424B4 1 v345924_424b4.htm 424B4

 PROSPECTUS

Rule 424(b)(4)

Registration No.: 333-186003

Registration No.: 333-188747

   

3,125,000 Ordinary Shares

 

 

 

Alcobra Ltd.  

 

 

Alcobra Ltd. is offering its ordinary shares in an initial public offering. No public market currently exists for our ordinary shares. The initial public offering price of our ordinary shares is $8.00 per share.

 

Our ordinary shares have been approved for listing on The NASDAQ Capital Market under the symbol “ADHD”.

 

We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the JOBS Act) and will be subject to reduced public company reporting requirements.

 

Investing in our ordinary shares involves a high degree of risk.  See “Risk Factors” beginning on page 5 of this prospectus for a discussion of information that should be considered in connection with an investment in our ordinary shares.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete.  Any representation to the contrary is a criminal offense.

 

    Per Share    Total 
Initial public offering price  $8.00   $25,000,000 
Underwriting discounts and commissions  $0.56   $1,750,000 
Proceeds to us (before expenses)  $7.44   $23,250,000 

 

The underwriters will receive compensation in addition to the underwriting discounts and commissions. See “Underwriting” for a description of compensation payable to the underwriters.

 

We have granted a 45-day option to the underwriters to purchase up to 458,125 additional ordinary shares solely to cover over-allotments, if any.

 

The underwriters expect to deliver the shares to purchasers in the offering on or about May 28, 2013.

 

 

Sole Book-Running Manager

 

Aegis Capital Corp

 

 

Co-Managers

 

Sunrise Securities Corp.   Feltl & Company

 

 

The date of this prospectus is May 21, 2013.

 

 
 

  

  

Therapy Indication Preclinical Phase 1/2a Phase 2b Phase III Timeline MG01CI for ADHD USA Adults Trial to launch 2013 USA Pediatric Trial to launch 2014 EU Adultatric Trial to launch 2014 Japan Adults & Pediatric Trial to launch 2015 MG01CI for other Disorders Executive Dysfunction/Sluggish Cognitive Tempo Trial to launch 2013 Mood Disorders Trial to launch 2014 Phase III Studies to follow after completion of one US study Alcobra Ltd. – Next Ste 

 
 

 

TABLE OF CONTENTS

 

  Page
Prospectus Summary 1
Risk Factors 5
Cautionary Note Regarding Forward-Looking Statements 25
Use of Proceeds 26
Dividend Policy 26
Capitalization 27
Dilution 28
Selected Financial Data 29
Management’s Discussion and Analysis of Financial Condition and Results of Operations 30
Business 36
Management 50
Principal Shareholders 65
Description of Share Capital 66
Shares Eligible for Future Sale 73
Taxation 75
Underwriting 81
Expenses 87
Legal Matters 87
Experts 87
Enforceability of Civil Liabilities 87
Where You Can Find Additional Information 88
Index of Financial Statements F-1

 

 


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

 

Until and including June 15, 2013, 25 days after the date of this prospectus, all dealers that buy, sell or trade our ordinary shares, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

 

For investors outside of the United States: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

 


In this prospectus, “we,” “us,” “our,” the “Company” and “Alcobra” refer to Alcobra Ltd.

 

Our reporting currency and functional currency is the U.S. dollar.

 

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PROSPECTUS SUMMARY

 

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our ordinary shares. Before you decide to invest in our ordinary shares, you should read the entire prospectus carefully, including the “Risk Factors” section and the financial statements and related notes appearing at the end of this prospectus.

 

Our Company

 

We are an emerging biopharmaceutical company primarily focused on the development and commercialization of our proprietary drug, MG01CI, to treat Attention Deficit Hyperactivity Disorder, or ADHD. The most common currently available treatments for ADHD are stimulants that increase the brain chemical dopamine. Stimulants have significant side effects, and as controlled substances have significant potential for misuse, abuse and addiction. MG01CI is a non-stimulant with a different mechanism of action. MG01CI is a proprietary, combined rapid onset/extended release formulation of the chemical Pyridoxine Pyroglutamate, which is more broadly known as Metadoxine. Metadoxine has been available since the 1980’s in immediate release forms for the acute treatment of alcohol intoxication and the chronic treatment of alcoholic liver disease in Italy, Portugal, Hungary, Russia, India, China, Mexico and Thailand. In September 2011, we completed a 120-patient double-blind Phase II study in Israel that showed significant improvement in clinical ADHD symptoms, and also showed favorable tolerability with no significant side effects over a placebo. The trial met all primary and secondary clinical endpoints showing statistically significant improvement over the placebo-treated control group.

 

We plan to initiate discussions with the U.S. Food and Drug Administration, or FDA, within six months from the date of this prospectus to seek approval, via an Investigational New Drug, or IND, Application submission, to conduct advanced clinical trials in the United States for the use of MGO1CI to treat ADHD in adults. If such FDA approval of our IND Application is granted and if these and any future clinical trials demonstrate the safety and efficacy of MGO1CI, we will seek to obtain marketing approval from the FDA for MG01CI for use in adults. We have similar plans to seek marketing approval in the European Union and later in Japan.  Following the successful completion of our next clinical trial in adults, we will seek to obtain regulatory approvals for clinical trials, via additional IND Application submissions, in order ultimately to obtain marketing approval of MG01CI for use in children.  The requirements to conduct pediatric clinical trials are more stringent than those for adults.  If our requests for approval to conduct clinical trials are denied, or if our clinical trials are unsuccessful, we will have to re-design our drug candidate and conduct additional preliminary clinical trials after any necessary regulatory approvals.

 

ADHD is one of the most common behavioral disorders in the world. It is estimated that between 5% and 12% of children worldwide are affected by this condition. Once believed to only affect children, ADHD is now known to persist into adolescence and adulthood in a large number of cases, with approximately 46% of all adults who had ADHD as children continuing to have symptoms of the disorder as adults. Approximately 95% of these adults experience impaired inattention and executive function symptoms, of which approximately 35% also experience hyperactivity-impulsivity symptoms.

 

ADHD is a treatable condition. The most commonly used therapeutic drugs are stimulants (Schedule II, Controlled Substances), such as Ritalin, Adderall, Vyvanse and Concerta, which are all dopaminergic (related to dopamine) compounds with significant abuse and misuse potential because their use may lead to severe psychological or physical dependence. In addition, stimulants have numerous side effects, such as uncomfortable mental states, interference with sleep and appetite, development of nervous ticks and potential cardiovascular effects resulting from increased blood pressure. These side effects have limited effective treatment in those taking the drugs and have also dramatically limited medication adherence rates. Up to 30% to 50% of those who are prescribed stimulants for ADHD either do not respond or cannot tolerate these treatments, and only about 20% of those prescribed with stimulants renew their prescription the following month. There also is a non-stimulant drug on the market called Strattera (Atomoxetine), launched in 2003. This drug also has significant side effects, such as fatigue, decreased appetite, sexual problems, palpitations, increased heart rate and high blood pressure and also has regulatory warning labels relating to suicidal thoughts and liver damage. Moreover, Strattera takes 6-10 weeks to achieve full clinical effectiveness. More recently, two additional non-stimulant medications with similar safety and efficacy profiles were approved for use only in children (Guanfacine and Clonidine). These two drugs have not had significant commercial success and have not been proven effective in adults. All approved ADHD drugs need to be carefully monitored by the treating physician to optimize the dose, starting with a low dose and slowly escalating to the most effective and tolerable dose.

 

In contrast to the most common available treatments which involve the use of stimulants, MG01CI is a non-stimulant with a differentiated mechanism of action that is neither dopaminergic (related to dopamine) nor noradrenergic (related to norepinephrine). Our 120-patient Phase II study showed significant improvement in clinical symptoms with higher response rates, and a more rapid onset than available non-stimulants. The trial also demonstrated favorable tolerability with no significant side effects over a placebo. MG01CI therefore potentially represents a safer alternative to stimulant-based treatments and a more tolerable and effective treatment than the non-stimulants which are currently in the market. Additionally, because of its unique mechanism of action and specific clinical effect on inattention and executive function, we believe that MG01CI possibly may be useful in treating additional cognitive disorders.

 

Our Strategy

 

Our objective is to develop and commercialize proprietary pharmaceutical products for treatment of central nervous system disorders, and cognitive dysfunctions in particular. To this effect, we intend to conduct additional clinical trials for MG01CI and, if those trials are successful, seek marketing approval from the FDA and other worldwide regulatory bodies for MG01CI for the treatment of ADHD in adults and children. We also plan to advance clinical studies and commercialization plans for MG01CI in additional indications of cognitive dysfunction which present significant market opportunities such as mood disorders, memory impairment, autism, and shift work/jet lag. Finally, we intend to develop products other than MG01CI that we have invented or that may be acquired by the Company.

 

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To achieve these objectives, we plan to:

 

·Subject to receiving the necessary regulatory approvals, initiate and complete two parallel Phase III clinical trials of MG01CI for the treatment of ADHD in adults, and, if they are successful, file for marketing approval for adults initially in the U.S. and the EU.

   

·If our adult clinical trials are successful, subject to receiving the necessary regulatory approvals, initiate and complete clinical trials in a pediatric ADHD population, and, if successful, file for marketing approval for that use in the U.S. and EU.

 

·Subject to receiving the necessary regulatory approvals, initiate and complete clinical trials in Japan for both adult and pediatric ADHD, and, if successful, file for marketing approval of such uses in that country.

 

·After receipt of marketing approval, prepare to commercialize MG01CI for the treatment of patients with ADHD by establishing distribution capabilities primarily in conjunction with large pharmaceutical companies.

 

·Conduct clinical investigations into the possible use of MG01CI to treat other cognitive disorders and impairments such as mood disorders, memory impairment, autism and shift work/jet lag.

 

·Conduct development of additional new molecules in our pipeline that are protected by patents, or in-license products in similar therapeutic areas.

 

Corporate Information

 

We are an Israeli corporation based in Tel Aviv and were incorporated in 2008. Our principal executive offices are located at 35 Ehad Ha-Am Street, 4th Floor, Tel-Aviv, Israel, and our telephone number is +972 72 220 4661. Our website address is www.alcobra-pharma.com. The information contained on, or that can be accessed through, our website is not part of this prospectus. We have included our website address in this prospectus solely as an inactive textual reference.

 

We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, or the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As such, we are eligible to, and intend to, take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and reduced disclosure obligations regarding executive compensation in our periodic reports. We could remain an “emerging growth company” for up to five years, or until the earliest of (a) the last day of the first fiscal year in which our annual gross revenue exceeds $1 billion, (b) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (c) the date on which we have issued more than $1 billion in nonconvertible debt during the preceding three-year period.

 

Risks Associated with Our Business

 

Our business is subject to numerous risks, as more fully described in the section entitled “Risk Factors” immediately following this prospectus summary. You should read these risks before you invest in our ordinary shares. In particular, our risks include, but are not limited to, the following:

 

·We depend entirely on the success of our only current product candidate, MG01CI, for the treatment of ADHD and other cognitive disorders. We have not received FDA approval to conduct the clinical trials that are necessary to receive regulatory approval to market MG01CI. We require additional and more complex clinical trials of MG01CI that must be successful if we are to seek and obtain regulatory marketing clearances. Advanced clinical trials are often not successful even if prior trials were successful, and even if we are able to conduct advanced clinical trials and those trials are successful, we may not obtain necessary regulatory approvals for MG01CI or we may be unable to successfully commercialize it even if we receive the necessary regulatory approvals.

 

·Our data from future clinical trials may not satisfy the FDA, or the FDA may require additional time or studies to assess the safety and efficacy of MG01CI.

 

·

To date, we have not generated revenue from the sale of any product, and we do not expect to generate significant revenue unless and until we obtain marketing approval of, and commercialize, MG01CI. We are unable to predict the extent of future losses or when we will become profitable based on the sale of any product, if at all. Even if we succeed in developing and commercializing our product candidate, we may never generate sufficient revenue to sustain profitability. As of December 31, 2012, we had an accumulated deficit of $8.2 million.

 

·We have no sources of revenue and will need to raise substantial additional capital to successfully commercialize MG01CI, and such capital may not be available to us or available only on unfavorable terms.

 

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·

We do not have any issued patents relating to our MG01CI technology, but one of our patent applications has been allowed by the U.S. Patent and Trademark Office, or U.S. PTO. Our current patent applications may not result in issued patents, and even if issued, those patents may be challenged by our competitors. Any such challenge would be extremely expensive and distracting, and if we cannot successfully defend our intellectual property, competitors may be able to develop generic versions of MG01CI, which would have a material adverse effect on our business or even force us to cease operations.

 

·As a public company following the conclusion of this offering, we will need to comply with extensive additional governmental regulations, which will be expensive and which will require significant management attention.

 

THE OFFERING

 

Ordinary shares offered by us

3,125,000 shares

   

Ordinary shares to be outstanding after this offering

11,126,884 shares

   

Over-allotment option The underwriters have an option for a period of 45 days to purchase up to 458,125 additional ordinary shares to cover over-allotments, if any.

 

Use of proceeds

We expect to receive approximately $22.2 million in net proceeds from the sale of 3,125,000 ordinary shares offered by us in this offering (approximately $25.6 million if the underwriters exercise their over-allotment option in full), after deducting estimated underwriting discounts and commissions and offering expenses payable by us. We currently expect to use the net proceeds from this offering for:

 

·      completing at least two advanced clinical trials of MG01CI for adult ADHD, estimated at $6,000,000 each;

 

·      completing a Phase I/II clinical study in children for MG01CI, estimated at $1,000,000 to $2,000,000;

 

·      preparing for our proposed studies in adults and children for MG01CI, including engaging the FDA in discussions related to protocols for the trials, estimated at $1,000,000 to $3,000,000;

 

·      evaluating MG01CI in Phase II clinical trials of additional disorders of cognitive function estimated at $1,000,000 to $2,000,000; and

 

·      the remainder for working capital and general corporate purposes.

 

 

Risk factors You should read the “Risk Factors” section starting on page 5 of this prospectus for a discussion of factors to consider carefully before deciding to invest in ordinary shares.

 

NASDAQ Capital Market Symbol “ADHD"

 

The number of our ordinary shares to be outstanding immediately after this offering is based on 7,794,256 ordinary shares outstanding as of April 1, 2013 (giving prospective effect to the issuance on May 19, 2013 of bonus shares equivalent to a stock split described below) and includes also: (i) 122,436 shares resulting from the mandatory conversion of our outstanding convertible notes upon closing of this offering and (ii) 85,192 shares issued contingent upon the closing of this offering consequent to cashless exercise of 129,257 warrants outstanding as of April 1, 2013 having a weighted average exercise price of $2.73 per share, at an offering price of $8.00 per share, or, the Warrant Cashless Exercise. This number excludes:

 

·

764,444 shares issuable upon the exercise of share options outstanding as of April 1, 2013 under our equity incentive plan;

 

·

58,700 shares issuable upon the exercise of warrants outstanding as of April 1, 2013  with a nominal exercise price, which warrants are expected to remain outstanding upon completion of this offering; and

  

  ·

7,009 shares reserved as of April 1, 2013 for future grants under our equity incentive plan.

 

  Unless otherwise indicated, all information in this prospectus assumes or gives effect to:

 

  · the filing of our amended and restated articles of association, which will occur immediately prior to the completion of this offering;
     
  · the issuance on May 19, 2013 of bonus shares under Israeli law to all of our shareholders on a basis of 4.87 bonus shares for each ordinary share outstanding (equivalent to a 5.87-for-1 stock split) and the customary adjustments to our outstanding options and warrants; and

 

  · no exercise of the underwriters’ over-allotment option.

 

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SUMMARY FINANCIAL DATA

 

The following table summarizes our financial data. We have derived the following statements of operations data for the years ended December 31, 2012 and 2011 and the balance sheet data as of December 31, 2012 from our audited financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future. The following summary financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus.

 

(in thousands of U.S. dollars, except share and per share amounts)        
  Years Ended December 31, 
   2012   2011 
Statements of Operations Data:        
         
Research and development expenses  $818   $1,822 
           
General and administrative expenses   683    2,084 
           
Financial expense, net   78    23 
           
Deemed dividend   -    180 
           
Loss attributable to holders of ordinary shares   1,579    4,109 
           
Weighted average number of ordinary shares used in computing basic and diluted net loss per share (1)   7,791,932    7,843,388 

_____________

 

(1)See Note 2(m) to our financial statements for an explanation of the method used to calculate basic and diluted net loss per ordinary share and the weighted average number of shares used in computation of the per share amounts.

  

 (in thousands of U.S. dollars)   As of December 31, 2012
    Actual     As Adjusted
(unaudited)(1)
 Balance Sheet Data:            
         
Total long-term assets   21   21
             
Total current liabilities     768     106
             
Shareholders’ equity (deficiency)     (567 )   22,286

 

(1)The unaudited as adjusted column in the balance sheet data above gives effect to the sale of 3,125,000 ordinary shares in this offering at an initial public offering price of $8.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, as if the sale had occurred on December 31, 2012, and to mandatory conversion of our outstanding convertible notes on the closing of this offering.

 

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RISK FACTORS

 

An investment in our ordinary shares involves a high degree of risk. We operate in a dynamic and rapidly changing industry that involves numerous risks and uncertainties. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including the consolidated financial statements and the related notes included elsewhere in this prospectus, before deciding whether to invest in our ordinary shares. If any of the risks discussed below actually occur, our business, financial condition, operating results or cash flows could be materially adversely affected. This could cause the trading price of our ordinary shares to decline, and you may lose all or part of your investment.

 

Risks Related to Product Development, Regulatory Approval and Commercialization

 

We depend entirely on the success of our only current product candidate, MG01CI, and we may not obtain regulatory approval of MG01CI for the treatment of ADHD or we may be unable to successfully commercialize it.

 

We have invested almost all of our efforts and financial resources in the research and development of MG01CI, which is currently our only product candidate. As a result, our business is entirely dependent on our ability to complete the development of, obtain regulatory approval for, and successfully commercialize, MG01CI in a timely manner. The process to develop, obtain regulatory approval for, and commercialize MG01CI is long, complex, costly and uncertain of outcome.

 

The research, testing, manufacturing, labeling, approval, sale, marketing and distribution of drugs are subject to extensive regulation by the FDA in the United States and other regulatory agencies in other countries. These regulations differ from country to country. We are not permitted to market MG01CI or any other product candidate in the United States until we receive approval of a New Drug Application, or NDA, from the FDA, or in any foreign countries until we receive the requisite approval from regulatory agencies in such countries. We have not received regulatory clearance to conduct the additional clinical trials that are necessary to be able to submit an NDA to the FDA or comparable applications to other regulatory authorities in other countries or received marketing approval for MG01CI. The results of additional clinical trials may be unsatisfactory, and even if we believe those clinical trials to be successful, there are many reasons why the FDA may not approve our NDA should we be in a position to file one.

 

Approval procedures vary among countries and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries might differ from that required to obtain FDA approval. The marketing approval process in other countries may include all of the risks detailed above regarding FDA approval in the United States as well as other risks. In particular, in many countries outside the United States, it is required that a product receive pricing and reimbursement approval before the product can be commercialized. This can result in substantial delays in such countries. In other countries, product approval depends on showing superiority to an approved alternative therapy. This can result in significant expense for conducting complex clinical trials. Finally, we do not have any products approved for sale in any jurisdiction, including international markets, and we do not have experience in obtaining regulatory approval in international markets. If we fail to comply with regulatory requirements in international markets or to obtain and maintain required approvals or if regulatory approvals in international markets are delayed, our target market will be reduced and our ability to realize the full market potential of our products will be harmed.

 

Marketing approval in one country does not ensure marketing approval in another, but a failure or delay in obtaining marketing approval in one country may have a negative effect on the regulatory process in others. Failure to obtain marketing approval in other countries or any delay or setback in obtaining such approval would impair our ability to develop foreign markets for MG01CI. This would reduce our target market and limit the full commercial potential of MG01CI. Many countries are undertaking cost-containment measures that could affect pricing or reimbursement of a product.

 

The commencement and completion of clinical trials can be delayed or prevented for a number of reasons.

 

We may not be able to commence or complete the clinical trials that would support our submission of an NDA to the FDA. Drug development is a long, expensive and uncertain process, and delay or failure can occur at any stage of any of our clinical trials. Clinical trials can be delayed or prevented for a number of reasons, including:

 

·difficulties obtaining regulatory approval to commence a clinical trial or complying with conditions imposed by a regulatory authority regarding the scope or term of a clinical trial;

 

·delays in reaching or failing to reach agreement on acceptable terms with prospective contract research organizations, or CROs, and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

 

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·insufficient or inadequate supply or quality of a product candidate or other materials necessary to conduct our clinical trials;

 

·difficulties obtaining institutional review board, or IRB, approval to conduct a clinical trial at a prospective site; and

 

·challenges recruiting and enrolling patients to participate in clinical trials for a variety of reasons, including size and nature of patient population, proximity of patients to clinical sites, eligibility criteria for the trial, nature of trial protocol, the availability of approved effective treatments for the relevant disease and competition from other clinical trial programs for similar indications.

 

Clinical trials may also be delayed or terminated as a result of ambiguous or negative interim results. In addition, a clinical trial may be suspended or terminated by us, the FDA, the IRBs at the sites where the IRBs are overseeing a trial, or a data safety monitoring board overseeing the clinical trial at issue, or other regulatory authorities due to a number of factors, including:

 

·failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;

 

·inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities;

 

·unforeseen safety issues or lack of effectiveness; and

 

·lack of adequate funding to continue the clinical trial.

  

Positive results in previous clinical trials of MG01CI may not be replicated in future clinical trials of MG01CI, which could result in development delays or a failure to obtain marketing approval.

 

Positive results in previous clinical studies of MG01CI may not be predictive of similar results in future clinical trials. Also, interim results during a clinical trial do not necessarily predict final results. A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials even after achieving promising results in early-stage development. Accordingly, the results from the completed preclinical studies and clinical trials for MG01CI may not be predictive of the results we may obtain in later stage trials. Our clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials. Moreover, clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain FDA approval for their products.

 

Obtaining approval of an NDA even after clinical trials that are believed to be successful is an uncertain process.

 

Even if we complete our planned clinical trials and believe the results to be successful, all of which are uncertain, obtaining approval of an NDA is an extensive, lengthy, expensive and uncertain process, and the FDA (and other regulatory agencies) may delay, limit or deny approval of MG01CI for many reasons, including:

 

·we may not be able to demonstrate to the satisfaction of the FDA that MG01CI is safe and effective for any indication;

 

·the results of clinical trials may not meet the level of statistical significance or clinical significance required by the FDA for approval;

 

·the FDA may disagree with the number, design, size, conduct or implementation of our clinical trials;

 

·the FDA may not find the data from preclinical studies and clinical trials sufficient to demonstrate that MG01CI’s clinical and other benefits outweigh its safety risks;

 

·the FDA may disagree with our interpretation of data from preclinical studies or clinical trials;

 

·the FDA may not accept data generated at our clinical trial sites;

 

·the data collected from preclinical studies and clinical trials of MG01CI may not be sufficient to support the submission of an NDA;

 

·the FDA may have difficulties scheduling an advisory committee meeting in a timely manner or the advisory committee may recommend against approval of our application or may recommend that the FDA require, as a condition of approval, additional preclinical studies or clinical trials, limitations on approved labeling, or distribution and use restrictions;

 

·the FDA may require development of a risk evaluation and mitigation strategy as a condition of approval;

 

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·the FDA may identify deficiencies in the manufacturing processes or facilities of third party manufacturers with which we enter into agreements for clinical and commercial supplies;

 

·the FDA may change its approval policies or adopt new regulations; and

 

·the FDA may require simultaneous approval for both adults and children delaying needed approvals, or we may have successful clinical trial results for adults but not children, or vice versa.

 

 Before we can submit an NDA to the FDA, we must conduct at least two Phase III clinical trials that will be substantially broader than our Phase II trial. We will also need to agree on a protocol with the FDA for the clinical trials before commencing those trials. Phase III clinical trials frequently produce unsatisfactory results even though prior clinical trials were successful. Therefore, the results of the additional trials that we conduct may or may not be successful. The FDA may suspend all clinical trials or require that we conduct additional clinical, nonclinical, manufacturing validation or drug product quality studies and submit those data before it will consider or reconsider the NDA. Depending on the extent of these or any other studies, approval of any applications that we submit may be delayed by several years, or may require us to expend more resources than we have available. It is also possible that additional studies, if performed and completed, may not be considered sufficient by the FDA to approve the NDA. If any of these outcomes occur, we would not receive approval for MG01CI and may be forced to cease operations.

 

Even if we obtain FDA approval for MG01CI for the treatment of ADHD, the approval might contain significant limitations related to use restrictions for certain age groups, warnings, precautions or contraindications, or may be subject to significant post-marketing studies or risk mitigation requirements. If we are unable to successfully commercialize MG01CI, we may be forced to cease operations.

 

MG01CI may produce undesirable side effects after approval of an NDA.

 

Even if MG01CI receives marketing approval, we or others may later identify undesirable side effects caused by the product, and in that event a number of potentially significant negative consequences could result, including:

 

·regulatory authorities may suspend or withdraw their approval of the product;

 

·regulatory authorities may require the addition of labeling statements, such as warnings or contraindications or distribution and use restrictions;

 

·regulatory authorities may require us to issue specific communications to healthcare professionals, such as “Dear Doctor” letters;

 

·regulatory authorities may issue negative publicity regarding the affected product, including safety communications;

 

·we may be required to change the way the product is administered, conduct additional preclinical studies or clinical trials or restrict the distribution or use of the product;

 

·we could be sued and held liable for harm caused to patients; and

 

·our reputation may suffer.

 

 Any of these events could prevent us from achieving or maintaining market acceptance of the affected product candidate and could substantially increase commercialization costs or even force us to cease operations.

 

We have only minimal preliminary pre-clinical or clinical data that support the applicability of MG01CI to other cognitive conditions, and ultimate regulatory approval for any additional applications is speculative.

 

We intend to investigate the use of MG01CI to treat other cognitive disorders and impairments. These efforts have just commenced, and very little data regarding such uses has been obtained. The regulatory approval process for additional indications would be as complex, time consuming and expensive as that for MG01CI in ADHD. As a result, ultimate regulatory approval for one or more of such indications is speculative.

 

Obtaining regulatory approval for clinical trials of MGO1CI in children will be more difficult than obtaining such approvals for adult clinical trials since the requirements for regulatory approval to conduct pediatric clinical trials are more stringent.

 

Pediatric drug development requires additional non-clinical work (such as animal studies in juvenile animals and additional reproductive toxicity work), as well as staged clinical work in determining safe dosing and monitoring. These additional tasks involve investment of significant additional resources beyond those needed for approval of the drug for adults. Approval of our drug for children may be significantly delayed due to these additional requirements.

 

Changes in regulatory requirements and guidance or unanticipated events during our clinical trials may occur, which may result in necessary changes to clinical trial protocols, which could result in increased costs to us, delay our development timeline or reduce the likelihood of successful completion of our clinical trials.

 

Changes in regulatory requirements and guidance or unanticipated events during our clinical trials may occur, as a result of which we may need to amend clinical trial protocols. Amendments may require us to resubmit our clinical trial protocols to IRBs for review and approval, which may impact the cost, timing or successful completion of a clinical trial. If we experience delays in completion of, or if we terminate, any of our clinical trials, the commercial prospects for MG01CI would be harmed and our ability to generate product revenue would be delayed, possibly materially.

 

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Recently enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize MG01CI or any other product candidate that we develop and affect the prices we may obtain.

 

In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval for MG01CI or any other product candidate that we develop, restrict or regulate post-approval activities and affect our ability to profitably sell MG01CI or any other product candidate for which we obtain marketing approval.

 

Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We are not sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of MG01CI, if any, may be. In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us to more stringent product labeling and post-marketing testing and other requirements.

 

In the United States, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or the MMA, changed the way Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases by the elderly and introduced a new reimbursement methodology based on average sales prices for drugs. In addition, this legislation authorized Medicare Part D prescription drug plans to limit the number of drugs that will be covered in any therapeutic class. As a result of this legislation and the expansion of federal coverage of drug products, we expect that there will be additional pressure to contain and reduce costs. These cost reduction initiatives and other provisions of this legislation could decrease the coverage and price that we receive for any approved products and could seriously harm our business. While the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates, and any reduction in reimbursement that results from the MMA may result in a similar reduction in payments from private payors.

 

More recently, President Obama signed into law the Patient Protection and Affordable Care Act, a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and the health insurance industry, impose new taxes and fees on the healthcare industry and impose additional health policy reforms. This law revises the definition of “average manufacturer price” for reporting purposes, which could increase the amount of Medicaid drug rebates to states once the provision is effective. Further, the new law imposes a significant annual fee on companies that manufacture or import branded prescription drug products. Substantial new provisions affecting compliance have also been enacted, which may require us to modify our business practices with healthcare practitioners. We will not know the full effects of this law until applicable federal and state agencies issue regulations or guidance under it. Although it is too early to determine its effect, the new law appears likely to continue the pressure on pharmaceutical pricing, especially under the Medicare program, and may also increase our regulatory burdens and operating costs.

 

Even if MG01CI or any other product candidate that we develop receives marketing approval, we will continue to face extensive regulatory requirements and the product may still face future development and regulatory difficulties.

 

Even if marketing approval is obtained, a regulatory authority may still impose significant restrictions on a product’s indications, conditions for use, distribution or marketing or impose ongoing requirements for potentially costly post-market surveillance, post-approval studies or clinical trials. For example, any labeling ultimately approved by the FDA for MG01CI, if it is approved for marketing, may include restrictions on use, such as limitations on how ADHD is defined and diagnosed or limiting MG01CI to second-line or concomitant therapy. In addition, the labeling may include significant restrictions on use. MG01CI will also be subject to ongoing FDA requirements governing the labeling, packaging, storage, advertising, distribution, promotion, recordkeeping and submission of safety and other post-market information, including adverse events, and any changes to the approved product, product labeling, or manufacturing process. The FDA has significant post-market authority, including, for example, the authority to require labeling changes based on new safety information and to require post-market studies or clinical trials to evaluate serious safety risks related to the use of a drug. These risks include adverse drug—drug interactions and concomitant therapy with other medications. In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with current Good Manufacturing Practice, or cGMP, and other regulations.

 

If we, our drug products or the manufacturing facilities for our drug products fail to comply with applicable regulatory requirements, a regulatory agency may:

 

8
 

 

·issue warning letters or untitled letters; 

 

·seek an injunction or impose civil or criminal penalties or monetary fines;

 

·suspend or withdraw marketing approval;

 

·suspend any ongoing clinical trials;

 

·refuse to approve pending applications or supplements to applications;

 

·suspend or impose restrictions on operations, including costly new manufacturing requirements;

 

·seize or detain products, refuse to permit the import or export of products or request that we initiate a product recall; or

 

·refuse to allow us to enter into supply contracts, including government contracts.

 

 If we obtain approval to commercialize MG01CI outside of the United States, a variety of risks associated with international operations could materially adversely affect our business.

 

If MG01CI is approved for commercialization outside the United States, we will likely enter into agreements with third parties to market MG01CI outside the United States. We expect that we will be subject to additional risks related to entering into or maintaining international business relationships, including:

 

·different regulatory requirements for drug approvals in foreign countries;

 

·differing United States and foreign drug import and export rules;

 

·reduced protection for intellectual property rights in foreign countries;

 

·unexpected changes in tariffs, trade barriers and regulatory requirements;

 

·different reimbursement systems;

 

·economic weakness, including inflation, or political instability in particular foreign economies and markets;

 

·compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;

 

·foreign taxes, including withholding of payroll taxes;

 

·foreign currency fluctuations, which could result in increased operating expenses and reduced revenues, and other obligations incident to doing business in another country;

 

·workforce uncertainty in countries where labor unrest is more common than in the United States;

 

·production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad;

 

·potential liability resulting from development work conducted by these distributors; and

 

·business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters.

 

Any government investigation of alleged violations of law could require us to expend significant time and resources in response, and could generate negative publicity. Any failure to comply with ongoing regulatory requirements may significantly and adversely affect our ability to commercialize and generate revenues from MG01CI. If regulatory sanctions are applied or if regulatory approval is withdrawn, the value of our company and our operating results will be adversely affected.

 

If we receive marketing approval for MG01CI, sales will be limited unless the product achieves broad market acceptance.

 

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The commercial success of MG01CI and any other product candidate for which we obtain marketing approval from the FDA or other regulatory authorities will depend upon the acceptance of the product by the medical community, including physicians, patients and healthcare payors. The degree of market acceptance of any approved product will depend on a number of factors, including:

 

·demonstration of clinical safety and efficacy compared to other products;

 

·the relative convenience and ease of administration;

 

·the prevalence and severity of any adverse side effects;

 

·limitations or warnings contained in the product’s approved labeling;

 

·distribution and use restrictions imposed by the FDA or agreed to by us as part of a mandatory or voluntary risk management plan;

 

·availability of alternative treatments, including, in the case of MG01CI, a number of competitive products already approved for the treatment of ADHD or expected to be commercially launched in the near future;

 

·pricing and cost effectiveness;

 

·the effectiveness of our or any future collaborators’ sales and marketing strategies;

 

·our ability to obtain sufficient third-party coverage or reimbursement; and

 

·the willingness of patients to pay for drugs out of pocket in the absence of third-party coverage.

 

If MG01CI is approved but does not achieve an adequate level of acceptance by physicians, healthcare payors and patients, we may not generate sufficient revenue from the product, and we may not become or remain profitable. In addition, our efforts to educate the medical community and third-party payors on the benefits of the product may require significant resources and may never be successful.

 

The FDA and other regulatory agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses. If we are found to have improperly promoted off-label uses, we may become subject to significant liability.

 

The FDA and other regulatory agencies strictly regulate the promotional claims that may be made about prescription products. In particular, a product may not be promoted for uses that are not approved by the FDA or such other regulatory agencies as reflected in the product’s approved labeling. In particular, any labeling approved by the FDA for MG01CI may include restrictions on use, such as limitations on how ADHD is defined and diagnosed or limiting MG01CI to second-line or concomitant therapy. The FDA may impose further requirements or restrictions on the distribution or use of MG01CI as part of a mandatory plan, such as limiting prescribing to certain physicians or medical centers that have undergone specialized training, limiting treatment to patients who meet certain safe-use criteria and requiring treated patients to enroll in a registry. If we receive marketing approval for MG01CI, physicians may nevertheless prescribe MG01CI to their patients in a manner that is inconsistent with the approved label. If we are found to have promoted such off-label uses, we may become subject to significant liability. The federal government has levied large civil and criminal fines against companies for alleged improper promotion and has enjoined several companies from engaging in off-label promotion. The FDA has also requested that companies enter into consent decrees or permanent injunctions under which specified promotional conduct is changed or curtailed.

 

It will be difficult for us to profitably sell MG01CI if reimbursement for the product is limited.

 

Market acceptance and sales of MG01CI will depend on reimbursement policies and may be affected by healthcare reform measures. Government authorities and third-party payors, such as private health insurers and health maintenance organizations (HMOs), decide which medications they will pay for and establish reimbursement levels. A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and these third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. We cannot be sure that reimbursement will be available for MG01CI and, if reimbursement is available, the level of reimbursement. Reimbursement may impact the demand for, or the price of, any product for which we obtain marketing approval. In addition, third-party payors are likely to impose strict requirements for reimbursement in order to limit off label use of a higher priced drug. Reimbursement by a third-party payor may depend upon a number of factors including the third-party payor’s determination that use of a product candidate is:

 

·a covered benefit under its health plan;
   
·safe, effective, and medically necessary;
   
·appropriate for the specific patient;
   
·cost effective; and
   
·neither experimental nor investigational.

 

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Obtaining coverage and reimbursement approval for a product candidate from a government or other third-party payor is a time-consuming and costly process that could require us to provide supporting scientific, clinical, and cost effectiveness data for the use of our product candidates to the payor. We may not be able to provide data sufficient to gain acceptance with respect to coverage and reimbursement. We cannot be sure that coverage or adequate reimbursement will be available for any of our product candidates. Also, we cannot be sure that reimbursement amounts will not reduce the demand for, or the price of, our product candidate. If reimbursement is not available or is available only to limited levels, we may not be able to commercialize certain of our product candidates profitably, or at all, even if approved.

 

If third-party manufacturers fail to comply with manufacturing regulations, our financial results and financial condition will be adversely affected.

 

Before they can begin commercial manufacture of MG01CI, contract manufacturers must obtain regulatory approval of their manufacturing facilities, processes and quality systems. In addition, pharmaceutical manufacturing facilities are continuously subject to inspection by the FDA and foreign regulatory authorities before and after product approval. Due to the complexity of the processes used to manufacture pharmaceutical products and product candidates, any potential third-party manufacturer may be unable to continue to pass or initially pass federal, state or international regulatory inspections in a cost effective manner.

 

If a third-party manufacturer with whom we contract is unable to comply with manufacturing regulations, we may be subject to fines, unanticipated compliance expenses, recall or seizure of our products, total or partial suspension of production and/or enforcement actions, including injunctions, and criminal or civil prosecution. These possible sanctions would adversely affect our financial results and financial condition.

 

We intend to rely primarily on third parties to market and sell MG01CI.

 

We currently have no manufacturing, sales or distribution capabilities. To the extent we rely on third parties to commercialize MG01CI, if marketing approval is obtained, we may receive less revenue than if we commercialized MG01CI ourselves. In addition, we would have less control over the sales efforts of any third parties involved in our commercialization efforts. In the event we are unable to collaborate with a third-party marketing and sales organization to commercialize MG01CI, particularly for broader patient populations, our ability to generate revenue will be limited.

 

Our market is subject to intense competition. If we are unable to compete effectively, MG01CI or any other product candidate that we develop may be rendered noncompetitive or obsolete.

 

There are a number of existing treatments for ADHD currently on the market, all of which are marketed by pharmaceutical companies that are far larger and more experienced than we are. Patients and doctors are often unwilling to change medications, and this factor will make it difficult for MG01CI to penetrate the market. Further, our industry is highly competitive and subject to rapid and significant technological change. Our potential competitors include large pharmaceutical and biotechnology companies, specialty pharmaceutical and generic drug companies, academic institutions, government agencies and research institutions. All of these competitors currently engage in, have engaged in or may engage in the future in the development, manufacturing, marketing and commercialization of new pharmaceuticals, some of which may compete with MG01CI or other product candidates. Smaller or early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies. These companies may have products in development that are superior to MG01CI. Key competitive factors affecting the commercial success of MG01CI and any other product candidates that we develop are likely to be efficacy, time of onset, safety and tolerability profile, reliability, convenience of dosing, price and reimbursement.

 

 Many of our potential competitors have substantially greater financial, technical and human resources than we do and significantly greater experience in the discovery and development of drug candidates, obtaining FDA and other regulatory approvals of products and the commercialization of those products. Accordingly, our competitors may be more successful than we may be in obtaining FDA and other marketing approvals for drugs and achieving widespread market acceptance. Our competitors’ drugs may be more effective, or more effectively marketed and sold, than any drug we may commercialize and may render MG01CI or any other product candidate that we develop obsolete or non-competitive before we can recover the expenses of developing and commercializing the product. We anticipate that we will face intense and increasing competition as new drugs enter the market and advanced technologies become available. Finally, the development of new treatment methods for the diseases we are targeting could render MG01CI or any other product candidate that we develop non-competitive or obsolete.

 

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We face potential product liability exposure, and, if claims are brought against us, we may incur substantial liability.

 

The use of MG01CI or other drugs exposes us to the risk of product liability claims. Product liability claims might be brought against us by consumers, healthcare providers or others selling or otherwise coming into contact with our products. If we cannot successfully defend ourselves against product liability claims, we could incur substantial liabilities. In addition, regardless of merit or eventual outcome, product liability claims may result in:

 

·decreased demand for MG01CI or any other product candidate for which we obtain marketing approval;

 

·impairment of our business reputation and exposure to adverse publicity;

 

·increased warnings on product labels;

 

·withdrawal of clinical trial participants;

 

·costs of related litigation;

 

·distraction of management’s attention from our primary business;

 

·substantial monetary awards to patients or other claimants;

 

·loss of revenue; and

 

·the inability to successfully commercialize MG01CI or any other product candidate for which we obtain marketing approval.

 

If product liability lawsuits are successfully brought against us, our insurance may be inadequate.

 

We have obtained product liability insurance coverage for our clinical trials with a $5.0 million annual aggregate coverage limit. However, our insurance coverage may not be sufficient to reimburse us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive, and, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. If and when we obtain marketing approval for MG01CI or any other product candidate, we intend to expand our insurance coverage to include the sale of commercial products; however, we may be unable to obtain this product liability insurance on commercially reasonable terms. On occasion, large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. The cost of any product liability litigation or other proceedings, even if resolved in our favor, could be substantial. A successful product liability claim or series of claims brought against us could cause our share price to decline and, if judgments exceed our insurance coverage, could decrease our cash and adversely affect our business.

 

The product liability insurance we will need to obtain in connection with the commercial sales of our product candidates if and when they receive regulatory approval may be unavailable in meaningful amounts or at a reasonable cost. If we are the subject of a successful product liability claim that exceeds the limits of any insurance coverage we obtain, we would incur substantial charges that would adversely affect our earnings and require the commitment of capital resources that might otherwise be available for the development and commercial launch of our product programs.

 

Risks Related to Our Financial Position and Need for Additional Capital

 

We have a limited operating history and we have incurred significant operating losses since our inception, and anticipate that we will incur continued losses for the foreseeable future.

  

We are an emerging biopharmaceutical company with a limited operating history. To date, we have focused almost exclusively on developing our lead compound, MG01CI. We have funded our operations to date primarily through proceeds from the private placement of ordinary shares and convertible debt. We have only a limited operating history upon which you can evaluate our business and prospects. In addition, we have limited experience and have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the pharmaceutical industry. We have not generated any revenue from product sales to date. We have incurred losses in each year since our inception in February 2008. Our loss attributable to holders of our ordinary shares for the years ended December 31, 2011 and 2012 was approximately $4.1 million and $1.6 million, respectively. As of December 31, 2012, we had an accumulated deficit of $8.2 million. Substantially all of our operating losses resulted from costs incurred in connection with our development program and from general and administrative costs associated with our operations.

 

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We expect our research and development expenses to increase in connection with our planned expanded clinical trials. In addition, if we obtain marketing approval for MG01CI, we will likely incur significant sales, marketing and outsourced manufacturing expenses, as well as continued research and development expenses. Furthermore, in the period following this offering, we expect to incur additional costs associated with operating as a public company, which we estimate will be at least several hundred thousand dollars annually. As a result, we expect to continue to incur significant and increasing operating losses for the foreseeable future. Because of the numerous risks and uncertainties associated with developing pharmaceutical products, we are unable to predict the extent of any future losses or when we will become profitable, if at all.

 

We have not generated any revenue from MG01CI or any other product candidate and may never be profitable.

 

Our ability to become profitable depends upon our ability to generate revenue. To date, we have not generated any revenue from our development stage product candidate, MG01CI, and we do not know when, or if, we will generate any revenue. We do not expect to generate significant revenue unless or until we obtain marketing approval of, and commercialize, MG01CI. Our ability to generate revenue depends on a number of factors, including our ability to:

 

  · obtain favorable results from and progress the clinical development of MG01CI;
     
  · develop and obtain regulatory approval for registration studies protocols for MG01CI;
     
  · subject to successful completion of registration, clinical trials and perhaps additional clinical trials of MG01CI, apply for and obtain marketing approval;
     
  · contract for the manufacture of commercial quantities of MG01CI at acceptable cost levels if marketing approval is received; and
     
  · establish sales and marketing capabilities, both internal and external, to effectively market and sell MG01CI in the United States and other countries.

 

Even if MG01CI is approved for commercial sale for the treatment of ADHD, it may not gain market acceptance or achieve commercial success. In addition, we anticipate incurring significant costs associated with commercialization. We may not achieve profitability soon after generating product revenue, if ever. If we are unable to generate product revenue, we will not become profitable and would be unable to continue operations without continued funding.

 

We will need substantial additional capital in the future. If additional capital is not available, we will have to delay, reduce or cease operations.

 

We will need to raise substantial additional capital to fund our operations and to develop and commercialize MG01CI. As of December 31, 2012, we had negative working capital of $(588,000) and cash and cash equivalents of $97,000. Our future capital requirements may be substantial and will depend on many factors including:

 

·our clinical trial results;
   
·the cost, timing and outcomes of seeking marketing approval of MG01CI;
   
·the cost of filing and prosecuting patent applications and the cost of defending our patents;
   
·the cost of prosecuting infringement actions against third parties;
   
·exploration and possible label expansion of MG01CI for the treatment of other conditions;
   
·the costs associated with commercializing MG01CI if we receive marketing approval, including the cost and timing of establishing sales and marketing capabilities to market and sell MG01CI;
   
·subject to receipt of marketing approval, revenue received from sales of approved products, if any, in the future;
   
·any product liability or other lawsuits related to our products;
   
·the expenses needed to attract and retain skilled personnel; and
   
·the costs associated with being a public company.

 

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Based on our current operating plan, we anticipate that the net proceeds of this offering, together with our existing resources, will be sufficient to enable us to maintain our currently planned operations, including our continued product development, at least through 2015. We believe these funds will enable us to complete any preparatory clinical and non-clinical work, as well as two Phase III clinical trials. We will require significant additional funds to initiate and complete the FDA approval process. However, changing circumstances may cause us to consume capital significantly faster than we currently anticipate. We have no committed external sources of funds. Additional financing may not be available when we need it or may not be available on terms that are favorable to us. If adequate funds are not available to us on a timely basis, or at all, we may be required to:

 

·terminate or delay clinical trials or other development activities for MG01CI; or

 

·delay our establishment of sales and marketing capabilities or other activities that may be necessary to commercialize MG01CI, if we obtain marketing approval.

 

 Raising additional capital would cause dilution to our existing shareholders, and may restrict our operations or require us to relinquish rights.

 

We may seek additional capital through a combination of private and public equity offerings, debt financings and collaborations and strategic and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a shareholder. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring debt, making capital expenditures or declaring dividends. If we raise additional funds through collaboration, strategic alliance and licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams or product candidates, or grant licenses on terms that are not favorable to us.

 

Our recurring operating losses have raised substantial doubt regarding our ability to continue as a going concern.

 

As of December 31, 2012, we had an accumulated deficit of $8.2 million. Our recurring operating losses raise substantial doubt about our ability to continue as a going concern. Our financial statements include a note describing the conditions which raise this substantial doubt. As a result, our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements as of and for the year ended December 31, 2012 with respect to this uncertainty. We have no current source of revenue to sustain our present activities, and we do not expect to generate revenue until, and unless, the FDA or other regulatory authorities approve MG01CI and we successfully commercialize MG01CI. Accordingly, our ability to continue as a going concern will require us to obtain additional financing to fund our operations. According to our estimates, based on our budget, if we are not successful in obtaining additional capital resources, there is a substantial doubt that we will be able to continue our activities after June 30, 2013. The perception of our ability to continue as a going concern may make it more difficult for us to obtain financing for the continuation of our operations and could result in the loss of confidence by investors, suppliers and employees.

 

Risks Related to Our Reliance on Third Parties

 

We have no manufacturing capacity and anticipate reliance on third-party manufacturers for our products.

 

We do not currently operate manufacturing facilities for clinical production of MG01CI. We do not intend to develop facilities for the manufacture of products for clinical trials or commercial purposes in the foreseeable future. We will rely on third-party manufacturers to produce bulk drug products required for our clinical trials. We plan to continue to rely upon contract manufacturers and, potentially, collaboration partners to manufacture commercial quantities of our drug product candidates if and when approved for marketing by the applicable regulatory authorities. Our contract manufacturers have not completed process validation for the drug substance manufacturing process. If our contract manufacturers are not approved by the FDA, our commercial supply of drug substance will be significantly delayed and may result in significant additional costs. We purchase finished MG01CI drug product from a third party under a clinical supply agreement. We do not have an agreement in place for, and we have not identified, a secondary fill/finish supplier. If we need to identify an additional fill/finish manufacturer, we would not be able to do so without significant delay and likely significant additional cost.

 

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Our contract manufacturer’s failure to achieve and maintain high manufacturing standards, in accordance with applicable regulatory requirements, or the incidence of manufacturing errors, could result in patient injury or death, product shortages, product recalls or withdrawals, delays or failures in product testing or delivery, cost overruns or other problems that could seriously harm our business. Contract manufacturers often encounter difficulties involving production yields, quality control and quality assurance, as well as shortages of qualified personnel.

 

Our existing manufacturers and any future contract manufacturers may not perform as agreed or may not remain in the contract manufacturing business. In the event of a natural disaster, business failure, strike or other difficulty, we may be unable to replace a third-party manufacturer in a timely manner and the production of MG01CI would be interrupted, resulting in delays and additional costs.

 

In addition, because our contract manufacturers of the bulk drug substance are located outside of the United States, we may face difficulties in importing our drug substances into the United States as a result of, among other things, FDA import inspections, incomplete or inaccurate import documentation or defective packaging.

 

Any collaboration arrangements that we may enter into in the future may not be successful, which could adversely affect our ability to develop and commercialize our current and potential future product candidates.

 

We may seek collaboration arrangements with pharmaceutical or biotechnology companies for the development or commercialization of our current and potential future product candidates. We may enter into these arrangements on a selective basis depending on the merits of retaining commercialization rights for ourselves as compared to entering into selective collaboration arrangements with other pharmaceutical or biotechnology companies for each product candidate, both in the United States and internationally. We will face, to the extent that we decide to enter into collaboration agreements, significant competition in seeking appropriate collaborators. Moreover, collaboration arrangements are complex and time consuming to negotiate, document and implement. We may not be successful in our efforts to establish and implement collaborations or other alternative arrangements should we so choose to enter into such arrangements. The terms of any collaborations or other arrangements that we may establish may not be favorable to us.

 

We previously had a collaboration with Teva Pharmaceuticals, Ltd., a large Israeli generic drug manufacturer. After our successful proof of concept trial in 2010, Teva made an equity investment in us, negotiated the right to acquire us should MG01CI reach market, and funded the next stage of clinical development of MG01CI. All of Teva’s rights with respect to the development of MG01CI and any outcomes thereof terminated when it failed to timely exercise an option to continue financing the development of MG01CI in November 2011. We do not have any continuing obligations to Teva other than that Teva continues to be a shareholder of the Company with related rights.

 

Any future collaborations that we enter into may not be successful. The success of our collaboration arrangements will depend heavily on the efforts and activities of our collaborators. Collaborators generally have significant discretion in determining the efforts and resources that they will apply to these collaborations.

 

Disagreements between parties to a collaboration arrangement regarding clinical development and commercialization matters can lead to delays in the development process or commercializing the applicable product candidate and, in some cases, termination of the collaboration arrangement. These disagreements can be difficult to resolve if neither of the parties has final decision making authority.

 

Collaborations with pharmaceutical or biotechnology companies and other third parties often are terminated or allowed to expire by the other party. Any such termination or expiration would adversely affect us financially and could harm our business reputation.

 

We currently depend on third parties to conduct our clinical trials.

 

We rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories to oversee some of the operations of our clinical trials and to perform data collection and analysis. As a result, we may face additional delays outside of our control if these parties do not perform their obligations in a timely fashion or in accordance with regulatory requirements. If these third parties do not successfully carry out their contractual duties or obligations and meet expected deadlines, if they need to be replaced, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or for other reasons, our financial results and the commercial prospects for MG01CI or any other potential product candidates could be harmed, our costs could increase and our ability to obtain regulatory approval and commence product sales could be delayed.

 

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Risks Related to Our Intellectual Property

 

We have filed multiple patent applications but have no issued patents and only one of our patent applications has been allowed by the U.S. PTO. There can be no assurance that any of our patent applications will result in issued patents. As a result, we may not be able to protect our proprietary technology in the marketplace.

 

We have filed patent applications in many countries worldwide. These applications cover a range of areas including: different formulations of Metadoxine, the use of Metadoxine for all cognitive impairments, combination therapy including Metadoxine, new molecular derivatives of Metadoxine and the manufacturing and production of Metadoxine API. Unless and until our pending applications issue, their protective scope is impossible to determine. It is impossible to predict whether or how many of these applications will result in issued patents. Even if pending applications issue, they may issue with claims significantly narrower than those we currently seek.

 

Even if we are issued patents, because the patent positions of pharmaceutical products are complex and uncertain, we cannot predict the scope and extent of patent protection for MG01CI.

 

Any patents that may issue to use will not ensure the protection of our intellectual property for a number of reasons, including without limitation the following:

 

·      any issued patents may not be broad or strong enough to prevent competition from other products including identical or similar products;

 

·      if we are not issued patents or if issued patents expire, there would be no protections against competitors making generic equivalents;

 

·      there may be prior art of which we are not aware that may affect the validity or enforceability of a patent claim;

 

·      there may be other patents existing in the patent landscape for MG01CI that will affect our freedom to operate;

 

·      if our patents are challenged, a court could determine that they are not valid or enforceable;

 

·      a court could determine that a competitor’s technology or product does not infringe our patents;

 

·      our patents could irretrievably lapse due to failure to pay fees or otherwise comply with regulations, or could be subject to compulsory licensing; and

 

·      if we encounter delays in our development or clinical trials, the period of time during which we could market our products under patent protection would be reduced.

 

We may not be able to enforce our intellectual property rights throughout the world. This risk is exacerbated for us because Metadoxine is manufactured and used in a number of foreign countries in other applications.

 

The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. This risk is exacerbated for us because Metadoxine is manufactured and used in a number of foreign countries in other applications and is widely available. The manufacture of Metadoxine and its use in other indications will not infringe our IP rights, and will make it more difficult to monitor and enforce any patent rights that may be issued to us.

 

The legal systems of some countries, particularly developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relating to life sciences. This could make it difficult for us to stop the infringement of any in-licensed patents we may acquire or the misappropriation of our other intellectual property rights. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit.

 

Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal decisions by courts in the United States and foreign countries may affect our ability to obtain adequate protection for our technology and the enforcement of intellectual property.

 

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We may infringe the intellectual property rights of others, which may prevent or delay our product development efforts and stop us from commercializing or increase the costs of commercializing our products.

 

Our commercial success depends significantly on our ability to operate without infringing the patents and other intellectual property rights of third parties. For example, there could be issued patents of which we are not aware that our products infringe. There also could be patents that we believe we do not infringe, but that we may ultimately be found to infringe. Moreover, patent applications are in some cases maintained in secrecy until patents are issued. The publication of discoveries in the scientific or patent literature frequently occurs substantially later than the date on which the underlying discoveries were made and patent applications were filed. Because patents can take many years to issue, there may be currently pending applications of which we are unaware that may later result in issued patents that our products infringe. For example, pending applications may exist that provide support or can be amended to provide support for a claim that results in an issued patent that our product infringes.

 

Third parties may assert that we are employing their proprietary technology without authorization. If a court held that any third-party patents are valid, enforceable and cover our products or their use, the holders of any of these patents may be able to block our ability to commercialize our products unless we obtained a license under the applicable patents, or until the patents expire. We may not be able to enter into licensing arrangements or make other arrangements at a reasonable cost or on reasonable terms. Any inability to secure licenses or alternative technology could result in delays in the introduction of our products or lead to prohibition of the manufacture or sale of products by us.

 

We may be unable to adequately prevent disclosure of trade secrets and other proprietary information.

 

We rely on trade secrets to protect our proprietary know-how and technological advances, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. We rely in part on confidentiality agreements with our employees, consultants, outside scientific collaborators, sponsored researchers and other advisors to protect our trade secrets and other proprietary information. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover our trade secrets and proprietary information. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights. Failure to obtain or maintain trade secret protection could enable competitors to use our proprietary information to develop products that compete with our products or cause additional, material adverse effects upon our competitive business position.

 

Under applicable employment laws, we may not be able to enforce covenants not to compete and therefore may be unable to prevent our competitors from benefiting from the expertise of some of our former employees. In addition, employees may be entitled to seek compensation for their inventions irrespective of their agreements with us.

 

We generally enter into non-competition agreements with our employees and certain key consultants. These agreements prohibit our employees and certain key consultants, if they cease working for us, from competing directly with us or working for our competitors or clients for a limited period of time. We may be unable to enforce these agreements under the laws of the jurisdictions in which our employees work and it may be difficult for us to restrict our competitors from benefitting from the expertise our former employees or consultants developed while working for us. For example, Israeli courts have required employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of the employer which have been recognized by the courts, such as the secrecy of a company's confidential commercial information or the protection of its intellectual property. If we cannot demonstrate that such interests will be harmed, we may be unable to prevent our competitors from benefiting from the expertise of our former employees or consultants and our ability to remain competitive may be diminished. In addition, the Israeli Supreme Court ruled in 2012 that an employee who receives a patent or contributes to an invention during his employment may be allowed to seek compensation for it from their employer, even if the employee’s contract of employment specifically states otherwise and the employee has transferred all intellectual property rights to the employer. The Supreme Court ruled that the fact that a contract revokes the employee’s right for royalties and compensation, does not rule out the right of the employee to claim their right for royalties. As a result, it is unclear if, and to what extent, our employees may be able to claim compensation with respect to our future revenue. As a result, we may receive less revenue from future products if such claims are successful which in turn could impact our future profitability.

 

Any lawsuits relating to infringement of intellectual property rights necessary to defend ourselves or enforce our rights will be costly and time consuming.

 

Our ability to defend our intellectual property may require us to initiate litigation to enforce our rights or defend our activities in response to alleged infringement of a third party. In addition, we may be sued by others who hold intellectual property rights who claim that their issued patents are infringed by MG01CI or any future products or product candidates. These lawsuits can be very time consuming and costly. There is a substantial amount of litigation involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries generally.

 

In addition, our patents and patent applications, or those of our licensors, could face other challenges, such as interference proceedings, opposition proceedings, and re-examination proceedings. Any of these challenges, if successful, could result in the invalidation of, or in a narrowing of the scope of, any of our patents and patent applications subject to challenge. Any of these challenges, regardless of their success, would likely be time consuming and expensive to defend and resolve and would divert our management’s time and attention.

 

Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.

 

As is the case with other pharmaceutical companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the biopharmaceutical industry involve both technological and legal complexity. Therefore, obtaining and enforcing pharmaceutical patents is costly, time-consuming and inherently uncertain. In addition, the United States has recently enacted and is currently implementing wide-ranging patent reform legislation. The United States Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the U.S. Congress, the federal courts, and the U.S. PTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future.

 

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Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

 

The U.S. PTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions during the patent process. There are situations in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case.

 

Risks Related to Our Business Operations and Industry

 

We manage our business through a small number of employees and key consultants. We depend on them even more than similarly-situated companies.

 

Our key employees include our Chief Executive Officer, Dr. Yaron Daniely, who has been with us since 2010. Key consultants include our Chief Financial Officer/Chief Accounting Officer, Udi Gilboa, who co-founded us in 2008 and has been with us since our founding; our Director of Non-Clinical Development, Hanna Ron, who has been with us since 2011; and our Clinical Advisory Board chairperson, Dr. Lenard A. Adler, who has been with us since 2011. Our future growth and success depend on our ability to recruit, retain, manage and motivate our employees and key consultants. The loss of the services of our chief executive officer or any of our key consultants or the inability to hire or retain experienced management personnel could adversely affect our ability to execute our business plan and harm our operating results. Although we have employment agreements in place with management, these agreements are terminable at will with minimal notice.

 

Because of the specialized scientific and managerial nature of our business, we rely heavily on our ability to attract and retain qualified scientific and technical consultants. In particular, the loss of one or more of our senior executive officers or key consultants could be detrimental to us if we cannot recruit suitable replacements in a timely manner. We do not currently carry “key person” insurance on the lives of members of senior management. The competition for qualified personnel in the pharmaceutical field is intense. Due to this intense competition, we may be unable to attract and retain qualified personnel necessary for the development of our business or to recruit suitable replacement personnel.

 

Failure to build our finance infrastructure and improve our accounting systems and controls could impair our ability to comply with the financial reporting and internal controls requirements for publicly traded companies.

 

As a public company, we will operate in an increasingly challenging regulatory environment which requires us to comply with the Sarbanes-Oxley Act and the related rules and regulations of the Securities and Exchange Commission and securities exchanges, expanded disclosures, accelerated reporting requirements and more complex accounting rules. Company responsibilities required by the Sarbanes-Oxley Act include establishing corporate oversight and adequate internal control over financial reporting and disclosure controls and procedures. Effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent financial fraud. We will be required to disclose material changes made in our internal controls and procedures on a quarterly basis. However, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act until the date we are no longer an “emerging growth company” as defined in the JOBS Act, because we are taking advantage of the exemptions contained in the JOBS Act. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.0 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

 

To date, we have never conducted a review of our internal control for the purpose of providing the reports required by these rules. During the course of our review and testing, we may identify deficiencies and be unable to remediate them before we must provide the required reports. Furthermore, if we have a material weakness in our internal controls over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. We or our independent registered public accounting firm may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting, which could harm our operating results, cause investors to lose confidence in our reported financial information and cause the trading price of our stock to fall.

 

To build our finance infrastructure, we will need to hire additional accounting personnel and improve our accounting systems, disclosure policies, procedures and controls. We are currently in the process of:

 

·initiating our plans to upgrade our computer systems, including hardware and software;

 

·establishing written policies and procedures; and

 

·enhancing internal controls and our financial statement review process.

 

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If we are unsuccessful in building an appropriate accounting infrastructure, we may not be able to prepare and disclose, in a timely manner, our financial statements and other required disclosures, or comply with existing or new reporting requirements. Any failure to report our financial results on an accurate and timely basis could result in sanctions, lawsuits, delisting of our shares from The NASDAQ Capital Market or other adverse consequences that would materially harm to our business. If we cannot provide reliable financial reports or prevent fraud, our business and results of operations could be harmed and investors could lose confidence in our reported financial information.

 

We will need to significantly increase the size of our organization, and we may experience difficulties in managing growth.

 

We currently have only one employee and in order to commercialize our products, we will need to substantially increase our operations, including expanding our employee base of managerial, operational and financial personnel. Any future growth will impose significant added responsibilities on members of management, including the need to identify, recruit, maintain and integrate additional employees. To that end, we must be able to:

 

·manage our clinical trials and the regulatory process effectively;

 

·develop our administrative, accounting and management information systems and controls;

 

·hire and train additional qualified personnel; and

 

·integrate current and additional management, administrative, financial and sales and marketing personnel.

 

Our business may be affected by macroeconomic conditions.

 

A deterioration in global economic conditions and uncertainties may have an adverse effect on our business. For instance, interest rates, the liquidity of the credit markets and the volatility of the capital markets could also affect the value of our investments and our ability to liquidate our investments in order to fund our operations.

 

Interest rates and the ability to access credit markets could also adversely affect the ability of patients and distributors to purchase, pay for and effectively distribute our products. Similarly, these macroeconomic factors could affect the ability of our contract manufacturers, sole-source or single-source suppliers to remain in business or otherwise manufacture or supply product. Failure by any of them to remain a going concern could affect our ability to manufacture products.

 

Risks Related to this Offering and Ownership of Our Ordinary Shares

 

The market price of our ordinary shares may be highly volatile, and you may not be able to resell your shares at or above the initial public offering price.

 

Prior to this offering, there has not been a public market for our ordinary shares. If an active trading market for our ordinary shares does not develop following this offering, you may not be able to sell your shares quickly or at the market price. The initial public offering price for the shares will be determined by negotiations between us and representatives of the underwriters and may not be indicative of prices that will prevail in the trading market.

 

The trading price of our ordinary shares is likely to be volatile. The following factors, in addition to other risk factors described in this section, may have a significant impact on the market price of our ordinary shares:

 

·inability to obtain the approvals necessary to commence further clinical trials;
   
·unsatisfactory results of clinical trials;
   
·announcements of regulatory approval or the failure to obtain it, or specific label indications or patient populations for its use, or changes or delays in the regulatory review process;
   
·announcements of therapeutic innovations or new products by us or our competitors;

 

·adverse actions taken by regulatory agencies with respect to our clinical trials, manufacturing supply chain or sales and marketing activities;

 

·changes or developments in laws or regulations applicable to MG01CI;

 

·any adverse changes to our relationship with manufacturers or suppliers;

 

·any intellectual property infringement actions in which we may become involved;

 

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·announcements concerning our competitors or the pharmaceutical industry in general;

 

·achievement of expected product sales and profitability or our failure to meet expectations;

 

·our commencement of, or involvement in, litigation;

 

·any major changes in our board of directors or management; and

 

·legislation in the United States relating to the sale or pricing of pharmaceuticals.

 

In addition, the stock market in general, and The NASDAQ Stock Market in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of small companies. Broad market and industry factors may negatively affect the market price of our ordinary shares, regardless of our actual operating performance. Further, a systemic decline in the financial markets and related factors beyond our control may cause our share price to decline rapidly and unexpectedly.

 

We may be subject to securities litigation, which is expensive and could divert management attention.

 

In the past companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Litigation of this type could result in substantial costs and diversion of management’s attention and resources, which could seriously hurt our business. Any adverse determination in litigation could also subject us to significant liabilities.

 

Our principal shareholders, chief executive officer and directors currently own approximately 80% of our outstanding ordinary shares and will own over 58% of our ordinary shares upon the closing of this offering. They will therefore be able to exert significant control over matters submitted to our shareholders for approval.

 

After this offering, our chief executive officer and directors, and shareholders who own more than 5% of our outstanding ordinary shares before this offering will, in the aggregate, beneficially own approximately 58% of our ordinary shares (assuming no exercise of the underwriters’ over-allotment option and no exercise of outstanding options). This significant concentration of share ownership may adversely affect the trading price for our ordinary shares because investors often perceive disadvantages in owning stock in companies with controlling shareholders. As a result, these shareholders, if they acted together, could significantly influence or even unilaterally approve matters requiring approval by our shareholders, including the election of directors and the approval of mergers or other business combination transactions. The interests of these shareholders may not always coincide with our interests or the interests of other shareholders.

 

If you purchase our ordinary shares in this offering, you will incur immediate and substantial dilution in the book value of your shares.

 

The initial public offering price is substantially higher than the net tangible book value per share of our ordinary shares. Investors purchasing ordinary shares in this offering will pay a price per share that substantially exceeds the net tangible book value of our ordinary shares. As a result, investors purchasing ordinary shares in this offering will incur immediate dilution of $5.993 per share, based on an initial public offering price of $8.00 per share, and our pro forma net tangible book value as of December 31, 2012. In addition, as of that date, options and warrants to purchase 952,402 of our ordinary shares at a weighted average exercise price of $2.212 per share were outstanding. The exercise of these options and warrants would result in additional dilution. As a result of this dilution, investors purchasing shares in this offering may receive significantly less than the purchase price paid in this offering in the event of liquidation. For more information, please refer to the section of this prospectus entitled “Dilution.”

 

Sales of a substantial number of shares of our ordinary shares in the public market by our existing shareholders could cause our share price to fall.

 

Sales of a substantial number of shares of our ordinary shares in the public market or the perception that these sales might occur, could depress the market price of our ordinary shares and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that sales may have on the prevailing market price of our ordinary shares. Substantially all of the shares owned by our existing shareholders and option holders are subject to lock-up agreements with the underwriters of this offering that restrict the shareholders’ ability to transfer our ordinary shares for at least six months from the date of this prospectus. Substantially all of our outstanding shares will become eligible for unrestricted sale upon expiration of the lockup period, as described in the section of this prospectus entitled “Shares Eligible for Future Sale.” In addition, shares issued or issuable upon exercise of options and warrants vested as of the expiration of the lock-up period will be eligible for sale at that time. Sales of shares by these shareholders could have a material adverse effect on the trading price of our ordinary shares.

 

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Our management will have broad discretion in the use of the net proceeds from this offering and may allocate the net proceeds from this offering in ways that you and other shareholders may not approve.

 

Our management will have broad discretion in the use of the net proceeds, including for any of the purposes described in the section entitled “Use of Proceeds,” and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. The failure of our management to use these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in short-term, investment-grade, interest-bearing securities. These investments may not yield a favorable return to our shareholders.

 

If we were to be characterized as a “passive foreign investment company” for U.S. tax purposes, U.S. holders of our ordinary shares could have adverse U.S. income tax consequences.

 

If we were to be characterized as a passive foreign investment company, or PFIC, under the U.S. Internal Revenue Code of 1986, as amended, or the Code, in any taxable year during which a U.S. taxpayer owns ordinary shares, such U.S. holder could be liable for additional taxes and interest charges upon certain distributions by us and  any gain recognized on a sale, exchange or other disposition, including a pledge, of the ordinary shares, whether or not we continue to be a PFIC. See “U.S. Federal Income Tax Consequences.” 

  

If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they adversely change their recommendations or publish negative reports regarding our business or our shares, our share price and trading volume could decline.

 

The trading market for our ordinary shares will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. We do not have any control over these analysts and we cannot provide any assurance that analysts will cover us or provide favorable coverage. If any of the analysts who may cover us adversely change their recommendation regarding our shares, or provide more favorable relative recommendations about our competitors, our share price would likely decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our share price or trading volume to decline.

 

Because we do not intend to declare cash dividends on our ordinary shares in the foreseeable future, shareholders must rely on appreciation of the value of our ordinary shares for any return on their investment.

 

We have never declared or paid cash dividends on our ordinary shares. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends in the foreseeable future. Moreover, the Israeli Companies Law imposes certain restrictions on our ability to declare and pay dividends. See “Description of Share Capital—Dividend and Liquidation Rights” for additional information.

  

The requirements associated with being a public company will require significant company resources and management attention.

 

Following this offering, we will become subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the listing requirements of the securities exchange on which our ordinary shares is traded, and other applicable securities rules and regulations. The Exchange Act requires that we file periodic reports with respect to our business and financial condition and maintain effective disclosure controls and procedures and internal control over financial reporting. In addition, subsequent rules implemented by the SEC and The NASDAQ Stock Market may also impose various additional requirements on public companies. As a result, we will incur additional legal, accounting and other expenses that we did not incur as a nonpublic company, particularly after we are no longer an “emerging growth company” as defined in the JOBS Act. In the period following this offering, we estimate that these expenses will be at least several hundred thousand dollars annually. Further, the need to establish the corporate infrastructure demanded of a public company may divert management’s attention from implementing our development plans. We have made changes to our corporate governance standards, disclosure controls and financial reporting and accounting systems to meet our reporting obligations. The measures we take, however, may not be sufficient to satisfy our obligations as a public company, which could subject us to delisting of our ordinary shares, fines, sanctions and other regulatory action and potentially civil litigation.

 

The recently enacted JOBS Act will allow us to postpone the date by which we must comply with some of the laws and regulations intended to protect investors and to reduce the amount of information we provide in our reports filed with the SEC, which could undermine investor confidence in our company and adversely affect the market price of our ordinary shares.

 

For so long as we remain an “emerging growth company” as defined in the JOBS Act, we intend to take advantage of certain exemptions from various requirements that are applicable to public companies that are not “emerging growth companies” including:

 

·the provisions of the Sarbanes-Oxley Act requiring that our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting;

 

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·the “say on pay” provisions requiring a non-binding shareholder vote to approve compensation of certain executive officers and the “say on golden parachute” provisions requiring a non-binding shareholder vote to approve golden parachute arrangements for certain executive officers in connection with mergers and certain other business combinations of the Dodd-Frank Act and some of the disclosure requirements of the Dodd-Frank Act relating to compensation of our chief executive officer;

 

·our ability not to comply with new accounting principles that do not apply to public companies until such accounting principles become applicable to private companies;

 

·any rules that may be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s report on the financial statements; and

 

·our ability to furnish two rather than three years of income statements and statements of cash flows in various required filings.

 

We intend to take advantage of these exemptions until we are no longer an “emerging growth company.” We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenue of at least $1.0 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

 

We cannot predict if investors will find our ordinary shares less attractive because we may rely on these exemptions. If some investors find our ordinary shares less attractive as a result, there may be a less active trading market for our ordinary shares, and our share price may be more volatile and may decline.

 

Our election to use the extended transition period for complying with new or revised accounting standards under the recently enacted JOBS Act could undermine investor confidence in our company and adversely affect the market price of our ordinary shares.

 

Our election to use the extended transition period for complying with new or revised accounting standards means that we may delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. This election could undermine investor confidence in our company and adversely affect the market price of our ordinary shares in part because our financial statements may not be comparable to companies that comply with public company effective dates.

 

As a foreign private issuer, we are permitted, and intend, to follow certain home country corporate governance practices instead of otherwise applicable SEC and NASDAQ requirements, which may result in less protection than is accorded to investors under rules applicable to domestic U.S. issuers.

 

As a foreign private issuer, we will be permitted, and intend, to follow certain home country corporate governance practices instead of those otherwise required under the Listing Rules of the NASDAQ Stock Market for domestic U.S. issuers. For instance, we intend to follow home country practice in Israel with regard to, among other things, director nomination procedures and approval of compensation of officers. In addition, we may follow our home country law instead of the Listing Rules of the NASDAQ Stock Market that require that we obtain shareholder approval for certain dilutive events, such as the establishment or amendment of certain equity based compensation plans, an issuance that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or greater interest in the company, and certain acquisitions of the stock or assets of another company. Following our home country governance practices as opposed to the requirements that would otherwise apply to a United States company listed on NASDAQ may provide less protection to you than what is accorded to investors under the Listing Rules of the NASDAQ Stock Market applicable to domestic U.S. issuers.

 

In addition, as a foreign private issuer, we will be exempt from the rules and regulations under the Exchange Act related to the furnishing and content of proxy statements, and our officers, directors and principal shareholders will be exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we will not be required under the Exchange Act to file annual, quarterly and current reports and financial statements with the SEC as frequently or as promptly as domestic U.S. issuers whose securities are registered under the Exchange Act. These exemptions and leniencies will reduce the frequency and scope of information and protections to which you are entitled as an investor.

 

Risks Related to Israeli Law and Our Operations in Israel

 

Our headquarters and other significant operations are located in Israel and, therefore, our results may be adversely affected by political, economic and military instability in Israel.

 

Our executive offices are located in Tel-Aviv, Israel. In addition, the majority of our officers and directors are residents of Israel. Accordingly, political, economic and military conditions in Israel may directly affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its trading partners could adversely affect our operations and results of operations. During November 2012, Israel was engaged in an armed conflict with a militia group and political party which controls the Gaza Strip, and during the summer of 2006, Israel was engaged in an armed conflict with Hezbollah, a Lebanese Islamist Shiite militia group and political party. These conflicts involved missile strikes against civilian targets in various parts of Israel, including areas in which our employees and some of our consultants are located, and negatively affected business conditions in Israel. Any armed conflicts, terrorist activities or political instability in the region could adversely affect business conditions and could harm our results of operations and could make it more difficult for us to raise capital. Parties with whom we do business have sometimes declined to travel to Israel during periods of heightened unrest or tension, forcing us to make alternative arrangements when necessary in order to meet our business partners face to face. In addition, the political and security situation in Israel may result in parties with whom we have agreements involving performance in Israel claiming that they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions in such agreements.

 

Our commercial insurance does not cover losses that may occur as a result of an event associated with the security situation in the Middle East. Although the Israeli government is currently committed to covering the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained, or if maintained, will be sufficient to compensate us fully for damages incurred. Any losses or damages incurred by us could have a material adverse effect on our business. Any armed conflicts or political instability in the region would likely negatively affect business conditions generally and could harm our results of operations.

 

Further, in the past, the State of Israel and Israeli companies have been subjected to an economic boycott. Several countries still restrict business with the State of Israel and with Israeli companies. These restrictive laws and policies may have an adverse impact on our operating results, financial condition or the expansion of our business.

 

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Our operations may be disrupted as a result of the obligation of management or key personnel or consultants to perform military service.

 

Our male employees and consultants in Israel, including members of our senior management, may be obligated to perform one month, and in some cases longer periods, of annual military reserve duty until they reach the age of 45 (or older, for citizens who hold certain positions in the Israeli armed forces reserves). In this connection, we note that our chief executive officer, Yaron Daniely, is 37 years old. In the event of a military conflict, he and other of our key personnel or consultants may be called to active duty. In response to increases in terrorist activity, there have been periods of significant call-ups of military reservists. It is possible that there will be similar large-scale military reserve duty call-ups in the future. Our operations could be disrupted by the absence of a significant number of our officers, directors, employees and consultants. Such disruption could materially adversely affect our business and operations.

 

Exchange rate fluctuations between the U.S. dollar and the New Israeli Shekel currencies may negatively affect our earnings.

 

We incur expenses both in U.S. dollars and New Israeli Shekels, or NIS. Our functional currency is the U.S. dollar. As a result, we are exposed to the risks that the NIS may appreciate relative to the U.S. dollar, or, if the NIS instead devalues relative to the U.S. dollar, that the inflation rate in Israel may exceed such rate of devaluation of the NIS, or that the timing of such devaluation may lag behind inflation in Israel. In any such event, the U.S. dollar cost of our operations in Israel would increase and our U.S. dollar-denominated results of operations would be adversely affected. The exchange rate as of April 30, 2013 was $1.00 = NIS 3.587. We cannot predict any future trends in the rate of inflation in Israel or the rate of devaluation (if any) of the NIS against the U.S. dollar.

 

In the past, we received Israeli government grants for certain of our research and development activities. The terms of those grants may require us, in addition to payment of royalties, to satisfy specified conditions in order to manufacture products and transfer technologies outside of Israel. We may be required to pay penalties in addition to repayment of the grants.

 

Our research and development efforts, during the period between May 1, 2009 and April 30, 2010, were financed in part through royalty-bearing grants, in an amount of $106,494 that we received from Israel's Office of the Chief Scientist of the Ministry of Industry, Trade and Labor, or OCS. With respect to such grants we are committed to pay royalties at a rate of 3% to 5% on sales proceeds from MG01CI, according to the OCS approval, the company is required to pay royalties from any income generated in connection with delayed release Metadoxine tablets up to the total amount of grants received, linked to the dollar and bearing interest at an annual rate of LIBOR applicable to dollar deposits. Regardless of any royalty payment, we are further required to comply with the requirements of the Israeli Encouragement of Industrial Research and Development Law, 5744-1984, and related regulations, or the Research Law, with respect to those past grants. When a company develops know-how, technology or products using OCS grants, the terms of these grants and the Research Law restrict the transfer of such know-how, and the transfer of manufacturing or manufacturing rights of such products, technologies or know-how outside of Israel, without the prior approval of the OCS. Therefore, if aspects of our technologies are deemed to have been developed with OCS funding, the discretionary approval of an OCS committee would be required for any transfer to third parties outside of Israel of know-how or manufacturing or manufacturing rights related to those aspects of such technologies, and may result in payment of increased royalties (both increased royalty rates and increased royalties ceilings) and/or payment of additional amounts to the OCS. We may not receive those approvals. Furthermore, the OCS may impose certain conditions on any arrangement under which it permits us to transfer technology or development out of Israel (including for the purpose of manufacturing). Currently, under the Research Law, there is no mechanism for the approval of licensing transactions of OCS-supported technologies, however, licensing OCS supported technologies may under certain circumstances be considered a transfer of know-how and therefore requires approval as aforementioned.

 

The transfer of OCS-supported technology or know-how outside of Israel may involve the payment of additional amounts depending upon the value of the transferred technology or know-how, the amount of OCS support, the time of completion of the OCS-supported research project and other factors up to a maximum of six times the amount of grants received. These restrictions and requirements for payment may impair our ability to sell our technology assets outside of Israel or to outsource or transfer development or manufacturing activities with respect to any product or technology outside of Israel (particularly since currently there is no mechanism for the approval of licensing transactions of OCS supported technologies). Furthermore, the consideration available to our shareholders in a transaction involving the transfer outside of Israel of technology or know-how developed with OCS funding (such as a merger or similar transaction) may be reduced by any amounts that we are required to pay to the OCS.

 

Our obligations and limitations pursuant to the Research Law are not limited in time and may not be terminated by us at will. As of the date of this prospectus, we have not been required to pay any royalties with respect to the OCS grants. As of the date of this prospectus, production of bulk drug substance and drug products required for our clinical trials does not involve manufacture of OCS supported products, technologies or know-how, and/or transfer of OCS supported technologies or know-how, and therefore no OCS committee approval has been sought after or required in connection with such production by our third-party manufacturer, Patheon Inc., located in Cincinnati, Ohio.

 

Provisions of Israeli law and our amended and restated articles of association may delay, prevent or otherwise impede a merger with, or an acquisition of, our company, which could prevent a change of control, even when the terms of such a transaction are favorable to us and our shareholders.

 

Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to such types of transactions. For example, a merger may not be consummated unless at least 50 days have passed from the date on which a merger proposal is filed by each merging company with the Israel Registrar of Companies and at least 30 days have passed from the date on which the shareholders of both merging companies have approved the merger. In addition, a majority of each class of securities of the target company must approve a merger. Moreover, a tender offer for all of a company's issued and outstanding shares can only be completed if the acquirer receives positive responses from the holders of at least 95% of the issued share capital. Completion of the tender offer also requires approval of a majority of the offerees that do not have a personal interest in the tender offer, unless, following consummation of the tender offer, the acquirer would hold at least 98% of the Company's outstanding shares. Furthermore, the shareholders, including those who indicated their acceptance of the tender offer, may, at any time within six months following the completion of the tender offer, petition an Israeli court to alter the consideration for the acquisition, unless the acquirer stipulated in its tender offer that a shareholder that accepts the offer may not seek such appraisal rights.

 

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Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to our shareholders whose country of residence does not have a tax treaty with Israel exempting such shareholders from Israeli tax. See “Taxation—Israeli Tax Considerations” for additional information.

 

Our amended and restated articles of association that will be in effect immediately prior to the consummation of this offering will also contain provisions that could delay or prevent changes in control or changes in our management without the consent of our board of directors. These provisions will include the following:

 

·no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates; and
   
·the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors.

 

It may be difficult to enforce a judgment of a United States court against us and our officers and directors and the Israeli experts named in this prospectus in Israel or the United States, to assert United States securities laws claims in Israel or to serve process on our officers and directors and these experts.

 

We were incorporated in Israel. Substantially all of our executive officers and directors reside outside of the United States, and all of our assets and most of the assets of these persons are located outside of the United States. Therefore, a judgment obtained against us, or any of these persons, including a judgment based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the United States and may not necessarily be enforced by an Israeli court. It also may be difficult for you to effect service of process on these persons in the United States or to assert U.S. securities law claims in original actions instituted in Israel. Additionally, it may be difficult for an investor, or any other person or entity, to initiate an action with respect to United States securities laws in Israel. Israeli courts may refuse to hear a claim based on an alleged violation of United States securities laws reasoning that Israel is not the most appropriate forum in which to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not United States law is applicable to the claim. If United States law is found to be applicable, the content of applicable United States law must be proven as a fact by expert witnesses, which can be a time consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel that addresses the matters described above. As a result of the difficulty associated with enforcing a judgment against us in Israel, you may not be able to collect any damages awarded by either a United States or foreign court. See "Enforceability of Civil Liabilities" for additional information on your ability to enforce a civil claim against us and our executive officers or directors named in this prospectus.

 

Your liabilities and responsibilities as a shareholder will be governed by Israeli law, which differs in some material respects from the U.S. law that governs the liabilities and responsibilities of shareholders of U.S. companies.

 

The liabilities and responsibilities of the holders of our ordinary shares are governed by our amended and restated articles of association and by Israeli law. These liabilities and responsibilities differ in some material respects from the liabilities and responsibilities of shareholders in typical U.S.-based corporations. In particular, a shareholder of an Israeli company has certain duties to act in good faith and fairness towards the company and other shareholders, and to refrain from abusing its power in the Company. See "Management—Approval of Related Party Transactions under Israeli Law—Shareholder Duties" for additional information. There is limited case law available to assist us in understanding the nature of this duty or the implications of these provisions. These provisions may be interpreted to impose additional obligations and liabilities on holders of our ordinary shares that are not typically imposed on shareholders of U.S. corporations.

 

24
 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Some of the statements made under “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in this prospectus constitute forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” “intends” or “continue,” or the negative of these terms or other comparable terminology.

 

Forward-looking statements include, but are not limited to, statements about:

 

·FDA approval of, or other regulatory action with respect to, MG01CI;

 

·the commercial launch and future sales of MG01CI or any other future products or product candidates;

 

·our ability to achieve favorable pricing for MG01CI;

 

·our expectations regarding the commercial supply of our ADHD products;

 

·third-party payor reimbursement for MG01CI;

 

·our estimates regarding anticipated capital requirements and our needs for additional financing;

 

·the ADHD patient market size and market adoption of MG01CI by physicians and patients;

 

·the timing, cost or other aspects of the commercial launch of MG01CI;

 

·the timing and cost of Phase III trials for MG01CI or whether such trials will be conducted at all;

 

·completion and receiving favorable results of Phase III trials for MG01CI;

 

·the development and approval of the use of MG01CI for additional indications or in combination therapy; and

 

·our expectations regarding licensing, acquisitions and strategic operations.

 

These statements are only current predictions and are subject to known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from those anticipated by the forward-looking statements. We discuss many of these risks in this prospectus in greater detail under the heading “Risk Factors” and elsewhere in this prospectus. You should not rely upon forward-looking statements as predictions of future events.

 

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by law, we are under no duty to update or revise any of the forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this prospectus.

 

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USE OF PROCEEDS

 

We expect to receive approximately $22,191,362 in net proceeds from the sale of 3,125,000 ordinary shares offered by us in this offering (approximately $25,599,812 if the underwriters exercise their over-allotment option in full), after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

We currently expect to use the net proceeds from this offering for:

 

  · completing at least two advanced clinical trials of MG01CI for adult ADHD, estimated at $6,000,000 each;
     
  ·

Completing a Phase I/II clinical study in children for MG01CI, estimated at $1,000,000 to $2,000,000;

     
  · preparing for our proposed studies in adults and children for MG01CI, including engaging the FDA in discussions related to protocols for the trials, estimated at $1,000,000 to $3,000,000;
     
  · evaluating MG01CI in Phase II trials for additional disorders of cognitive function, estimated at $1,000,000 to $2,000,000; and
     
  · the remainder for working capital and general corporate purposes.

 

The amounts and timing of our actual expenditures will depend upon numerous factors, including the progress of our development and commercialization efforts, the status of and results from our clinical trials, whether or not we enter into strategic collaborations or partnerships, and our operating costs and expenditures. Accordingly, our management will have significant flexibility in applying the net proceeds of this offering.

 

We have no current understandings, commitments or agreements with respect to any material acquisition of or investment in any technologies, products or companies.

 

We expect to conduct two Phase III clinical trials for adult ADHD. We do not expect that these funds will be adequate to complete the Phase III clinical trials required for pediatric approval, which will require us to raise additional funds for this purpose.

  

DIVIDEND POLICY

 

We have never declared or paid any cash dividends on our ordinary shares and do not anticipate paying any cash dividends in the foreseeable future. Payment of cash dividends, if any, in the future will be at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant.

 

The Israeli Companies Law imposes further restrictions on our ability to declare and pay dividends. See “Description of Share Capital—Dividend and Liquidation Rights” for additional information. 

 

Payment of dividends may be subject to Israeli withholding taxes. See “Taxation—Israeli Tax Considerations” for additional information.

 

26
 

  

CAPITALIZATION

 

The following table sets forth our cash and cash equivalents and our capitalization as of December 31, 2012:

 

·on an actual basis;

 

·

on a pro forma basis to give effect to the mandatory conversion of our Convertible Notes at the closing of this offering and the Warrant Cashless Exercise; and

 

·

on a pro forma, as adjusted, basis to also give effect to: (i) the sale of 3,125,000 ordinary shares in this offering at an initial public offering price of $8.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us; (ii) the conversion of Convertible Notes in the principal amount of $600,000 and accrued interest in the amount of $10,000 (as of December 31, 2012) at the closing of the offering, at an assumed conversion price of $6.00 (75% of an initial public offering price of $8.00, as if the sale of the shares in each case had occurred on December 31, 2012; and (iii) the Warrant Cashless Exercise.

 

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

 

    December 31, 2012  
(in thousands, except share and per share data)   Actual     Adjustments 
(unaudited)
    Pro Forma 
as adjusted 
(unaudited)
 
Convertible Notes   $ 662     $ (662 )   $  
Ordinary shares of NIS 0.01 par value -
10,000,000 shares authorized at December 31, 2012 and 2011; 8,098,581 and 8,096,109 issued shares at December 31, 2012 and 2011, respectively; 7,794,256 and 8,096,109 shares outstanding at December 31, 2012 and 2011, respectively
    4       9       13  
Additional paid-in capital     7,615       22,992       30,607  
Deficit accumulated during the development stage     (8,186 )     (148 )     (8,334 )
Total shareholders’ equity (deficiency)     (567 )     22,853       22,286  
Total capitalization   $ 95     $ 22,191     $ 22,286  

  

The number of our ordinary shares to be outstanding immediately after this offering is based on 7,794,256 ordinary shares outstanding as of April 1, 2013 (giving prospective effect to the issuance on May 19, 2013 of bonus shares equivalent to a stock split described below) and includes also: (i) 122,436 shares resulting from the mandatory conversion of our outstanding convertible notes upon closing of this offering and (ii) 85,192 shares issued in connection with the Warrant Cashless Exercise. This number excludes:

 

·

764,444 shares issuable upon the exercise of share options outstanding as of April 1, 2013 under our equity incentive plan;

 

·

58,700 shares issuable upon the exercise of warrants outstanding as of April 1, 2013 with a nominal exercise price, which warrants are expected to remain outstanding upon completion of this offering; and

   

·

7,009 shares reserved as of April 1, 2013 for future grants under our equity incentive plan.

 

As of December 31, 2012, we had Convertible Notes outstanding in the aggregate redemption amount of $662,000. This debt will be converted into ordinary shares at the closing of the offering at a conversion price equal to 75% of the initial public offering price.

  

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DILUTION

 

If you invest in our ordinary shares, you will experience immediate and substantial dilution to the extent of the difference between the initial public offering price of our ordinary shares and the pro forma as adjusted net tangible book value (deficit) per share of our ordinary shares immediately after the offering.

 

Our historical net tangible book value (deficit) per share is determined by dividing our total tangible assets, less total liabilities, by the actual number of outstanding ordinary shares. The historical net tangible book value (deficit) of our ordinary shares as of December 31, 2012 was $(567,000), or $(0.07) per share. On a pro forma basis, giving effect to the conversion of our outstanding promissory notes in the principal amount of $600,000 and accrued interest in the amount of $10,000 at a price of $6.00 into 101,667 ordinary shares and the cashless exercise of 129,257 warrants resulting in the issuance of 85,192 shares, our historical net tangible book value per share was $0.012.

 

The pro forma as adjusted net tangible book value of our ordinary shares as of December 31, 2012 was $22,286,362, or $2.007 per share. The pro forma as adjusted net tangible book value gives effect to the sale of ordinary shares in this offering at an initial public offering price of $8.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The difference between the initial public offering price and the pro forma as adjusted net tangible book value (deficit) per share represents an immediate dilution of $5.993 per share to new investors purchasing ordinary shares in this offering.

    

 The following table illustrates this dilution on a per share basis to new investors:

 

Initial public offering price per share           $8.00 
Net tangible book value per share before this offering, as of December 31, 2012   $ (0.07 )      
Pro forma increase in net tangible book value  per share attributable to conversion of promissory notes     0.082        
Pro forma net tangible book value per share as of December 31, 2012     0.012        
Increase in net tangible book value per share attributable to new investors in this offering     1.995        
Pro forma as adjusted net tangible book value per share after offering           $2.007 
Dilution in pro forma tangible book value (deficit) per share to new investors           $5.993 

  

If the underwriters’ over-allotment option to purchase additional shares from us is exercised in full, and based on an initial public offering price of $8.00 per share, the pro forma as adjusted net tangible book value per share after this offering would be approximately $2.22 per share, the increase in the pro forma net tangible book value per share attributable to new investors would be approximately $2.21 per share and the dilution to new investors purchasing shares in this offering would be approximately $5.78 per share.

 

The table below summarizes as of December 31, 2012, on the pro forma as adjusted basis described above, the number of ordinary shares we issued and sold, the total consideration we received and the average price per share (1) paid by our existing shareholders and (2) to be paid by new investors purchasing our ordinary shares in this offering at the initial public offering price of $8.00 per share, before deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

   Shares Purchased   Total Consideration   Average
Price
 
   Number   Percent   Amount   Percent   Per Share 
Existing shareholders   7,981,115    71.9%  $5,761,000    18.7%  $0.72 
New investors   3,125,000    28.1%   25,000,000    81.3    8.00 
Total   11,106,115    100%  $30,761,000   $100%  $ 

  

The number of our ordinary shares to be outstanding immediately after this offering is based on 7,794,256 ordinary shares outstanding as of December 31, 2012 (giving prospective effect to the issuance on May 19, 2013 of bonus shares equivalent to a stock split described below) and includes also: (i) 101,667 shares resulting from the mandatory conversion of our outstanding convertible notes upon closing of this offering as if the conversion had occurred on December 31, 2012 and (ii) 85,192 shares issued in connection with the Warrant Cashless Exercise. This number excludes:

 

·

764,444 shares issuable upon the exercise of share options outstanding as of December 31, 2012 under our equity incentive plan;

 

·

58,700 shares issuable upon the exercise of warrants outstanding as of December 31, 2012 with a nominal exercise price, which warrants are expected to remain outstanding upon completion of this offering; and

  

·

7,009 shares reserved as of December 31, 2012 for future grants under our equity incentive plan.

 

To the extent that new options are granted under our equity benefit plans, there will be further dilution to investors purchasing ordinary shares in this offering.

 

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SELECTED FINANCIAL DATA

 

The following table summarizes our financial data. We have derived the following statements of operations data for the years ended December 31, 2012 and 2011 and the balance sheet data as of December 31, 2012 from our audited financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future. The following summary financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus.

 

(in thousands of U.S. dollars, except share and per share amounts)        
  Years ended December 31, 
   2012   2011 
Statements of Operations Data:        
         
Research and development expenses  $818   $1,822 
           
General and administrative expenses   683    2,084 
           
Financial expense, net   78    23 
           
Deemed dividend   -    180 
           
Loss attributable to holders of ordinary  shares   1,579    4,109 
           
Weighted average number of ordinary shares used in computing basic and diluted net loss per share   7,791,932    7,843,388 

 

 (in thousands of U.S. dollars)  Year Ended December 31, 2012 
   Actual   Pro forma
(unaudited)
(1)(2)
   Pro forma,
as adjusted
(unaudited)
 
             
Balance Sheet Data:               
                
Total long-term assets  $21   $   $21 
                
Total current liabilities   768    (662)   106 
                
Shareholders’ equity (deficiency)   (567)   22,853    22,286 

 

 

(1)Gives effect to the mandatory conversion of our outstanding Convertible Notes on the closing of this offering.
(2)Gives effect to the sale of 3,125,000 ordinary shares in this offering at the initial public offering price of $8.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, as if the sale had occurred on December 31, 2012.

 

29
 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with our financial statements and related notes included elsewhere in this prospectus. This discussion and other parts of the prospectus contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

 

Introduction

 

We are an emerging biopharmaceutical company primarily focused on the development and commercialization of our proprietary drug, MG01CI, to treat Attention Deficit Hyperactivity Disorder, or ADHD. The most common currently available treatments for ADHD are stimulants that increase the brain chemical dopamine. Stimulants have significant side effects, and as controlled substances have significant potential for misuse, abuse and addiction. MG01CI is a non-stimulant with a different mechanism of action.  In September 2011, we completed a 120-patient double-blind Phase II study in Israel that showed significant improvement in clinical ADHD symptoms, and also showed favorable tolerability with no significant side effects over a placebo.  The trial met all primary and secondary clinical endpoints showing statistically significant improvement over the placebo-treated control group.

 

We plan to initiate discussions with the FDA within six months from the date of this prospectus to seek approval, via an IND Application submission, to conduct one or more advanced clinical trials in the United States for the use of MGO1CI to treat ADHD in adults. If such FDA approval of our IND Application is granted and if our clinical trials demonstrate the safety and efficacy of MGO1CI, we will then seek to obtain marketing approval from the FDA for MG01CI for use in adults. We have similar plans to seek marketing approval in the European Union and later in Japan.  If our clinical trials for adults are successful, we will seek to obtain regulatory approvals for clinical trials, via additional IND Application submissions, in order ultimately to obtain marketing approval of MG01CI for use in children.  The requirements to conduct pediatric clinical trials are more stringent than those for adults.  If our requests for approval to conduct clinical trials are denied, or if our clinical trials are unsuccessful, we will have to re-design our drug candidate and conduct additional preliminary clinical trials after any necessary regulatory approvals.

 

To date, we have not generated revenue from the sale of any product, and we do not expect to generate significant revenue unless and until we obtain marketing approval of, and commercialize, MG01CI. As of December 31, 2012, we had an accumulated deficit of $8.2 million.

 

Our financing activities are described below under “Liquidity and Capital Resources.” We will need to raise substantial additional funds to achieve our long-term strategic objectives, including at least two Phase III clinical trials. If the results of our Phase III trials are successful, we plan to submit an NDA to the FDA. Obtaining approval of an NDA is an extensive, lengthy, expensive and uncertain process, and the FDA (and other regulatory agencies) may delay, limit or deny approval of MG01CI.

 

Financial Overview

 

Operating Expenses

 

Our current operating expenses consist of two components – research and development expenses, and general and administrative expenses.

 

Research and Development Expenses

 

Our research and development expenses consist primarily of the cost of third party clinical consultants and expenses related to conducting clinical trials, as well as salaries and related personnel expenses, travel expenses, and share-based compensation expenses to research and development employees.

 

The following table discloses the breakdown of research and development expenses for the last two fiscal years.

(in thousands of U.S. dollars)   December 31,  
    2012     2011  
Salaries and related personnel expenses   $ 56     $ 161  
Cost to third party clinical consultants and expenses related to conducting clinical trials     663       1,464  
Share-based compensation     *) -       18  
Travel expenses     48       81  
Other expenses     51       98  
Total   $ 818       1,822  

  

*) Represents an amount less than $1.

  

We expect that our research and development expenses will increase as we conduct at least two Phase III clinical trials that are broader than our Phase II trial prior to submitting an NDA to the FDA. The Company plans to launch two Phase III trials in adults with ADHD, each including 250 patients, in 2014, as well as a Phase I/II pediatric study in 2014.

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of salary and compensation costs paid to our CEO, share- based compensation expenses, payments to our CFO, professional service fees for accounting, legal, bookkeeping and facilities costs (including rent expense for our facility in Tel Aviv Israel), and depreciation expenses.

 

We expect our general and administrative expenses, such as accounting and legal fees, to increase after we become a U.S. public company, and we expect increases in the number of our executive, accounting and administrative personnel due to the anticipated growth of our company.

 

Financial Expense and Income

 

Financial expense and income consist of bank fees and other transactional costs, exchange rate differences, financial expenses related to our outstanding convertible notes and interest earned on our cash, cash equivalents and short-term bank deposits.

 

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Critical Accounting Policies and Estimate

 

We describe our significant accounting policies more fully in Note 2 to our financial statements for the year ended December 31, 2012. We believe that the accounting policies below are critical in order to fully understand and evaluate our financial condition and results of operations.

 

We prepare our financial statements in accordance with accounting principles generally accepted in the United States ("U.S. GAAP").

 

The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions. Our management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.

 

JOBS Act

 

On April 5, 2012, the U.S. Congress enacted the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. This means that an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are electing to delay such adoption of new or revised accounting standards.

 

Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company”, we intend to rely on other exemptions, including without limitation, (i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404 and (ii) complying with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis). These exemptions will apply for a period of five years following the completion of our initial public offering or until we are no longer an “emerging growth company,” whichever is earlier.

 

Stock-Based Compensation and Fair Value of Ordinary Shares

 

We account for stock-based compensation in accordance with ASC 718, “Compensation - Stock Compensation,” which requires companies to estimate the fair values of equity-based payments awards on the date of grant using an option-pricing model. The value of the stock options is recognized as an expense over the requisite service periods in our statement of operations. We recognize compensation expenses for the value of our awards granted based on the straight-line method over the requisite service period of each of the awards.

 

We selected the Black-Scholes-Merton ("Black-Scholes") option-pricing model as a fair value method for our options awards. The option-pricing model requires a number of assumptions:

 

Expected dividend yield - The expected dividend yield assumption is based on our historical experience and expectation of no future dividend payouts. We have historically not paid cash dividends and have no foreseeable plans to pay cash dividends in the future.

 

Volatility - Since the Company is not traded on any stock exchange market, quoted prices of our shares are unavailable. According to ASC 718-10-30-20, in case of no historical data for a company, the expected volatility was based on similar companies' stock volatility.

 

Risk free interest rate - The risk free interest rate is based on the yield of U.S. Treasury bonds with equivalent terms.

 

Expected term - ASC 718 provides the factors to consider when estimating the expected term of an option: An option’s expected term must at least include the vesting period and the Employees’ historical exercise and post-vesting employment termination behavior for similar grants. It also determines that if the amount of past exercise data is limited, that data may not represent a sufficiently large sample on which to base a robust conclusion on expected exercise behavior. In that circumstance, it may be appropriate to consider external data or the SEC staff’s “simplified” method to the expected term. Accordingly, we used the "simplified" method, meaning the expected life is set as the average of the vesting period for each vested tranche of options and the contractual term for those options.

 

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Share price - Because there has been no public market for our ordinary shares, the fair value of the ordinary shares underlying the options had been determined by our management, using the assistance of an independent valuation firm.

 

We did not grant options to employees or directors in 2011 and 2012 (other than two grants as stated in Note 9(c) to the financial statements included herein, for which no compensation expense was recorded). For options granted up until December 31, 2010, the fair value of the ordinary shares was based on the application of Option-Pricing Method ("OPM"). The first step in performing a valuation using OPM involves estimating the present value of the total shareholders’ equity (preferred and Ordinary). As part of our analysis, we used recent investment rounds, respectively to the option valuation dates, in our shares in order to evaluate the present value of our total shareholders' equity.

 

Under the option-pricing method, we estimated the fair value of the ordinary shares as the net value of a series of call options, representing the present value of the expected future returns to the Ordinary shareholders. Essentially, the rights of the Ordinary shareholders are equivalent to a call option on any value of the Company above the respective preferred shareholders’ liquidation preferences, with adjustment to account for the rights retained by the preferred shareholders related to their share in any value above the values at which they would convert to ordinary shares. Thus, the Ordinary shares were valued by estimating the value of its share in each of these call option rights. 

 

Results of Operations

 

   December 31, 2012 
   2012   2011 
   (in thousands US$) 
         
Research and development expenses  $818   $1,822 
           
General and administrative expenses   683    2,084 
           
Operating loss   1,501    3,906 
           
Financial Expense, net   78    23 
           
Net Comprehensive loss  $1,579   $3,929 
           
Deemed dividend   -    180 
           
Net loss attributable to holders of ordinary shares  $1,579   $4,109 

 

Comparison of the Year Ended December 31, 2012 to the Year Ended December 31, 2011

 

Research and development expenses

 

Our research and development expenses amounted to $818,000 for the year ended December 31, 2012, representing a decrease of $1,004,000, or 55%, compared to $1,822,000 for the year ended December 31, 2011. The decrease in our research and development expenses in 2012 resulted partially from a decrease in available funds, but primarily from a decrease in research and development activity that took place once our clinical trials were completed. Following clinical trial completion, research and development is limited to clinical study report writing, regulatory preparation and document collection, and study data presentations. Payroll related expenses decreased $105,000, reflecting a decrease in the number of employees engaged in research and development related activities from four to one, and third party clinical consultants and expenses related to conducting clinical trials decreased $801,000 due to a decrease in our clinical trials.

 

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General and administrative expenses

 

Our general and administrative expenses totaled $683,000 for the year ended December 31, 2012, a decrease of $1,401,000, or 67%, compared to $2,084,000 for the year ended December 31, 2011. In 2011, we recorded share based compensation expenses in the amount of $1,535,000. This reduction was offset by an increase of $113,000 in professional services and an additional increase of $52,000 in travel expenses.

 

Operating loss

 

As a result of the foregoing, our operating loss for the year ended December 31, 2012 was $1,501,000, as compared to an operating loss of $3,906,000 for the year ended December 31, 2011, a decrease of $2,405,000, or 62%.

 

Financial expense

 

We recognized financial expenses of $78,000 for the year ended December 31, 2012, representing an increase of $55,000, or 239%, compared to financial expenses of $23,000 for the year ended December 31, 2011.

 

Loss

 

As a result of the foregoing, our loss for the year ended December 31, 2012 was $1,579,000, as compared to $3,929,000 for the year ended December 31, 2011, a decrease of $2,350,000, or 60%.

 

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Liquidity and Capital Resources

 

Overview

 

Since our inception through December 31, 2012, we have funded our operations principally with $5.8 million from the sale of ordinary shares, preferred shares and convertible loans. As of December 31, 2012, we had $97,000 in cash and cash equivalents.

 

   Years Ended,
December 31,
 
   2012   2011 
   (in thousands US$) 
         
Operating activities  $(1,585)  $(2,361)
           
Investing activities   1,026    (1,041)
           
Financing activities   601    2,620 
           
Net increase (decrease) in cash and cash equivalents   42    (782)

 

Operating Activities

 

Net cash used in operating activities of $2.4 million during the year ended December 31, 2011 was primarily used for a payment of $1.6 million for clinical trials and other third party expenses and an aggregate of $0.4 million in salary payments. The remaining amount was for travel, rent and other miscellaneous expenses. Net cash used in operating activities of $1.6 million during the year ended December 31, 2012 was primarily used for payment of $0.8 million for clinical trials and other third party expenses and an aggregate of $0.3 million in salary payments. The remaining amount of $0.5 million was for travel, rent and other miscellaneous expenses.

 

Investing Activities

 

Net cash used in investing activities during 2011 was $1 million primarily reflected our use of cash to invest in short-term bank deposits, and increase in restricted bank deposits. In 2012, we withdrew these deposits into cash.

 

Financing Activities 

 

Net cash provided by financing activities in the year ended December 31, 2011 consisted of $2.1 million of net proceeds from issuance of ordinary shares, and $0.5 million of proceeds from loans. Net cash provided by financing activities in the year ended December 31, 2012 consisted of $0.6 million of net proceeds from convertible notes.

 

Current Outlook

 

Our independent registered public accounting firm’s report to our financial reports for the fiscal year ended December 31, 2012, states that there is a substantial doubt that we will be able to continue as a going concern. Furthermore, according to our estimates, based on our budget, if we are not successful in obtaining additional capital resources, there is a substantial doubt that we will be able to continue our activities after June 30, 2013. Even if we are able to raise funds in the offering contemplated herein, we believe that we will need to raise additional funds before we have any cash flow from operations.

 

We believe that our existing cash resources and the net proceeds from the current offering will be sufficient to fund our projected cash requirements approximately through the conclusion of 2015. Nevertheless, we will require significant additional financing in the future to fund our operations if and when we obtain regulatory approval of MG01CI and commercialize the drug. We currently anticipate that, assuming consummation of the current offering, we will utilize approximately $16 million for clinical trial activities over the course of the next 30 months. We also anticipate utilizing approximately between $1 million to $3 million for capital expenditures over such 30-month period, which consists primarily of expenditures for the manufacture of our drug candidate for use in clinical trials and supporting pre-clinical studies required for obtaining approval to conduct such clinical studies. Our future capital requirements will depend on many factors, including:

 

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·the progress and costs of our preclinical studies, clinical trials and other research and development activities;
·the scope, prioritization and number of our clinical trials and other research and development programs;
·the costs and timing of obtaining regulatory approval for our drug candidate;
·the costs of filing, prosecuting, enforcing and defending patent claims and other intellectual property rights;
·the costs of, and timing for, strengthening our manufacturing agreements for production of sufficient clinical and commercial quantities of our drug candidate;
·the potential costs of contracting with third parties to provide marketing and distribution services for us or for building such capacities internally;
·the costs of acquiring or undertaking the development and commercialization efforts for additional, future therapeutic applications of our drug candidate;
·the magnitude of our general and administrative expenses;
·any cost that we may incur under current and future in- and out-licensing arrangements relating to our drug candidate; and
·payments to the OCS.

 

Until we can generate significant recurring revenues, we expect to satisfy our future cash needs through the net proceeds from the current offering, debt or equity financings, or by out-licensing applications of our drug candidate. We cannot be certain that additional funding will be available to us on acceptable terms, if at all. If funds are not available, we may be required to delay, reduce the scope of, or eliminate research or development plans for, or commercialization efforts with respect to, one or more applications of our drug candidate. This may raise substantial doubts about the Company’s ability to continue as a going concern.

 

Contractual Obligations

 

The following table summarizes our significant contractual obligations at December 31, 2012:

 

   Total   Less than 1 year   1-3 years   3-5 years   More than 5 years 
   (in thousands US$) 
Operating leases:                         
Facility    4    4    -    -    - 
Motor Vehicles    17    14    3    -    - 
                          

 

Off-Balance Sheet Arrangements

 

We currently do not have any off-balance sheet arrangements.

 

Quantitative and Qualitative Disclosure About Market Risk

 

We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of foreign currency exchange rates. Approximately 40% of our expenses are denominated in New Israeli Shekel. Changes of 5% and 10% in the USD/NIS exchange rate will increase/decrease the operation expenses by 2% and 4%, respectively.

 

Foreign Currency Exchange Risk

 

Our results of operations and cash flow are subject to fluctuations due to changes in foreign currency exchange rates. Certain of our expenses are denominated in New Israeli Shekels. Our results of operations and cash flow are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. We do not hedge our foreign currency exchange risk. In the future, we may enter into formal currency hedging transactions to decrease the risk of financial exposure from fluctuations in the exchange rates of our principal operating currencies. These measures, however, may not adequately protect us from the material adverse effects of such fluctuations.

 

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BUSINESS

 

We are an emerging biopharmaceutical company primarily focused on the development and commercialization of our proprietary drug, MG01CI, to treat Attention Deficit Hyperactivity Disorder, or ADHD. The most common currently available treatments for ADHD are stimulants that increase the brain chemical dopamine. Stimulants have significant side effects, and as controlled substances have significant potential for misuse, abuse and addiction. MG01CI is a non-stimulant with a different mechanism of action. In September 2011, we completed a 120-patient double-blind Phase II study in Israel that showed significant improvement in clinical ADHD symptoms, and also showed favorable tolerability with no significant side effects over a placebo. The trial met all primary and secondary clinical endpoints showing statistically significant improvement over the placebo-treated control group.

 

We plan to initiate discussions with the U.S. Food and Drug Administration, or FDA, within six months from the date of this prospectus to seek approval, via an IND Application submission, to conduct advanced clinical trials in the United States for the use of MGO1CI to treat ADHD in adults. If such FDA approval of our IND Application is granted and if these and any future clinical trials demonstrate the safety and efficacy of MGO1CI, we will seek to obtain marketing approval from the FDA for MG01CI for use in adults. We have similar plans to seek marketing approval in the European Union and later in Japan.  Following the successful completion of our next clinical trial in adults, we will seek to obtain regulatory approvals for clinical trials, via additional IND Application submissions, in order ultimately to obtain marketing approval of MG01CI for use in children.  The requirements to conduct pediatric clinical trials are more stringent than those for adults.  If our requests for approval to conduct clinical trials are denied, or if our clinical trials are unsuccessful, we will have to re-design our drug candidate and conduct additional preliminary clinical trials after any necessary regulatory approvals.

 

ADHD is one of the most common behavioral disorders in the world. It is estimated that between 5% and 12% of children worldwide are affected by this condition. Once believed to only affect children, ADHD is now known to persist into adolescence and adulthood in a large number of cases, with approximately 46% of all adults who had ADHD as children continuing to have symptoms of the disorder as adults. Approximately 95% of these adults experience impaired inattention and executive function symptoms, of which approximately 35% also experience hyperactivity-impulsivity symptoms.

 

ADHD is a treatable condition. The most commonly used therapeutic drugs are stimulants (Schedule II, Controlled Substances), such as Ritalin, Adderall, Vyvanse and Concerta, which are all compounds that increase the brain chemical dopamine, and which have significant abuse and misuse potential because their use may lead to severe psychological or physical dependence. In addition, stimulants have numerous side effects, such as uncomfortable mental states, interference with sleep and appetite, development of nervous ticks and potential cardiovascular effects resulting from increased blood pressure. These side effects have limited the effectiveness of treatment for those taking the drugs and have also dramatically limited medication adherence rates. Up to 30% to 50% of those who are prescribed stimulants for ADHD either do not respond or cannot tolerate these treatments, and only about 20% of those prescribed with stimulants renew their prescription the following month.

 

The only non-stimulant drug approved to treat adult ADHD is Strattera. Strattera affects the chemical norepinephrine, which is a stress hormone that affects parts of the brain where attention and responses are controlled. This drug has significant side effects, such as fatigue, decreased appetite, sexual problems, palpitations, increased heart rate and high blood pressure and also has regulatory warning labels relating to suicidal thoughts and liver damage. Moreover, Strattera takes 6-10 weeks to achieve full clinical effectiveness. More recently, two additional non-stimulant medications with similar safety and efficacy profiles were approved for use only in children (Guanfacine and Clonidine). These two drugs have not had significant commercial success. All approved ADHD drugs need to be carefully monitored by the treating physician to optimize the dose, starting with a low dose and slowly escalating to the most effective and tolerable dose.

  

In contrast to all available treatments, MG01CI is a non-stimulant with a differentiated mechanism of action that targets neither dopamine nor norepinephrine. Our 120-patient Phase II study showed significant clinical improvement in clinical symptoms with higher response rates, and a more rapid onset than available non-stimulants. The trial also demonstrated favorable tolerability with no significant side effects over a placebo. MG01CI therefore potentially represents a safer alternative to stimulant-based treatments and a more tolerable and effective treatment than the non-stimulants which are currently in the market. Additionally, because of its unique mechanism of action and specific clinical effect on inattention and executive function, we believe that MG01CI possibly may be useful in treating additional cognitive disorders, such as schizophrenia, mild cognitive impairment in Alzheimer’s disease, Tourette’s syndrome and cognitive impairment in mood disorders, and we plan to use proceeds from this offering to evaluate MG01CI in one or more of such disorders.

 

Market Overview

 

About ADHD

 

The U.S. ADHD market size in 2011 has been estimated to be $3.8 billion, which accounted for approximately 90% of the global ADHD market. The difference in market sizes between U.S. and non-U.S. sales does not stem from a difference in sales volumes, but simply the lack of significant sales of innovative ADHD drugs outside the U.S. (non-U.S. markets are dominated by generic drugs). Global prevalence rates of the disease are estimated to be approximately 8-10% of school-aged children and approximately 4-5% of the adult population. Adult diagnosis and treatment is forecast to grow in the near future due to increased disease awareness and less sociological stigmatization towards the condition. In the United States, the diagnosis rate is approximately 51% in children and 31% in adults with consequent treatment rates of approximately 70% in children and 49% in adults. Overall, the U.S. market is forecast to grow at a compound annual growth rate (CAGR) of 7.3% per annum and reach $6.2 billion by 2018. The global ADHD market is forecast to grow at a CAGR of 8.0% in part because higher disease recognition is expected in Japan and Europe due to the adoption of the broader diagnostic criteria prevalent in the U.S. Further, these predominant criteria are expected to broaden further in 2013. Also, the estimated growth for the non-U.S. markets is higher due to prospective approval dates for major ADHD drugs that have already been marketed in the U.S., such as Vyvanse, Intuniv and Kapvay. Despite upcoming patent expiration dates and the entry of several generic compounds, the market size is expected to grow further as new drugs enter the market and compensate for the generic erosion.

 

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Development of ADHD Symptoms

 

Once perceived to only affect children, ADHD is now known to persist into adolescence and adulthood in a sizeable number of cases. The following graphic illustrates how the nature of ADHD symptoms change with age:

 

Children Adolescents Adults

 

 

Hyperactive

Aggressive

Low frustration tolerance

Impulsive

Easily distracted

Inattentive

Shifts activities

Easily bored

Impatient

Restless

 

A recent study showed that approximately 46% of adults who suffered from ADHD as children continue to have symptoms of the disorder as adults, with approximately 95% experiencing attention deficit symptoms and about 35% of them experiencing hyperactivity- impulsivity symptoms. As the majority of sufferers of ADHD age, their symptoms tend toward impatience, restlessness, boredom and low concentration levels from the more aggressive hyperactivity and impulsive behavior evident in children.

 

Although the definitive causes of ADHD are still unclear, current research suggests that ADHD is caused by an interaction between environmental factors and genetic predispositions. Biologic factors that reportedly increase the risk of having ADHD include maternal smoking, drug or alcohol abuse during pregnancy, brain injury and exposure to toxins. Furthermore, diet may play a role in ADHD.

 

Impact of Untreated and Undertreated ADHD

 

ADHD is believed to be one of the most under-diagnosed and under-treated mental health conditions facing children and adults. ADHD increases health risks, adverse social externalities and economic costs as illustrated in the following table. Despite the disorder being highly treatable, most adults with ADHD remain undiagnosed and untreated.

 

The following illustrates the effects on society when ADHD remains untreated:

 

Healthcare System

ñ 50% in bicycle accidents

ñ 33% in ER visits

2-4x more car accidents

 

 

Patient

ñ criminal activity

ñ incarceration

 

Family

3-5x more divorce/separation

2-4x more sibling fights

School and Occupation

46% expelled

35% drop out

Lower occupational status

 

Society

Substance use disorders:

2x risk and earlier onset

Less likely to quit in adulthood

 

 

Employer

Increased parental absenteeism and lower productivity

Diagnosis of ADHD

 

The diagnosis of ADHD is obtained by a psychiatric assessment which is intended to eliminate other potential causes. A formal diagnosis is completed by a qualified physician and is based on a number of set criteria. The Diagnostic and Statistical Manual of Mental Disorders, fourth edition (DSM-IV), diagnostic criteria are most widely used to diagnose ADHD.

 

·      DSM-IV criteria. The American Psychiatric Association provides a set of standardized criteria for classifying mental disorders known as the Diagnostic and Statistical Manual of Mental Disorders (DSM). These criteria are based on the premise that attention deficits are distinct and differentiated conditions that are abnormalities resulting from biological origins that can be reliably and objectively measured. The diagnostic criteria include:

 

 

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Inattention – the patient makes careless mistakes in activities and is easily distracted

 

Hyperactivity – the patients fidgets, squirms, talks excessively or displays restless behavior

 

Impulsiveness – the patient interrupts others and cannot wait for a turn

 

There must be clear evidence of significant impairment in social, school, or work functioning

 

Signs of impairment present before 7 years of age and present in two or more settings (school/work and home)

 

Signs are not better accounted for by another mental disorder

  

The DSM-IV criteria are becoming more prevalent as the diagnostic measure for ADHD in Europe and Japan. If the DSM-IV criteria are used, rather than an alternative measure in declining use, a diagnosis of ADHD is 3–4 times more likely. Consequently, the size of the market in Europe and Japan is set to grow with improved diagnosis rates driven by adoption of the DSM-IV criteria.

 

Key Products and Market Participants

 

The principal pharmaceutical companies marketing drugs to treat ADHD are shown in the following table, together with the drug brand name, patent expiration date, class/method of action and reported 2011 sales.

 

 

Brand Name

Company Patent Expires Class/Method of Action 2011 Sales
Vyvanse Shire June 2023

Stimulant

(Dopamine reuptake inhibitor)

$1,272 million
         
Concerta J&J May 2011

 Stimulant

(Dopamine reuptake inhibitor)

 

$682 million

         
Adderall XR Shire 2012

Stimulant

(Dopamine reuptake inhibitor)

 

$953 million

         
Strattera Eli Lilly August 2010

 Non-Stimulant

(NE reuptake inhibitor)

$620 million
         
Focalin Novartis December 2015

 Stimulant

(Dopamine reuptake inhibitor)

$340 million
         
Ritalin/ Ritalin LA Novartis 2015

Stimulant

(Dopamine reuptake inhibitor)

$490 million
         
Intuniv Shire September 2015

Non-Stimulant

(NE receptor agonist)

$223 million
         
Dextro- amphetamine ER Teva N/A

 Stimulant

(Dopamine reuptake inhibitor)

$269 million
         
Adderall IR Teva N/A

Stimulant

(Dopamine reuptake inhibitor)

$29 million

 

 

 

In addition to the foregoing drugs, neuropsychological tools are being used in the diagnosis of ADHD, and there are exploratory studies being conducted to assess the potential efficacy of neurofeedback in the treatment of ADHD.

 

Limitations of Current Treatment Options for ADHD

 

Because of the significant side effects and abuse potential associated with current stimulant treatment options for ADHD which are narcotics, there is a significant need to develop safe and effective non-stimulant/non-narcotic treatment alternatives.

 

Historically, the first line treatment for ADHD was stimulants, such as methylphenidate and amphetamine. These are classified as Schedule II controlled substances that can cause dependence and abuse. The danger of prescription drug abuse is one of the main causes of low treatment rates, particularly by primary care physicians (PCPs) who are the largest group of prescribers. All but one of the current drugs on the market to treat adult ADHD are stimulants. Strattera is the only drug currently on the market for adults that is a non-stimulant. Strattera has been effective, but it also has serious side effects, such as fatigue, decreased appetite, sexual problems, palpitations, increased heart rate, blood pressure, and regulatory warning labels on suicidal thoughts and liver damage. Moreover, Strattera also takes 6-10 weeks to achieve full clinical effects. New non-stimulant therapies, such as MG01CI, will not have the risk of abuse and do not have significantly delayed effect, and we believe that their market entry should increase treatment rates and drive market growth.

 

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While stimulants have been shown to be effective for the treatment of ADHD, up to 30% to 50% of those who are prescribed stimulants for ADHD either do not respond or cannot tolerate these treatments. Consequently, medication adherence rate for these ADHD therapies is poor, with less than 20% of prescriptions re-filled beyond the first month. Therefore, there is a significant need to develop safe and effective non-stimulant treatment alternatives, particularly ones devoid of abuse potential and significant side effects.

 

Our Strategy

 

Our objective is to develop and commercialize proprietary pharmaceutical products for treatment of central nervous system disorders, and cognitive dysfunctions in particular. To this effect, we intend to conduct additional clinical trials for our most advanced product (MG01CI) and, if those trials are successful, seek marketing approval from the FDA and other worldwide regulatory bodies for MG01CI for the treatment of ADHD in adults and children. We also plan to advance clinical studies and commercialization plans for MG01CI in additional indications of cognitive dysfunction which present significant market opportunities such as mood disorders, memory impairment, autism, and shift work/jet lag. Finally, we intend to develop products other than MG01CI that we have invented or that may be acquired by the Company. To achieve these objectives, we plan to:

 

·Initiate and complete two Phase III clinical trials of MG01CI for the treatment of ADHD in adults, and, if they are successful, file for marketing approval for adults in the U.S. (Expected initiation in the fourth quarter of 2013 and expected completion in the second quarter of 2015)

 

·Initiate and complete clinical trials in a pediatric ADHD population, and, if successful, file for marketing approval for that use in the U.S.. (Expected initiation in the third quarter of 2014 and expected completion in the second quarter of 2015)

 

·

Initiate and complete clinical trials in EU and Japan for both adult and pediatric ADHD, and, if successful, file for marketing approval of such uses in these regions. (Expected initiation in the first quarter of 2015 for EU and 2016 for Japan and expected completion in the fourth quarter of 2016)

 

·Prepare to commercialize MG01CI for the treatment of patients with ADHD by establishing distribution capabilities primarily in conjunction with large pharmaceutical companies.

 

·Conduct clinical investigations into the possible use of MG01CI to treat other cognitive disorders and impairments such as mood disorders, memory impairment, autism and shift work/jet lag. (Expected initiation in the fourth quarter of 2014 and expected completion in the fourth quarter of 2015)

 

·Conduct development of additional new molecules in Alcobra's pipeline that are protected by patents, or in-license products in similar therapeutic areas.

  

MG01CI Overview and Mechanism of Action

 

MG01CI is a proprietary, combined rapid onset/extended release formulation of the chemical Pyridoxine Pyroglutamate, which is more broadly known as Metadoxine. Our internal studies suggest that Metadoxine attaches to and neutralizes a unique protein in the brain called the 5-HT2B receptor, and excludes binding of all other molecules that normally attach there. This protein has been associated with ADHD in studies exploring the hereditary basis of ADHD, as well as in studies that attempt to understand the molecular basis of the disorder, but no approved or, to our knowledge, investigational drug has yet to display this profile other than ours. MG01CI consists of a single oral tablet, which includes both a rapid onset release Metadoxine formulation and an extended release Metaxdoxine formulation together providing the desired dual release profile. The new extended-release formulation prolongs the serum levels of Metadoxine for up to 12 hours, which results in enhanced efficacy benefits.

 

Metadoxine has been available since the 1980’s in immediate release forms for the acute treatment of alcohol intoxication and the chronic treatment of alcoholic liver disease. Metadoxine was approved for these indications in Italy, Portugal, Hungary, Russia, India, China, Mexico and Thailand. A literature survey covering over 20 years of post-marketing surveillance identifies only a few cases of minor adverse events. To our knowledge, no drug-related serious adverse events have ever been reported. We have multiple claims in our pending patent applications (including one application that has been allowed by the U.S. PTO) that, if issued, would prevent the use by others of Metadoxine to treat ADHD and all other cognitive disorders.

 

Normally, the level of neurotransmitters in the brain, such as dopamine, norepinephrine and serotonin, are fully regulated in order to ensure proper neurological function and neuron-to-neuron communication. Communication between neurons is achieved by the controlled release of neurotransmitters from one neuron, their transport by a dedicated transporter across the synapse (the gap between two neurons) to another neuron, and their binding and internalization into the target neuron using a unique, designated receptor. One of the purported causes of the symptoms of ADHD is low levels in the brain of these neurotransmitters causing the lack of regulation of neuronal networks.  In the design of pharmacological treatments for ADHD, low neurotransmitter levels can be modulated through blocking the release, delivery and/or the uptake of neurotransmitters by their respective plasma transporters/receptors. All stimulants modulate dopamine. Atomoxetine (Strattera), the only non-stimulant approved for adults, works through modulating norepinephrine. MG01CI has the potential to be the first product approved for ADHD that works on the brain network that is controlled by the serotonin protein, in contrast to the dopamine pathway and the norepinephrine pathway.

 

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The neural networks operating in the brain are directed by various proteins and signals. One way to affect these networks is to identify a drug that binds to the site and inhibits the action of the protein or signal. In investigating the proposed mechanism of action for MG01CI, over 80 different central nervous system receptors and transporters were tested in the laboratory for binding with Metadoxine. Binding of Metadoxine was tested on targets that are part of the muscarinic network, dopamine network, serotonin network, GABA network, noradrenaline network, opioid network and cannabinoid network. These networks each function to orchestrate different activities and signals in the brain in different regions of the brain using different protein agents. Metadoxine displayed extensive and highly specific receptor binding to only one of the serotonin receptors named 5-HT2B that has been implicated genetically in ADHD and molecularly in control of dopamine outflow. The binding had approximately 50-fold selectivity over all other 5-HT receptor subtypes and a variety of other receptors. No binding was detected to any of the proteins involved in the brain networks controlled by dopamine or noradrenaline. Selectivity in binding is important because the goal is to bind only with the targeted receptor to achieve the desired effect and not bind to other receptors where it may have an undesired effect. Therefore, MG01CI displays a novel mechanism of action because it is the only ADHD drug candidate which exclusively affects the 5-HT2B serotonin receptor.

 

Although there are scientific papers that suggest that the 5-HT2B protein may take part in some aspects of the ADHD neurological disorder, the clinical trials using MG01CI are the first to show that by using a molecule that binds and neutralizes 5-HT2B, one can proactively improve the clinical symptoms of this disorder.

 

In summary, we believe that MG01CI is the first drug candidate to affect the serotonergic pathway and is currently the only drug candidate that shows exclusive binding to the 5-HT2B serotonin receptor. Moreover, the 5-HT2B receptor is implicated genetically and physiologically as a possible etiologic factor in the development of ADHD, creating the potential for MG01CI to be an effective treatment for ADHD.

 

Clinical Data

 

Symptom and Clinical Efficacy Measurement

 

There are various methodologies for evaluating and measuring changes in the symptoms of ADHD patients, including behavior rating scales, computer-based cognitive tests and verbal and pictorial performance tests. The key approved and widely accepted methodologies used to test the clinical efficacy of ADHD pharmacotherapies include:

 

· Conners’ Adult ADHD Rating Scales (CAARS). CAARS measure the presence and severity of ADHD symptoms to determine whether or not ADHD is a contributing factor to a patient’s symptoms. The scales quantitatively measure the frequency and severity of ADHD symptoms across clinically significant areas using a 30-item questionnaire. The scale has been used extensively in clinical trials including pivotal Phase III studies of approved pharmacotherapies for ADHD. Modified versions of the CAARS measure are used for diagnostics in children, with a different emphasis on the type of symptoms.

 

· Adult ADHD Quality of Life Questionnaire (AAQoL). AAQoL provides a validated disease-specific measure of the impact of ADHD on the quality of life. It is measured as an overall score (totaling 29 items) and four subscale scores including: life productivity (11 items), psychological health (6 items), life outlook (7 items) and relationships (5 items). It has been validated in clinical trials and used in the Phase III study of Atomoxetine (Strattera) in adults.

 

· Test of Variables of Attention (TOVA). TOVA is a computerized test that assists in the screening, diagnosis, and treatment monitoring of attention disorders such as ADHD. The test provides an objective, quantitative neurological measure of attention. The test consists of a 20-minute, simple "computer game" that measures responses to either visual or auditory stimuli. These measurements are then compared to the measurements of a group of people without attention disorders who complete the same test. The test provides information about a subject’s response style, such as the tendency to make impulsive errors or errors due to inattention, distraction or reaction time. TOVA outcomes include subscores for Response Time Variability (a time measurement of how consistently a target signal is identified and a microswitch is pressed throughout the test), Response Time (a time measurement of how fast or slow information is processed and responded to), Commission Errors (a measure of impulsivity: how many times an incorrect signal is identified and the micorswitch is pressed erroneously), and Omission Errors (a measure of inattention: how many times is the correct target signal missed and the microswitch is not pressed). The TOVA also provides a calculated ADHD Score that provides a cumulative index. ADHD scores <-1.8 are considered outside the normative range.

 

Clinical Results

 

We have conducted several clinical trials in adult ADHD patients in Israel testing the safety and efficacy of our novel non-stimulant drug candidate, MG01CI. These trials included:

 

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·A Phase IIa proof of concept study of 38 adult ADHD patients, followed by two extension studies to determine length of efficacy and optimized dosages; and

 

·A six-week, randomized, double-blind, placebo-controlled, parallel-group, multi-center Phase IIb study of 120 adult ADHD patients, in which ADHD subjects were randomly assigned in a 1:1 ratio to one of two treatment groups : a 1,400mg dose of MG01CI and a matching placebo.

 

Additional information about our clinical trials is shown in the following chart. 

  Phase IIa Phase IIb
When the clinical study was held Q1-Q2 2010 Q2-Q3 2011
How long the clinical study was active 3 months 4 months
How we targeted patients to enroll Existing adult patients in local ADHD treatment clinic Existing adult patients in local clinics; online advertisement; newspaper advertisement
Whether we conducted the study with any other parties No No
The steps taken to ensure the accuracy of the results Outside contract research organization (CRO) oversight, including monitoring visits; outside medical monitor; double-typing of data in the data management system; automatic and manual query generation; and external expert review

  

The Phase IIa study was designed to evaluate the effect on cognitive function of a single oral administration of MG01CI in subjects ranging from ages 18-45 who had been diagnosed as having ADHD. The study was performed at the ADHD unit of the Geha Mental Health Hospital (Israel). The primary outcome measures in the trial were the one-hour post-medication ADHD Score, and various TOVA subscores, Secondary outcome measures were subtests from the WAIS-R test. The Wechsler Adult Intelligence Scale, or WAIS, is a battery of tests designed to measure intelligence in adolescents and adults. WAIS includes both non-verbal performance scales as well as verbal intelligence items. A revised form of the WAIS, WAIS-R, consists of six verbal and five performance subtests. The verbal tests are: information, comprehension, arithmetic, digit span, similarities, and vocabulary. The performance subtests are: picture arrangement, picture completion, block design, object assembly, and digit symbol.

 

Results of this clinical study showed clinically and highly statistically significant improvement in all the TOVA parameters that were abnormal at baseline (see table below). “P values” are a measure of statistical significance. P is a statistical measure for the probability of an error. In clinical investigations, p<0.05 (meaning that the probability of an error in the outcome is less than 5%) is considered a statistically significant finding.

 

Parameter (n=38) Change from baseline p
Omission Score +12.9 (+16.6%) p<0.03
Commission Score +7.0 (+7.1%) p<0.01
Response Time Score +11.0 (+12.4%) p<0.02
Response Time Variability Score +17.1 (+38.6%) p<0.001
ADHD Score +3.9 (+65.8%) p<0.001
TOVA Subscores

 

Furthermore, results of the Wechsler subtests confirmed the ability of MG01CI to improve cognitive functions in adults with ADHD, with clinical and statistically significant improvement seen in both working memory and spatial memory tests. A significant correlation was found between the drug response measured by the TOVA and the response measured by the WISC subtests.

  

WAIS-R subtest

(n-38)

 

Baseline mean (min,max) Post medication mean (min,max) Change p
Correct Symbols 34.5 (18,59) 37.9 (22,57) +3.4 p<0.002
Symbol Search 74.6 (54,119) 81.7 (61,112) +7.2 p<0.001
Digits Forward 10.0 (5,14) 10.7 (7,14) +0.7 p<0.003
Digits Backward 7.0 (3,13) 7.8 (2,14) +0.9 p<0.01
Total Digits 17.0 (9,26) 18.6 (10,27) +1.6 p<0.002
Wechsler Subscores

 

In a small extension study to study the duration of drug benefits, 10 subjects were evaluated using TOVA immediately before, and 90 minutes, 4 hours and 7 hours after, taking a single 1400mg dose of MG01CI. Data below show the mean TOVA scores in these patients at the specified time points, showing an extended effect of the drug on cognitive functions. A TOVA score of -1.8 or less is considered abnormal.

  

 

Mean ADHD Scores Following Single MG01CI Dosing

 

In another extension study designed to validate the MG01CI dose used in studies thus far, 10 subjects were evaluated using TOVA 90 minutes after blindly taking either 700mg, 1400mg or 2100mg doses of MG01CI on separate occasions. TOVA results following these treatments were compared to the baseline and data obtained before any treatment in these patients. Data below show the mean ADHD score in these patients at baseline and following each of the three evaluated drug doses, establishing the likely effective dose range for MG01CI to be 700-1400mg.

 

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Mean ADHD Scores Before and 90 Minutes Following One of Three MG01CI Doses

 

Summary of Phase IIb Clinical Study

 

We recently completed a six-week randomized, double-blind, placebo-controlled, parallel-group, multi-center Phase IIb study in 120 adult subjects with ADHD that was performed in two centers in Israel: the ADHD unit at Geha Mental Health Hospital and the Cognitive Neurology unit at Rambam Healthcare Campus.

 

ADHD subjects were randomly assigned in a 1:1 ratio to one of two treatment groups: 1,400mg MG01CI and matching placebo. The primary efficacy measure was the CAARS questionnaire, and the secondary efficacy measures were the TOVA test and the AAQoL questionnaire.

 

Significant improvements in CAARS scores (p<0.016), TOVA ADHD scores (p<0.02) and AAQoL scores (p<0.01) were observed in the MG01CI treated group versus the placebo group, as can be seen in the image below. Improvements in CAARS and TOVA scores were statistically significant over the placebo after as little as two weeks of treatment. Sub-analysis of subjects with ADHD inattentive type (n=48) showed an even greater improvement in CAARS scores over the placebo, as well as a larger response rate.

 

 

 

Physical examination, laboratory parameters, vital signs, and ECGs showed no consistent differences between treatment groups or cumulative changes over time. The most commonly reported adverse events were nausea, fatigue and headache. Nausea was the only adverse event to occur exclusively in the MG01CI group and should be considered an anticipated event in future MG01CI research; fatigue occurred in similar numbers in both groups, and headache occurred notably less frequently in the MG01CI group.

 

Summary of Clinical Data and Key Conclusions

 

Subjects treated with MG01CI showed statistically significant improvement in CAARS Total ADHD Symptoms Score, as well as higher response rates on the CAARS Total ADHD Symptom Score over subjects treated with placebo.

 

Improvements in ADHD symptoms (scored by CAARS) were significantly different in subjects treated with MG01Cl vs. placebo as early as 2 weeks following treatment initiation.

 

Improvement in inattention symptoms was statistically significant. One measure of effectiveness is called an “effect size” based on various statistical computations. An effect size of 0.4 has been reported for Atomoxetine, the only approved non-stimulant medication of Adult ADHD. An effect size of 0.9, calculated for the predominantly-inattentive ADHD population in Alcobra's Phase IIb study is therefore significantly higher, and in fact comparable to reported effect sizes of stimulant medications such as Concerta and Adderall.

 

Statistically significant findings were found using the TOVA neuropsychological test, as well as the Quality of Life questionnaire. TOVA scores were significantly better as early as two weeks after study initiation, and remained significantly better throughout the trial. AAQoL scores were significantly better starting at week 6 of treatment.

 

Adverse Events

 

The most commonly reported adverse events in the various clinical studies were nausea, fatigue and headache. Transient moderate nausea was the only adverse event to occur exclusively in the MG01CI group, with an incidence of approximately 17%; fatigue was largely the same in the control groups and the MGOCI groups, and headache occurred notably less frequently in the MG01CI group, in about 5% of the subjects.

 

In addition, products containing Metadoxine outside the United States cite either complete lack of adverse events or infrequent diarrhea and moderate skin rash.

 

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Commercialization

 

We do not have any internal sales, marketing or distribution infrastructure. In the event we receive regulatory approval for MG01CI, we intend, where appropriate, to pursue commercialization relationships with pharmaceutical companies and other strategic partners providing for distribution through their sales and marketing organizations in order to gain access to global markets. Over the longer term, we may ultimately build an internal commercial infrastructure.

 

Third-Party Reimbursement

 

Sales of pharmaceutical products depend in significant part on the availability of coverage and adequate reimbursement by third-party payors, such as state and federal governments, including Medicare and Medicaid, managed care providers, and private insurance plans. Decisions regarding the extent of coverage and amount of reimbursement to be provided for MG01CI will be made on a plan by plan, and in some cases, patient by patient, basis.

 

Within the Medicare program, as a self-administered drug, MG01CI would be reimbursed under the expanded prescription drug benefit known as Medicare Part D. This program is a voluntary Medicare benefit administered by private plans that operate under contracts with the federal government. These Part D plans negotiate discounts with drug manufacturers, which may be passed on to each of the plan’s enrollees. Historically, Part D beneficiaries have been exposed to significant out-of-pocket costs after they surpass an annual coverage limit and until they reach a catastrophic coverage threshold. However, changes made by recent legislation will reduce this patient coverage gap, known as the donut hole, by reducing patient responsibility in that coverage range.

 

An ongoing trend has been for third-party payors, including the United States government, to apply downward pressure on the reimbursement of pharmaceutical products. Also, the trend towards managed health care in the United States and the concurrent growth of organizations such as health maintenance organizations tend to result in lower reimbursement for pharmaceutical products. We expect that these trends will continue as these payors implement various proposals or regulatory policies, including various provisions of the recent health reform legislation that affect reimbursement of these products. There are currently, and we expect that there will continue to be, a number of federal and state proposals to implement controls on reimbursement and pricing, directly and indirectly.

 

Research and Development

 

We are conducting development activities to expand the commercial potential of MG01CI. We sponsor and conduct clinical research activities with investigators and institutions to measure key clinical outcomes that are necessary in order for us to be able to file an NDA with the FDA and equivalent filings with other regulatory authorities. For the years ended December 31, 2012 and 2011, we incurred $818,000 and $1,822,000, respectively, of research and development expense.

 

Our clinical studies have been conducted at two established medical institutions in Israel, the ADHD clinic of the Geha Mental Health Hospital and the Cognitive Neurology unit at Rambam Healthcare Campus.  We entered into customary clinical trial agreements in February 2011 with each of the institutions.  The clinical trial agreements are in customary form and provide financial support for personnel, equipment, laboratory tests and filing during the clinical trial through payment to the research fund of the medical institution. The agreements were terminated with the conclusion of the clinical trials, and the finalization of the Clinical Study Report. The principal investigators at these institutions were Dr. Iris Manor (Geha) and Dr. Rachel Ben Hayun (Rambam). All clinical and nursing staff was compensated entirely by their employer institution. We do not have any other business relationship with any of the investigators.

 

Grants from the Office of the Israeli Chief Scientist

 

Our research and development efforts, during the period between May 1, 2009 and April 30, 2010, were financed in part through royalty-bearing grants, in an amount of $106,494 that we received from Israel's Office of the Chief Scientist of the Ministry of Industry, Trade and Labor, or OCS. With respect to such grants we are committed to pay certain royalties.  Regardless of any royalty payment, we are further required to comply with the requirements of the Research Law with respect to those past grants. When a company develops know-how, technology or products using OCS grants, the terms of these grants and the Research Law restrict the transfer of such know-how, and the transfer of manufacturing or manufacturing rights of such products, technologies or know-how outside of Israel, without the prior approval of the OCS. We do not believe that these requirements will materially restrict us in any way.

  

Former Strategic Relationship with Teva Pharmaceuticals

 

Following our successful proof of concept trial in 2010, Teva Pharmaceuticals, the large Israeli generic drug company, made an equity investment in us, negotiated the right to acquire us should MG01CI reach the market, and funded the next stage of clinical development of MG01CI. All of Teva’s rights to the product terminated when it failed to timely exercise an option to continue development of MG01CI in November 2011 after requesting an extension of the deadline. We do not have any continuing obligations to Teva other than that Teva continues to be a shareholder of the Company with related rights.

 

Manufacturing

 

We currently have no manufacturing facilities and no personnel with commercial-scale manufacturing experience. We currently rely on one third-party manufacturer, Patheon Inc., which is located in Cincinnati, Ohio, to produce bulk drug substance and drug products required for our clinical trials. We have entered into a customary clinical trial agreement with Patheon. Supply under the agreement is done by purchase orders, there are no minimum purchase requirements or unusual financial arrangements and the agreement is terminable at will by either party.  We plan to continue to rely upon contract manufacturers and, potentially, collaboration partners to manufacture commercial quantities of our drug product candidates if and when we receive approval for marketing by the applicable regulatory authorities.

 

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We have not identified a secondary fill/finish supplier. We do not have a long-term commercial supply arrangement in place with any of our contract manufacturers. If we need to identify an additional fill/finish manufacturer, we would not be able to do so without significant delay and likely significant additional cost.

 

Our third-party manufacturers, their facilities and all lots of drug substance and drug products used in our clinical trials are required to be in compliance with current Good Manufacturing Practices, or cGMP. The cGMP regulations include requirements relating to organization of personnel, buildings and facilities, equipment, control of components and drug product containers and closures, production and process controls, packaging and labeling controls, holding and distribution, laboratory controls, records and reports, and returned or salvaged products. The manufacturing facilities for our products must meet, and continue to meet, cGMP requirements and FDA satisfaction before any product is approved and we can manufacture commercial products. Contract manufacturers often encounter difficulties involving production yields, quality control and quality assurance, as well as shortages of qualified personnel.

 

Competition

 

We face competition from established pharmaceutical and biotechnology companies that currently market a wide range of drugs to treat ADHD. All of these competitors have far greater marketing and research capabilities than us. We also face potential competition from academic institutions, government agencies and private and public research institutions, among others, which may in the future develop products to treat ADHD. All of these companies and institutions may have products in development that are superior to MG01CI. Our commercial opportunity would be reduced significantly if our competitors develop and commercialize products that are safer, more effective, more convenient, have fewer side effects or are less expensive than MG01CI. Public announcements regarding the development of competing drugs could adversely affect the commercial potential of MG01CI.

 

Intellectual Property

 

We seek patent protection in the United States and internationally for MG01CI and any other products that we may develop. Our policy is to pursue, maintain and defend patent rights developed internally and to protect the technology, inventions and improvements that are commercially important to the development of our business. Our portfolio of patent applications that cover the release formulations and pharmacokinetic profile of Metadoxine, including our special sustained release, combined release and burst release formulations and the associated methods of treatment.

 

One of our patent applications has been allowed by the U.S. PTO, and we expect the patent to be issued shortly. No patents have yet been issued on any of our patent applications. We cannot be sure that any patents will be granted with respect to any of our pending patent applications or with respect to any patent applications filed by us in the future. There is also a significant risk that any issued patents will have substantially narrower claims than those that are currently sought. Even with respect to any patents that may be issued to us, we cannot be sure that any such patents will be commercially useful in protecting our technology. Any patents issued with respect to our current patent applications would expire from 2028 to 2030. We also rely on trade secrets to protect our product candidates. Our commercial success also depends in part on our non-infringement of the patents or proprietary rights of third parties. For a more comprehensive discussion of the risks related to our intellectual property, please see “Risk Factors — Risks Related to Our Intellectual Property.”

 

The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. This risk is exacerbated for us because Metadoxine is manufactured and used in a number of foreign countries in other applications and is widely available. The manufacture of Metadoxine and its use in other indications will not infringe our IP rights, and will make it more difficult to monitor and enforce any patent rights that may be issued to us.

 

Our success depends in part on our ability to:

 

·      preserve trade secrets;

 

·      prevent third parties from infringing upon our proprietary rights; and

 

·      operate our business without infringing the patents and proprietary rights of third parties, both in the United States and internationally.

 

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We also protect our proprietary technology and processes, in part, by confidentiality and invention assignment agreements with our employees, consultants, scientific advisors and other contractors. These agreements may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our employees, consultants, scientific advisors or other contractors use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.

 

Regulatory Matters

 

Clinical trials, the drug approval process, and the marketing of drugs is intensively regulated in the United States and in all major foreign countries.

 

In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or FDCA, and related regulations. Drugs are also subject to other federal, state and local statutes and regulations. Failure to comply with the applicable United States regulatory requirements at any time during the product development process, approval process or after approval may subject an applicant to administrative or judicial sanctions. These sanctions could include the imposition by the FDA or an Institutional Review Board, or IRB, of a clinical hold on trials, the FDA’s refusal to approve pending applications or supplements, withdrawal of an approval, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, civil penalties or criminal prosecution. Any agency or judicial enforcement action could have a material adverse effect on us.

 

The FDA and comparable regulatory agencies in state and local jurisdictions and in foreign countries impose substantial requirements upon the clinical development, manufacture and marketing of pharmaceutical products. These agencies and other federal, state and local entities regulate research and development activities and the testing, manufacture, quality control, safety, effectiveness, labeling, storage, distribution, record keeping, approval, advertising and promotion of our products.

 

The FDA’s policies may change and additional government regulations may be enacted that could prevent or delay regulatory approval of MG01CI or any future product candidates or approval of new disease indications or label changes. We cannot predict the likelihood, nature or extent of adverse governmental regulation that might arise from future legislative or administrative action, either in the United States or abroad.

 

Marketing Approval

 

The process required by the FDA before drugs may be marketed in the United States generally involves the following:

 

·nonclinical laboratory and animal tests;

 

·submission of an Investigational New Drug, or IND, application which must become effective before clinical trials may begin;

 

·adequate and well-controlled human clinical trials to establish the safety and efficacy of the proposed drug for its intended use or uses;

 

·pre-approval inspection of manufacturing facilities and clinical trial sites; and

 

·FDA approval of a new drug application (NDA) which must occur before a drug can be marketed or sold.

 

The testing and approval process requires substantial time and financial resources, and we cannot be certain that any approvals for MG01CI will be granted on a timely basis if at all.

 

We will need to successfully complete extensive additional clinical trials in order to be in a position to submit a new drug application to the FDA. Our planned future clinical trials for MG01CI may not begin or be completed on schedule, if at all. Clinical trials can be delayed for a variety of reasons, including delays in:

 

·obtaining regulatory approval to commence a study;

 

·reaching agreement with third-party clinical trial sites and their subsequent performance in conducting accurate and reliable studies on a timely basis;

 

·obtaining institutional review board approval to conduct a study at a prospective site;

 

·recruiting patients to participate in a study; and

 

·supply of the drug.

 

 

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We must reach agreement with the FDA on the proposed protocols for our future clinical trials in the U.S. A separate submission to the FDA must be made for each successive clinical trial to be conducted during product development. Further, an independent IRB for each site proposing to conduct the clinical trial must review and approve the plan for any clinical trial before it commences at that site. Informed consent must also be obtained from each study subject. Regulatory authorities, an IRB, a data safety monitoring board or the sponsor, may suspend or terminate a clinical trial at any time on various grounds, including a finding that the participants are being exposed to an unacceptable health risk.

 

Our objective is to conduct additional clinical trials for MG01CI and, if those trials are successful, seek marketing approval from the FDA and other worldwide regulatory bodies. To achieve this objective, we plan to initiate and complete two parallel Phase III clinical trials of MG01CI for the treatment of ADHD in adults, and, if it is successful, file for marketing approval for adults initially in the United States and the European Union. We completed a Phase II trial in 2011 and plan to begin an advanced clinical study in 2013.

  

For purposes of NDA approval, human clinical trials are typically conducted in phases that may overlap.

 

·      Phase I.     The drug is initially introduced into healthy human subjects and tested for safety, dosage tolerance, absorption, metabolism, distribution and excretion. In the case of some products for severe or life-threatening diseases, especially when the product may be too inherently toxic to ethically administer to healthy volunteers, the initial human testing is often conducted in patients.

 

·      Phase II.     This phase involves trials in a limited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage. Phase II studies may be sub-categorized to Phase IIa studies which are smaller, pilot studies to evaluate limited drug exposure and efficacy signals, and Phase IIb studies which are larger studies testing more rigorously both safety and efficacy.

 

 

·      Phase III.     This phase involves trials undertaken to further evaluate dosage, clinical efficacy and safety in an expanded patient population, often at geographically dispersed clinical trial sites. These trials are intended to establish the overall risk/benefit ratio of the product and provide an adequate basis for product labeling.

 

 

All of these trials must be conducted in accordance with good clinical practice requirements in order for the data to be considered reliable for regulatory purposes.

 

Typically, if a drug product is intended to treat a chronic disease, as is the case with MG01CI, safety and efficacy data must be gathered over an extended period of time, which can range from six months to three years or more. Government regulation may delay or prevent marketing of product candidates or new drugs for a considerable period of time and impose costly procedures upon our activities. We cannot be certain that the FDA or any other regulatory agency will grant approvals for MG01CI or any future product candidates on a timely basis, if at all. Success in early stage clinical trials does not ensure success in later stage clinical trials. Data obtained from clinical activities is not always conclusive and may be susceptible to varying interpretations, which could delay, limit or prevent regulatory approval.

 

The NDA Approval Process

 

In order to obtain approval to market a drug in the United States, a marketing application must be submitted to the FDA that provides data establishing to the FDA’s satisfaction the safety and effectiveness of the investigational drug for the proposed indication. Each NDA submission requires a substantial user fee payment unless a waiver or exemption applies. The application includes all relevant data available from pertinent non-clinical studies and clinical trials, including negative or ambiguous results as well as positive findings, together with detailed information relating to the product’s chemistry, manufacturing, controls and proposed labeling, among other things. Data can come from company-sponsored clinical trials intended to test the safety and effectiveness of a use of a product, or from a number of alternative sources, including studies initiated by investigators.

 

The FDA will initially review the NDA for completeness before it accepts it for filing. The FDA has 60 days from its receipt of an NDA to determine whether the application will be accepted for filing based on the agency’s threshold determination that the application is sufficiently complete to permit substantive review. After the NDA submission is accepted for filing, the FDA reviews the NDA to determine, among other things, whether the proposed product is safe and effective for its intended use, and whether the product is being manufactured in accordance with cGMP to assure and preserve the product’s identity, strength, quality and purity. The FDA may refer applications for novel drug products or drug products that present difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation as to whether the application should be approved and, if so, under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions.

 

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Based on pivotal Phase III trial results submitted in an NDA, upon the request of an applicant, the FDA may grant a priority review designation to a product, which sets the target date for FDA action on the application at six months, rather than the standard ten months. Priority review is given where preliminary estimates indicate that a product, if approved, has the potential to provide a significant improvement compared to marketed products or offers a therapy where no satisfactory alternative therapy exists. Priority review designation does not change the scientific/medical standard for approval or the quality of evidence necessary to support approval.

 

After the FDA completes its initial review of an NDA, it will communicate to the sponsor that the drug will either be approved, or it will issue a complete response letter to communicate that the NDA will not be approved in its current form and inform the sponsor of changes that must be made or additional clinical, nonclinical or manufacturing data that must be received before the application can be approved, with no implication regarding the ultimate approvability of the application.

 

 Before approving an NDA, the FDA will inspect the facilities at which the product is manufactured. The FDA will not approve the product unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications.

 

Additionally, before approving an NDA, the FDA may inspect one or more clinical sites to assure compliance with good clinical practices (GCPs). If the FDA determines the application, manufacturing process or manufacturing facilities are not acceptable, it typically will outline the deficiencies and often will request additional testing or information. This may significantly delay further review of the application. If the FDA finds that a clinical site did not conduct the clinical trial in accordance with GCP, the FDA may determine the data generated by the clinical site should be excluded from the primary efficacy analyses provided in the NDA. Additionally, notwithstanding the submission of any requested additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval.

 

The testing and approval process for a drug requires substantial time, effort and financial resources, and this process may take several years to complete. Data obtained from clinical activities are not always conclusive and may be susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. The FDA may not grant approval on a timely basis, or at all. We may encounter difficulties or unanticipated costs in our efforts to secure necessary governmental approvals, which could delay or preclude us from marketing our products.

 

The FDA may require, or companies may pursue, additional clinical trials after a product is approved. These so-called Phase IV studies may be made a condition to be satisfied for continuing drug approval. The results of Phase IV studies can confirm the effectiveness of a product candidate and can provide important safety information. In addition, the FDA now has express statutory authority to require sponsors to conduct post-market studies to specifically address safety issues identified by the agency.

 

Any approvals that we may ultimately receive could be withdrawn if required post-marketing trials or analyses do not meet the FDA requirements, which could materially harm the commercial prospects for MG01CI.

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