6-K 1 v338961_6k.htm FORM 6-K

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 6-K

 

Report of Foreign Private Issuer

 

Pursuant to Rule 13a-16 or 15d-16

of the Securities Exchange Act of 1934

 

For the month of March, 2013

 

Commission File Number: 000-51310

 

XTL Biopharmaceuticals Ltd.
(Translation of registrant’s name into English)

 

85 Medinat Hayehudim St., Herzliya
Pituach, PO Box 4033,
Herzliya 46140, Israel
(Address of principal executive offices)

 

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

 

Form 20-F      x           Form      40-F      ¨

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ¨

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ¨

 

Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

 

Yes      ¨           No      x

 

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82- N/A

 

 

 

 
 

 

Incorporation by Reference: This Form 6-K of XTL Biopharmaceuticals Ltd. dated March 24, 2013 is hereby incorporated by reference into the registration statements on Form F-3 (File No. 333-141529, File No. 333-147024 and File No. 333-153055) filed by XTL Biopharmaceuticals Ltd. with the Securities and Exchange Commission on March 23, 2007, October 30, 2007 and August 15, 2008, respectively, and the registration statements on Form S-8 (File No. 333-148085, File No. 333-148754 and File No. 333-154795) filed by XTL Biopharmaceuticals Ltd. with the Securities and Exchange Commission on December 14, 2007, January 18, 2008, and October 28, 2008, respectively.

 

XTL Biopharmaceuticals – Immediate Report

 

Attached hereto is an English translation (from Hebrew) of our financial statements and additional information as submitted on Tel Aviv Stock Exchange. The following documents are included:

 

1.Description of the Company's Business for the year ending December 31, 2012.

 

2.Board of Directors' Report on the Status of the Company for the Year Ending December 31, 2012.

 

3.Consolidated Financial Statements as of December 31, 2012 (+ Purchase Price Allocation - Proteologics and EPO Impairment Study)

 

4.Separate Financial Information in accordance with Article 9c of the Israeli Securities Regulations (Periodical and Immediate Reports).

 

5.Pro Forma Consolidated Financial Statements as of December 31, 2012, in accordance with Regulation 9a of the Israeli Securities Regulations (Periodical and Immediate Reports) – 1970.

 

6.Additional Company Information.

 

7.Report on the Effectiveness of Internal Control Over the Auditing of Financial Statements and Disclosures.

 

- 2 -
 

 

XTL Biopharmaceuticals Ltd.

("The Company")

 

Periodic Report as of 31 December 2012

 

Table of Contents:

 

1.Chapter One – Description of the Company's Business for the Year Ending 31 December 2012

 

2.Chapter Two – Board of Directors' Report on the Status of the Company for the Year Ending 31 December 2012

 

3.Chapter Three – Consolidated Financial Statements as of 31 December 2012

 

4.Chapter Four – Separate Financial Information in accordance with Article 9c of the Israeli Securities Regulations (Periodic and Immediate Reports), 1970

 

5.Chapter Five – Additional Company Information

 

6.Chapter Six – Report on the Effectiveness of Internal Control over Financial Reporting and Disclosure

 

 
 

 

Chapter One – Description of the Company's Business

 

1Glossary

 

1.1For the purpose of this report, the following terms will be defined as follows:

 

Multiple Myeloma   Multiple Myeloma is one of the forms of blood cancer diseases comprising 10% of all blood cancers and approximately 1% of all malignancies. The disease is characterized by an uncontrollable proliferation of white blood cells of plasma cells type in the bone marrow that result in the formation of malignant cells that damage and destroy parts of the bone. The disease is multiple in its nature as reflected in the formation of a large number of malignant cells. The malignant cells and the secreted proteins are responsible for a series of clinical expressions and complications including bone damage accompanied by pain and fractures, bone marrow damage with anemia (blood deficiency), sensitivity to infections, weakened immune system, damage to the nervous system, renal failure, clotting mechanism disorders, etc. Multiple Myeloma is incurable. Patients diagnosed with the disease have an average life expectancy of 4-5 years.
     
Plasma Cells   A group of cells comprising approximately 2-5% of all white blood cells in the human body. The plasma cells produce immunoglobulin proteins in the body that serve as antibodies in the immune system.
     
Erythropoietin - EPO     A hormone produced in the human body by the kidneys. Its known role is to induce the formation of red blood cells in the bone marrow.
     

Recombinant EPO

(Recombinant Erythropoietin)

  A genetically engineered hormone that is primarily designed to act against various types of anemia, particularly anemia experienced by patients with renal failure (and who are being treated with dialysis), as well as patients suffering from various forms of cancer accompanied by anemia.
     
Stem Cells   Stem cells are undeveloped cells that produce the three types of blood cells. Most stem cells are found in the bone marrow, but some – known as Peripheral Blood Stem Cells (PBSC) – are collected from the bloodstream.

 

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    Self (autologous) transplant – the patient receives stem cells from his/her own bone marrow or from his/her peripheral blood.
     
Neuropathy / Peripheral Neuropathy   Damage to the functioning of the nerves responsible for transmitting sensations from the fingertips and legs. In mild cases, neuropathy might cause a feeling of numbness in the hands and feet. In severe cases, pains and stabbing sensation throughout the body to the point where it interferes with the extremities' functioning and movement.
     
T-Lymphocytes   Cells (white blood cells) in the circulatory system that serve as an important component of the immune system. Operates in several ways and is responsible for helping the body fight infections, malignant cells, etc.
     
Anticancer Effect   Anticancer effect is any phenomenon that causes cancer cells to stop reproducing, that eliminates them or 'freezes' their growth and spreading.
     
Schizophrenia   A severe chronic (psychotic) mental illness that is one of the most prevalent mental diseases. It affects most of the mental and social functions, state of mind, perception and thought as well as cognitive functions.
     
Antipsychotic Drugs   Drugs used to treat psychotic disorders such as schizophrenia and bipolar disorder. These drugs do not cure the disorder but rather manage the psychotic symptoms arising from the disease such as hallucinations and delusions. The drugs are classified into two main categories: typical, also known as first-generation drugs and atypical, also known as second-generation drugs which are more efficient.

 

Psychotic Disorder   An extreme mental state of partial or complete loss with reality. Psychosis is characterized as behavior perceived as strange or irregular and incomprehensible that might sometimes arouse feelings of anxiety and social rejection.
     
Bipolar Disorder   A mental illness that causes dramatic mood swings and sparks manic-depressive episodes.
     
Minocycline  

A broad-spectrum tetracycline antibiotic that has been used for over 20 years and today is mainly used to treat acne.

Minocycline is a small molecule with a molecular weight of 495 that is highly lipophilic and can therefore easily traverse the blood-brain barrier.

 

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Helsinki Committee   A committee that operates by virtue of the Public Health Regulations (Clinical Trials on Human Subjects), 1980 and that is responsible for approving and monitoring clinical trials – for additional information, see Article 17.1 below.
     

IRB

 

  Institutional Review Board – the corresponding committee to the Helsinki Committee in the US and around the world.
     
FDA   Food and Drug Administration – the agency in the United States that inspects and regulates development and registration of drugs in that country.
     
EMEA   European Medicines Agency – the European agency responsible for regulating the development and registration of drugs in the EU member nations. To date, approximately 35 countries are members of the EMEA1.
     
Serious Adverse Events   Serious Adverse Event (SAE) or Serious Adverse Drug Reaction – any troublesome clinical event, in any dosage, that results in death or causes life-threatening complications or that requires hospitalization or further hospitalization or that ends in a permanent disability or handicap.
     
Activity   The laboratory or clinical result that provides an indication of the clinical efficacy of the drug.
     
Efficacy   Proof of the clinical effect of the drug in human clinical trials.

 

Orphan Drug   A special track for approval and marketing of pharmaceutical preparations by the American Food and Drug Administration, the FDA. The track is designed to respond to the need to develop drugs for certain populations and for incurable and relatively rare diseases (in the US – diseases with a maximum number of patients of 200,000 and in the EU – diseases that occur in up to 5 patients out of 10,000 patients). Recognition of a drug as an orphan drug grants the manufacturer with a regulatory exclusivity in marketing the drug for a period of 7 years in the US and of 10 years in the EU.
Ethical Drug   A patent-protected drug that can only be manufactured and sold by the pharmaceutical that developed it.

 

 

 1 According to the information appearing at the organization website: http://www.emea.europa.eu/htms/aboutus/emeaoverview.htm 

 

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Cardiovascular   Cardio – related to the heart; vascular – blood vessels
     
Cardiovascular Event   Event such as a heart attack, stroke and death (in the context of hypertension and cardiopulmonary diseases)
     
USA National Institute of Health   American federal agency that is part of the U.S. Department of Health and Human Services and the primary federal agency for conducting and supporting clinical studies. The NIH website lists all significant clinical trials being conducted around the world.
     
Blood Pressure   The pressure applied by blood on arterial walls. This pressure undergoes changes due to the contraction and expansion of the heart.

 

Millimeter of Mercury (mmHG)   Measurement unit of pressure – pressure applied by one column of mercury 1mm high on a basis of 1 square cm.
     
Systolic Blood Pressure   Maximum blood pressure created in arteries when the heart is contracting ("systole")
     
Diastolic Blood Pressure   Blood pressure in the arteries at its lowest pressure that occurs when the heart is refilling with blood ("diastole") one moment before it contracts
     
Sympathetic Nervous System   One of the two parts of the autonomous nervous system responsible for subconscious actions, including control over peripheral resistance, regular heartbeat, intestinal movement, sweating, saliva secretion, etc.
     
Clinical trials   Clinical trials on human beings
     
Controlled trials   Clinical trials in which the effect of treatment in both groups of participants is examined. Subjects in one group are given the treatment being studied and in the other group – no treatment or another treatment whose effects are known, so that the effect of the treatment can be assessed by comparing the subjects' reactions in both group.
     
Randomized, Controlled Trials   Controlled clinical trials in which the placement into groups is random (much like a coin toss). The trial method contains placement objectivity.
     
Double Blind, Randomized Controlled Clinical trials   Randomized controlled clinical trials in which treatment is administered so that neither the doctor nor the subject are aware of which group the subject belongs. This is the highest level of a trial in achievement of objectivity in clinical trial planning.
     
Pivotal Study   Trial whose design and scope is such that its results will be accepted by the scientific community as the primary response to a question such as whether a certain treatment is effective.

 

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Peripheral Resistance   The property of blood vessels (or tubes in general) to impede flow. As a result, pressure must be increased to increase the flow. If peripheral vascular resistance rises, the heart generates higher blood pressure to maintain the same level of blood flow throughout the vessels, thereby creating hypertension.
     
Ejection Fraction   Index of the heart's ability to pump blood into the arteries in each beat from its section known as the "left ventricle". Just before the beat, one of the heart's chambers, the left ventricle, is filled with blood and immediately afterwards, it contracts. Ejection Fraction is the percentage in drop in volume in the left ventricle after each beat.
     
(Congestive Heart Failure) CHF   Disease in which the heart is unable to withstand the work load imposed on it and pump a sufficient amount of blood to all parts of the body due to congestion of blood in the veins and the excess accumulation of fluid in the body's tissues.

 

2Description of the General Development of the Company's Business

 

2.1General

 

a.The Company was incorporated in Israel on 9 March 1993 as a private company in accordance with the Israeli Companies Law, 1999 ("Companies Law"), under the name Xenograft Technologies Ltd. On 3 July 1995, the Company changed its name to XTL Biopharmaceuticals Ltd., with its defined objectives being the practice of any legal activity.

 

b.On 1 September 2005, the Company filed an application for listing the Company's American Depositary Receipts ("ADRs") on the NASDAQ under the NASDAQ Global Market list with the Securities & Exchange Commission in the United States ("SEC"). Beginning on that date and until 17 April 2009, the Company's ADRs were traded on the NASDAQ. For more information, see the immediate report published by the Company on 17 April 2009.

 

c.In 2005, the Company acquired from VivoQuest Inc. ("VivoQuest") an exclusive worldwide and perpetual license to use VivoQuest's intangible assets, covering a compound library including certain compounds ("DOS") for the potential treatment of Hepatitis C, and other assets. In the course of 2008, the Company sublicensed the use of the DOS technology to Presidio Pharmaceuticals Inc. ("Presidio"). For further information on the Company's engagement, see item 18.2 below and also the immediate report published by the Company on 20 March 2008.

 

On 22 August 2012, Presidio requested to terminate its agreement with the Company that is valid since 24 August 2012. Following the announcement to terminate said agreement, all DOS technology (including all patents maintained by Presidio) was returned to the company 90 days after the date of said notice, in accordance with the provisions of the agreement. As of the date of the report, the Company plans to review the renewal of activity in the Hepatitis C sector and/or locate strategic partners to continue the development and marketing of drugs to treat Hepatitis C based on DOS technology returned to it from Presidio.

 

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d.In July 2009, the Company's shares were delisted from trade on the NASDAQ due to a claim by the NASDAQ Compliance Committee that the Company had failed to comply with some of the listing criteria. Shortly after, the Company's ADRs began being quoted over the counter ("OTC"2) on the Pink Sheets, and accordingly, from this date on, the Company files reports in accordance with Chapter F of the Israeli Securities Law as well as reports in accordance with the U.S. Securities Exchange Act of 1934 regarding a foreign private issuer whose securities are held by the public. Since the delisting of the Company's ADRs from the NASDAQ, the Company is no longer subject to the NASDAQ provisions (for more information, see the immediate report published by the Company on 12 July 2009.

 

On 1 June 2012, the Company submitted a request to re-list its ADRs on NASDAQ, subject to compliance with all of the criteria required that was examined by the NASDAQ admissions committee, including criteria of minimal price for ADR (in accordance with various listing criteria). On September 24, 2012, the Company's Board of Directors approved the change in quantity of shares to ADR so that 20 ordinary shares of the Company will comprise one ADR, in order to support the Company's compliance with the conditions for listing the ADR for trade on NASDAQ. The determining date for change in the ADR ratio was 4 October 2012. As of the report date, the relisting process has yet to be completed as previously mentioned and the Company is in the midst of discussions with the NASDAQ Compliance committee to complete the process.

 

Despite the aforementioned, as of the date of this report, the Company is registered on the SEC as a reporting company and is therefore required to issue reports to the SEC in accordance with the U.S. Securities Exchange Act of 1934 provisions. Since the Company is not incorporated in the US, these requirements consist of the filing of a 20-F report (annual report for a foreign company) once a year as well as immediate reports regarding any changes in the Company's capital structure. As a result, the Company incurs expenses attributed to reporting requirements to the SEC, as aforementioned, that include, inter alia, the cost of legal advisors in the US, Bank of New York-Mellon (BONY) costs, and other various costs that were estimated, at the time of this report, at US$ 120,000 a year.

 

e.Until the start of 2008, the Company was involved in the development of drugs primarily used to treat Hepatitis C and B. At the end of 2007, the Company discontinued the research and development plans of these drugs (with the exception of the development of DOS technology as stipulated in this article) and an agreement was signed with Yeda Research and Development Ltd. (the commercial arm of the Weizmann Institute of Science) ("Yeda") for the recovery of all the rights to the Company's original technologies.

 

 

2The OTC is an electronic quoting system between brokers that displays quotes, prices and trading volumes of securities traded over the counter.

 

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f.On 19 March 2009, the Company entered into an agreement with Bio Gal Ltd. (Hereinafter "Bio Gal") to purchase assets, rights to the patent to use Recombinant Erythropoietin to extend the lives of terminal Multiple Myeloma patients as well as improve the quality of their lives. On 31 December 2009, the Company's board of directors approved the Company's agreement to acquire 100% of the shares of XTEPO, a private Israeli company founded by the shareholders of Bio Gal in order to carry out the aforementioned transaction, which will receive a license for exclusive use of a patent on the Recombinant EPO drug from Bio Gal, while simultaneously investing in XTEPO US$ 1.5 million by private investors (based on exercise of the options they were given).

 

In order to execute said acquisition, the Company issued approximately 133 million Ordinary shares to XTEPO's shareholders against 100% of their holdings in XTEPO by issuing the Company's Ordinary shares in an extraordinary private placement in accordance with the Securities Regulations (Private Placement of Securities in a Listed Company), 2000 to XTEPO's shareholders ("share swap agreement") that was approved by an extraordinary shareholders' meeting on 2 March 2010 so that upon completion of said share swap agreement, XTEPO's shareholders held (along with their holdings of Company shares on the eve of the share swap agreement) approximately 70.64% of the issued and outstanding share capital of the Company and the balance, of 29.36%, was held by the Company's shareholders on the eve of implementation of the share swap agreement. The consummation of the share swap agreement was subject to meeting certain prerequisites which had been completed on 3 August 2010 as well as all the measures required as per the share swap agreement.

 

g.On 27 February 2011, the Company published a prospectus (Hereinafter "the prospectus") for completion on the TASE in which the Company offered up to 13,210,000 Ordinary shares of NIS 0.1 par value each of the Company and up to 6,605,000 registered warrants (Series 1), exercisable into up to 6,605,000 Ordinary shares of the Company during every trading day on the Tel-Aviv Stock Exchange Ltd. (Hereinafter: "TASE") from their listing date on the TASE through 27 November 2011, and up to 19,815,000 registered warrants (Series 2), exercisable into up to 19,815,000 Ordinary shares of the Company during every trading day on the TASE, from the listing date on the TASE through 27 February 2013. For more information, see item 1.1 to the Company's board of directors' report and the Company's report from 27 February 2011 . On 7 March 2011, and in accordance with the prospectus published by Company as above, the Company published a supplementary notice which, inter alia, reduced the number of securities being offered by the Company in accordance with the prospectus.

 

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On 7 March 2011, the Company published an immediate report regarding the results of the bid in accordance with the aforementioned supplementary notice ("the bid") as detailed below: 58 orders were received in the bid to purchase 79,004 units with a total monetary value of NIS 10,553,017.

Excess demand in the offering was 185% higher and the unit price set in the bid was NIS 132.25, as stipulated below: (a) 19 orders were fully met to purchase 19,953 units at a unit price that is higher than the unit established in the bid;

2 orders to purchase 30,600 units at the price per unit established in the bid were partially met such that each of the investors received 74.66% of their order.

(c) 37 orders to purchase 28,451 units at a unit price that is lower than the price set forth in the bid were not met.

 

The number of units ordered at unit price or higher or at a higher price exceeded the total units offered, resulting in oversubscription. Accordingly, the Company exercised its right to allocate additional units as stipulated in Article 2.2.6.2 of the prospectus and Article 1.4 of the supplementary notice discussed above ("the additional allocation"). Within the confines of the additional allocation, the Company allotted 6,420 units to ordering parties who submitted the orders at the established unit price, and 95.64% of their orders were met. Total immediate consideration (gross) the Company received for the securities offered to the public in accordance with the supplementary notice, including the additional allocation, amounted to NIS 6,509,345.

 

h.On 24 March 2011, the Company entered into a term sheet to acquire the activity of MinoGuard Ltd. ("MinoGuard") by an exclusive license to use MinoGuard's entire technology in return for royalties on sales and milestone payments throughout the clinical development process. MinoGuard was founded in 2007 in order to commercialize combination therapies for treating psychotic diseases, focusing on schizophrenia. On 30 November 2011, the Company reported that it had closed an agreement for obtaining an exclusive global license to MinoGuard's entire technology. For more information about the exclusive licensing agreement, see Article 18.11.2 below.

 

i.On 21 April 2011 , the Company announced that on 20 April 2011, it had applied to the FDA, a sub-unit of the Health and Human Services ("HHS") for orphan drug designation for its EPO drug for the treatment of Multiple Myeloma for which it owns a patent through 2019. On 29 May 2011, the Company announced that it was granted an orphan drug designation from the FDA for its EPO (which is in planning and preparation towards Phase 2 clinical trial).

 

j.On 2 November 2011 , the Company entered a contractual arrangement in a memorandum of understanding to an agreement in which it will acquire NiCure technology, based on the local administration of renin-angiotensin inhibitors (a known drug for the treatment of hypertension, "Enalaprilat") and is a novel treatment for the symptoms of cartilage-related diseases (such as Osteoarthritis) ("the Technology") from Mor Research Applications Ltd., the Technology Transfer Office of Clalit Health Services, by obtaining an exclusive license to use the entire technology in return for royalties on sales and milestone payments throughout the clinical development process. The signing of the agreement by the parties is subject to, among others, the completion of a due diligence study, examination of the regulatory environment for the continued development of the technology and the approval of the Company's board of directors. For more information about the Company's contractual arrangement, see Article 8.11.3 below. As of the date of approval of the financial statements, the transaction has not been completed and the Company is considering this project fit to its business plan.

 

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k.On 14 March 2012, the Company entered a strategic collaboration framework agreement  with Clalit Health Services – Clalit Research Institute Ltd. (Hereinafter: "The Institute") and Mor Research Applications Ltd. in which the Institute would grant the Company the right to receive content based on data originating in the Institute's database regarding technology originating in the inventions and patents of Clalit Health Service physicians, in projects whose content will be agreed upon between the Company and the Institute and Mor in advance and in writing. For more information about the agreement, see Article 8.11.1 below.

 

l.On 12 April 2012, the Company entered a contractual arrangement with Kitov Pharmaceuticals Ltd. (Hereinafter: "Kitov") in a non-binding letter of intent in which the Company plans to purchase the entire share capital of Kitov in consideration for allocation of the Company's shares as well as milestone payments through the Kitov product development process. On 6 March 2013, and after the report date, the Company announced that negotiations it conducted with Kitov did not come to fruition and the parties decided to end the process.

 

m.On 10 June 2012, the Company received notice from the TASE updating that beginning on 17 June 2012, the Company's securities would be listed on the TA-Yeter 50 and the TA-BlueTech 50 indices.

 

n.On 13 June 2012, the Company entered a contractual arrangement in an agreement on principles with InterCure Ltd. (Hereinafter: "InterCure") in which, subject to implementation of a debt arrangement in accordance with Article 350 of the Israeli Companies Law 5759-1999 (Hereinafter: "The Arrangement"), the transaction has not yet been completed in which InterCure would convert all of its debts into ordinary shares of InterCure in accordance with a distribution that will be agreed upon between it and all of its creditors (including employees), the Company will acquire control over InterCure in consideration of an accumulated investment of $2.7 million, some in cash and some in allocation of Company shares. As part of the suspending condition for implementation of the agreement, InterCure undertook that on the date of completion of the transaction, it will be without debts and/or financial undertakings, net and without any contingent liabilities, with the exception of the sum of up to $150,000 liability net.

 

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On 25 July 2012, the transaction was completed following compliance with all of the suspending terms and the Company acquired 16,839,532 ordinary shares with no n.v. of InterCure in consideration for the allocation, by way of private allocation of 7,165,662 ordinary shares of NIS 0.1 n.v. per Company share whose value on the date of the signing of the Agreement, in accordance with the value of the Company share on the TASE totaled $2.2 million, and that represents $1.75 million for InterCure pre-money, but after conversion of InterCure debts as previously mentioned (Hereinafter: "Adjusted Value for InterCure"). The fair value of Company shares on the date of completion of the transaction totaled $2,469 thousand. In addition, the Company transferred to InterCure a sum of $150,000 in cash based on the adjusted value for InterCure. With execution of the said allocation, the Company held 50.79% of the issued and outstanding share capital of InterCure.

 

In addition, the Company and Medica Fund, which invested in InterCure shares, in addition to the Company a sum of approximately $460,000, granted to InterCure convertible loan of $500,000 (the Company's share stood at $330,000) for a period of up to ten months with an interest rate of 15%. The Company and the Medica Fund have the right to convert the loan to 11,546,507 additional shares of InterCure (the Company's share is 7,620,695 shares) that will be capitalized, upon conversion of the loan and assuming full dilution, as of the date of completion of the transaction, approximately 24.47% of the issued and outstanding share capital of InterCure (the Company's share in the convertible loan will be 16.15% of the issued and paid-up capital of InterCure). On 6 August 2012, Medica Fund converted the loan it granted InterCure into shares. On 3 March 2013, the Company's Board of Directors granted an extension of an additional 6 months to repay the loan (Hereinafter: "Date of Repayment") subject to that if InterCure receives money from any source (without operating income) up to the date of repayment, InterCure will be required to pay off the balance of the loan, or any part of it, in payments that will not be less than $50,000 per payment.

 

The Company's holding rate in the issued and paid-up share capital of InterCure as of the report date totaled 45.41%. At the same time, if the Company converts the loan it granted InterCure into shares, its holding in InterCure will be 54.72%. If all warrants granted to employees and directors in InterCure are exercised, and assuming that said conversion of shares will stand the Company's holding percentage in InterCure at 52.77%. For more information about InterCure, see Article 2.33 below.

 

It should be noted that on 28 October 2012, InterCure allocated 20,185,184 performance-contingent warrants that can be exercised into 20,185,184 ordinary shares with no n.v to Giboov Ltd. (Hereinafter: "Giboov"). If all of the performance-contingent warrants granted to the directors and employees are exercised, and that have not yet expired or forfeited, the Company's holding percentage in InterCure will be 36.76% of the issued and oustanding share capital of InterCure. As of the date of the signing of the financial statements, said warrants had not yet reached maturity.

 

o.On 21 November 2012, the Company acquired from Teva Pharmaceutical Industries Ltd. (Hereinafter: "Teva"), in an outside transaction, 4,620,356 ordinary shares of NIS 1 n.v. per share of Proteologics Ltd. (Hereinafter: "Proteologics"), which comprises Teva's full holdings in Proteologics and approximately 31.35% of the issued and outstanding share capital of Proteologics (as of the date of acquisition; approximately 31.24% as of 31 December 2012), in consideration of approximately NIS 6.5 million (approximately $1.7 million).

 

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Proteologics is a public company whose shares are listed on the TASE and that specializes in the discovery and development of drugs that operate on various components of the Ubiquitin system that was discovered by Dr. Avram Hershko and Dr. Aaron Ciechanover, 2004 Nobel Prize laureates in chemistry for this discovery. For more information about Proteologics, see Article 2.3.4 below.

 

2.2Listed below is a flowchart of the Company's holding structure as of this report date

 

Y:\Vineyard\Live jobs\2013\03 Mar\24 Mar\Shift III\v338961_XTL BIOPHARMACEUTICALS LTD_6-K\Draft\03-Production

 

2.3Information about the Company's Holdings

 

2.3.1As of the report date, the American companies, XTL Biopharmaceuticals Inc. and XTL Development Inc. are not operational.

 

2.3.2XTEPO Ltd. – XTEPO is a private company incorporated and registered in Israel on 9 November 2009, in accordance with the Israeli Companies Law 5759-1999 (Hereinafter: "The Companies Law") for the purpose of a share swap agreement with Bio Gal Company as stipulated in Article 2.1 above.

 

2.3.3InterCure Ltd.- InterCure incorporated in Israel on 20 November 1994 as a private company in accordance with the Israeli Companies Ordinance [New Version] 5743-1983 ("The Companies Ordinance"). On 26 July 2007, the company became a public company as defined in the Israeli Companies Law 5759-1999. Since its inception, InterCure has been specializing in the development of unique technologies and devices for non-medicinal and non-invasive treatment of chronic illnesses including hypertension, heart failure, sleep difficulties and stress. InterCure therapeutic devices are based on patent-protected technologies for respiratory modulation that reduces hyperactivity of the sympathetic nervous system.

 

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Over the past decade, InterCure has been preparing the groundwork required for large-scale commercialization of technologies and devices that it developed that include, inter alia, clinical trials, regulatory approvals in major markets, mass production and quality control systems, marketing systems and sales to consumers and physicians, branding and advertisements, distribution channels and business partnerships.

 

As of the date of the report, and following proof of the clinical efficacy and after having obtained FDA3 approval, InterCure sold approximately 200,000 devices under the brand RESPeRATE® (Hereinafter: "The Device" or "The Product"), in its various versions, to the first target market that it defined –non-medicinal and non-invasive treatment of hypertension in chronic patients who are unable to stabilize with drugs and/or who suffer from adverse events from drug therapy and/or who have not yet begun drug therapy. Most of the devices to treat hypertension were sold to the end-users (patients) at a price of $300-400 per unit4.

 

In addition, InterCure has several initial clinical trials and professional medical publications that indicate the efficacy of the technology it developed in non-medicinal and non-invasive treatment in heart failure patients. In addition, InterCure has evidence of the efficacy of the device in alleviating stress and in facilitating sleep. For more information about InterCure's area of operation, see Article 3.2 below.

 

InterCure has two subsidiaries: InterCure Inc. ("InterCure Inc") a private company founded on 11 February 2000 in accordance with the laws of the State of Delaware USA that has offices in Manhattan New York, USA and InterCure UK Limited ("InterCure UK"), a private company founded on 12 May 2008 in the United Kingdom and as of the report date, is not an active company.

 

 

3 http://www.accessdata.fda.gov/scripts/cdrh/cfdocs/cfpmn/pmn.cfm?ID=7215

4 The devices were sold directly by InterCure and its subsidiary in the United States, and through various distribution channels as stipulated in Article 9.6 below. As such, the average price that the Company receives for the device is lower than the price to the consumer. The price of $300-400 per consumer occasionally includes indirect taxes (such as VAT and sales tax) in accordance with the sale in various countries. In addition, the Company occasionally conducts sales promotion campaigns that cause a decline in the average price of a device during the sale period.

 

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2.3.4Protelogics Ltd – Protelogics was incorporated in Israel on 19 May 1999 as a private company limited in shares formerly known as Lismon (Israel) Ltd. In May 2000, the Company changed its name to its current name Proteologics Ltd. Since March 2010, Protelogic shares have been listed on the Tel-Aviv Stock Exchange Ltd.

 

As of the report date, Proteologics specializes in research and development of new drugs for a range of illnesses based on the Ubiqutin system. Proteologics has the knowledge and expertise of the Ubiqutin system and is channeling its efforts towards discovering new drugs that operate on various components of this system, particularly cancer and inflammatory diseases.

 

The Ubiquitin system was first discovered in 1978 by Professor Avram Hershko and Professor Aaron Ciechanover, of the Faculty of Medicine in the Technion, and Professor Ernie Rose, who won the 2004 Nobel Prize in Chemistry for this research. Disruptions in the body's Ubiquitin system might result in a long series of diseases, including metabolic disorders, nerves disorders, malignant diseases, inflammatory diseases, viral diseases, etc. 

 

Protelogics' research and development method involves selecting target proteins in the Ubiqutin system, whose integration in their actions causes the formation of a certain disease and the ability to be a target for the drug. Once the target protein has been selected, Proteologics works to develop a drug that neutralizes or inhibits or activates said target proteins, improving or curing said disease. Proteologics believes that the knowledge it has accrued regarding the Ubiquitin system, including the knowledge, unique tools and experience in discovering lead molecules that can be used in drug development may help it detect and develop new drugs for an array of diseases.

 

For more information about Proteologics, including information about its area of operation, executive officers, etc. see the periodic report for 2012 that was published by the company on 10 March 2013.

 

It should be noted that the Company considers its holding in Proteologics as an asset only and its products and management are not considered part of the Company's activities.

 

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3Areas of Activity

 

As of the report date, the Company operates (The Company, subsidiary XTEPO and InterCure, hereinafter jointly: "The Group") in two main areas of activity: (a) Planning, development and research in order to develop and commercialize its technologies (Hereinafter: "Drug Development Field"); (b) Development and marketing of unique technologies and devices for non-medicinal and non-invasive treatment of chronic diseases including hypertension, heart failure, sleep difficulties and stress (Hereinafter: "Medical Device Field"). For more information about the Group's activities in the medical device field, that was carried out through InterCure, see Article 3.2 below.

 

3.1Listed below is information about the Group's activities in the field of drug development:

 

3.1.1The Group's Drugs

 

Recombinant EPO

 

Recombinant EPO is a drug that, as of the date of this report, is used to treat (i) anemia in patients with renal failure (dialysis) and (ii) anemia in cancer patients. Recombinant EPO was developed, manufactured and marketed by Johnson & Johnson, Hoffman La Roche and Amgen, and generates billions of dollars in sales every year, and is therefore considered a drug with an extremely large market scope. The drug has been administered to millions of patients over the past 20 years, resulting in extensive clinical experience with the drug and safety information about it. As of the date of this report, the Group began preparing for a Phase 2 clinical trial on Multiple Myeloma patients in Israel and in other countries, in accordance with the clinical protocol that was received as part of the Bio Gal transaction and that will be updated by the Company ahead of its approval by the FDA and other ministries of health as the case may be. The protocol is based on the information that was collected about the use of recombinant EPO and the expectation that it may prolong the life of Multiple Myeloma patients while significantly improving their quality of life and causing less side effects than currently available treatments.

 

SAM-101

 

SAM-101 is a technology developed for treating mental illnesses based on a combination of existing antipsychotics and a recognized medicinal compound (Minocycline). The drug had been developed prior to its acquisition by the Company by MinoGuard, which, to the best of the Company's knowledge, had successfully completed a Phase 2a prospective, randomized, double-blind, placebo-controlled, clinical trial conducted on about 70 schizophrenics in the Shalvata Mental Health Hospital in Israel. To the best of the Company's knowledge, the trial's endpoints were met, demonstrating that SAM-101 improves the positive symptoms of the disease as well as the patients' cognitive state, minimizes the negative symptoms (social parameters and patient cognition) and reduces weight gain side effect among patients. As of the date of this report, the Company intends to conduct clinical trials, develop, register, market, distribute and sell the drugs which are the product of this technology, regardless of the type of disease.

 

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3.1.2Drug development process - general description

 

Drug development is a complex process that generally includes the following primary stages5. Each stage must comply with the health agencies' criteria before the next stage can begin, as follows:

 

a)Preclinical Phase - this phase includes trials in labs and on animals in order to demonstrate the efficiency of the drugs in models that simulate the disease for which the drug is being investigated. The preclinical phase also includes trials under meticulous conditions in order to determine whether the drug has any toxic adverse effects and to learn about the various characteristics in animals. In addition, the preclinical stage includes development of manufacturing methods under GMP (Good Manufacturing Practice - which is a collection of manufacturing requirements that the drug must comply with in order to allow the administration of the drug to patients in the future).

 

b)Phase 1 - this is the first clinical phase in drug development in which an initial test is carried out on humans. The phase is designed to assess the safety of the drug as well as the maximum dosage that can be safely administered to patients. This phase may also include additional tests such as drug dispersal in the body and how long the drug remains in the blood, measurements that will help asses its biological availability, etc. There are instances in which this trial phase is carried out on healthy individuals and in other cases the trial is carried out on patients with the investigated disease.

 

c)Phase 2 - in this phase, an initial test of the efficiency of the drug is carried out in patients. In addition, this phase attempts to determine the optimal dosage of the drug to treat patients. At the same time, the phase continues to test its safety. Several Phase 2 trials are often carried out while the first Phase 2 trial (Phase 2a) is designed to serve as proof of concept and the second Phase 2 trial (Phase 2b) is a broader trial that includes a larger number of patients and that is carried out in a larger number of medical centers than was Phase 2a.

 

 

 5 Description of the stages is general and changes are occasionally possible, including in different drugs. for example, in some cases, Phases 1 and 2 or 2 and 3 may be unified

 

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d)Phase 3 – the decisive phase of multinational, multicenter, randomized, placebo controlled, double blind trials. This phase includes the largest number of subjects (hundreds and even thousands) and the trial is carried out in a large number of medical centers around the world. The purpose of this phase is to prove the efficiency and safety of the drug in a large number of patients in a way which simulates as much as possible (more than the previous phases) the manner in which the drug will be used in the clinical practice. Following successful conclusion of this phase, applications can be submitted to the health agencies for receipt of approval to register the drug.

 

It should be emphasized that the conduct of clinical trials on human beings in each of the phases, Phase 1, Phase 2 and Phase 3 requires the prior approval of the Helsinki Committee/IRB and of the regulatory agencies in the countries where the clinical trials are being conducted. It should be noted that only successful results in the preliminary phases will guarantee the possibility of moving on to the next stage.

 

Once all of the said phases (including completion of Phase 3) have been successfully completed, the Group can submit an application for approving the drug's registration by the relevant regulatory agency, e.g. the FDA in the U.S.

 

The development process, as previously mentioned, takes many years and requires extensive funding due to the prolonged duration of the trials, the process for obtaining approval, and obtaining information and results from the trials, at the end of which the Group will be able to submit an application for approval to register the drug by the FDA or any corresponding regulatory agency in any other country. Occasionally, the clinical development, including the conduct of clinical trials, is carried out with the assistance of expert subcontractors who are entrusted with operating under the meticulous professional standards dictated by the regulatory requirements.

 

3.2As previously mentioned, InterCure operates in the field of medical products and developed unique technologies and tools for non-medicinal and non-invasive treatment of chronic diseases including hypertension, heart failure, difficulty sleeping and stress. InterCure's therapeutic devices are based on patent-protected technology for respiratory modulation that reduces hyperactivity of the sympathetic nervous system. Listed below is information about the Group's activities that are being carried out through InterCure in the field of medical devices:

 

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3.2.1InterCure Products and Services

 

As of the report date, InterCure is manufacturing (through subcontractors) and markets the following products and services:

 

3.2.1.1RESPeRATE – basic version of the device.

 

3.2.1.2RESPeRATE Duo – basic version of the device that allows two users to save the information about the exercise data in the device in separate computer memories.

 

3.2.1.3RESPeRATE Ultra – version of the device that includes an ability to instruct new users on how to efficiently use the device, smaller device size and larger user screen than in the basic version.

 

3.2.1.4RESPeRATE Ultra Duo – version of the device that allows two users to save information about the exercise data in the RESPeRATE Ultra model in separate computer memories.

 

3.2.1.5RESPeRATE Ultra Deluxe – version of the device with an illuminated display easy to use in the dark (bedroom environment).

 

3.2.1.6RESPeRATE Rx – version f the device sold under a phsician's prescription in the United Kingdom

 

3.2.1.7Accessories to the device, such as a carry case and speakers

 

3.2.1.8Extended warranty period for the devices, which provide 36 month warranty period instead of an initial 12-month warranty period around the world, with the exception of Europe, in which the initial warranty period is 24 months in accordance with the law.

 

3.2.1.9Support plan and personal training in the US through email and telephone, for a fee that improves the effectiveness of the InterCure products and regular customer support.

 

In addition, InterCure offers its customers from time to time peripheral equipment (the revenue from which is not material as of the date of publication of this report), such as a blood pressure meters and books on hypertension, which it buys from third parties, as well as value added service online for the community of users who are interested in non-medicinal treatment of hypertension (user forums, eNewsletters, etc.). InterCure does not charge for online services at this stage.

 

InterCure even provides technical support services to customers, including through call centers, for its products in the US, UK and Israel. These services are provided free of charge and people who are not customers can call and ask questions about the device.

 

For more information about InterCure products and services, see Article 9 below.

 

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4Investment in the Company's Capital and Shares Transactions

 

4.1With the exception of the execution of the share swap agreement stipulated in item 2.1 above and the Company's offering of shares and warrants on 7 March 2011 through a prospectus in which one of the interested parties participated - Mr. Alexander Rabinovich (see item 2.1 above), in the two years preceding the date of this report, no investments were made in the Company's share capital and no material transactions were carried out by any of its interested parties.

 

4.2On 18 March 2012, the Company's Board of Directors approved a private offering to institutional and private investors (foreign and Israeli) in consideration for $2.4 million (approximately NIS 9.1 million). As part of the private offering, the Company allocated 11,560,362 ordinary shares of the Company with NIS 0.1 n.v. per share, 3,853,454 warrants (Series A) and 1,926,727 warrants (Series B), that reflect a share price of NIS 0.7896.

 

The warrants (Series A) can be exercised into shares from the date of their allocation (18 March 2012) and until 17 September 2012, so that every warrant will be exercised into one ordinary share of NIS 0.1 n.v. per share against exercise surcharge of NIS 1.046, linked to the US dollar. In the period, 560,000 warrants (Series A) were exercised into 560,000 ordinary shares of the Company of NIS 0.1 n.v. per share in consideration for $155,000. On 17 September 2012, the balance of warrants (Series A) totaling 3,293,454 warrants expired. The warrants (Series B) can be exercised into shares from the date of their allocation (18 March 2012) and until 17 March 2015 so that each warrant will be exercised into one ordinary share of NIS 0.1 n.v. per share against exercise price of NIS 1.124 per share, linked to the US dollar.

 

4.3On 25 July 2012, the Company finalized its contractual arrangement in an agreement with InterCure in which the Company acquired control of InterCure in consideration for an aggregate investment of approximately $2.7 million, part in cash and part in allocation of Company shares. The Company acquired 16,839,532 ordinary shares with no n.v. of InterCure in consideration of the allocation by means of private allocation of 7,165,662 ordinary shares of NIS 0.1 n.v. per share of the Company, whose value on the date of the signing of the agreement is based on the value of a Company share on the TASE, totaling $2.2 million and that represents a value of $1.75 million for InterCure pre-money, after conversion of InterCure debts as previously stipulated. The Company's price per share derived from the value of the allocated shares divided by the share portions received by the Company is NIS 1.194. The fair value of Company shares on the date of completion of the transaction was $2,469 thousand. For more information about the acquisition of InterCure, see Article 2.1 above.

 

 

 6 Based on a conversion rate of NIS 3.769 per $US 1 that is the representative rate of the US dollar from 16 March 2012.

 

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The table presents the investments made in the Company by investors only:

 

Date of
Allocation
  Number of
Offerees
  The
Consideration
  Company value post money derived from allocation
(if relevant)
18 March 2012   6   $2.4 million (approximately NIS 9.1 million)   Approximately NIS 156 million
25 July 2012   1   $2.2 million dollars   Approximately NIS 285 million

 

For details about option allocations to employees and service providers, see Note 20 to the consolidated financial statements.

 

5Distribution of Dividends

 

Since the date of the Company's establishment through the date of this report, the Company has not distributed any dividends and the Company has no profits regarding the profit criterion as stipulated in Article 302 of the Israeli Companies Law 5759-1999.

 

As of the date of this report, the Company does not have a dividend distribution policy.

 

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Chapter Two – Additional Information

 

6.Financial information about the Group's areas of activity

 

Below is financial information about the Group's area of activity (in Thousands of Dollars)

 

   Drug Development   Medical Device 
   2012   2011   2010   2012   2011   2010 
Revenue (from third parties)   -    -    -    938    -    - 
Costs   (1,359)   (1,224)   (1,256)   (1,555)   -    - 
Loss from Regular Activity   (1,359)   (1,224)   (1,256)   (617)   -    - 
Loss from regular activity attributed to Parent Company owners   (1,359)   (1,224)   (1,256)   (282)   -    - 
Loss from regular activities attributed to minority interest   -    -    -    (335)   -    - 
Assets attributed to field of activity   7,310    4,073    3,797    3,776    -    - 
Liabilities attributed to field of activity   757    629    963    905    -    - 

 

For information and explanations about the results of Company activities and the changes that occurred during the period, see Company Board of Directors explanations about the status of Company affairs attached as Chapter B of this report.

 

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7General environment and impact of external factors on the Group's operations

 

Listed below are the trends, events and developments in the Group's macro economic environment that have affected or that might materially affect the Group's activity results in its area of activity:

 

7.1Drug Development

 

The biopharmaceutical industry which is the focus of the Group's products is facing an increasing need for new developments to treat patients of various diseases. Despite the progress of the pharmaceutical industry in general, and its impressive achievements over the past several decades, as of the date of this report, drugs for many diseases, including various cancers and schizophrenia, are still insufficient both in terms of limited range of action, inefficacy and serious side effects. The increase in average age of the population, which is accompanied by a parallel increase in the number of different patients in general increases the need for new drugs in the fields underlying the Company's products.

 

As good as any drug may be in alleviating the symptoms of the disease, they are not efficient in all patients. Frequently, many patient populations lack an efficient drug to treat their disease or the phase of the disease that they are in. Furthermore, the drug often positively affects the patient for a certain period of time but then its positive effect wanes. In addition, many drugs trigger extremely serious side effects that occasionally prevent patients from taking the drug and even a market that offers a large variety of drugs is constantly in need of introducing new drugs.

 

The target market of the Group's drug is unique. The Group believes that the ability of any drug to capture a market share depends on the drug's short-term and long-term efficacy as well as on its side effects, both absolutely and relative to its competing drugs.

 

In light of the fact that the Group is developing a new indication for the Recombinant EPO, a drug that already exists and that has been approved for treatment of anemia, the Group expects to receive an exemption for the preclinical trials as well as from the Phase 1 clinical trials. As of the date of this report, the Group has a preliminary plan to initiate Phase 2 clinical trial in patients with Multiple Myeloma. It should be noted that the Company received a preliminary plan as part of the assignment of the patent license agreement. At the same time, and in light of the fact that a prolonged period of time has passed since the date of the preparation of this plan, the Company immediately began after the completion of the transaction in preparation of the trial that includes, inter alia, updating the plan that will be brought before medical agencies for approval prior its implementation.

 

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Studies conducted by Prof. Mittelman revealed that use of Recombinant EPO in patients in advanced stages of Multiple Myeloma significantly contributed to suppression of symptoms of the disease, improved the immune system, stabilized patients' health, prolonged their survivability and significantly improved their lives, without causing serious side effects. These properties grant this drug an advantage in most therapeutic properties for which the drug is designed.

 

The Group anticipates that if these properties are expressed in clinical trials as well, a medical agency criteria for drug approval, the drug will capture a large market share in the drug market for treatment of Multiple Myeloma, including providing a solution to terminally ill patients in the advanced stage of the disease who do not respond well or who demonstrate an insufficient response to currently available treatments. In addition, the Group expects the drug to capture another market share of combining the drug with currently available drugs and therapies. If these projects are realized, the drug's market is estimated at hundreds of millions of dollars a year.

 

In addition, the SAM-101 technology successfully completed a Phase 2a prospective, randomized, double-blind, placebo-controlled clinical trial conducted on about 70 schizophrenics in the Shalvata Mental Health Hospital in Israel. To the best of the Company's knowledge, the trial's endpoints were met, demonstrating that SAM-101 improves the positive symptoms of the disease as well as the patients' cognitive state, minimizes the negative symptoms (social parameters and patient cognition) and reduces weight gain side effect among patients. The Group intends to continue developing the SAM-101 technology which is based on a combination of existing antipsychotics and a recognized medicinal compound (Minocycline).

 

The Group anticipates that if the clinical trials reinforce the Phase 2a clinical trial results as described above, the SAM-101 drug is expected to capture a significant market share in the schizophrenia drug industry mainly due to the side effects of consuming the existing drugs and due to the limited efficacy of the existing drugs in treating the negative and cognitive symptoms of schizophrenia patients. Decision Resources, the research company, estimated the size of the schizophrenia treatment industries in the U.S., France, Germany, Italy, Spain, the UK and Japan in 2011 at approximately US$ 7.4 billion. 7Due to the partial success of the new drugs which have recently been introduced into the market and the loss of the patents for the leading ethical drugs by large pharmaceutical companies such as Eli Lilly, the Group anticipates that the commercialization of the SAM-101, if and when it occurs, will achieve a significant market share of the schizophrenia treatment industry, estimated at hundreds of millions of dollars a year.

 

 

7 http://decisionresources.com/Products-and-Services/Report?r=pcorcg0713

 

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However, it should be emphasized that clinical studies include many elements of uncertainty, and the possibility of the Group not succeeding in its attempts to continue to demonstrate the efficiency and safety of the drugs or that the drugs will prove to be less efficacious than expected cannot be ruled out. In addition, the possibility of the development of other drugs by the competition that will compete with the Group's drugs cannot be ruled out.

 

The Group's assessments regarding the potential of the Company's drugs to capture a large market share in the Multiple Myeloma and schizophrenia drug markets represent forward-looking statements. This information is uncertain and based on the information the Group has as of the date of this report. It is emphasized that the results of the trial phases that will be conducted in practice might significantly differ from the estimates based on this information, since the continued successful development of the Group's drugs is not definite.

 

7.2The Medical Device Field

 

7.2.1General

 

In September 2008, a global financial crisis erupted that resulted in a severe credit crisis, to developments and turmoil in markets and to a significant economic slowdown.

 

7.2.2Macro Economic Trends

 

The Group's activity, through InterCure, focuses on the development of innovative technologies and home medical devices as well as the marketing of these devices. The home medical device sector was affected by macro economic trends. Generally recognized is that during any period characterized by economic slowdown, as is projected in the American market, expenses for the purchase of consumer products declines. At the same time, InterCure believes that in the field of medical devices, the impact of declining expenditure due to the economic slowdown in the market is diminished. Concurrently, since in most cases, the Group's products are paid for by the consumer, the economic slowdown in the Group's target markets had a negative material impact on sales.

 

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7.2.3Aging Population and Increased Public Awareness

 

Among the adult population in the industrialized world (particularly between the ages of 50-80), there is increasing demand for products that improve health, including home medical devices in areas in which the Group is active. In industrialized nations in which the Group operates, through InterCure, the percentage of adults in the population has been increasing, as has been public awareness of the need to protect health and for more proactive treatment in health-related areas.

 

7.2.4Usage Internet And Direct Marketing

 

In the United States, which leads in direct advertising of pharmaceuticals, about one-third of consumers exposed to direct advertising ask their physician about the medical treatment or drug advertised and in a significant percentage of cases, the physician prescribes to the patient the drug the patient requests.8 The increased use of online devices may affect demand for InterCure products, which are largely based on commercial activity of online advertising and direct sales to consumers through the internet.

 

7.2.5Alternative Medicine Trend

 

In the United States, and in other industrialized nations, recent years have witnessed a significant increase in the number of people who use alternative medicine. In addition, some physicians believe that alternative medicine is applicable and/or effective9. This trend, as long as it continues, may increase demand for InterCure products, which allows for non-medicinal treatment of the disease.

 

7.2.6.Reimbursement

 

InterCure believes that there is demand for technology that may reduce the cost of medical treatment, including home medical devices that may reduce cost of treatment hypertension and diseases caused by hypertension. Accordingly, InterCure believes that medical insurers might decide to indemnify the purchases or InterCure products for part or all of the purchase of the device in order to lower the gross expenses in refunding money to policyholders for the purchase of drugs to lower blood pressure and treatments for the disease. Although InterCure does not base its business model on medical reimbursement for the purchase of the product, it is working to convince medical insurers to provide full or partial refund to policyholders who purchase the product. InterCure believes that a reimbursement from the medical insurers, if any, may increase sales.

 

 

8Food and Drug Administration Surveys of patients, 2004 http://www.fda.gov/downloads/AboutFDA/CentersOffices/CDER/ucm109875.pdf
9Astin JA, Marie A, Pelletier KR, Hansen E, & Haskell WL; A Review of the Incorporation of Complementary and Alternative Medicine by Mainstream Physicians; Arch Intern Med, 1998; 158: 2303-2310

 

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In the US, the reimbursement procedure in insurance companies consists of a few stages. In the first stage, an application is made for the receipt of a CPT code from the American Medical Association (AMA). In the second stage, an application to an ICD-9 code is made to the coordinating committee of the Medicare centers. In the third stage, an application is made to the Statistical Analysis Medical Equipment (SADMERC) regional contractor for the receipt of a new code (HCPCS). After receiving the code with a patient's request to receive a device, the patient's date should be examined in order to verify he fits the criteria enabling him to get reimbursed. If the patient fits the criteria, a device will be supplied to the patient and an invoice will be issued to the insurer.

 

As of today, InterCure does not have a reimbursement code for its products in the US, and one cannot evaluate at this stage, whether it will receive such code in the future.

 

In the United Kingdom, InterCure filed an application to establish insurance indemnity as part of the British health basket. On 17 November 2011, InterCure announced that the British Department of Health approved its application for insurance indemnity for the product and as part of the health basket in Britain10. As a result, InterCure signed several distribution agreements in Britain, and on 1 February 2012, began selling the product in a manner in which patients in Britain who were required to pay GBP 200 out of pocket to purchase the product could receive the device free of charge or for a nominal fee upon presentation of a signed physician's prescription.

 

7.2.7Clinical Studies

 

Clinical studies on the importance of lowering blood pressure and/or the link between hypertension and other diseases and/or publications regarding InterCure products, including on their effectiveness, and the link between them and other areas of medicine, may affect the scope of demand for InterCure products. Clinical studies that were published in recent years defined a new category of "pre-hypertension" (People whose blood pressure exceeds 130/85 mmHG) by the National Institute of Health in the US. The definition of hypertension in a manner that will include hypertension above 130/85 mmHG, if any, may increase the number of people who will treat their hypertension and accordingly, increase demand for products designed to lower blood pressure, including InterCure products.

 

7.2.8.Developments in Medical Treatment (Devices and Drugs) and Development and Manufacturing of Competing Products

 

InterCure activity may be affected by the development, manufacturing and marketing of products using other technologies that compete with its own technologies and products. In addition, the introduction to use of new procedures for medical treatment, as well as new drugs to treat hypertension that have no adverse events might harm demand for InterCure products.

 

 

10               British Department of Health approval refers to England and Wales. Scotland and North Ireland are separate authorities that, to the best of Company knowledge, update their health basket in accordance at a later stage and without need for additional applications by the Company.

 

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To the best of InterCure's knowledge, as of the date of this report, there is no non-medicinal non-invasive medical device to lower blood pressure with proven effectiveness in clinical trials that has been approved for marketing by the FDA but new technologies might be developed in the future that will lower blood pressure. It should be noted that the Company's technology is unique and patent-protected, which limits the development of competing technologies.

 

In the third quarter of 2010, InterCure learned that the Lloyds Pharmacy chain in Britain ("The Chain"), which distributed InterCure devices, developed in conjunction with Harvard Medical Devices Ltd. ("The Manufacturing Company") and began advertising a competing device that claims non-medicinal treatment of hypertension at a lower price that the one developed by InterCure ("The Competing Device"). A review conducted by InterCure, to the best of its knowledge, revealed that the Competing Device, does not modulate respiration in an interactive manner during the exercise (mode of action is patent-protected by InterCure and has been proven effective in the lowering of blood pressure). At the same time, a review conducted by InterCure's advisors reveals that the Competing Product includes elements that were copied from its products, a possible copyright infringement. InterCure has adopted several measures and its possibilities, including legal and regulatory actions. To the best of InterCure's knowledge, sale of the Competing Device began in the first quarter of 2011 under Lloyds Pharmacy's private brand and under the brand Kinetics, which belongs to the Manufacturing Company. At this stage, InterCure cannot assess whether and how sales of the Competing device will affect its sales in Britain.

 

For information regarding to InterCure's intellectual property, see section 9.3. for additional information regarding competition to InterCure's technology see section 9.8.

 

InterCure cannot influence the entry of new competition into the market or on the continue developments of existing competition. As such, it plans to continue investing in the development of new products and protecting the intellectual property rights in order to protect its competitive status.

 

7.2.9.Company Product Approval Policies by Regulatory Authorities

 

InterCure activity is affected by regulatory authority policies in various countries regarding approval of product marketing and control. InterCure has regulatory approval to market its products in the US, the EU, Israel11 and other countries. For more information about the relevant regulatory authorities and necessary approvals, see Article 9.20.

 

 

11 Approval of medical devices is in the renewal stage following expiration of the previous approval on 31 January 2013. InterCure and its regulatory advisors believe that said approval is expected to be received in the next several months.

 

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7.2.10Israeli Identity

 

The sale of InterCure products in various countries outside of Israel might be affected by the international standing of Israel. In general, Israeli identity serves in certain cases as a sales promotion (in light of recognition of the technological advantages in Israel) and in other cases as a disadvantage which might result in cancellation of transactions (such as within the confines of the Arab boycott, etc.)

 

Chapter Three - Description of the Group's Business in its Field of Operations

 

8Drug Development

 

8.1General Information about Drug Development Activities

 

Listed below is a detailed description of the Group's business operations including a description of trends, events and developments in the Group's macroeconomic environment that have or are expected to have a significant impact on the Group's business.

 

8.1.1General

 

The study by Prof. Mittelman in the field of Multiple Myeloma

 

The clinical observations, carried out under the leadership of Prof. Mittelman, who serves as the Group's Medical Director, of patients in advanced stages of Multiple Myeloma and their analysis revealed that treatment with Recombinant EPO extended the lives of some of the patients beyond what was expected in their condition if they hadn't receive the treatment. The results and conclusions derived from said observations were later examined under lab conditions in mouse models for multiple myeloma, which revealed that Recombinant EPO has an anticancer effect based on its effect on the activation of T lymphocytes in the immune system.

 

These findings12 raised the premise that Recombinant EPO affects the immune system, regardless of the cancerous tumor. Another study conducted by the study team of Prof. Mittelman revealed prominent changes in various immune system parameters in Multiple Myeloma patients in advanced stages of the disease, and that treatment of these patients with Recombinant EPO resulted in improvements in their immune system in terms of its components and in terms of function, a fact that contributes to the prolonged lives of these patients.

 

 

12 The findings were published by Prof. Mittlemen et al - Mittelman M, Zeidman A, Kanter P, Katz O, Oster H, Rund D, Neumann D. Erythropoietin has an anti-myeloma effect – a hypothesis based on a clinical observation supported by animal studies. Eur J Haematol 2004: 72: 155–165. _ Blackwell Munksgaard 2004..

 

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It should be noted that in 2006, a study was published by the Cleveland Clinic and H. Lee Moffitt Cancer and Research Institute13, which retrospectively examined 257 patients who were administered Recombinant EPO to treat their anemia, that verified the findings of Prof. Mittelman's group – the general survivability of patients treated with EPO improved. The study concluded that a random prospective study would guarantee verification of these findings.

 

It should be noted that, in addition to the aforementioned, over the past decade, Prof. Mittelman and his research team published several articles on Recombinant EPO treatment of patients with Multiple Myeloma.14

 

The study of Prof. Yehiel Levkovitz and Dr. Shlomo Mendelovic in the field of mental illnesses

 

Minocycline has the ability to penetrate the central nervous system at an effective clinical level in addition to its microbial feature. It was discovered that the drug has neuro-protective agents in models of ischemic stroke, Multiple Sclerosis, spinal cord injuries, Parkinson's and Huntington's disease.

 

Following in-vivo studies which demonstrated the efficacy of treating schizophrenics in a rat model with recognized antibiotics15 in 2004, Prof. Levkovitz and Dr. Mendelovic received a grant from the Stanley Foundation for investigating the neuro-protective effect of Minocycline in the early stages of the development of schizophrenia in humans. A prospective, randomized, double-blind, placebo-controlled clinical trial administered Minocycline to about 70 schizophrenics in the Shalvata Mental Health Hospital in Israel in addition to an antipsychotic drug which was administered to 2/3 of the subjects. A control group consisting of 1/3 of the patients in the trial was administered both an antipsychotic drug and a placebo. The antipsychotics included Risperdal, Zyprexa, Geodon, Seroquel and Leponex. In a trial conducted over a period of six months, each patient was tested for the effect of the Minocycline on various clinical and cognitive parameters.

 

 

13R. Baz, E. Walker, T.K. Choueiri, R. Abou Jawde, C. Brand, B, McGowan, E. Yiannaki, S. Andresen, M.A. Hussein - Recombinant Human Erythropoietin Is Associated with Increased Overall Survival in Patients with Multiple Myeloma, Acta Haematol 2007;117:162–167, DOI: 10.1159/000097464

14 The articles published below:

(1)Erythropoietin treatment in advanced multiple myeloma is associated with improved immunological functions: could it be beneficial in early disease? doi:10.1111/j.1365-2141.2006.06366. British Journal of Haematology, 135, 660–672.; (2) Erythropoietin effects on dendritic cells: Potential mediators in its function as an immunomodulator? doi: 10.1016/j.exphem.2008.07.010. Society for Hematology and Stem Cells. Published by Elsevier Inc.; (3) Erythropoietin as an Immunotherapeutic Agent: New Uses For An Old Drug? Medical Hypotheses and Research, VOL. 2, NO. 4, October 2005.; (4) Erythropoietin enhances immune responses in mice. DOI 10.1002/eji.200637025. Eur. J. Immunol. 2007. 37: 1584–1593.; (5) Non-erythroid activities of erythropoietin: Functional effects on murine dendritic cells. doi:10.1016/j.molimm.2008.10.004. Molecular Immunology 46 (2009) 713–721.

15 (Levkovitz Y., Levi U., Braw Y., and Cohen H., (2007) Brain Research, 1154: 154-162

 

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The trial results showed that a combination of antipsychotics and Minocycline improves the positive symptoms, cognitive functions and reduces the negative symptoms and side effects of the antipsychotics (such as weight gain). The trial concluded that the proposed combined treatment enhances the regular drug that is currently offered to schizophrenia patients and is likely to slow down the clinical deterioration 16

 

Three independent groups of researchers (from the universities of Manchester, England, Japan17 and Maryland) who have been studying the combination of these drugs have also reached similar conclusions to those of Prof. Levkovitz and Dr. Mendelovic.

 

8.1.2Structure of the Drug Development Activity of the Group and Changes Therein

 

8.1.2.1Multiple Myeloma

 

Multiple Myeloma is a form of blood cancer. The disease is characterized by uncontrollable proliferation of a type of white blood cells known as plasma cells in the bone marrow that causes the accumulation of malignant cells that damage and destroy parts of the bone. This disease has a multiple nature that is expressed in the creation of a large number of accumulations of malignant cells. The malignant cells and the secreted proteins are responsible for a series of clinical expressions and complications, including bone damage with pain and breaks, bone marrow damage accompanied by anemia (blood deficiency), sensitivity to infections, weakening of the immune system, nervous system damage, kidney failure, clotting disorders, etc. The disease is incurable, and the average life expectancy of patients is 4-5 years.

 

The National Cancer Institute estimates that in the U.S. alone, all newly diagnosed cancers in 2013 will reach 1.7 million (approximately 0.5% of the population), with the number of cancer-related deaths totaling 0.6 million (approximately 0.2% of the population) 18. Of all forms of cancer currently known, the most common forms in the U.S. 19 are intestinal cancer (approximately 102,000 new patients a year), lung cancer (approximately 228,000 new patients), breast cancer in women (approximately 235,000 new patients) and prostate cancer in men (approximately 239,000 new patients).

 

 

16 Levkovitz Y, Mendlovic S, et al. J. Clinical Psychiatry

17 Miyaoka T et al. Clinical Neuropharmacology 31, October 2008

18 The data is taken from the National Cancer Institute - NCI- http://www.cancer.gov/cancertopics/what-is-cancer

19 Data taken from "Cancer facts & Figures 2013" published by the "American Cancer Society".

 

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Multiple Myeloma is a blood cancer that comprises 10% of all blood cancers. As of the date of this report, in the U.S. alone there are 74,800 Multiple myeloma patients and in 2013, about 22,350 new cases are diagnosed 20. This number increases in direct proportion with the average life expectancy around the world. Accordingly, approximately 10,710 patients are expected to die from Multiple Myeloma in the U.S. in 2013. Multiple Myeloma is largely considered an old person's cancer, since the disease largely appears between the ages of 65-70, although diagnosis of the disease in 50 year olds is not uncommon. In addition, Multiple Myeloma comprises approximately 1% of all cancer cases and approximately 2% of all cancer-related deaths 21. In addition, it should be noted that Multiple Myeloma is extremely common among men, and within this group, men of African descent have twice the chance of contracting the disease over Caucasian men.

 

As of the date of this report, there are several recognized therapies used to treat Multiple Myeloma, including chemotherapy, radiation therapy, bone marrow transplantation and new drugs. Chemotherapy kills cancer cells but also healthy cells in the patient's body, especially active cells such as mucous cells, connective tissue cells, blood cells including immune system cells, reproductive ells, etc. This damage is caused by the treatment, which damages the cancer cells but also the healthy cells in the body and is accompanied by serious side effects, including nausea, vomiting, hair loss, acute pain, etc. In addition, there are biological drugs that are more specific to cancer cells that are known to have milder adverse events than chemotherapy such as Thalidomide ® ("Thalidomide") and Revlimid®, both manufactured by Celgene Corporation and Velcade ®, developed by Millennium Pharmaceuticals ("Velcade"). These biological drugs are characterized by extremely high prices. It should be noted that despite the aforementioned, not one of these drugs cures the disease. In addition, two drugs were recently approved to treat multiple myeloma, Kyprolis ®, which was developed by Onyx Pharmaceuticals, Inc. and approved by the FDA in July 2012 and POMALYST ®, which was developed by Celgene and approved by the FDA in February 2013.

 

In the Western world, the cancer drug market in general, and the market for Multiple Myeloma in particular, is characterized by drugs that have been approved for use generally for specific indications. For example, a drug will not be approved to treat multiple myeloma without a specific definition of the type of patients entitled to receive the drug. This definition includes the stage of the disease the patient is in, definition of patients based on previous therapies, etc. The result essentially is that the cancer drug market is composed of multiple patient populations. One of the challenges in developing cancer drugs is the definition of the field being targeted by the drug since there are numerous forms of cancer, each of which has several different stages of disease progression. Any drug that is approved for use is designed for a specific stage in the progression of the type of disease the drug was designed for. In cancer, there are many patient populations for whom there is no suitable treatment and the diseases they have do not have any suitable therapy.

 

 

20 The data is taken from "Cancer facts & Figures 2013" published by the "American Cancer Society".

21 The data is taken from the website of AMEN (Association for Multiple Myeloma) - http://www.amen.org.il/site_files/index.he.1024.html

 

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Furthermore, the efficacy of all currently available drugs is limited. Every one of the existing drugs has a significant percentage of patients who fail to respond to them. In addition, the response of many of the patients considered to be responders was extremely partial, not long-lasting, and required taking several drugs concomitantly to achieve the desired clinical result. Cancerous tumors are occasionally so violent that the average life expectancy of patients is limited to months, or occasionally, a mild improvement in the patients' quality of life is sufficient reason for the drug to be considered efficacious.

 

Based on the aforementioned, there is a clinical need for drugs to treat Multiple Myeloma that will be, on the one hand, efficacious and have limited side effects on the other hand. The new indication that the Group intends to develop for Recombinant EPO in the treatment of patients with multiple myeloma will try to provide a certain response to this need, i.e.: an efficacious drug that does not cause significant side effects.

 

8.1.2.2Schizophrenia

 

Schizophrenia is a syndrome of psychiatric illnesses that are characterized by psychosis and cognitive, perceptual, emotional and behavioral deficiencies which are liable to impair human functions at various levels. According to the U.S. National Institute of Mental Health ("NIMH") 22, schizophrenia is one of the most prevalent mental disorders and about 1% of the adult population in the U.S. suffers from schizophrenia during their lifetime. The disease usually erupts before the age of 25 and is partly related to the side effects of antipsychotic drugs. The disease's main symptoms consist of unrealistic delusions, sight and hearing disorders and more rarely visual hallucinations. The symptoms also affect thought patterns and cause bizarre speech patterns. These symptoms lead to different degrees of dysfunctions and distress. Therefore, schizophrenia patients are often in need of assistance in their daily routine such as housing, occupation, society etc.

 

Schizophrenia is a chronic illness that requires lifelong medicinal treatment. While most available drugs are efficacious in alleviating the "positive" symptoms (which are evident and will not appear in non-schizophrenics such as hallucinations and delusions), even the best available drug is only partially efficacious in treating several of the disease's more disturbing symptoms known as the "negative" symptoms (the absence of symptoms that are commonly evident among schizophrenics, relating to the abnormal behavior and emotions such as lack of feelings or expressions of feelings, withdrawal from family life and from society, lack of energy, lack of motivation, loss of pleasure or interest in life, poor hygiene, numbness to the point of catatonia etc.) as well as cognitive symptoms.

 

 

22 http://www.nimh.nih.gov/health/topics/schizophrenia/index.shtml

 

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As of the date of this report, since the factors that cause schizophrenia are yet unknown, the market does not offer the appropriate drugs that can prevent the disease. The currently available drugs for treating the symptoms of the disease generally involve severe side effects.

 

Antipsychotic drugs consist of Chlorpromazine, Perphenazine, Thioridazine, Haloperidol, Lithium and others, used to treat schizophrenia, dementia and manic depression. These drugs are considered as typical antipsychotic drugs.

 

In addition to the use of typical antipsychotic drugs, in recent years patients have been treated using atypical antipsychotic drugs (Clozapine, Risperidone, Quetiapine etc.) which are considered critical to helping millions of schizophrenics around the world regain their lives and without which those patients would have spent their entire lives in psychiatric institutions.

 

The research company, Decision Resources estimated the size of the schizophrenia treatment in the U.S., France, Germany, Italy, Spain, the UK and Japan in 2010 at approximately US$ 7.4 billion 23.

 

The schizophrenia treatment industry experienced significant changes during this period due to the loss of exclusivity on some of the leading drugs as patents expired and the marketing of generic drugs which led, according to Decision Resources, to a decline in sales in the aforementioned countries to approximately $6.5 billion, and against approval of new drugs to be marketed that are currently in various stages of development that might increase the scope of sales in those countries to approximately $7.9 billion in 2021.

 

Although the schizophrenia treatment market is saturated and despite the loss of exclusivity of patents for a large part of the leading drugs, the need for more efficacious antipsychotic medications with fewer or diminished side effects continues to motivate the development of drugs. Moreover, the growing importance is accorded to treating the negative and cognitive symptoms of schizophrenia in view of the enhanced efficacy of existing drugs for treating these symptoms.

 

 

23 http://decisionresources.com/Products-and-Services/Report?r=pcorcg0713

 

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8.1.3Legislative limitations and special constraints applicable to the area of operations

 

For information about legislative limitations and constraints to which the Group is subject, see Article 8.10 below.

 

8.1.4Drug Development Processes

 

The drug development process is multi-phased, and includes the following phases: the preclinical phase, Phase 1, Phase 2 and Phase 3 (for more information, see item 3.1.2 above).

 

In light of the Group's intentions to develop a new indication for the Recombinant EPO, which is a drug approved for another use, as previously mentioned, and based on the fact that the Preclinical Phase and Phase 1 clinical trials are ones that examine the drug's toxicity and safety, respectively, the Group believes that it will be granted an exemption from carrying out these stages and that the drug development process will begin with Phase 2.

 

Furthermore, since the completion of the Phase 2a trial on the SAM-101 at the Shalvata Mental Health Center in Israel was successful, the Group intends to continue developing the SAM-101 and estimates that the development may commence from the Phase 2b clinical trial.

 

The Group assessment regarding the drug development phases and obtaining an exemption for the Preclinical and Phase 1 clinical trials represents forward-looking information. This information is not definite and is based on information available to the Group as of the date of this report. The actual results may be significantly different from the results derived from this information, since there is no certainty regarding the exemption from carrying out any phase and/or regarding the results of the drug trials to be conducted by the Group.

 

8.1.5Critical Success Factors in the Areas of Operation

 

In order to successfully develop a pharmaceutical product, the knowledge and technologies required to facilitate the development of efficient products are needed, as are long-term investments, in the form of financial funding and quality personnel that specialize in the area of operation, clinical planning and development as well as commercialization ability once development has been completed and marketing approval obtained. In addition, ownership of intangible assets (intellectual property) is required that would enable the development and enhancement of the designated product.

 

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The Group has (via its subsidiary as mentioned above) a license for exclusive use of a patent for use of the Recombinant EPO to treat Multiple Myeloma. This, as previously mentioned, is based on the study conducted by Prof. Moshe Mittelman, an internationally renowned hematologist who serves ad the Director of Internal Medicine at Ichilov Hospital and as Medical Director in the Group, and an exclusive license for the SAM-101 drug to treat mental illnesses.

 

8.1.6Entry barriers in the areas of operation

 

The main entry barrier to the drug development market is the lengthy, multiple year process of development, which is a regulated, thorough and cumulative process, i.e.: failure in any development phase will prevent advancement to the next phase. This type of process that takes many years obviously requires allocation of significant financial resources to finance continued development expenses.

 

As previously mentioned, ensuring intellectual property ownership is of prime importance, since without ownership, certain substances and products cannot be developed and used, thereby preventing progress in development. In addition, guaranteed ownership of intellectual property rights is required to benefit from the results of development on the one hand, and to ensure that the development is not found in another patent, on the other. Without patent protection, anyone could benefit from the results of the research and development without having had to pay the expenses incurred by the original developer, and in the case of the Group, paid for. Similarly, if development deviates into another patent, there will be an option of blocking all commercial activity by the developer. In order to guarantee commercialization freedom of development products, the relevant licenses needed for product development must be ensured. Furthermore, and in addition to the aforementioned, skilled, professional personnel who are experts in the field are required.

 

8.1.7Alternatives to the products underlying the drug development field of operation and changes therein

 

8.1.7.1Alternatives to the Recombinant EPO

 

As of the date of this report, the Recombinant EPO drug that the Group intends to develop faces no competition for this stage of the disease, based on the fact that the Recombinant EPO drug is designed to treat Multiple Myeloma patients in advanced stages of the disease who were already treated with all current standard therapies. At this stage, these patients are treated, with supportive drugs and treatments (palliative etc.). in addition, to the best of the Company’s knowledge, to the date of this report, there is no known drug or drug under development that works on the immune system as the recombinant EPO does.

 

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Despite the aforementioned, it is possible that the Recombinant EPO drug will be found to be efficacious in the future for patients who are not terminally ill, when combined with other currently available drugs. If said assessment comes to fruition, the Recombinant EPO drug may be used as a substitute and/or supplementary drug to other drugs that are currently available on the market and/or drugs that are currently in development. Multiple Myeloma patients who are in the non-terminal stages currently have in the market drugs that have been approved for use, which may make its entry into this market difficult. It should be noted that the development of the new indication for a drug provides an advantage over a drug that was developed from the beginning, in light of the Group's assessment that one or more phases in drug development, particularly Phase 1, would be redundant, since these phases have already been previously carried out during testing of the same product for its original indication but in this case as well, development of a new indication is expected to be lengthy.

 

It should be noted that in recent years 24, treatment of Multiple Myeloma patients in the various stages has been composed of chemotherapy combined with autologous stem cell transplantations or a combination of Thalidomide, dexamethasone (a type of steroid) and Velcade, based on the patient's condition. If said transplantation is carried out, the patients receive initial treatment of high dosages of preliminary chemotherapy. This treatment is largely administered to patients who are under the age of 65. If the patient is above the age of 65, and his physical condition prevents an autologous stem cell transplantation from being carried out, the standard treatment involves a combination of two or more drugs including Thalidomide, steroids, Velcade, Revlimid and mild chemotherapy.

 

The aforementioned therapies lead to a median survival time of approximately 30 months in close to 83% of patients who underwent autologous stem cell transplantation (and who were under the age of 65) and a survival time of approximately 24 months in almost 90% of patients (and who were under the age of 65).

 

It is clarified that the currently available therapies and drugs used to treat Multiple Myeloma patients have side effects such as neuropathy – peripheral neuropathy, which occasionally might be irreversible and require discontinuation of the therapy for extended periods of time.

 

 

 

24  The aforementioned regarding treatment of multiple myeloma patients and patient survival time was taken from the article by Prof. Ben-Ami Sela, director of the Pathology Chemistry Institute, Sheba Medical Center, Tel-Hashomer that was published on the website www.tevalife.com.

 

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Another drug currently administered to patients is one known as Velcade (scientific name – Bortezomib) which was approved in 2003 by the FDA and that extends the survivability time of patients with the disease, with 33% of all patients attaining an overall survival time of approximately 5 years, with the survival time among all patients on the drug being 33 months. The drug Recombinant EPO that is being developed by the Group may be one that can be administered in combination with this drug.

 

In July 2012, the FDA approved for use the drug Carfilzomib (Kyprolis) of Onyx Pharmaceuticals Inc. This drug is considered more effective than Velcade. In Phase II studies, there were incidents in which patients failed to respond to Velcade but responded to Kyprolis25. As of the date of these reports, the information available regarding the drug is still limited.

 

In addition, in February 2013, the FDA approved the drug Pomalidomide, which is considered more effective than thalidomide and Revlimid26.

 

In addition to the aforementioned, it should be noted that as of the date of this report, several additional drugs are in various phases of clinical trials, and if approved, if and when approved, may constitute an alternative to the recombinant EPO being developed by the Group.

 

8.1.7.2Alternatives to SAM-101

 

As of the date of this report, there are alternative therapies for the Company's drug, classified into two types: (1) psychosocial therapy which consists mainly of clinic care, full or part-time hospitalization, occupational therapists, psychologists etc; (2) medicinal therapy which consists of administering antipsychotic drugs such as Chlorpromazine, Perphenazine, Thioridazine, Haloperidol and Lithium as well as atypical antipsychotic drugs such as Clozapine, Risperidone, Quetiapine etc.

 

It should also be noted that as of the date of this report, there are certain additional drugs that are in various stages of clinical trials which, if and once approved, might provide an alternative to SAM-101.

 

 

 

25  Niesvizky R et al: Clin Canter Res 2013; Kortuem KM et al: Blood 2013; 121:893

26  Traynor K et al: Am J Health Sys Pharm 2013;70:474; Leleu X et al: Blood 2013; 121:1968

 

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8.1.8Structure of the competition in the area of operations and changes therein

 

8.1.8.1General

 

The Group's competition in the field includes a wide range of companies around the world, starting with small pharmaceuticals up to the mega multinationals. Multinational marketing of a drug requires access to marketing channels around the world, thus generally forcing small companies to collaborate with large companies in the field. On the one hand, this is a limiting factor for small companies. On the other hand, these giant companies are constantly searching for new drugs in order to broaden the range of drugs they market or in order to increase the amount of developed drugs (drug development pipeline). The need of giant multinationals for new drugs in certain periods makes these companies willing to invest vast sums of money to acquire drug development and marketing rights, which is an opportunity for drug developing companies.

 

The Group has a preliminary plan to conduct a Phase 2 trial of the Recombinant EPO that includes the enrollment of approximately 50 patients27. If a situation arises in which a large number of drugs are in development while the Group is conducting the trial, this might make patient enrollment for Phase 2 and Phase 3 of the trial difficult. The need for a large number of patients in the advanced phases of the clinical trials poses a significant obstacle in drug development that might affect the chances and timetable involved to complete development of the Group's Recombinant EPO drug. This problem can frequently be solved by adopting a development strategy that includes, inter alia: accurate definition of the type of patients who will participate in the trial (based on the severity of the disease, type of therapies previously received, other drugs they received concomitant with the investigational drug, etc.); optimal choice of sites to conduct the clinical trials (e.g. some of the trials will be conducted in countries in which certain therapeutic alternatives are not yet being offered to patients or study sites known for their ability to enroll patients into trials with relative speed, etc.); use of organizations that specialize in clinical study management 28; interest shown by study doctors who will participate in the study on the drug and how it operates; provision of financial incentive to the study fund of the departments participating in the trial (incentive indirectly serves to improve the conditions of the patients' hospitalization) in order to make sure that they prefer directing patients to clinical trial of the Group's drug over other clinical trials. The Group intends to adopt these types of strategies to ensure a rapid patient enrollment rate and compliance with the scheduled timeframe, although there is no guarantee that this will happen.

 

 

 

27  This assessment is based on numbers of patients required in clinical studies on other drugs designed to treat multiple myeloma and cancer in general. No comprehensive statistical planning has yet been carried out and the Group still has not convened a discussion on the clinical plan with the regulatory authorities, the FDA and others – and the number of patients that will be ultimately be required may differ from this estimate

28  These companies are known as CRO - Clinical Research Organization

 

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8.1.8.2Competition in the Cancer Market

 

The cancer drug market is extremely large. National medical institutions in the U.S. estimated that the overall cost of treating cancer in 2008 was US$ 201.5 billion 29. In 2008, sales of all cancer drugs totaled US$ 77.4 billion 24.

 

In 2011, sales of drugs used to treat Multiple Myeloma in the U.S., France, Germany, Italy, Spain, England and Japan totaled US$ 4.4 billion (and are expected to rise to US$ 7.2 billion in 202130). According to their recent financial statements, actual sales of Velcade in 2011 by Johnson & Johnson (which markets Velcade outside the U.S.) amounted to US$ 1.5 billion 26. Also, based on the financial statements of the pharmaceutical Celgene (which markets Revlimid), Revlimid sales in 2011 amounted to $3.21 billion 31. Velcade sales by the Japanese pharmaceutical Takeda (which markets Velcade in the US) in 2010 amounted to $0.73 billion 32. In July 2012, the FDA approved the drug Kyprolis of Onyx Pharmaceuticals Inc. and its sale in 2012 according to its financial statements for that year, totaled $64 billion 33.

 

Listed below is a table displaying the advantages and disadvantages of the Company's main competing drugs and therapies as of the date of the report: [If a reimbursement can be obtained from the insurers or from any other party, this should be noted in the table]

 

 

 

29  http://www.cancer.org/cancer/cancerbasics/economic-impact-of-cancer

30  http://decisionresources.com/News-and-Events/Press-Releases/Multiple-Myeloma-100212

31  http://ir.celgene.com/phoenix.zhtml?c=111960&p=irol-sec

32  http://www.takeda.com/investor-information/annual/pdf/index/ar2012_en.pdf (page 45)

33  http://www.sec.gov/Archives/edgar/data/1012140/000104746913001966/a2212722z10-k.htm

 

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        Comparative properties
Company   Type of
therapy /
name of
drug
  Route of
administration of
treatment
  Drug intake
frequency
  Average
monthly
cost of
treatment
in USD
  Side effects    Efficiency /
survival time
                         
Celgene Corporation   Thalidomide®   Oral Tablets   One pill per day, dosage occasionally needs to be adjusted based on adverse events   Approx.  1,000   Resulting in congenital  defects, peripheral neuropathy (nerve damage), fatigue, constipation, blood clots tendency (including increased risk of deep vein thrombosis), etc.

Approximately half of the patients reduce the dose or cease the treatment.
  Single preparation (approximately 30% of patients respond). Combined with another drug, -approximately 50%-60% of patients respond. The drug results in a mild remission of the disease.

Response might last a year
                         
Celgene Corporation   Revlimid®   Oral Tablets   Generally, one tablet per day for 21 days followed by a one-week break   Approx. 9,000   Serious injury to bone marrow (sensitivity to infection sand suppression of creation of blood platelets (thrombocytes, i.e. risk of life-threatening bleeding), blood clots tendency and embolisms, liver damage, serious damage to bone marrow, damage to digestive system accompanied by nausea, acute diarrhea, etc.   Not tested in comparison to Thalidomide (but is considered better)

When combined with another drug, - approximately 50%-60% of patients respond.
Response can last up to a year

 

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Millennium Pharma-ceuticals   Velcade®   Intravenous injection   Two injections per week for two weeks followed by a 10-day break; for a minimal  period of 7-8 cycles   Approx. 10,000   Acute Peripheral neuropathy (nerve damage) to the point of impaired function, digestive disorders and nausea, on rare occasions, liver damage, etc.   Triggers a response in 30% in single treatment and when combined with another drug, in approximately 50%-60%. Response lasts a year.

In patients in the advanced stages of the disease, the drug extended life by an average of 12 weeks
                         
Onyx Pharmaceuticals   Kyprolis®   Intravenous injection   20 mg/mr

2-8 minutes in day 1,2,8,9,15,16 in 28-day cycle. From 2nd cycle dose can be increased to 27 mg/mr
  Approximately 4,020   Approved for marketing by the FDA on July 2012. There are no date from phase 3 trials.   Considered more efficacious than Velcade ®. In  phase 2 trials there were patients that did not respond to  Velcade and responded to Kyprolis. Information is limited as of the date of the report.

 

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Celgene Corporation   Pomalyst®   Oral Tablets   1-5 mg per day   Unknown – the drug was recently approved   Suppression of bone marrow. Toxicity. thrombosis. digestive disorders.   In phase 2 trials with relapsed patients, 63% response rate. Only 5% complementary response.
                         
    Chemo-therapy   Infusion or tablets           Suppression of the immune system and bone marrow, hair loss, nausea and vomiting, damage to all cells in the body   20%-30% of patients respond, response lasts less than a year
                         
    Bone Marrow Transplant   Intravenous           Extremely aggressive treatment and suitable only for people who are relative healthy (under the age of 65)   Approximately 60%-70% of patients respond to therapy for a period of approx. two-three years

 

It should be clarified that given the fact that the patients with the disease are treated with a combination of drugs and therapies, as detailed in the table above, they become resistant to the treatment administered to them so that at a certain stage, the treatment combination is no longer beneficial and/or negatively affects (side effects) the patient's condition. As a result, the patient's caregivers tend to change the composition of the treatment and drugs administered to each patient, based on their condition in each stage.

 

For information about other drugs and therapies that are in competition with the Group's drugs, see item 8.1.2.1 above.

 

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8.1.8.3Competition in the Schizophrenia Market

 

As discussed above, Decision Resources, the research company, estimated the size of the schizophrenia treatment industries in the U.S., France, Germany, Italy, Spain, the UK and Japan in 2011 at approximately US$ 7.4 billion 34.

 

The schizophrenia treatment market is liable to experience significant changes in the coming years due to the loss of exclusivity on some of the leading drugs as patents expire and generic versions are marketed on the one hand and new drugs currently in different stages of development are approved for commercialization on the other.

 

Although the schizophrenia treatment market is saturated and despite the loss of exclusivity of patents for a large part of the leading drugs, the need for more efficient antipsychotic medications with fewer or diminished side effects continues to motivate the development of drugs. Moreover, there growing importance is accorded to treating the negative and cognitive symptoms of schizophrenia in view of the enhanced efficiency of existing drugs for treating these symptoms.

 

Below is data about the sales volumes of several leading schizophrenia drugs based on the financial statements of the selling companies:

 

In 2012, the worldwide sales of Zyprexa (Olanzapine) by Eli Lilly totaled approximately US$ 1.7 billion (in comparison with $4.6 billion in 2011 – a decline attributed to the loss of exclusivity of the drug in the drug's main market)35. The global sales of Abilify (Aripiprazole) by Bristol Meyers in 2011 totaled approximately US$ 2.8 billion36. The total sales of Seroquel/XR (Quetiapine) by AstraZeneca in 2011 amounted to approximately US$ 5.8 billion. It should be noted that these drugs are not only given to schizophrenics but also to other mental patients. Furthermore, as described above, in the coming years, certain patents granted for some of the leading drugs will expire and new generic drugs will be introduced into the market.

 

 

 

34  http://decisionresources.com/Products-and-Services/Report?r=pcorcg0713

35  http://files.shareholder.com/downloads/LLY/2362248097x0xS59478-13-7/59478/filing.pdf (page 29)

36  http://www.sec.gov/Archives/edgar/data/901832/000119163813000103/azn201301316k.htm

 

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8.1.8.4Methods for dealing with the competition

 

In order to successfully cope with the anticipated competition, the Group must position its drug by emphasizing its advantages over the competition. According to the Group, the anticipated advantages of the Recombinant EPO, once it is approved, is based on the premise of a longer life expectancy of patients who take the drug coupled with improved quality of life without any significant side effects. The Group believes that the fact that the Recombinant EPO's possible efficacy in a combination treatment with or after other currently available therapies will reinforce the drug's position and give the Company a marketing advantage. Later on, if and when the drug is approved for marketing, these advantages are expected to provide the company with a significant preference that, with the right marketing, will guarantee, according to the Group's estimation, an advantage in the Multiple Myeloma therapy market.

 

The Group also estimates that the expected benefits of the SAM-101 are based on the assumption that in addition to being highly effective in treating schizophrenia, it will also minimize the weight gain tendency, which is a major reason why many schizophrenics abstain from taking medications.

 

In addition, among the main factors affecting the ability of a new product to penetrate the drug market and its competitiveness are clinical advantages that the product provides and the ability to protect its intellectual property rights. In light of the fact that the Group has licenses for the exclusive use of the patent for the Recombinant EPO to treat patients with Multiple Myeloma and for the SAM-101 to treat schizophrenia, the Group believes that its drugs contains the right properties to withstand expected competition.

 

Several years will pass until the Group's products reach the market but until they reach this stage, the chances are that one of the giant pharmaceutical companies in the field will try to seek collaboration with the Group in the drugs' development and/or marketing.

 

The Group's assessments regarding product compatibility and possible penetration into the drug market represent forward-looking information. This information is not definitive and based on the Company's currently available information as of the date of this report. Actual results may be significantly different from the results derived from this information, since there is no certainty regarding results of the clinical trial that the Group will conduct on the drugs.

 

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8.2Customers

 

8.2.1As of the date of this report, the company has not yet begun marketing and distribution of its products and therefore has no customers.

 

8.2.2The potential customers of the Company's products are international or local pharmaceutical companies and/or international and/or local distributors.

 

8.3Marketing and Distribution

 

8.3.1As of the date of this report, the Company has not yet begun marketing and distributing its products.

 

8.3.2The marketing and distribution strategy reviewed by the Company primarily involves strategic partnerships with international or local pharmaceutical companies and/or international and/or local distributors.

 

8.4Fixed Assets and Facilities

 

The Company's offices are located in Herzliya, in accordance with a rental agreement from 4 August 2010. The basic rental period is for 36 months with an option for an additional 24-month period. In addition, the Company has the right to terminate the agreement after 29 months and/or upon introducing an alternative tenant in its place, pursuant to approval of the landlord. Monthly rental costs and management fees in accordance with the agreement, total NIS 16 thousand (US$ 4.2 thousand).

 

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8.5Research and Development

 

Listed below is a table of clinical trials that the Company intends to conduct:

 

Trial title   Development
stage
of the

trial
(*)
  Purpose of the clinical
trial
  Study
site
  Scheduled
number of 
trial

subjects
  Number
of
subjects
as of
the

date of
the
report
  Trial
nature
and

status
  Performance
timetable
  Projected
cost
(estimate)
  Aggregate cost between
January – December 2012
                                     
Recombinant EPO 30 for treating Multiple Myeloma   2   Primary endpoint: extension of life
Secondary endpoint: improved quality of life and improvement in various blood parameters
  Not yet decided   About 50   0   Not yet submitted to the authorities and/or Helsinki Committee   The trial is expected to begin in the fourth quarter of 2013   US$ 1-1.5 million   Preliminary Phase 2 study for testing the existence of proteins in the blood of patients, maintenance costs and handling the Company's patent registration process in various countries, regulatory issues
A total of US$ 90 thousand
                                     
SAM-101 for treating schizophrenia 31   2 Testing various dosages of Minocycline in combination with antipsychotic drugs in schizophrenia patients.
No endpoints have been determined yet
  Not yet decided   Not yet decided   0   Not yet filed   The Group is in planning stages of the clinical trial which is scheduled to commence in 2014   About US$ 2-2.5 million   The MinoGuard transaction which includes the exclusive right to use the SAM-101 was consummated in November 2011 and therefore no development costs have been accrued (see more details in Note ___ to the Company's consolidated financial statements)

  

(*)For extensive information, see item 8.2.3 above. It should be noted that no approval has yet been received for conducting the trial from Phase 2.

 

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Assuming that the clinical trials detailed above achieve the desired results, the Company faces several business options: (1) conducting a Phase 2b and/or Phase 3 clinical trial; (2) entering into a collaboration agreement with a large pharmaceutical company to continue the drugs' development; or (3) granting a license to a large pharmaceutical company to continue development and commercialization of the drugs. The considerations for choosing among the above options will depend on the Company's financial ability and on the suggestions made by other business partners.

 

As of the date of this report, the Company and its medical consultants believe that a Phase 3 clinical trial of the EPO drug is expected to last between 3-4 years, with an estimated cost of US$ 10-30 million. This is based, inter alia, on data obtained from the Company's regulatory consultants and on a review of the history of clinical trials in companies in the industry.

 

As for the SAM-101 drug, it is impossible at this stage to assess the development cost of a Phase 3 clinical trial or any other stage that is more advanced than Phase 2 since the Phase 2 clinical plan and its exact targets have yet to be defined.

 

The Group's assessments regarding the projected expenses for Phase 2 and primarily Phase 3 clinical trials represent forward-looking information. This information is not definitive and based on the Company's currently available information as of the date of this report. Actual results might be significantly different from the results derived from this information since the expected number of patients for the Phase 3 trial, the duration of the trials and the complexity of the trials are uncertain and depend primarily on variables external to the Company such as: decisions made by the FDA and other health institutions, clinical trial results of other companies in the industry and other regulatory issues. The costs incurred in conducting the trials might therefore significantly change.

 

8.6Intangible Assets

 

8.6.1On November 30, 2011, the Company entered into an agreement with MinoGuard for acquiring an exclusive license to use MinoGuard's leading drug, SAM-101, which is based on a combination of existing antipsychotic drugs and a known medicinal compound for treating mental illnesses, focusing on schizophrenia. See more details about the license agreement in item 18.1 below.

 

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8.6.2In December 2009 32, the Company, via XTEPO, entered into an agreement with Bio-Gal to acquire the license to use the patented Recombinant EPO in the treatment of advanced stage Multiple Myeloma patients and improve the quality of their lives. For additional information about the license agreement, see item 8.11.4 below.

 

8.6.3In August 2005, the Group entered into an agreement to acquire rights and assets from VivoQuest. Pursuant to the agreement, the Group acquired the usage rights to the development of a novel pre-clinical library of compounds for the treatment of Hepatitis C ("DOS"), laboratory equipment and the lease rights to a laboratory used by VivoQuest. In accordance with the agreement, and as of the date of this report, the Group has usage and development rights only concerning which it is obligated to pay up to US$ 34 million on the basis of milestones, of which an amount of US$ 25 million will be paid by the Group subject to regulatory approval and the actual sales of products. It should be noted that, according to the agreement, the Group has been granted the choice of settling the said amounts either in cash or through the allocation of shares.

 

In 2008, the Company granted a secondary license for use of DOS technology to Presidio Pharmaceuticals Inc. (Hereinafter: "Presidio). On 22 August 2012, Presidio requested to terminate its contractual arrangement with the Company that is valid since 24 August 2012. Following the announcement to terminate said agreement, all DOS technology (including all patents maintained by Presidio) was returned to the company 90 days after the date of said notice, in accordance with the provisions of the agreement. As of the date of the report, the Company plans to review the renewal of activity in the Hepatitis C sector and/or locate strategic partners to continue the development and marketing of drugs to treat Hepatitis C based on DOS technology returned to it from Presidio.

 

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8.6.4The Company has an exclusive license of the patents and patent applications of the Recombinant EPO and SAM-101 drugs, as detailed in the table below:

 

Patent
name
  Countries
in which
application
was filed
  Priority
date
  Application No.   Patent No.   Status   Expiration
date (**)
                         
BIOGAL-001 EP(*)   Europe   30.03.1999   99 91 2039.7   1 067 955   Granted   30.03.2019
                         
BIOGAL-001 CA   Canada   30.03.1999   2,366,674     Allowed   30.03.2019
                         
BIOGAL-001 IL2   Israel   30.03.1999   138705   138705   Granted   30.03.2019
                         
BIOGAL-001 JP   Japan   30.03.1999   2000-543153   4456271   Granted   30.03.2019
                         
BIOGAL-001 HK   Hong Kong   30.03.1999   01104635.2   HK1033910   Granted   30.03.2019
                         
BIOGAL-001 US   USA   30.03.1999   09/647,761   6,579,525   Granted   30.03.2019

 

Valid in Austria, Belgium, France, Germany, the UK, Ireland, Italy, the Netherlands, Spain, Switzerland and Sweden.

 

(**)Subject to meeting all the required annual payments.

 

Patent name   Countries
in which
application
was filed
  Priority
date
  Application
No.
  Patent
No.
  Status   Expiration
date (*)
Combined therapies of antipsychotic drugs and tetracyclines in the treatment of psychiatric disorders   Canada   18.10.2007   2666796   -   filed   18.10.2027
    Europe   18.10.2007   07827225.9   -   examination   18.10.2027
                         
    India   18.10.2007   3100/DELNP/ 2009   -   filed   18.10.2027
                         
    Israel   18.10.2007   198134   -   examination   18.10.2027
                         
    PCT   29.03.2007   PCT/IL2007/ 000414   -   expired    
                         
    1-PCT   18.10.2007   PCT/IL2007/ 001251   -   expired    
                         
    USA   18.10.2007   12/446444   -   examination   18.10.2027
                         
    USA   18.10.2007   13/733,130   -   examination   18.10.2027

 

(*)Assuming that a patent is registered based on the PCT.

 

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Patent name   Countries
in which
application
was filed
  Priority
date
  Application
No.
  Patent
No.
  Status   Expiration
date (*)
                         
PYRAZOLE COMPOUNDS   USA   15.02.2005   11/058852   8329703   granted   25.03.2026
                         
    USA  

15.02.2005

15.11.2012

  13/678449   -   examination    
                         
4-ethynyl pyrazole derivative compounds and methods for treatment of HCV   USA  

13.10.2006

20.04.2007

06.06.2007

 

  11/974744   7923004   granted   30.10.2027
3,4-disubstituted coumarin and quinolone compounds   USA   29.03.2005   11/093846   8048889   granted   06.09.2029
                         
4-thio substituted quinoline and naphthyridine compounds   USA   22.08.2007   11/895088   8143276   granted   04.06.2030
                         
BENZO[B]FURAN DIMERS   USA   24.6.2002   10/602341   6855822   granted   24.06.2023
                         
Benzofuran compounds   USA   16.05.2005   11/130660   7994360   granted   04.01.2029
                         
4-Thio Coumarins   USA   14.05.2002   10/437768   6703514   granted   13.05.2023
                         
    USA  

14.05.2002

06.01.2004

  10/752654   7148253   granted   13.15.2023

 

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8.7Human Capital

 

As of the date of this report, the Group (without InterCure) has three full-time employees/service providers in the administration and finance departments (two of whom are executives) and three service providers/consultants who provide the Company administrative, medical and financial services (one of whom is an executive). For information about the terms of employment of officers, see Regulation 21 in Chapter D of this report. In addition, as of the date of this report, InterCure has four employees and nine service providers in marketing and sales, business development, management, finance and administration. For information about human capital in InterCure, see section 9.14.

 

8.8Financing

 

As of the date of this report, the Company has no loans or any liability with the exception of the current liabilities to suppliers, other service providers, employees and directors.

 

8.9Taxes

 

For information about the taxes to which the Group is subject, see Note 27 of the Financial Statements for 31 December 2012.

 

On 15 July 2010, the Company signed a pre-ruling arrangement with the income tax authorities regarding the share swap agreement in accordance with Articles 103 and 104 of the Income Tax Ordinance. As a result of the agreement, the Company became subject to various restrictions and some of the Company's aggregate losses for tax purposes were reduced and a sum of NIS 80 million (approximately $22 million) was determined as well as NIS 0.7 million (approximately $0.19 million dollars37)) was calculated, adjusted, as well as losses the company had prior to the share swap, following said depreciation, will not remain offset against any income originating in XTEPO (transferee company) and not in offset against capital gain from sale of XTEPO shares.

 

It should be noted that the provisions of Articles 103 and 104 of the Income Tax Ordinance that discuss restructuring and mergers impose statutory restrictions and various conditions on entities participating in the restructuring / merger and, inter alia, limit the dilution of holdings both by means of prospectus as well as private placements. The summary of the main restrictions mentioned above does not purport to be a review of the provisions of Articles 103 and 104 of the Income Tax Ordinance and does not replace the need to read said Articles in their entirety.

 

 

 

37  Based on the exchange rate for 30 September 2010 that was NIS 3.665 = US$1.

 

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As of 31 December 2011, the Company has incurred accumulated business losses for tax purposes of US$ 26 million (approximately NIS 96 million) and accumulated capital loses of US$ 0.19 million (approximately NIS 0.7 million) that are carried forward to future years. For more information, see Note 27c to the Company's financial statements as of 31 December 2012

 

In addition, the Company's management believes that the utilization of losses for tax purposes of the U.S. subsidiaries, XTL Biopharmaceuticals Inc and XTL Development Inc, as of 31 December 2012, totaling approximately US$ 20 million, is limited and therefore the tax losses might be significantly lowered in accordance with local laws that deal with changes in control in a company following the consummation of the Bio-Gal transaction. As mentioned in the annual financial statements for 2012, the Company does not record deferred taxes in respect of losses for tax purposes since their utilization in the foreseeable future is not certain.

 

8.10Limitations arising from legislation, regulations and special constraints on the area of operation

 

8.10.1The Helsinki Committee

 

A prerequisite for the Group's ability to conduct trials is obtaining prior approval from parties certified to approve clinical trials on human subjects in every country in which the Group wishes to conduct the said trial. The trials must comply with the principles in the Helsinki Declaration and must have obtained ethics committee approval in every medical institution in which the trial is being conducted. The doctor and/or the committee of doctors with whom the Group will cooperate will submit the trial protocol to the medical institution's ethics committee. After the discussion during which the committee will determine whether the trial protocol complies with the rules of ethics, and if the protocol is approved, the scheduled trial can begin. Any change in the trial protocol requires an update and a resubmission for ethics committee approval.

 

Helsinki Committee approval – as previously mentioned, a prerequisite for approval of use of pharmaceutical products by the western health agencies, including the Israeli Ministry of Health, and it allows proof of safety and efficiency of pharmaceutical products through clinical trials. In order to conduct clinical trials in Israel that involve human subjects, permission must be obtained in accordance with the study plan (protocol) ("the permit") from the committee (known as the Helsinki Committee), which operates by the virtue of the Public Health Regulations (Clinical Trials on Human Subjects), 1980 ("the Public Health Regulations").

 

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The permit is issued subject to submitting the application for approval by a licensed doctor who will be the principal investigator in charge of the trial, to the investigator participating in the clinical trial on human subjects having the skills and experience in their field to conduct the trial and to the trial complying with the conditions below:

 

(a)The anticipated advantages for the participant in the trial and for the company justify the risk and discomfort involved in the trial;

 

(b)The clinical and scientific information currently available justifies conducting the requested clinical trial;

 

(c)The clinical trial is scientifically planned to facilitate a response to the question being studied, and is described in a clear, detailed and precise manner in the trial protocol;

 

(d)The risk to the trial participant is minimized due to the use of proper study methods, and use, whenever possible, of procedures that have already been carried out on human beings or on animals. In addition, trial participants will be closely monitored during the trial and in the follow-up;

 

(e)Trial participants will be selected based on the inclusion and exclusion criteria in accordance with the trial protocol;

 

(f)An informed consent form for the trial is to include all necessary information as described in the procedure;

 

(g)The trial protocol includes provisions on protection of participants' privacy and the confidentiality of the collected information;

 

(h)The trial protocol includes a mechanism for trial follow-ups;

 

(i)Suitable insurance coverage of participants taken out by the trial sponsor;

 

(j)The sponsor and the principal investigator are capable of allocating the resources required to properly conduct the trial, including skilled personnel and required equipment;

 

(k)The nature of the commercial contractual arrangement with the investigator and with the study site does not prejudice any proper conduct of the trial;

 

(l)If all or some of the participants in the trial are potentially subject to undue pressure or influence regarding participation in the trial – appropriate measures will be adopted to prevent or minimize said undue pressure or influence.

 

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8.10.2FDA and EMEA Approval

 

The products the Group intends to develop and market are pharmaceutical products. As such, their manufacturing, sale and marketing are contingent on obtaining a license in every country in which the Group wishes to market the said products. To obtain the said approval, the Group must comply with the licensing requirements, including safety conditions and quality assurance standards required in each of the countries.

 

The requirements to obtain approval to sell the Group's drugs varies from country to country, as does the time needed for the various authorities to conduct tests in each country to obtain the license and costs involved. The lack of a license in a certain country for the Group's products will prevent their sale and accordingly, might harm the Group's revenues. Main markets the Group is targeting include the United States and the European Union.

 

The Group intends to complete product development, obtain FDA and EMEA approval for the drugs' marketing and sale. It will be clarified that every approval is separate and independent. Said approval will be required in the future for any modification of the products, which will obtain approval or for expanding their current applications.

 

Once FDA or EMEA approval has been obtained, the Group will be able to market the products only for the indications listed in the approval. The FDA and EMEA can conduct tests and investigations to ensure the Group's compliance with the legal and licensing requirements. In addition, the Group can work to monitor and keep track of its compliance with the FDA requirements via a quality control system and by significantly reducing the possibility of failure, and even report them in advance, if detected. Non-compliance with the said requirements can lead to sanctions against the Group, including publication of a public warning regarding the product (black box warning), imposition of penalties and civilian compensations, refusal to approve new products for the Company or to remove licensing from the current product.

 

It should be noted that today, the FDA is considered the most stringent agency and its approval is a significant sign, indicating the receipt of an approval granted by the other regulatory agencies.

 

a-55
 

 

8.11Significant Agreements

 

8.11.1Framework collaboration agreement with Clalit Health Services – Clalit Research Institute Ltd. and Mor Research Applications Ltd.

 

On March 14, 2012, the Company entered a contractual arrangement in a framework agreement for strategic cooperation with Clalit Health Services – Clalit Research Institute Ltd. (Hereinafter: "The Institute") and Mor Research Applications Ltd. in which the Institute would grant the Company the right to receive content based on data originating in the Institute's database regarding technology originating in the inventions and patents of Clalit Health Service physicians, in projects whose content will be agreed upon between the Company and the Institute and Mor in advance and in writing. In consideration for the aforementioned, the Company will pay the Institute the cost price for its activity within the confines of every project plus 10% royalties calculated from the sum of royalties to which Mor is entitled in accordance with the agreement with the Company for all technologies whose rights were granted to the company, Said agreement can be terminated pursuant to having issues written notice 180 days in advance and subject to all joint active projects between the parties having been concluded. According to the company, access to data in accordance with this agreement will allow the company to review the safety and efficacy data of the technology that it develops and the technology whose development has yet to begin.

 

8.11.2Acquisition Agreement MinoGuard

 

On 24 March 2011, the Company entered into a term sheet to acquire the activity of MinoGuard Ltd. ("MinoGuard") by an exclusive license to use MinoGuard's entire technology in return for royalties on sales and milestone payments throughout the clinical development process. On 30 November 2011, the Company completed the agreement for obtaining an exclusive global license to MinoGuard's entire technology as follows:

 

The Company will act conduct clinical trials, develop, register, market, distribute and sell the drugs arising from the developed technology, regardless of a specific disease ("the license").

 

b)In return for the license, the Company will pay MinoGuard cumulative fees in connection with meeting certain R&D milestones and with the drug's approval in a total of approximately US$ 2.5 million. In addition to the payment of milestones as above, the Company will pay MinoGuard royalties at a rate of 3.5% of the sales of products deriving from the license and/or 7.5%-20% of the net consideration to the Company in case a sublicense is granted to a third party, depending on the drug's clinical trial phase when such sublicense is granted. It should be noted that the Company has the right, at its sole discretion, to repay the fees detailed herein in cash or by allocating securities to MinoGuard.

 

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c)In addition to said fees, if the Company does not commence the Phase 2 clinical trial by 30 June 2013 (whereby, as stated in the agreement, obtaining approval for commencing the clinical trial or continuing the clinical trials that had been or will be conducted by MinoGuard and/or its researchers will be viewed as commencing Phase 2 trial in this context), the Company will pay MinoGuard an annual fee for the license at US$ 45 thousand to be paid on said date and augment (assuming the trial has not been launched) by US$ 90 thousand annually until a maximum of US$ 675 thousand in the eighth year of the license period.

 

d)The consideration for the license was determined following negotiations held between the Company and MinoGuard and is expected to be paid out of the Company's own resources and from royalties from sales, to the extent that the development milestones are achieved and/or that the relevant commercialization approvals are obtained.

 

e)In the Company's estimate, and based on the Phase 2 clinical trial budget set forth in the agreement, the cost of investing in the technology's development in accordance with the necessary procedures until completing the Phase 2 clinical trial as of the date of this report is estimated at US$ 2.5 million.

 

f)It should be noted that the technology transferred to the Company according to the license is patent protected until 2027. It should be noted that if the Company does not commence the Phase 2 clinical trial detailed above within a period of 9.5 years from the date of the agreement, the license will expire.

 

g)Furthermore, the technology's development stage has not yet been completed and there is no guarantee that all the different R&D milestones and product approval targets will be met, that all the necessary approvals will be obtained from the relevant authorities or that the drug will achieve the commercialization stage.

 

For more information regarding the license agreement, see the Company's report from 30 November 2011.

 

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8.11.3Term sheet for the acquisition of NiCure Technology

 

On 2 November 2011, the Company entered into a term sheet by which it will acquire a technology ("NiCure" - "the technology") from Mor Research Applications Ltd., the Technology Transfer Office of Clalit Health Services, by obtaining an exclusive license to use the entire technology in return for royalties on sales and milestone payments throughout the clinical development process. The agreement that will be signed by the parties is subject to, among others, the completion of a due diligence study, examination of the regulatory environment for the continued development of the technology and the approval of the Company's board.

 

The technology mentioned above is based on the local administration of renin-angiotensin inhibitors (a known drug for the treatment of hypertension, "Enalaprilat") and is a novel treatment for the symptoms of cartilage-related diseases (such as Osteoarthritis). The therapy focuses on increasing or replenishing the level of glycoaminoglycans (GAGs) in the synovial fluid and cartilage, thereby relieving or even reversing symptoms of such diseases. Moreover, the same technology can be used to treat skin wrinkles.

 

According to estimates of the scientists who have invented this technology, the technology may enter Phase 2 clinical trial for the continuance of the clinical development based on this technology, as the drug mentioned above was approved for the treatment of reducing hypertension and is being provided to patients for already 20 years.

 

For more information regarding the acquisition of the "NiCure" technology, see the Company's report from 3 November 2011. As of the date of this report, the transaction was not closed and the Company is considering this project fit to its business plan.

 

8.11.4License Agreement with Bio-Gal

 

On 31 December 2009, the Group, through XTEPO, entered a contractual arrangement with Bio-Gal in an agreement to receive an exclusive license for a patent (as this term is defined below), that was signed between Bio-Gal and Yeda and Mor Research Applications Ltd. ("Mor") (Yeda and Mor collectively - "the license owners") in 2002 ("the original licensing agreement"), for exclusive use of the registered patent of the license owners for the Recombinant EPO drug in order to develop a new indication that aims to extend the life of patients with Multiple Myeloma as well as improve their quality of life ("the patent"). It should be noted that the assignment of the original licensing agreement to the Company involved obtaining the consent of the license owners, who gave it, and then XTEPO, which was established for the purpose of said agreement, stepped into the shoes of Bio-Gal as license owner in every respect.

 

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In accordance with the terms of the original licensing agreement, Bio-Gal undertook to manage the study in terms of further development of patents owned by the license owners, including full financing of the study extension, and will own exclusive international licensing rights to development use, marketing, distribution and sale of drugs used to treat multiple myeloma and other types of cancer, as much as the study permits. According to the licensing agreement, Bio-Gal will bear all expenses related to preparation, filing, preserving and protecting every patent that will be registered as a result of the study. The exclusive license given to the company (via XTEPO) as previously stated will remain valid for 15 years from the first commercial sale of the drug by Bio-Gal or until the end of the patent period in the countries where the patent is registered (whichever is later). It should be noted that the patent is a registered patent in the U.S. since 1999 and in Europe, Israel and Hong Kong, Japan and others as well as in Canada, it should be noted that the company obtained approval for all patent registration requests that it requested. The patent validity is expected to expire in countries in which it is registered in 2019. It is important to note, though, that the Company's EPO drug received an Orphan Drug status in May 2011.

 

In return for said assignment of license and in accordance with the amendments made to the original licensing agreement (the last of which was made in April 2008), the Group will pay Yeda:

 

1)Annual licensing fee of one percent (1%) of net sales of the EPO drug by the Group and/or its subcontractors (who might operate under a sub license).

 

2)A one-time payment if one of the following are met (see also subsection 3 below that updates the terms of this item): (1) sale of 50% or more of XTEPO shares to a third party; (2) merger between XTEPO and a third party; (3) sale or transfer of XTEPO's strategic assets ("the exercise") totaling US$ 250,000 or 2.5% of XTEPO's gross gains from the exercise (whichever is lower).

 

3)Despite the aforementioned, the parties to the agreement decided that the said payments will be deferred to the date of successful completion of Phase 2 of the clinical trial for which the Group will pay Yeda a one-time sum of US$ 350,000, whichever of the following comes earlier:

 

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(a)Capital raising of at least US$ 2 million by the Company or by XTEPO following successful completion of Phase 2 clinical trial.

 

(b)Six months from the date of successful completion of Phase 2 clinical trial.

 

On 3 August 2011, the Bio-Gal transaction was consummated after all the prerequisites had been met, including obtaining a ruling from the tax authorities regarding the tax exemption of the share swap agreement pursuant to Articles 103 and 104 to the Income Tax Ordinance.

 

8.11.5Sublicense agreement with Presidio

 

On 19 March 2008, the Group entered into a contractual arrangement for granting a sublicense of the DOS technology to Presidio, a company incorporated in Delaware that specializes in drug development and marketing ("the agreement"). On 4 August 2008, the Group signed an amendment to the agreement ("the amendment") in which Presidio assumes responsibility for all development, commercialization and patent cost responsibilities, including all resulting costs, regarding the DOS technology, in exchange for an initial payment of US$ 5.94 million and a future payment of up to US$ 59 million based on milestones such as submitting an application for registration of an investigational new drug ("IND") with the FDA, submitting an application for commercialization and marketing of the drug with the FDA or any parallel authority and payment of royalties of between 1% - 10%, based on Presidio's revenues. In addition, the Group is entitled to receive a varying percentage of receipts paid to Presidio if the latter grants a DOS sublicense to a third party.

 

On 22 August 2012, Presidio requested to terminate its contractual arrangement with the Company that is valid since 24 August 2012. Following the announcement to terminate said agreement, all DOS technology (including all patents maintained by Presidio) was returned to the company 90 days after the date of said notice, in accordance with the provisions of the agreement. As of the date of the report, the Company plans to review the renewal of activity in the Hepatitis C sector and/or locate strategic partners to continue the development and marketing of drugs to treat Hepatitis C based on DOS technology returned to it from Presidio.

 

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8.12Legal Proceedings

 

As of the date of this report, the Group is not facing and is not conducting any legal proceedings of any kind.

 

8.13Targets and Business Strategy

 

The Group intends to develop its drugs by conducting clinical trials, including Phase 2 clinical trials, while creating value for the Group and for the drugs that it owns: the Recombinant EPO drug used to treat patients with Multiple Myeloma and the SAM-101 drug for treating patients with mental disorders, particularly schizophrenia. The Company is planning to examine other technologies for their incorporation in the Company's activities.

 

In addition, the Company plans to explore additional technology to incorporate them in company activity.

 

Listed below is a table summarizing the Company's strategy expected targets for 2013-2015:

 

    Current status   2013   2014   2015
                 
Recombinant EPO   Design and research towards a clinical study   Obtaining approval for clinical trial   Clinical trial   Clinical trial
                 
SAM-101   design and regularory review towards a clinical study   Study and clinical trial planning   Obtaining approval for clinical trial   Clinical trial
                 

 

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The Company's management and its regulatory advisors estimate that obtaining an approval for initiating the Recombinant EPO clinical trial is expected to be received by the end of 2013 and continue for a period of two-and-a-half years 38.

 

Completion of planning for the trial and obtaining approvals for the start of the trial with the SAM-101 drug are planned for 2014.

 

It should be noted that in addition to the aforementioned, the Group is striving to identify, examine and acquire additional technologies including, inter alia, the development of a new indication for drugs that have been approved for marketing for the treatment of relatively rare and currently incurable diseases. In addition, the Group plans on developing collaborations with large pharmaceutical companies to market its drugs and other collaborations to develop its clinical abilities, inter alia, through s scientific advisory committee that will be set up, to create collaborations with major research institutions and retain its position in the capital markets.

 

Below is a list of advisory scientific committee members set up by the company:

 

Name of
committee
member
  education   Professional
experience
  Type of
compensation
given for service
  Economic
value of
compensation
Dr. William J Kennedy   1975 Ph.D Degree in Pharmacology, Department of Pharmacology, Schools of Medicine and Dentistry, SUNY, Buffalo, NY

1969 MA Degree in Biology, Department of Biology, Clark University, Worcester, MA

1966 BS Degree in Biology, Siena College, Loudonville, NY
  1999 to present Consultant to the Pharmaceutical Industry, specializing in Regulatory Affairs 

1986 to 1999 Vice President, Drug Regulatory Affairs, Zeneca Pharmaceuticals Group, Wilmington, DE 

1982 to 1986 Director, Drug Regulatory Affairs, G. D. Searle & Co., Skokie, IL
  120,000 options granted on June 2011. For additional details see Note 20 (a) (6) for the consolidated financial statements. Also, in June 2012, Dr. Kennedy received a one-time-bonus of $12,000.   $19,000

 

 

 

38  The estimated trial period is a Company projection based on the patient enrollment rate in other companies conducting clinical trials on Multiple Myeloma treatments in compliance with FDA standards.

 

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The Group's assessments regarding its targets and business strategy represent forward-looking information. This information is uncertain and based on the Company's currently available information as of the date of this report. Actual results might be significantly different than the estimates derived from this information, since the clinical development of drugs is essentially a process that contains numerous uncertainties and as such, inter alia, there is no certainty that the timetable for development and obtaining initial clinical results from the drugs will come to fruition in the way expected by the Group's management.

 

8.14Expected Developments in the Coming Year

 

The Company intends to act in the course of the coming year to obtain FDA approvals for initiating the Phase 2 clinical trial on the Recombinant EPO drug. The collected date acquired in a protein study, will be integrated, as required, in the clinical trial protocol, with the aim of proving the advantages of the Recombinant EPO in the treatment of patients with Multiple Myeloma. The Company also intends to investigate data and plan the clinical trial of the SAM-101 drug.

 

As stated in Article 8.13 above, the Company is planning to explore other technologies in the course of its business in order to integrate them in the Company and expand the variety of its technological solutions.

 

For information about the clinical trials that the Company intends on conducting, see item 8.5 above. Without derogating from the generality of the aforementioned, the Company does not rule out any possibility of filing applications to obtain grants from the Chief Scientist in accordance with the Israeli Law for the Encouragement of Industrial Research and Development, 1984, as will be determined by the Company's board of directors pursuant to the recommendations of the Company's management.

 

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The Group's estimates regarding the developments in the ensuing year, including projected expenses, represent forward-looking information. This information is uncertain and based on the Company's currently available information as of the date of this report. Actual results might be significantly different from the results derived from this information, since there is no guarantee regarding the future and the results of clinical trials that the Group is planning to conduct.

 

8.15Events after the balance sheet date

 

For information about events that occurred in the company after the balance sheet date, see Article 4.1 of the Board of Directors report.

 

8.16Discussion of Risk Factors

 

Listed below is information about the risk factors that might have crucial effect on the Group's operations and business results.

 

8.16.1Industry Risks

 

8.16.1.1Exposure to effects of regulation

 

The Group, like any business involved in the medical field, is subject to approvals, licenses and regulation on the part of government and international organizations related to environmental quality, toxins, medicine, etc. If any amendments are made in the provisions of the law that are related to the Group's activities, this might result in heavy expenses to the Company and even discontinuation of the development of its drugs.

 

8.16.1.2Dependency on external financing

 

The Group, like any business in the biotechnology industry, depends on external financing since it essentially does not have all of the revenues whereas development expenses incurred in development of its drugs are high. At a certain stage, the Group's financing sources will run out and the Group will not be able to continue financing the drug development activity as previously mentioned. See Note 1b of the Company's financial statements.

 

8.16.1.3Dependency on professional, skilled personnel

 

As a biotechnology company, the Group is required to employ skilled personnel who can perform the tasks with consummate professionalism and skill in order to achieve maximum results with maximum supervision.

 

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8.16.1.4Dependency on trial volunteers

 

As an organization in the clinical biotechnology industry that performs trials, the Group requires healthy and sick volunteers to carry out its trials. A frequent difficulty when conducting clinical trials involves the enrollment of volunteer patients due to fierce competition over these patients (particularly when patients are in the advanced stages of their disease) and occasionally due to patients' use of other drugs – which may disqualify them from participating in the trials.

 

8.16.1.5Exposure to lawsuits

 

In light of the Group's operations in the clinical trials industry, it is exposed to legal proceedings related to potential adverse events of its drugs. Adverse events of drugs are a known phenomenon, particularly during the development stages. The Group cannot guarantee that no adverse event will be discovered in relation to its drugs, thus creating the possibility that such discovery is to render the Group vulnerable to various lawsuits.

 

8.16.1.6Competition

 

The Group is exposed to the possibility that competing companies will develop a similar drug to the one developed by it – for additional information about the competition and the products competing with the Group's products, see item 8.2.7 above.

 

In addition, it should be noted that the Recombinant EPO related patent is scheduled to expire in 2019 and the drug will become generic. Despite the aforementioned, in May 2011, the Company's EPO drug obtained an Orphan Drug status from the FDA, which allows the manufacturer, among others, regulatory exclusivity in marketing the drug for a period of seven years in the U.S. from the date of receiving the marketing approval (see details in item 2.1 above).

 

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It should further be noted that the patent for using Erythropoietin to treat anemia will shortly expire and there is a risk that in certain countries, the Recombinant EPO will be given in off-label-use. The Group, however, believes that this risk is limited since the Recombinant EPO is a drug that includes the Black Box warning that may deter doctors from prescribing it for off-label-use, and subsequently, from taking the drug not according to its indications.

 

8.16.2Risks that are unique to the group

 

8.16.2.1Development Failure

 

As a company operating in the biotechnology industry, the Group essentially relies on the future potential embodied in the development of its drugs since as of the date of this report, the Company has no income. If the Group's expectations regarding the development of its drugs fail to be realized into products with marketing feasibility, the continued existence of the Group as an independent organization will be in doubt. Since the field in question is drug development, there is no certainty that the Group's drug trials will succeed. As previously mentioned, if these trials fail, the Group's entire existence will be in question. It should be emphasized that any clinical study contains numerous elements of uncertainty and the possibility that the Group will fail in its attempt to prove and demonstrate the efficiency and safety of its drugs or if those drugs turn out to be less efficient than expected cannot be ruled out. In addition, the possibility of the development of other drugs by the competitors that will compete with the Group's drugs and capture a significant share of its market share cannot be ruled out as well.

 

8.16.2.2Relative dependency on key figure

 

The Group is moderately dependent on Prof. Moshe Mittelman who serves as the Company's medical director 35 and who developed the indication of the Recombinant EPO on which his study is based. If for some reason Prof. Mittelman fails to support scientific / clinical aspects and/or if he no longer serves in his position, then the Group will suffer some damage. If Prof. Mittelman discontinues his work with the Group, some time may pass until the Group finds a replacement for Prof. Mittelman. It should be emphasized that regarding any aspect related to performance or continued performance of the clinical trials on the Recombinant EPO, the Group believes that Prof. Mittelman's leaving will not cause a significant delay in the Group's clinical activities as specified above.

 

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8.16.2.3Intellectual property protection

 

The Group, being a company in the biotechnology industry, largely relies on the possibility of protecting and preserving its intellectual property. Infringement of its intellectual property rights through violation of the patents given to the company can seriously harm the Group's operations. Without protection of the Group's intellectual property, there is nothing stopping any other party from using the Group's developments without having had to incur heavy development expenses. In addition, protecting the patent given to the Group might not withstand legal proceeding that will validate the claims included in it.

 

8.16.2.4Marketing and Sales

 

The Group lacks any manufacturing, marketing and sales facilities. If its drugs do reach the stage at which the Group can commercialize the drugs, it will need to collaborate with another organization or try to create manufacturing, marketing and sales systems to realize the drugs' inherent marketing potential. Below is a table of risk factors that might affect the Group's operations and business results as well as the Group's assessment with regard to the degree to which these risk factors might affect the Group's operations in general:

 

Type of risk   Brief description  

Degree of impact on the Group's

operations

        High   Moderate   Low
                 
Industry risks   Compliance with laws and regulations          
                 
    Dependency on external financing          
                 
    Dependency on professional, skilled personnel          
                 
    Dependency on locating trial participants          
                 
    Adverse events are liable to occur during use of the drugs and definitely during use of the drugs in development– which can lead to lawsuits          
                 
    Development of rival drugs          
                 
    Patent expiration in 2019 and failure to obtain Orphan Drug approval in Europe and in Japan          
                 
Risks unique to the Group   Numerous elements of uncertainty – unsatisfactory results, delay or failure of the Group's drugs – no guarantee of trial success or lack of adverse events          
                 
    Dependency on a key figure – Prof. Moshe Mittelman who serves as the Company's medical director          
                 
    Due to the strong dependency on patents and protection of intellectual property, there is a possibility of infringement of existing patents          
                 
    In the future, when the Group's drugs move ahead to the manufacturing stage, the Group will be dependent on manufacturers since it is unable to mass produce the drugs          

 

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9.The segment of medical devices

 

Please note that the Group's activities in the segment of medical devices as elaborated below are performed by InterCure which, as discussed above, is an Israeli public (in the Tel Aviv stock exchange) consolidated subsidiary of the Company.

 

9.1General information on the segment of medical devices

 

Below is a detailed description of the Group's business activities performed by InterCure in the segment of medical devices, including trends, events and developments in the Group's macroeconomic environment which have or are expected to have a material impact on the Group's business:

 

9.1.1The structure of InterCure's area of activity and changes therein

 

InterCure's main field of activity since its establishment is the research and development of technologies and devices for the non-medicinal non-invasive treatment of chronic diseases, including hypertension, congestive cardiac failure, insomnia and stress. Below is a description of the hypertension market and the need for an effective non-medicinal therapy.

 

9.1.1.1Hypertension as defined today is blood pressure which is over 140 mmHg (systolic) and/or 90 mmHg (diastolic) and represents one of the most serious risks of stroke, heart diseases, renal failure and death 48. Hypertension, also known as the "silent killer", is one of the most common diseases in the population in general and specifically in the adult population. In the U.S., about 76 million people over the age of 20 49 have been diagnosed with high blood pressure and more than one billion in the entire world 50. It is estimated that in 2025, their number will reach 1.5 billion 51. In Israel, for example, about one million have hypertension, which are about 20% of the adult population 52.

 

9.1.1.2The table below demonstrates how the percentage of people diagnosed with hypertension in the U.S. rises with age in both women and men 49:

 

Age   Men   Women
20-34   11%   6.8%
35-44   25%   19%
45-54   37%   35%
55-64   54%   53.3%
65-74   64%   69%
75+   66.7%   78.5%

 

48The JNC 7 Report. Prevention, Detection, Evaluation, and treatment of High Blood Pressure, JAMA. 2003;289:2560-2572.
49Www.americanheart.org/downloadable/heart/1265665152970DS-3241%20, HeartStrokeUpdate_2010 American Heart Association: High Blood Pressure. Statistical Fact Sheet, 2012 update.http://www.heart.org/idc/groups/heart-public/@wcm/@sop/@smd/documents/downloadable/ucm_319587.pdf.
50Kearney PM et al, Global Burden of Hypertension: analysis of worldwide data, Lancet Jan 2005, 15-21;365(9455):217-23.
51Global burden of hypertension may reach 1.5 billion by 2025
http://www.theheart.org/article/380077.do, 2005
52See the Israeli Society of Hypertension website at: http://www.ish.org.il/kidney0309.asp

 

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9.1.1.3          Balancing high blood pressure significantly reduces the risks of morbidity and mortality. For example, lowering systolic blood pressure by 14 mmHg over a period of five years reduces the risk of a stroke (by about 37%), cardiac failure (by about 55%) and heart attack (by about 27%) 53. Recently, a positive and continuous correlation has been detected between blood pressure in excess of 120/80 mmHg and increased morbidity and mortality. For instance, a person with blood pressure of 135/85 mmHg is twice more likely to become sick or die from a cardiovascular event than a person with blood pressure of 115/80 mmHg. Accordingly, in 2003, the US Department of Health changed the normal-high threshold to 120-139 mmHg (systolic) or 80-89 mmHg (diastolic), which added some 59 million people in the U.S. to the diagnosis of pre-hypertension. This might increase the device's potential customers. In fact, the number of people diagnosed with pre-hypertension is identical to the number of people diagnosed with hypertension and the majority of people in the first group will later suffer from hypertension. The change in the definitions literally multiplies the potential target audience.

 

9.1.1.4The overall annual cost of treating hypertension in InterCure's main market in the U.S. is estimated at approximately US$ 56 billion 54, of which US$ 36 billion expensed on various hypertension medications 55. The average annual individual cost is US$ 1,131 56. Even before the definitions of hypertension were changed, the disease and its complications in the U.S. led to more doctor visits than any other disease. Moreover, hypertension is on average the most expensive disease for the American patients themselves who pay an average of US$ 550 a year on medications (not including additional prescriptions covered by the insurance companies) 57.

 

9.1.1.5As discussed above, the orthodox solutions for non-medicinal treatment of hypertension are changing one's lifestyle such as getting involved in physical activity, losing excess weight, reducing the consumption of salt and limiting the consumption of alcohol. If these measures are insufficient, the GP will generally recommend medication. Oftentimes, one drug is not enough and the patient is required to take more than one drug. The use of each of the existing hypertension drugs has side effects such as fatigue, depression, impotence, coughing, dizziness etc. Moreover, for an extremely large number of patients, the drugs are highly ineffective in stabilizing the patient's condition although about half of the patients in the U.S. who have been prescribed medications are treated with more than one drug simultaneously 58. In addition, some of the patients are not interested in taking medications at all and more than 50% of the patients discontinue the use of the drugs in less than a year 59, generally due to the side effects, which exposes them to the risks of hypertension.

 

 

53SHEP Cooperative Research Group, Arch Intern Med. 1998; 158:741-751.
54Balu S, Thomas J 3rd. Incremental expenditure of treating hypertension in the United States. Am J Hypertens. 2006 Aug; 19(8):810-6.
55The World Hypertension Market 2007-2023. Reportlinker.com.
56Rui T. Economic Cost of Hypertension, 2011. Power Point Presentation.
57W.J Cohn, N.A Krause; Spending and Service Use among People With the Fifteen Most Costly Medica l Condition, 1997. Gu Q, et.Gu Q, et. al, Trends in Antihypertensive Medication Use and Blood Pressure Control.
58Among United States Adults with Hypertension, Circulation. 2012; 126: 2105-2114.
59Osterberg L, Blaschke T. Drug therapy: Adherence to medication. N Engl J Med. 2005;353:487-497.

 

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9.1.1.6Despite the apparent benefits of treating the disease and the enormous investments in increasing awareness and in medications in the U.S., less than 25% of hypertension patients (including undiagnosed patients and/or non-medicated patients) manage to stabilize their blood pressure to below 140990 mmHg. About 45 million Americans who are aware of their condition are not properly stabilized or are stabilized but suffer from side effects and need a supplementary solution as described in the sketch in paragraph 9.1.1.7 below.

 

9.1.1.7To the best of the Group's knowledge, through InterCure, the device's potential target audience can be categorized into several groups as follows:

 

a)Subjects who form part of the pre-hypertension group for which developing hypertension is a matter of time. These subjects can prevent/defer the development of hypertension by changing their lifestyles, using methods of relaxation (such as the RESPeRATE) and it has been reported that medication can significantly defer the onset of hypertension.

 

b)Subjects with borderline hypertension - many times, in these subjects both the caregiver and the patient are skeptical about introducing medication. This group has the potential of benefiting from relaxation therapy.

 

c)The group of patients with hypertension who receive medication - relaxation therapy and the RESPeRATE are likely to improve their blood pressure balance and minimize the number/dosage of drugs they take.

 

d)All patient groups who suffer from stress can benefit from the RESPeRATE, including people with hypertension, diabetes, heart failure etc.

 

In the UK, Germany, Italy and Canada, things are even worse - less than 10% of people with hypertension are stabilized 60. In the UK, where the device was recently added to the British NHS Drug Tariff, the condition of eight out of ten patients diagnosed with hypertension is not stabilized.

 

 

60K Wolf-Maier, Hypertension Treatment and Control in Five European Countries, Canada, and the United States. Hypertension. 2004;43:10

 

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In view of the size of the hypertension market and in the absence of an adequate solution (as of the date of this report), as specified above, InterCure has developed the RESPeRATE for non-medicinal non-invasive treatment of hypertension.

 

The information presented above is based on various publications, including medical publications, which include data from the American Heart Organization, the National Center for Health Statistics and the Center for Disease Control and Prevention. InterCure estimates that the information and data herein are reliable and there is no linkage between InterCure and the entities which issued said publications.

 

9.1.2Limitations, legislation, regulations and special requirements applicable to the area of activity

 

The sale and marketing of InterCure's products worldwide are subject to various regulatory approvals and to InterCure's compliance with international standards of the FDA and the CE Mark as well as other international standards in various countries around the world aimed at assuring the quality and safety of the products.

 

In addition, InterCure's publications are supervised by statutory entities in charge of securing truth in advertising (such as the FTC) and non-profit consumer protection organizations whose requirements are not legally enforceable.

 

See more details of limitations and legislation applicable to InterCure in paragraph 9.20 below.

 

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9.1.3Changes in the scope of activities and the profits there from

 

9.1.3.1As mentioned above, InterCure develops and markets unique technologies and devices for the non-medicinal and non-invasive treatment of chronic illnesses such as hypertension, cardiac failure, insomnia and stress. The hypertension market involves considerable monetary expenses which are required in order to develop new products, particularly new drugs. Due to the size of this market and the absence of an adequate solution for hypertension (including the risk of side effects inherent in the existing drugs), from time to time, efforts are made to launch new products (and mainly new drugs).

 

9.1.3.2Based on global aging trends in the industrialized world, the fact that the percentage of people diagnosed with hypertension rises with age and the enhanced awareness of both physicians and the public for the need for alternative treatment of hypertension, InterCure estimates that the hypertension treatment market is expected to grow.

 

InterCure estimates that the growth in this market will affect the rate of increase in its revenues in the coming years, although it also estimates that the main growth in revenues is based on increased market penetration due to expansion of marketing activities and increased awareness to its products by both physicians and patients.

 

In view of the financial crisis in the markets and the recession experienced in the U.S. and British economies, there has been a considerable slowdown in consumer spending and consequently there has been a decline in the efficiency of advertising channels which InterCure uses. These changes have had adverse effects on InterCure's business results since its sales are directly affected by the scope and efficiency of advertising. Concurrently, InterCure has significantly reduced the advertising scope in recent years in order to focus on advertising channels with a more positive contribution to profits.

 

InterCure's assessments of the growth in the scope of activity in the industrialized world in InterCure's area of activity, as discussed in this paragraph, represent forward-looking information, as defined in the Israeli Securities Law. The actual impact may be materially different from the impact forecasted herein as a result of different factors, the principal of which being that the hypertension market will not experience the expected growth and/or that there will be changes in the demand for medical devices and/or hypertension solutions and/or that there will be changes in product prices and/or technological changes and/or that competing products will enter the market, all of which might modify the assessments presented above, or the realization of any of the risk factors described in paragraph 9.26 below.

 

9.1.4The rate of operating income in the area of activity

 

As of the date of this report, to the best of InterCure's knowledge, there is no product that directly competes with its products and therefore, InterCure cannot assess the rate of operating income in its area of activity.

 

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In the third quarter of 2010, InterCure learned that the British chain Lloyds Pharmacy ("Lloyds") which had distributed InterCure's device in the past, co-developed with Harvard medical Devices Ltd. ("the manufacturing company") and began advertising a competing device for the non-medicinal treatment of hypertension for a cheaper price than the device developed by InterCure ("the competing device"). Following an examination by InterCure's advisors, the competing device does not interactively guide respiration during use (a patented method developed by InterCure with proven efficiency in lowering blood pressure).

 

According to InterCure and the information it has, the above product does not comply with clinical and regulatory standards (did not go through clinical trials for its approval) and therefore is not comparable to InterCure's product in related aspects to profitability in its field of operation.

 

In 2012, InterCure incurred operating losses totaling US$582 thousand. InterCure estimates that adding the device to the British NHS Drug Tariff will have a positive effect on its profits in the medium and long term assuming that it will be able to invest the necessary resources for increasing physicians' awareness. In the near term, the rate of InterCure's operating income is mainly affected by its ability to preserve and increase the investment in advertising, mostly online advertising which yields a positive contribution to InterCure's overall profits and by the mix of its distribution channels which are also affected by the scope of advertising.

 

At this stage, InterCure does not foresee any deterioration in the rate of operating income due to competition. For the description of a competing product, see paragraph 9.8 below.

 

InterCure's assessments of the possible changes in its profits due to competition and/or distribution channels and the possible need to find other marketing and distribution channels due to possible decline in profits, represent forward-looking information, as defined in the Israeli Securities Law. The actual impact may be materially different from that forecasted herein as a result of different factors, the principal of which being that the changes in said factors do not occur as anticipated by the Group and/or that there will not be a need to use other marketing and distribution channels and/or that such changes will occur but they will have no effect on InterCure's business, or the realization of any of the risk factors described in paragraph 9.26 below.

 

9.1.5Developments in the markets of the field of activity and changes in customer attributes

 

The relevant markets for the Group's operations through InterCure have grown in the last decade, as InterCure estimates, as a result of several factors, including population aging and increased physicians' and public awareness to the link between hypertension and cardiovascular diseases. The increased awareness is also a result of scientific publications that link obesity with hypertension and hypertension and other diseases and mortality.

 

In the past year, the U.S. preventive medicine budget has increased significantly. In 2012, the IOM recommended increasing Government health and preventive medicine funding by US$ 12 billion a year, twice the budget for 2009. A new fund has been established for investing in preventive medicine activities with investments to be gradually increased from US$ 500 million in 2010 to US$ 2 billion a year by 2015. The fund has already invested US$ 1.25 billion in preventive medicine and public health projects. Combined with federal, state and local budgets and programs, in excess of US$ 385 million (31%) has been invested out of the 2010-2011 budget in preventive medicine activities consisting of holding blood pressure tests, preventing the use of tobacco and encouraging a healthy lifestyle. Almost US$ 480 million (38%) has been invested in developing infrastructures and manpower for various needs such as public health training centers 61.

 

 

61The prevention and Public Health Fund; American Public Health Association, June 2012. http://www.apha.org/NR/rdonlyres/8FA13774-AA47-43F2-838B-1B0757D111C6/0/APHA_PrevFundBrief_June2012.pdf.

 

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The "Million Hearts" initiative is a private-public national initiative for preventing a million heart attacks over a period of five years - 2012-2017 by minimizing the number of people who need care and improving the quality of care for those who need it, including patients suffering of hypertension. In order to achieve this overall goal, the initiative is promoting medicinal treatment and supporting a network of records to keep track of blood pressure and cholesterol. In 2013, the initiative's budget is US$ 5 million 62.

 

In the UK, the preventive medicine budget for 2006-7 was £ 3.7 billion (not including preventive medicine related drugs) 63.

 

9.1.6Technological changes that have a material effect on the area of activity

 

The future development of new competing technologies and/or new medications for treating hypertension might have an adverse effect on the demand for InterCure's products.

 

9.1.7The critical success factors in the field of activity and changes therein

 

The critical success factors underlying InterCure's activities are as follows:

 

9.1.7.1Increasing awareness to InterCure's non-medicinal non-invasive therapy and its benefits so that it is perceived among the target consumers as standard care for hypertension as well as in the other markets which InterCure intends to enter.

 

9.1.7.2Continuing to establish awareness and support for the therapy and device in the medical community until it is included in the standard therapy protocol for hypertension.

 

9.1.7.3Establishing and expanding the medical distribution channels concurrently with the continued development of effective direct advertising channels.

 

9.1.7.4Maintaining technological and product innovation that will distinguish InterCure's products from other therapies for hypertension and/or stress, insomnia and distinguish any other product developed by InterCure from future competing products.

 

9.1.7.5Developing other products based on InterCure's technologies.

 

 

62Fiscal Year 2013, Budget in Brief, Strengthening Health and Opportunity for All Americans, US Department of Health and Human Services. http://www.hhs.gov/budget/budget-brief-fy2013.pdf.
63Public health and prevention expenditure in England. Health England report, 2009.

 

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9.1.7.6Unlike for certain areas of the medical device industry, compensation of policyholders by insurance companies is not a critical success factor since it has been proven that consumers are willing to pay for the device out of their own pocket. However, clearly any insurance compensation, if received, will significantly contribute to expanding the demand for the device, particularly in view of the enduring economic crisis.

 

9.1.8Changes in the system of suppliers and raw materials in the field of activity

 

InterCure does not predict any material changes in the system of suppliers and raw materials underlying its operations.

 

9.1.9Main barriers to entry in the field of activity

 

The main barriers to entry in InterCure's field of activity are as follows:

 

9.1.9.1Patents - regarding InterCure's patents, see paragraph 9.13 below.

 

9.1.9.2Technological exclusivity - since the hypertension market is very large and plays host to numerous multinational pharmaceutical companies, any new entity interested in entering and operating in the market will need, among others, a proven technological advantage that separates it from competitors.

 

9.1.9.3Recognition among in the medical community - the need to achieve recognition and support in the medical community requires conducting clinical trials that build product confidence and recognition. Conducting and publishing clinical trials are time and resource consuming and require the development of knowhow and a human infrastructure for managing an intricate clinical, regulatory and marketing array.

 

9.1.9.4The need for regulatory approvals - InterCure must obtain regulatory approvals for marketing therapeutic devices in its main markets of operation, such as for a device that purports to lower blood pressure. Accordingly, any potential rival will need to obtain the approval of the relevant regulator for the commercialization of any product (such as the FDA in the U.S. and the CE Mark in Europe), a process which requires performing clinical trials and investing efforts, resources and time.

 

In this context it should be noted that as explained in paragraph 9.20 below, there are certain types of regulatory approvals which may be obtained by demonstrating that a product operates similarly to another product that has already received regulatory approval for marketing. However, although InterCure had received FDA approval under the 510K track which consists of conducting clinical trials 64, it is not enough for a potential competitor to demonstrate that its product is similar to InterCure's product in order to obtain approval for marketing its product unless it proves through clinical trials that the new product is efficient and safe.

 

 

64See details of an application filed under this track in paragraph 9.20 below.

 

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Another critical barrier to entry in the area of activity in the U.S. and the UK is the need to comply with requirements of non-profit and non-statutory organizations, as explained in paragraph 9.20 below. To the best of InterCure's knowledge, as of the date of the report, InterCure is complying with the requirements of these organizations.

 

9.1.9.5Branding - in the medical field in general and specifically in the home healthcare medical device market, branding represents another barrier to entry. An important parameter in deciding whether to acquire a therapeutic device is consumer confidence that the product is efficient and safe.

 

9.1.9.6Setting up a marketing and advertising system - setting up a marketing, advertising and sale system that is adapted to introducing a home healthcare medical device requires extensive resources, expertise and quite some time for effectively increasing activity.

 

9.1.9.7Insurance/medical compensation code - the grant of a compensation code by an insurer or healthcare authority that offer participation in the cost of purchase of the product may significantly facilitate the entry into the market by both legitimizing the effectiveness of the product or service and reducing the cost of purchase for the end user.

 

9.1.10Barriers to exit in the area of activity

 

InterCure estimates that there are no material barriers to exit in its area of activity.

 

9.1.11Substitutes to the products in the area of activity and changes therein

 

The standard care for hypertension includes recommended changes in lifestyle, behavioral changes and medications. As of the date of this report and to the best of InterCure's knowledge, there is no existing medical device for treating hypertension approved by the FDA except for InterCure's device. See details of competing products in paragraph 9.8 below.

 

 

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9.1.12The structure of the competition in the area of activity and changes therein

 

To the best of InterCure's knowledge, there is no other medical device in the market except the one developed by it which offers non-medicinal non-invasive care for hypertension that has been clinically tested and approved by the FDA under the 510K track. See more details of competing products in paragraph 9.8 below.

 

9.2Products and services

 

9.2.1The principal products and services - introduction

 

Below are details of InterCure's products:

 

9.2.1.1RESPeRATE - the basic version of the device.

 

9.2.1.2RESPeRATE Duo - a basic version of the device which enables two users to record their progress data in separate computer memory functions.

 

9.2.1.3RESPeRATE Ultra 65 - a version of the device which guides new users on how to effectively use the device, offering a smaller device and larger user screen.

 

9.2.1.4RESPeRATE Ultra Duo 65 - a version of the device which enables two users to record their progress data on the RESPeRATE Ultra model in separate computer memory functions.

 

9.2.1.5RESPeRATE Ultra Deluxe - a version of the device with a screen light that makes it easy to read the screen in the dark (designed for the bedroom).

 

9.2.1.6RESPeRATE Rx - a version of the device that is sold through a doctor's prescription in the UK.

 

9.2.1.7Device accessories such as a carry case and speakers.

 

9.2.1.8Extended warranty for the devices which provides a 36-month warranty instead of the initial 12-month warranty worldwide, excluding Europe where the initial warranty period is legally set at 24 months.

 

9.2.1.9Support and personal training program in the U.S. available via email and phone for a fee which improves the effectiveness of InterCure's products and ongoing support for customers.

 

 

65Consecutive instructions that guide the user through a controlled breathing pattern but based on the user's own breathing pattern and consecutively monitored by a breathing sensor in order to allow users to relax their breathing (to less than 10 breaths a minute) in an effortless manner and by relatively extending the duration of exhaling compared to inhaling.

 

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InterCure also offers its customers occasional supplementary aides (from which the revenues are immaterial as of the date of this report) such as blood pressure monitors and books in the subject of hypertension which it purchases from third parties as well as online added value services to the community of users and to anyone interested in non-medicinal therapy for hypertension (a users' forum, eNewsletters etc.). At this stage, InterCure does not charge for these online services.

 

InterCure also provides technical support services for its customers, including through call centers in the U.S., the UK and Israel. These services are given free of charge and are also offered to non-customers and prospective customers.

 

9.2.2The principal product - technical and physical description

 

9.2.2.1As stated above, the RESPeRATE (and its various versions) developed and marketed by InterCure uses a unique and patented interactive breathing technology 65 to reduce sympathetic nerve traffic, reduce peripheral resistance 66 and lower blood pressure in the home environment without using a guide. The use of the device for 15 minutes a day several times a week will significantly lower blood pressure throughout the day beyond the effects achieved through the use of medications and/or dietary changes and/or physical activity. See more details in paragraph 9.2.3 below.

 

 

 

66Relaxing the small blood vessels reduces their resistance to blood flow and consequently the heart's need to develop high blood pressure to assure regular blood supply.

 

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9.2.2.2As described in the above sketch, the device is made of three major parts: a respiration sensor placed on a flexible belt, a battery-operated portable computerized unit and earplugs. The user puts on the sensor belt around the chest or diaphragm, puts on the earplugs and turns the machine on. The machine picks up the breathing signal, analyzes breathing patterns - the breathing rate and the duration of inhalation and exhalation. Based on these features, using a synthesizer, the machine composes and sounds a musical note that is comprised of a high pitch sound which instructs the user to exhale while the sound is being made and a low pitch sound which instructs to inhale air. The respiration sensor and the guiding sounds are consecutive and simultaneous. By matching the duration of the sounds to the user's breathing pattern and changes therein according to unique algorithms, the device creates personal guided breathing exercises using people's natural tendency to adapt their movements to the sound pattern (as in dancing to the sounds of an orchestra and/or marching to a drum beat). The device guides the user to alter their natural breathing pattern from a typical rate of 14-18 times per minute to therapeutic breathing which is basically slower (less than 10 times a minute) and which is done effortlessly by relatively extending the duration of exhalation compared to inhalation. The device stops the guided slowing down of the breathing rate once it identifies that the user is not in sync with the device. This interactive therapeutic breathing technique, which combines the fruits of a decade's research of analyzing breathing signals and respiratory effort, allows practicing guided therapeutic breathing with no concentration or physical exertion, which enhances the efficacy of treatment by preventing increased sympathetic nervous system activity in times of exertion. In addition, InterCure has developed a technology designed to assure that the music played by the device is pleasant to the patient and facilitates the use of the device over time.

 

9.2.3The principal product - description of clinical proof of device efficacy and safety

 

In order to obtain regulatory labeling for the device's commercialization as an efficient and safe therapy for hypertension and to increase the medical community's support of this new therapy, InterCure has been conducting a variety of clinical trials.

 

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The device's ability to lower blood pressure has been demonstrated in ten 67 separate clinical trials, the results of nine of which were published in professional medical journals 68, 69, 70, 71, 72, 73, 74, 75 and of one as an abstract in an international convention 76, 77. The results of all those clinical trials are consistent and demonstrate a significant decline in blood pressure throughout the day, in addition to the decline achieved through any other means of therapy. However, two assays were published with a small number of subjects in which the decline observed from the use of the device was not statistically different from that of the control device 78.

 

 

67The first two assays were published in one article (see footnote 68).
68Schein M, Gavish B, Herz M, et al. Treating hypertension with a device that slows and regularizes breathing: a randomized double-blind controlled study. J Hum Hypertens. 2001;15:271-278.
69Grossman E, Grossman A, Schein MH, Zimlichman R, Gavish B. Breathing control lowers blood pressure. J Hum Hypertens. 2001;15:263-26.
70Rosenthal T, Alter A, Peleg E, Gavish B. Device-guided breathing exercises reduce blood pressure - ambulatory and home measurements. Am J Hypertens. 2001;14:74-76.
71Meles E, Giannattasio C, Failla M, et al. Nonpharmacologic treatment of hypertension by respiratory exercise in the home setting. Am J Hypertens. 2004;17:370-374.
72Viskoper R, Shapira I, Priluck R, et al. Non-pharmacological treatment of resistant hypertensives by device-guided slow breathing exercises. Am J Hypertens. 2003;16:484-487.
73Elliott WJ, Izzo JL Jr, White WB, et al. Graded blood pressure reduction in hypertensive outpatients associated with use of a device to assist with slow breathing. J Clin Hypertens (Greenwich). 2004;6:553-559.
74Effect Bae et al, Effect of Device-guided breathing exercise on blood pressure control: Korean multi-center study. JH et al. Korean Hypertension journal. 2006; 1:19-23.
75Schein, MH., Gavish, B., Baevsky, T., Kaufman, M., Levine, S., Nessing, A., Alter, A. Treating hypertension in type II diabetic patients with device-guided breathing: a randomized controlled trial. Journal of Human Hypertension 2008;23: 325-331.
76Aydin L, Kürklü A, Şengül A, Altuntaş Y, Erdine S. Device-guided paced breathing reduces blood pressure: ambulatory and office measurements. J Hyperten 2008;26:S371-S372.
77Regarding referrals to professional articles included herein, it should be noted that these are scientific publications that appear in known medical journals that are considered reliable in the medical community since these journals use experts to substantiate and examine each article before it is published and a similar process is practiced for the abstracts mentioned herein.
78In 2007, a study conducted in the Netherlands was published (Journal of Hypertension 2007, 25:241–24) which, unsuccessfully, attempted to re-enact lowering blood pressure as discussed above in diabetics. As published in this study, 40% of patients (six out of fifteen) were unable to use the device properly. As preamble to the article, the journal added an editorial which extensively reviews the device's clinical evidence and states that the arguments of the study do not coincide with what is known so far about the device and that it is likely that the study's small scope (30 people, 15 in the therapy group) does not enable proving the aforementioned (Journal of Hypertension 2007, 25:57–61). The architects of the study later confessed to InterCure that they had not translated the device's auxiliary literature into Dutch in full but rather settled for a summary of a few lines thereof and had also guided people to use the device in a clinic. Based on its accumulated experience, InterCure believes that understanding the use of the device requires self teaching using the manual attached to the device in a language that is clearly understood by the user since it has been proven that the absence of proper device practice will not lower blood pressure. These conditions were not met in said study and therefore InterCure believes that it is highly likely that this explains the results of the study. In a trial using the same method conducted with therapy and control groups, each of 15 people, a difference was found between the groups which resembled the other trials of the device but with a statistically immaterial outcome due to the small number of participants. The results were published in Blood Press. 2009;18(5):273-9. It should be noted that the researchers did not report the method of using the device or using the data automatically accumulated in the device, which is a fundamental condition for understanding the results.

 

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A recently published controlled study demonstrated the device's ability to reduce the sympathetic nervous system activity 79, which coincides well with the mechanism in the device 80.

 

As specified in this paragraph below, the average declines in blood pressure of 14/8 mmHg observed in the trials are clinically significant 81. It should be noted that the results have been proven independently of the patient's gender and of taking medications and no undesired side effects have been observed. In general, the high blood pressure declined significantly within only 3-4 weeks of use of the device. It is important to state that these declines over time have clinical and economic importance in view of the fact that the risk of a cardiovascular event is doubled in the event of a 20 mmHg elevation in systolic pressure or 20 mmHg in diastolic pressure 82. This is the reason why lowering the blood pressure reduces the risk of cardiovascular events, which can be quantified by the Ministry of Health as a saving. Based on the results of the trials, InterCure developed a statistical model that proves the economic benefit of using the device. The model was used by the British healthcare authorities in the process of assessing the economic profitability of the device which led to including it in the British NHS Drug Tariff in February 2012. Just as important is the ability to use the device over time and maintain reduced blood pressure. Nearly 100 testimonials of using the device between one to ten years have been delivered to the healthcare authorities in the process of making that assessment.

 

Following InterCure's assessment that its arguments regarding the efficiency of the device as a means of treating hypertension would have been dubiously accepted by the medical community and the medical regulatory authorities (due to their habit of treating hypertension through medications and not using a device as the one marketed by InterCure), InterCure planned and conducted four group double-blind randomized controlled trials which compared the use of the device to the use of a walkman playing calm music. In addition, InterCure tested the effect of the device on special patient populations using a variety of measurement methods in order to test and demonstrate the physiological source of the effect.

 

 

79Oneda B, Ortega KC, Gusmדo JL, Araתjo TG, Mion D Jr. Sympathetic nerve activity is decreased during device-guided slow breathing. Hypertens Res. 2010 Jul; 33:708-712.
80Parati G, Gavish B, Izzo JL, Respiration and blood pressure, in AHA Hypertension Primer 3rd ed. Izzo JL and Black HR, eds. Lippincott, Williams and Wilkins, Baltimore, 2003; Ch. A40, p.117-120.
81The average declines in blood pressure refer to the results of the first seven clinical trials concentrated in the article mentioned below. The declines in the other clinical trials remained consistent.
82Global burden of hypertension may reach 1.5 billion by 2025
http://www.theheart.org/article/380077.do, 2005.

 

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Along with the growing recognition from the medical community in the category of devices for treating hypertension, several articles were published recently in this subject which positioned the device as a means of treating hypertension 83, 84, 85 and as a non-pharmacological means of treating hypertension 86.

 

9.2.3.1The main points of the clinical trials and population of subjects

 

The ten clinical trials conducted - four group double-blind randomized controlled trials 32, 33, 37, one controlled trial 35 and two uncontrolled trials 34, 36 - were described in the review published regarding the first seven studies 87. In addition, a group randomized controlled trial 75 and two uncontrolled trials 40, 74 were conducted. In total, theses studies recruited over 500 hypertension patients.

 

In all the trials, a daily 15-minute practice 88 use of the device was tested over a period of eight weeks. In two trials, the control group used a walkman playing calm music 68, in two trials, the patients measured their blood pressure using a digital monitor 35, 37, in one trial, both devices were used 33 and in one trial, no devices were used and only the medications were administered 32.

 

In the first seven trials whose concentrated results were published 89, 78% of the patients were already medicated for hypertension and one third of the medicated patients received more than three drugs. Although the majority of patients were treated through medications and/or change in lifestyle, their initial blood pressure as measured at a clinic was non-stabilized at 150/90 mmHg on average.

 

 

83RESPeRATE: nonpharmacological treatment of hypertension. Sharma M, Frishman WH, Gandhi K. Cardiol Rev. 2011; 19:47-51.
84Device-Guided Breathing and Hypertension. A Yet To Be Determined Positioning. Sica DA. Cardiol Rev. 2011; 19:45-46. [Editorial].
85Non-pharmacological Interventions for Patients with Resistant Hypertension. Abe N, Bisognano JD US Cardiol 2011; 8:52–55.
86Nondrug interventions for treatment of hypertension. Woolf KJ, Bisognano JD. J Clin Hypertens (Greenwich). 2011; 13:829-835.
87Elliott WJ, Izzo JL Jr. Device guided breathing to lower blood pressure: Case report and clinical overview. Medscape General Medicine, Pulmonary Medicine Section. Available on the Internet at: www.medscape.com/viewarticle/539099.
88In the first three trials, practice lasted about ten minutes. In the following trials and using the device at its default option, practice lasted 15 minutes.
89Elliott WJ, Izzo JL Jr. Device guided breathing to lower blood pressure: Case report and clinical overview. Medscape General Medicine, Pulmonary Medicine Section. Available on the Internet at: www.medscape.com/viewarticle/539099.

 

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9.2.3.2The principal trial results

 

The users of the device with uncontrolled blood pressure demonstrated a significant decline in blood pressure measured at the clinic by an average 14 mmHg in systolic blood pressure that was non-stabilized before the trial (over 140 mmHg) and an average 8 mmHg in uncontrolled basic values of diastolic blood pressure (over 90 mmHg), compared to the corresponding average decline in blood pressure observed in the control group of 9 mmHg and 4 mmHg in systolic and diastolic blood pressure, respectively. The declines in blood pressure in the control group were smaller than those of the therapy group with a statistical significance level of p=0.008 and p=0.002, respectively (namely, the risk of statistical error is 0.8% and 0.2%, respectively).

 

The results were similar for both men and women and for both subjects who were under medicinal therapy and those who were not.

 

The scope of the decline in systolic blood pressure corresponded to the cumulative time which the patient spent practicing therapeutic breathing - the more the device was used, the more the blood pressure was reduced. It was also found that timing the breathing with the guiding sounds (under proper use of the device) is an important component in lowering blood pressure using the device 90.

 

A continuous decline in blood pressure was observed after 3-4 weeks of using the device.

 

Larger declines in blood pressure measured at a clinic were found in the older population (average declines of 18 mmHg and 8 mmHg in systolic and diastolic blood pressure, respectively in adults over 65) and in subjects with initially uncontrolled blood pressure, whether under medicinal therapy or not.

 

Blood pressure taken at a clinic and at home (up to six months of using the device), and specifically 24-hour ambulatory blood pressure monitoring demonstrated that the decline in blood pressure achieved through permanent use lasts throughout the day over months.

 

The user's ability to consistently operate the RESPeRATE through self training alone, without previous respiratory practice has been objectively proven in clinical trials by using the device's internal memory and in market researches with users.

 

In order to maintain reduced blood pressure over time, the patient must continue to use the device in the manner described above.

 

 

90Gavish B, Device-guided breathing in the home setting: Technology, performance and clinical outcomes. Biol. Psychol. 2010; 84:150-156.

 

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9.2.4Support services for InterCure's customers

 

As of the date of this report, InterCure operates in-house call centers in its U.S. and Israeli offices manned by InterCure employees as well as external call centers. In addition, InterCure hires call center services in Southampton, UK. Both the internal and external call centers use InterCure's IT systems and engage in sales, customer service (providing technical information, receiving complaints etc.), first line customer support and product returns. These services are rendered free of charge to both customers and non-customers.

 

See details of the product's principal markets, trends and changes in supply and demand in paragraph 7.2 above.

 

9.2.5Changes in the corporation's market share

 

With respect to anticipated material changes in InterCure's market share in the main markets of its product, given that the hypertension therapeutic device category is relatively new in the market 91 and that it is based on a unique patented technology as an exclusive FDA cleared non-medicinal non-invasive device for treating hypertension, the demand for InterCure's products will vary mainly based on the degree of success of its marketing activities and the increase in product recognition in the public and medical community, provided that no competing novel medical device with significant benefits over InterCure's products and/or a new drug with significant benefits over existing drugs are not launched, and subject to the effect of the economic crisis on InterCure's activities.

 

9.3Segmentation of revenues and profitability of products and services

 

Through InterCure, the Group has a single group of products - the RESPeRATE and RESPeRATE Ultra devices and their various versions (see also paragraph 9.2.1 above). Revenues from these devices represented about 95% of InterCure's total revenues in 2012. Revenues from related products and services represented about 5%, 4% and 2% of InterCure's total revenues in 2012, 2011 and 2010, respectively.

 

InterCure's financial data relating to the medical device area of activity (U.S. dollars in thousands):

 

The following table presents InterCure's revenues, total gross profit and the rate of gross profit of total revenues:

 

   2012   2011   2010 
             
Revenues (U.S. dollars in thousands)   2,267    3,171    3,728 
Gross profit (U.S. dollars in thousands)   1,733    2,411    2,846 
                
Gross profit rate (%)   76%   76%   76%

 

 

91To the best of InterCure's knowledge, the British Hypertension Society's document of 2010 is the first to mention this category.

 

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9.4New products

 

InterCure intends to promote the development of new products in additional markets as specified below:

 

Product 
name
  Designated
labeling
  Product's
development
stage as of the
report date
  Expected
milestones in
the coming 12
months
  Nearest product
milestone and
expected
completion date
  Estimated costs
of nearest
milestone
completion
  Size of potential
target market
(number of
patients or
procedures) and
monetary scope
of the product's
potential target
market as of the
report date
  The
corporation's
assessment of
product launch
date
  The
corporation's
assessment of the
product's
expected market
share, assuming
marketing
approval is
granted
Undecided   Device for treating congestive heart failure   Phase II clinical trials completed   Undecided   Undecided   Undecided   6 million patients in the U.S. (670,000 new patients every year), monetary scope of target market of US$ 1.6 billion in medical devices in 2010, expected to increase to US$ 3.2 billion in 2016 92. In Europe - expected market scope of US$ 1.5 billion in 2016   Unknown   Currently unknown

 

 

92http://www.allvoices.com/contributed-news/12461583-congestive-heart-failure-treatment-devices-market-global-industry-size-share-trends-analysis-and-forecasts-2012-2018.

 

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Product 
name
  Designated
labeling
  Product's
development
stage as of the
report date
  Expected
milestones in
the coming 12
months
  Nearest product
milestone and
expected
completion date
  Estimated costs
of nearest
milestone
completion
  Size of potential
target market
(number of
patients or
procedures) and
monetary scope
of the product's
potential target
market as of the
report date
  The
corporation's
assessment of
product launch
date
  The
corporation's
assessment of the
product's
expected market
share, assuming
marketing
approval is
granted
Undecided   Device for treating insomnia   An initial (pilot) study has been completed to assess product feasibility   Undecided   Undecided   Undecided   82 million in the U.S. of which 40 million with chronic insomnia, monetary scope of target market of US$ 23.7 billion in 2007, of which US$ 2.4 billion are allocated to cellular devices for home use. The market grew by 18% this year 93.   Unknown   Currently unknown
Undecided   Stress therapy   Development plan in process   Unknown   Unknown   Undecided   75% of the entire population experience different levels of stress once every two weeks 94   Unknown   Currently unknown

 

 

93http://www.prweb.com/releases/2008/06/prweb1006354.html.
94National Health Interview Survey. http://www.stresscure.com/hrn/facts.html.

  

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Device for treating congestive heart failure ("CHF") - CHF affects some 6 million people in the U.S. and is the most common cause of hospitalization of patients above 65 in the U.S., with over one million hospitalizations a year. The total cost of treating the disease in the U.S. alone approximates US$ 33 billion a year. About 91% of CHF patients have a medical history of hypertension, yet once a patient is diagnosed with heart failure, it is usually accompanied by shortness of breath, which causes a significant deterioration in the patient's quality of life. As a response for these market needs, InterCure has begun developing a device for treating patients with CHF based on the RESPeRATE by adapting the guidance algorithm and treatment protocol to the special characteristics of patients with CHF and adding various relevant components. The device successfully underwent three phase II clinical trials conducted in Italy 95, 96 and in Japan 97. These trials, which consisted of about 60 subjects, demonstrated statistically significant improvement in the main parameters used to monitor the disease, including improved quality of life (LWHF QOL questionnaire), improved results of a 6-minute walking test, ejection fraction, reduced pulmonary artery pressure 97, stabilized blood oxygen levels and breathing patterns (initially unstable) 96 and a considerable reduction in the sympathetic nervous system's activity 97. A randomized study held in Sweden on about 70 patients with chronic heart failure (with a discman as a control function) found that proper use of the device minimizes the symptoms of the disease (mainly shortness of breath on exertion) 98.

 

A market study conducted by Proformant Inc. (advisory company specializing in medical devices) among American cardiologists in 2003 indicated that a device for treating CHF has great potential in the market, assuming that the improvements discussed above are also proven in controlled trials. It was found that an outcome which will be acceptable to cardiologists as desirable is reduced shortness of breath which is symptomatic of severe heart failure.

 

In general, before any widespread commercialization of the technology in the CHF market, several development stages must be completed, at least one pivotal study, as part of the regulatory approvals, and support must be obtained in the medical community. In the reporting period, InterCure did not act to promote this area.

 

Device for treating insomnia - the market of people with insomnia in the U.S. is estimated at 82 million Americans who report experiencing one or more of the symptoms of insomnia at least once a week, of whom 40 million suffer from chronic insomnia 99. According to a report issued by Marketdata Enterprises, the market is even larger and includes about 58% of the overall population in the U.S. (namely, about 170 million people suffering from insomnia) 100.

 

 

95Aiolfi et al. Effect of Respiratory Pacing on CHF Patients with Periodic Breathing Journal of Cardiac Failure, 2003; 9: S97.
96Parati G, MD, Malfatto G, Boarin S, Branzi G, MD, Caldara G, Giglio A, Bilo G, Ongaro G, Alter A, Gavish B, Mancia G. Device-Guided Paced Breathing in the Home Setting on Exercise Capacity, Pulmonary and Ventricular Function in Patients With Chronic Heart Failure: A Pilot Study. Circulation: Heart Failure. 2008; 1:178-183.
97Asanoi H, Goso Y, Yamazaki T: Slowing Respiration Effectively Suppresses Sympathetic Nerve Activity in Patients with Chronic Heart Failure Circulation Journal 2004, 68 (Suppl I), 184.
98Impact of device-guided slow breathing on symptoms of chronic heart failure: a randomized, controlled feasibility study. Ekman I, Kjellström B, Falk K, Norman J, Swedberg K. Eur J Heart Fail 2011;13:1000-1005.
99Brain Basics: Understanding Sleep, National Institute of Neurological Disorders. http://www.ninds.nih.gov/disorders/brain_basics/understanding_sleep.html.
100http://www.prweb.com/releases/2008/06/prweb1006354.html.

 

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In response to the needs of this market, InterCure is considering developing a device for treating insomnia based on the RESPeRATE technology with the necessary adjustments. InterCure completed an initial (pilot) study designed to assess the degree of feasibility, safety and medical effect of said device. InterCure continues to conduct clinical surveys and pilot testing in order to define an end configuration of the product (as a stand-alone product). In addition, InterCure has initiated the device's design process. A consumer survey conducted by Ipsos Vantis in February 2008 suggests that 50% of the users of the device for treating hypertension also suffer from insomnia. Moreover, 78% have also reported improvement in being able to fall asleep after using the device. Accordingly, InterCure has defined a version of the device that is adapted to insomnia in addition to hypertension. In the reporting period, InterCure did not act to promote this area.

 

9.5Customers

 

9.5.1Private customers

 

The majority of InterCure's customers are private people who purchase a single device for personal use or for the use of another (or receive it through a doctor's prescription in the UK) (the Duo version is designed to be used by up to two people). Certain individuals and/or organizations purchase a small number of devices, for example, for conducting medical tests using the devices. Therefore, InterCure is not dependent on any customer or another and the loss of a customer is not expected to have a material effect on its operations.

 

InterCure grants its customers warranty for products sold by it under different terms such as a warranty limited to one year (and in Europe two years). When purchasing the device, InterCure allows the customers to purchase an extended warranty for an additional fee.

 

9.5.2Distributors and resellers

 

The majority of InterCure's sales are made directly to private customers. However, InterCure sells certain devices to a limited number of distributors 101 and resellers which have been proven to add value. These distributors and resellers sometimes purchase a few dozen or a few hundred devices in a single order. The major resellers include Costco Canada and Drug.com, which merged with Walgreen. In early 2012, InterCure discontinued the sales through Costco US, see details in paragraph 9.6.3 below.

 

Net sales (less returns) to Costco (US and Canada) in 2012, 2011 and 2010 accounted for 3.4%, 17% and 24%, respectively.

 

InterCure has a distribution channel for the RESPeRATE Rx which is supplied through a wholesale agent for a doctor's prescription in UK pharmacies. See details in paragraph 9.6.3 below and a description of InterCure's engagement with distributors and resellers in paragraph 9.6.5 below.

 

 

101In the first quarter of 2011, InterCure signed a distribution agreement in Norway which grants the distributor a year's exclusivity.

 

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9.6Marketing and distribution

 

InterCure's marketing and distribution activity is derived, among others, from its targets, commercialization strategy and work plan, as detailed in paragraph 9.24 below.

 

As stated above, as of the date of this report, InterCure's main targets are to become profitable, derive positive cash flows from operating activities and recover growth in 2013 by increasing sales and exposure while continuing to establish the therapeutic technology developed as part of the standard therapeutic protocol for treating hypertension.

 

For that purpose, InterCure adopted the following business strategy and work plan:

 

·Focus the majority of resources on the initial target market of hypertension.
·Focus on direct marketing channels (online advertising/distributors).
·Strive to become profitable and grow by enhancing the investment in online advertising in a controlled fashion - an advertising channel which has been proven as positively contributing to InterCure's overall profits through direct sales and support of distribution channels and other targets.
·Leverage the receipt of insurance compensation in the UK as a profit growth target and as a model for other countries by adapting the marketing and distribution system, forming partnerships, all without making significant investments.
·Establishing the support of the medical community for the therapeutic technology in order to accelerate penetration into the insurance compensation market and include the technology in the therapeutic guidelines of the appropriate medical organizations.

 

InterCure's principal marketing efforts are focused in the U.S. and the UK where it adopts said strategy and which represent the principal markets in terms of scope of sales. The marketing activity in the U.S. market is done in collaboration with the subsidiary, InterCure Inc. InterCure also operates in other markets as described in this report 102. For financial information regarding InterCure's geographical segments, see Note 24 to InterCure's consolidated financial statements as published on March 21, 2013.

 

For details of material marketing and distribution agreements signed by InterCure, see paragraph 9.21 below.

 

Below is a description of InterCure's activity through the various marketing and distribution channels:

 

 

102As of the date of this report, the scope of sales of InterCure's products in other countries excluding the U.S., Canada and the UK is immaterial.

 

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9.6.1Direct marketing, marketing infrastructures and advertising

 

As part of the implementation of the business strategy described above, InterCure operates a direct marketing system which consists of advertising, direct sales, logistics and customer service.

 

InterCure's marketing system and advertising budgets are adapted on an ongoing basis to allow support for the direct sales, the expanding distribution channels and to increase the medical community's awareness to the device. This system relies on sophisticated IT systems developed by InterCure which enable the management, monitoring and analysis of advertising for continued optimization of the advertising budget, namely, deciding in which channels to invest more and in which less based on the profits of the different advertising channels 103. Moreover, these IT systems allow managing customer relations and form a logistic platform for taking orders electronically and through internal and external call centers in Israel and worldwide (mostly the U.S. and the UK), supplying the devices to the customer's home, all in integration with InterCure's ERP system.

 

As stated above, the marketing strategy described above continues to allow material product exposure and branding, support for other distribution channels and a certain increase in the medical community's awareness to the device while generating direct income for InterCure.

 

In 2012, more than 1.3 million unique visitors visited the product's website. InterCure sent about 15 million emails to customers who registered on the website (while adhering to the relevant regulations regarding sending emails, including compliance with the Can-Spam Act in the U.S.) and reached about 12,000 doctors. The vast majority of these visitors found the website through the large variety of InterCure's online advertising means, including search engine marketing where surfers seeking information by using search words relating to hypertension receive a text ad or sponsored link directing them to InterCure's website. In addition, InterCure advertises contextual ads, in eNewsletters and/or solo emails to subscribers of other companies (acting, to the best of InterCure's knowledge, in compliance with the relevant regulations in this field, including compliance with the Can-Spam Act in the U.S.). InterCure utilizes geo-targeting and retargeting techniques when possible. Moreover, InterCure operates a large array of online tools for turning visitors registered on the website into customers, such as by sending out email recommendations for non-medicinal therapy for hypertension (10 daily tips), emails on sales promotions, a highly active online forum, blogs, eNewsletters etc.

 

In summary, the investment in on-line marketing and the distribution mixture of InterCure result in positive contribution (gross profit after deducting media expenses) to the overhead.

 

 

103Most ads include a specific link or contact number that allows the IT system to attribute responses to specific ads and individually calculate the return on the investment.

 

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9.6.2Resellers in the markets in which InterCure operates through direct marketing

 

In the context of the activities in the main target markets, the U.S. and the UK, InterCure also sells its product through a limited number of value adding resellers such as chains. These resellers purchase the product from InterCure at a discount and usually resell it for the same price offered to direct customers. InterCure estimates that most resellers were first exposed to the product through its direct advertising activity but purchased the products from established websites such as www.amazon.com ("Amazon") or www.drugstore.com) which offer added security for some of the customers when purchasing new and unfamiliar products.

 

In 2012, these resellers accounted for 13% of total product units sold by InterCure, mostly through online shopping websites (in 2011 and 2010 - 11% and 14%, respectively).

 

9.6.3Chain distribution

 

Below is a description of the main chains which are among InterCure's customers:

 

U.S. and Canada

 

·Costco Wholesale Corporation (the largest club chain in the U.S. and the fourth largest wholesaler in the U.S. with sales of US$ 88.9 billion in 2011, "Costco") - in July 2008, InterCure started selling the RESPeRATE through Costco's website, www.costco.com. In 2010, the device began selling in Canada through Costco's Canadian subsidiary at www.costco.ca. Costco sold the device as a valued-added bundle for an end consumer price of approximately US$ 200-270 based on sales promotion campaigns supported by InterCure. In 2010, InterCure noticed a decline in the chain's sales which it believes arose from the continued minimization of consumer advertising volumes. On March 4, 2012, InterCure announced the discontinuance of product sales through Costco U.S. However, InterCure continues to sell the product in Canada through Costco Canada, a separate legal entity.

 

Since Costco U.S. was InterCure's single largest customer in the U.S. which had accounted for 8-9% of InterCure's revenues during certain periods of collaboration, the discontinuance of sales had a negative impact on InterCure's sales. See more details in InterCure's immediate report of March 4, 2012.

 

The UK

 

·Boots UK Limited ("Boots") is the largest chain of pharmacies in the UK with some 2,500 pharmacies, including Alliance Boots, with a sales turnover of approximately £ 6.6 billion in the 2009/10 fiscal year 104. In November 2009, InterCure began selling the RESPeRATE Ultra version of the device in over 600 Alliance Boots stores representing the vast majority of the chain's stores.

 

 

104http://www.boots-uk.com/App_Portals/BootsUK/Media/PDFs/Annual_Review_FINAL.pdf.

 

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In the third quarter of 2012, InterCure decided to discontinue sales through Boots due to low profit margins. The revenues from product sales by Boots in 2011 and 2010 accounted for about 14% and 8% of InterCure's revenues, respectively. InterCure estimates that the discontinuance of sales through Boots will not have a material effect on its sales but will reexamine its decision in the future.

 

·Credenhill Limited ("Credenhill") - a veteran British importer and distributor of products for cardiovascular patients, licensed under the British NHS Drug Tariff. This license allows Credenhill to supply the product directly to the customer's home and claim the related expenses from the British NHS. As of February 2012, Credenhill has a twofold role in the RESPeRATE Rx's distribution channel: direct supply of the device to the patient's home through a distant pharmacy and wholesale supply of products to pharmacies across Britain, which supply the product to patients against a doctor's prescription.

 

·Dispex Limited ("Dispex") - a wholesale purchase group of some 900 clinics with a special license from the British NHS to supply prescription products directly from the dispensing doctor. This license, which is mainly granted to doctors in areas with no available pharmacies, allows doctors to write prescriptions and supply the device simultaneously. These doctors may purchase the devices at a discount from a wholesaler and claim full reimbursement directly from the British NHS.

 

9.6.4Marketing to the medical community

 

As discussed in paragraph 9.24 below, InterCure views the expansion of the medical community's recognition and support as a critical success factor in the medium and long term. However, given the need to minimize losses in the short term, InterCure has been forced to significantly reduce its investments in this area.

 

This issue received validation with the receipt of insurance compensation in the UK which allows each consumer with a signed doctor's prescription to receive the device free of charge (or for a fee of £ 7 in certain cases). In fact, the insurance compensation removed the product's price barrier for the consumer by shifting the decision to 40,000 physicians who treat hypertension, including hypertension specialists, cardiologists, nephrologists, GPs, internal physicians and primary care trusts.

 

In recent years through the date of signing InterCure's debt refinancing (July 2012), InterCure did not have the resources to allocate substantial sums to sales promotion in the medical market. Following the debt refinancing, InterCure is acting to promote this area.

 

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In this target market, InterCure offers several activities in addition to the direct marketing activity which also has a direct effect on physicians and caregivers as media consumers themselves. InterCure has a variety of marketing activities directed exclusively at the medical community for educating the medical market using the following methods:

 

·Promoting the device by providing physicians with information that is delivered to the end consumer at the website.

 

·eDetailing as part of a special website for physicians, providing clinical information packages upon demand and sending out information leaflets to applicants.

 

·Participating in professional conventions for product presentation. In the reporting period, InterCure minimized the use of this method due to cost.

 

Simultaneously, InterCure is reviewing possible collaborations with companies with suitable public relations resources without having to make large investments.

 

InterCure estimates that in the U.S., which currently does not offer insurance compensation, there are some 120,000 specialists, cardiologists, nephrologists, GPs and internal physicians who treat hypertension. In addition, there is a large population of professional caregivers who are interested in the device such as biofeedback therapists, chiropractors, naturopaths, psychologists etc.

 

In order to expand the medical community's support and recognition, InterCure is using the following techniques:

 

·Continued advertising of medical assays in the area of activity and of results of any new clinical trials.

 

·Supporting clinical trials conducted by researchers and specialists which might affect public opinion in the relevant areas, including research of the following types:

 

1.Unfunded research - InterCure does not participate in funding, conducting or analyzing the research. InterCure provides the researchers paid trial kits (at a discount) upon demand which consist of a device, a manual and information on trials conducted on the device.

 

2.Collaborated research - research that is not funded by InterCure but for which InterCure provides the researchers devices free of charge and in return receives the right to monitor and counsel the research and analyze the results.

 

9.6.5Exclusive distributors and resellers in the rest of the world

 

As of the date of this report, InterCure does not have any exclusive distributors.

 

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9.6.6Dependency on distribution channels

 

InterCure is not dependent on any particular distribution channel. Nevertheless, in 2011, InterCure's sales to Costco (U.S. and Canada) totaled approximately US$ 540 thousand, accounting for about 17% of InterCure's total sales (approximately US$ 906 thousand, accounting for about 24% of InterCure's total sales in 2010). On March 4, 2012, InterCure announced the discontinuance of sales through Costco U.S., see details in paragraph 9.6.3 above.

 

9.7Order backlog

 

InterCure does not base its sales on order backlog.

 

9.8Competition

 

As of the date of this report, recommended changes in behavior such as physical exercise or dietary changes and medications for lowering blood pressure represent the standard care in the hypertension market.

 

As discussed above, InterCure is the only company to have developed and to market a non-medicinal non-invasive device for treating hypertension which has been clinically tested by it and which has been cleared by the FDA.

 

In the third quarter of 2010, InterCure learned that the British chain Lloyds Pharmacy ("Lloyds") which had distributed InterCure's device in the past, co-developed with Harvard medical Devices Ltd. ("the manufacturing company") and began advertising a competing device for the non-medicinal treatment of hypertension for a cheaper price than the device developed by InterCure ("the competing device"). Following an examination by InterCure's advisors, the competing device does not interactively guide respiration during use (a patented method developed by InterCure with proven efficiency in lowering blood pressure). However, InterCure's advisors' examination also revealed that the competing device comprises elements copied from InterCure's product in alleged violation of copyright. InterCure has taken several regulatory steps and is examining its possible legal course of actions against the competing device. In the first quarter of 2011, sales of the competing device commenced under a private brand name of Lloyds Pharmacy - Kinetik - owned by the manufacturing company. At this stage, the Group, through InterCure, cannot assess whether and how the sales of the competing device will affect its sales in the UK.

 

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To the best of InterCure's knowledge and on the competing device's advertised features, below is a table presenting InterCure's device against the competing device - Kinetik according to advantages and disadvantages:

 

Product features, advantages and
disadvantages compared to
competing products (existing or
under development)
  InterCure's product   The competing product - Kinetik
The use of the device  

The patient is required to strap on a belt and put on earplugs. In the identification stage, the device measures the breathing pattern (over about 2 minutes) and displays it on the screen.

In the interactive practice stage, the device makes sounds based on the breathing pattern based on two tones: a rising tone (inhalation) and a falling tone (exhalation). The sound changes and slows down based on the breathing pattern. In the first minute, the screen shows the patient when the music "controls" the breathing rate of the patient and gradually gets him to an optimal breathing rate. The treatment range is defined to 10 breaths a minute. After 15 minutes, the device gradually reduces the sound volume and automatically turns off.

The treatment term is generally definable and specifically per treatment. The device works interactively with the patient during the term of the treatment – the rhythm changes according to the breathing pattern. If the decreased breathing rate is "uncomfortable" to the patient, the device recognizes it and reverts to the previous "comfortable" rhythm, and continues gradual reduction of the breathing rate in "comfortable" manner to the patient. .

 

The patient is required to strap on a belt and put on earplugs. In the identification stage, the device measures the breathing pattern (over about 2 minutes) and displays it on the screen.

In the practice stage, based on the breathing pattern, the device chooses the right sound and rate for the patient's breathing (provides inhaling and exhaling instructions in the first minute of practice). The music is comprised of two tones: one increases (inhale) and the other decreases (exhale).

The treatment range is defined as less than 10 breaths a minute. InterCure does not have information about success indices.

         
Side effects and safety issues   None   None
         
Cost   US$ 299-US$ 399   £ 42.00 -£ 65.00 (US$ 67-US$ 104)
         
Convenience (duration of therapy, number of sessions etc.)  

15 minutes for each session and a recommended 45 minutes a week for recording the number of 10 breaths per minute.Convenient display.

A vocal tutorial and easy to understand follow up.

The breathing sensor can be adjusted.

The breathing sensor can be adjusted.

The device has the possibility to change the volume.

The device has a memory for an effectively cumulative weekly treatment (total time of breathing in an effective rate of less than 10 breaths per minute) and also The device has a statistical recording function that allows the patient to analyze, check and compare the progress (last treatment, 10 last treatments, all treatments).

It should be noted that InterCure has several RESPeRATE models including the Deluxe model (with the large color LCD screen) and the Duo model which allows the device to memorize two users etc. 

 

20 minutes each session, a 10 minutes of breathing at less than 10 breaths per minute per session. Recommended 40 minutes a week in less than 10 breaths per minute.

A wide and easy to use screen.

A vocal tutorial and easy to understand follow up.

The breathing sensor can be adjusted.

The device has the possibility to change the volume.

Variety of music.

 

         
Possible compensation from insurers, medical carriers or others   In the United Kingdom, InterCure filed an application to establish insurance indemnity as part of the British health basket.   to the best of InterCure's knowledge, does not exist.

 

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The competing product's advantages:

 

-Price
-Easy to use screen

 

The competing product's disadvantages:

 

-To the best of InterCure's knowledge, the product was not FDA cleared and is not supported by clinical trials.
-Kinetik relies on clinical trials previously conducted by InterCure only

unable to record data beyond the current treatment or statistical capabilities- No statistical analysis

-Only one model

 

To the best of InterCure's knowledge, there are certain products and therapies that target hypertension but do not directly compete with InterCure's products such as:

 

·Hypertension medications for lowering blood pressure which represent the major share in the hypertension market. Additional information about the hypertension drug market is provided in paragraph 9.11 below. It should be noted that InterCure does not offer its products as an alternative for hypertension drugs.

 

·Baroreflex Activation Therapy - CVRx has developed a barostimulation device implanted in the body near the main artery which stimulates the nervous system and directly affects the baroreflex. According to the manufacturer, the future product price is planned to reach thousands of dollars (in the vicinity of US$ 20,000 not including the procedure itself) and is designed for hypertensive resistant patients who fail to respond to hypertension drugs. The manufacturer's first product is CE Marked and is undergoing clinical trials for FDA approval.

 

·Renal Sympathetic Nerve Abelation - a catheter-based technique promoted by Medtronics designed to reduce the sympathetic nervous system's activity by applying radiofrequency pulses to the renal arteries and de-nerving them. According to InterCure's estimates, the future product price and cost of procedure are expected to be in excess of US$ 20,000 for hypertensive resistant patients only. The product is currently in clinical trial stages.

 

·Biofeedback relaxation devices operating on heartbeat variations without regulatory approvals and/or that claim to treat hypertension. These devices are designed for relaxation which is not viewed as medical therapy and therefore they are exempt from obtaining regulatory approvals. However, to the extent that InterCure's devices are used (or will be used in the future) by people also for relaxation purposes, these devices form competition. The leading devices in this field include the following:

 

1.StressEraser - a device which measures heartbeat variations and outlines a suitable graph using a screen, previously sold for US$ 300. This device also guides the users to adjust their exhalation to the heart-breathing rate to about six times per minute. In 2009, the company that manufactured this device discontinued its operations and to the best of InterCure's knowledge, the remaining inventory of devices was sold at US$ 120-180.

 

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2.Devices that purport to lower blood pressure - for example, Zona, which consists of a palm spring which until recently was argued to lower blood pressure through long term practice. To the best of InterCure's knowledge, these devices did not receive regulatory marketing approval for lowering blood pressure and are sold at US$ 150-300 a unit. As of the report date, the website promoting this device was amended to exclude any specific arguments about lowering blood pressure and describe cardiovascular training. InterCure believes this amendment was carried out at the request of regulatory entities.

 

·Mobile applications and software for relaxation and breathing pattern manipulation - in the reporting period and following the proliferation of smart phones, a variety of mobile apps for relaxation and breathing pattern manipulation were introduced, all without a respiration sensor connection. InterCure has been monitoring the developments in this relatively new market.

 

InterCure is coping with the competition mainly by creating barriers to entry based on its registered patents, continuing to protect its intellectual property, establishing the brand name in the medical and consumer markets and developing follow-up products to retain its relative edge.

 

9.9Seasonality

 

Product sales are subject to seasonality whereby the sales in the first and fourth quarters are higher than in the other quarters when neutralizing special offers during the holiday season between Thanksgiving and Christmas (during which time U.S. sales are especially high) and since it is winter time when blood pressure is generally higher due to the constriction of blood vessels from the cold. The first quarter is traditionally considered especially good for health products. However, the increase in sales does not necessarily correspond to the behavior of the sale consideration. Beyond seasonality, InterCure's sales are also affected by online advertising and sales promotion.

 

9.10Production capacity

 

As of the date of this report, InterCure meets all its production needs through subcontractors and particularly a major subcontractor in China which has been manufacturing the RESPeRATE Ultra versions since November 2008. In 2012, InterCure made an average of less than 1,000 product units a month. The Chinese production line's monthly manufacturing capacity is about 10,000. In the event of increased demand, the manufacturing capacity can be enhanced within several weeks given that the product's assembly line and testing process is not complicated. The time needed to prepare for increased production mainly depends on the ability of the component suppliers to respond to increased order volumes and the availability of components with variable manufacturing technology. InterCure estimates that in the event of a major increase in product demand, the subcontractor will be able to add another production line within three months without material costs. InterCure is dependant on the manufacturer. However, in a few months, InterCure can transfer the manufacturing to another manufacturer. Due to such dependency, InterCure owns a significant inventory in its warehouse, which is sufficient for more than 6 months of sales, in accordance to InterCure's current run-rate.

 

9.11Fixed assets and facilities

 

InterCure's listed domicile is at 16 Hatidhar Street, Raanana 43652 Israel, at CFO Direct Ltd. InterCure Inc. operates out of its Manhattan offices in New York.

 

In May 2010, InterCure Inc. signed an office lease agreement with monthly lease fees of approximately US$ 5.5 thousand for a period of three years. InterCure Inc. is considering renewing the lease agreement or alternatively relocating to new offices.

 

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9.12Research and development

 

9.12.1Research and development activity and results

 

In 2002, InterCure began selling and marketing its products for treating hypertension. InterCure intends to continue engaging in research, development and marketing of existing products as well as of new products (see paragraph 9.4 above) in the future.

 

For the purpose of its R&D activity, the Group, through InterCure, has set up a scientific and clinical team and an R&D team (see paragraph 9.14.3 below).

 

InterCure invests resources in protecting its intellectual property, see details of approved patents and patent applications in paragraph 9.13.2 below.

 

The following tables summarize the data on clinical trials in InterCure's products. The first table includes clinical trials initiated and sponsored by InterCure and clinical trials which InterCure did not initiate or sponsor but participated in their planning or provided technological-scientific counseling thereto. All the clinical trials in this table have been concluded. As of the report date, InterCure is not sponsoring any other clinical trials. The second table includes clinical trials conducted by researchers who use InterCure's technology for different indications. InterCure encourages this type of scientific activity and makes its accumulated knowhow arising from the completion of successful trials available to interested researchers. Since the purchase of devices for these independent clinical trials cannot be limited and given that InterCure does not take an active part in them and cannot intervene in their planning, management or schedules, and given that InterCure sometimes learns about these trials only after the fact or on www.clinicaltrial.gov, InterCure itself cannot provide current updates about these trials.

 

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Table 1 of clinical trials - clinical trials sponsored by and/or in participation with InterCure

 

Trial name   Phase   Trial objective   Medical
institution in
which located
  Number of
subjects
  Number of
new subjects
as of the
report date
  Nature and
status of trial
  Schedule/year
of conclusion
  Results
Shein 1   III   Lowering blood pressure measured in a clinic   Hadassah Hospital, Israel   28       Randomized double-blind controlled   1997   Success - significant lowering of blood pressure compared to control group 68
2   III   Lowering blood pressure measured in a clinic   2 Sick Fund clinics, Israel   37       Randomized double-blind controlled   1998   Success - significant lowering of blood pressure compared to control group 68
Grossman   III   Lowering blood pressure measured in a clinic and at home   Sheba Hospital, Israel   33       Randomized double-blind controlled   1999   Success - significant lowering of blood pressure compared to control group 69
Rosenthal 1   IV   Lowering blood pressure - ambulatory measurement   Sheba Hospital, Israel   13       Open trial   2001   Success - significant lowering of blood pressure 70

Me

les

  IV   Lowering blood pressure measured in a clinic and at home   San Gerardo Hospital, Italy   79       Controlled   2001   Success - significant lowering of blood pressure 71
Vascofer   IV   Lowering blood pressure in hypertensive resistant patients   Barzilai Hospital, Israel   17       Open trial   2002   Success - significant lowering of blood pressure 72

 

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Trial name   Phase   Trial objective   Medical
institution in
which located
  Number of
subjects
  Number of
new subjects
as of the
report date
  Nature and
status of trial
  Schedule/year
of conclusion
  Results
    III   Lowering blood pressure measured in a clinic and at home without a doctor's supervision   Multi-central, U.S.   149       Randomized double-blind controlled   2001   Success - FDA approval for the hypertension labeling without a doctor's prescription 73
Hypertension Korea   IV   Lowering blood pressure measured in a clinic   Multi-central, South Korea 105   70       Open trial   2005   Success - significant lowering of blood pressure 74
    IV   Lowering blood pressure in diabetics   4 Sick Fund clinics, Israel   66       Randomized double-blind controlled   2007   Success - significant lowering of blood pressure 75
1. Aydin   IV   Lowering blood pressure - ambulatory measurement   Şişli Etfal Hospital, Turkey 105  

1

 

3

      Open trial   2002   Success - significant lowering of blood pressure 76
    I   Effect on respiratory models and physiological variables in borderline hypertension   NIH, U.S. 105   32       Controlled   2008   Distinctive differences have been identified 106

 

 

105Independent research, not financed by InterCure.
106Anderson DE, McNeely JD, Windham BG. Device-guided slow-breathing effects on end-tidal CO(2) and heart-rate variability. Psychol Health Med. 2009 Dec;14(6):667-79.

 

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Trial name   Phase   Trial objective   Medical
institution in
which located
  Number of
subjects
  Number of
new subjects
as of the
report date
  Nature and
status of trial
  Schedule/year
of conclusion
  Results
Anderson 2   IV   Effect on respiratory models and blood pressure in borderline hypertension and hypertension   NIH, U.S. 105   40       Controlled   2008   Lowered blood pressure in clinic measurement, not ambulatory measurement 107
Heart Failure - La Rovera   I + II   Effect on heart failure in patients with chronic unstable breathing   Saluatore Hospital, Italy   26 in the hospital, 8 went on to home use       Hospital - controlled, home - open trial   2003   Success - stabilized breathing and oxygen level 95
    II   Effect on heart failure   San Luca Hospital, Italy   24       Randomized double-blind controlled   2003   Success - improved physiological variables 96
Heart Failure - Asanoi   I   Effect of heart failure on sympathetic nervous system   University of Toyama, Japan 105   14       Controlled   2004   Success - reduced sympathetic nervous system activity 97
Heart Failure -Ekman   III   Effect on heart failure   Guttenberg Hospital, Sweden 105           Randomized double-blind controlled   2009   Success - reduced shortness of breath 98

 

 

107Anderson DE, McNeely JD, Windham BG. Regular slow-breathing exercise effects on blood pressure and breathing patterns at rest. J Hum Hypertens. 2010 Dec;24(12):807-13.

 

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Table 2 of clinical trials - clinical trials not sponsored by and/or in participation with InterCure

 

Trial name   Development
phase in
which the
trial is
included
  IND or
IDE
opened
for the
trial
  Trial objective   Source of
funding and
medical
institution in
which
located
  Planned
number
of
subjects
  Number of
subjects as
of the
report date
  Nature and
status of
trial
  Schedule/year
of conclusion
  Results
Hypertension – Columbia   IV       Lowering blood pressure - ambulatory measurement and 4-month follow-up   NHLB grant to Columbia Presbyterian , NY, USA   200-400   Unknown   Randomized double-blind controlled - underway   2012   Not concluded
Hypertension-Diabetes Netherlands #1   IV       Lowering blood pressure measured in a clinic  

MRF grant to Isala Clinics,

Netherlands

  30   30   Randomized controlled - concluded   2006   Lowered blood pressure but not more than control group 78, 108
Hypertension- Netherlands #2   IV       Lowering blood pressure measured in a clinic  

MRF grant to Isala Clinics

Netherlands

  30   30   Randomized controlled - concluded   2008   Lowered blood pressure more than control group but not statistically significant 78, 109
Hypertension-Diabetes Netherlands #3   III       Lowering blood pressure measured in a clinic  

MRF grant to Isala Clinics

Netherlands

  48   Unknown   Randomized controlled - underway   Unknown   Unknown
Sympathtic activity - Brazil   IV       Reducing sympathetic activity - physiological mechanism   General Hospital, University of Sa˜o Paulo, Brazil   27   27   Randomized controlled - concluded   2010   Proven reduced sympathetic activity 79
Heart Failure – Parati 2   III       Effect on heart failure   European grant to St. Luca Hospital, Milan, Italy   80   Unknown   Randomized controlled - unknown   Unknown   Not concluded

 

 

108Logtenberg SJ, Kleefstra N, Houweling ST, Groenier KH, Bilo HJ. Effect of device-guided breathing exercises on blood pressure in hypertensive patients with type 2 diabetes mellitus: a randomized controlled trial. J Hypertens. 2007 Jan;25(1):241-6.
109Altena MR, Kleefstra N, Logtenberg SJ, Groenier KH, Houweling ST, Bilo HJ. Effect of device-guided breathing exercises on blood pressure in patients with hypertension: a randomized controlled trial. Blood Press. 2009;18(5):273-9.

 

a-102
 

 

Trial name   Development
phase in
which the
trial is
included
  IND or
IDE
opened for
the trial
  Trial objective   Source of
funding and
medical
institution in
which
located
  Planned
number
of
subjects
  Number of
subjects as
of the
report date
  Nature and
status of
trial
  Schedule/year
of conclusion
  Results
COPD - Norway   I+II+III       Effect on patients with Chronic Obstructive Pulmonary Disease   Norway NIH grant for University of Oslo, Norway  

I - 10

II - 48

III - 150

  Unknown   Randomized double-blind controlled   2013   Not concluded
COPD – Mayo Clinic   I       Effect on patients with Chronic Obstructive Pulmonary Disease   Mayo Clinic, MN, USA   15   Unknown   Open trial   2011   Not concluded
Anxiety in dental clinic   III       Effect on anxiety level before dental surgery   Private Clinic, IO, USA   81   81   Controlled - concluded   2010   Reducing the level of anxiety before dental surgery 110

Hot flashes in menopause

I

Effect of hot flashes on menopausal women

UCSF, USA

12

12

Open trial - concluded

2009

  Improved parameters
Urgency incontinence   I       Effect of incontinence   UCSF, USA   30   30   Randomized controlled - concluded   2010   Improved parameters
Chronic stress   III           UCD, USA   170   Unknown   Randomized controlled - underway   2013   Not concluded
PTSD   II       Effect on patients with post-traumatic stress disorder   NCCAM grant to Oregon U, USA   100   Unknown   Randomized controlled - underway   2013   Not concluded
Nerve control in diabetics   I       Reducing sympathetic activity - physiological mechanism       30   Unknown   Randomized controlled - underway   Unknown   Not concluded

 

 

110Morarend QA, Spector ML, Dawson DV, Clark SH, Holmes DC. The Use of a Respiratory Rate Biofeedback Device to Reduce Dental Anxiety: An Exploratory Investigation. Appl Psychophysiol Biofeedback. 2011 Mar 2.

 

a-103
 

 

Until the date of this report, InterCure financed its investments in R&D through its own resources and grants received from the Chief Scientist, as explained below, as well as using the proceeds from offering its securities to the public and from investments in InterCure.

 

On June 18, 2007, InterCure received the Chief Scientist's approval for its R&D investments as an R&D company pursuant to the TASE's guideline definitions.

 

The following table presents R&D expenses and grants from the Chief Scientist in 2010-2012 (in U.S. dollars in thousands):

 

R&D expenses

 

   Year ended December 31, 
   2012   2011   2010 
             
Salaries and related expenses   55    204    244 
Vehicle expenses   17    30    30 
Materials and equipment maintenance   -    1    2 
Foreign travel   -    1    2 
Other   22    8    3 
Share-based payment   -    (22)   9 
                
Total   94    222    290 

 

9.12.2Development grants received by InterCure and their repayment

 

Below are data regarding grants received from the Chief Scientist: in 2010-2012, no grants were received from the Chief Scientist and no grants were approved in 2012. As of the date of this report, InterCure received the following grants from the Chief Scientist:

 

·In 1997 and 1998, InterCure received grants totaling US$ 280,882 (NIS 1,151 thousand) for developing a non-medicinal product to treat hypertension (RESPeRATE), repaid in full.

 

·In January 2004, InterCure received another grant totaling US$ 198,765 (NIS 896 thousand) for developing a device to treat CHF patients (letter of approval in file 32707). According to this letter of approval, InterCure was approved a budget facility of NIS 2,210,521 and a grant at 50%. In practice, InterCure received for this program a grant of US$ 198,765 (NIS 896 thousand).

 

·Grants received in accordance with the Law for the Encouragement of Industrial Research and Development, 1984 ("the R&D Law") are generally repaid in the form of royalties from sales of products (and related services) based (in whole or in part) on the technology and knowhow developed in the context of the relevant R&D programs, until the entire grant amounts are repaid (linked to the dollar and bearing interest). If the production activity is taken outside of Israel, the repayment amount may be higher, ranging between 3% and 5% in royalties on future sales until full repayment of the grant, linked to the dollar and bearing interest of Libor, as updated from time to time.

 

a-104
 

 

·As for the grant InterCure received in 2004 for developing a device to treat CHF patients, as of the date of this report, InterCure has not commenced the marketing or sale of the technology developed in this program and therefore no royalties are paid by InterCure in its respect. In addition, an approval received from the Tmura Fund in January 2007 clarified that InterCure is exempt from paying royalties on said grant on sales of the hypertension device since the development activity in the CHF program did not contribute to improving the device. Nevertheless, it was ruled that if InterCure uses the knowhow developed in this program for improving/upgrading its products, it will be required to pay royalties on income from the upgraded device until the repayment of the full grants in said program.

 

·In addition to the royalty liability described above, the receipt of grants from the Office of the Chief Scientist imposes various other restrictions on the recipients in accordance with the R&D Law such as restrictions on transferring the production outside of Israel or transferring knowhow developed through the grants (or based on such knowhow) to a third party in or outside of Israel. In addition, InterCure is required to provide notice of certain changes effected to the ownership structure in the grant recipient.

 

As a rule, the R&D Law states that any product developed in the context of an approved program will be manufactured in Israel unless its manufacturing abroad was approved in advance and based on the approved percentage. Subject to notifying the Office of the Chief Scientist, a company may manufacture not more than 10% (cumulative) of its original production capacity outside of Israel. Manufacturing abroad in excess of this rate requires the approval of the Office of the Chief Scientist and is subject to royalties at a higher rate, which could be material, and at a larger scope, up to a maximum of 120%, 150% or 300% of the grants received for said program, based on the percentage of foreign manufacturing (up to 50%, over 50% and over 90%, respectively). The above does not apply to foreign manufacturing approved in return for importing an alternative manufacturing activity into Israel, which is not subject to increased royalties.

 

The R&D Law also states that the transfer of knowhow developed through Chief Scientist grants (or based on such knowhow) to a third party in or outside of Israel is subject to the Chief Scientist's approval. As a rule, the transfer of such knowhow outside of Israel, as approved by the Chief Scientist, is subject to a certain fee (according to predetermined formulas) or, in certain circumstances, to the receipt of alternative knowhow or knowledge sharing in the context of joint and new R&D activity.

 

Moreover, the receipt of grants from the Office of the Chief Scientist is subject to filing a report to the Office of the Chief Scientist in the event of specific changes in the ownership structure in the grant recipient. According to the R&D Law, a company, its controlling shareholders or a foreign interested party therein must notify the Office of the Chief Scientist in any event of change in control in the company or change in the composition of ownership which renders a non-Israeli resident into a direct interested party in the company. Moreover, the foreign interested party must confirm its compliance with the R&D Law and its regulations in writing to the Office of the Chief Scientist.

 

a-105
 

 

The restrictions described above continue to apply to the relevant companies even after the repayment of full royalties in respect of grants received.

 

·In September 2008, InterCure filed an application to the Office of the Chief Scientist for allowing the foreign manufacture of the RESPeRATE Ultra at a rate that exceeds 10% but is lower than 50%. On August 6, 2009, the Office of the Chief Scientist notified InterCure that its application was rejected. On September 17, 2009, InterCure applied to the Office of the Chief Scientist for re-deliberating the request. To date, no re-hearing was scheduled and InterCure has no intention of pursuing its appeal. It should be noted that InterCure has obtained a legal opinion which supports its argument that the manufacture of the RESPeRATE Ultra in China is not in violation with the R&D Law.

 

As of the date of this report, InterCure is in compliance with all the terms of the letter of approval and estimates that it will be able to continue to comply with them in the future.

 

9.13Intangible assets

 

9.13.1General

 

InterCure has knowhow relating to the development of products in the medical devices segment which consists, among others, of information, data, reports, intellectual property, sketches, technical specs, software programs, algorithms, list of potential distributors and plans. InterCure takes all the necessary steps and invests considerable resources in order to protect its business and any other knowhow relating to its products and business by registering patents in various countries around the world. In addition, InterCure enters into confidentiality agreements with third parties that are exposed to its information, in whole or in part, including its employees and suppliers and various subcontractors or makes sure that the engagement agreements have a confidentiality clause.

 

a-106
 

 

9.13.2The following table summarizes information and data about InterCure's patents

 

#   Patent name   Patent description   Patent number   Patent rights
(ownership)
  Expected
date of
patent
expiration
  Priority
date
  Date of
application
filing 111
  Countries of
approval
  Countries
where the
application was
filed
1   Apparatus and method for manipulating biological rhythmic patterns   Apparatus that produces music-like sound patterns of biorhythmic activity which interactively monitors the biorhythmic activity of the body of a user.   US 5076281   InterCure   31/12/2008   31.5.88   31.5.88   Israel, U.S.   Israel, U.S., Hong Kong
                                     
2   Stress detecting apparatus and method for monitoring respiration   A respiratory sensor in the shape of a belt that mainly responds to forces applied thereon.   US 5423328   InterCure   19/01/2014   20.1.93   19.1.94   Israel, U.S., Japan   Israel, U.S., Japan
                                     
3   Systems and methods for beneficial modification of biorhythmic activity   Modifying biorhythmic activity by creating signals that guide the users to modify certain non-biorhythmic activity parameters that are specific to breathing monitored by a respiration sensor placed on a belt.   US 5800337   InterCure   22/01/2016   22.1.96   21.1.96   U.S.   U.S.
                                     
4   Modification of biorhythmic activity   Modifying biorhythmic activity by creating signals that guide the users to modify certain non-biorhythmic activity parameters.   US 6090037   InterCure   21/01/2017   21.1.96   21.1.97   Israel, U.S., Canada, Austria, Belgium, France, Germany, Switzerland, Italy, Sweden, Spain, Denmark, the Netherlands, the UK and Japan   Israel, U.S., Canada, Austria, Belgium, France, Germany, Switzerland, Italy, Sweden, Spain, Denmark, the Netherlands, the UK and Japan
                                     
5   Interventive- diagnostic device   Therapeutic apparatus for improving health using several configurations and applications, including biorhythmic activity sensor and another sensor for measuring progress.   PCT/IL00/00400   InterCure   2019   6.7.99  

Israel: 6/7/1999.

US:

6.7.00

  Israel, U.S., Europe 112, Hong Kong   Israel, U.S.

  

 

111Relating to the next stage after the initial filing which is either international or in a specific country.
112The application was removed due to cost considerations.
a-107
 

 

#   Patent name   Patent description   Patent number   Patent rights
(ownership)
  Expected date
of patent
expiration
  Priority
date
  Date of
application
filing 111
  Countries of
approval
  Countries
where the
application
was filed
6   Interventive- diagnostic device   Therapeutic apparatus for improving health using several configurations and applications, including a respiration sensor adapted to respond to mechanical effort 113.   US 7717858   InterCure   15/12/2024   6.7.99  

15/10/2003

6.7.00

  U.S.   U.S.
7   Interventive- diagnostic device   Therapeutic apparatus for improving health using several configurations and applications, including a music-like sound pattern based on biorhythmic models.   US 8183453   InterCure   06/07/2020   6.7.99  

21/4/2009

6.7.00

  U.S.   U.S.
8   Interventive- diagnostic device (4)   Therapeutic apparatus for improving health using several configurations and applications, including remote-controlled modification of biorhythmic activity in response to measurable physiological activity.       InterCure   06/07/2020   6.7.99  

15/5/2012

6.7.00

  US   US
9   Generalized metronome for modification of biorhythmic activity   Apparatus and system for modification of biorhythmic activity patterns in a non-monitored manner.  

PCT/IL03/00649

(10/524,056)

  InterCure   06/08/2023   9.8.02   6.8.03   Israel, U.S., Europe, Japan 112, South Korea 112, India, China, Hong Kong, Canada   India, China, Hong Kong
10   Apparatus and method for beneficial modification of biorhythmic activity   Therapeutic apparatus for improving health using several configurations and applications, including a sensor that measures activity and a sensor that measures progress.   PCT/IL03/01053   InterCure   2022   13.12.02  

US:

13/12/2002

ROW:

10.12.03

  Israel, U.S., Europe 112, Canada, China, Japan, India, New Zealand, Singapore, Australia, South Korea 112    
11   Apparatus and method for breathing pattern determination using a microphone   Apparatus and method for monitoring breathing using a standard microphone.  

PCT/IL05/000778

US 7850619

  InterCure

21/07/2025

07/07/2027

  23.7.04   21.7.05   Israel 112, U.S., Europe 112, India 112, Canada 112, China 112, Singapore, Japan 112, Australia 112, South Korea 112   Singapore, U.S.
                               
12   Apparatus and method for breathing pattern determination using a non-contact microphone   Apparatus and method for filtering a signal.  

US11/958083 allowed 12/3/2013

  InterCure

27/12/2028

  23.7.04  

17.12.07

21/7/2005

  US   U.S.

  

 

113Describes the sensor used in InterCure's principal product.

 

a-108
 

 

InterCure has a variety of patents registered in various countries and several pending patent applications filed in a variety of countries, as detailed above.

 

Patent related costs (including registration and management) in 2012 totaled US$ 18 thousand compared to US$ 45 thousand in 2011 and US$ 76 thousand in 2010.

 

InterCure's first patent, the device and method for effecting rhythmic body activity ("the first patent"), expired on May 30, 2009 in the U.S. and on May 31, 2008 in Israel. InterCure's other patents are in effect until 2013 or later, based on the later of the priority date or the international application filing date.

 

The firs patent protects, among others, the technology and apparatus that include a biorhythmic activity sensor that processes the biorhythmic activity and transfers signals to the CPU, which transfers breathing pattern parameters and sound pattern synthesizer for producing music-like sound pattern signals having a rhythm which is non-identical to the rhythm of the biorhythmic activity.

 

The apparatus is based on the first patent's technology and on the patent protected modification of biorhythmic activity technology ("the second patent"). The second patent protects, among others, a system for modifying the natural biorhythmic activity by changing at least one feature of the biorhythmic activity other than frequency. InterCure's accumulated experience demonstrates that using the second patent's protected principles (modification of breathing pattern) is essential to the clinical activity observed in treating hypertension and heart diseases. This need has been recognized as early as the inception of InterCure's activity and in fact, all the clinically tested devices are based on the second patent's principles.

 

InterCure estimates that the expiration of the first patent did not and/or will not materially impair the device's IP protection given that the device will continue to be protected by patents Nos. 3 and 4 in effect until 2017 and by patent No. 10 in effect until 2023. More protection is provided by patent No. 6 which accurately describes the product's sensor, and by patent No. 7 which describes the sound patterns that guide the breathing patterns, in effect until 2020.

 

Moreover, on November 7, 2011, InterCure entered into a license agreement with Yazmonit Ltd. (a company controlled by Dr. Benjamin Gavish, director and interested party at the time) ("Yazmonit") whereby InterCure granted Yazmonit an indefinite license to exclusively use the patent and technology rights relating to an unutilized portion of InterCure's IP and the right to use the RESPeRATE trademark owned by it for a total consideration US$ 25,000. See details of the license agreement in the Company's directors' report for 2012.

 

a-109
 

 

9.13.3Trademarks

 

InterCure and InterCure Inc. have the following registered trademarks:

 

Registered trademark
details
  International 
classification 114
  Country
RESPeRATE   10   Israel
InterCure   10   U.S.
RESPeRATE   10, 42   U.S.
InterCure   10, 42   EU
RESPeRATE   10   EU
RESPeRATE   10   South Korea
RESPeRATE   10   China
RESPeRATE   10   Japan

 

InterCure renews said trademarks on an ongoing basis in return for immaterial amounts.

 

As stated above, InterCure is acting to advertise the RESPeRATE brand name. This brand name as well as InterCure's name is critical to its sales and activities given the connection between the brand name and the device sold by it.

 

9.13.4URL addresses

 

InterCure has different registered URL addresses, including www.resperate.com, and a variety of domain suffixes, including of the main countries in which it operates. The expenses incurred in registering URL addresses are immaterial. InterCure renews them on an ongoing basis.

 

9.14Human capital

 

9.14.1Organizational structure

 

Below is a chart describing InterCure's organizational structure (with its subsidiaries, sub-subsidiaries in the Group) as of the report date:

 

a-110
 

 

 

a-111
 

 

9.14.2InterCure's employee headcount

 

As of the date of this report, InterCure (and its subsidiaries) has 10 employees and service providers as follows:

 

    As of the date of this report    As of December 31, 2012
Department   Employees   Service
providers
  Employees   Service
providers
Marketing, sales, marketing operations and business development   2   4   5   1
Management, finances and administration   2   4   1   3
R&D, production and logistics (including Chief Scientist and regulation)   0   1 (part time)   1 (part time)   2
Total   4   9   7   6

 

See details of material changes in InterCure's employee headcount in paragraph 19.4.7 below.

 

InterCure's medical director heads the clinical research and regulation department and is in charge of scientific developments, scientific publications, supervision, regulatory and clinical issues and IP.

 

In his capacity, InterCure's CEO supervises the operations of Gibuv, a supplier which provides InterCure online marketing services and is a leading factor in the product's online selling process and responsible for the supervision of InterCure's creative and tele-sale systems, . the operating and logistic activities in the U.S. and the UK.

 

The development officer is in charge of InterCure's development and production department which handles all the product areas, including upgrading existing products and developing new products. The management of acquisitions and production is outsourced. This department is also responsible for QA which is being conducted by InterCure's QA and regulatory manager (external advisor). Starting from 2012, the development officer grants services to InterCure as a subcontractor.

 

InterCure is not dependent of any of its employees and officers.

 

The officer in InterCure in charge of handling and managing InterCure's IP and intangible assets is Prof. Reuven Zimlichman, a medical professor with a PhD from the Hebrew University of Jerusalem with honors. He serves as Head of the Hypertension Institute at the Wolfson Medical Center, Director of the Cardiovascular Research Institute at the Tel-Aviv University Faculty of Medicine, Assistant Dean of the faculty and Head of the School of Continuing Education.

 

a-112
 

 

9.14.3Scientific Advisory Board

 

Some of the world's leading physicians and scientists (from Israel as well), specializing in hypertension, serve as members of InterCure's Scientific Advisory Board ("the Advisory Board"). The Advisory Board mainly advises InterCure on issues of medical development and marketing, including managing the medical community's product labeling requirements, planning pre-clinical and clinical trials and publishing their results. The status of the members of the Advisory Board is that of advisors whose recommendations are not binding to InterCure. In the ten years of the Advisory Board's operation, InterCure has granted all six members a collective number of 130,000 options which have since expired and paid them an overall advisory fee of a little under US$ 100,000. In 2012, 2011 and 2010 and through the date of this report, the members of the Advisory Board have not received remuneration.

 

The Advisory Board is comprised as follows:

 

Name of
member
  Education   Professional experience   Type of
remuneration
for the services
Prof. Henry Black, M.D.   Professor of Internal Medicine, New York University School of Medicine in New York City.   Former President of the American Society of Hypertension, former Dean of Research at the Rush Medical College in Chicago and Chairperson of the Department of Preventive Medicine at Rush University.   Payment by hourly rate according to the scope of consulting provided based on InterCure's needs in coordination with management.
             
Jay N. Cohn, M.D.   Professor of Medicine, Cardiovascular Division, Department of Medicine at the University of Minnesota Medical School in Minneapolis.   Former President of the American Society of Hypertension and the International Society of Hypertension, founder of the Heart Failure Society of America, former President of the Israeli Society of Hypertension, Head of Internal Medicine Department in the Chaim Sheba Medical Center, Tel-Hashomer.    
             
Joseph L. Izzo, M.D.   Professor of Medicine, Pharmacology and Toxicology at the University at Buffalo, New York.   Former Treasurer of the American Society of Hypertension.    
             
Giuseppe Mancia, M.D.   Chairman of the Department of Clinical Medicine, Prevention and Applied Biotechnologies, University of Milan-Bicocca, Italy.   Past president of the European Society of Hypertension.    

 

a-113
 

 

9.14.4InterCure's investment in training programs

 

InterCure invests resources in training its employees for their various positions, as needed and based on available economic resources.

 

9.14.5Option plans for employees and directors

 

InterCure has option plans for employees and non-employees.

 

·On July 25, 2012, 1,484,551 options were allocated to the then CEO of the consolidated Company (InterCure) which are exercisable into 1,484,551 Ordinary shares of InterCure with no par value for an exercise price of NIS 0.54 per warrant based on the share price of InterCure as determined in the debt settlement of InterCure. The fair value of all the options according to the Black-Scholes model pursuant to IFRS 2 as at the date of grant was approximately $ 132 thousand. Following the conclusion of the term of InterCure's CEO on January 25, 2013, 1,237,126 warrants were forfeited and 247,425 warrants became exercisable for a period of 90 days from the date of conclusion of term until April 24, 2013. If these warrants are not exercised until said date, they will expire. In addition, 1,000,000 stock options were allocated to InterCure's Deputy CEO and CFO which are exercisable into 1,000,000 Ordinary shares of InterCure with no par value for an exercise price of NIS 0.54 per option, based on InterCure's share price as determined in the debt settlement of InterCure. The fair value of all the stock options according to the Black-Scholes model pursuant to IFRS 2 as at the date of grant was approximately $ 88 thousand. The exercise period of the stock options granted to the then CEO, and to the Deputy CEO and CFO is a maximum of ten years from the date of allocation. The options vest in 12 equal quarterly portions over a period of three years from the grant date.

 

·On September 3, 2012, in an extraordinary meeting of InterCure's shareholders, 75,000 options were allocated to each of four directors in InterCure which are exercisable into 300,000 Ordinary shares of InterCure with no par value for an exercise price of NIS 0.54 per stock option. The fair value of all the stock options according to the Black-Scholes model pursuant to IFRS 2 as at the date of the approval of InterCure's extraordinary meeting was approximately $ 26 thousand. The exercise period of the options is a maximum of ten years from the allocation date. The warrants vest in 12 equal quarterly portions over a period of three years from the grant date.

 

a-114
 

 

9.14.6Employment agreements

 

InterCure enters into personal labor contracts with its employees. These contracts may be terminated early by either party by providing a 30-day advance notice, except for certain employees (including executives) for whom the advance notice period is longer. These employment contracts prescribe the employees' employment terms, social benefits and other applicable rights (such as annual vacation, sick leave, vehicle or travel expenses, participation in mobile phone maintenance), contributions to executive insurance policies and to an advanced study fund. The employment agreements also include an undertaking to maintain confidentiality, protect intellectual property and a non-competition clause.

 

As a rule, InterCure has a policy of improving the employment terms of its employees over their period of employment, subject to performance. Improved terms may be expressed by adding or upgrading terms such as advanced study fund, options, non-recurring bonuses, salary increases and added vacation days.

 

InterCure Inc. has employees under employment agreements (in the format of engagement letters). These agreements can be terminated early by either party by providing an advance notice of 14 days, except for certain employees (including executives) for whom the advance notice period is longer. These employment agreements prescribe the employees' employment terms and social benefits (annual vacation, medical insurance, dental insurance, reimbursement of expenses) and the employees' undertaking to maintain confidentiality, protect intellectual property and adhere to a non-competition clause. As of the date of the report, InterCure UK has no employees.

 

9.14.7Material changes in the employee headcount in 2012

 

In 2012, in order to reduce costs, InterCure continued its efforts to minimize the number of permanent employees, including the termination of the employment of InterCure's VP and InterCure's director of operations in the UK and hiring the director of operations as a subcontractor.

 

Following the debt refinancing, there were changes in InterCure's management personnel, including the CEO, the CFO, the Head Scientist and the Board members (apart from one external director) as follows:

 

a-115
 

 

·On July 23, 2012, following the debt refinancing, Mr. Daniel Plotkin, Dr. Benjamin Gavish, Dr. Arie Ovadia and Mr. Erez Gavish all terminated their service as directors in InterCure and Mr. Amit Yonay, Mr. David Grossman, Mr. Moshe Misgav and Mr. Yoav Waizer were appointed as directors on InterCure's Board.

 

·On July 25, 2012, Mr. Amit Yonay was appointed as Chairman of InterCure's Board.

 

·On July 25, 2012, Mr. Ronen Twito was appointed as InterCure's Deputy CEO.

 

·On July 25, 2012, CPA Shlomo Nimrodi concluded his service as InterCure's internal auditor. On the same date, CPA Daniel Shapira was appointed as InterCure's internal auditor.

 

·On September 3, 2012, Mr. Ronen Twito was appointed as InterCure's CFO.

 

·On September 3, 2012, Mr. Guy Amodi concluded his service as external director and Mrs. Yaniva Pepel Weitz was appointed as InterCure's external director.

 

·On November 28, 2012, Mr. Erez Gavish concluded his service as InterCure's CEO.

 

·On November 28, 2012, Mr. Ronen Twito was appointed as InterCure's temporary CEO and terminated his service as Deputy CEO.

 

·On December 12, 2012, Mr. Omri Batzir was appointed as comptroller and officer in charge of financial affairs in InterCure and Mr. Ronen Twito terminated his service as InterCure's CFO.

 

9.15Raw materials and suppliers

 

9.15.1Subcontractors

 

As of the date of the report and since 2003, InterCure has been manufacturing the device (and its different versions) on a turnkey basis by an independent subcontractor which is unrelated to InterCure's interested parties ("the subcontractor"). InterCure orders some of the device's raw materials for the subcontractor from time to time, mainly the more expensive ones, or negotiates with suppliers of raw materials due to profit considerations and offsets the price paid by it to the subcontractor.

 

In the event that a certain supplier or suppliers need to be replaced for whatever reason, InterCure will be required to train the new supplier and provide it with the knowhow underlying the manufacturing process and the new supplier will be required to purchase the raw materials for the manufacturing process. InterCure assesses that a process of training a new supplier will take several months, in which case InterCure will be prepared in terms of inventory for the relevant period.

 

In 2012, 2011 and 2010, InterCure's expenses in respect of the subcontractor accounted for about 61%, 72% and 67% of total cost of sales, respectively.

 

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9.15.2The main raw materials used in the area of activity

 

InterCure's products include both purchased components ("shelf components") such as solid-state electronic components and tailored components developed according to customized specs such as injection of plastic part, machining etc. Most tailored components are manufactured in China whereas the shelf components are made in the U.S., Europe and the Far East and purchased by InterCure's main subcontractors.

 

Most components can be purchased and supplied within eight weeks at the most but the purchase and supply of a small number of components may take up to 22 weeks. InterCure prepares for the purchase of the components with a prolonged purchase process in advance by providing appropriate manufacturing forecasts to the relevant subcontractors, maintaining a minimum inventory of the various components and/or signing annual agreements with the component suppliers. As of the date of this report, there are two shelf components, the sound and CPU, which do not have an immediately available alternative manufacturer. If these components become unavailable, it will take several months and an immaterial expense to modify plans and locate similar components.

 

9.16Working capital

 

9.16.1Policy of holding inventories of raw materials

 

InterCure generally does not hold inventories of raw materials. The purchase of raw materials is done by the subcontractor (see paragraph 9.15.1 above), except in case a component is upgraded or technologically modified.

 

As a result of InterCure's credit policy described in paragraph 9.16.5 below, InterCure's balance of trade receivables decreased in relation to the scope of sales (24 days in 2012, 35 days in 2011 and 56 days in 2010 - the average customer credit days decreased in 2010-2012 due to the increase in the scope of sales to the direct distribution channels). The Company provides credit to suppliers of 30-60 credit days. The actual average credit days in 2012-2010 are as follows:

 

    2012   2011   2010
Average suppliers' credit days   99   85   88

 

9.16.2Policy of holding inventories of finished products

 

The majority of InterCure's inventory of finished products is held at the warehouses of its logistic subcontractors in the U.S., the UK and Canada. The number of finished products is derived from the anticipated cope of sales in the U.S., UK and Canadian markets. InterCure also holds a small inventory in Israel and New York.

 

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9.16.3Merchandise return policy

 

InterCure has a product return policy based on a full refund less handling and shipping costs if the product is returned within 30 days 115 from receipt by the customer. The returned devices go through a refurbishing process (such as replacing the package, batteries etc.) and resold as refurbished products (by providing proper disclosure to the customer and in conformity with the relevant country's applicable laws) or provided to the customer as an alternative product to replace a defective product in the warranty period based on the warranty terms. InterCure regularly examines the scope and rate of device returns, including according to countries and marketing channels (and including direct sales as opposed to sales by distributors).

 

9.16.4Policy of providing product warranty

 

InterCure provides its customers full warranty for its products for a period of twelve (12) months, except in countries of the EU where the warranty period is 24 months. If a warranty certificate has been purchased/received, the warranty period will be three years. The difference between the warranty periods arises from legal requirements in the EU. According to InterCure's policy, a defective product returned during the product return period (30-60 days as above) is replaced with a new identical product whereas a product returned after a longer period within the warranty period is replaced by a refurbished product. In 2012, the percentage of malfunctioning devices returned to InterCure was less than 0.5%. In this context it should be noted that InterCure sells separate warranty periods (of up to three years from the date of purchase), see details in paragraph 3.2.1.8 above.

 

9.16.5Credit policy

 

InterCure's credit policy addresses its two types of product consumers: private consumers who purchase the products directly from InterCure and consumers who purchase the products from local resellers. Most private consumers use a credit card as the means of payment. The credit card is automatically inspected by InterCure's IT systems and once it is cleared by the credit card company, the customer's order is admitted and a shipment order is delivered to the logistics company. As of the date of the report, the payment clearance is usually done within 2-5 days in the U.S. and two weeks in the UK. InterCure allows private consumers in the U.S. to use eChecks where the payment is immediately withdrawn from the consumer's bank account through PayPal. In addition, InterCure allows its customers to purchase the device in up to ten installments or using standard standing orders. In such case, product shipment is carried out after the check is cleared by the bank. The credit policy for resellers is separately determined with each reseller at 0-75 credit days.

 

9.17Investments

 

Through the report date, InterCure has invested a total of approximately US$ 583 thousand in various IT systems and showcases and in their installation. In 2012, IntreCure invested a total of US$ 153 thousand in software that is used for analytics and for preparing executive reports for analysis.

 

 

115In certain cases, the product can be refunded within 60 days from purchase.

 

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9.18Financing

 

9.18.1Capital raising

 

On July 26, 2007, InterCure completed its IPO on the TASE in which it offered to the public 3,000,000 registered Ordinary shares of NIS 0.01 par value each, NIS 41,000,000 par value of debentures (series A) convertible into InterCure shares and 1,500,000 registered stock options (series 1) that are exercisable into IntreCure shares.

 

In 2011, approximately NIS 272,834 par value of debentures (series A) were converted into Ordinary shares of InterCure of NIS 0.01 par value each.

 

In 2011, no stock options (series 1) were exercised.

 

On July 12, 2011, 1,606,656 stock options (series 1) expired.

 

As for InterCure's debt refinancing, which in its framework, the debentures were delisted (series A). See paragraph 2.1(n) above.

 

9.18.2The corporation's assessment of the need to raise additional resources

 

As of the date of this report, InterCure has a cash balance of approximately US$ 650 thousand and financial assets with a fair value of approximately US$ 2,300 thousand. Moreover, InterCure is considering obtaining additional financial resources to allow it faster and more growth.

 

InterCure's intentions with respect to raising capital and financial resources represent forward-looking information, as defined in the Israeli Securities Law. The timetables and completion of these steps, if at all, may be materially different from those anticipated above as a result of various factors which are not under InterCure's control and as a result of the realization of any of the risk factors described herein.

 

9.18.3Charges

 

As of the date of this report, InterCure has no charges. It should be noted that a cash balance of approximately US$ 200 thousand is held to secure documentary credit extended to a supplier of products of InterCure.

 

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9.19Taxation

 

9.19.1Income Tax (Inflationary Adjustments) Law, 1985

 

According to the law, until the end of 2007, the results for tax purposes in Israel were adjusted for the changes in the Israeli CPI. In February 2008, the "Knesset" (Israeli parliament) passed an amendment to the Income Tax (Inflationary Adjustments) Law, 1985, which limits the scope of the law starting 2008 and thereafter. Since 2008, the results for tax purposes are measured in nominal values, excluding certain adjustments for changes in the Israeli CPI carried out in the period up to December 31, 2007. Adjustments relating to capital gains such as for sale of property (betterment) and securities continue to apply until disposal. Since 2008, the amendment to the law includes, among others, the cancellation of the inflationary additions and deductions and the additional deduction for depreciation (in respect of depreciable assets purchased after the 2007 tax year).

 

InterCure Inc. is taxed according to the tax laws in the U.S. and InterCure UK is taxed according to the tax laws in the U.K.

 

9.19.2Tax rates applicable to InterCure and its subsidiaries (the Group's sub-subsidiaries)

 

·InterCure

 

The Israeli corporate tax rate was 26% in 2009, 25% in 2010, 24% in 2011 and 255 in 2012.

 

A company is taxable on its real (non-inflationary) capital gains at the corporate tax rate in the year of sale. A temporary provision for 2006-2009 stipulates that the sale of an asset other than a quoted security (excluding goodwill that was not acquired) that had been purchased prior to January 1, 2003, and sold by December 31, 2009, is subject to corporate tax as follows: the part of the real capital gain that is linearly attributed to the period prior to December 31, 2002 is subject to the corporate tax rate in the year of sale as set forth in the Israeli Income Tax Ordinance, and the part of the real capital gain that is linearly attributed to the period from January 1, 2003 through the date of sale is subject to tax at a rate of 25%.

 

On December 5, 2011, the "Knesset" (Israeli parliament) passed the Law for Tax Burden Reform (Legislative Amendments), 2011 ("the Law") which, among others, cancels effective from 2012, the scheduled reduction in the corporate tax rate. The Law also increases the corporate tax rate to 25% in 2012. In view of this increase in the corporate tax rate to 25% in 2012, the real capital gains tax rate and the real betterment tax rate were also increased accordingly.

 

·InterCure Inc.

 

The tax rates applicable to InterCure Inc. whose place of incorporation, as stated, is the U.S. are Corporate tax (progressive) at the rate of up to 35% plus State tax and Local tax at rates that depend on the state and city where InterCure Inc. conducts its business. In New York State, where InterCure offices are located, the State tax is at the rate of 7.5%.

 

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·InterCure UK

 

The tax rates applicable to InterCure UK whose place of incorporation is the U.K. are corporate tax (progressive) at the rate of up to 28%. As of the reporting date, InterCure UK has not yet commenced operations.

 

·Carryforward losses

 

InterCure has carryforward business losses and capital losses which total approximately US$ 14 as of December 31, 2012.

 

InterCure's subsidiary (the Group's sub-subsidiary) has carryforward business losses and capital losses which total approximately US$ 24 as of December 31, 2012. It should be noted that following the composition of creditors agreed upon in July 2012 in which the control over InterCure was changed, the utilization of said losses is limited and they are expected to be significantly reduced according to internal U.S. laws.

 

Deferred tax assets relating to carryforward business losses were not recognized because their utilization in the foreseeable future is not probable.

 

·Tax assessments

 

InterCure has received final tax assessments through the 2007 tax year. The subsidiaries (Group's sub-subsidiaries) have not received tax assessments since their incorporation (excluding immaterial registration taxes in the State of Delaware, U.S.).

 

·Approved enterprise

 

In August 1999, InterCure received an "approved enterprise" status pursuant to the Law for the Encouragement of Capital Investments, 1959 ("the Law") under the alternative track. On July 19, 2005, the final performance approval relating to this letter of approval was received. Total approved investments added up to NIS 865,200. The year of operation as determined in the final performance approval is 2001.

 

According to the Law, InterCure is entitled to various tax benefits by virtue of the "approved enterprise" status granted to part of its production facilities under the alternative track. These tax benefits comprise tax exemption for a period of two years and tax at reduced rate for further five years from the beginning of the benefit period for that part of taxable income earned from approved enterprise that was recognized by the Investment Center. InterCure is eligible for deduction of accelerated depreciation on fixed assets used by the approved enterprise. As of the reporting date, the benefit period has not yet begun.

 

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The above benefits are conditional upon the fulfillment of the conditions stipulated by the Law, regulations published thereunder and the letter of approval according to which the investment in the approved enterprise was made, among others, InterCure is required to report to the Investment Center on any change in its condition, in carrying out the plan or making the investments that may have a significant effect on accomplishing the plan. Receiving the benefits is conditional upon the proper management of appropriate accounting records; change in the composition of right holders, including as a result of a public offering in a cumulative rate of over 49% and a private placement in any rate whatsoever, between the period of carrying out the plan and the end of the benefit period is subject to the approval of the Investment Center (a company that issues shares and/or convertible debentures on a stock exchange representing up to 49% of ownership of the Company is relieved from receiving an advance approval and is required to report to the Investment Center within 60 days from the issue date). Non-compliance with the conditions may cancel all or part of the benefits and refund of the amount of the benefits including interest. As of the reporting date, InterCure is meeting all the conditions in the letter of approval and it believes that it will continue to satisfy them in the future too. On January 6, 2005, InterCure received a letter of approval for an expansion plan under the alternative track. The performance date was scheduled for January 6, 2007. Total approved investments under this plan added up to NIS 362,000.

 

As of the date of the end of the plan, InterCure has practically made all the approved investment.

 

On July 8, 2009, the final performance approval relating to this letter of approval was received. Total approved investments added up to NIS 255,693. The year of operation as determined in the final performance approval is 2005.

 

The above benefits are conditional upon the fulfillment of the conditions stipulated by the Law, as abovementioned. Further, an additional condition for receiving the benefits under the approval from July 8, 2009 is implementing the marketing plan as described in InterCure's letter from 2005 and maintaining the scope of sales and their ratios as set forth in the above letter.

 

In August 2005, InterCure filed a request with the Investment Center to receive the status of an enterprise that specializes in high-tech sales. On July 31, 2006 (update No. 1 to the letter of approval from January 6, 2005 which was received on August 3, 2006), the Investment Center approved the request and InterCure was recognized as an enterprise with high-tech sales characteristic. For computing the base turnover according to erosion of base turnover procedure, InterCure may deduct in any of the tax benefit years the base turnover by 10% provided that the conditions of the procedure are fulfilled. The detailed approval is relevant for approved plans that were implemented through 2004.

 

On January 28, 2006, InterCure filed a request to be regarded as a beneficiary enterprise (approved) according to Amendment No. 60 to the Law. In 2011, InterCure no longer handles the request.

 

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9.20Restrictions and oversight applicable to the corporation's activities

 

9.20.1Compliance with laws and regulations

 

To the best of InterCure's knowledge, it is in compliance with the material legal requirements and regulations applicable to it in its various countries of operation, as specified below. InterCure's activity is subject to compliance with the laws of the State of Israel by virtue of its incorporation in Israel and the offering of its securities to the Israeli public as well as to compliance with the authorities' standards and regulations applicable to the products that it markets in the U.S., Europe, Canada and other markets of operation. The requirements underlying the approval for the sale of InterCure's products and the duration of the inspections performed by the authorities and the costs thereof vary from country to country. The absence of a license to market InterCure's products or services in a specific country and the subsequent inability to sell these products or services will adversely affect InetrCure's revenues.

 

In addition, InterCure's publications are supervised by statutory entities that are governed by the relevant truth in advertising laws (such as the U.S. Federal Trade Commission, "FTC") and non-statutory non-profit consumer protection organizations whose rules are not legally binding but may have a significant effect on InterCure's advertising activity. InterCure maintains constant contact with these non-statutory non-profit organizations in the U.S. and the UK in order to ascertain that it complies with their local standards.

 

In 2003, the European Parliament passed a directive proscribing the use of lead and other hazardous substances. This regulation, known as the restriction of the use of certain hazardous substances in electrical and electronic equipment, "RoHS"), became a binding standard in the countries of the EU effective from early 2008. This directive applies to the majority of electrical and electronic products, apart from those used in military/space, medical, server and automobile applications. In addition, InterCure complies with the European WEEE in the UK - Directive EC/2002/96 - which aims to prevent the accumulation of waste electrical and electronic equipment and increase the recovery and recycling potential of this type of waste. The Directive also prescribes provisions for reusing, recycling or partially using products at the end of their lifecycle.

 

InterCure has all the regulatory approvals needed for marketing its products in the U.S., Europe, Canada and other countries as specified above.

 

9.20.2The U.S. market - the FDA, FTC and other organizations

 

To the best of InterCure's knowledge, based on commonly available publications, the FDA, which is a federal organization forming part of the U.S. Department of Health and Human Services, is entrusted with protecting the health of the U.S. public by enacting and enforcing high product standards through various regulatory requirements and the provisions of the Federal Food, Drug and Cosmetic Act ("the FDC Act"). The provisions of the FDC Act are designed to secure the safety and efficacy of such products as drugs for consumption by humans and for veterinarian purposes, biological products and medical devices. Foreign companies which manufacture medical devices for export to the U.S. are required to meet the FDA's regulatory requirements as well as other potential regulatory requirements in various U.S. states before exporting their medical devices and even afterwards, since the FDA does not recognize regulatory approvals granted by foreign institutions.

 

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Among others, FDA requirements consist of manufacturing medical devices in conformity with QA regulations, obtaining scientific reports of medical devices, appointing a U.S. agent and allowing FDA representatives to supervise the manufacturing process at the plant.

 

In the U.S., the FDA classifies medical devices into three classes based on their level of risk or indication. The method of supervision varies for each class to assure the safety and effectiveness of products. The first class imposes very few requirements on the manufacturer or importer for obtaining FDA approval whereas the third class imposes numerous requirements. The first and second classes require filing a 510K application, unless the product is exempt. The third class requires filing a Premarketing Approval ("PMA") application. A 510K application consists of proof that the device in question is substantially equivalent in terms of safety and effectiveness to a device already marketed in the U.S. A PMA application is required for devices of the third class which are life supporting or have a critical role in preventing injury, devices which substantially bear a higher risk or are unlike any other previously cleared device. The PMA process is significantly longer and costlier than the 510K process, but it provides the original applicant several years of "exclusiveness". In addition, in certain cases, the FDA allows devices with a relatively low risk that have applied for a new indication under the PMA track to apply for a 510K approval consisting of clinical trials for proving the ne indication. This process, as undergone by InterCure, actually represents an interim class between the standard 510K process and the PMA process. In this case, it is not enough for an applicant to prove that its product is substantially equivalent to InterCure's product to obtain marketing approval but also has to prove the effectiveness and safety of the new product based on the sought indication through clinical trials.

 

In May 2000, after having completed the first three clinical trials conducted in Israel, InterCure obtained its first FDA approval for marketing the RESPeRATE with a specific indication for lowering blood pressure accompanied by medicinal/non-medicinal therapy under a doctor's prescription. In July 2002, InterCure obtained approval for marketing the device without a doctor's prescription after having completed another clinical trial conducted in several medical centers in the U.S. The device which is marketed in the U.S. obtained a 510K classification approval by the FDA after its safety and effectiveness in treating hypertension had been proven. This is the first device ever approved with an indication for treating hypertension and stress.

 

InterCure is committed to market this product only for the purposes for which it was approved and to act in compliance with the Medical Device Reporting Regulations which require it to report any incidents of death or severe injury resulting from the use of the product. Moreover, InterCure's production facilities are required to meet FDA regulations and are potentially subject to inspection by the FDA, as is InterCure's compliance with the Quality Systems Registrars ("QSR"). Among others, InterCure is required to operate in accordance with written procedures, manufacture its products according to the manufacturer's instructions, inspect the manufacturing process and investigate and document any malfunctions therein. InterCure is listed at the FDA as manufacturer and developer. Its main subcontractor is also listed at the FDA as a contractual manufacturer. InterCure's non-compliance with FDA requirements, including QSR requirements, will affect its ability to manufacture, supply and/or sell its products.

 

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Moreover, non-compliance with regulatory requirements regarding medical devices will lead to both civil and criminal sanctions initiated against InterCure, including issuing a public warning against its product, refusal to grant approval to marketing and selling new products or cancellation of existing marketing and selling licenses. For more details of InterCure's risk factors regarding FDA approval for its products, see paragraph 9.26 below.

 

The following table presents the data of FDA approvals obtained by InterCure:

 

Name of FDA
approved Medical
Device
  RESPI-LOW
Biofeedback Device
  RESPERATE MODEL RR-150
The indication   Relaxation treatment for the reduction of stress by leading the user through interactively guided and monitored breathing exercises. Adjunctive treatment for high blood pressure.   Relaxation treatment for the reduction of stress by leading the user through interactively guided and monitored breathing exercises. Adjunctive treatment for high blood pressure.
         
Approval Process   510(K) ; Class II   510(K) ; Class II
         
Approval Number   K000405   K020399
         
Effective Date of Approval   5/2000   7/2002

 

 

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9.20.3The European common market - CE Marking

 

The CE Mark is the EU's stamp of approval for products which represents the manufacturer's statement that the product meets the required criteria and technical specs of the relevant authorities such as health, safety and environmental protection. The CE Marking guarantees free trade between EU countries and EFTA countries (Iceland, Lichtenstein and Norway) and allows the law enforcement and customs authorities in European countries to proscribe the marketing of similar products without a CE Marking. Based on the Medical Devices Directive (93/42/EEC), effective from June 14, 1998, manufacturers of medical devices must comply with this directive. A "medical device" is defined as an apparatus or substance used to treat humans, including for diagnosis and therapy purposes. The control process and the receipt of a CE Marking require the product to meet certain technical specs and to comply with the manufacturer's quality management system. The notified bodies are in charge of granting the CE Marking and subject the companies to annual inspections.

 

In June 2007, InterCure received a letter from the Medicines and Healthcare products Regulatory Agency ("MHRA") stating that the latter has objections as to the classification of InterCure's device in the UK as class I (as recently defined) or class IIa 116. A class IIa medical device must be externally inspected by a notified body approved by the European authorities to assure compliance with standards and safety requirements as well as technical and clinical aspects of the device.

 

In December 2007, the device was reclassified as class IIa and received the CE Marking (number 0473), including a specific indication for treating hypertension, after having met the inspection of the notified body approved by the European authorities - Intertek Services Ltd. AMTAC Certification 1. The MHRA later approved that the new classification meets its requirements. This approval must be renewed annually. As explained below, InterCure is also subject to the inspection of the notified body Intertek 117, for approving the product marketed in Europe and to assure the continued validation of the ISO approvals as specified in paragraph 9.20.9 below.

 

The following table presents data of European approvals obtained by InterCure:

 

Name of FDA approved
Medical Device
  RESPeRATE and RESPeRATE ULTRA
The Indication   Relaxation treatment for the reduction of stress by leading the user through interactively guided and monitored breathing exercises. The device is indicated for use only as an adjunctive treatment for high blood pressure together with other pharmacological and/or nonpharmacological interventions. Over-the-counter.
     
Notified Body   Intertek 0473
     
Approval Process   Class IIa ; Annex V
     
Number of Approval   605 CE
     
Effective Date of Approval   15.11.2007
     
Date of the last audit conducted by the notified body and results  

13-14.3.2013

The audit was successfully completed with no comments

 

 

116According to the Medical Device Directive ("MDD") classification method, each active therapeutic device designed to transfer or exchange energy is defined as class IIa. An active therapeutic device is defined as any apparatus used (independently or together with another medical device) to support, alter, replace or rehabilitate biological activities or structures in order to treat or ameliorate a disease, injury or disability.
117A British company specializing in providing certification services pursuant to European and ISO standards.

 

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9.20.4The Canadian market - Health Canada and CSA

 

The device has received the approval of Health Canada, a department of the government of Canada with responsibility for national public health, similarly to the FDA in the U.S. and to the Israeli Department of Medical Devices. The device has been classified by Health Canada as class II. In addition to proof of product safety and effectiveness, this level also requires ISO 13485 approval regarding the company's QA system and a special approval for compliance with Canadian Medical Devices Conformity Assessment System ("CMDCAS"). InterCure is in compliance with these standards and the device has received the Canadian authorities' marketing approval in Canada in March 2004, which is renewed annually. The Ultra version of the device which is adapted to the Canadian market has received the Canadian authorities' marketing approval in Canada.

 

The following table presents data of Canadian approvals obtained by InterCure:

 

Name of FDA approved
Medical Device
  RESPeRATE, RESPeRATE DUO,
RESPeRATE ULTRA and RESPeRATE
ULTRA DUO
The Indication   Relaxation treatment for the reduction of stress by leading the user through interactively guided and monitored breathing exercises. The device is indicated for use only as an adjunctive treatment for high blood pressure together with other pharmacological and/or nonpharmacological interventions. Over-the-counter.  
     
Number of Approval   63948
     
Effective Date of Approval   11.3.2004 (last amended 18.8.2008)

 

9.20.5The Israeli market - Israeli Ministry of Health, Department of Medical Devices

 

InterCure's Israeli activities are subject to the approval of the Israeli Department of Medical Devices at the Ministry of Health ("the Department"). A medical device is defined as an apparatus, an instrument, a chemical substance, a biological or technological product used for medical treatment or required for the operation of a device or instrument used for therapy which is not principally designed to operate on the human body as a medication. The Department is the Government entity in charge of providing approvals for and overseeing the marketing of medical devices in Israel and for approving clinical trials in Israel. The RESPeRATE has the Department's marketing approval in Israel, first granted on May 6, 1997, renewed in 2008 and is in effect until January 31, 2013. In December 2012, InterCure began the product's renewal process and estimates, based on its regulatory counsel, that the renewal will be received in the coming months. The renewal of the approval is technical by nature and does not involve time or material expenses. See more details of the Department in paragraph 9.20.9 below.

 

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The following table presents data of Israeli approvals obtained by InterCure:

 

Name of FDA approved
Medical Device
  RESPeRATE
The Indication   Relaxation treatment for the reduction of stress by leading the user through interactively guided and monitored breathing exercises. Adjunctive treatment for high blood pressure.
     
AMR Number   2370000
     
Effective Date of Approval   28.1.2008
     
End of Approval   31.1.2013

 

9.20.6Other countries

 

InterCure markets its product under the same high standards even in countries where it is not subject to product regulations.

 

9.20.7Israeli legislation

 

·The Law for the Encouragement of Industrial Research and Development

 

The Law for the Encouragement of Industrial Research and Development prescribes a series of requirements applicable to petitioners of benefits for funding research and development such that recipients of benefits pursuant to the Law for the Encouragement of Industrial Research and Development are required to pay the Israeli Ministry of Finance royalties on any income deriving from the sale of the product developed in the context of the approved program or resulting therefrom, including product related or product inherent services. In addition, the Law for the Encouragement of Industrial Research and Development prescribes that any product developed as a result of the research funded by the Ministry of Industry Trade and Labor will only be manufactured in Israel, unless the Ministry of Industry Trade and Labor's Research Committee approves the transfer of the product's manufacturing rights outside of Israel. Such approval may be granted for a certain portion of the consideration in the transaction for transferring or selling the knowhow outside of Israel or for the receipt of knowhow from third parties or collaboration in research and development activities.

 

See details of the Chief Scientist approved programs received by InterCure and the various terms that must be met to comply with the underlying letters of approval in paragraph 9.12.2 above.

 

·Approved enterprise

 

In August 1999, InterCure received an approved enterprise status, as defined in the Law for Encouragement of Capital Investments, see paragraph 9.19.2 above.

 

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·Business license

 

In accordance with the provisions of the Business Licensing Law, 1968, InterCure is not required to obtain a business license.

 

·Quality and safety standards

 

InterCure is required to meet the following international quality standards for manufacturing medical devices: ISO 13485:2003 (CMDCAS in Canada) and SAFETY IEC 60601-1 or EMC IEC 60601-1-2 (QSR) and more. InterCure is listed at the FDA as a manufacturer of medical devices.

 

·Quality control

 

InterCure's products are developed, manufactured and assembled in conformity with controlled engineering documentation and their quality is assured by professionally trained and skilled employees and advisors. InterCure's subcontractors supply the complete products and/or assemblies/components manufactured by them for InterCure in strict adherence to the quality requirements based on the above mentioned quality standards. The chief subcontractor also meets international quality standards and is listed at the FDA as a manufacturer of medical devices. InterCure's products, including the sensors, are 100% quality assured.

 

9.21Material agreements

 

9.21.1Agreement with Gibuv Ltd., supplier of online sale services

 

On September 24, 2012, InterCure announced the signing of a three-year non-exclusive strategic service agreement with Gibuv Ltd. ("the service provider"), a private company wholly-owned by Messrs. Shay Ben-Yitzhak and Avner Yassur, for the provision of online selling and marketing services of InterCure's products ("the services").

 

According to the strategic agreement, which is territorially unlimited, the service provider will provide InterCure online sale services in return for a monthly fee of $ 40,000 plus VAT in return for the services ("the consideration") whereby in the first four months of the strategic agreement period, no consideration will be paid and will later be paid provided that revenues are derived from online sales in an amount of at least $ 50,000. In addition, InterCure will provide monthly online advertising budgets for the online sale activity performed by the service provider, which will not be less than $130,000, and all under the mechanism as described in the agreement.

 

In the context of the strategic agreement, the service provider will be allocated up to 20,185,184 unlisted stock options ("the stock options") that are exercisable into shares of InterCure for an exercise price (dividend adjusted) of NIS 0.54 per stock option which will vest according to the service provider's compliance with annual sales targets. In the context of the strategic agreement, the service provider's shareholders were given a call option to sell to InterCure the service provider's entire share capital for a period of 18 months from the effective date of the strategic agreement. On the date of signing the strategic agreement, InterCure was granted a put option to purchase the service provider's entire share capital for a period of one year from the effective date of the strategic agreement. The agreement's allocation items were approved by the general meeting of InterCure's shareholders on October 28, 2012. InterCure will be able to cancel the agreement if the service provider fails to meet the sales targets prescribed in the strategic agreement effective from March 2014 or in the event of material breach of the agreement, fraud, damage etc.

 

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9.21.2Manufacturing agreement with a subcontractor

 

As of the date of this report, the Chinese manufacturer of the device is the exclusive supplier of the Ultra versions. The Chinese manufacturer is a company registered in Hong Kong which holds manufacturing plants in Shenzhen, China. According to the turnkey manufacturing agreement, the entire manufacturing process is performed by the Chinese manufacturer, including the purchase of raw materials and components from suppliers, and the supply of a finished product to InterCure. The Chinese manufacturer is restricted to entering into engagements with suppliers approved by InterCure only and is in charge of supervising the quality of the raw materials and components supplied by it in accordance with InterCure's specifications. The Chinese manufacturer manufactures according to order forecasts delivered by InterCure from time to time and is committed to provide InterCure reasonable advance notice if any shortage of raw materials and/or components is expected in the market or in a specific supplier. The timeframe in which the Chinese manufacturer can respond to increased device demands and increased manufacturing is derived from the rate of the change in demand.

 

9.21.3Logistic service agreement with Capacity L.L.C

 

Capacity L.L.C ("Capacity") is an unrelated U.S. company which as of the date of the report serves as InterCure's exclusive logistic service supplier (Fulfillment) in the U.S., responsible for about 100% of InterCure's and InterCure Inc.'s logistic activity in the U.S. InterCure's latest engagement contract with Capacity was signed on May 15, 2006 for one year and is renewed annually by the parties 118. InterCure has signed an agreement with Capacity for the supply of a logistic service package consisting of clearing cargos for customs purposes, transport, storage, individual and distributor handling and shipment on a pick & pack basis. Capacity stores an inventory of InterCure's products in its warehouses that is fully insured. In addition to said logistic service package, Capacity handles InterCure's EDI system needs for working with the various distribution networks.

 

9.21.4Logistic service agreement with Emery Limited

 

Emery, a private unrelated English company serves as of the date of the report as InterCure's sole supplier of logistic services (Fulfillment) in the UK, responsible for about 100% of InterCure's logistic activity in the UK. The latest engagement between InterCure and Emery was signed on May 23, 2006 in effect until May 5, 2009 but remains in effect until either party decides to terminate it by notifying the other party at least three months in advance. The logistic services provided by Emery include: cargo customs clearance, transport, storage and individual and distributor handling and shipment on a pick & pack basis. In addition to these services, Emery operates a call center for InterCure's customers and a refurbishment system for returned products consisting of updating, renewing and calibrating devices for their sale as refurbished products. Emery also takes orders for devices, handles payments made for devices ordered through it, including receiving and collecting payments.

 

 

118The parties continue to execute the agreement although it has not been formally renewed and InterCure is acting to have it renewed.

 

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9.21.5License agreement and line of credit

 

On October 6, 2011, InterCure's audit committee and Board approved an agreement for the receipt of a line of credit from Yazmonit Ltd. (a company controlled by Dr. Benjamin Gavish, a director and interested party in InterCure at the time, "the LC agreement" and "Yazmonit", respectively) as a qualifying transaction for InterCure owing to InterCure's credit crisis and low inventory levels and as a means of allowing InterCure's continued operating activities. According to the LC agreement, Yazmonit extended a third party which is InterCure's product manufacturer a credit line in a total of approximately US$ 72 thousand for a period of 40 days ("the LC term"). At the end of the LC term, InterCure shall pay the third party an amount of $ 72,120 or provide it an alternative credit line. As collateral in favor of Yazmonit and should the third party exercise all or part of the credit line, then the products (or part thereof, based on the payment made by InterCure) will be delivered from the third party to the exclusive ownership of Yazmonit and the latter will be able to sell them.

 

According to the LC agreement, extending the LC term by up to 90 days requires the approval of InterCure's license agreement with Yazmonit ("the license agreement") whereby, subject to obtaining the Israeli Chief Scientist's approval (if indeed required), InterCure will provide Yazmonit an exclusive license to use the technology and patent rights of an unutilized portion of its IP ("the license") and the right to use InterCure's RESPeRATE trademark for an indefinite period in consideration of an overall amount of US$ 25,000. The license includes any future product and applications that require an external computer unit (and a smartphone) and are not in the field of treating hypertension. According to the license agreement, the license will not include products and/or applications for treating hypertension in any form whatsoever nor will it include any stand-alone product in any field of future indication developed by InterCure. In addition, according to the license agreement, if Yazmonit needs components manufactured by or for InterCure, InterCure will sell them to Yazmonit at cost + 5%. According to the LC agreement, InterCure was able to repurchase the license from Yazmonit for a sum of US$ 75,000 over a four-month period from the effective date of the agreement (which has elapsed as of the date of this report).

 

On October 25, 2011, the meeting of holders of debentures (series A) of InterCure decided not to object to InterCure's engagement in the license agreement. On November 7, 2011, InterCure announced that it had obtained the approval of the holders of debentures (series B) of InterCure for the license agreement. On the same date, InterCure's audit committee and Board approved its engagement in the license agreement. To the best of the Company's knowledge, on October 12, 2011, Yazmonit opened the line of credit discussed above and on November 13, 2011 it delivered the consideration for the license agreement. The LC agreement was extended twice (to May 30, 2012 and December 31, 2012) under the same terms.

 

On January 21, 2013, InterCure announced that it was examining several issues regarding the license agreement, including its legal validity.

 

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9.21.6Insurance policies

 

InterCure has an officers' and directors' liability insurance policy for covering itself and its subsidiaries (sub-subsidiaries in the Group) at a maximum limit of US$ 5,000 and US$ 1,000 for legal expenses in Israel per case and cumulatively for the entire insurance period ("the policy"). The insurance period is from July 26, 2012 through July 25, 2013. The annual policy premium is approximately US$ 7,000. The deductible is US$ 10,000 per claim for indemnification against InterCure, US$ 50,000 per claim filed in a U.S. or Canadian court and US$ 50,000 for a securities claim.

 

The main policy terms are as follows:

 

·The policy covers all officers and directors of InterCure, past present and future.

 

·The policy covers claims filed in any jurisdiction including Canada and the U.S.

 

·The policy provides full unlimited retroactive coverage for claims arising from any alleged or actual breach of duty, breach of trust, negligence, error, misrepresentation, misstatement, failure, false presentation, violation of responsibility or authority, breach of contract, slander, libel, defamation or any other act committed by the policyholders in their capacity as InterCure's officers or directors or officers or any other external entities on in any matter argued against them merely in their capacity as InterCure's officers or directors, including breach of duty of care toward InterCure or any other person and breach of fiduciary duty toward InterCure provided that the policyholders acted in good faith and did not perceive their acts as impairment of InterCure's interests.

 

·The policy cannot be cancelled except due to non-compliance with premium payments or for the reasons stated in the Insurance Law, 1981.

 

·The policy was extended to apply also to directors acting on behalf of InterCure in other corporations (subject to obtaining a list of the directors' names and the corporations in which they serve on behalf of InterCure in advance based on the policy terms).

 

·The policy includes automatically added coverage of existing or new subsidiaries based on the policy terms.

 

·The policy confers entitlement to compensation for costs arising from public relation activities up to US$ 150,000 in crisis events as defined in the policy.

 

·The officer and directors are entitled to legal counseling, before a claim has been filed, in an amount of up to US$ 25,000 per person and a total of up to US$ 150,000.

 

InterCure has an insurance policy for covering monetary claims arising from third party bodily or property damages due to clinical trials or faulty products. The policy covers up to US$ 2 million per case and InterCure pays an annual premium of approximately US$ 66,000. InterCure has other insurance policies, including business insurance, employer's liability insurance and third party liability insurance.

 

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Engagements with officers

 

On July 25, 2012, Mr. Ronen Twito was appointed as InterCure's Deputy CEO. In return for Mr. Twito's services, on July 25, 2012, InterCure's Board approved the allocation of 1,000,000 stock options which are exercisable into 1,000,000 Ordinary shares of InterCure for an exercise increment of NIS 0.54 per stock option. The stock options vest in 12 equal portions each quarter over a period of three years from the grant date. On September 3, 2012, Mr. Twito was also appointed as InterCure's CFO.

 

After the former CEO (Mr. Erez Gavish) announced that he will not be renewing his employment agreement, on November 29, 2012, InterCure's Board appointed Mr. Ronen Twito as temporary CEO of InterCure (by concluding his office as Deputy CEO), with no additional consideration apart from the stock options previously granted to him.

 

It should be noted that Mr. Twito serves as the Company's Deputy CEO and CFO.

 

On December 12, 2012, Mr. Omri Batzir was appointed as comptroller and officer in charge of financial affairs in InterCure. According to his terms of employment, Mr. Batzir is entitled to a monthly salary of NIS 16,000, a mobile phone, a leased class 2 vehicle and vacation days and sick leave as prescribed by law. In addition, Mr. Bazir was granted 100,000 options exercisable into 100,000 Ordinary shares of InterCure for an exercise increment of NIS 0.54 per stock option. The stock options vest in 12 equal portions each quarter over a period of three years from the grant date.

 

On March 21, 2013, Prof. Reuven Zimlichman was appointed as InterCure's medical director. According to his consulting agreement, he will provide InterCure services consisting of R&D consulting, IP and medical regulation management. For a maximum of 20 hours of consulting a month, Prof. Zimlichman will be entitled to a monthly fee of US$ 1,500. He will also be granted 125,000 options exercisable into 125,000 Ordinary shares of InterCure for an exercise increment of NIS 0.54 per stock option. The stock options vest in 12 equal portions each quarter over a period of three years from the grant date. Alternatively, if as a result of the signing of an agreement between InterCure and a medical institution (such as a sick fund) for the sale of InterCure's products through the medical institution the total sales of InterCure's products exceed US$ 175,000, then 30% of the then unvested stock options will vest. In addition, Prof. Zimlichman will be entitled to receive a non-recurring bonus from InterCure in the occurrence of the following:

 

In the event of completion of a transaction led by Prof. Zimlichman between InterCure and a medical institution (such as a sick fund) for the sale of InterCure's products through the medical institution (in this paragraph "a transaction") as a result of which the total sales of InterCure's products exceed US$ 100,000, Prof. Zimlichman will be entitled to a bonus of US$ 4,000.