      5,121      19,015      13,198      22,727   
                                         

ATTRIBUTABLE TO:

             

Owners of the parent

  3,863      14,345      2,495      4,965      18,435      10,040      20,744   

Minority interest

  146      544      335      156      580      3,158      1,983   
                                         
  4,009      14,889      2,830      5,121      19,015      13,198      22,727   
                                         

LOSS PER SHARE ATTRIBUTABLE TO THE EQUITY HOLDERS OF THE COMPANY DURING THE YEAR

             

Basic and Diluted

  0.72      2.69      0.57      1.05      3.89      2.41      5.87   
                                         

 

* Reclassified (2007–75,000 NIS and 2008–147,000 NIS) in order to properly reflect the classification of shipment costs.

 

 

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Consolidated Statements of Financial Position

 

     Three months ended
March 31, 2010
    Year ended
December 31, 2009
 
     (Unaudited)              
     Convenience
translation

into  US$
    NIS     Convenience
translation

into  US$
(Note 1(c))
    NIS  
    

(In thousands)

 

Cash and cash equivalents

   10,109      37,534      6,568      24,388   

Working capital

   9,387      34,854      6,042      22,435   

Intangible assets, net

   3,896      14,465      3,900      14,482   

Total assets

   15,646      58,094      11,625      43,165   

Provision for royalties to the Israeli Office of the Chief Scientist

   1,163      4,320      1,090      4,048   

Total liabilities

   3,470      12,888      3,725      13,832   

Accumulated losses

   (42,495   (157,787   (38,632   (143,442

Total equity

   12,176      45,206      7,900      29,333   

 

 

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RISK FACTORS

Investing in our ordinary shares involves a high degree of risk. You should carefully consider the following risk factors, as well as the financial and other information in this prospectus, before deciding to invest in our ordinary shares. If any of the following risks actually occurs, our business, financial condition and results of operations could be materially adversely affected. In such case, the trading price of our ordinary shares could decline and you may lose all or part of your investment in our ordinary shares.

Risks Related to Our Business

We have a history of losses, may incur future losses and may not achieve profitability.

We have incurred net losses in each fiscal year since we commenced operations as a medical device company in late 2004. We incurred net losses of NIS 19 million (US$5.1 million) in 2009, NIS 13.2 million (US$3.6 million) in 2008 and NIS 22.7 million (US$6.1 million) in 2007. For the three months ended March 31, 2010, our net losses were NIS 14.9 million (US$4 million). As of March 31, 2010, our accumulated deficit was NIS 157.8 million (US$42.5 million). Our losses could continue for the foreseeable future as we expand our commercialization efforts for our products, increase our marketing and selling expenses, continue to invest in research and development and incur additional costs as a result of being a public company in the United States. The extent of our future operating losses and the timing of becoming profitable are highly uncertain, and we may never achieve or sustain profitability.

We have a limited operating history and we may not succeed in generating significant revenues and becoming profitable.

Since commencing our operations as a medical device company, we have focused on the research and development of our products and have a limited operating history. We have only recently commenced sales of our Adi insulin pump and LightyDD infusion sets in several countries in Europe and our other products are in various stages of research and development. We may not succeed in generating significant revenues and the future success of our business cannot be determined at this time. In addition, we have very limited experience in commercializing our products and face a number of challenges with respect to our commercialization efforts, including, among others:

 

   

we may not have adequate financial or other resources;

 

   

we may fail to obtain or maintain regulatory approvals for our products in our target markets or may face adverse regulatory or legal actions relating to our products even if regulatory approval is obtained;

 

   

we may not be able to manufacture our products in commercial quantities, at an adequate quality or at an acceptable cost;

 

   

we may not be able to establish adequate sales, marketing and distribution channels;

 

   

healthcare professionals and patients may not accept our products;

 

   

we may not be aware of possible complications from the continued use of our products since we have limited clinical experience with respect to the actual use of our products;

 

   

technological breakthroughs in diabetes monitoring, treatment and prevention may reduce the demand for our products;

 

   

changes in the market for insulin pumps, new alliances between existing market participants and the entrance of new market participants may interfere with our market penetration efforts;

 

   

third-party payors may not agree to reimburse patients for any or all of the purchase price of our products, which may adversely affect patients’ willingness to purchase our products;

 

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uncertainty as to market demand may result in inefficient pricing of our products;

 

   

we may face third party claims of intellectual property infringement; and

 

   

we are dependent upon the results of ongoing clinical studies relating to our products and the products of our competitors.

The occurrence of any one or more of these events may limit our ability to successfully commercialize our products, which in turn could prevent us from generating significant revenues and could harm our business, financial condition and results of operations.

We expect to derive substantially all of our revenues in the near future from sales of a few products and our inability to successfully commercialize these products, or any subsequent decline in demand for these products, could severely harm our ability to generate revenues and become profitable.

We currently rely solely on the successful commercialization of our Adi insulin pump and LightyDD infusion sets to generate revenues and, consequently, we are vulnerable to fluctuations in demand for these products. Fluctuations in demand may be due to many factors, including, among others:

 

   

market acceptance of a new product, including healthcare professionals’ and patients’ preferences;

 

   

development of similarly cost-effective insulin pumps by our competitors;

 

   

development delays of our information technology platform that will allow physicians and patients to download and manage information regarding the use of our insulin pumps;

 

   

technological innovations in diabetes monitoring, treatment and prevention;

 

   

adverse medical events for patients using our products, whether actually resulting from the use of our products or not;

 

   

changes in regulatory policies toward insulin pumps;

 

   

changes in regulatory approval or clearance requirements for our products;

 

   

third party claims of intellectual property infringement; and

 

   

budget constraints of diabetes patients and the availability of reimbursement or insurance coverage from third-party payors for these products.

In addition, the demand for our LightyDD infusion sets may also be adversely affected by the following factors:

 

   

increases in market acceptance of insulin patch pumps, which do not require infusion sets; and

 

   

adverse responses from certain of our competitors to the offering of our LightyDD infusion sets as a generic device that is compatible with their pumps.

If we are unable to successfully commercialize our Adi insulin pump and LightyDD infusion sets, or if demand for these products declines, our business and ability to generate revenues could be severely harmed.

If we do not effectively manage our growth, our ability to increase sales and cash flow will be limited and we may not become profitable.

We have only recently begun to commercialize our Adi insulin pump and LightyDD infusion sets. If the commercialization of these and our other future products is successful, our business will need to grow. Continued growth would subject us to numerous challenges, including, among others:

 

   

implementing appropriate operational and financial systems and controls;

 

   

expanding our manufacturing capacity and scaling up production;

 

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expanding our sales and marketing capabilities;

 

   

managing our international operations effectively;

 

   

providing adequate training and supervision to maintain high quality standards; and

 

   

preserving our culture and values.

In addition, our expected growth will continue to place additional significant demands on our management and our financial and operational resources. If we are unable to manage our growth, our business, financial condition and results of operations could be harmed.

If healthcare professionals do not recommend our products to their patients, our products may not achieve market acceptance and we may not become profitable.

Diabetes patients are generally referred by their healthcare professional to a specified device and insulin pumps are purchased by prescription. If healthcare professionals, including physicians and diabetes educators, do not recommend or prescribe our products to their patients, our products may not achieve market acceptance and we may not become profitable. In addition, physicians have historically been slow to change their medical treatment practices because of perceived liability risks arising from the use of new products. Delayed adoption of our products by healthcare professionals could lead to a delayed adoption by patients and third-party payors. Healthcare professionals may not recommend or prescribe our products until, among others:

 

   

there is sufficient long-term clinical evidence to convince them to alter their existing treatment methods and device recommendations;

 

   

there are recommendations from other prominent physicians, diabetes educators and/or diabetes associations that our products are safe and effective;

 

   

we obtain favorable data from clinical studies for our products;

 

   

reimbursement or insurance coverage from third party payors is available; and

 

   

they become familiar with the complexities of an insulin pump.

We cannot predict when, if ever, healthcare professionals and patients may adopt the use of our products. Since we have only begun to commercialize our products, long-term clinical evidence is not yet available. Even if favorable data is obtained from clinical studies for our products, there can be no assurance that prominent physicians, diabetes educators and/or diabetes associations would endorse our products or that future clinical studies will continue to produce favorable data regarding our products. In addition, prolonged market experience may also be a pre-requisite to reimbursement or insurance coverage from third-party payors. If our products do not achieve an adequate level of acceptance by patients, healthcare professionals and third-party payors, we may not generate significant product revenues and we may not become profitable.

In the event that we are not successful in penetrating the markets of the BRIC countries and Mexico, we will not be able to implement a key component of our current growth strategy.

Our current growth strategy depends to a large extent on our ability to successfully commercialize our products in the BRIC countries and Mexico. However, we have limited experience in penetrating markets, in general, and no experience in penetrating the markets of the BRIC countries and Mexico, in particular. See “—We have a limited operating history and we may not succeed in generating significant revenues and becoming profitable.” Our ability to penetrate these markets is subject to a number of risks and uncertainties, including, among others, our ability to obtain required regulatory approvals, difficulties predicting trends and patient preferences, the potential for political and economic instability and the still evolving nature of healthcare systems. We also believe that the overall level of awareness of the clinical advantages of insulin pump therapy in these markets is low and that, in effect, we will need to create demand for our insulin pumps in these markets.

 

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We can provide no assurance that we will be successful in increasing awareness of the clinical advantages of insulin pump therapy in these markets or creating demand for our products. Even if we succeed in increasing such awareness, diabetes patients and third-party payors may not be able to afford even a cost-effective product if the purchasing power in these markets does not increase as we expect. As a result, we may not be able to generate substantial sales of our products in these markets. If we are unable to maximize our opportunities in the BRIC countries and Mexico, our business, financial condition and results of operations could be materially adversely affected.

We face competition from numerous competitors, most of whom have longer operating histories and far greater resources than we have, which may make it more difficult for us to achieve significant market penetration in our target markets and which may allow them to introduce competing products.

The medical device industry is intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants, particularly in the United States and Europe. Our products compete with a number of existing insulin delivery devices and other methods for the treatment of diabetes and our success depends on our ability to effectively compete in this global market. Most of our competitors are large, well-capitalized companies with significantly larger market shares and resources than we have and they are able to spend more aggressively on product development, marketing, sales and other product initiatives than we can. Medtronic MiniMed, a division of Medtronic has been the market leader in insulin pumps for many years and has a majority share of the conventional insulin pump market in the United States and Europe. Other significant suppliers in the United States are Animas Corporation, a division of Johnson & Johnson, and Roche Insulin Delivery Systems Inc., or Roche, which also holds a significant market share in Europe. Although significantly smaller in size, Insulet Corporation, or Insulet, is increasingly becoming a major participant in the medical device industry.

Many of these and other competitors have, among others:

 

   

significant brand name recognition;

 

   

established relationships with healthcare professionals, customers and third-party payors;

 

   

established distribution networks and channel penetration;

 

   

additional product lines and the ability to offer rebates or bundle products to offer higher discounts or other incentives to gain a competitive advantage; and/or

 

   

greater financial and human resources for product development, sales and marketing, customer support and intellectual property litigation.

Our ability to compete effectively in our market depends upon our ability to distinguish our company and our products from our competitors and their products based on various factors, including, among others:

 

   

product performance;

 

   

product pricing;

 

   

brand name recognition;

 

   

compliance with supply obligations and customer support;

 

   

customer retention rates;

 

   

intellectual property protection;

 

   

the success and timing of new product development and introductions; and

 

   

the development of successful distribution channels.

In addition, because most of our competitors have significantly greater product development resources than us, they or other well-capitalized companies may at any time develop additional products for the treatment of

 

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diabetes which could render our products obsolete or substantially reduce our revenues. For example, market participants are working to develop additional cost-effective insulin delivery methods, such as an insulin spray, which Generex Biotechnology Corp. has already launched in India, and an inhaled insulin product, which MannKind Corporation has developed. Although we believe that these products are less effective in treating diabetes and do not compete directly with insulin pump therapy, their successful launch could adversely affect the demand for our products and, consequently, our business, financial condition and results of operations.

With respect to diabetes treatment options, we also compete with multiple daily injection therapy, or MDI therapy, which utilizes substantially less expensive delivery methods than insulin therapy supported by our insulin pumps, such as insulin pen injectors and insulin syringe and needle sets. More recently, MDI therapy has been made more effective by the introduction of long-acting insulin analogs by both Sanofi-Aventis and Novo Nordisk A/S, and further improvements in the effectiveness of MDI therapy may result in fewer diabetes patients converting from MDI therapy to insulin pump therapy than we expect. In that case, sales of our products may be negatively affected and we may face pricing pressure to remain competitive with MDI therapy, either of which could adversely affect our business, financial condition and results of operations.

If we are unable to establish adequate sales, marketing and distribution channels with third parties, our business, financial condition and results of operations could be harmed.

We currently do not intend to establish a direct sales force to market and sell our products. Therefore, we must enter into arrangements with third parties to conduct sales and marketing activities on our behalf. Such arrangements usually result in lower profit margins for us compared to marketing and selling our products directly. We have recently entered into several agreements with distributors in Europe, China and Mexico to distribute our products and are dependent on their efforts for the successful distribution of our Adi insulin pump and LightyDD infusion sets in their respective markets. Although most of our agreements provide for exclusivity, we cannot be certain that our future agreements will be exclusive in nature. In that case, our future distributors will be able to market and sell competing products, which may harm our sales and revenues. In addition, our distributor in the Netherlands and Belgium has not agreed to distribute our products on an exclusive basis in these markets and may distribute the products of our competitors. We can provide no assurance that our current or future distributors will be successful or effective in selling and marketing our products. If we fail to create effective marketing and distribution channels, our ability to generate revenue and achieve our anticipated growth could be adversely affected. Furthermore, if these distributors experience financial or other difficulties, sales of our products could be reduced, and our business, financial condition and results of operations could be harmed.

We are dependent upon third-party suppliers, which makes us vulnerable to supply problems and price fluctuations.

We rely on a number of third-party suppliers to manufacture the components of our Adi insulin pump and LightyDD infusion sets and expect to continue to rely on such suppliers to manufacture components for our Nilipatch insulin patch pump when we begin its commercialization. Although none of our third-party suppliers is a sole-source supplier, we currently do not have a second-source supplier for any of our components. We also do not have supply agreements with our third-party suppliers and we generally make our purchases on a purchase order basis. Our third-party suppliers may encounter problems during manufacturing due to a variety of reasons, including, among others, failure to follow specific protocols and procedures, failure to comply with applicable regulations, equipment malfunctions and environmental factors, any of which could delay or impede their ability to meet our demand for components. Our reliance on third-party suppliers also subjects us to additional risks that could harm our business, including, among others:

 

   

we may not be able to obtain an adequate supply of our components in a timely manner or on commercially reasonable terms;

 

   

since we are not a major customer of many of our third-party suppliers, these suppliers may prioritize other customers’ needs over ours;

 

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our third-party suppliers, especially new suppliers, may make manufacturing errors that may not be detected by our quality assurance testing, which could negatively affect the efficacy or safety of our products or cause shipment delays due to such errors; and

 

   

our suppliers may encounter financial or other hardships unrelated to our demand, which could inhibit their ability to fulfill our orders and meet our requirements.

In the future, we may approach alternative third-party suppliers to manufacture our components. However, we can provide no assurance that a new third-party supplier will be able to manufacture exactly the same component to our custom specifications, which may require us to redesign a product and potentially re-submit an application for clearance to the FDA and other applicable regulatory authorities. Any interruption or delay in obtaining components from our third-party suppliers, or our inability to obtain products from alternate suppliers at acceptable prices in a timely manner, could impair our ability to meet the demand of our customers and cause them to cancel orders or switch to competing products, which, in turn, could harm our business, financial condition and results of operations.

In addition, after we establish the manufacturing procedures for each of our products, we may also enter into contract manufacturing arrangements with third parties to manufacture and assemble complete products. In that case, we will maintain only limited in-house manufacturing capabilities with respect to such products and our contract manufacturing arrangements may subject us to risks similar to those described above for our third-party suppliers.

We have limited manufacturing capabilities and, if we are unable to scale our manufacturing operations to meet anticipated market demand, our growth could be limited and our business, financial condition and results of operations could be harmed.

We currently have limited resources, facilities and experience in commercially manufacturing sufficient quantities of our products to meet the demand we expect from our expanded commercialization efforts. We expect to face certain technical challenges as we increase manufacturing capacity, including, among others, equipment design and automation, material procurement, lower than expected yields and increased scrap costs, as well as challenges related to maintaining quality control and assurance standards. Furthermore, we may encounter similar or unforeseen challenges initiating and later expanding production of our new products, such as our Nilipatch insulin patch pump. Although we recently entered into a letter of intent with UPG (Suzhou) EPZ Co. Ltd., or UPG, pursuant to which we agreed to negotiate a definitive manufacturing and supply agreement by mid-September of 2010 with UPG for the design for manufacturing and manufacturing of the disposable parts of our Adi durable insulin pump, our LightyDD infusion sets and our Nilipatch insulin patch pump. However, if we are unable to negotiate a definitive agreement prior to such time, we believe that either party will be able to terminate the letter of intent upon reasonable prior notice to the other party. If we are unable to scale our manufacturing capabilities to meet market demand, our growth could be limited and our business, financial condition and results of operations could be harmed.

Insulin pumps are complex medical devices that require intensive training and care; any misuse of our insulin pumps could damage our reputation, subject us to product liability claims and otherwise harm our business, financial condition and results of operation.

Insulin pumps are complex medical devices that require training and care. Although our distributors are required to ensure that our products are only prescribed for diabetes patients who have been identified as capable of properly handling such devices and only after successfully completing comprehensive user training by a competent tutor, the potential for misuse of our products still exists due to their complexity. Such misuse could result in adverse medical events for patients which could damage our reputation, subject us to costly product liability litigation and otherwise harm our business, financial condition and results of operations.

 

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Insulin pumps are automated machines susceptible to malfunction, which may result in severe adverse medical events. If manufacturers of insulin pumps are not able to reduce the occurrence of malfunctions, or if insulin pumps are perceived to be riskier than other insulin delivery devices, the market for insulin pumps may suffer and our business, financial condition and results of operations could be harmed.

Insulin pumps are automated machines susceptible to malfunction. The U.S. Food and Drug Administration, or the FDA, has recently reported that there is an increasing trend in software and hardware malfunctions in insulin pumps from several manufacturers. Since insulin pumps are used by diabetes patients who require daily intake of insulin in order to control their blood glucose levels, malfunctions in the operation of insulin pumps could result in improper blood glucose levels and lead to severe adverse medical events and even death. The FDA has examined nearly 17,000 reports of health and other problems related to insulin pumps from 2006 through 2009. Although the reports do not prove a device caused a particular problem, such reports could result in a perception among diabetes patients that insulin pumps are riskier than other insulin delivery devices. In addition, the FDA has indicated that these reports signal a need for additional investigation and additional data and information from insulin pump manufacturers when filing adverse event reports about potential insulin pump problems. In order to obtain additional data, the FDA could impose additional requirements or require additional testing of insulin pumps prior to approving or clearing the devices for use or for ensuring their continuing commercial availability. If manufacturers of insulin pumps are not able to reduce the occurrence of malfunctions or if insulin pumps are perceived to be riskier than other insulin delivery devices, the market for insulin pumps may suffer and our business, financial condition and results of operations could be harmed.

Our clinical experience to date may not have revealed certain potential long-term complications from our products, which could subject us to product liability claims if our products malfunction in the future.

Our clinical trials have been limited to relatively few patients over a relatively short period of time. For example, the durability of our Adi insulin pump, which includes technology that is new and sophisticated and is expected to operate properly over a period of four years, has not been tested over an actual period of four years but rather by an accelerated lab study. In addition, we have a limited history of the use of our products and our customer base is not wide. Therefore, we have a limited ability to discover in advance problems and/or inefficiencies concerning our products and we cannot assure you that their long-term use would not result in unanticipated complications. Furthermore, the interim results from our current pre-clinical studies and clinical trials may not be indicative of the clinical results obtained when we examine the patients at later dates. If unanticipated long-term side-effects result from the use of our products, or if our products do not function as expected over time, we could be subject to liability claims and our products would not be widely adopted.

Our products under development may not achieve market acceptance, which could adversely affect our opportunities for growth.

We consider our Nilipatch insulin patch pump to be an evolution of our Adi insulin pump and currently plan to base our U.S. market penetration and our next-generation insulin pumps on this device. If our Nilipatch insulin patch pump does not achieve market acceptance in the United States and elsewhere, our growth and ability to generate significant revenues could be limited. Our Nilipatch insulin patch pump may not achieve market acceptance for a number of reasons, including, among others:

   

market acceptance of a new product may be slow;

 

   

healthcare professionals and patients may prefer existing or other new products;

 

   

technological innovations in diabetes monitoring, treatment and prevention could limit the advantages presented by our Nilipatch insulin patch pump and/or could change the market for diabetes treatment such that the demand for insulin pump therapy is reduced;

 

   

adverse medical events for patients using our products, whether actually resulting from the use of our products or not, could limit demand for our Nilipatch insulin patch pump;

 

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changes in regulatory policies toward insulin patch pumps could limit our ability to market our Nilipatch insulin patch pump in certain markets;

 

   

third party claims of intellectual property infringement could require us to change our products or could otherwise adversely affect our ability to successfully penetrate the market; and

 

   

budget constraints of diabetes patients and the availability of reimbursement or insurance coverage from third-party payors could limit demand for insulin pump therapy.

In addition, we are continuing our research and development efforts for a continuous glucose monitoring system and a device that includes an insulin pump and continuous glucose monitoring system on one patch. If we are unable to complete the development of these devices, obtain required approvals or clearances and/or successfully commercialize them, our anticipated growth and development could be hindered. The successful development of these products subjects us to a number of challenges, including, among others:

 

   

technological challenges related to the development of a continuous glucose monitoring system, which we may not be able to overcome;

 

   

receipt of FDA and other international regulatory approval, clearance or registration for a continuous glucose monitoring system as a replacement to finger stick measurement, which, to our knowledge, has not been granted in any jurisdiction to date;

 

   

patients may not recognize the benefits of continuous glucose monitoring and may be unwilling to change their current treatment regimens;

 

   

the invasive nature of a continuous glucose monitoring system compared to self-monitored glucose testing devices, including single-point finger stick devices;

 

   

costs of disposables required for continuous glucose monitoring compared to daily finger stick measurement, which could prove significant if reimbursement by third-party payors is not available;

 

   

technological challenges related to hosting both the insulin pump and the continuous glucose monitoring system within the same minimized device, which we may not be able to overcome;

 

   

receipt of FDA and other international regulatory approval, clearance or registration for our combined device or for all of our combined device’s specifications;

 

   

the need to continually improve and upgrade a first-generation device and our ability to compile long-term clinical data; or

 

   

continued development of, or our ability to gain access to, the algorithms on which the development of a continuous glucose monitoring depends.

Substantially all of our operations are currently conducted at a single location near Haifa, Israel and any disruption at our facility could harm our business, financial condition and results of operations.

Substantially all of our operations are conducted at a single location near Haifa, Israel. We take precautions to safeguard our facility, including obtaining insurance coverage and implementing health and safety protocols and off-site storage of computer data. However, a natural or other disaster, such as a fire or flood or an armed conflict involving Israel, could damage or destroy our facility and our manufacturing equipment or inventory, cause substantial delays in our operations and otherwise cause us to incur additional unanticipated expenses. In addition, the insurance we maintain against fires, floods and other natural disasters may not be adequate to cover our losses in any particular case. Furthermore, we may not be reimbursed for losses resulting from armed conflicts or terrorist attacks in Israel. With or without insurance, damage to our facility, our other property or to any of our suppliers, whether located in Israel or elsewhere, due to fire, a natural disaster or casualty event or an armed conflict, could materially adversely affect our business, financial condition and results of operations. See also “Risks Related to Our Operations in Israel—Conditions in Israel could harm our business, financial condition and results of operations.”

 

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We intend to engage a third party service provider to develop and later manage our information technology platform, which would allow healthcare professionals and patients to download and manage the data logs from our insulin pumps. If the development of this information technology platform is not successful or completed in a timely manner, or if we do not manage the personal and health information we compile in accordance with government regulations, market acceptance of our products could be limited and we may be subject to regulatory sanctions.

We intend to engage a third party service provider to develop and later manage the information technology platform for our insulin pumps, which would allow healthcare professionals and patients to download and manage the data logs from our insulin pumps. This information technology platform is preferred by physicians who need to review, monitor and adjust the diabetes treatment of their patients based on the performance of their respective insulin pumps. An information technology platform helps physicians and patients review, analyze, and evaluate historical blood glucose test results, insulin dosages, and carbohydrate intake data. Recording and analyzing this information over time can enable an effective diabetes management program and improve a patient’s glucose control, and is therefore viewed as an important feature of an insulin pump. To our knowledge, most of our competitors’ products already offer this functionality. We cannot currently estimate when we will be able to engage a third party service provider to develop an information technology platform for our insulin pumps or when we will be able to offer it to physicians and patients using our products. If the development of our information technology platform is not successful or completed in a timely manner, market acceptance of our insulin pumps may be limited due to the importance of this feature.

After the third-party service provider has completed the development of our information technology platform, we expect that it will also manage the platform’s operation and continue to upgrade its performance. This information technology platform is expected to hold personal and health information of a patient. The confidentiality of such information is generally protected by government regulations, which prescribe civil and criminal liabilities if violated. If our information technology platform does not properly protect patient information, demand for our products could be harmed and we may be subject to civil and criminal sanctions, which could materially adversely affect our business, financial condition and results of operations. See also “Risks Related to Our Industry Regulation and Pricing—If we are found to have violated laws protecting the confidentiality of patient health information, we could be subject to civil or criminal penalties, which could increase our liabilities and damage our reputation or otherwise materially adversely affect our business, financial condition and results of operations.”

We intend to sell our products worldwide and, if we are unable to manage our international operations, our business, financial condition and results of operations could be harmed.

Our headquarters and all of operations and employees are located in Israel but we intend to market our products globally. Accordingly, we are subject to risks associated with global operations and our international sales and operations will require significant management attention and financial resources. In addition, our international sales and operations will subject us to risks inherent in international business activities, many of which are beyond our control and include, among others:

 

   

foreign certification, registration and other regulatory requirements;

 

   

customs clearance and shipping delays;

 

   

import and export controls;

 

   

trade restrictions (mostly in Arab countries);

 

   

multiple and possibly overlapping tax structures;

 

   

difficulty forecasting the results of our international operations and managing our inventory due to our reliance on third-party distributors;

 

   

differing laws and regulations, business and clinical practices, third-party payor reimbursement policies and patient preferences;

 

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differing intellectual property protection among countries;

 

   

difficulties staffing and managing our international operations;

 

   

difficulties in penetrating markets in which our competitors’ products are more established;

 

   

currency exchange rate fluctuations; and

 

   

political and economic instability, war or acts of terrorism.

If we are unable to manage our international operations effectively, our business, financial condition and results of operations could be harmed.

Technological breakthroughs in diabetes monitoring, treatment or prevention could reduce the demand for our insulin pumps; if we are unable to successfully complete the development and commercialization of our combined continuous glucose monitoring and insulin pump device, we could be at a competitive disadvantage.

Diabetes treatment is subject to rapid technological change and product innovation. Our ability to become and remain competitive depends in large part upon our ability to develop and market cost-effective new products and technologies that meet diabetes patients’ needs in a timely manner. A number of companies, including existing pharmaceutical companies and medical researchers, are pursuing new insulin delivery devices, delivery technologies, sensing technologies, procedures, drugs and other therapies for monitoring, treating and/or preventing insulin-dependent diabetes. Successful developments by our competitors or others could reduce the demand for our insulin pumps. Furthermore, if we are unable to successfully complete the development of our continuous glucose monitoring system and a device that will host both our insulin pump and continuous glucose monitoring system on one patch, we may be at a competitive disadvantage and our business, financial condition and results of operations could be harmed.

Consolidation in the healthcare industry could materially adversely affect our future revenues and operating income.

The medical device industry has experienced a significant amount of consolidation resulting in increased competition and pricing pressures. In addition, group purchasing organizations and integrated health delivery networks have served to concentrate purchasing decisions for some customers, which has placed additional pricing pressure on medical device manufacturers and suppliers. Further consolidation in the industry and concentrated purchasing decisions could exert additional pressure on the prices of our products and could harm our future revenues and operating income.

We may be subject to product liability lawsuits, which could result in expensive and time-consuming litigation, payment of substantial damages, and an increase in our insurance rates.

If our current or future products are found to be defectively designed, manufactured or labeled, or contain defective components or are misused, or if someone claims any of the foregoing, whether or not meritorious, we may become subject to substantial and costly litigation. Any misuse of our devices or failure to adhere to the operating guidelines of our insulin pumps and our insulin infusion sets could cause significant harm to patients, including death. In addition, if our operating guidelines are found to be inadequate, we may be subject to liability claims. Such claims could divert management’s attention from day-to-day responsibilities, be expensive to defend and result in sizable damage awards against us. We maintain product liability insurance to protect against these risks, but we may not have sufficient insurance coverage for all future product liability claims. Any such claims brought against us, whether or not meritorious, could increase our product liability insurance rates or prevent us from securing continuing coverage at reasonable rates, or at all, could damage our reputation in the industry and could reduce our revenues. Product liability claims in excess of our insurance coverage would be paid out of cash reserves, which could harm our business, financial condition and results of operations.

 

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We may require additional funding in order to complete the commercialization of our Adi insulin pump and LightyDD infusion sets and the development and commercialization of our other products under development.

Our current operations have consumed substantial amounts of cash. We expect that we will need to continue to spend substantial amounts in order to complete the commercialization of our Adi insulin pump and LightyDD infusion sets and the development of our Nilipatch insulin patch pump and combined continuous glucose monitoring and insulin pump device. Although we intend to use a portion of the net proceeds of this offering to finance some of these operations, we currently expect that we may need to raise additional funds in the future. Additional financing may not be available to us on a timely basis on terms acceptable to us, or at all. In addition, any additional financing may be dilutive to our shareholders or may require us to grant a lender a security interest in our assets.

Furthermore, if adequate additional financing on acceptable terms is not available, we may not be able to commercialize our Adi insulin pump and LightyDD infusion sets at the rate we desire and we may have to delay development or commercialization of our other products. Alternatively, we may be required to license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize on our own. We also may have to reduce marketing, customer support or other resources devoted to our products. Any of these factors could harm our business, financial condition and results of operations.

We depend on third parties to manage our pre-clinical and clinical studies and trials and to perform related data collection and analysis and, as a result, we may face costs and delays that are outside of our control.

Development of medical devices includes pre-clinical studies and, to the extent required by regulatory authorities, clinical trials. We rely on third parties, including clinical investigators and clinical sites, to manage our pre-clinical studies and clinical trials and to perform related data collection and analysis. Although we have contractual arrangements with these third parties, we may not be able to control the amount and timing of resources that these parties devote to our studies and trials. If these third parties fail to properly manage our studies and trials, we will be unable to complete them, which could prevent us from obtaining regulatory approvals for our products or achieving market acceptance of our products.

Our business is subject to complex environmental legislation that may increase our costs and our risk of noncompliance.

Our research and development and manufacturing processes involve the handling of potentially harmful biological and other hazardous materials. We are subject to local laws and regulations governing the use, handling, storage and disposal of these materials, and we incur expenses related to compliance with these laws and regulations. If we are found to have violated environmental, health and safety laws, whether as a result of human error, equipment failure or other causes, we could be held liable for damages, penalties and costs of remedial actions which could materially adversely affect our business, financial condition and results of operations. In the future, we could be subject to additional environmental requirements or existing environmental laws could become more stringent, which may impose greater compliance costs and increasing risks and penalties associated with violations. For example, changes to, or restrictions on, permitting requirements or processes, hazardous or biological material storage or handling might require an unplanned capital investment or relocation. If we fail to comply with existing or new environmental laws or regulations, our business, financial condition and results of operations could be harmed.

We may engage in future acquisitions that could disrupt our business, divert management attention, increase our expenses or otherwise harm our business, financial condition and results of operations.

In the future, we may acquire complementary businesses, products, technologies or other assets. If we engage in future acquisitions, we may not strengthen our competitive position or achieve any of our intended

 

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goals or synergies with respect to any such acquisition. In addition, any such acquisition may be viewed negatively by our customers, financial markets or investors. Furthermore, any such acquisition could pose challenges with respect to the integration of personnel, technologies and operations from the acquired businesses and in the retention and motivation of key personnel from such businesses. Acquisitions may also disrupt our ongoing operations, divert management’s attention from day-to-day responsibilities, increase our expenses and otherwise harm our business, financial condition and results of operations.

As a foreign private issuer under the U.S. securities laws with shares to be listed on The NASDAQ Capital Market, or NASDAQ, we will be permitted to follow our home country corporate governance practices instead of certain NASDAQ Marketplace Rules.

As a foreign private issuer under the U.S. securities laws with shares to be listed on NASDAQ, we will be permitted to comply with our home country corporate governance practices instead of certain NASDAQ Marketplace Rules. We intend to follow Israeli law and practice instead of the applicable NASDAQ Marketplace Rules regarding the number of independent directors on our board of directors, the composition of our compensation committee, the director nominations process and the requirements relating to quorum and timing of our annual meetings, proxy solicitations, review of related-party transactions and shareholder approval for certain dilutive events. Accordingly, our shareholders may not enjoy the same protection intended to be afforded by the NASDAQ Marketplace Rules.

Instead, we intend to rely on the exemptions from the NASDAQ Marketplace Rules requiring that the majority of our board of directors be independent, that the compensation of executive officers be determined or recommended to the board by a committee comprised solely of independent directors, and that director nominees be selected, or recommended for the board of directors’ selection, either by a majority of the independent directors or a committee comprised solely of independent directors. Instead, we will follow Israeli law that requires two of our directors to be external directors (who will also be “independent” as defined by the NASDAQ Marketplace Rules), our compensation committee to be comprised solely of directors, including at least one external director, and our directors will be recommended by our board of directors for election by our shareholders.

We also intend to comply with Israeli law and practice with respect to the following shareholders’ meeting matters:

 

   

our quorum for shareholders’ meetings is set at 25% of the voting power of our ordinary shares, compared to 33 1/3% of the outstanding shares of a company’s common stock under the NASDAQ Marketplace Rules;

 

   

we are required to solicit proxies only with respect to certain matters brought before a shareholders’ meeting, such as the election or dismissal of directors and the approval of related-party transactions and mergers, compared to the solicitation of proxies for all matters brought before a shareholders’ meeting under the NASDAQ Marketplace Rules; and

 

   

our annual shareholders’ meeting must be convened not later than 15 months after the previous annual meeting, compared to not later than one year after the end of a company’s fiscal year-end under the NASDAQ Marketplace Rules.

In addition, the NASDAQ Marketplace Rules require that we obtain shareholder approval for certain dilutive events, such as for the establishment or amendment of certain equity-based compensation plans and arrangements, an issuance that will result in a change of control of a company, certain transactions other than a public offering involving issuances of a 20% or more interest in a company and certain acquisitions of the stock or assets of another company. Under Israeli law and practice, in general, the approval of the board of directors is required for the establishment or amendment of equity-based compensation plans and arrangements, unless the arrangement is for the benefit of a director, or a controlling shareholder, in which case audit committee and shareholder approvals are also required. Similarly, the approval of the board of directors is generally sufficient for a private placement unless the private placement involves a director, a controlling shareholder or is deemed a “significant private placement” (as defined in “Management—NASDAQ Marketplace Rules and Home Country Practices”), in which case shareholder approval, and, in some cases, audit committee approval, would also be required.

 

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A foreign private issuer that elects to follow a home country practice instead of the applicable NASDAQ Marketplace Rules must submit to NASDAQ in advance a written statement from an independent counsel in such issuer’s home country certifying that the issuer’s practices are not prohibited by the home country’s laws. In addition, a foreign private issuer must disclose in its annual reports filed with the SEC each such requirement that it does not follow and describe the home country practice followed by the issuer instead of any such requirement. For further information, see “Management—NASDAQ Marketplace Rules and Home Country Practices.”

We are subject to the requirements of Israeli law relating to internal controls and procedures and will be subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. We can provide no assurance that we will be able to comply with these requirements in a timely manner or that we will not discover a material weakness with respect to our internal control over financial reporting under Israeli and U.S. laws.

Pursuant to Section 404 of the Sarbanes-Oxley Act, following our initial public offering and beginning with our annual report for the year ending December 31, 2011, our management will be required to deliver a report that assesses the effectiveness of our internal control over financial reporting, and our auditors will be required to deliver an attestation report on management’s assessment of, and the operating effectiveness of, our internal control over financial reporting. In addition, we are already subject to the Israeli requirements relating to internal controls and procedures and have commenced documenting our material procedures in compliance with these requirements. We believe that we still have a substantial effort ahead of us to implement appropriate processes, document the system of internal control over key processes, assess their design, remediate any deficiencies identified and test their operation pursuant to both Israeli and U.S. requirements. Furthermore, in order to comply with U.S. requirements, we will have to expand the scope of the internal control assessment performed under Israeli requirements, since U.S. requirements require an issuer to assess all business processes which relate to material accounts. However, under Israeli law the threshold for determining which process to assess is much higher and, therefore, many business processes that are required to be assessed under U.S. law are not required to be assessed under Israeli law.

We can provide no assurance that we will be able to timely and successfully complete the procedures, certification and attestation requirements of the applicable Israeli and U.S. laws in connection with internal control over financial reporting. In addition, we cannot be certain that all material weaknesses will be revealed and corrected or that additional material weaknesses will not be identified in the future in connection with our compliance with these requirements. The existence of one or more material weaknesses would preclude a conclusion by our management that we maintain effective internal control over financial reporting. If we fail to comply with the requirements of Israeli law and Section 404 of the Sarbanes-Oxley Act, or if we or our independent registered public accounting firm identify and report a material weakness, it may affect the reliability of our internal control over financial reporting.

As a foreign private issuer, we are permitted to file less information with the SEC than a company incorporated in the United States. Accordingly, there may be less publicly available information concerning us than there is for companies incorporated in the United States.

As a foreign private issuer, we are exempt from certain rules under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which impose disclosure requirements, as well as procedural requirements, for proxy solicitations under Section 14 of the Exchange Act. In addition, our officers, directors and principal shareholders are exempt from the reporting and ‘‘short-swing’’ profit recovery provisions of Section 16 of the Exchange Act. Moreover, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act, nor are we generally required to comply with Regulation FD, which restricts the selective disclosure of material nonpublic information. Accordingly, there may be less information publicly available concerning us than there is for U.S. public companies.

 

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Adverse changes in general economic conditions in all major markets could harm us.

We are subject to the risks arising from adverse changes in general economic market conditions. The world economy remains extremely sluggish as it seeks to recover from a severe recession and unprecedented economic turmoil in recent years. This turmoil and the uncertainty about future economic conditions could materially adversely affect our current and prospective customers, the financial ability of health insurers to pay claims and our ability to finance our operations. This turmoil and the uncertainty about future economic conditions could also cause delays or other problems with key suppliers and increase the risk of counterparty failures. We cannot predict the timing, strength or duration of this severe global economic downturn or of any subsequent recovery.

Healthcare spending in the United States and elsewhere has been, and is expected to continue to be, negatively affected by these recessionary trends. Since the sale of our products is generally dependent on the availability of third-party reimbursement and normally requires the patient to make a significant co-payment, the impact of the recession on our potential customers may reduce the desirability of our products.

In addition, the severe recession has impacted the financial stability of many private health insurers. As a result, it has been reported that some insurers are scrutinizing claims more rigorously and delaying or denying reimbursement for new products. Since we hope to obtain third-party reimbursement for our products, we may be harmed by these changes.

For other factors that could adversely affect healthcare spending and the medical device industry, see “Risks Related to Our Industry Regulation and Pricing – Healthcare reform legislation in the United States and elsewhere could adversely affect our revenue and financial condition.”

The failure to attract and retain qualified personnel could harm our business, financial condition and results of operations.

Our success depends in large part on our ability to continue to attract, retain and motivate qualified engineers and other highly skilled technical personnel. We may be unable to continue to attract and retain sufficient numbers of highly skilled employees, including for our key managerial positions, which could harm our business, financial condition and results of operations.

Risks Related to Our Industry Regulation and Pricing

We conduct business in a heavily regulated industry and if we fail to comply with applicable laws and government regulations, we could suffer penalties or be required to make significant changes to our operations.

The healthcare industry is subject to extensive laws and regulations relating to:

 

   

quality and safety of medical equipment and services;

 

   

billing for services;

 

   

financial relationships with physicians and other referral sources, such as diabetes educators;

 

   

inducements and courtesies being given to patients;

 

   

confidentiality, maintenance and security issues associated with medical records and individually identifiable health information;

 

   

false claims;

 

   

professional licensing; and

 

   

labeling and packaging of products and language and content of instructions for use.

 

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These laws and regulations are extremely complex, can vary by country, and, in some cases, are still evolving. In many countries, the healthcare industry does not have the benefit of significant regulatory or judicial interpretation of these laws and regulations.

We believe that we currently are in compliance with all applicable healthcare industry regulations and laws of the countries in which we operate, but regulatory authorities that enforce the various statutes may determine that we are currently, or in the future may be, violating these laws and we may need to restructure some of our operations.

In the European Economic Association, or the EEA, the advertising and promotion of our products is subject to EEA Member States laws implementing the Directive 93/42/EEC concerning Medical Devices, or the Medical Devices Directive, the Directive 2006/114/EC concerning misleading and comparative advertising, and Directive 2005/29/EC on unfair commercial practices, as well as other EEA Member State legislation governing the advertising and promotion of medical devices. These laws may restrict the advertising and promotion of our products to the general public and may also impose limitations on our promotional activities with healthcare professionals.

We intend to eventually commence commercial operations in the United States and will then be subject to, among others, the federal anti-kickback law and similar state laws, which prohibit payments that are intended to induce physicians or other healthcare professionals either to refer patients or to acquire or arrange for or recommend the acquisition of healthcare products or services. These laws could constrain our sales, marketing and other promotional activities by limiting the kinds of financial arrangements, including sales programs, we may have with hospitals, physicians or other potential purchasers of medical devices. Other federal and state laws generally prohibit individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other third-party payors that are false or fraudulent, or for items or services that were not provided as claimed. Because we may provide some coding and billing information to purchasers of our products, and because we cannot be certain that the U.S. government will regard any billing errors that may be made as inadvertent, these laws are potentially applicable to us. In addition, these laws may apply to us because we intend to provide reimbursement to healthcare professionals for training patients on the use of our products. Anti-kickback and false claims laws prescribe civil and criminal penalties for noncompliance, which can be substantial. Even an unsuccessful challenge or investigation into our practices could cause adverse publicity and/or be costly to respond to, either of which could have a material adverse effect on our business, financial condition and results of operations.

In addition, healthcare laws and regulations may change significantly in the future. We try to monitor these developments through our distributors, who are contractually obligated to inform us of all relevant developments. Any new healthcare laws or regulations could restrict our operations or otherwise harm our business, financial condition and results of operations.

If we are found to have violated laws protecting the confidentiality of patient health information, we could be subject to civil or criminal penalties, which could increase our liabilities and damage our reputation or otherwise materially adversely affect our business, financial condition and results of operations.

Our insulin pumps accumulate data regarding the patient’s use of the pump. We intend to develop an information technology platform that will allow a patient and his or her physician to download and manage the patient’s information, including health information and personally identifiable information. Countries in which we currently operate or intend to operate in the near future prescribe a number of laws protecting the confidentiality of certain patient health information, including patient records, and restricting the use and disclosure of that protected information. In the EEA, the use, handling, disclosure and processing of patient health-related personal data is strictly regulated by EEA Member State laws implementing Directive 95/46/EC on the protection of individuals with regard to the processing of personal data and on the free movement of such data, or the EU Data Protection Directive. In the United States, the U.S. Department of Health and Human

 

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Services promulgated patient privacy rules under the Health Insurance Portability and Accountability Act of 1996, or HIPAA. These privacy rules protect medical records and other personal health information by limiting their use and disclosure, giving individuals the right to access, amend and seek accounting of their own health information and limiting most uses and disclosures of health information to the minimum amount reasonably necessary to accomplish the intended purpose. Moreover, we may be subject to similar privacy protection laws and regulations in the other countries in which we intend to operate in the near future. Some of these countries have broad patient privacy protections, while others may regulate the protection of medical information more narrowly or may not have specific laws and regulations addressing patient privacy protections at all. For example, in the Russian Federation, the Law on Fundamentals of the Civic Health Protection, or the Civic Health Law, provides for the special medical secrecy regime. Under this regime, medical records, diagnoses and other personal information obtained in connection with patient examination or treatment, including the mere fact of a patient seeking medical attention, may not be generally disclosed. In addition, personal information is subject to general safe-keeping rules prescribed by the Federal Law on Personal Data. In Brazil, Resolution 196/1996 of the Brazilian Council of Health governs patient privacy protections in clinical research, including the confidentiality of patients’ identity, image, privacy and personal information. In India, the right to privacy is recognized by the Indian Constitution, and the specific right to medical privacy is governed by the Indian Medical Council and similar laws that require the confidentiality of patient information and prohibit disclosure except in certain enumerated circumstances. In Mexico, patient identity and health information is protected under the Clinical Records Official Regulation and the Federal Law for the Protection of Personal Data in Possession of the Private Sector, which prohibit the disclosure of patient health information to third parties only in very limited circumstances and protect the confidentiality of personal data, including health information. Although China does not have an established body of laws that systematically protects the confidentiality of patient health information, a new law on the Liability for Infringement of Rights was enacted for implementation on July 1, 2010. The law recognizes, for the first time, the right to privacy, although the scope of such right has yet to be defined. Specifically, the law requires medical institutions and staff to maintain the privacy of their patients’ medical information.

If we are found to be in violation of the privacy rules under the laws of any of these jurisdictions, we or our employees could be subject to civil or criminal penalties, which would increase our liabilities and damage our reputation or otherwise harm our business, financial condition and results of operations.

If we fail to obtain and maintain necessary regulatory clearances for our products and indications in our target markets, if clearances for future products and indications are delayed or not issued, or if there are regulatory changes in our existing or future target markets, our commercial operations could be harmed.

Our products are medical devices subject to extensive regulations which are meant to assure their safety, effectiveness and compliance with applicable consumer laws. If we fail to obtain and maintain these regulatory approvals or clearances, our ability to sell our products and generate revenues will be materially harmed.

These laws and regulations relate to the design, development, testing, manufacturing, storage, labeling, packaging, content and language of the instructions for use of the device, sale, promotion, distribution, importing and exporting, shipping, post-sale surveillance and recall from our products’ markets, and all countries in which we intend to sell our products apply some form of regulations of this kind. Most notably, we must comply with the Medical Devices Directive and are subject to extensive regulation in the United States by the FDA and other federal, state and local authorities. Devices that comply with the requirements of the Medical Devices Directive are entitled to bear the CE conformity mark, indicating that the device meets minimum standards of performance, safety and quality (i.e., the essential requirements) and, accordingly, can be commercially distributed throughout the EEA and Turkey and other countries outside Europe that have accepted the CE marking as a certification of efficiency and safety of medical devices. To obtain a CE mark for the types of medical devices that we manufacture we must implement a quality management system, or QMS, and create a Technical File demonstrating compliance with the requirements of the Medical Devices Directive. The QMS and Technical File must be audited by a third-party assessing body, or a notified body, who, if the audit is successful, will issue an

 

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EC Certificate. We must then draw up a Declaration of Conformity stating that our products conform to the type described in the EC Certificate and with the provisions of the Medical Devices Directive, and must affix the CE marking to all of our products marketed in the EEA.

The Medical Devices Directive has been recently amended by Directive 2007/47/EC whose provisions had to be adopted by the EU Member States by March 21, 2010. Directive 2007/47/EC has strengthened the EEA’s conformity assessment and post-marketing surveillance procedures. The European Commission is also currently reviewing the medical devices legislative framework with the aim of simplifying it and ensuring a more uniform application of the provisions contained in the Directives across the EEA. These adopted or expected regulatory changes may adversely affect our business, financial condition and results of operations or restrict our operations.

Furthermore, since we intend to distribute our products in the BRIC countries and Mexico, we will also have to obtain the necessary regulatory approvals, registrations or certifications for marketing and distribution in these countries. Moreover, in some countries, including Brazil, Russia, and China, approvals, registrations or certifications are only valid for a limited period of time after which we must file re-registrations or seek renewal. The regulatory frameworks for marketing and distributing medical devices in these jurisdictions are complex, and we cannot assure you that we will ultimately be granted or able to maintain the necessary approvals, registrations or certifications to market and distribute our products there. Furthermore, the laws in a number of the BRIC countries may change significantly in the future. We are aware of proposed legislation in several of these countries which, if enacted, could affect the regulation of our products in those countries. For example, in 2006, the Indian government proposed a bill known as the Medical Devices Regulation Bill which would consolidate the laws related to medical devices and establish the Medical Device Regulatory Authority of India. If the Medical Devices Regulation Bill becomes law, it may have a significant impact on the procedure to market our medical devices in India. Specifically, if passed, the Medical Devices Regulation Bill will require that any medical device imported into India satisfies prescribed requirements of essential principles of safety and performance. A device manufacturer will be required to ensure that the medical device imported into India satisfies the requirements of the Act, rules and regulations made thereunder, at all stages of production, processing, import, distribution and sale. Similarly, in China, there are a number of proposed administrative regulations and departmental rules which, if adopted in their current forms, would include the creation of new procedures for manufacturing processes, would require that foreign devices receive requisite marketing approvals in the exporting country prior to registering the device in China, and would require additional support documentation for marketing approval requests. We are also aware that draft legislation in Russia entitled the Technical Rules for Medical Purpose Devices and Supplies Safety, or the Russian Safety Law, has been introduced to the Russian Parliament. We believe that the Russian Safety Law is in an early stage of development and it is unclear if or when it would be adopted or whether the proposed legislation will be significantly revised. If enacted in its current form, the Russian Safety Law is aimed at setting unified rules for safety and state control of medical purpose wares, including medical devices, as well as at harmonizing Russian regulation with similar rules of the World Trade Organization and takes the Global Harmonization Task Force recommendations into account. While we try to monitor changes and developments, any new healthcare laws or regulations could materially adversely affect our business, financial condition and results of operations or restrict our operations.

Our first generation Adi insulin pump received FDA 510(k) clearance on June 8, 2008, CE mark certification on November 21, 2007 and an Amar approval, the required regulatory approval in Israel, on November 11, 2008, while our LightyDD infusion sets and Nilipatch insulin patch pump received CE mark certification on March 20, 2009 and September 1, 2009, respectively. On January 14, 2010, we filed a 510(k) premarket notification for our LightyDD infusion sets, which is currently pending with the FDA. We also received Amar approval in Israel for the LightyDD infusion sets on November 4, 2009. We cannot guarantee when or if we will receive clearance of this 510(k) notification from the FDA. In addition, we are currently in the process of applying for regulatory approvals in Mexico and China with respect to our Adi insulin pump and LightyDD infusion sets, and we are in the process of applying for regulatory approval in Mexico for our Nilipatch insulin pump. Compliance with the requirements of the European Union or approval or clearance by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one foreign

 

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regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA. If we fail to obtain the necessary regulatory approvals or clearances in countries where we intend to distribute our products, our commercial operations could be harmed. For additional information regarding the regulatory requirements applicable to us, see “Health, Regulatory, Environment and Pricing.”

We expect to eventually generate a portion of our revenues from sales of our products in the United States. Before a new medical device, or a new use of, or claim for, an existing product can be marketed in the United States, it must first receive either 510(k) clearance or premarket approval, or PMA, from the FDA, unless an exemption applies. In the 510(k) clearance process, the FDA must only determine that the proposed device is “substantially equivalent” to a device legally on the market, known as a “predicate” device, with respect to intended use, technology and safety and effectiveness in order to clear the proposed device for marketing. Clinical data is sometimes required to support substantial equivalence. The PMA pathway requires an applicant to demonstrate the safety and effectiveness of the device based, in part, on the data obtained in clinical trials. Both of these processes can be expensive and lengthy. The FDA’s 510(k) clearance process usually takes from three to 12 months, but it can last longer. The PMA pathway is much more costly and uncertain than the 510(k) clearance process and it generally takes from one to three years, or even longer, from the time the application is filed with the FDA. Since no precedent for FDA approval of a continuous glucose monitoring system as a replacement for single-point finger stick devices has been established, we may be required to obtain premarket approval for our continuous glucose monitoring and insulin pump device. We cannot assure you that the FDA will not demand that we obtain a PMA for our continuous glucose monitoring system or some of our other future products or that we will be able to obtain the 510(k) clearance for our Nilipatch insulin patch pump and LightyDD infusion sets.

The FDA can delay, limit or deny approval of an application for many reasons, including, among others:

 

   

we may not be able to demonstrate to the FDA’s satisfaction that our products are safe for their intended users;

 

   

the data from our pre-clinical studies and clinical trials may be insufficient to support approval;

 

   

the manufacturing process or facilities we use may not meet applicable requirements; and

 

   

changes in FDA approval policies or the adoption of new regulations may require additional data.

We may not obtain the necessary regulatory approvals to market our combined continuous glucose monitoring system and insulin pump device in the United States or elsewhere. Even if approved, our combined device may not be approved for the indications that are necessary or desirable for successful commercialization. Any delay in, or failure to receive or maintain, approval for our products under development could prevent us from generating revenue from these products or achieving profitability.

Even after we receive regulatory clearances, regulators can potentially revoke such clearances.

Even after we receive required clearances or approvals, our clearances can be revoked if safety or effectiveness problems develop or if we modify any of our products in a manner that would significantly affect their safety or effectiveness or that would constitute a major change in their intended use. We may not be able to obtain additional regulatory clearances for new products or for modifications to, or additional indications for, our existing products in a timely fashion, or at all. Delays in obtaining future regulatory clearances or approvals may result in recalls of the modified products, may require us to stop marketing the modified products, and could adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn could harm our revenue and future profitability.

If the relevant regulatory agency disagrees with our assessments and requires new regulatory clearances or approvals for modifications, we may be required to recall and to stop marketing the modified devices.

 

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Although we have complied with the requirements of the Medical Devices Directive and our products being commercialized are CE marked, the regulations implementing and enforcing the Medical Devices Directive are drafted individually in each Member State of the EEA, which sometimes interprets the provisions of the Medical Devices Directive differently. This can mean that complying with the regulations of one Member State does not automatically guarantee compliance in others, and it does not ensure against interference from other competent authorities.

We are subject to annual audits by a notified body under the Medical Devices Directive. During this audit, the notified body examines the maintenance and implementation of our quality control system, device post marketing feedback and any changes or modifications made to the products. In addition, we must also comply with the Medical Device Vigilance System, which is intended to improve the protection of health and safety of patients, users and others by reducing the likelihood of reoccurrence of incidents related to the use of a medical device. Under this system, incidents (which are defined as any malfunction or deterioration in the characteristics and/or performance of a device, as well as any inadequacy in the labeling or the instructions for use which, directly or indirectly, might lead to or might have led to the death of a patient, or user or of other persons or to a serious deterioration in their state of health) are evaluated and, where appropriate, information is disseminated between the national health authorities of the EEA in the form of a National Competent Authority Report, or NCAR. The Medical Device Vigilance System is also intended to facilitate a direct early and harmonized implementation of Field Safety Corrective Actions, or FSCAs, across the Member States where the device is in use. An FSCA is an action taken by a manufacturer to reduce a risk of death or serious deterioration in the state of health associated with the use of a medical device that is already placed on the market. An FSCA may include device recall, modification, exchange, or destruction. FSCAs must be notified by the manufacturer as its legal representative to its customers and/or the end users of the device.

In the United States, we will also be subject to numerous post-marketing regulatory requirements, which include quality system regulations related to the manufacturing of our devices, labeling regulations and medical device reporting regulations, and require us to report to the FDA if our devices cause or contribute to a death or serious injury or malfunction in a way that would likely cause or contribute to a death or serious injury. Our products and/or their use will also be subject to state regulations, which are, in many instances, in flux. Changes in state regulations may impede sales. We cannot predict the impact or effect of future legislation or regulations at the federal or state levels.

In the United States, the FDA and state authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements or to take satisfactory corrective action in response to an adverse inspection by the FDA could result in enforcement action by the FDA or state agencies, which may include any of the following sanctions:

 

   

warning letters, fines, injunctions, consent decrees and civil penalties;

 

   

repair, replacement, refund, recall or seizure of our products;

 

   

issuing an import alert to block entry of products the FDA has reason to believe violate applicable regulatory requirements;

 

   

operating restrictions or partial suspension or total shutdown of production;

 

   

refusing our requests for 510(k) clearance or premarket approval of new products, new intended uses, or modifications to existing products;

 

   

withdrawing 510(k) clearance or premarket approvals that have already been granted; and

 

   

criminal prosecution.

We believe that most of the countries where we intend to distribute our products apply some form of regulations and enforcement measures of this kind. For example, in Brazil we are required to implement a Quality Management System in compliance with Brazil’s Good Manufacturing Practices, or GMPs, and beginning in May 2010, the Brazilian regulatory authority, Agência Nacional De Vigilância Sanitária, or

 

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ANVISA, will perform worldwide, on-site inspections at the manufacturer’s facilities for manufacturers of Class III and IV devices and issue GMP compliance certificates. These GMP compliance certificates must be renewed every two years although companies may complete a “self-inspection” process provided that no non-conformities have been found and no incidents have been reported during intermediate years between inspections which are anticipated to occur every four years. In Mexico, our devices will also be required to comply with mandatory labeling standards, as well as the requirements of the Mexican technovigilance system, including adverse event reporting. Failure to comply with the applicable regulatory requirements in any country in which we intend to market our product could result in enforcement measures, including the rescission or withdrawal of our approvals, registrations or clearances.

If any one of these events were to occur, our business, financial condition and results of operations could be materially adversely affected.

Additionally, the manufacturing of our products must occur in a highly controlled and clean environment to minimize particles and other yield- and quality-limiting contaminants from contaminating our products. Weaknesses in process control or minute impurities in materials may cause a substantial percentage of defective products in a lot. If we are unable to maintain stringent quality controls, or if contamination problems arise, our commercialization efforts could be delayed and our ability to meet market demand could be seriously hindered, which could have a material adverse effect on our business, financial conditions and results of operations.

Our current or future products are subject to recalls even after receiving regulatory clearances, which could damage our reputation and have a material adverse effect on our business, financial condition and results of operations.

The FDA and similar governmental bodies in other countries have the authority to require the recall of our current or future products if we, our component suppliers, or, in the future, our contract manufacturers, fail to comply with relevant regulations pertaining to the procedures and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of our products, or if new information is obtained concerning the safety or efficacy of these products. Any recall of our products could materially disrupt our operations and materially adversely affect our results of operations. A government-mandated recall could occur, for example, if a regulatory body finds that there is a reasonable probability that the device would cause serious, adverse health consequences or death. In the EEA, Member State authorities can take interim measures ordering the withdrawal of devices from the market or prohibiting or restricting their introduction to the market if they consider that when correctly installed, maintained and used for their intended purpose, the devices may compromise the health and/or safety of patients, users or other persons. A voluntary recall of any of our products by us could occur as a result of manufacturing defects, labeling deficiencies, packaging defects or other failures to comply with applicable regulations. Any recall of our products would divert our management’s attention and financial resources and damage our reputation with customers. A recall involving our Adi insulin pump or our LightyDD infusion sets would be particularly harmful to our business, financial condition and results of operations because we currently rely on them as our only source of revenue from operations.

If we are unable to successfully complete pre-clinical studies or clinical trials with respect to our products in development, we may be unable to receive regulatory approvals or clearances for these products and/or our ability to achieve market acceptance of our products will be harmed.

Development of medical devices includes pre-clinical studies and, to the extent required by regulatory authorities, clinical trials, which can be long, expensive and uncertain processes, subject to delays and failure at any stage. In addition, the data obtained from the studies and trials may be inadequate to support regulatory clearances or approvals or to allow market acceptance of the products being studied. Our combined continuous glucose monitoring and insulin pump is currently undergoing pre-clinical studies and we expect that it will have to undergo a clinical trial.

 

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The commencement or completion of any of our pre-clinical studies or trials may be delayed or halted, or be inadequate to support regulatory clearance or product acceptance, for numerous reasons, including, among others:

 

   

patients do not enroll in the clinical trial at the rate we expect;

 

   

patients do not comply with trial protocols;

 

   

patient follow-up is not at the rate we expect;

 

   

patients experience adverse side effects;

 

   

patients die during a clinical trial, even though their death may not be related to our products;

 

   

the FDA or other regulatory authorities do not approve a clinical trial protocol or a clinical trial, or place a clinical trial on hold;

 

   

institutional review boards, or IRBs, ethics committees and third-party clinical investigators may delay or reject our trial protocol;

 

   

third-party clinical investigators decline to participate in a study or trial or do not perform a study or trial on our anticipated schedule or consistent with the investigator agreements, study or trial protocol, good clinical practices or other FDA or IRBs, ethics committees, or any other applicable requirements;

 

   

third-party organizations do not perform data collection, monitoring and analysis in a timely or accurate manner or consistent with the study or trial protocol or investigational or statistical plans;

 

   

regulatory inspections of our studies, trials or manufacturing facilities may, among others, require us to undertake corrective action or suspend or terminate our studies or clinical trials;

 

   

changes in governmental regulations or administrative actions;

 

   

the interim or final results of the study or clinical trial are inconclusive or unfavorable as to safety or efficacy; and

 

   

a regulatory agency concludes that our trial design is inadequate to demonstrate safety and efficacy.

The results of pre-clinical studies do not necessarily predict future clinical trial results, and predecessor clinical trial results may not be repeated in subsequent clinical trials. Additionally, the FDA, EEA, or other regulatory entities may disagree with our interpretation of the data from our pre-clinical studies and clinical trials, or may find the clinical trial design, conduct or results inadequate to demonstrate safety or efficacy, and may require us to pursue additional pre-clinical studies or clinical trials, which could further delay the clearance or approval of our products. The data we collect from our current clinical trials, our pre-clinical studies and other clinical trials may not be sufficient to support regulatory clearance or approval.

Failure to secure or retain adequate coverage or reimbursement for our products by third-party payors could harm our business, financial condition and results of operations.

We expect that sales of our products will be limited unless a substantial portion of the sales price of the products is paid for by third-party payors, including governmental agencies, private insurance companies, health maintenance organizations, preferred provider organizations and other managed care providers. Although the costs of insulin pump therapy and supplies are generally reimbursable in high-income countries, we may need to meet certain requirements to have our products covered and/or may have to agree to a net sales price lower than the net sales price we might otherwise charge. Our initial dependence on the commercial success of our insulin pumps makes us particularly susceptible to any cost containment or price reduction efforts. In addition, in some foreign markets, pricing and profitability of medical devices are subject to government control. Furthermore, there can be no assurance that third-party reimbursement and coverage will be available or adequate in either Europe, the BRIC countries, Mexico, Israel, the United States or any other international market, or that future legislation, regulation or reimbursement policies of third-party payors will not otherwise negatively affect the demand for our existing products or products under development.

 

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We believe that in the future reimbursement will be subject to increased restrictions in the United States and in other international markets. Healthcare market initiatives may lead third-party payors to decline or reduce reimbursement for the products. We further believe that the overall escalating cost of medical products and services will continue to lead to increased pressures on the healthcare industry, both domestically and internationally, to reduce the cost of products and services, including our current products and products under development.

Moreover, compliance with administrative procedures or requirements of third-party payors may result in delays in processing approvals by those payors for patients to obtain coverage for the use of our products.

Healthcare reform legislation in the United States and elsewhere could harm our revenues and financial condition.

From time to time, the U.S. Congress and other foreign legislative bodies consider legislation that could significantly change the statutory provisions governing the regulatory clearance or approval, manufacture and marketing of a device. In addition, regulations and regulatory guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted or if regulations, guidance or interpretations will be changed, and what the impact of such changes, if any, may be.

In recent years, there have been numerous initiatives on the federal and state levels for comprehensive reforms affecting the payment for, the availability of, and reimbursement for, healthcare services in the United States. These initiatives have ranged from proposals to fundamentally change federal and state healthcare reimbursement programs, including providing comprehensive healthcare coverage to the public under governmental funded programs, to minor modifications to existing programs.

In March 2010, President Obama signed one of the most significant healthcare reform measures in decades. The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, or, collectively, the PPACA, substantially changes the way healthcare is financed in the United States by both governmental and private insurers, and significantly impacts the medical device industry. The comprehensive $940 billion overhaul is expected to extend coverage to approximately 32 million previously uninsured Americans.

We anticipate the PPACA will significantly affect how the healthcare industry operates in relation to Medicare, Medicaid and the insurance industry. The PPACA contains a number of provisions, including those governing enrollment in federal healthcare programs, reimbursement changes and fraud and abuse, which will impact existing government healthcare programs and will result in the development of new programs, including Medicare payment for performance initiatives and improvements to the physician quality reporting system and feedback program. There can be no assurance that the PPACA will not harm our business and financial results, and we cannot predict how future federal or state legislative or administrative changes relating to healthcare reform would affect our business.

One effect of the PPACA is the establishment of an excise tax on the medical device industry. The law would impose on taxable medical devices a tax equal to 2.3% of the price for which the device is sold for devices sold after December 31, 2012. The PPACA also creates a new nonprofit corporation known as the “Patient-Centered Outcomes Research Institute” to assess the comparative effectiveness of therapeutic products, including medical devices. It is unclear what impact the excise tax proposal or the comparative effectiveness analysis would have on our products or our financial results. These reforms may harm our business, financial condition and results of operations.

 

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Risks Related to Our Intellectual Property

If we are unable to protect our intellectual property rights, our competitive position could be harmed.

Our success and ability to compete depends in large part upon our ability to protect our intellectual property. We have submitted several patent applications in various countries, usually including the United States, the European Community, Israel and Canada, with respect to the processes on which the novelty of our products depends. We face several risks and uncertainties in connection with our intellectual property rights, including, among others:

 

   

pending and future patent applications may not issue as patents or, if issued, may not issue in a form that will be advantageous to us;

 

   

any issued patents may be challenged, invalidated or legally circumvented by third parties;

 

   

our patents may not be upheld as valid and enforceable or prevent the development of competitive products;

 

   

for a variety of reasons, we may decide not to file for patent protection; and

 

   

the laws of certain countries in which we intend to sell our products, including China, may not protect our intellectual property rights to the same extent as the laws of the United States, Europe or Israel.

Consequently, our competitors could develop, manufacture and sell products that directly compete with our products, which could decrease our sales and diminish our ability to compete effectively. In addition, competitors could attempt to develop their own competitive technologies that fall outside of our intellectual property rights. If our intellectual property does not adequately protect us from our competitors’ products and methods, our competitive position could be materially adversely affected.

In addition, we intend to establish, build and strengthen our brand name “Spring” and believe that by doing so, we will be more successful in marketing our products. We have applied to register “Spring” as our trademark in the European Union and in the United States. However, our ownership and use of the “Spring” brand name may be challenged, invalidated or legally circumvented by third parties, in which case our growth strategy may be hindered.

Our efforts to protect our intellectual property may be less effective in some countries where intellectual property rights are not as well protected as in the United States.

The laws of some countries do not protect proprietary rights to the same degree as the laws of the United States and there is a risk that our ability to protect our proprietary rights may not be adequate in these countries. Many companies have encountered significant problems in protecting their proprietary rights against copying or infringement in such countries, some of which are countries in which we intend to sell our products. In particular, the application of laws governing intellectual property rights in China is uncertain and evolving and could involve substantial risks to us. If we are unable to adequately protect our intellectual property rights in China, our attempts to penetrate the Chinese market may be harmed. In addition, our competitors in China and these other countries may independently develop similar technology or duplicate our products, even if unauthorized, which could potentially reduce our sales in these countries and harm our business, financial condition and results of operations.

The steps we have taken to protect our intellectual property may not be adequate, which could have a material adverse effect on our ability to compete in the market.

In addition to patents, we rely on confidentiality, non-compete, non-disclosure and assignment of inventions provisions, as appropriate, with our employees, consultants and, to some extent, our distributors, to protect and otherwise seek to control access to, and distribution of, our proprietary information. These measures may not be adequate to protect our intellectual property from unauthorized disclosure, third-party infringement or misappropriation, for the following reasons:

 

   

the agreements may be breached, may not provide the scope of protection we believe they provide or may be determined to be unenforceable;

 

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we may have inadequate remedies for any breach;

 

   

trade secrets and other proprietary information could be disclosed to our competitors; or

 

   

others may independently develop substantially equivalent or superior proprietary information and techniques or otherwise gain access to our trade secrets or disclose such technologies.

Specifically with respect to non-compete agreements, under current U.S. and Israeli law, we may be unable to enforce these agreements, in whole or in part, and it may be difficult for us to restrict our competitors from gaining the expertise that our former employees gained while working for us. For example, Israeli courts have recently required employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of the employer which have been recognized by the courts, such as the secrecy of a company’s confidential commercial information or its intellectual property. If we cannot demonstrate that harm would be caused to us, we may be unable to prevent our competitors from benefiting from the expertise of our former employees.

If, for any of the above reasons, our intellectual property is disclosed or misappropriated, it could harm our ability to protect our rights and could have a material adverse effect on our business, financial condition and results of operations.

Third-party claims of infringement or other claims against us could require us to redesign our products, seek licenses, or engage in future costly intellectual property litigation, which could negatively affect our future business and financial performance.

Substantial litigation over intellectual property rights exists in the medical device industry. We expect that we may be subject to third-party infringement claims as our revenues increase, the number of competitors grows and the functionality of products and technology in different industry segments converges. Third parties may currently have, or may eventually be issued, patents on which our current or future products or technologies may infringe. We are aware of certain patents and patent applications owned by our competitors that cover different aspects of insulin infusion and the related devices. Any of these third parties might make a claim of infringement against us. For example, we recently received a letter from a third party relating to a European patent that purports to cover a certain mechanism used in the integrated infusion set of our Adi insulin pump for the insertion of the cannula through which insulin is infused into a patient’s body. In this letter, the third party requested that we disclose why we believe that our mechanism does not infringe this European patent and also indicated that it is willing to consider granting us a license against the payment of a royalty. After consulting with our European patent attorney, we are of the opinion that our insertion mechanism does not infringe any valid claim of this patent. We also have the option of using a generic inserter. Any litigation with respect to this letter or otherwise, regardless of its outcome, would likely result in the expenditure of significant financial resources and the diversion of management’s time and resources. In addition, litigation in which we are accused of infringement may cause negative publicity, adversely impact prospective customers, cause product shipment delays, prohibit us from manufacturing, marketing or selling our current or future products, require us to develop non-infringing technology, make substantial payments to third parties or enter into royalty or license agreements, which may not be available on acceptable terms, or at all. If a successful claim of infringement were made against us and we could not develop non-infringing technology or license the infringed or similar technology in a timely and cost-effective manner, our ability to generate significant revenues may be substantially harmed and we could be exposed to significant liability. A court could enter orders that temporarily, preliminarily or permanently enjoin us or our customers from making, using, selling, offering to sell or importing our current or future products, or could enter an order mandating that we undertake certain remedial activities. Claims that we have misappropriated the confidential information or trade secrets of third parties can similarly harm our reputation, business, financial condition or results of operations.

We may also become involved in litigation in connection with our brand name rights. We do not know whether others will assert that our brand name infringes their trademark rights. In addition, names we choose for our products may be claimed to infringe names held by others. If we have to change the names we use, we may experience a loss in goodwill associated with our brand name, customer confusion and a loss of sales.

 

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We may need to initiate lawsuits to protect or enforce our patents and other intellectual property rights, which could be expensive and, if we lose, could cause us to lose some of our intellectual property rights, which would harm our ability to compete in the market.

We rely on patents to protect a portion of our intellectual property and our competitive position. Patent law relating to the scope of claims in the technology fields in which we operate is still evolving and, consequently, patent positions in the medical device industry are generally uncertain. In order to protect or enforce our patent rights, we may initiate patent litigation against third parties, such as infringement suits or interference proceedings. Any lawsuits that we initiate could be expensive, take significant time and divert management’s attention from other business concerns, and the outcome of litigation to enforce our intellectual property rights in patents, copyrights, trade secrets or trademarks is highly unpredictable. Litigation also puts our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing. In addition, we may provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, including attorney fees, if any, may not be commercially valuable. The occurrence of any of these events could harm our business, financial condition and results of operations.

Risks Related to Our Operations in Israel

Conditions in Israel could harm our business, financial condition and results of operations.

We are incorporated under Israeli law and our principal offices, research and development facilities and some of our suppliers are located in Israel. Accordingly, political, economic and military conditions in Israel directly affect our business. Since the State of Israel was established in 1948, a number of armed conflicts have occurred between Israel and its Arab neighbors. Although Israel has entered into various agreements with Egypt, Jordan and the Palestinian Authority, there has been an increase in unrest and terrorist activity, which began in September 2000 and has continued with varying levels of severity until now. In mid-2006, a war took place between Israel and Hezbollah in Lebanon, resulting in thousands of rockets being fired from Lebanon up to approximately 50 miles into Israel, including into Haifa where our facility is located. In addition, the establishment in 2006 of a government in the Palestinian Authority by representatives of the Hamas militant group has created additional unrest and uncertainty in the region. Furthermore, several countries, principally in the Middle East, still restrict doing business with Israel and Israeli companies, and additional countries may impose restrictions on doing business with Israel and Israeli companies if hostilities in Israel continue or increase. These restrictions may materially limit our ability to sell our products to companies in these countries. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners, or a significant downturn in the economic or financial condition of Israel, could adversely affect our operations and product development, cause our revenues to decrease and adversely affect the share price of publicly traded companies having operations in Israel, such as us, or otherwise adversely affect business conditions and our operations. Moreover, parties with whom we do business may decline to travel to Israel during periods of heightened unrest or tension, forcing us to make alternative arrangements when necessary. The political and security situation in Israel may also result in parties with whom we have agreements involving performance in Israel claiming that they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions in the agreements. Finally, any hostilities involving Israel could have a material adverse effect on our facilities or on the facilities of our local suppliers in which event, all or a portion of our inventory may be damaged, and our ability to deliver products to customers could be materially adversely affected. Our commercial insurance does not cover losses that may occur as a result of events associated with the security situation in the Middle East. Although the Israeli government currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained or, if maintained, will be sufficient. Any losses or damages incurred by us could harm our business, financial condition and results of operations.

Our operations may be disrupted by the obligations of personnel to perform military service.

As of July 22, 2010, we had 72 employees, including management, all of whom were based in Israel. Our employees in Israel, including executive officers, may be called upon to perform up to 31 days (in some cases

 

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more) of annual military reserve duty until they reach age 49 and, in emergency circumstances, could be called to active duty. In response to increased tension and hostilities in the region, there have been occasional call-ups of military reservists since September 2000, including in connection with the mid-2006 war in Lebanon, 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 have a material adverse effect on our business and results of operations. In addition, the absence of a significant number of the employees of our suppliers related to military service or the absence for extended periods of one or more of their key employees for military service may disrupt their operations, which could have a material adverse effect on our ability to deliver products to our customers.

Pursuant to the terms of the government grants we have received for research and development expenditures through the Office of the Chief Scientist, we are obligated to pay certain royalties to the Israeli government from sales of our products, which affects our results of operations. In addition, the amount of royalties will increase if we decide to manufacture our products abroad or transfer technologies outside of Israel, which could negatively affect our cost of production or future transactions with respect to our products. If we fail to comply with the conditions of the grants, we may be required to refund grants previously received together with interest and penalties, and may be subject to criminal charges.

We have received grants from the government of Israel through the Office of the Chief Scientist of the Ministry of Industry, Trade and Labor, or the Office of the Chief Scientist, for the financing of a portion of our research and development expenditures in Israel pursuant to the Encouragement of Industrial Research and Development Law 5744-1984, or the Research and Development Law. Under the Research and Development Law and our approved plans, royalties on the revenues derived from sales of all of our products are payable to the Israeli government, at an annual rate of 3% for the first three years of sales and 3.5% thereafter, up to the aggregate amount of the grants received as adjusted for fluctuations in the U.S. dollar/NIS exchange rate and for changes in the London Interbank Offered Rate, or LIBOR. Royalties are paid on our consolidated revenues. As of March 31, 2010, provision for royalties to the Office of the Chief Scientist was NIS 4,320 thousand (US$1,163 thousand), including accrued interest. Payment of royalties will affect our results of operations.

In addition, we recently entered into a letter of intent with UPG pursuant to which we agreed to negotiate a definitive manufacturing and supply agreement with UPG for the design for manufacturing and manufacturing of the disposable parts of our Adi durable insulin pump, our LightyDD infusion sets and our Nilipatch insulin patch pump. Under the Research and Development Law, manufacturing of products abroad, as well as the transfer of technologies outside of Israel, require the prior approval of the Office of the Chief Scientist and will result in an increase of the amount owed to the Israeli government by the recipient of the grants and the rate of royalty repayment. In the event that manufacturing is transferred abroad, the increase in the amount owed to the Israeli government depends on the volume of manufacturing expected to be performed outside of Israel. If less than 50% of the manufacturing activity is performed outside of Israel, the amount owed will increase to 120% of the grant received; if more than 50% but less than 90% of the manufacturing activity is performed outside of Israel, the amount owed will increase to 150% of the grant received; and if more than 90% of the manufacturing activity is performed outside of Israel, the amount owed will increase to 300% of the grant received (all linked to the U.S. dollar plus LIBOR). In our case, the manufacturing activity currently expected to be performed outside of Israel pursuant to our anticipated manufacturing and supply agreement with UPG constitutes more than 50% but less than 90% of our manufacturing activity and, consequently, the amount of royalties that we owe to the Israeli government will increase to 150% of our total grants (excluding the grants provided to G-Sense) (i.e., US$2,643 thousand taking into account actual grants received by Nilimedix to date (not including grants receivables), linked to the U.S. dollar plus LIBOR, not on a capitalized basis). However, we may transfer more of our manufacturing activity abroad in the future and, therefore, may be liable to pay the Israeli government up to 300% of our total grants. In addition, royalties owed after manufacturing is transferred abroad are payable out of sales of the products for which the applicable grants were received at a rate equal to the ratio between the amounts of the grants received by Nilimedix and the total amount of grants received plus our investment in the

 

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approved plans of Nilimedix, as determined by an accountant of the Industrial Research and Development Administration (the body administering the Research and Development Law). Since the rate of royalty payment is dependent upon the volume of sales of the products for which the applicable grants were received, the timeframe for royalty payments is not set. However, as required under the Research and Development Law, we are required to analyze and file a report with the Office of the Chief Scientist regarding the volume of sales every six months until full payment of royalties owed. Royalties from sales reported on such semi-annual reports are required to be paid to the Israeli government on the date we submit the reports. In our case, the grants that Nilimedix received constituted 40% of the total amount of the approved plans on average. Accordingly, we expect a payment rate of no more than 40% of sales after the transfer of manufacturing, instead of the generally applicable payment rate of 3% to 3.5% of sales. Such liability, as well as the liability resulting from the limitations on the transfer of technology outside of Israel, could negatively affect our cost of production, our ability to outsource or transfer development or manufacturing activities, or any sale or ability to sell or engage in other possible transactions that we may want to consummate with respect to our technology. Furthermore, if we fail to comply with any of the conditions and restrictions imposed by the Research and Development Law or by the specific terms under which we received the grants, we may be required to refund any grants previously received together with interest and penalties, and may be subject to criminal charges. In recent years, the government of Israel has accelerated the rate of repayment of the Office of Chief Scientist grants and may further accelerate them in the future. These restrictions on transferring technologies and/or manufacturing outside of Israel continue to apply even after we have repaid any grants, in whole or in part.

Exchange rate fluctuations may decrease our earnings if we are not able to hedge our currency exchange risks successfully.

We expect that a majority of our revenues will be denominated in currencies other than the NIS. However, a significant portion of our costs, including personnel and some marketing and facilities expenses, are incurred in NIS. If the other currencies affecting our operations decline in value in relation to the NIS, it will become more expensive for us to fund our operations in Israel. Historically, we have not engaged in hedging transactions since we only recently commenced sales of our products in currencies other than the NIS. In the future, if we do not successfully engage in hedging transactions, our results of operations may be subject to losses from fluctuations in foreign currency exchange rates.

Your rights and responsibilities as a shareholder will be governed by Israeli law and differ in some respects from those under Delaware law.

Since we are an Israeli company, the rights and responsibilities of our shareholders are governed by our articles of association and our amended and restated memorandum of association, or, collectively, our articles of association, and by Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in a Delaware corporation. In particular, a shareholder of an Israeli company has a duty to act in good faith towards the company and other shareholders and to refrain from abusing his, her or its power in the company, including, among others, in voting at the general meeting of shareholders on certain matters, such as amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers and interested party transactions requiring shareholder approval. In addition, a shareholder who knows that it possesses the power to determine the outcome of a shareholders’ vote or to appoint or prevent the appointment of a director or executive officer in the company has a duty of fairness towards the company. However, Israeli law does not define the substance of this duty of fairness. Because Israeli corporate law has undergone extensive revisions in recent years, there is little case law available to assist in understanding the implications of these provisions that govern shareholder behavior. 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.

 

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You may have difficulties enforcing a U.S. judgment against us, our executive officers and directors and some of the experts named in this prospectus or asserting U.S. securities laws claims in Israel.

A significant portion of our assets and the assets of our directors and executive officers and some of the experts named in this prospectus are located outside the United States. We do not have any tangible assets in the United States. Therefore, a judgment obtained against us or any of these persons in the United States, including one based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the United States and may not be enforced by an Israeli court. It also may be difficult for you to assert violations of the U.S. securities laws in original actions instituted in Israel. For additional disclosure relating to your ability to enforce a civil claim against us, our executive officers or directors, or some of the experts named in this prospectus, see “Enforceability of Civil Liabilities.”

Provisions of our articles of association and Israeli law may delay, prevent or hinder an acquisition of our company, which could prevent a change of control and, therefore, depress the price of our ordinary shares.

Israeli corporate law regulates mergers, tender offers for acquisitions of shares above specified thresholds, transactions involving directors, officers or significant shareholders and other matters that may be applicable to change of control transactions. For example, a merger may not be consummated unless at least 50 days have passed from the date that a merger proposal was filed by each merging company with the Israel Registrar of Companies and at least 30 days from the date that the shareholders of both merging companies approved the merger. In addition, a majority of each class of securities of the target company must approve a merger. In addition, a full tender offer can only be completed if the acquirer receives at least 95% of the issued share capital, and the shareholders, including those who indicated their acceptance of the tender offer, may, at any time within three months following the completion of the tender offer, petition the court to alter the consideration for the acquisition. Furthermore, our articles of association provide for a staggered board, which could deter a potential purchaser from acquiring control of our company. For additional information on these matters, see “Management—Board of Directors and Executive Officers” and “Description of Share Capital.”

Israeli tax considerations may also make potential transactions unappealing to us or to some of our shareholders. For example, Israeli tax law does not recognize tax-free share exchanges to the same extent as U.S. tax law. With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of 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 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.

These provisions of Israeli law may delay, prevent or make difficult an acquisition of our company, which could prevent a change of control and therefore depress the price of our ordinary shares.

Provisions of Israeli corporate law may delay, prevent or impede certain transactions between us and our subsidiary, NextGen, or between NextGen and our other subsidiaries, which could adversely affect the management of our business.

Israeli corporate law requires special approvals for extraordinary transactions between a public company and a controlling shareholder or an extraordinary transaction in which a controlling shareholder has a personal interest. Such transactions require the approval of a company’s audit committee, board of directors and shareholders, provided that such shareholder approval fulfills one of the following requirements: (i) at least one-third of the shares held by shareholders who have no personal interest in the transaction and are voting, must be voted in favor of approving the transaction (for this purpose, abstentions are disregarded); or (ii) the shareholders who have no personal interest in the transaction voting at the meeting against the transaction may not represent more than 1% of the voting rights of the company. This requirement allows minority shareholders to exercise significant influence over such transactions and, in certain cases, effectively block such transactions.

 

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Our subsidiary, NextGen, is a publicly-traded company in which we currently hold an equity interest of approximately 58.2% on a fully-diluted basis. Under the Israeli Companies Law, 5759-1999, or the Israeli Companies Law, we are considered a controlling shareholder of NextGen and, therefore, the special approval requirements described above will apply to transactions or agreements between us and NextGen entered into other than in the ordinary course of business. Furthermore, special approval requirements may also apply to transactions between NextGen and our other subsidiaries to the extent that we would be deemed to be an interested party in such transactions. These provisions and requirements could delay, prevent or impede a significant transaction between us and NextGen or a transaction between NextGen and our other subsidiaries, even if such a transaction would be considered beneficial by some of our shareholders.

Risks Related to This Offering

Purchasers in this offering will experience immediate and substantial dilution in net tangible book value.

The assumed initial public offering price will be substantially higher than the pro forma net tangible book value per ordinary share of our outstanding ordinary shares as of March 31, 2010. As a result, investors purchasing ordinary shares in this offering will incur immediate dilution of US$7.58 per ordinary share, based on an assumed initial public offering price of US$11.00 per ordinary share, the midpoint of the range set forth on the cover of this prospectus. This dilution is due in large part to earlier investors having generally paid substantially less than the assumed initial public offering price when they purchased their ordinary shares. Investors purchasing ordinary shares in this offering will pay a price per ordinary share that substantially exceeds the book value of our assets after subtracting our liabilities. As a result of this dilution, investors purchasing ordinary shares from us will have contributed 61.1% of the total amount of our total net funding to date but will own only 22.2% of our equity. In addition, the exercise of outstanding options and warrants will, and future equity issuances may, result in further dilution to investors. As of March 31, 2010, there were 268,607 options to purchase ordinary shares outstanding under our share option plans and otherwise at a weighted average exercise price of NIS 28.21 (US$7.60) per ordinary share and 211,406 warrants to purchase ordinary shares at a weighted average exercise price of NIS 29.71 (US$8.00). See “Dilution.”

Our ordinary shares will be traded on more than one market and this may result in price variations.

Our ordinary shares are currently traded on the TASE and we have applied to have our ordinary shares listed on NASDAQ upon completion of this offering. Trading in our ordinary shares on these markets will take place in different currencies (U.S. dollars on NASDAQ and NIS on the TASE), and at different times (resulting from different time zones, different trading days and different public holidays in the United States and Israel). The trading prices of our ordinary shares on these two markets may differ due to these and other factors. Any decrease in the trading price of our ordinary shares on one of these markets could cause a decrease in the trading price of our ordinary shares on the other market.

Our management will have broad discretion over the use of the net proceeds from this offering and may not obtain a favorable return on the use of these proceeds.

Our management will have broad discretion in determining how to apply the net proceeds from this offering and may spend the proceeds in a manner that our shareholders may not deem desirable. We currently intend to use the net proceeds that we will receive from this offering to expand our sales and marketing operations, expand our manufacturing capabilities, finalize the research, development and commercialization of our Nilipatch insulin pump, and for working capital and general corporate purposes. We may also use a portion of the net proceeds to fund possible investments in, or acquisitions of, complementary businesses, products or technologies, although we have no understandings or arrangements to do so. We cannot assure you that these uses or any other use of the net proceeds of this offering will yield favorable returns or results. See “Use of Proceeds.”

 

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We will incur increased costs as a result of being a U.S. public company.

We are an Israeli public company. As a U.S. public company, we will incur additional legal, accounting and other expenses associated with our U.S. public company reporting requirements. We also anticipate that we will incur costs associated with complying with U.S. corporate governance requirements, including requirements under the Sarbanes-Oxley Act, as well as the rules and regulations implemented by the SEC and the Financial Industry Regulatory Authority, Inc., or FINRA. We expect that these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. We also expect that these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage.

Risks Related to Our Ordinary Shares

An active public trading market for our ordinary shares in the United States may not develop.

An active public trading market for our ordinary shares in the United States may not develop after completion of this offering or, if developed, may not be sustained. The price of our ordinary shares sold in this offering will not necessarily reflect the market price of our ordinary shares after this offering. In addition, our ordinary shares will be listed on NASDAQ, which provides limited liquidity as compared to The NASDAQ Global Market or other national exchanges. The lack of a trading market in the United States may result in the loss of research coverage by any securities analysts that may cover our company in the future. Moreover, we cannot assure you that any securities analysts will initiate or maintain research coverage of our company and our ordinary shares in the United States.

We are controlled by a small number of existing shareholders, who may make decisions with which you may disagree.

Three of our shareholders are parties to a voting agreement pursuant to which they vote together on matters brought before meetings of our shareholders. Consequently, these shareholders’ holdings are aggregated and they are deemed beneficial holders of approximately 17.0% of our outstanding ordinary shares as of July 22, 2010. Following the completion of this offering, these shareholders will beneficially own approximately 13.1% of our outstanding ordinary shares, or 12.7% if the underwriters exercise their over-allotment option in full. After the closing of this offering, these shareholders could exercise significant influence over our operations and business strategy and will have sufficient voting power to influence all matters requiring approval by our shareholders, including the ability to elect or remove directors, approve or reject mergers or other business combination transactions, raise future capital and amend our articles of association. The interests of these shareholders may differ from the interests of our other shareholders. In addition, subject to a tag-along right among themselves, these shareholders are not prohibited from selling a controlling interest in us to a third party. Furthermore, this concentration of ownership may delay, prevent or deter a change in control, or deprive you of a possible premium for your ordinary shares as part of a sale of our company. For a more detailed description of the voting agreement, see “Related Party Transactions.”

If securities or industry analysts do not publish research or reports about our business, or if they change their recommendations regarding our ordinary shares or their outlook on our industry as a whole adversely, our ordinary share price and trading volume could decline.

The trading market for our ordinary shares will be influenced by research reports and opinions that securities or industry analysts publish about our business and our industry as a whole. We are not currently covered by Israeli analysts and we may not be covered by U.S. analysts. Investors have numerous investment opportunities and may limit their investments to publicly traded companies that receive thorough research coverage. If no analysts commence coverage of us or if one or more analysts covering us cease to cover us or fail to publish reports in a regular manner, we could have limited visibility in the U.S. financial markets, which could cause a significant and prolonged decline in the price of our ordinary shares due to lack of investor awareness.

 

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In the event that we do not obtain analyst coverage, or if in the future one or more analysts downgrade our ordinary shares or comment negatively about our prospects, the prospects of other companies operating in our industry or the overall outlook of our industry as a whole, the price of our ordinary shares could decline significantly. There is no guarantee that the equity research organizations affiliated with the underwriters of this offering will elect to initiate or sustain research coverage of us, nor whether such research, if initiated, will be positive towards the price of our ordinary shares or our business prospects.

Additional financing may result in dilution to our shareholders.

We may need to raise additional funds in the future to finance our growth, to make acquisitions or for other reasons. See “Risks Related to Our Business—We may require additional funding in order to complete the commercialization of our Adi insulin pump and LightyDD infusion sets and the development and commercialization of our other products under development.” Any required additional financing may not be available on terms acceptable to us, or at all. If we raise additional funds by issuing equity securities, you may experience significant dilution of your ownership interest and the newly issued securities may have rights senior to those of the holders of our ordinary shares. Alternatively, if we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operational flexibility, and would also require us to fund additional interest expense. If additional financing is not available when required or is not available on acceptable terms, we may be unable to successfully commercialize our products, continue our research and development operations or develop or enhance our products through acquisitions or otherwise in order to take advantage of business opportunities or respond to competitive pressures, which could have a material adverse effect on our business, financial condition and results of operations.

Future sales of our ordinary shares could reduce our stock price.

A substantial number of ordinary shares held by our current shareholders or issuable upon exercise of options and warrants will be eligible for sale in the public market after this offering, and may be sold in a registered offering under the Securities Act of 1933, as amended, or the Securities Act, or pursuant to an exemption from registration. In addition, we have granted the underwriters of this offering warrants to      purchase 93,750 of our ordinary shares and have registered the underlying ordinary shares under this registration statement. Furthermore, our executive officers and directors have agreed not to sell any ordinary shares for a period of 180 days after the date of this prospectus. An aggregate of 1,012,077 ordinary shares are subject to this lock-up. Sales by shareholders, including our executive officers and directors after the expiration of the lock-up period, and the underwriters of substantial amounts of our ordinary shares upon exercise of the warrants, or the perception that these sales may occur in the future, could have a negative effect on the trading price of our ordinary shares.

We may experience significant fluctuations in our quarterly results of operations, which could cause us to miss expectations about these results and cause the trading price of our ordinary shares to decline.

Fluctuations in our quarterly results of operations may result from numerous factors, including, among others:

 

   

our commercialization efforts and market acceptance of our products;

 

   

the performance of our third-party distributors;

 

   

our ability to manufacture our products efficiently;

 

   

practices of third-party payors with respect to reimbursement for our current or future products;

 

   

timing of regulatory approvals and clearances and our ability to maintain any such approvals and clearances;

 

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our ability to develop, introduce and deploy new products and product enhancements that meet customer requirements in a timely manner;

 

   

changes to applicable federal, state, local and international laws or regulations;

 

   

changes to our effective tax rates;

 

   

delays in, or failures of, deliveries by our suppliers;

 

   

delays in shipping;

 

   

our ability to access capital and control expenses;

 

   

new product introductions by our competitors;

 

   

changes in our pricing and distribution terms or those of our competitors;

 

   

timing of research and development expenditures; and

 

   

market conditions in the diabetes medical devices industry and the global economy as a whole.

These factors, some of which are not within our control, may cause the trading price of our ordinary shares to fluctuate substantially. In particular, if our quarterly results of operations fail to meet or exceed the expectations of securities analysts or investors, the trading price of our ordinary shares could drop suddenly and significantly. In addition, since we have only recently begun to commercialize our products, we believe that future quarterly comparisons of our financial results will not necessarily be meaningful and should not be relied upon as an indication of our future performance.

The trading price of our ordinary shares may be volatile.

The trading price of our ordinary shares on the TASE has been volatile and we expect that the trading price of our ordinary shares on NASDAQ may also be volatile. The trading price of our ordinary shares may be affected by a number of factors, including, among others:

 

   

our failure to maintain and increase production capacity and reduce per unit production costs;

 

   

regulatory approvals in the BRIC countries and Mexico;

 

   

changes in the availability of third-party reimbursement in the United States or other countries;

 

   

the volume and timing of orders for our products;

 

   

developments in administrative proceedings or litigation related to intellectual property rights;

 

   

the issuance of patents to us or our competitors;

 

   

the announcement of new products or product enhancements by us or our competitors;

 

   

the announcement of technological or medical innovations in the treatment or diagnosis of diabetes;

 

   

changes in governmental regulations or in the status of our regulatory approvals or applications;

 

   

developments in our industry;

 

   

the publication of clinical studies relating to our products or a competitor’s product;

 

   

quarterly variations in our or our competitors’ results of operations;

 

   

changes in earnings estimates or recommendations by securities analysts; and

 

   

general market conditions.

The above market and industry factors could have a material adverse effect on the trading price of our ordinary shares, regardless of our actual operating performance.

 

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Furthermore, certain historical fluctuations in the trading price of our ordinary shares on the TASE have been unrelated or disproportionate to our operating performance. Market volatility reached unprecedented levels in the second half of 2008, resulting in the bankruptcy or acquisition of, or government assistance to, several major U.S. and international financial institutions and a material decline in global economic conditions. In particular, the U.S. equity markets experienced significant price and volume fluctuations that have affected the trading prices of equity securities of many medical device and technology companies. For example, during the period from September 2008 to March 2009, the trading price of our ordinary shares on the TASE experienced significant volatility, with the closing price ranging from NIS 32.80 on September 2, 2008 to NIS 9.376 on March 12, 2009. Continued uncertainty regarding global economic conditions could continue to cause the trading price of our ordinary shares to be volatile.

We do not expect to pay dividends, and any return on investment may be limited to the value of our ordinary shares.

We have never declared and do not anticipate paying cash dividends on our ordinary shares in the foreseeable future. Our board of directors has discretion to declare and pay dividends on our ordinary shares and will make any determination to do so on a number of factors, including, among others, our earnings, financial condition and other business and economic factors that our board of directors may deem relevant. In addition, we may only pay dividends in any fiscal year out of “profits” (as defined by the Israeli Companies Law), provided that the distribution is not reasonably expected to impair our ability to fulfill our outstanding and expected obligations. If we do not pay dividends, our ordinary shares may be less valuable because a return on your investment will only occur if the trading price of our ordinary shares appreciates.

Risks Related to Taxation

If at any time we are treated as a passive foreign investment company, or PFIC, under U.S. federal income tax laws, our shareholders may be subject to adverse tax consequences.

We would be classified as a PFIC for U.S. federal income tax purposes, for any taxable year in which, after applying relevant look-through rules with respect to the income and assets of our subsidiaries, either at least 75% of our gross income is “passive income,” or on average at least 50% of the gross value of our assets is attributable to assets that produce passive income or are held for the production of passive income.

Based on our structure and the composition of our income and assets, we do not believe that we were a PFIC for the taxable year ended December 31, 2009. However, there can be no assurance that the U.S. Internal Revenue Service, or IRS, will not successfully challenge our position or that we will not become a PFIC in a future taxable year since PFIC status is tested each year and depends on our assets and income in such year. If we are classified as a PFIC at any time that a U.S. Holder (as defined in “Material United States Federal Income Tax Consequences”) holds our ordinary shares, such holder could be subject to additional taxes and a special interest charge in respect of gain realized from the sale or other disposition of our ordinary shares and upon the receipt of “excess distributions” (as defined in the United States Internal Revenue Code of 1986, as amended, or the Code). In addition, special U.S. federal income tax reporting requirements will apply.

Each U.S. Holder should consult its own tax advisor concerning the U.S. federal income tax consequences of holding our ordinary shares if we were a PFIC in any taxable year in light of such holder’s particular circumstances.

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve risks and uncertainties. We have based these forward-looking statements on our current expectations and projections about future events. These statements include but are not limited to:

 

   

the expected growth and development of the diabetes and drug delivery market;

 

   

our ability to successfully commercialize our products;

 

   

the cost-effectiveness of our spring-based design;

 

   

our reliance on commercializing a limited number of products;

 

   

our current dependence on a limited number of distributors and expectations as to any increase in the amount and proportion of our revenues;

 

   

our ability to scale our operations to meet anticipated demand for our products;

 

   

our expectations as to regulatory requirements and approvals for our current and future products;

 

   

our expectations as to the market opportunities for our products, as well as our ability to take advantage of those opportunities;

 

   

clinical data we expect to accumulate in order to support the efficacy our products;

 

   

our ability to protect our intellectual property and avoid infringing others’ intellectual property;

 

   

our estimates of future performance, market acceptance of our products, sales, gross margin, expenses (including stock-based compensation expenses) and material costs;

 

   

our ability to utilize current reimbursement and insurance coverage patterns;

 

   

our ability to meet anticipated cash needs based on our current business plan;

 

   

our ability to achieve research and development milestones and targets and to complete the development of our next generation products;

 

   

our expected treatment under Israeli and U.S. federal tax legislation and the impact that Israeli tax and corporate legislation may have on our operations; and

 

   

our intended use of the proceeds from this offering.

These statements may principally be found in the sections of this prospectus entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Industry” and “Business” and in this prospectus generally, including the sections of this prospectus entitled “Business—Overview” and “Business—Industry Background,” which contain information obtained from independent industry sources.

In addition, statements that use the terms “believe,” “expect,” “plan,” “intend,” “estimate,” “anticipate,” “may,” “might,” “will,” “should,” “potential,” “continue” and similar expressions are intended to identify forward-looking statements. All forward-looking statements in this prospectus reflect our current views about future events and are based on assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from future results expressed or implied by these forward-looking statements. Many of these factors are beyond our ability to control or predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable, actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including all the risks discussed in “Risk Factors” and elsewhere in this prospectus. Accordingly, you should not place undue reliance on any forward-looking statements.

 

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You should read this prospectus and the documents that we reference in this prospectus and the exhibits to the registration statement on Form F-1, of which this prospectus forms a part, that we have filed with the SEC completely and with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. All forward-looking statements speak as of the date of this prospectus and, unless we are required to do so under U.S. federal securities laws or other applicable laws, we do not intend to update or revise any such forward-looking statements.

 

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REVERSE STOCK SPLIT

Our shareholders approved a 32-for-one reverse stock split of our ordinary shares that we effected on April 28, 2010. The 32-for-one reverse stock split also applied to our outstanding options and warrants and has been reflected in the respective exercise prices. No fractional ordinary shares, warrants or options were issued in connection with the stock split, and all such fractional interests were rounded to the nearest whole number of ordinary shares, warrants or options.

 

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PRICE RANGE OF OUR ORDINARY SHARES

Our ordinary shares have been trading on the TASE under the symbol “DMDC” since August 1994. No trading market currently exists for our ordinary shares in the United States. We have applied to have our ordinary shares listed on NASDAQ under the symbol “DMED.”

The following table sets forth, for the periods indicated, the reported high and low sales prices of our ordinary shares on the TASE after giving effect to the 32-for-one reverse stock split of our ordinary shares that we effected on April 28, 2010. The U.S. dollar per ordinary share amounts are calculated using the prevailing exchange rate on the date on which the high or low market price was observed/recorded.

 

     Price per
ordinary share
     High    Low    High    Low
     NIS    US$

Annual:

     

2010 (through July 29)

   45.47    24.77    12.30    6.75

2009

   38.40    9.09    9.80    2.39

2008

   37.92    8.22    11.24    2.14

2007

   45.54    16.06    10.63    3.84

2006

   24.06    15.10    5.28    3.37

2005

   57.25    13.22    13.29    2.95

Quarterly:

           

Third Quarter 2010 (through July 29)

   37.60    27.63    9.89    7.10

Second Quarter 2010

   45.47    25.75    12.30    6.65

First Quarter 2010

   44.16    24.77    11.89    6.75

Fourth Quarter 2009

   36.16    24.32    9.80    6.44

Third Quarter 2009

   36.58    28.32    9.40    7.57

Second Quarter 2009

   38.40    12.38    9.80    2.94

First Quarter 2009

   14.53    9.09    3.65    2.39

Fourth Quarter 2008

   15.97    8.22    4.57    2.14

Third Quarter 2008

   32.80    16.16    9.02    4.76

Second Quarter 2008

   37.92    22.21    11.24    6.27

First Quarter 2008

   34.27    18.56    8.88    5.49

Most recent six months:

           

July 2010 (through July 29)

   37.60    27.63    9.89    7.10

June 2010

   35.22    26.49    9.17    6.84

May 2010

   41.48    25.75    11.16    6.65

April 2010

   45.47    39.20    12.30    10.59

March 2010

   44.16    32.86    11.89    8.66

February 2010

   33.28    26.91    8.84    7.27

January 2010

   28.80    24.77    7.73    6.75

December 2009

   30.72    24.32    8.14    6.44

On July 29, 2010, the last reported sale price of our ordinary shares on the TASE was NIS 36.05, or US$9.51 per ordinary share. On July 29, 2010, the exchange rate of the NIS to the dollar was US$1.00 = NIS 3.789. As of July 29, 2010, there were four shareholders of record of our ordinary shares, including the Leumi Bank nominee company. The number of record holders is not representative of the number of beneficial holders of our ordinary shares.

 

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EXCHANGE RATE INFORMATION

The following table shows:  (1) for each of the years indicated, the average exchange rate between the NIS and the U.S. dollar, expressed as NIS per U.S. dollar and calculated based on the average of the representative rate of exchange during the relevant period as published by the Bank of Israel; and (2) for each of the months indicated, the high and low exchange rates between the NIS and the U.S. dollar based on the daily representative rate of exchange as published by the Bank of Israel:

 

Year

   Average
     NIS

2005

   4.4878

2006

   4.4565

2007

   4.1081

2008

   3.5878

2009

   3.9326

2010 (through July 29)

   3.7731

Month

   High    Low
     NIS    NIS

October 2009

   3.780    3.690

November 2009

   3.826    3.741

December 2009

   3.815    3.772

January 2010

   3.765    3.667

February 2010

   3.752    3.704

March 2010

   3.787    3.713

April 2010

   3.749    3.682

May 2010

   3.870    3.730

June 2010

   3.888
   3.814

July 2010 (through July 29)

   3.894
   3.849

As of July 29, 2010, the daily representative rate of exchange between the NIS and the U.S. dollar as published by the Bank of Israel was NIS 3.789 to U.S.$1.00. We make no representation that any NIS or U.S. dollar amount could have been, or could be, converted into U.S. dollars or NIS, as the case may be, at any particular rate, the rates stated above, or at all.

The effect of the exchange rate fluctuations on our business and operations is discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

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USE OF PROCEEDS

We estimate that the net proceeds we will receive from the sale of 1,875,000 ordinary shares in this offering will be approximately US$17,299 thousand, at an assumed public offering price of US$11.00 per ordinary share, the midpoint of the range set forth on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each US$1.00 increase in the assumed public offering price of US$11.00 per ordinary share would increase or decrease, as applicable, the net proceeds to us by approximately US$1,719 thousand, assuming the number of ordinary shares offered by us as set forth on the cover of this prospectus remains the same and after deducting estimated underwriting discounts and commissions payable by us. If the underwriters exercise their over-allotment option in full, we estimate that we will receive additional net proceeds of approximately US$2,837 thousand, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use approximately US$4,000 thousand of the net proceeds that we will receive from this offering to expand our sales and marketing operations; approximately US$5,500 thousand to expand our manufacturing capabilities; approximately US$5,000 thousand to finalize the research, development and commercialization of our Nilipatch insulin pump and approximately US$2,799 thousand for working capital and general corporate purposes. We also may use a portion of the net proceeds to fund possible investments in, or acquisitions of, complementary businesses, products or technologies. We have no current agreements or commitments with respect to any investment or acquisition, and we are not engaged in negotiations with respect to any investment or acquisition. Pending their ultimate use, we intend to invest the net proceeds to us from this offering in U.S. government securities and Israeli government securities. We cannot predict whether the net proceeds from such investments will produce a favorable return.

The amount and timing of our actual expenditures may vary significantly from our current expectations and will depend on a number of factors, including our future revenues and cash generated by operations and the other factors we describe in “Risk Factors.” Therefore, we will have broad discretion in the way we use the net proceeds from this offering.

 

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DIVIDEND POLICY

We have never declared or paid a dividend and currently do not intend to pay cash dividends in the foreseeable future. We currently intend to reinvest any future earnings in developing and expanding our business.

Our ability to distribute dividends also may be limited by future contractual obligations and by Israeli law, which permits the distribution of dividends only out of “profits” (as defined by the Israeli Companies Law), provided that the distribution is not reasonably expected to impair our ability to fulfill our outstanding and expected obligations. See “Description of Share Capital—Dividend and Liquidation Rights.” In addition, the payment of dividends may be subject to Israeli withholding taxes. See “Israeli Taxation and Government Programs—Taxation of Our Shareholders—Taxation of Non-Israeli Shareholders on Receipt of Dividends.”

 

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CAPITALIZATION

The following table sets forth our capitalization as of March 31, 2010 on:

 

   

an actual basis; and

 

   

an as adjusted basis to reflect the issuance of ordinary shares in this offering at an assumed initial public offering price of US$11.00 per share, the midpoint of the range set forth on the cover page of this prospectus.

You should read this table in conjunction with our audited consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

There has been no material change in our capitalization between March 31, 2010 and the date of this prospectus, except for the exercise of warrants to purchase 53,250 ordinary shares for a total amount of NIS 1,474 thousand (US$397 thousand).

 

     As of March 31, 2010  
     (Unaudited)  
     Actual     As adjusted  
     NIS     US$     NIS     US$  
     (In thousands)  

Equity attributable to owners of D. Medical:

        

Ordinary shares of NIS 0.32 par value: 312,500,000 ordinary shares authorized; 6,071,367 ordinary shares issued and outstanding on an actual basis and 7,946,367 ordinary shares issued and outstanding, as adjusted.

   2,003      539      2,603      701   

Share premium and other reserves

   194,389      52,354      258,023      69,491   

Warrants and equity portion of convertible debt

   3,048      821      3,048      821   

Accumulated losses

   (157,787   (42,495   (157,787   (42,495

Minority interest

   3,553      957      3,553      957   

Total Capitalization

   45,206      12,176      109,440      29,475   

 

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DILUTION

Our as adjusted net tangible book value as of March 31, 2010 was NIS 30,741 thousand (US$8,280 thousand), or NIS 5.063 (US$1.364) per ordinary share. As adjusted net tangible book value per ordinary share represents the amount of our total tangible assets less our total liabilities, divided by the number of ordinary shares outstanding.

Pro forma as adjusted net tangible book value dilution per ordinary share represents the difference between the amount per ordinary share paid by purchasers of ordinary shares in this offering and net tangible book value per ordinary share immediately after the completion of this offering on a pro forma as adjusted basis. After giving effect to the sale of 1,875,000 ordinary shares by us in this offering at an assumed initial public offering price of US$11.00 per ordinary share, the midpoint of the range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value would have been US$27,193 thousand, or approximately US$3.42 per ordinary share. This represents an immediate increase in pro forma as adjusted net tangible book value of US$2.06 per ordinary share to existing shareholders and an immediate dilution of US$7.58 per ordinary share to new investors in this offering. The following table illustrates this per share dilution:

 

Assumed initial public offering price per ordinary share, net

   US$ 10.087

As adjusted net tangible book value per ordinary share as of March 31, 2010

   US$ 1.364

Pro forma as adjusted net tangible book value per ordinary share after this offering

   US$ 3.422

Dilution per ordinary share to investors in this offering

   US$ 7.578

If all options and warrants outstanding on March 31, 2010 were exercised, our pro forma as adjusted net tangible book value would be US$3.67 per ordinary share and dilution to new investors in this offering would be US$7.33 per ordinary share.

The following table presents, on a pro forma as adjusted basis, as of March 31, 2010, the differences between the number of ordinary shares purchased from us, the total consideration paid to us, and the average price per ordinary share paid by existing shareholders, option/warrant holders and investors in this offering at an assumed initial public offering price of US$11.00 per ordinary share, the midpoint of the range set forth on the cover page of this prospectus:

 

     Ordinary Shares Purchased     Total Consideration     Average Price
Per Ordinary
Share
     Number    Percent     Amount
(in thousands)
   Percent    

Existing shareholders

   6,071,367    72.1   US$ 8,280    26.8   US$ 1.36

Option/warrant holders

   480,013    5.7      US$ 3,732    12.1      US$ 7.78

New investors in this offering

   1,875,000    22.2      US$ 18,913    61.1      US$ 10.087
                              

Total

   8,426,380    100   US$ 30,925    100   US$ 3.67
                              

If the underwriters exercise their over-allotment option in full and assuming the exercise of all of our outstanding options and warrants, the percentage of ordinary shares held by existing shareholders will decrease to 69.7% of the total number of ordinary shares outstanding after this offering, and the number of ordinary shares held by new investors in this offering will increase to 2,156,250, or 24.7%, of the total number of ordinary shares outstanding after this offering.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

Our selected consolidated statements of financial position as of December 31, 2008 and 2009 and the selected consolidated statements of comprehensive loss for the three years ended December 31, 2009 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. Our selected consolidated statements of financial position as of December 31, 2007 have been derived from our audited consolidated financial statements not included in this prospectus. Our consolidated statements of comprehensive loss for the three months ended March 31, 2010 and 2009 and our selected consolidated statements of financial position as of March 31, 2010 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. We prepare our consolidated financial statements in accordance with IFRS as issued by the IASB. Our audited consolidated financial statements for the year ended December 31, 2008 were our first audited consolidated financial statements that were prepared in accordance with IFRS and in compliance with IFRS 1 “First Time Adoption of International Financial Reporting Standards.” Accordingly, the transition date for implementation of IFRS on our consolidated financial statements is January 1, 2007, and the comparative numbers as of December 31, 2007 and for the year then ended, which are presented in our audited consolidated financial statements included elsewhere in this prospectus, were re-presented to reflect the retroactive adoption of IFRS as of the transition date. Prior to our adoption of IFRS, we prepared our consolidated financial statements in accordance with Israeli generally accepted accounting principles. Our historical results are not necessarily indicative of results to be expected in any future periods. You should read this information together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and related notes included elsewhere in this prospectus. In accordance with Item 3.A.1 of Form 20-F, we are omitting our selected consolidated financial data for fiscal years 2005 and 2006 because we prepared our consolidated financial statements for those years in accordance with Israeli generally accepted accounting principles and such information cannot be provided in accordance with IFRS without unreasonable effort or expense.

 

    Three months ended
March 31,
    Year ended
December 31,
 
    2010     2010     2009     2009     2009     2008     2007  
    (Unaudited)                          
    Convenience
translation
into US$
    NIS     Convenience
translation
into US$

(Note 1(c))
    NIS  
    (In thousands)  

CONTINUING OPERATIONS:

             

Sales

  146      543      —        99      368      —        —     

Cost of sales

  349      1,298      —        177      657      —        —     
                                         

Gross loss

  203      755      —        78      289      —        —     

Research and development expenses, net

  607      2,252      3,056      3,553      13,193      *14,658      *8,759   

Selling and marketing expenses

  157      584      —        188      698      —        —     

General and administrative expenses

  694      2,577      816      1,498      5,563      *3,045      *2,720   

Other (income) expenses, net

  62      231      70      (192   (714   3,193      441   
                                         

Operating loss

  1,723      6,399      3,942      5,125      19,029      20,896      11,920   
                                         

Registration costs

  1,629      6,049      —        —        —        —        —     

Finance income

  (8   (29   (854   (65   (243   (1,035   (571

Fair value losses (gains) on warrants at fair value through profit or loss

  665      2,469      (390   (66   (244   (7,950   10,358   

Finance costs

  —        1      132      127      473      1,287      1,020   
                                         

Finance (income) costs, net

  657      2,441      (1,112   (4   (14   (7,698   10,807   
                                         

LOSS AND TOTAL COMPREHENSIVE LOSS FOR THE YEAR

  4,009      14,889      2,380      5,121      19,015      13,198      22,727   
                                         

ATTRIBUTABLE TO:

             

Owners of the parent

  3,863      14,345      2,495      4,965      18,435      10,040      20,744   

Minority interest

  146      544      335      156      580      3,158      1,983   
                                         
  4,009      14,889      2,830      5,121      19,015      13,198      22,727   
                                         
   

US$

    NIS    

US$

    NIS  

LOSS PER SHARE ATTRIBUTABLE TO THE EQUITY HOLDERS OF THE COMPANY DURING THE YEAR:

             

Basic and diluted

  0.72      2.69      0.57      1.05      3.89      2.41      5.87   
                                         

 

* Reclassified (2007-75,000 NIS and 2008-147,000 NIS) in order to properly reflect the classification of shipment costs.

 

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Consolidated Statements of Financial Position

 

     Three months ended
March 31,
    Year ended
December 31,
 
     2010     2010     2009     2009     2009     2008     2007  
     (Unaudited)                          
     Convenience
translation
into US$
    NIS     Convenience
translation
into US$

(Note 1(c))
    NIS  
     (In thousands)  

Cash and cash equivalents

   10,109      37,534      11,603      6,568      24,388      17,503      21,645   

Working capital

   9,387      34,854      15,198      6,042      22,435      18,412      20,895   

Intangible assets, net

   3,896      14,465      11,345      3,900      14,482      11,356      6,635   

Total assets

   15,646      58,094      30,650
  
  11,625      43,165      33,472      39,136   

Provision for royalties to the Israeli Office of Chief Scientist

   1,163      4,320      3,681
  
  1,090      4,048      3,193      —     

Total liabilities

   3,470      12,888      8,834
  
  3,725      13,832      8,895      21,891   

Accumulated losses

   (42,495   (157,787   (127,502

  (38,632   (143,442   (125,007   (114,967

Total equity

   12,176      45,206      21,816
  
  7,900      29,333      24,577      17,245   

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with “Selected Consolidated Financial Data” and our consolidated financial statements and the related notes included elsewhere in this prospectus. In addition to historical consolidated financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions more fully described in “Forward-Looking Statements.” Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Risk Factors” and elsewhere in this prospectus.

Overview

We are a medical device company engaged through our subsidiaries in the research, development, manufacturing and sale of innovative products for diabetes treatment and drug delivery. We have developed durable and semi-disposable insulin pumps, which continuously infuse insulin into a patient’s body using our proprietary spring-based delivery technology. We believe that our spring-based delivery mechanism is cost-effective compared to a motor and gear train and allows us to incorporate certain advantageous functions and design features in our insulin pumps.

Most currently available insulin pumps are costly and have what we believe are performance and design limitations related to their motor and gear train insulin delivery system. Our proprietary spring-based design, which eliminates the need for a motor and gear train, has allowed us to develop products that we believe offer a cost-effective treatment solution for governments and private payors. In addition, our spring-based delivery technology monitors the actual delivery of insulin and is able to detect and alert a patient to air bubbles and other adverse occurrences, such as occlusions, which could impair the accurate delivery of insulin. Furthermore, the design of our insulin pumps has allowed us to substantially reduce their size and weight and has enabled us to include all moving parts in a disposable element, which we believe reduces concerns relating to wear and tear.

During 2009, we incurred net losses of NIS 19 million (US$5.1 million) and generated revenues of NIS 368 thousand (US$99 thousand), all of which revenues were generated during the fourth quarter of 2009. During the first quarter of 2010, we generated revenues of NIS 543 thousand (US$146 thousand) and incurred net losses of NIS 14.9 million (US$4 million), including registration costs of NIS 6 million (US$1.6 million) and fair value losses on warrants at fair value through profit or loss of NIS 2.5 million (US$0.7 million) as a component of our financial costs.

Factors Affecting Our Results of Operations

Our results of operations are impacted and will continue to be impacted by various trends and uncertainties relating to our current financial condition, the markets in which we operate, our research and development operations and the products we sell. In this section, the term “we” refers to D. Medical and its consolidated subsidiaries, unless otherwise indicated.

Key Products

We have commercialized the following products:

 

   

our Adi insulin pump, which is a durable insulin pump with an integrated disposable cartridge and infusion set; and

 

   

our LightyDD infusion set, which can be used with most other manufacturers’ durable insulin pumps and includes several unique features, including its proprietary detach-detect mechanism.

For a more detailed description of our products, see “Business—Our Products.”

We commenced sales and marketing operations in late 2009 and are currently selling our Adi durable insulin pump to our distributors in the Netherlands, Belgium and the Czech Republic. During the fourth quarter

 

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of 2009, we commenced sales of our LightyDD insulin infusion sets to our distributors in the Netherlands and Belgium. Our LightyDD infusion sets are compatible with most other manufacturers’ durable insulin pumps but are not compatible with insulin pumps manufactured by Medtronic, which is the largest manufacturer of insulin pumps. During the first quarter of 2010, we also commenced sales of our LightyDD infusion sets to our distributor in the Czech Republic. We have also engaged distributors in Sweden, Italy, Mexico and China to sell and market our products in those countries, and, subject to our receipt of the necessary regulatory approvals, we intend to begin selling our products in these markets in the near future.

While we intend to roll out our products initially in Europe, we also plan to focus on our commercialization efforts in the BRIC countries and Mexico, and have already entered into distribution agreements with respect to Mexico and China. Although we have not obtained the required regulatory approvals and do not presently sell our products in the BRIC countries and Mexico, we believe that our spring-based design will enable us to provide a cost-effective treatment solution to governments and private payors in these markets.

Our ability to continue to expand our initial sales efforts in Europe and our ability to enter into additional distribution agreements will have a significant impact on our future results of operations.

We continue to invest in our research and development operations and expect that costs associated with research and development will affect our results of operations. Research and development expenses accounted for 73.5%, 70.1% and 70.4% of our operating expenses in 2007, 2008 and 2009, respectively, because we were primarily a research and development company during those periods. However, we have now commenced selling our products and we expect research and development expenses as a percentage of our total expenses to decrease over time. Accordingly, during the first quarter of 2010, our research and development expenses accounted for 39.9% of our operating expenses.

Our research and development operations are ongoing and are focused on creating the next generation of our insulin pumps, including:

 

   

our Nilipatch insulin patch pump, which is a semi-disposable spring-based insulin patch pump that we view as the next generation of our Adi durable insulin pump. The Nilipatch insulin patch pump consists of a durable component that includes the controlling mechanism of the insulin pump, a disposable component that includes most of the moving elements of the insulin pump and an integrated insulin cartridge that can hold up to 300 units of insulin. We have commenced the commercialization process for our Nilipatch insulin patch pump, which includes facilitating its transition from a research and development product to a product that we can sell in large quantities. This process, which we expect to complete by the beginning of 2011, entails the finalization of the Nilipatch insulin patch pump’s commercial design and layout, the launch of a marketing campaign, the engagement and training of appropriate distributors, and the submission of applications for its initial regulatory approvals. In order to develop a commercially successful design and layout for our Nilipatch insulin patch pump, we are in the process of designing user-friendly interface and casing for it and developing an appropriate manufacturing method and process, which would allow us to manufacture large quantities of the Nilipatch insulin patch pump;

 

   

a device that will host our existing insulin pump technology and our continuous blood glucose monitoring system (under development) on one patch in a manner that may enable and substantiate the hardware requirements for a complete “closed-loop” system, which will mimic the normal biological function of the pancreas. While the feasibility of our existing insulin pump technology has already been established, the continuous glucose monitoring system has proved feasible in animal studies and is currently undergoing additional animal testing and we expect to complete its research and development in 2012;

 

   

our micro-electro-mechanical systems, or MEMS, insulin infusion pump, which is the integration of mechanical elements, sensors, actuators, and electronics on a common silicon substrate through microfabrication technology that is expected to enable us to further reduce the size and weight of our products and reduce our cost of goods. The MEMS insulin infusion pump has passed technical feasibility testing; and

 

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a simplified insulin pump specifically designed to manage the treatment of Type 2 diabetes patients, many of whom do not require all of the features required by Type 1 diabetes patients.

To date, we have received and expect to continue to receive grants from the Office of the Chief Scientist as participation in our research and development operations. Once a certain research and development project is approved by the Office of the Chief Scientist, it extends to us a grant of up to 50% of the research and development expenses actually incurred in connection with a project. We intend to continue to take advantage of these grants. There is no assurance that we will receive such grants in the future.

We operate mainly through our subsidiary, Nilimedix, which has developed our core proprietary technology, the spring-based delivery mechanism, and is now focused on manufacturing and marketing our Adi insulin pump, as well as the final stages of development of our Nilipatch insulin patch pump. Nilimedix also operates in conjunction with Medx-Set on manufacturing and marketing our LightyDD infusion sets. G-Sense focuses on researching and developing a continuous glucose monitoring system and intends to cooperate with Nilimedix to develop a combined continuous glucose monitoring and insulin pump device on one patch.

Additionally, through NextGen we hold an indirect controlling interest in Sindolor Medical, which is developing pain alleviation products. NextGen is a holding company, publicly traded on the TASE, and may invest in other medical device opportunities.

For a more detailed description of our business and plans, see “Business.”

Sales and Cost of Sales

Since commencing our operations as a medical device company in 2004, we have been primarily engaged in research and development operations. In the fourth quarter of 2009, we commenced manufacturing and sales of our products and we expect to derive our revenues from sales of our products, initially in Europe and subsequently in the BRIC countries and Mexico. We commenced our initial sales efforts by entering into three distribution agreements in Sweden, the Netherlands and Belgium, and the Czech Republic in the fourth quarter of 2009, a distribution agreement in Mexico in January 2010, a distribution agreement in China in April 2010 and a distribution agreement in Italy in June, 2010. Our revenues are currently derived from sales to our distributors in the Netherlands and Belgium and the Czech Republic, but we expect that our distributor in Sweden will initiate sales in the near future and that we will be able to initiate sales in Mexico prior to the end of the first half of 2011, assuming regulatory approvals are obtained. We expect our sales to increase over time as we continue to expand our distribution channels and introduce new products. Our sales in the fourth quarter of 2009 totaled NIS 368 thousand (US$99 thousand) and increased to NIS 543 thousand (US$146 thousand) in the first quarter of 2010, an increase of NIS 175 thousand (US$47 thousand), or 47.6%.

Our cost of sales relates to the raw material and labor costs associated with manufacturing our products. Cost of sales for the fourth quarter of 2009 amounted to NIS 657 thousand (US$177 thousand) and, due to the increase in our manufacturing activities during the first quarter of 2010, increased to NIS 1,298 thousand (US$349 thousand), an increase of 98%. Since we recently commenced our manufacturing activities, we currently obtain low yields, which resulted in high cost of sales. We expect that once we increase our sales and manufacturing volume, including through the engagement of a contract manufacturer, we will achieve economies of scale and will be able to capitalize on the cost-effectiveness of our spring-based design, which will cause our cost of sales to decrease. We have recently entered into a letter of intent with UPG pursuant to which we agreed to negotiate a definitive manufacturing and supply agreement by mid-September of 2010 with UPG for the design for manufacturing and manufacturing of the disposable parts of our Adi durable insulin pump, our LightyDD infusion sets and our Nilipatch insulin patch pump. As of the date of this prospectus, we have not yet entered into a definitive agreement pursuant to this letter of intent. Our financial performance is, and will continue to be, affected by our commercialization efforts with respect to our products, our manufacturing capabilities and the cost-effectiveness of our spring-based design.

 

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We do not have any post-shipment obligation other than warranty obligations, and we do not adjust our purchase prices for subsequent sales by our distributors.

We further expect that if we are able to achieve cost-effectiveness from economies of scale and obtain the necessary regulatory approvals, we will become price competitive in the BRIC countries and Mexico.

We have not yet completed the development of Sindolor Medical’s pain alleviation products.

Research and Development Expenses, Net

Our research and development expenses consist primarily of (i) materials used in research and development and expenses related to engaging subcontractors, which represented 47.7% of our research and development expenses in 2009, and (ii) the salaries of, and compensation costs in respect of options granted to, employees engaged primarily in research and development operations, which represented 40.4% of our research and development expenses in 2009.

In 2008, we provided a one-time grant of options to a member of our senior management who was primarily engaged in research and development activities, which resulted in a charge of NIS 1,581 thousand (US$426 thousand). We do not expect to make any additional such grants in the future.

The grants we receive from the Office of the Chief Scientist are presented in our financial statements as a deduction from research and development expenses. Please see Note 2(p) of our audited consolidated financial statements included elsewhere in this prospectus and “—Office of the Chief Scientist.”

We intend to continue our research and development operations and, therefore, expect our research and development expenses to increase in absolute NIS but not necessarily as a percentage of revenues as we continue to commercialize our products.

Selling and Marketing Expenses

We began incurring selling and marketing expenses in 2009 in connection with the commencement of sales of our products. Our selling and marketing expenses include salaries and related expenses of employees primarily engaged in pursuing relationships with distributors, potential strategic partners and key opinion leaders, and attending conferences. We expect that our selling and marketing expenses will increase in absolute NIS as a result of the expansion of our sales and marketing efforts, such as engaging more distributors in more countries, participating in more exhibitions and increasing the promotion of our products generally. Since we expect the increase in our sales to substantially exceed the increase in our selling and marketing expenses, we do not believe that selling and marketing expenses will also increase as a percentage of revenues.

General and Administrative Expenses

Our general and administrative expenses consist primarily of salaries and compensation costs related to warrants granted to executive, accounting and administrative personnel, professional service fees and other general corporate expenses, such as communication, office and travel expenses. As we began our transition from focusing on research and development to the commercialization of our products in late 2009, we increased the number of our executive personnel and, as a result, incurred higher general and administrative costs.

We expect our general and administrative expenses to increase in absolute NIS and as a percentage of revenues as a result of expenses related to becoming a U.S. public company, such as accounting and legal fees, and expected increases in the number of our executive, accounting and administrative personnel due to the expected growth of our company.

Other Expenses

Other expenses primarily include the net present value of future payments of royalties to the Office of the Chief Scientist. See “—Office of the Chief Scientist.”

 

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Office of the Chief Scientist

Since 2004 and through March 31, 2010, we have received grants from the Office of the Chief Scientist as participation in research and development activities in the aggregate amount of approximately NIS 7,422 thousand (US$1,999 thousand). During the year ended December 31, 2009, we received grants from the Office of the Chief Scientist totaling NIS 3,003 thousand (US$809 thousand). From March 31, 2010 through July 22, 2010, we received grants from the Office of the Chief Scientist totaling NIS 832 thousand (US$224 thousand). We are obligated to repay these grants (linked to the U.S. dollar plus interest) on a semi-annual basis from sales of our Adi insulin pumps, Adi set integrated cartridge and LightyDD infusion sets, which represent all of our currently commercialized products, and from sales of our products under development if and when they are commercialized. We commenced sales of our commercialized products during the fourth quarter of 2009 and, therefore have commenced paying royalties to the Israeli government. As of the date of this prospectus, Nilimedix has paid NIS 11 thousand (US$3 thousand) in royalties to the Office of the Chief Scientist, and G-Sense has not paid any royalties to the Office of the Chief Scientist under approved programs. The grants are denominated in NIS, but we are obligated to repay the amounts in U.S. dollars (based on the exchange rate published immediately prior to the provision of the grant). Pursuant to the terms of the grants, we do not receive funds as advances but instead as reimbursements for expenses actually incurred. Upon receipt of such reimbursements, annual interest at the rate of LIBOR will accrue on the amounts received. Pursuant to the Research and Development Law, the rate of repayment can range between 3% and 5% of our revenues; however, in accordance with procedures published by the Office of the Chief Scientist (number 200-04, version 2), we account for a rate of 3% to 3.5%. As of March 31, 2010, we owed US$2,048 thousand to the Israeli government under grants received from the Office of the Chief Scientist. We currently owe US$2,272 thousand to the Israeli government under grants received from the Office of the Chief Scientist.

We recently entered into a letter of intent with UPG pursuant to which we agreed to negotiate a definitive manufacturing and supply agreement with UPG for the design for manufacturing and manufacturing of the disposable parts of our Adi durable insulin pump, our LightyDD infusion sets and our Nilipatch insulin patch pump. Under the Research and Development Law, manufacturing of products abroad, as well as the transfer of technologies outside of Israel, require the prior approval of the Office of the Chief Scientist and will result in an increase of the amount owed to the Israeli government by the recipient of the grants and the rate of royalty repayment. In the event that manufacturing is transferred abroad, the increase in the amount owed to the Israeli government depends on the volume of manufacturing expected to be performed outside of Israel. If less than 50% of the manufacturing activity is performed outside of Israel, the amount owed will increase to 120% of the grant received; if more than 50% but less than 90% of the manufacturing activity is performed outside of Israel, the amount owed will increase to 150% of the grant received; and if more than 90% of the manufacturing activity is performed outside of Israel, the amount owed will increase to 300% of the grant received (all linked to the U.S. dollar plus LIBOR). In our case, the manufacturing activity currently expected to be performed outside of Israel pursuant to our anticipated manufacturing and supply agreement with UPG constitutes more than 50% but less than 90% of our manufacturing activity and, consequently, the amount of royalties that we currently owe the Israeli government will increase to 150% of our total grants (excluding the grants provided to G-Sense) (i.e., US$2,979 thousand taking into account actual grants received by Nilimedix to date (not including grants receivables), linked to the U.S. dollar plus LIBOR, not on a capitalized basis). However, we may transfer more of our manufacturing activity abroad in the future and therefore may be liable to pay the Israeli government up to 300% of our grants. In addition, royalties owed after manufacturing is transferred abroad are payable out of sales of the products for which the applicable grants were received at a rate equal to the ratio between the amounts of the grants received and the total amount of grants received plus our investment in the approved plans of Nilimedix, as determined by an accountant of the Industrial Research and Development Administration (the body administering the Research and Development Law). Since the rate of royalty payment is dependent upon the volume of sales of the products for which the applicable grants were received, the timeframe for royalty payments is not set. However, as required under the Research and Development Law, we are required to analyze and file a report with the Office of the Chief Scientist regarding the volume of sales every six months until full payment of royalties owed. Royalties from sales reported on such semi-annual reports are required to be paid to

 

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the Israeli government on the date we submit the reports. In our case, the grants that Nilimedix received constituted 40% of the total amount of the approved plans on average. Accordingly, we expect a payment rate of no more than 40% of sales after the transfer of manufacturing, instead of the generally applicable payment rate of 3% to 3.5% of sales.

Segment Reporting

Segment reporting is determined by management, which considers the business from a geographical perspective and from a products perspective. See Note 2(c) of our audited consolidated financial statements included elsewhere in this prospectus for a more detailed discussion of our segments.

We consider NextGen’s operations, which are conducted through Sindolor Medical, as a separate segment for purposes of financial reporting. Consequently, we have two primary segments of operations: (i) insulin pumps and related products and (ii) pain alleviation products. These operating segments constitute the basis for our segment information reporting.

Our segment information for the year ended December 31, 2009 and the three months ended March 31, 2010 was as follows:

 

    Year ended
December 31,
2009
    Three
months
ended
March 31,
2010
    Year ended
December 31,
2009
    Three
months
ended
March 31,
2010
    Year ended
December 31,
2009
    Three
months
ended

March 31,
2010
    Year ended
December 31,
2009
  Three
months
ended

March 31,
2010
  Year ended
December 31,
2009
    Three
months
ended

March 31,
2010
 
          (Unaudited)           (Unaudited)           (Unaudited)         (Unaudited)         (Unaudited)  
    Insulin pumps
and related
products
    Pain  alleviation
products
    Total  before
eliminations
    Eliminations*   Total  
    NIS  
    (In thousands)  

Revenue from external customers

  368      543      —       —       368     

543

 

  —     —     368      543   

Operating loss

  (13,689   (4,581   (1,639   (546   (15,328   (5,127   400   600   (14,928   (4,527

Segment assets

  17,551      23,387      3,513      8,518      21,064      31,905      —     —     21,064      31,905   

 

* Reflect inter-company management fees.

Please see Note 28 of our audited consolidated financial statements included elsewhere in this prospectus for our segment information for the years ended December 31, 2008 and 2007, and Note 4 of our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus for our segment information for the three months ended March 31, 2009.

Application of Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements included elsewhere in this prospectus, which have been prepared in accordance with IFRS and the related transition rules. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to areas that require a significant level of judgment or are otherwise subject to an inherent degree of uncertainty. These areas include discount rates and growth rates with respect to impairment tests for goodwill, know how and rights in patents, as well as our liabilities for royalties to the Office of the Chief Scientist and to the minority interest. We base our estimates on historical experience, our observance of trends in particular areas and information or valuations and various other assumptions that we believe to be reasonable under the circumstances and which form the basis for making judgments about the carrying value of assets and liabilities that may not be readily apparent from other sources. Although management believes its estimates and payments are reasonable, actual amounts could differ significantly from amounts previously estimated.

 

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Our significant accounting policies are more fully described in Note 2 to our audited consolidated financial statements and in Note 3 to our unaudited interim condensed consolidated financial statements, included elsewhere in this prospectus. However, as set forth below, certain of our accounting policies are particularly important to our financial position and results of operations.

Intangible Assets

Impairment of Non-financial Assets

Assets that have an indefinite useful life (e.g., goodwill) are not subject to amortization and are tested annually for impairment. Assets that are subject to depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows, or cash-generating units. Non-financial assets, other than goodwill, that suffered impairment are reviewed for possible reversal of the impairment at each reporting date.

We evaluate annually whether goodwill and other non-depreciated, intangible assets have suffered any impairment in accordance with the accounting policy stated above. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of estimates. Even if the gross profit and growth rate, according to our estimates used to calculate the value of use of the cash-generating unit, would have been 10% and 1% lower, respectively, or if the discount rate used to calculate the value in use of the cash-generating entity would have been 2% higher, than management’s estimates as of December 31, 2009 and 2008 and as of March 31, 2010, no impairment of goodwill and other non-depreciated, intangible assets would have been required.

Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the net identifiable assets of the acquired subsidiary at the date of acquisition or as a result of a transaction with minority interests. Goodwill is included in intangible assets. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed.

Goodwill is allocated to cash-generating units that are not larger than operating segments for the purpose of impairment testing. The allocation is made to those cash-generating units (as defined below) or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose. Based on a valuation of our cash-generating units by BDO Ziv Haft Consulting and Management Ltd., or BDO, we concluded that our goodwill was not impaired at December 31, 2009 and at March 31, 2010.

Computer Software

Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortized using the straight line method over their estimated useful lives (three years). In 2009 and the first quarter of 2010, we amortized NIS 49 thousand (US$13 thousand) and NIS 17 thousand (US$5 thousand), respectively, for acquired computer software licenses.

Research and Development

Expenses associated with research and development are generally recognized as incurred. Capitalization of research and development expenses is subject to management’s judgment, and research and development costs that are directly attributable to the design and testing of new or improved products are recognized as intangible assets only if all of the following criteria are met:

 

   

it is technically feasible to complete the product so that it will be available for use;

 

   

our management intends to complete the development of the intangible assets and use or sell them;

 

   

there is an ability to use or sell the products derived from the intangible assets;

 

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it can be demonstrated how the intangible asset will generate probable future economic benefits;

 

   

adequate technical, financial and other resources to complete the development and to use or sell the intangible asset are available; and

 

   

the expenditure attributable to the intangible asset during its development can be reliably measured.

As of December 31, 2009 and March 31, 2010, we did not believe that all of the criteria set forth above had been met with respect to our products that were at the research and development stage and, accordingly, we did not capitalize any research and development expenses with respect to these products for these periods. If we had concluded that all of the criteria had been met, we would have capitalized our research and development expenses, which would have reduced our losses by NIS 13,193 thousand (US$3,553 thousand) in 2009, and by NIS 2,252 thousand (US$607 thousand) in the first quarter of 2010.

Acquisition of Know How, Rights in Patents and In-Process Research and Development Acquired

Know how, rights in patents and in-process research and development acquired are presented based on the fair value at the date of the acquisition and are not depreciated during the research and development period. Such assets are tested annually for impairment in accordance with IAS 36 “Impairment of Assets.” Commencing at the end of the development process, we depreciate the in-process research and development acquired over its remaining useful life.

Subsequent expenditures related to an in-process research and development project acquired separately or in a business combination and recognized as an intangible asset and incurred after the acquisition of that project are accounted for in accordance with the policy concerning research and development expenses. Based on an external study by BDO, we concluded that in-process research and development project acquired was not deemed to be impaired as of December 31, 2009 and as of March 31, 2010.

Finance Income and Finance Costs

In 2009 and the first quarter of 2010, our finance income and finance costs consisted primarily of exchange rate differences and interest income on short-term bank deposits. In 2008 and 2007, our finance income and finance costs consisted primarily of interest paid on convertible debentures and interest paid on an escrow account held with respect to our outstanding convertible debentures.

Foreign currency transactions are translated into NIS using the exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the statement of comprehensive loss to “finance costs” and “finance income.”

Share-based Compensation

We operate a number of equity-settled, share-based compensation plans pursuant to which we receive services from employees and other service providers as consideration for equity instruments (warrants) of D. Medical or its subsidiaries. The fair value of the services received in exchange for the grant of the warrants is recognized as an expense in the statement of comprehensive loss, allocated between our research and development expenses and our general and administrative expenses. During the first quarter of 2010, our share-based compensation expense amounted to NIS 1,082 thousand (US$291 thousand). In 2009, 2008 and 2007, our share-based compensation expense amounted to NIS 1,718 thousand (US$463 thousand), NIS 1,930 thousand (US$520 thousand) and NIS 612 thousand (US$165 thousand), respectively.

In the case of share-based payments to employees, the total amount to be expensed is determined by reference to the fair value of the warrants granted (using the Black-Scholes model for option pricing). Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. The total expense is recognized over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied.

 

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In the case of share-based payments for service received from service providers that are not employees, the amounts recognized as an expense in the statement of comprehensive loss are determined by reference to the fair value of the services received.

When the warrants are exercised, we or our relevant subsidiary issue new ordinary shares. The proceeds received, net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the options are exercised.

Derivative Financial Instruments

In connection with the issuance of our warrants in connection with our public offering of ordinary shares and warrants in January 2007, we recognized and classified the warrants as a liability in the statements of financial position. See “Description of Share Capital” for a more detailed description of these warrants. The warrants are presented as non-current liabilities in the statements of financial position (for a discussion with respect to the classification of this liability under non-current liabilities, as opposed to current liabilities, see Note 2(i) to the audited consolidated financial statements included elsewhere in this prospectus). Since this liability is a non-equity derivative financial instrument, it is classified as a financial liability at fair value through profit or loss. This liability is initially recognized at its fair value on the date the contract is entered into and subsequently accounted for at fair value. The fair value changes are charged to “fair value losses (gains) on warrants at fair value through profit or loss” in the statement of comprehensive loss. In the first quarter of 2010, our fair value loss (gain) on warrants at fair value amounted to a loss of NIS 2,469 thousand (US$665 thousand). In 2009, 2008 and 2007, our fair value loss (gains) on warrants at fair value amounted to a gain of NIS 244 thousand (US$ 66 thousand), a gain of NIS 7,950 thousand (US$2,141 thousand) and a loss of NIS 10,358 thousand (US$2,790 thousand), respectively. On March 31, 2010, the warrants expired. Prior to their expiration, warrants were exercised for an aggregate of 466,308 ordinary shares, resulting in aggregate gross proceeds to us of NIS 12,861 thousand (US$3,464 thousand). We currently do not have any outstanding publicly-traded warrants that are classified as non-equity derivative financial instrument.

Income Tax

Commencing in fiscal year 2008, our results of operations for tax purposes are accounted for at nominal values. Until the end of fiscal year 2007, our results of operations for tax purposes were measured in real terms, adjusted for any changes in the Israeli consumer price index, or CPI, based on the Israeli Inflationary Adjustments Law (1985).

Our income is taxed at the regular Israeli corporate tax rate. In accordance with the law for the Amendment of the Israeli Tax Ordinance (2005), a gradual decrease in the corporate tax rates was enacted and the corporate tax rate for 2007 and thereafter will be as follows: 2007—29%; 2008—27%; 2009—26%; and 2010 and thereafter—25%. On July 14, 2009, the Israeli parliament approved the 2009 Israel Economic Efficiency Law (Legislation amendments for applying the economic plan for 2009 and 2010) pursuant to which Israeli corporate tax rates were further reduced as follows: 2011—24%; 2012—23%; 2013—22%; 2014—21%; 2015—20%; and 2016 and thereafter—18%.

As of December 31, 2009 and March 31, 2010, we had a capital loss for tax purposes in the amount of NIS 46,158 thousand (US$12,431 thousand) and our consolidated carry-forward tax losses amounted to NIS 62,623 thousand (US$16,866 thousand). Deferred tax assets are recognized only to the extent that future utilization of the related loss carry-forward is probable. Based on our estimates and assumptions, it is not probable that taxable profits will be generated in the very near future because we have only recently commenced our sales operations and our research and development expenses continue to be substantial. Accordingly, we are not recording deferred income tax assets for the loss carry-forwards.

In accordance with the 2010 Amendment to the Israeli Tax Ordinance (No. 174-temporary order relating to tax years 2007, 2008 and 2009), published on February 4, 2010, IFRS standards will not be used for determining the taxable income for tax years 2007, 2008 and 2009, even if such standards were used to prepare our audited consolidated financial statements related to such years.

 

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Office of the Chief Scientist

As per International Accounting Standard, or IAS, 20, “Accounting for Government Grants and Disclosure of Government Assistance,” these grants are defined as “forgivable loans.” If, upon the entitlement to receive the grant, there is reasonable assurance that the grants received will be repaid, then we must record a liability as a provision for royalties’ payments. In the event that, as of said date, there is no reasonable assurance that the grant will be repaid, then grants received should be recorded to the profit and loss as an offset of research and development expenses. In the event that, as of said date, grants were recorded to profit and loss and in subsequent periods, the probability to return the grant became “more likely than not,” then such liability will be recorded based on IAS 37 “Provisions, Contingent Liabilities and Contingent Assets,” which was reflected in our liabilities for 2008. See “—Other Expenses.”

Consolidated Statements of Comprehensive Loss Data

 

    Three months ended March 31,     Year ended December 31,  
    2010     2010     2009     2009     2009     2008     2007  
    (Unaudited)                          
     Convenience
translation
into US$
    NIS     Convenience
translation
into US$
    NIS  
    (In thousands, except per share information)  

CONTINUING OPERATIONS:

             

Sales

  146      543      —        99      368      —        —     

Cost of sales

  349      1,298      —        177      657      —        —     
                                         

Gross loss

  203      755      —        78      289      —        —     

Research and development expenses, net

  607      2,252      3,056      3,553      13,193      14,658   8,759

Selling and marketing expenses

  157      584      —        188      698      —        —     

General and administrative expenses

  694      2,577      816      1,498      5,563      3,045   2,720

Other (income) expenses, net

  62      231      70      (192   (714   3,193      441   
                                         

Operating loss

  1,723      6,399      3,942      5,125      19,029      20,896      11,920   
                                         

Registration costs

  1,629      6,049      —        —        —        —        —     

Finance income

  (8   (29   (854   (65   (243   (1,035   (571

Fair value losses (gains) on warrants at fair value through profit or loss

  665      2,469      (390   (66   (244   (7,950   10,358   

Finance costs

  —        1      132      127      473      1,287      1,020   
                                         

Finance (income) costs, net

  657      2,441      (1,112   (4   (14   (7,698   10,807   
                                         

LOSS AND TOTAL COMPREHENSIVE LOSS FOR THE YEAR

  4,009      14,889      2,380      5,121      19,015      13,198      22,727   
                                         

ATTRIBUTABLE TO:

             

Owners of the parent

  3,863      14,345      2,495      4,965      18,435      10,040      20,744   

Minority interest

  146      544      335      156      580      3,158      1,983   
                                         
  4,009      14,889      2,830      5,121      19,015      13,198      22,727   
                                         
    US$     NIS     US$     NIS  

LOSS PER SHARE ATTRIBUTABLE TO THE EQUITY HOLDERS OF THE COMPANY DURING THE YEAR:

             

Basic and diluted

  0.72      2.69      0.57      1.05      3.89      2.41      5.87   
                                         

 

* Reclassified (2008-NIS 147,000 and 2007-NIS 75,000) in order to properly reflect the classification of shipment costs.

Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009

Sales. Sales of our Adi insulin pump, its related cartridges and our LightyDD infusion sets amounted to NIS 543 thousand (US$146 thousand) during the three months ended March 31, 2010. We had no sales for the three months ended March 31, 2009, during which period we were still focusing solely on our research and development operations.

 

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Cost of Sales. Cost of sales for the three months ended March 31, 2010 amounted to NIS 1,298 thousand (US$349 thousand) and primarily included the cost of raw materials utilized in manufacturing our products and salaries and related expenses of employees primarily engaged in manufacturing activities. Since we only commenced sales during the fourth quarter of 2009, we had no cost of sales for the three months ended March 31, 2009.

Research and Development Expenses, net. Our research and development expenses, net for the three months ended March 31, 2010 were NIS 2,252 thousand (US$607 thousand) as compared to NIS 3,056 thousand (US$823 thousand) for the three months ended March 31, 2009, a decrease of NIS 804 thousand (US$217 thousand), or 26%. The decrease in research and development expenses, net in the first quarter of 2010 was primarily due to the termination of the employment of the then-chief executive officer of Nilimedix, who primarily engaged in research and development activities, and to the continued diversion of our resources from research and development operations to manufacturing and marketing activities.

Selling and marketing expenses. Our selling and marketing expenses for the three months ended March 31, 2010 amounted to NIS 584 thousand (US$157 thousand) and reflect salaries and related expenses of employees primarily engaged in pursuing relationships with distributors, potential strategic partners and key opinion leaders, and attending conferences. We had no selling and marketing expenses during the first quarter of 2009 because we were focused on research and development activities.

General and Administrative Expenses. Our general and administrative expenses for the three months ended March 31, 2010 were NIS 2,577 thousand (US$694 thousand), as compared to NIS 816 thousand (US$220 thousand) for the three months ended March 31, 2009, an increase of NIS 1,761 thousand (US$474 thousand), or 216%. General and administrative expenses during the first quarter of 2009 were insignificant due to our historical focus in research and development activities. The substantial increase in general and administrative expenses during the first quarter of 2010 is the result of our continued transition into a sales and marketing company, which entailed increased manufacturing and required additional managerial and administrative personnel, and the consolidation of NextGen, which reports high administrative expenses (including expenses related to directors’ compensation, audit and legal services and directors and officers insurance) as a result of being a public company. For details regarding our acquisition of NextGen, which we consummated in January 2010, see “Related Party Transactions – Transactions with our Affiliates and Associates – Transactions with Sindolor Medical.” General and administrative expenses in the first quarter of 2010 also include compensation costs in respect of warrants granted to our chief executive officer in 2009, salaries and compensation costs related to our managerial and administrative personnel, and administrative costs of NextGen.

Other (Income) Expenses, net. Our other (income) expenses, net for the three months ended March 31, 2010 were expenses of NIS 231 thousand (US$62 thousand) as compared to NIS 70 thousand (US$19 thousand) for the three months ended March 31, 2009, an increase of NIS 161 thousand (US$43 thousand), or 230%. Since the probability of generating revenues from sales substantially increased in the first quarter of 2010 as compared to the first quarter of 2009, the net present value of future payments of royalties to the Office of the Chief Scientist has increased substantially.

Operating Loss. As a result of the foregoing, our operating loss for the three months ended March 31, 2010 was NIS 6,399 thousand (US$ 1,723 thousand) as compared to an operating loss of NIS 3,942 thousand (US$1,062 thousand) for the three months ended march 31, 2009, an increase of NIS 2,457 thousand (US$662 thousand), or 63%.

Registration Costs. During the three months ended March 31, 2010, we incurred registration costs of NIS 6,049 thousand (US$1,629 thousand). These costs were incurred in connection with the acquisition of NextGen and a subsequent exercise of rights to purchase shares of NextGen as part of a rights offering of NextGen’s shares, all occurring during the first quarter of 2010. For a description of these transactions, see “Related Party Transactions – Transactions with our Affiliates and Associates – Transactions with Sindolor Medical.” We had no registration costs during the three months ended March 31, 2009. The rights associated with NextGen’s stock

 

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exchange registration, amounting to NIS 5,889 thousand (US$1,586 thousand), are contractual in nature and therefore represent an identifiable intangible item. However, since it is unlikely that future economic benefits associated with such rights will flow to us, they do not qualify for capitalization in accordance with IAS 38 and we recognize their costs as an expense (registration costs).

Finance Income. Our finance income for the three months ended March 31, 2010 was NIS 29 thousand (US$8 thousand) as compared to NIS 854 thousand (US$230 thousand) for the three months ended March 31, 2009, a decrease of NIS 825 thousand (US$222 thousand), or 97%. Finance income for the three months ended March 31, 2010 was primarily composed of interest income on bank deposits, while finance income for the three months ended March 31, 2009 was primarily the result of gains on dollar-linked bank deposits resulting from a 10% increase in the U.S. dollar to NIS exchange rate.

Finance Costs. Our finance costs for the three months ended March 31, 2010 were NIS 1 thousand (US$0.27 thousand) as compared to NIS 132 thousand (US$36 thousand) for the three months ended March 31, 2009, a decrease of NIS 131 thousand (US$36 thousand), or 99%. Finance costs for the three months ended March 31, 2010 were primarily composed of bank commissions, while the finance costs for the three months ended March 31, 2009 were primarily composed of losses on exchange rate fluctuations and accrued interest on our liability to the Office of the Chief Scientist.

Fair Value Losses (Gains) on Warrants at Fair Value Through Profit or Loss. Fair value losses (gains) on warrants at fair value through profit or loss for the three months ended March 31, 2010 were losses of NIS 2,469 thousand (US$665 thousand) as compared to gains (NIS 390 thousand (US$105 thousand) for the three months ended March 31, 2009. During the first quarter of 2010, most of the remaining warrants with respect to which fair value losses (gains) are recorded were exercised and the remaining warrants expired. Increases in the market value of the warrants at their dates of exercise during the first quarter of 2010 resulted in fair value losses on warrants at fair value through profit or loss. See “Application of Critical Accounting Policies—Derivative Financial Instruments.”

Loss and Total Comprehensive Loss. As a result of the foregoing, our loss and total comprehensive loss for the three months ended March 31, 2010 was NIS 14,889 thousand (US$4,009 thousand) as compared to NIS 2,830 thousand (US$762 thousand) for the three months ended March 31, 2009, an increase of NIS 12,059 thousand (US$3,248 thousand), or 426%.

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

Sales. We commenced sales of our Adi insulin pumps, its related cartridges and our LightyDD infusion sets in the fourth quarter of 2009. Sales of these products amounted to NIS 368 thousand (US$99 thousand) during that period. We had no sales for the year ended December 31, 2008, during which period we were focusing solely on our research and development operations.

Cost of Sales. Cost of sales for the year ended December 31, 2009 amounted to NIS 657 thousand (US$177 thousand). We had no cost of sales for the year ended December 31, 2008, during which period no sales occurred. Cost of sales for the year ended December 31, 2009 primarily included the cost of raw materials utilized in manufacturing our products and salaries and related expenses of employees primarily engaged in manufacturing activities, which amounted to NIS 155 thousand (US$42 thousand) and NIS 433 thousand (US$117 thousand), respectively.

Research and Development Expenses, net. Our research and development expenses, net for the year ended December 31, 2009 were NIS 13,193 thousand (US$3,553 thousand), as compared to NIS 14,658 thousand (US$3,948 thousand) for the year ended December 31, 2008, a decrease of NIS 1,465 thousand (US$395 thousand), or 10%. The decrease in research and development expenses, net between 2008 and 2009 was primarily due to compensation costs in respect of warrants granted in 2008 (a difference of NIS 1,708 thousand (US$460 thousand)), as well as decreases in materials and subcontractors (a decrease of NIS 1,991 thousand

 

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(US$536 thousand)), partially offset by increases in other salaries and related expenses (an increase of NIS 1,030 thousand (US$277 thousand)). In 2008, the then-Chief Executive Officer of Nilimedix, who was primarily engaged in research and development activities was granted warrants at a par value exercise price, resulting in a one-time expense of NIS 1,581 thousand (US$426 thousand). The decrease in materials and subcontractors is attributable to our decision in late 2009 to focus our efforts on a smaller number of research and development projects. Our research and development expenses during 2009 and 2008 were primarily attributable to the insulin pumps and amounted to NIS 8,112 thousand (US$2,185 thousand) and NIS 9,131 thousand (US$2,459 thousand), respectively. Our other research and development expenses during 2008 and 2009 related to: (i) our continuous glucose monitoring system project in the amounts of NIS 1,736 thousand (US$468 thousand) and NIS 2,045 thousand (US$551 thousand), respectively; (ii) our infusion sets in the amounts of NIS 1,206 thousand (US$325 thousand) and NIS 1,837 thousand (US$495 thousand), respectively; and (iii) the pain alleviation technology being developed by Sindolor Medical in the amounts of NIS 2,585 thousand (US$696 thousand) and NIS 1,199 thousand (US$323 thousand), respectively.

Selling and Marketing Expenses. Our selling and marketing expenses for the year ended December 31, 2009 were NIS 698 thousand (US$188 thousand) and were attributable to the commencement of our sales in Europe. Until late 2009, we were focused solely on research and development activities and, therefore, had no selling and marketing expenses for the year ended December 31, 2008. Our selling and marketing expenses consisted primarily of salary expenses and expenditures relating to travel, conferences and exhibitions, which amounted to NIS 280 thousand (US$75 thousand) and NIS 324 thousand (US$87.2 thousand), respectively.

General and Administrative Expenses. Our general and administrative expenses for the year ended December 31, 2009 were NIS 5,563 thousand (US$1,498 thousand ), as compared to NIS 3,045 thousand (US$820 thousand) for the year ended December 31, 2008, an increase of NIS 2,518 thousand (US$678 thousand), or 82.7%. The increase in general and administrative expenses in 2009 is partially attributable to increased salaries and compensation costs related to the hiring of our chief executive officer, chief financial officer and chief operating officer during the third and fourth quarters of 2009 and compensation costs in respect of warrants granted to these and other executives in the amount of NIS 2,173 thousand (US$585 thousand). Our general and administrative expenses also increased in 2009 by NIS 31 thousand (US$8 thousand) due to increased office and related expenses attributable to the relocation of our operations to Tirat Hacarmel near Haifa, Israel. In addition, we are obligated to pay rent on our previous facility until September 2010, for which we fully provided NIS 143 thousand (US$39 thousand) under office and related expenses for 2009.

Other (Income) Expenses, net. Our other (income) expenses, net for the year ended December 31, 2009 were income of NIS 714 thousand (US$192 thousand), as compared to expenses of NIS 3,193 thousand (US$860 thousand) for the year ended December 31, 2008. Other (income) expenses, net for the year ended December 31, 2009 were attributable to an adjustment of the net present value of future payments of royalties owed to the Office of the Chief Scientist for total income of NIS 1,214 thousand (US$327 thousand) resulting from new grants received from the Office of the Chief Scientist during 2009 and a change in our estimated income during the forthcoming years. The change in our estimated income also caused a decrease in our estimated liability to the Office of the Chief Scientist. We have estimated future payments of royalties to the Office of the Chief Scientist at a rate of 3 to 3.5%. After we commenced sales in 2009, we were able to update our estimate of the expected income during the forthcoming years and changed our estimated income accordingly. We reflected this by projecting slower growth over an extended period of time. The income from the decrease in our liability to the Office of the Chief Scientist was offset by costs related to the acquisition of NextGen, which closed in early 2010, and costs related to several public and private placements of our ordinary shares for a total of NIS 500 thousand (US$135 thousand). Other (income) expenses, net for the year ended December 31, 2008 were attributable to the first-time provision for royalties owed to the Office of the Chief Scientist because 2008 was the first fiscal year during which the probability that we would be required to repay the grants became “more likely than not.” The total provision in 2008 for royalty payments owed to the Office of the Chief Scientist was NIS 3,193 thousand (US$860 thousand).

 

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Operating Loss. As a result of the foregoing, our operating loss for the year ended December 31, 2009 was NIS 19,029 thousand (US$5,125 thousand), as compared to an operating loss of NIS 20,896 thousand (US$5,628 thousand) for the year ended December 31, 2008, a decrease of NIS 1,867 thousand (US$503 thousand), or 9%.

Finance Income. Our finance income for the year ended December 31, 2009 was NIS 243 thousand (US$65 thousand), as compared to NIS 1,035 thousand (US$279 thousand) for the year ended December 31, 2008, a decrease of NIS 792 thousand (US$213 thousand), or 76%. Finance income for the year ended December 31, 2009 was primarily composed of gains from exchange rate fluctuations, whereas finance income for the year ended December 31, 2008 was primarily composed of interest income on bank deposits.

Finance Costs. Our finance costs for the year ended December 31, 2009 were NIS 473 thousand (US$127 thousand), as compared to NIS 1,287 thousand (US$347 thousand) for the year ended December 31, 2008, a decrease of NIS 814 thousand (US$219 thousand), or 63%. Finance costs for the year ended December 31, 2009 were primarily composed of losses on exchange rate fluctuations and accrued interest on our liability to the Office of the Chief Scientist. The finance costs for the year ended December 31, 2008 were primarily composed of amortization costs of our convertible debentures issued in 2007, which were subsequently converted during 2007 and 2008.

Fair Value Losses on Warrants at Fair Value Through Profit Or Loss. Fair value losses on warrants at fair value through profit or loss for the year ended December 31, 2009 were NIS 244 thousand (US$66 thousand), as compared to NIS 7,950 thousand (US$2,141 thousand) for the year ended December 31, 2008, a decrease of NIS 7,706 thousand (US$2,075 thousand), or 97%, due to changes in the market value of the warrants. See “Application of Critical Accounting Policies—Derivative Financial Instruments.”

Loss and Total Comprehensive Loss. As a result of the foregoing, our loss and total comprehensive loss for the year ended December 31, 2009 was NIS 19,015 thousand (US$5,121 thousand), as compared to NIS 13,198 thousand (US$3,555 thousand) for the year ended December 31, 2008, an increase of NIS 5,817 thousand (US$1,567 thousand), or 44%.

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Research and Development Expenses, net. Our research and development expenses, net for the year ended December 31, 2008 were NIS 14,658 thousand (US$3,948 thousand), as compared to NIS 8,759 thousand (US$2,359 thousand) for the year ended December 31, 2007, an increase of NIS 5,899 thousand (US$1,589 thousand), or 67.3%. This increase is attributable to the expansion of our research and development activities in 2008, including a substantial increase in the number of employees and subcontractors engaged in research and development activities. The increase in compensation costs in respect of warrants was NIS 1,473 thousand (US$397 thousand) in 2008, primarily due to the warrants granted at a par value exercise price to the then-Chief Executive Officer of Nilimedix, who primarily engaged in research and development activities. The increase in salary and related expenses from 2007 to 2008 was NIS 1,611 thousand (US$434 thousand).

General and Administrative Expenses. Our general and administrative expenses for the year ended December 31, 2008 were NIS 3,045 thousand (US$820 thousand), as compared to NIS 2,720 thousand (US$733 thousand) for the year ended December 31, 2007, an increase of NIS 325 thousand (US$88 thousand), or 12%. This increase in general and administrative expenses in 2008 is primarily attributable to increased salary and related expenses of executive and administrative personnel by NIS 476 thousand (US$128 thousand) compared to 2007.

Other (Income) Expenses, net. Our other (income) expenses, net for the year ended December 31, 2008 were NIS 3,193 thousand (US$860 thousand), as compared to NIS 441 thousand (US$119 thousand) for the year ended December 31, 2007. Other (income) expenses, net in 2008 were attributable to the first-time provision for royalties owed to the Office of the Chief Scientist, while the other (income) expenses, net in 2007 were attributable to costs related to an issuance of our ordinary shares.

Operating Loss. As a result of the foregoing, our operating loss for the year ended December 31, 2008 was NIS 20,896 thousand (US$5,628 thousand), as compared to NIS 11,920 thousand (US$3,210 thousand) for the year ended December 31, 2007, an increase of NIS 8,976 thousand (US$2,417 thousand), or 75%.

 

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Finance Income. Our finance income for the year ended December 31, 2008 was NIS 1,035 thousand (US$279 thousand), as compared to NIS 571 thousand (US$154 thousand) for the year ended December 31, 2007, an increase of NIS 464 thousand (US$125 thousand), or 81%. Finance income for the years 2008 and 2007 was composed of interest income on bank deposits, and the increase in 2008 compared to 2007 was primarily attributable to a little more than a 100% increase in interest income on short-term bank deposits.

Finance Costs. Our finance costs for the year ended December 31, 2008 were NIS 1,287 thousand (US$347 thousand), as compared to NIS 1,020 thousand (US$275 thousand) for the year ended December 31, 2007, an increase of NIS 267 thousand (US$72 thousand), or 26%. Finance costs for the years ended December 31, 2008 and 2007 were primarily composed of losses on exchange rate fluctuations, which were substantially higher in 2008 compared to 2007, and of the amortization over a two-year period of our convertible debentures issued during 2007, which were subsequently converted during 2007 and 2008.

Fair Value Losses (Gains) on Warrants at Fair Value Through Profit Or Loss. Fair value losses (gains) on warrants at fair value through profit or loss for the year ended December 31, 2008 were losses of NIS 7,950 thousand (US$2,141 thousand), as compared to gains of NIS 10,358 thousand (US$2,790 thousand) for the year ended December 31, 2007, a change of NIS 18,308 thousand (US$4,931 thousand), or 177% due to changes in the market value of the warrants. See “—Derivative Financial Instruments.”

Loss and Total Comprehensive Loss. As a result of the foregoing, our loss and total comprehensive loss was NIS 13,198 thousand (US$3,555 thousand) for the year ended December 31, 2008, as compared to NIS 22,727 thousand (US$6,121 thousand) for the year ended December 31, 2007, an increase of NIS 9,529 thousand (US$2,566 thousand), or 42%.

Quarterly Results of Operations

The following table presents our unaudited quarterly results of operations for the nine quarters in the period ended March 31, 2010. This unaudited information has been prepared on the same basis as our annual audited consolidated financial statements and includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the unaudited information for the fiscal quarters presented. You should read this information together with the audited consolidated financial statements and the related notes included elsewhere in this prospectus. The operating results for any fiscal quarter are not necessarily indicative of the results for any future fiscal quarters or for a full fiscal year.

 

      Q1/10     Q4/09     Q3/09     Q2/09     Q1/09     Q4/08     Q3/08     Q2/08     Q1/08  
     (Unaudited)  
     NIS (In thousands)  

Sales

   543      368      —        —        —        —        —        —        —     

Cost of sales

   1,298      657      —        —        —        —        —        —        —     
                                                      
   755      289      —        —        —        —        —        —        —     

Research and development expenses, net

   2,252      3,010      3,990      3,137      3,056      3,962      2,666      3,786      4,244   

Selling, general and administrative expenses

   3,161      2,646      1,460      1,339      816      923      844      631      647   

Other (income) expenses, net

   231      (836   248      (196   70      3,193      —        —        —     
                                                      

Operating loss

   6,399      5,109      5,698      4,280      3,942      8,078      3,510      4,417      4,891   

Registration costs

   6,049      —        —        —        —        —        —        —        —     

Finance income

   (29   (665   (36   (16   (854   (280   (234   (255   (266

Fair value losses (gains) on warrants at fair value through profit or loss

   2,469      (3,094   (1,215   4,455      (390   (1,560   (5,640   2,250      (3,000

Finance costs

   1      389      177      551      132      477      —        778      986   
                                                      

Total loss

   14,889      2,291      4,624      9,270      2,830      5,761      (2,364   7,190      2,611   
                                                      

 

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Our operating results are difficult to forecast and will fluctuate, and we believe that period-to-period comparisons of our operating results will not necessarily be meaningful. See “Risk Factors—We may experience significant fluctuations in our quarterly results of operations, which could cause us to miss expectations about these results and cause the trading price of our ordinary shares to decline.”

Liquidity and Capital Resources

Since commencing our operations as a medical device company in 2004 through March 31, 2010, we have funded our operations primarily through private placements and public offerings of our ordinary shares, and grants from the Office of the Chief Scientist in the aggregate amount of NIS 7,422 thousand (US$1,999 thousand). During the year ended December 31, 2009, we received grants from the Office of the Chief Scientist totaling NIS 3,003 thousand (US$809 thousand). As of March 31, 2010, we had working capital of NIS 34,854 thousand (US$9,387 thousand), and our primary source of liquidity was cash and cash equivalents in the amount of NIS 37,534 thousand (US$10,109 thousand). As of December 31, 2009 and 2008, we had working capital of NIS 22,435 thousand (US$6,042 thousand) and NIS 18,412 thousand (US$4,959 thousand), respectively, and our primary source of liquidity was cash and cash equivalents in the amount of NIS 24,388 thousand (US$6,568 thousand) and NIS 17,503 thousand (US$4,714 thousand), respectively.

We believe that our current cash balances will be sufficient to meet our anticipated cash requirements for the coming year. If existing cash and cash generated from operations are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity securities or obtain a credit facility. We can provide no assurance that we will not require additional capital beyond the amounts currently forecasted by us or that any such required additional capital will be available on reasonable terms, if at all.

Historical Cash Flows

 

     Year ended December 31,  
     2009     2009     2008     2007  
      Convenience
translation

into  US$
    NIS  
      (In thousands)  

Net cash used in operating activities

   (4,282   (15,902   (13,964   (10,551

Net cash provided by (used in) investing activities

   105      392      (3,590   (974

Net cash generated from financing activities

   5,989      22,239      13,869      25,126   

Net increase (decrease) in cash and cash equivalents

   1,812      6,729      (3,685   13,601   

 

     Three months ended March 31,  
     2010     2010     2009  
     (Unaudited)  
      Convenience
translation

into  US$
    NIS  
      (In thousands)  

Net cash used in operating activities

   (1,587   (5,891   (3,461

Net cash provided by (used in) investing activities

   38      141      (3,265

Net cash generated from financing activities

   5,098      18,925      —     

Net increase (decrease) in cash and cash equivalents

   3,549      13,175      (6,726

Operating Activities

Net cash used in operating activities in the three months ended March 31, 2010 was NIS 5,891 thousand (US$1,587 thousand), as compared to NIS 3,461 thousand (US$932 thousand) in the three months ended March 31, 2009. Net cash used in operating activities in 2009 was NIS 15,902 thousand (US$4,283 thousand), as

 

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compared to NIS 13,964 thousand (US$3,761 thousand) and NIS 10,551 thousand (US$2,842 thousand) in 2008 and 2007, respectively. The increases in net cash used in operating activities in 2009 and in the three months ended March 31, 2010 primarily reflect the increases in operating losses from 2008 to 2009 and from the first quarter of 2009 to the first quarter of 2010.

Investing Activities

Net cash provided by investing activities in the three months ended March 31, 2010 was NIS 141 thousand (US$38 thousand) as compared to net cash used in investing activities of NIS 3,265 thousand (US$879 thousand) in the three months ended March 31, 2009. Net cash provided by investing activities in the three months ended March 31, 2010 is attributable to repayments of a loan previously provided to an employee and short-term deposits, which repayments were offset by capital expenditures of NIS 274 thousand (US$74 thousand). Capital expenditures in the three months ended March 31, 2010 primarily include expenditures required for our expanded manufacturing activities. Net cash used in investing activities in the three months ended March 31, 2009 is attributable to investments in short-term deposits and capital expenditures, which primarily included expenditures relating to the relocation to our new facility in Tirat Hacarmel.

Net cash provided by investing activities in 2009 was NIS 392 thousand (US$105 thousand), as compared to net cash used in operating activities of NIS 3,590 thousand (US$967 thousand) and NIS 974 thousand (US$262 thousand) in 2008 and 2007, respectively. Our capital expenditures in 2009 of NIS 1,543 thousand (US$416 thousand), as compared to NIS 501 thousand (US$135 thousand) and NIS 225 thousand (US$61 thousand) in 2008 and 2007, respectively, were offset by the repayment of short-term bank deposits. Our capital expenditures in 2009 reflect an increase in our scope of operations and primarily include expenditures relating to the relocation to our new facility in Tirat Hacarmel, including expenditures required for our clean room and machinery used for manufacturing. Net cash used in investing activities in 2008 was primarily affected by an investment in short-term bank deposits and, in 2009, the repayment of such deposits.

Financing Activities

Net cash generated from financing activities in the three months ended March 31, 2010 was NIS 18,925 thousand (US$5,098 thousand), comprised primarily of proceeds from the exercise of warrants to purchase our ordinary shares (amounting to NIS 14,591 thousand (US$3,930 thousand)), net proceeds from the issuance of shares of NextGen through a rights offering, and the amount of cash NextGen had when we acquired it, partially offset by deferred charges incurred in connection with this offering which will be attributed to equity if and when this offering is completed. For details regarding our acquisition of NextGen, which we consummated in January 2010, and the rights offering in NextGen, which was consummated in March 2010, see “Related Party Transactions—Transactions with our Affiliates and Associates—Transactions with Sindolor Medical.” We did not generate cash from financing activities during the first quarter of 2009.

Net cash generated from financing activities in 2009 was NIS 22,239 thousand (US$5,989 thousand), comprised primarily of proceeds from the issuance of our ordinary shares and warrants, as compared to NIS 13,869 thousand (US$3,735 thousand) and NIS 25,126 thousand (US$6,767 thousand) in 2008 and 2007, respectively. Net cash generated from financing activities in 2008 was primarily affected by the conversion of convertible debentures into ordinary shares and the subsequent release of the restricted deposit held to secure the debentures. Net cash generated from financing activities in 2007 was comprised primarily of proceeds from the issuance of our ordinary shares and from the exercise of warrants.

 

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Contractual Obligations

The following table summarizes our contractual obligations as of December 31, 2009:

 

    Payments Due by Period

Contractual Commitments

  Total   Less than
1 year
  1-3
years
  3-5
years
  More than
5 years
    NIS (In thousands)

Operating leases:

         

Facility (1)

  2,056   511   1,147   398     —  

Vehicles (2)

  128   128   —     —     —  

Other long-term liabilities reflected on the company’s balance sheets:

         

Liability to minority interest (3)

  3,085   46   1,217   1,822   —  

Office of the Chief Scientist (4)

  4,183   135   4,048   —     —  
                   

Total

  9,452   820   6,412   2,220   —  

 

(1) Includes the lease of our current Tirat Hacarmel facility and the lease of our previous facilities in Matam, Haifa, which is due to expire in September 2010. As of December 31, 2009, we had no contractual obligations with respect to our facilities in Ramat-Gan. However, during 2010, we became contractually obligated under our Ramat-Gan lease to pay NIS 48 thousand (US$13 thousand) over a one-year period ending on December 31, 2010. See also “Related Party Transactions—Transactions with Our Directors and Principal Officers” for a description of our obligations with respect to our facilities in Ramat-Gan.
(2) We lease cars for the use of our employees. These leases may be terminated at any time, subject to the payment of early termination fees, which amount to between two and four months of lease payments. The amounts shown above reflect the potential liability if all car leases were terminated.
(3) Relates to our obligation to pay royalties to the minority shareholders of Nilimedix pursuant to our February 6, 2005 agreement with Nilimedix and Avraham Shkalim. This obligation expires upon the exercise of these shareholders’ rights to convert their ordinary shares of Nilimedix into our ordinary shares. As of the date hereof, all shareholders have committed to convert their ordinary shares, but the conversion of such shares is subject to the receipt of certain approvals, including a pre-ruling of the Israeli Tax Authority allowing the shareholders to postpone tax payment. For a more detailed description of this agreement, see “Related Party Transactions—Transactions with Our Affiliates and Associates—Transactions with Nilimedix.”
(4) See “—Office of the Chief Scientist.”

Recent Accounting Pronouncements

Warrants of Subsidiaries

IAS 27 (revised), “consolidated and separate financial statements,” (effective from July 1, 2009), requires that the effects of all transactions with non-controlling interests be recorded in equity if there is no change in control and these transactions will no longer result in goodwill or gains and losses. IAS 27 (revised) also specifies the accounting when control is lost. Any remaining interest in the entity is re-measured to fair value, and a gain or loss is recognized in profit or loss. We have applied IAS 27 (revised) prospectively to transactions with non-controlling interests from January 1, 2010.

 

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IAS 27 (revised) determines that D. Medical’s portion in the equity fund due from the issuance of warrants of subsidiaries should be classified as a non-controlling equity rights. The effect of this change was as follows:

 

     March 31, 2009    December 31, 2009
     (Unaudited)     
     As
previously
reported
   Effect of
retrospective
change
    As reported
in the
current
statement
   As
previously
reported
   Effect of
retrospective
change
    As reported
in the
current
statement
      NIS
     (In thousands)

Effect on equity:

               

Warrants

   144,984    (239   144,745    167,737    (382   167,355
                               

Minority interest

   399    239      638    207    382      589
                               

Off-balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Quantitative and Qualitative Disclosure of Market Risks

Exchange Rate Risk

Some of our assets and liabilities are affected by fluctuations in the exchange rate between the NIS and the U.S. dollar and between the NIS and the Euro. For example, our obligation to pay royalties to the Office of the Chief Scientist is linked to the U.S. dollar and some of our suppliers are located in Europe and require payment in Euros.

As of March 31, 2010, our total liabilities, net linked to the U.S. dollar amounted to NIS 5,620 thousand (US$1,514 thousand). An increase of 5% in the exchange rate between the NIS and the U.S. dollar would cause an exchange rate loss of NIS 281 thousand (US$76 thousand), while an increase of 10% in the exchange rate between the NIS and the U.S. dollar would cause an exchange rate loss of NIS 562 thousand (US$151 thousand). A decrease of 5% in the exchange rate between the NIS and the U.S. dollar would cause an exchange rate gain of NIS 281 thousand (US$76 thousand), while a decrease of 10% in the exchange rate between the NIS and the U.S. dollar would cause an exchange rate gain of NIS 562 thousand (US$151 thousand).

As of December 31, 2009, our total assets, net linked to the Euro amounted to NIS 604 thousand (US$163 thousand). An increase of 5% in the exchange rate between the NIS and the Euro would cause an exchange rate gain of NIS 30 thousand (US$8 thousand), while an increase of 10% in the exchange rate between the NIS and the Euro would cause an exchange rate gain of NIS 60 thousand (US$16 thousand). A decrease of 5% in the exchange rate between the NIS and the Euro would cause an exchange rate loss of NIS 30 thousand (US$8 thousand), while a decrease of 10% in the exchange rate between the NIS and the Euro would cause an exchange rate loss of NIS 60 thousand (US$16 thousand). The above analysis is based on the exchange rate between the NIS and the Euro as of March 31, 2010, which was 1 Euro = NIS 4.9905

During 2008 and 2009, the exchange rate between the NIS and the U.S. dollar decreased by 1.1% and 0.7%, respectively, and further decreased by 1.6% during the first quarter of 2010. During 2008, the exchange rate between the NIS and the Euro decreased by 6.4%, and during 2009, the exchange rate between the NIS and the Euro increased by 2.7%. During the first quarter of 2010, the exchange rate between the NIS and the Euro decreased by 8.3%.

To date, we have not hedged the risks associated with fluctuations in currency exchange rates.

Interest Rate Risk

Our obligation to pay royalties to the Office of the Chief Scientist is linked to LIBOR and we are therefore exposed to changes in LIBOR.

 

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As of March 31, 2010, we reported a total liability of NIS 4,572 thousand (US$1,231 thousand) with respect to our obligation to pay royalties to the Office of the Chief Scientist. A 25% increase in LIBOR would cause an interest rate loss of NIS 43 thousand (US$12 thousand), while a 50% increase in LIBOR would cause an interest rate loss of NIS 87 thousand (US$23 thousand). A 25% decrease in LIBOR would cause an interest rate gain of NIS 44 thousand (US$12 thousand), while a 50% decrease in LIBOR would cause an interest rate gain of NIS 86 thousand (US$23 thousand). The above analysis is based on LIBOR as of March 31, 2010, which was 0.98%.

In addition, we intend to invest our cash balances, including certain of the net proceeds from this offering pending their ultimate use, primarily in bank deposits and securities issued by the U.S. and Israeli governments. We are exposed to market risks resulting from changes in interest rates relating primarily to our financial investments in cash and deposits. We do not use derivative financial instruments to limit exposure to interest rate risk. Our interest gains may decline in the future as a result of changes in the financial markets; however, we believe any such potential loss would be immaterial to us.

Capitalization

Our obligation to pay royalties to the Office of the Chief Scientist and to Nilimedix’ minority shareholders is reported on a capitalized basis. The net present value of these liabilities is dependent upon our estimates and assumptions as to future revenues and interest rates and the risk that we will not meet such estimates. Based on such estimates and assumptions, we are using a capitalization rate of 15% to calculate the present value of future payments to the Office of the Chief Scientist and royalties to Nilimedix’ minority shareholders. Market conditions and risks could result in a change of our estimates and assumptions as to future revenues and interest rates, which would affect our rate of capitalization.

As of March 31, 2010, we reported a total liability of NIS 4,572 thousand (US$1,231 thousand) with respect to our obligation to pay royalties to the Office of the Chief Scientist and a liability of NIS 3,101 thousand (US$835 thousand) with respect to our obligation to pay royalties to Nilimedix’ minority shareholders. A 25% increase in the rate of capitalization would decrease our liabilities by NIS 620 thousand (US$167 thousand), while a 50% increase in the rate of capitalization would decrease our liabilities by NIS 1,363 thousand (US$367 thousand). A 25% decrease in the rate of capitalization would increase our liabilities by NIS 1,280 thousand (US$345 thousand), while a 50% decrease in the rate of capitalization would increase our liabilities by NIS 2,503 thousand (US$674 thousand). For a description of our obligation to pay royalties to Nilimedix’ minority shareholders, see Note 16 to our audited consolidated financial statements included elsewhere in this prospectus.

 

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INDUSTRY

Understanding Diabetes

Diabetes is a chronic, life-threatening disease for which there is no known cure. Diabetes is caused by the body’s inability to produce or effectively utilize the hormone insulin, which prevents the body from adequately regulating blood glucose levels.

Glucose is the primary source of energy for cells and must be maintained at certain concentrations in the blood so that cells can function optimally. Normally, the pancreas controls blood glucose levels by secreting the hormone insulin to lower blood glucose levels when concentrations are too high. In people with diabetes, the pancreas does not produce sufficient levels of insulin, or the body fails to utilize insulin effectively, causing blood glucose concentrations to rise to abnormally high levels. This condition is called hyperglycemia and can lead to serious chronic long-term complications, such as heart disease, limb amputations, loss of kidney function and blindness. To prevent high blood glucose levels, people with diabetes often administer insulin in an effort to normalize blood glucose levels. Unfortunately, the administration of insulin can drive blood glucose levels too low, resulting in hypoglycemia. In cases of severe hypoglycemia, diabetes patients risk acute complications, such as loss of consciousness or even death. Due to the drastic nature of the acute complications associated with hypoglycemia, many diabetes patients are afraid of lowering their blood glucose levels. Consequently, these patients often remain in a hyperglycemic state, exposing themselves to the long-term chronic complications discussed above.

According to the ADA, (i) diabetes was the seventh leading cause of death listed on U.S. death certificates for adults in 2006, (ii) adults with diabetes are subject to a substantially higher risk of suffering a stroke or dying from a heart disease than adults who do not have diabetes, (iii) diabetes is the leading cause of new cases of blindness among adults aged 20 to 74 and is the leading cause of kidney failure, accounting for 44% of new cases in 2005, (iv) approximately 60 to 70% of people with diabetes have mild to severe forms of nervous system damage, and (v) more than 60% of non-traumatic lower-limb amputations occur in people with diabetes.

Diabetes is typically classified into two categories: Type 1 diabetes (previously called insulin-dependent diabetes mellitus or juvenile-onset diabetes) and Type 2 diabetes (previously called non-insulin-dependent diabetes mellitus or adult-onset diabetes), which account for 5 to 10% and 90 to 95%, respectively, of all diagnosed diabetes cases in the United States. Type 1 diabetes patients must take insulin daily, while Type 2 diabetes patients may require diet and nutrition management, exercise, oral medications and/or the administration of insulin to regulate blood glucose levels.

According to the National Diabetes Information Clearing House, or the NDICH, a unit of the National Health Institute, Type 1 diabetes:

 

   

is not currently preventable;

 

   

develops when the body’s immune system destroys pancreatic beta cells, the only cells in the body that produce insulin;

 

   

usually strikes children and young adults (although diabetes can occur at any age); and

 

   

may be caused by autoimmune, genetic or environmental factors, such as viruses.

According to the NDICH, Type 2 diabetes:

 

   

usually begins as insulin resistance, a disorder in which (i) cells do not use insulin properly and require larger than normal amounts of insulin to function normally, and (ii) the pancreas gradually loses its ability to produce insulin; and

 

   

is associated with older age, obesity, a family history of diabetes, a history of gestational diabetes, impaired glucose metabolism, physical inactivity and race/ethnicity.

Although still rare, Type 2 diabetes in children and adolescents is being diagnosed more frequently.

 

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Worldwide Prevalence of Diabetes

The IDF estimates that diabetes currently affects 285 million people worldwide and that by 2030, 438 million people will be affected by diabetes worldwide. The rising prevalence of diabetes – the IDF estimated that diabetes affected 151 million people worldwide in 2000 –  is likely to be primarily due to rapid cultural and social changes, including aging populations, increasing urbanization, dietary changes, reduced physical activity and other unhealthy lifestyle and behavioral patterns.

The following table presents projected regional estimates for diabetes in persons aged 20 to 79 in 2010 and 2030:

 

    2010   2030   2010/2030

Region

  Population   No. of
people

with
diabetes
  Comparative
diabetes
prevalence
  Population   No. of
people

with
diabetes
  Comparative
diabetes
prevalence
  Increase
in the no.
of people
with
diabetes
    (In millions)   (In millions)   (%)   (In millions)   (In millions)   (%)   (%)

North America & Caribbean

  320   37.4   10.2   390   53.2   12.1   42.4

Middle East and North Africa

  344   26.6   9.3   533   51.7   10.8   93.9

South-East Asia (1)

  838   58.7   7.6   1,200   101.0   9.1   72.1

Europe (2)

  646   55.4   6.9   659   66.5   8.1   20.0

South and Central America

  287   18.0   6.6   382   29.6   7.8   65.1

Western Pacific (3)

  1,531   76.7   4.7   1,772   112.8   5.7   47.0

Africa

  379   12.1   3.8   653   23.9   4.7   98.1
                           

Total

  4,345   284.6   6.4   5,589   438.4   7.7   54.0
                           

 

Source: IDF.

(1) The South-East Asia region includes, among other countries, India.
(2) The Europe region includes Russia.
(3) The Western Pacific region includes, among other countries, China.

Cost of Treatment

According to the Diabetes Atlas, estimated global healthcare expenditures associated with the treatment and prevention of diabetes and its complications are expected to total at least US$376 billion in 2010. By 2030, this number is projected to exceed US$490 billion.

In addition, the Diabetes Atlas estimates that there is a large disparity in spending for diabetes treatment among regions and countries with more than 80% of estimated global diabetes expenditures made in higher income countries rather than in lower- and middle-income countries where over 70% of people with diabetes live.

The following table presents projected diabetes-related regional healthcare expenditures in 2010 and 2030:

 

Region

   2010    2030
     (In US$ billions)    (In US$ billions)

North America & Caribbean

   214.2    288.7

Middle East and North Africa

   5.6    11.4

South-East Asia (1)

   3.1    5.3

Europe (2)

   105.5    124.6

South and Central America

   8.1    13.2

Western Pacific (3)

   38.2    44.8

Africa

   1.4    2.0

 

 

Source: The Diabetes Atlas

(1) The South-East Asia region includes, among other countries, India, Bangladesh, Nepal and Sri Lanka.
(2) The Europe region includes Russia.
(3) The Western Pacific region includes, among other countries, China, Indonesia, Australia, Japan, Korea, Philippines, Thailand and Vietnam.

 

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According to the Diabetes Atlas, the United States is projected to spend US$198 billion, or 52.7%, of the total global diabetes-related healthcare expenditures in 2010, while India, the country with one of the largest number of diabetes patients, is projected to spend an estimated US$2.8 billion, or less than 1%, of the total global diabetes-related healthcare expenditures in the same period. In 2010, an estimated average of US$7,383 per patient is expected to be spent on diabetes-related care in the United States, while an estimated US$55 per patient will be spent in India.

We believe that a cost-effective solution for the treatment of diabetes is critical in developing countries where income levels are generally low since diabetes patients in these countries have to pay for most, if not all, of their treatment. In addition, if the healthcare systems in these countries undergo reforms and increase their support for diabetes patients, we believe that their limited resources will cause them to seek cost-effective diabetes treatment solutions.

We believe that the economic burden of diabetes treatment may be too high for some patients in developed countries as well. Diabetes patients who either reside in developed countries where reimbursement for diabetes treatment is limited, such as certain countries in eastern Europe, or reside in developed countries where the treatment of diabetes does not qualify for partial or full reimbursement under their national healthcare system, such as Type 2 diabetes patients in many developed countries, are also in need of a cost-effective insulin delivery device. In addition, diabetes patients using private healthcare systems often require treatment solutions that are not cost prohibitive.

Treating Diabetes

Diabetes is often frustrating and difficult for patients to manage because blood glucose levels are affected by the carbohydrate content of meals, exercise, stress, illness or impending illness, hormonal releases, variability in insulin absorption and changes in the effects of insulin on the body. Insulin-dependent diabetes patients, consisting primarily of Type 1 patients, require (i) constant monitoring and the daily administration of insulin, as well as the ingestion of additional carbohydrates throughout the day, in order to maintain blood glucose levels within normal ranges, and (ii) a continuous supply of insulin, known as basal insulin, to provide for background metabolic needs. In addition to basal insulin, insulin-dependent patients require supplemental insulin, known as bolus insulin, to compensate for carbohydrates ingested during meals or snacks or for high blood glucose levels. Diabetes patients attempting to control their blood glucose levels tightly to prevent long-term complications associated with fluctuations in levels are at greater risk for overcorrection, which often results in hypoglycemia. As a result, the time spent managing diabetes, the fluctuations in blood glucose levels and the fear of hypoglycemia all contribute to the often overwhelming burden borne by patients and their families.

Insulin Therapies

There are three primary types of insulin therapy:

 

   

conventional therapy, which consists of patients using insulin injector systems (as described under “—Insulin Delivery Systems—Insulin Injectors Systems”) to administer a mixture of long-acting and regular insulin once or twice per day;

 

   

MDI therapy, which consists of patients using insulin injector systems to administer long-acting insulin or a mixture of long-acting and regular insulin once or twice per day, plus an additional administration of a rapid-acting insulin before all meals and snacks and as needed; and

 

   

insulin pump therapy, which consists of patients using insulin pumps (as described under “—Insulin Delivery Systems—Insulin Pumps”) to administer a continuous infusion of basal rapid-acting insulin via a subcutaneous (i.e., below the skin) infusion set with the ability to infuse bolus rapid-acting insulin before all meals and snacks and as needed.

 

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Insulin Injector Systems

Conventional and MDI therapies use insulin injector systems, which include pre-filled and reusable insulin pen injectors, insulin syringe and needle sets and insulin jet injectors.

 

   

Insulin pen injectors are either pre-filled, ready-to-use devices that contain multiple doses of insulin or reusable devices that use cartridges of insulin that are replaced every few days. Insulin pen injectors use short thin needles and a spring to deliver the medication.

 

   

Insulin syringe and needle sets are specially designed needles attached to small, hollow barrel-shaped devices equipped with a movable plunger and are intended for single use. Most insulin syringe and needle sets are packaged in ready-to-use form with the needle attached to the barrel.

 

   

Insulin jet injectors are designed to deliver insulin subcutaneously by releasing a high pressure jet stream through a very small opening located on the bottom of the injector.

Insulin Pumps

There are currently two types of insulin pumps available on the market: durable and fully-disposable.

Durable insulin pumps are small mechanical devices slightly larger than a pager. A durable insulin pump is worn externally, usually on a belt or in a pocket, and delivers insulin subcutaneously through a disposable infusion set. An infusion set consists of two tubes: a tiny flexible plastic tube, known as a cannula, which is inserted beneath the skin, usually in the abdomen, arms or legs; and a thin plastic tube, which connects the cannula to the insulin pump. Infusion sets are usually replaced every two or three days. Insulin is delivered through the infusion set via a reservoir cartridge in an insulin pump that typically contains between 200 and 300 units of insulin. The reservoir cartridge connects to the infusion tubing through an adapter in the pump.

Fully-disposable insulin pumps are small, light and self-adhesive disposable devices that are currently only offered by Insulet. The device is worn directly on the skin beneath a patient’s clothing for up to three days before the pump is replaced. Insulin is injected into a cartridge reservoir in the pump, which contains up to 200 units of insulin, and is delivered through a cannula inserted beneath the skin via an automated insertion process. A disposable insulin pump is accompanied by a wireless hand-held device, similar in size and appearance to a personal digital assistant, which is used to program and control the insulin pump.

The February 2008 Center for Evidence-based Purchasing Buyers’ Guide: Insulin Pumps estimates that the direct costs of insulin pump therapy are approximately three times higher than MDI therapy. These costs include equipment costs (insulin pumps and related disposables) and insulin costs.

The following table sets forth the 2008 market share of insulin delivery devices in Europe (according to Frost & Sullivan’s European Insulin Delivery Devices Market Outlook, April 2009) based on percent of revenues from sales by insulin delivery device:

 

Type of Insulin Delivery Device

   Europe  

Non-Insulin Pump Delivery Devices

   73.3

Insulin Pumps

   26.7

The Benefits of Insulin Pump Therapy

MDI therapy and insulin pump therapy are intensive insulin management therapies, which many healthcare professionals believe result in a more effective control over blood glucose levels. Although conventional therapy is easy to administer and is relatively inexpensive, it is the least effective therapy and leads to the highest long-term complication rates.

 

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The 1993 Diabetes Control and Complications Trial, or DCCT, which tracked Type 1 diabetes patients, and the 1998 UK Prospective Diabetes Study, or UKPDS, which tracked Type 2 diabetes patients, demonstrated that diabetes patients who intensively managed blood glucose levels delayed the onset, and slowed the progression of, diabetes-related complications. The DCCT demonstrated that intensive management reduced the risk of complications for Type 1 diabetes patients over an average period of 6.5 years by 76% for eye disease, 60% for nerve disease and 54% for albuminuria and 39% for microalbuminuria, both of which are types of kidney disease. The UKPDS demonstrated that lowering blood glucose levels in Type 2 diabetes patients through intensive diabetes therapy resulted in lower incidences of diabetes-related eye disease, nervous system disease and kidney disease and that the rate of overall complications relating to microvascular disease decreased by 25% over an average of ten years. The 2005 Epidemiology of Diabetes Intervention and Complications Study, or EDIC, which reexamined approximately 90% of the DCCT subjects over a period of six years, concluded that intensive diabetes therapy reduces the risk of cardiovascular disease by 42% and the risk of non-fatal heart attack, stroke or death from cardiovascular disease by 57%.

Notwithstanding the benefits of MDI therapy, insulin pump therapy is widely considered to be the most physiological and most advanced of all insulin therapies because it closely mimics a normally-functioning pancreas by using rapid-acting insulin and allows patients to customize basal and bolus insulin doses to meet their specific and varying daily insulin needs. Studies have shown that MDI therapy, although more effective than conventional therapy, is less physiological than insulin pump therapy since it delivers a constant level of insulin during the day and night while the body’s needs for basal insulin is usually not as constant. In addition, MDI therapy requires as many as six painful injections per day to compensate for each meal or snack.

Insulin pump therapy has been shown to provide people with insulin-dependent diabetes with numerous advantages compared to MDI therapy, including:

 

   

Better Glycemic Control  –  several studies have demonstrated the superiority of insulin pump therapy over MDI therapy with respect to better glycemic control, reduced glycemic variability and hypoglycemic events. Insulin pump therapy also provides greater consistency in basal insulin absorption over MDI therapy due to the use of rapid-acting, as opposed to long-acting, insulin, and in bolus therapy through the infusion of supplemental insulin more frequently and without the need for injection.

 

   

Increased Lifestyle Flexibility  –  insulin pump therapy provides patients with increased flexibility with respect to their diet, ability to exercise and sleeping habits. With MDI therapy, patients may need to eat whether or not they are hungry to compensate for peaking insulin, falling blood glucose levels or exercise. With insulin pump therapy, insulin peaking is reduced and patients can generally tolerate falling blood glucose levels or exercise without being forced to eat by temporarily reducing their infusion rate of basal insulin. Moreover, insulin pump therapy frees patients from frequent painful injections.

The Challenges of Current Insulin Pump Therapy

Although insulin pump therapy is considered the best clinical treatment solution for Type 1 diabetes patients and for Type 2 diabetes patients who are insulin-dependent, its widespread adoption has been limited.

We believe that the limited adoption of insulin pump therapy is attributable to its high cost and the less than optimal performance and design of currently available insulin pumps. We further believe that these factors are related to the use of a motor and gear train delivery method in our competitors’ insulin pumps.

Cost

The insulin pumps offered by our competitors use a motor and a gear train to administer insulin, which we believe results in high production costs. In addition, motor and gear trains require sophisticated and costly manufacturing processes. We believe that the high costs associated with motor and gear train insulin pumps have severely limited the adoption of such pumps, particularly in developing countries.

 

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As a consequence of the high costs associated with motor and gear train insulin pumps, durable insulin pumps have a list price of between US$4,000 and US$6,000. These costs are in addition to the continuing annual cost of infusion sets, batteries and an expensive type of insulin required for the operation of an insulin pump. To our knowledge, durable insulin pumps currently on the market are generally intended to be used over a period of four years, which is the standard warranty period for such devices. The list price of Insulet’s Omnipod – the only marketed fully-disposable insulin pump – can be as low as US$700; however, after the initial acquisition of the system, a user of an Omnipod needs to purchase at least 10 disposable insulin pumps per month with a list price of US$400 each. Assuming a four-year operation period (the remote control of the Omnipod system also carries a four-year warranty period), and taking into account the cost of supplies required for the durable insulin pumps (estimated at US$1,500 per year, excluding the cost of insulin), the overall price of the fully-disposable insulin pump is even higher than the price of durable insulin pumps. The overall list price of the Omnipod could match the list price of a durable insulin pump after only two years of use. Nevertheless, the cost advantage of the fully-disposable insulin pump remains in its pay-as-you-go pricing model. Since we have only recently begun sales of our Adi durable insulin pump and our LightyDD infusion sets in a limited number of countries in Europe, have not yet begun sales of our Nilipatch insulin patch pump, and have not yet executed a final manufacturing and supply agreement, we are not yet able to provide definitive information as to the costs or list prices of our products. Nevertheless, since our insulin pumps do not require a motor and gear train, we believe that we will be able to provide a cost-effective treatment solution to governments and private payors. For a detailed description of our spring-based technology and products, see “Business.”

In the United States and other developed countries, the costs of insulin pumps are usually covered in part by third-party payors, but co-payments and deductibles can still be significant. For example, co-payments in the United States usually amount to 20% of the cost of an insulin pump, which means that a patient would have to invest between US$800 and US$1,200 for the insulin pump and US$300 annually for infusion sets, in addition to the cost of insulin. Type 2 diabetes patients typically face even higher costs because they receive lower reimbursements.

We believe that a further obstacle to the widespread adoption of insulin pump therapy in developed countries is third-party payors’ reluctance to cover the large up-front costs of durable insulin pumps due to the relatively short average length of time patients remain with the same health plan and the risk that they may abandon insulin pump therapy.

Performance

We believe that motor and gear train delivery mechanisms have certain disadvantages. For example, the successful delivery of the intended dosage of insulin is dependent upon the proper operation of a complex process, beginning with a delivery command to the motor, which then activates the gear train and piston in order to create a chain reaction that eventually results in the delivery of the intended dosage of insulin. In order to achieve the force that would push the insulin into a patient’s body, a motor and gear train-based delivery process requires many actions, while a spring-based delivery mechanism requires one action – the release of the spring. Therefore, we believe that a motor and gear train-based insulin delivery process is more susceptible to malfunction than a spring-based delivery process since in a motor and gear train-based delivery process many individual faults can jeopardize the electromechanical delivery command. For a detailed description of our spring-based delivery technology, see “Business—D. Medical’s Treatment Solution—Spring-Based Delivery.” If not detected by the patient, a malfunction can lead to hyperglycemia or hypoglycemia.

In addition, a motor and gear train system is not directly equipped for the real-time discovery of an improperly executed electromechanical command because it does not measure the flow of insulin into the body. This also leads to a limited ability to detect occlusions, which are blockages in the tube, and an inability to detect air bubbles in the cartridge reservoir or infusion set of the insulin pumps. Although motor and gear train insulin pumps have an occlusion detection and warning feature, such detection may take up to a few hours since the actual insulin output is not closely monitored. Delayed occlusion detection poses an even higher risk to patients

 

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while they are sleeping. We believe that motor and gear train insulin pumps offer no solution to the detection of air bubbles in infusion sets, which can prevent a full and accurate delivery of the intended insulin dosage.

Durable insulin pumps, including our Adi insulin pump and the durable portion of our semi-disposable Nilipatch insulin patch pump, are intended to be used over a four-year period, which is the standard warranty period for such devices. However, compared to the movable components in the Adi insulin pump, which are included in a disposable cartridge, the movable components in durable insulin pumps are subject to wear and tear, which can compromise the delivery of insulin. Furthermore, because our competitors’ durable insulin pumps contain a motor and gear train, it is difficult for them to minimize the size and reduce the weight of their devices.

Aside from the motor and gear train, our competitors’ insulin pumps do not include integrated infusion sets, which we believe increases the likelihood of the occurrence of leaks in the joint connecting the infusion set to the insulin pump, known as a luer lock, and can result in the delivery of incorrect insulin dosages. More importantly, we believe that none of our competitors’ infusion sets or insulin pumps are capable of detecting the detachment of an infusion set from a patient’s body. If, for example, an infusion set detaches from a patient’s body during the night with no warning, the patient may not receive insulin for a prolonged period, which may result in an adverse medical event.

Furthermore, in the DCCT, an important aspect of intensive insulin management was the monitoring of blood glucose levels at least four times per day using conventional single-point blood glucose meters. Although not unique to insulin pump therapy, insufficient testing of blood glucose levels reduces the effectiveness of insulin pump therapy. Currently, most patients using an insulin pump must perform blood glucose testing independently and manually adjust the infusion instructions accordingly. We believe that most patients do not perform sufficient testing. Therefore, diabetes patients will benefit from a system that allows for both continuous glucose monitoring and continuous subcutaneous insulin infusion on the same patch, such as the system we are currently developing. See “Business—Research and Development” for a more detailed description of our “closed-loop” system.

Design and Ease of Use and Maintenance

Many patients find durable motor and gear train insulin pumps to be obtrusive. Durable insulin pumps are about the size of a large pager and are typically worn on a belt or in a pocket. To experience truly continuous insulin infusion therapy, a patient must be continuously connected to the insulin pump via up to 42 inches of tubing, which can interfere with a patient’s normal movement, sleep and exercise. In addition, the infusion set’s tubing can twist, leak or be accidentally disconnected, resulting in inconsistent or interrupted insulin delivery and requiring patients to take the time to insert a new infusion set. Additionally, patients often disconnect their infusion set’s tubing and remove the insulin pump in order to shower, swim and exercise, which is both an inconvenience and an interruption of insulin pump therapy. In some cases, patients must remove the insulin pump because the device is not waterproof.

Insulin pumps require patients to manage numerous components, including the insulin pump, reservoir cartridge, tubing, infusion set, insertion device, batteries and separate blood glucose testing supplies. Insulin pumps also require a significant number of steps to initiate insulin delivery, including connecting and priming various components of the system and manually inserting the infusion set, either with or without an insertion device. In addition, most insulin pumps have user interfaces that require the user to learn specific coding instructions, which may be difficult to understand and may limit the use of advanced therapy features. Because of these attributes, insulin pumps require training and we believe are often difficult to use, limiting a patient’s ability to optimize their diabetes management through insulin pump therapy. We also believe that the complexity of certain insulin pumps significantly limits healthcare professionals’ willingness to recommend insulin pump therapy due to the limited number of patients that they consider to be insulin pump therapy candidates.

Finally, due to the need to wear and be connected to an insulin pump, patients often experience psychological challenges associated with the perception of being visibly dependent on a “life supporting device.”

 

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BUSINESS

Overview

We are a medical device company engaged through our subsidiaries in the research, development, manufacture and sale of innovative products for diabetes treatment and drug delivery. We have developed durable and semi-disposable insulin pumps, which continuously infuse insulin into a patient’s body using our proprietary spring-based delivery technology. We believe that our spring-based delivery mechanism is cost-effective compared to a motor and gear train and allows us to incorporate certain advantageous functions and design features in our insulin pumps.

The IDF estimates that diabetes currently affects 6.4% of people worldwide and that by 2030, this percentage will have increased to 7.7%. If not treated correctly, diabetes can result in blindness, kidney failure, nervous system damage, lower-limb amputations and even death. According to various studies, including studies published in Diabetes Care’s November 1999, November 2002, June 2007 and October 2007 issues, insulin pump therapy is the most efficacious type of therapy for patients who take insulin daily. According to The Wall Street Journal, the worldwide market for insulin delivery systems (such as insulin pumps, syringes and pens) is estimated to be US$1.6 billion, with revenues increasing year-over-year.

Most currently available insulin pumps are costly and have what we believe are performance and design limitations related to their motor and gear train insulin delivery system. Our proprietary spring-based design, which eliminates the need for a motor and gear train, has allowed us to develop products that we believe offer a cost-effective treatment solution for governments and private payors. In addition, our spring-based delivery technology monitors the actual delivery of insulin and is able to detect and alert a patient to air bubbles and other adverse occurrences, such as occlusions, which could impair the accurate delivery of insulin. Furthermore, the design of our insulin pumps has allowed us to substantially reduce their size and weight and has enabled us to include all moving parts in a disposable element, which we believe reduces concerns relating to wear and tear.

We commenced sales and marketing operations in late 2009 and are currently selling our Adi durable insulin pump, or Adi insulin pump, to our distributors in the Netherlands, Belgium and the Czech Republic. During the fourth quarter of 2009, we commenced sales of our LightyDD insulin infusion sets to our distributors in the Netherlands and Belgium. Our LightyDD infusion sets are compatible with most other manufacturers’ durable insulin pumps but are not compatible with insulin pumps manufactured by Medtronic, which is the largest manufacturer of insulin pumps. During the first quarter of 2010, we also commenced sales of our LightyDD infusion sets to our distributor in the Czech Republic. We have also engaged distributors in Sweden, Italy, Mexico and China to sell and market our products in those countries, and, subject to our receipt of the necessary regulatory approvals, we intend to begin selling our products in these markets in the new future. Our LightyDD infusion sets include unique features, such as our proprietary detach-detect mechanism, which alerts a patient when the infusion set detaches from the patient’s body. We have also developed our Nilipatch insulin patch pump, a semi-disposable insulin patch pump, and have commenced its commercialization process by transitioning it from a research and development product to a product that we can sell in large quantities. This process, which we expect to complete by the beginning of 2011, entails the finalization of our Nilipatch insulin patch pump’s commercial design and layout (which includes the incorporation of a user-friendly interface and casing into its design and the development of a manufacturing process that would allow us to manufacture it in large quantities), the launch of a marketing campaign, the identification, engagement and training of appropriate distributors, and the submission of applications for its initial regulatory approvals.

While we intend to roll out our products initially in Europe, we also plan to focus on our commercialization efforts in the BRIC countries and Mexico and we have already entered into distribution agreements with respect to Mexico and China. Although we have not obtained the required regulatory approvals and do not presently sell our products in the BRIC countries and Mexico, we believe that our spring-based design will enable us to provide a cost-effective treatment solution to governments and private payors in these markets.

 

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Our research and development operations are ongoing and are focused on creating the next generation of our insulin pumps, including a simplified semi-disposable insulin pump specifically designed to treat Type 2 diabetes patients who typically do not begin using insulin until later in life and, therefore, are generally less amenable to complex insulin delivery technology. We are also focused on developing a device that will combine a continuous glucose monitoring system and an insulin pump on the same patch.

We operate mainly through our subsidiary, Nilimedix, which has developed our core proprietary technology, the spring-based delivery mechanism, and is now focused on manufacturing and marketing our Adi insulin pump, as well as the final stages of development of our Nilipatch insulin patch pump. Nilimedix also operates in conjunction with Medx-Set on manufacturing and marketing our LightyDD infusion sets. G-Sense focuses on researching and developing a continuous glucose monitoring system and intends to cooperate with Nilimedix to develop a combined continuous glucose monitoring and insulin pump device on one patch.

Additionally, through our subsidiary, NextGen, we hold an indirect controlling interest in Sindolor Medical, which is developing pain alleviation products. NextGen is a holding company, which is publicly traded on the TASE, and may invest in other medical device opportunities.

During 2009, we incurred net losses of NIS 19 million (US$5.1 million) and generated revenues of NIS 368 thousand (US$99 thousand), all of which revenues were generated during the fourth quarter of 2009. During the first quarter of 2010, we generated revenues of NIS 543 thousand (US$146 thousand) and incurred net losses of NIS 14.9 million (US$4 million), including registration costs of NIS 6 million (US$1.6 million) and fair value losses on warrants at fair value through profit or loss of NIS 2.5 million (US$0.7 million) as a component of our financial costs.

D. Medical’s Treatment Solution — Spring-Based Delivery

We are able to offer insulin pump therapy without a motor and gear train, thereby reducing the high material costs and the performance and design limitations we believe are associated with motor and gear train insulin pumps. We believe that our proprietary spring-based delivery technology enables the introduction of products that combine the advantages of insulin pump performance with the cost-effectiveness stemming from an innovative spring-based design.

Our treatment solution features two major elements:  (i) spring-based delivery; and (ii) a range of infusion sets and insulin pump-related disposables.

Our proprietary spring-based delivery technology generates the drive energy required to deliver insulin by loading the reservoir cartridge, which results in the compression of a spring. The insulin pump is controlled by a pressure sensing technology, which monitors the pressure both inside the reservoir cartridge and in the infusion line. A micro controller-triggered mechanism then calculates, delivers and controls accurate dosages of insulin through a series of valves and sensors. All of the valves and moving components of our insulin pumps are contained in a disposable set that is replaced every three days.

 

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We believe that the advantages of this mechanism over conventional insulin pumps, whether durable or disposable, include cost-effectiveness and flexibility of design.

LOGO

Our Strengths

We are able to offer insulin pump therapy without a motor and gear train, which we believe provides us with the following competitive advantages:

Cost-Effectiveness

We believe that our spring-based design, which eliminates the need for a motor and gear train, results in a cost-effective treatment solution and will enable us to:

 

   

price our products competitively and provide governments and private payors, particularly in the BRIC countries and Mexico, with cost-effective treatment solutions; and

 

   

potentially develop a cost-effective insulin delivery device for Type 2 diabetes patients.

Since we have only recently begun sales of our Adi durable insulin pump and our LightyDD infusion sets in a limited number of countries in Europe, have not yet begun sales of our Nilipatch insulin patch pump, and have not yet executed a final manufacturing and supply agreement, we are not yet able to provide definitive information as to the costs or list prices of our products. Nevertheless, since our insulin pumps do not require a motor and gear train, we believe that we will be able to provide a cost-effective treatment solution to governments and private payors.

Ability to Monitor Delivery and Detect Adverse Events

Our proprietary spring-based delivery technology monitors the actual delivery of insulin and is able to detect and alert a patient to air bubbles and other adverse consequences, such as occlusions, which could impair the accurate delivery of insulin.

 

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Flexibility of Design and Ease of Use and Maintenance

Our proprietary spring-based delivery technology provides us with flexibility in designing our products, allowing us to:

 

   

achieve substantial weight and size reduction in our insulin pumps, resulting in a device that is less obtrusive for patients;

 

   

incorporate fewer movable components in our insulin pumps, resulting in greater ease of use for patients; and

 

   

design a disposable element incorporating all moving parts, which increases ease of maintenance and decreases the wear and tear on our durable and semi-disposable insulin pumps.

Although our insulin pumps, like our competitors durable insulin pumps, are intended to be used over a four-year period (the standard warranty period for such devices), the moving parts of our insulin pumps are not susceptible to wear and tear since they are included in a disposable element which is replaced every three days.

In addition, our LightyDD infusion sets include unique features, such as our proprietary detach-detect mechanism that alerts a patient when an infusion set detaches from their body.

We believe that our proprietary spring-based delivery technology is also one of the principal factors that has allowed us to design our Nilipatch insulin patch pump as a semi-disposable pump, as opposed to a fully-disposable insulin patch pump. Our Nilipatch insulin patch pump has a disposable mechanical delivery mechanism that also contains the reservoir cartridge and which can be separated from the durable electronic control system. A semi-disposable insulin patch pump is currently more cost-effective than a fully-disposable insulin patch pump because users need to replace, and consequently continue to pay for, only the disposable parts. We believe that the cost-effectiveness of our semi-disposable Nilipatch insulin patch pump will provide us with pricing and margin flexibility, which is particularly advantageous in the BRIC countries and Mexico.

We believe that other features of our insulin pumps reduce the complexity and obtrusiveness currently associated with available insulin pumps, including:

 

   

an option for pre-filled reservoir cartridges for our Nilipatch insulin patch pump;

 

   

the ability to operate our Nilipatch insulin patch pump directly and without a remote control, so that if the remote control is damaged or lost, the pump can still be operated;

 

   

the integration of the infusion set into the reservoir cartridge of our Adi durable insulin pump, as well as our occlusion warning and detach-detect features, all of which decrease the complexity of insulin pumps and reduce the anxiety that may be associated with using such a complex device.

For a more detailed description of our products, see “—Products.”

Future Treatment Solutions

We believe that the inherent advantages of our proprietary spring-based delivery technology allow for:

 

   

the development of a device that will host both our insulin pump and continuous glucose monitoring system on one patch;

 

   

the development of an insulin pump that will accommodate pre-filled cartridges for patients, allowing for improved ease of use;

 

   

the development of a simplified insulin pump specifically designed to manage the treatment of Type 2 diabetes patients who do not require all of the features required by Type 1 diabetes patients; and

 

   

the development of other drug delivery platforms based on our innovative core technology.

For a more detailed description of our ongoing research and development efforts, see “—Research and Development.”

 

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Our Strategy

Our goal is to gain a significant share of the worldwide market for insulin pump therapy and related disposables, primarily in the BRIC countries, Mexico and Europe. To achieve our goal, we intend to employ the following strategies:

Leverage the cost-effectiveness of our spring-based design to penetrate markets in the BRIC countries and Mexico

We believe that certain markets, including the BRIC countries and Mexico, under-utilize insulin treatment, in general, and insulin pump therapy, in particular, due to the high cost of our competitors’ currently-available insulin pumps for which no, or limited, reimbursement is currently available from third-party payors. Upon our receipt of the necessary regulatory approvals, we intend to leverage the cost-effectiveness of our spring-based design to penetrate these markets. Our initial focus in these markets will be on Type 1 diabetes patients. We have entered into distribution agreements for Mexico and China and are in the process of identifying and negotiating with additional distributors and/or licensees in Brazil, Russia and India.

Achieve higher margins by utilizing distributors and avoiding the costs associated with maintaining a direct sales force.

We do not currently have and do not intend to employ a direct sales force. Instead, our business model anticipates using local third-party distributors to distribute our products in order to avoid the sizeable direct and indirect costs associated with maintaining a direct sales force. We believe this approach will decrease the costs we incur with respect to selling and distributing our products and maximize the sales potential of our products.

Roll out our products initially in Europe.

We have entered into distribution agreements covering our Adi insulin pump and LightyDD infusion sets in Sweden, Italy, the Netherlands and Belgium, and the Czech Republic. Both of these products have received CE mark approval and we intend to roll out these products in other European countries by entering into additional distribution agreements. We believe that the successful distribution of our products in the countries in which we have already engaged distributors will allow us to gain brand and product recognition, which will enable our penetration into additional European countries and, eventually, will support our entry into the United States.

Continue our research and development efforts.

We intend to continue our research and development efforts to develop next-generation insulin pumps either on our own or together with a strategic partner. Our research and development efforts include the development of (i) a simplified insulin pump specifically designed to manage the treatment of Type 2 diabetes patients, the treatment of which may not be as intensive as the treatment of Type 1 diabetes but for which an insulin pump may be the most appropriate and convenient treatment solution, (ii) a device that combines an insulin pump and a continuous glucose monitoring device on one patch, which we believe will enhance the effectiveness of insulin pump therapy and will be marketable to diabetes patients worldwide, and (iii) products that incorporate MEMS. See “—Research and Development” for a more detailed description of these products.

Streamline our manufacturing capabilities to further minimize our material costs.

We are a small company and currently assemble all of our products at our facilities near Haifa, Israel. We intend to streamline our manufacturing capabilities by entering into contract manufacturing agreements with third parties, which we believe will allow us to further minimize our cost structure and ensure that we can meet the anticipated demand for our products. We also believe that the outsourcing of our manufacturing capabilities will allow our management to focus on our marketing and product development efforts. We have recently entered into a letter of intent with UPG pursuant to which we expect to enter into a manufacturing and supply agreement

 

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with UPG for the design for manufacturing and manufacturing of the disposable parts of our Adi durable insulin pump, our LightyDD infusion sets and our Nilipatch insulin patch pump. As of the date of this prospectus, we have not yet entered into a definitive agreement pursuant to this letter of intent. See “—Manufacturing and Quality Assurance.”

Create a presence for our products in the United States.

We believe that we can successfully penetrate the U.S. market with our LightyDD infusion sets because they can be used with other manufacturers’ insulin pumps and we believe present a lower barrier to entry. We plan to introduce our LightyDD infusion sets into the U.S. market once we receive the necessary clearances and approvals from the FDA. Our LightyDD infusion sets are compatible with most other manufacturers’ durable insulin pumps, but are not compatible with insulin pumps manufactured by Medtronic, which is the largest manufacturer of insulin pumps.

Leverage our proprietary technology for use in other drug delivery therapies.

We believe that our proprietary spring-based delivery technology may be adapted for other drug delivery therapies. We may explore opportunities to apply our proprietary technology to complementary drug therapies on our own or, if necessary, through strategic partnerships with third parties.

Our Challenges

Although we believe that our spring-based delivery technology provides us with the competitive advantages described above, our clinical experience to date may not have revealed certain potential long-term complications from our products. Our clinical trials have been limited to relatively few patients over a relatively short period of time. For example, the durability of our Adi insulin pump, which includes technology that is new and sophisticated and is expected to operate properly over a period of four years, has not been tested over an actual period of four years but rather by an accelerated laboratory study. In addition, we have a limited history of the use of our products and our customer base is not wide. Therefore, our ability to discover in advance problems and/or inefficiencies concerning our products is limited.

In addition, although our insulin pumps do not use a motor and gear train, they are nevertheless automated machines susceptible to malfunction. Our insulin pumps’ micro-control, sensors and other components could malfunction and result in a severe adverse medical event.

Furthermore, our Adi insulin pump still lacks an information technology platform, a feature viewed by physicians as important. Accordingly, we intend to engage a third-party service provider to develop and later manage such a platform.

Moreover, since we have only recently commenced sales of our products and have a limited operating history and manufacturing capabilities and have not yet entered into a definitive manufacturing and supply agreement with UPG, we are subject to certain potential challenges, including, among others, intense competition in the medical devices industry, our limited manufacturing capabilities, which may restrict or delay our ability to leverage the cost-effectiveness of our spring-based design, and our lack of regulatory approvals in the BRIC countries and Mexico where we plan to focus our commercialization efforts.

For further details and additional information regarding potential challenges we face, see “Risk Factors.”

Our Products

We have begun marketing our Adi durable insulin pump in Sweden, the Netherlands, Belgium, the Czech Republic, Italy, Mexico and China. Our Adi insulin pump has received a CE mark, which certifies that a product has met European Union consumer safety, health or environmental requirements. The first generation of our Adi insulin pump has been cleared for marketing in the United States by the FDA and has also received the required regulatory approvals for marketing in Israel. We are currently in the process of applying for regulatory approvals in Mexico and China.

 

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Our LightyDD infusion sets have received a CE mark and an Amar approval and we have also begun marketing them as a generic device in several countries in Europe. We are awaiting FDA clearance for our LightyDD infusion sets and regulatory approvals to begin marketing in Mexico and China.

Our semi-disposable Nilipatch insulin patch pump has received a CE mark and is awaiting regulatory approval in the United States, Israel and Mexico. We are currently finalizing the commercial layout and design of our Nilipatch insulin patch pump and are commencing preparations for its production. We expect to commence marketing of the Nilipatch insulin patch pump in Europe during the first quarter of 2011.

Adi Insulin Pump

Our Adi insulin pump is a durable insulin pump with an integrated infusion set. It measures 59x55x22 mm in size and weighs only 82 grams, including the battery. To our knowledge, this makes the Adi insulin pump the smallest durable insulin pump currently available in the market.

Our Adi insulin pump features our proprietary spring-based delivery technology. It has no motor or gear train, but instead delivers insulin by spring action and measurements of pressure differences. All of our Adi insulin pump’s moving components, as well as the reservoir cartridge, are contained in a disposable element that is replaced every few days. Upon injecting the insulin into the reservoir cartridge, the spring compresses, creating constant pressure in the reservoir cartridge. This pressure drives accurate dosages of insulin through a valve in accordance with the measurements and calculations performed by the microcontroller.

 

LOGO

This operation allows our Adi insulin pump to offer the following advantageous features:

 

   

Instant air bubble detection – enabling the immediate detection of air bubbles in the reservoir cartridge before it reaches the tubing, which prevents the disruption of insulin delivery and decreases the risk of hyperglycemia.

 

   

Occlusion alarm – enabling the prompt detection of even a partial occlusion in the tubing due to the system’s ability to sense changes in pressure in the infusion line.

 

   

Disposable element – all moving components are contained in a disposable element making our insulin pump less prone to mechanical failure and easier to fix and service.

 

   

Detach-detection – the integrated infusion set alerts users to any detachment of the cannula from the body, thereby preventing a disruption in the insulin-delivery process.

 

   

Reservoir cartridge capacity – the reservoir cartridge contains up to 300 units of insulin, as compared to 200 units of insulin in most other insulin pumps.

 

   

Efficient use of energy – only one standard AAA battery is needed to power the control electronics.

 

   

Overfilled reservoir cartridge detection – if the user tries to fill the reservoir cartridge with more than 300 units of insulin, an alarm is sounded until the user removes the excess insulin.

 

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Magnesium housing – our Adi insulin pump is housed in a durable, lightweight magnesium housing, which reduces the probability of accidental damage.

 

   

Small basal insulin increment – our Adi insulin pump can be used by patients who require smaller continuous dosages of insulin, such as children.

We provide a four-year warranty period for our Adi insulin pump.

LightyDD Infusion Sets

Our LightyDD infusion sets can be used with insulin pumps that use luer locks to connect the infusion set to the insulin pump. Our LightyDD infusion sets include the following advantageous features:

 

   

Detach-detection – the integrated infusion set alerts users to any detachment of the cannula from the body, thereby preventing a disruption in the insulin-delivery process.

 

   

Auto-retractable introducer needle – this feature complies with regulatory directives relating to needle protection.

 

   

Hidden needle – the needle is hidden at all times, which is a useful feature for users who suffer from an aversion to needles.

 

   

Simple insertion – the needle’s insertion is at a 90 degree angle and only requires a user to press the insertion case; an audible click confirms connection.

 

   

Soft teflon cannula – offered at lengths of 6mm or 9mm, which provides users with more flexibility and choice.

 

   

Protective cap – allows easy temporary disconnection of the tubing for certain purposes, such as showering and exercising.

 

   

Water-proof set.

 

   

Hypo-allergenic adhesive tape – prevents irritation and allergic reactions.

 

   

Connection to all insulin pumps that use luer locks to connect the infusion set to the insulin pump –allows users of most other durable insulin pumps available on the market to enjoy the benefits of our LightyDD infusion sets. However, insulin pumps manufactured by Medtronic, which is the largest manufacturer of insulin pumps, do not use luer locks and are therefore incompatible with our LightyDD infusion sets.

 

   

Various tubing lengths – allowing more flexibility and choice for the user.

Nilipatch Insulin Pump

Our Nilipatch insulin patch pump, which we are currently transitioning from the final stages of development to the initial stages of production, is a semi-disposable insulin patch pump that we view as the next generation of our Adi insulin pump. Utilizing our proprietary spring-based delivery technology, we believe that our Nilipatch insulin patch pump will be a device offering superior performance while maintaining the lowest weight and minimal size among comparable products. We expect that we will have finalized our Nilipatch insulin patch pump’s commercial layout and design, commenced preparations for its production and commercialization, and obtained all required regulatory approvals for its commercial designs for the European market by the first half of 2011 and for the BRIC countries and Mexico by the second half of 2011 or the beginning of 2012.

Our Nilipatch insulin patch pump can be worn externally using an infusion set or attached directly to the skin without any tubing. The pump may be controlled directly (as opposed to Insulet’s Omnipod, which requires the remote control for its operation) and is also accompanied by a wireless remote control with a large color screen and a blood glucose monitoring feature.

 

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LOGO

Our Nilipatch insulin patch pump has the same advantageous features of our Adi insulin pump but in a smaller and more discrete device. We believe that we will also be able to offer a version of the same insulin patch pump compatible with pre-filled, off-the-shelf insulin cartridges, which will eliminate the need for users to fill the reservoir cartridge with insulin (something many users are averse to doing) will reduce the psychological barriers to the use of an insulin pump and will lead to a higher acceptance rate in comparison to other insulin pumps.

We believe that our Nilipatch insulin patch pump is cost-effective because it is both semi-disposable, as compared to Insulet’s fully-disposable insulin pump (the only currently available disposable insulin pump on the market), and can hold up to 300 units of insulin, as compared to Insulet’s Omnipod, which holds only 200 units. The Nilipatch insulin patch pump is semi-disposable and features a drive mechanism and reservoir cartridge that are disposable and a control unit that is durable and can be used over a long period of time, for which we intend to provide a four-year warranty. Consequently, the semi-disposable nature of the Nilipatch insulin patch pump is expected to provide pricing flexibility because the user is required to replace, and pay for additional units of, only a portion of the insulin pump once every three days. In addition, since our Nilipatch insulin patch pump can hold up to 300 units of insulin, the number of disposable elements that must be purchased annually could potentially be reduced for patients who seek insulin patch pumps but require an insulin intake in excess of 200 units every three days. Since we have not yet begun sales of our Nilipatch insulin patch pump, and have not yet executed a final manufacturing and supply-agreement, we are not yet able to provide definitive information as to the costs or list prices of our Nilipatch insulin patch pump. Nevertheless, we expect that our Nilipatch insulin patch pump will constitute a cost-effective treatment solution to governments and private payors for the reasons set forth above.

We believe that our Nilipatch insulin patch pump’s advantages serve as the basis for the future development of a device designed specifically for the treatment of Type 2 diabetes patients who are insulin dependent and generally require large quantities of insulin for their daily treatment. Type 2 diabetes patients may find the large capacity of our Nilipatch insulin patch pump’s reservoir cartridge particularly attractive.

Competition

The market for insulin pumps is highly competitive, subject to rapid change and highly sensitive to the introduction of new products. We compete with other developers and manufacturers of insulin pumps, developers and manufacturers of other insulin delivery methods and other diabetes treatment methods.

Most of our competitors in the insulin pumps market are large companies who aggressively devote significant resources to product development, marketing and sales. According to Medtech Insight, the market

 

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leader in the U.S. insulin pumps market is Medtronic, which held 54.5% of the U.S. market in 2008. Additionally, Animas and Roche held 25.4% and 15.2% of the U.S. market in 2008, respectively. Insulet, which held 3.6% of the U.S. market in 2008, has recently become a significant participant in the insulin pumps market.

Frost & Sullivan’s 2006 “Diabetes Drug Delivery Methods—Market and Technologies” indicates that in 2005 Medtronic and Roche, held 62.5% and 28.2%, respectively, of the insulin pump market in Europe.

We believe that the insulin pump markets in the BRIC countries and Mexico have not yet matured.

According to Medtech, all of the companies referred to above are in various stages of introducing and/or developing advanced generations of their insulin pumps, and most of them are aggressively pursuing the development of a “closed-loop” system that would continuously monitor the levels of glucose in the blood and automatically deliver insulin to achieve the required dosage. Medtronic, which controls 90% of the worldwide market of continuous glucose monitoring, has already launched a semi-closed loop system that suspends insulin delivery when it detects that blood glucose levels are too low. Medtronic has also partnered with blood glucose monitoring companies LifeScan Inc., a Johnson & Johnson company, and Bayer Diabetes Care to distribute and co-market glucose meters capable of communicating with Medtronic’s MiniMed insulin pumps. Other participants in the market for continuous glucose monitoring, such as Dexcom Inc. and Abbot Laboratories Inc., have each partnered with insulin pump companies, such as Insulet and Animas, to develop systems that work together.

Advanced generations of our competitors’ insulin pumps would likely incorporate some of the features that we consider as differentiating features of our insulin pumps. For example, Medtronic is expected to launch a semi-disposable insulin patch pump. In addition, successful introductions of closed loop systems, which integrate continuous glucose monitoring and the insulin pump on the same patch, may impact the demand for insulin pumps.

Nonetheless, we believe that the advantages presented by our proprietary spring-based delivery technology, primarily its cost-effectiveness and the resulting beneficial features and design of our insulin pumps, will allow us to compete in the worldwide market for insulin pumps, particularly in the BRIC countries and Mexico, and to eventually develop a continuous glucose monitoring system and an insulin pump on one patch.

We expect that competition for our products will be intense. Since most of our competitors are large, well-capitalized companies with significantly larger market shares and resources than we have, we believe that they are better situated to maintain and/or increase their market shares, primarily because they have:

 

   

significantly greater brand recognition;

 

   

established relationships with healthcare professionals, customers and third-party payors;

 

   

established distribution networks and channel penetration;

 

   

additional lines of products and the ability to offer rebates or bundle products to offer higher discounts or other incentives to gain a competitive advantage; and/or

 

   

greater financial and human resources for product development, sales, customer support and marketing and patent litigation.

The large market participants have established worldwide operations, which we are only beginning to develop. Even Insulet, a relatively new market participant, which offers an insulin patch pump that we believe is the most comparable to our Nilipatch insulin patch pump, has recently entered into a distribution agreement with Ypsomed to exclusively distribute its product in 11 countries, including Australia, China and various countries in Europe. According to Insulet’s public reports, the minimum annual purchase levels called for in its distribution agreement with Ypsomed would exceed US$100 million over the agreement’s five-year term.

 

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In addition, primarily due to the prevalence of diabetes in developing countries, market participants are working to develop additional cost-effective and/or convenient insulin delivery methods, such as an insulin spray, which Generex Biotechnology Corp. has already launched in India, and an inhaled insulin product developed by MannKind Corporation, which, according to Medtech, is expected to be introduced into the U.S. market by early 2011. Although these products are not substitutes for insulin pump therapy, which is widely considered to be the most physiological and most advanced of all insulin therapies, their successful launch could adversely affect the demand for our products.

Our products also compete with MDI therapy, which utilizes substantially less expensive delivery methods than insulin pump therapy, such as pen injectors and syringes. MDI therapy has become more effective through the introduction of long-acting insulin analogs by both Sanofi-Aventis and Novo Nordisk A/S. While we believe that insulin pump therapy, in general, and our insulin pumps, in particular, have significant competitive and clinical advantages over traditional MDI therapy for Type 1 diabetes patients, improvements in the effectiveness of MDI therapy may result in fewer diabetes patients converting from MDI therapy to insulin pump therapy.

Sales and Marketing

We began selling our Adi insulin pump and LightyDD infusion sets through our distributors in the Netherlands and Belgium during late 2009 and in the Czech Republic in 2010 . Our strategy is to enter into distribution agreements in the BRIC countries and Mexico and to increase our roll-out in Europe. We also intend to explore the expansion of our sales through partnership opportunities with insulin producers, as well as licensing and manufacturing agreements with manufacturers who will both manufacture and sell our products. We employ a vice president of sales, vice president of marketing and business development, a marketing director and additional support personnel to manage and expand our sales and marketing efforts, but we currently do not intend to hire a direct sales force. We have recently launched our brand name Spring™ under which we intend to market all our products. As part of launching our brand name, we have also launched a new website, www.springnow.com, which is primarily intended for physicians and diabetes patients.

Nilimedix has entered into six distribution agreements, which provide for the distribution of our products in Sweden, the Netherlands and Belgium, the Czech Republic, Italy, Mexico and China. With the exception of our distribution agreement for Sweden, which has an initial term of two years, each of the distribution agreements has an initial term of three years and is thereafter automatically renewed, usually for one-year periods, unless either party notifies the other of its desire not to renew six months in advance. In addition, each party to the distribution agreements may terminate the agreement upon 180-days’ prior written notice to the other party. Each of our distributors may distribute our products only within specified territories and, with the exception of our distribution agreement for the Netherlands and Belgium, the agreements are mutually exclusive, which means that each of the distributors has the exclusive right to distribute our products in its specified territory and has agreed not to distribute products within its specified territory that may compete with our products. Our distributor in the Netherlands and Belgium has the exclusive right to distribute our products in its territory but has not agreed to refrain from distributing competing products. Our distribution agreement for China provides for the sale of our LightyDD infusion sets on a non-exclusive basis, our distribution agreements for Mexico and Sweden allow us to sell our infusion sets to original equipment manufacturers, and our distribution agreement for the Czech Republic allows us to sell our products to entities that will market them under their own private label. We may terminate any distributor’s exclusive right to distribute our products in its specified territory if the distributor does not meet a sales target to be determined annually between the parties. Such failure also allows us to terminate the agreement in its entirety. We have granted a right of first refusal to our Mexican distributor with respect to the distribution of our future products in Mexico and, with respect to our other distributors, we have agreed to favorably consider them as distributors for our future products in their specified territories if they meet their sales targets. Each distributor has agreed to ensure that our products are sold only to suitable users who have been prescribed insulin pumps by their physicians and have successfully completed comprehensive insulin pump training by a competent tutor. Each distributor is also responsible for the after-sale support and customer service required by our products.

 

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Our Chinese distributor has also prepared a marketing plan for the introduction of our products into the Chinese market and has undertaken to invest US$1.3 million over a four-year period to execute this plan.

Pursuant to an agreement with the T.B.N. Group, which facilitated our engagement with the Chinese distributor, we are obligated to pay the T.B.N. Group a commission at the rate of 6% of the total amounts received by us for sales to the distributor in each quarter, for a period of 3.5 years from the date of the first order received by us (after the execution of the agreement and the completion of the regulatory proceedings in China).

Manufacturing and Quality Assurance

We are currently producing our Adi insulin pump, its related disposables and our LightyDD infusion sets at our facility in Tirat Hacarmel, Israel. We rely on outside suppliers for our components and our production activities currently include manually assembling the components of our products, which limits our ability to increase our manufacturing capacity. We have recently entered into a letter of intent with UPG pursuant to which we intend to enter into a manufacturing and supply agreement with UPG for the design for manufacturing and manufacturing of the disposable parts of our Adi durable insulin pump, our LightyDD infusion sets and our Nilipatch insulin patch pump. Pursuant to this letter of intent, the parties agreed to negotiate a definitive agreement by mid-September of 2010. However, if we are unable to negotiate a definitive agreement prior to such time, we believe that either party will be able to terminate the letter of intent upon reasonable prior notice to the other party. As of the date of this prospectus, we have not yet entered into a definitive agreement pursuant to this letter of intent. If we commence operations under a definitive agreement with UPG, we will maintain only a limited manufacturing capability in order to manufacture our Adi durable insulin pump and to provide for contingencies. We may also contract our Adi durable insulin pump’s manufacturing in the future. We own the equipment used for our current manufacturing activity, including the machines and fixtures, and our 30 square meter clean room.

We operate pursuant to a quality assurance system that meets the requirements of ISO 13485. We have devised a quality assurance system that consists of a quality assurance manual, quality assurance procedures, work instructions and forms filled out by our employees that allow us to monitor employee compliance with our manufacturing procedures. We have also set standards for our suppliers and subcontractors and have confirmed that our current suppliers and subcontractors meet these standards. We perform inspections and tests throughout the manufacturing process, beginning with inspections of raw materials and components upon their receipt through in-process inspections and final inspections of our products. In addition, our development activities are strictly documented until our products are transferred to production personnel.

As of July 22, 2010, we had 41 employees primarily engaged in manufacturing and quality assurance activities, all of whom have been trained and are qualified to perform their duties.

Research and Development

As of July 22, 2010, we had 17 employees in our research and development operations. In addition, we periodically engage subcontractors to perform specific research and development projects, such as mold planning, product design and electronics. Our research and development operations are primarily focused on the development of our next generation durable insulin pump and our Nilipatch insulin patch pump, which will also be the basis for any future drug delivery devices. In addition, we are developing a continuous blood glucose monitoring system and a device that will host our insulin pump and our continuous blood glucose monitoring system on one patch to create a “closed-loop” system, mimicking the biological function of the pancreas. This product has proved feasible in animal studies and is currently undergoing additional animal testing.

We have also begun research and development on next generation products which will incorporate MEMS elements that are expected to enable us to further reduce the size and weight of our products and further reduce our cost of goods. MEMS is the integration of mechanical elements, sensors, actuators and electronics on a common silicon substrate through microfabrication technology, which holds the promise of the realization of complete systems-on-a-chip. Because MEMS devices are manufactured using batch fabrication techniques similar to those used for integrated circuits, it is believed that high levels of functionality, reliability and sophistication can be placed on a small silicon chip at a relatively low cost.

 

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We believe that our products may also be utilized for the delivery of other medications that need to be administered subcutaneously in precise and varied doses over an extended period of time. These medications may include drugs used for pain alleviation, spinal cord compression and cancer drugs or hormones. If we are able to identify an appropriate strategic partner, we intend to commence research and development for the utilization of our core technology in such drug delivery devices.

Our gross research and development expenditures were NIS 10,086 thousand (US$2,716 thousand), NIS 16,344 thousand (US$4,402 thousand) and NIS 14,224 thousand (US$3,831 thousand) in 2007, 2008 and 2009, respectively, and NIS 2,512 thousand (US$677 thousand) for the three months ended March 31, 2010. The Office of the Chief Scientist has funded a substantial portion of our research and development expenses. See “—Israeli Taxation and Government Programs—Office of the Chief Scientist.” We expect to increase our expenditures on our research and development operations in order to complete the development of our products under development, as described above.

Scientific Advisory Board

We have recruited experts in the field of diabetes to advise us on the development, design and clinical applications of our products, as well as on physician education and other matters that may affect market acceptance of our products. Our scientific advisory board meets with management at least once a year and is led by Professor Moshe Phillip, M.D, who has been closely involved with the development and design of our products since 2003. Professor Phillip is the Director of the Institute for Endocrinology and Diabetes, Israel National Center for Childhood Diabetes.

Below are some of the other members of our scientific advisory board:

 

   

Satish K. Garg, Professor of Pediatric Medicine and Head of the Adults Program at the Diabetes Center at US, Denver, Colorado, University;

 

   

Tadej Battelino, Professor of Medicine, Chief Executive of the Department of Pediatric Endocrinology/Diabetology and Metabolism at the University Children’s Hospital, Ljubljana, Slovenia; and

 

   

Jan Bolinder, Professor and Head of Diabetes Research at the Karolinska Institute of Stockholm, Sweden.

Below are detailed individual biographies of certain members of our scientific advisory board.

Moshe Phillip, MD is a professor of pediatrics specializing in pediatric endocrinology at the Sackler Faculty of Medicine at Tel-Aviv University, or Sackler, and holds the Irene and Nicholas Marsh Chair in Endocrinology and Diabetes. Dr. Phillip is active in both clinical and basic research. Since 1997, he has also served as the director of the Institute for Endocrinology and Diabetes, National Center for Childhood Diabetes at Schneider Children’s Medical Center of Israel, which is affiliated with Sackler. Between 1992 and 1997, he served as division head at the Pediatric Diagnostic and Therapeutic Center at Soroka Medical Center Ben Gurion University Beer-Sheba. Previously, he served as head of the School for Continuing Education at Sackler and since 2006 as Vice Dean for Research and Development of Tel-Aviv University. He received his MD degree from Ben Gurion University in 1983 and specialized in pediatric endocrinology between 1989 and 1992 at the University of Maryland School of Medicine in Baltimore. Professor Phillip is a member of national organizations, such as the Israeli Medical Association and the Israeli National Committee for Child Health Care. He chaired the committee of Type 1 diabetes at the National Council for Diabetes. Professor Phillip is the author of close to 200 publications, is serving as a member of the editorial boards of several Israeli and international journals and is a reviewer for more than 15 journals.

Satish K. Garg, MD, MBBS, DM is a professor of medicine and pediatrics at the Young Adult Clinic of the Barbara Davis Center for Diabetes of the University of Colorado School of Medicine in Denver, Colorado. His research interests include the early detection and treatment of renal and retinal complications of Type 1 diabetes

 

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and the development of new diagnostic and therapeutic tools related to clinical diabetes management that include, among others, new insulin analogs and glucose sensors. Dr. Garg received a medical degree in internal medicine from Punjab University in Ludhiana, India, where he also completed a residency in internal medicine at Christian Medical College and Hospitals. He completed fellowships in adult endocrinology and diabetes at the Post Graduate Institute of Medical Education and Research (PGIMER) in Chandigarh, India, and in pediatric endocrinology and diabetes at the University of Colorado at Denver and Health Sciences Center. He is board certified in internal medicine and endocrinology and diabetes. Dr. Garg is the editor in-chief of the Diabetes Technology and Therapeutics Journal and chair of the planning committee for Clinical Therapeutics and New Technology area for the 2007 and 2008 Annual American Diabetes Associations meetings. He is a member of the International Diabetes Federation, the American Diabetes Association, the Endocrine Society of India, the European Association for the Study of Diabetes, the Regional Pediatric Endocrine Society of Colorado, the Research Society for the Study of Diabetes Mellitus, and numerous other professional societies in both the United States and India. He is an international lecturer and speaker and has published more than 177 original manuscripts in peer-reviewed journals.

Tadej Battelino, MD obtained his MD at the Ljubljana Medical Faculty in 1990, where he also passed his board exam in pediatrics. In 1993 and 1994, he completed a clinical fellowship in pediatric endocrinology at Loyola University of Chicago, Illinois, USA. After obtaining his PhD, he completed a postdoctoral fellowship in 1996 and 1997 at Hôpital Robert Debré and INSERM U-457, Paris, France. He is currently a tenured professor of pediatrics at the Ljubljana Medical Faculty and head of the pediatric endocrinology, diabetes and metabolism department at the UMC-University Children’s Hospital Ljubljana, Slovenia. He acted as principal investigator for several competitive research projects from the Slovenian National Research Agency, participated in trials sponsored by the European Association for the Study of Diabetes, in two EU-sponsored research projects and in many other international clinical and basic research projects. His publications include basic and clinical research papers on diabetes, pediatric endocrinology, metabolism and genetics. He is a member of many Slovenian and international professional societies, including the ESPE, EASD, ADA and ISPAD. He is co-organizer of the annual meetings of the Advanced Technologies and Treatment of Diabetes. He was a guest lecturer at Vienna and Tel Aviv Universities and at many international meetings and symposia. He serves as editor of the European Journal of Endocrinology and as reviewer for international peer-reviewed journals and international grant committees.

Jan Bolinder, MD is a professor in clinical diabetology at the Karolinska Institutet and chairman of the Department of Medicine at the Karolinska University Hospital Huddinge in Stockholm, Sweden. He earned his MD in 1977 and his PhD in Medicine in 1983 at the Karolinska Institutet and holds specialist degrees in internal medicine and endocrinology and diabetology. Dr. Bolinder has almost two decades of experience with the microdialysis technique primarily with respect to studies of human adipose tissue and skeletal muscle metabolism in vivo and also in the development of the technique as a clinical tool for continuous glucose monitoring in patients with diabetes mellitus. He has authored more than 150 articles and reviews in peer-reviewed journals within the field of clinical/experimental diabetology and metabolism. His main areas of research interest include molecular and cellular mechanisms underlying insulin resistance in adipose tissue and skeletal muscle, clinical glucose monitoring, islet and pancreas transplantation, and epidemiology.

Intellectual Property

We rely on a combination of patent, copyright, trademark and trade secret laws and confidentiality and invention assignment provisions to protect our intellectual property rights. All professional employees and technical consultants are required to execute confidentiality provisions in connection with their employment and consulting relationships with us. We also require all professional employees and technical consultants to agree to disclose and assign to us all inventions developed in connection with their services to us. However, there can be no assurance that these provisions will be enforceable or that they will provide us with adequate protection of our intellectual property rights.

 

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Our spring-based delivery technology is protected by several issued patents in the United States, the European Union and Israel. Our bubble detection feature is protected by issued patents in the United States, Canada and Singapore. We are also seeking patent protection for our spring-based delivery technology in Canada, which we expect to receive within the next few months, and for our bubble detection feature in Japan, Korea, India, China, Israel and the European Union. We have filed an international application under the Patent Cooperation Treaty, which reserves the initial date of filing for subsequent national application filings in the treaty’s contracting states with respect to a semi-disposable drug delivery device with wireless monitoring. In addition, we have ten additional pending patent applications, covering various novel aspects of our infusion set, continuous glucose monitoring system, and combined continuous glucose monitoring and insulin pump device. We filed most of these additional patent applications only in the United States or as an international application, but we filed the patent application covering our LightyDD infusion sets’ detach-detect mechanism in the European Union, Japan, China, India, Israel, Korea and Singapore.

We recently received a letter from a third party relating to a European patent that purports to cover a certain mechanism used in the integrated infusion set of our Adi insulin pump for the insertion of the cannula through which insulin is infused into a patient’s body. In this letter, the third party requested that we disclose why we believe that our mechanism does not infringe this European patent and also indicated that it is willing to consider granting us a license against the payment of a royalty. After consulting with our European patent attorney, we are of the opinion that our insertion mechanism does not infringe any valid claim of this patent. We also have the option of using a generic inserter.

Our trademarks include “Nilimedix” and we have filed applications for the registration of “Spring,” initially in the United States and the European Union. All other trademarks, trade names and service marks appearing in this prospectus are the property of their respective owners.

See also “Risk Factors—Risks Relating to Our Intellectual Property.”

Sindolor Medical

Sindolor Medical develops pain alleviation products intended to alleviate pain by using a super cooled plate attached to the skin through which the skin is pierced. Sindolor Medical has recently diverted its focus to developing QuickKool, a homecare device, which is intended to alleviate various types of pain through cooling and may also be used for injections for burns and bruises. QuickKool™ is in its initial stages of development.

Sindolor Medical currently uses funds previously invested in it by its shareholders, including us, to fund its operations. Funds invested in Sindolor Medical by its shareholders since and including the Company’s initial investment in May 2007 amounted to US$1,800 thousand as of June 30, 2010. We did not make any investments in Sindolor Medical in 2009. On February 17, 2010, NextGen and Sindolor Medical entered into a convertible loan agreement pursuant to which NextGen agreed to extend a loan to Sindolor Medical in a total amount of NIS 1,000 thousand (US$269 thousand). For a description of our investment in Sindolor Medical, see “Related Party Transactions—Transactions with Our Affiliates and Associates—Transactions with Sindolor Medical” and the notes to our consolidated financial statements included elsewhere in this prospectus.

 

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Employees

As of July 22, 2010, we had 68 employees, not including management, seven of whom served in administrative, accounts and human resources capacities, 17 of whom were employed in research and development, four of whom were employed in sales and marketing and 41 of whom were employed in manufacturing and quality assurance. All of our employees are based in Israel. The breakdown of our employees by department as of year end for each of the last three fiscal years is as follows:

 

     2009    2008    2007

Department

              

Administration, accounts and human resources

   5    3    2

Research and Development

   23    21    14

Sales and Marketing

   2    3    2

Manufacturing and Quality Assurance

   13    —      —  
              

Total

   43    27    18
              

NextGen and Sindolor Holding currently have no employees. Israel Tal serves as the chief executive officer of NextGen and Amir Loberman serves as chief financial officer of NextGen. Sindolor Medical employs only a chief executive officer, Mr. Tal, and a clinical advisor, professor Moshe Philip. Zeev Bronfeld, a director of D. Medical, is also engaged by Sindolor Medical as a third-party service provider in the capacity of chairman of the board of directors of Sindolor Medical. For a description of Mr. Bronfeld’s agreement with Sindolor Medical, see “Related Party Transactions—Transactions with our Directors and Principal Officers.”

Under applicable Israeli law, we and our employees are subject to protective labor provisions, including restrictions on working hours, minimum wages, minimum vacation, sick pay, severance pay and advance notice of termination of employment, as well as equal opportunity and anti-discrimination laws. Orders issued by the Israeli Ministry of Industry, Trade and Labor may make certain industry-wide collective bargaining agreements applicable to us. These agreements affect matters such as cost of living adjustments to salaries, the length of working hours and weeks, recuperation, travel expenses and pension rights. Our employees are not represented by a labor union. We provide our employees with benefits and working conditions which we believe are competitive with benefits and working conditions provided by similar companies in Israel. We have never experienced labor-related work stoppages and believe that our relations with our employees are good.

Israeli law generally requires the payment of severance by employers upon the death of an employee or termination of employment by the employer. We fund our ongoing severance obligations by making monthly payments to insurance policies. Most of our employees have agreed that upon termination of their employment, they will be entitled to receive only the amounts accrued in the insurance policies with respect to severance pay. Pursuant to Israeli law, these employees will generally be entitled to receive such amounts even if they resign. Accordingly, our accrued severance pay funds relate only to employees who have not agreed to receive only the funds accrued in their insurance plan. Our liability for severance pay-net as of March 31, 2010 totaled NIS 216 thousand (US$58 thousand). Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute, which is similar to the U.S. Social Security Administration. These amounts also include payments for national health insurance. The payments to the National Insurance Institute are generally 17.43% of wages, up to a specified amount, of which the employee contributes 12.0% and the employer contributes approximately 5.43%.

Facilities

Our operations are conducted in a facility located in the Industrial Park of Tirat HaCarmel, Israel. We lease approximately 625 square meters at this facility under a lease agreement providing for an initial term of five years that commenced on December 1, 2008. We have an option to extend the lease under the same terms for an additional period of five years. All of our subsidiaries operate from this facility.

 

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Our registered office is in Ramat-Gan, Israel. We share this facility with Biocell Ltd., or Biocell (a public company under the control of Zeev Bronfeld, one of our directors), and Biomedix Incubator Ltd., or Biomedix (a public company in which Zeev Bronfeld and Meni Mor, the chairman of our board of directors, are part of the controlling shareholders group). Messrs. Bronfeld and Mor are also two of our controlling persons. This facility, totaling approximately 240 square meters, was initially leased by us but we have assigned the lease agreement to Biocell. Nevertheless, under an agreement among our company, Biocell, Biomedix and Gefen Biomed Investments Ltd., a publicly-held company controlled by Biomedix, or Gefen, the expenses of this lease, including the rent and maintenance expenses, are equally shared by us, Biocell, Biomedix and Gefen. The initial four-year term of the lease agreement ended in July 2009, but the agreement has since been automatically extended twice pursuant to a provision that provides for three automatic one-year extensions unless the lessee submits a written notice of its desire not to extend the lease at least 120-days prior to the end of the then-current term.

For further details regarding our agreement with Biocell, Biomedix and Gefen, see “Related Party Transactions.”

We believe that our current utilized facilities are adequate to meet our needs for the foreseeable future.

We are also a party to an additional lease agreement for facilities which we no longer use. These facilities were the site of our subsidiaries’ operations prior to the relocation to our current primary facility in the Industrial Park of Tirat HaCarmel. The lease agreement extends until late 2010 and we are trying to locate a sub-lessee to cover our rent and maintenance obligations.

Legal Proceedings

We are not a party to any material litigation or proceeding and are not aware of any material litigation or proceeding, pending or threatened, to which we may become a party.

 

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HEALTH, REGULATORY, ENVIRONMENT AND PRICING

Health

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