UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

(Mark One)

☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report: Not applicable

For the transition period from ____ to _____

Commission file number 001-35948

Kamada Ltd.

(Exact name of registrant as specified in its charter)

N/A

(Translation of Registrant’s name into English)

State of Israel

(Jurisdiction of incorporation or organization)

2 Holzman St.

Science Park
P.O Box 4081
Rehovot 7670402

Israel
(Address of principal executive offices)

Amir London, Chief Executive Officer
2 Holzman St., Science Park

Rehovot 7670402, Israel
+972 8 9406472
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

Title of Each Class	Name of Each Exchange on which Registered
Ordinary Shares, par value NIS 1.00 each	The Nasdaq Stock Market LLC

Securities registered or to be registered pursuant to Section 12(g) of the Act. None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

As of December 31, 2019, the Registrant had 40,353,101 Ordinary Shares outstanding.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

☐   Yes   ☒   No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

☐   Yes   ☒   No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

☒   Yes   ☐   No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

☒   Yes   ☐   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer   ☐   Accelerated filer   ☒   Non-accelerated filer   ☐   Emerging growth company  ☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards^† provided pursuant to Section 13(a) of the Exchange Act. ☐

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP ☐ International Financial Reporting Standards as issued by the International Accounting Standards Board ☒ Other   ☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 ☐   Item 18 ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

☐   Yes   ☒   No

TABLE OF CONTENTS

PART I
Item 1. Identity of Directors, Senior Management and Advisers	1
Item 2. Offer Statistics and Expected Timetable	1
Item 3. Key Information	1
Item 4. Information on the Company	45
Item 4A. Unresolved Staff Comments	80
Item 5. Operating and Financial Review and Prospects	80
Item 6. Directors, Senior Management and Employees	101
Item 7. Major Shareholders and Related Party Transactions	122
Item 8. Financial Information	125
Item 9. The Offer and Listing	125
Item 10. Additional Information	125
Item 11. Quantitative and Qualitative Disclosures About Market Risk	141
Item 12. Description of Securities Other Than Equity Securities	141
Item 13. Defaults, Dividend Arrearages and Delinquencies	142
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds	142
Item 15. Controls and Procedures	142
Item 16A. Audit Committee Financial Expert	143
Item 16B. Code of Ethics	143
Item 16C. Principal Accountant Fees and Services	143
Item 16D. Exemptions from the Listing Standards for Audit Committees	143
Item 16E. Purchase of Equity Securities by the Issuer and Affiliated Purchasers	143
Item 16F. Change in Registrant’s Certifying Accountant	144
Item 16G. Corporate Governance	144
Item 16H. Mine Safety Disclosure	144
Item 17. Financial Statements	145
Item 18. Financial Statements	145
Item 19. Exhibits	145

i

In this Annual Report on Form 20-F (this “Annual Report”), unless the context indicates otherwise, references to “NIS” are to the legal currency of Israel, “U.S. dollars,” “$” or “dollars” are to United States dollars, and the terms “we,” “us,” the “Company,” “our company,” “our,” and “Kamada” refer to Kamada Ltd., along with its consolidated subsidiaries.

This Annual Report contains forward-looking statements that relate to future events or our future financial performance, which express the current beliefs and expectations of our management in light of the information currently available to it. Such statements involve a number of known and unknown risks, uncertainties and other factors that could cause our actual future results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements include all statements that are not historical facts and can be identified by words such as, but without limitation, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “target,” “likely,” “may,” “will,” “would,” or “could,” or other words, expressions or phrases of similar substance or the negative thereof. We have based these forward-looking statements largely on our management’s current expectations and future events and financial trends that we believe may affect our financial condition, results of operation, business strategy and financial needs. Forward-looking statements include, but are not limited to, statements about:

● our expectation that our 2020 revenues will be in the range of $132 million to $137 million, with the year-over-year growth driven by increased sales of Proprietary IgG products portfolio and Alpha-1 Antitrypsin (“AAT”) intravenous product, GLASSIA® (“GLASSIA“), in international markets, growth of the Distribution segment in Israel and increases sale of KEDRAB®, our anti-rabies immunoglobulin products (“KEDRAB”), in the U.S.;

● our expectation that we will continue to generate gross, operating and net profits as well as positive cash flows during 2020 and beyond;

● our expectation that the expected change in product sales mix, during 2020, as well as reduced plant utilization, is anticipated to result in an overall decrease in the Propriety Products segment’s full-year gross margins of approximately three to five percentage points as compared to 2019;

● our expectation for an approximately 20% to 25% increase in research and development expenses during 2020, as compared to 2019, due to the planned acceleration of our pivotal Phase 3 InnovAATe clinical trial;

● our expectation that the minimum aggregate revenue from sales of GLASSIA to Takeda Pharmaceutical Company Limited (“Takeda”), for the year 2020 will be approximately $65 million, for the year 2021 to be in the range of $25 million to $50 million;

● our expectation that Takeda is planning to complete the technology transfer of GLASSIA, and pending FDA approval, will initiate its own production of GLASSIA for the U.S. market in 2021;

● our expectation that the planned transition of GLASSIA manufacturing to Takeda during 2021 will result in a significant reduction of our revenues and profitability during the years 2021 and 2022 as well as excess manufacturing plant capacity, which will reduce manufacturing efficiencies;

● our expectation that upon initiation of sales of GLASSIA manufactured by Takeda, Takeda will pay us royalties at a rate of 12% on net sales through August 2025, and at a rate of 6% thereafter until 2040, with a minimum of $5 million annually, for each of the years from 2022 to 2040, and our expectation that based on current GLASSIA sales in the United States and forecasted future growth, we will receive royalties from Takeda in the range of $10 million to $20 million per year for 2022 to 2040;

● our belief that our current cash and cash equivalents and short-term investments will be sufficient to satisfy our liquidity requirements for the next 12 months; and

● our belief that our relationships with our strategic partners, including with Takeda and Kedrion S.p.A (“Kedrion”), will continue without disruption;

ii

● our expectation that continued business development efforts, focused on creating new growth opportunities through the identification of new product opportunities for our manufacturing plant and seeking complementary products via licensing and acquisition, are expected to result in resumed revenue and profitability growth beginning in 2023, which growth will be driven by an expected increase in Proprietary Products segment’s sales in international markets, an anticipated continued increase in KEDRAB sales in the U.S., the commercial manufacturing of the new specialty hyper-immune globulin product at our facility beginning in 2023, expected growth in our Distribution segment, and the expected royalties to be paid by Takeda on GLASSIA sales;

● our belief that we will be able to register our proprietary products in additional countries where they are not currently registered, and our belief that this would lead to additional sales worldwide;

● our belief that we will be able to continue to meet our customers demand for GLASSIA, KEDRAB, and other proprietary products;

● our expectation that sales of KamRAB through the Pan American Health Organization (“PAHO”) will continue in 2020;

● our estimation that the total U.S. market for rabies treatment is approximately $150 million per year and our expectation that our market share for KEDRAB sales in the U.S. market will continue to grow in the coming years;

● our belief that U.S.-based and other healthcare providers would seek to continue to diversify their source of anti-rabies immunoglobulin using our product;

● our belief that anti-rabies products based on equine serum are inferior to products made from human plasma;

● our expectations regarding the potential market opportunities for our products and product candidates;

● our expectations regarding the potential actions or inactions of existing and potential competitors of our products, including our belief that there will be no new supplier of AAT by infusion in the U.S. market in the near future;

● the legislation or regulation in countries where we sell our products that affect product pricing, reimbursement, access or distribution channels may affect our sales and profitability;

● our projection that changes in the product sales mix and geographic sales mix may have an effect on our sales and profitability;

● our ability to procure adequate quantities of plasma and fraction IV from our suppliers, which are acceptable for use in our manufacturing processes;

● our ability to maintain compliance with government regulations and licenses;

● our expectation that pursuant to our 12-year contract manufacturing agreement with an undisclosed partner, we will commercially manufacture the hyper-immune globulin product starting in early 2023, which we estimate will add $8 to $10 million to our annual revenues and have gross margin similar to average gross margin of products in our Proprietary Products segment;

● our expectation of launching PF 708 in Israel during 2022 upon receipt of regulatory approval from the Israeli Ministry of Health (“IMOH”);

● our expectation of launching five other biosimilar products pursuant to an agreement with Alvotech during the years 2023-2025, subject to approval by the IMOH;

iii

● our belief that the distribution of the six biosimilar products pursuant to an agreement with Alvotech will generate peak revenues in the range of $20 million to $30 million annually;

● our ability to identify growth opportunities for existing products and our ability to identify and develop new product candidates;

● our focus on the AAT deficiency (“AATD”) field and on becoming the innovator in this field by developing different therapeutic approaches to AATD independently and through collaborations with strategic partners;

● our belief that the market opportunity for AAT products will continue to grow;

● our ability to successfully attract partners in development programs for Inhaled AAT for AATD in the United States and the European Union, and to maintain such partnerships, if we decide to pursue such direction, as well as the impact on our business resulting from such partnerships, or from a failure to form such partnerships or fully realize the benefits of such partnerships;

● our belief that Inhaled AAT for AATD will increase patient convenience and reduce the need for patients to use intravenous infusions of AAT products, thereby decreasing the need for clinic visits or nurse home visits and reducing medical costs;

● our belief that Inhaled AAT for AATD will enable us to treat significantly more patients from the same amount of fraction IV and production capacity and therefore increase our profitability;

● the various uses of AAT products to potentially be effective for various indications, including Graft versus Host Disease (“GvHD”), prevention of lung transplantation rejection and organ preservation, and our ability to generate the needed data to potentially attract strategic partner(s) to collaborate in the further development of those indications;

● our expectation that we will report final results from the Phase II clinical study of our intravenous AAT product to prevent lung transplantation rejection during 2020;

● our expectation that we will report interim results from the Phase II Investigator-Initiated clinical study of our intravenous AAT product for GvHD during 2020;

● the timing of, and our ability to, obtain and/or maintain regulatory approvals for our products and new product candidates, the rate and degree of market acceptance, and the clinical utility of our products;

● our development plan of a recombinant AAT product and its future potential utilization;

● our ability to obtain and maintain protection for the intellectual property, trade secrets and know-how relating to or incorporated into our technology and products;

● our expectations regarding our ability to utilize Israeli tax incentives against future income; and

● our expectations regarding taxation, including that we will not be classified as a passive foreign investment company for the taxable year ending December 31, 2020.

iv

All forward-looking statements involve risks, assumptions and uncertainties. You should not rely upon forward-looking statements as predictors of future events. The occurrence of the events described, and the achievement of the expected results, depend on many events and factors, some or all of which may not be predictable or within our control. Actual results may differ materially from expected results. See the sections “Item 3. Key Information — D. Risk Factors” and “Item 5. Operating and Financial Review and Prospectus,” as well as elsewhere in this Annual Report, for a more complete discussion of these risks, assumptions and uncertainties and for other risks, assumptions and uncertainties. These risks, assumptions and uncertainties are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results.

All of the forward-looking statements we have included in this Annual Report are based on information available to us as of the date of this Annual Report and speak only as of the date hereof. We undertake no obligation, and specifically decline any obligation, to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Annual Report might not occur.

The audited consolidated financial statements for the years ended December 31, 2019, 2018 and 2017 included in this Annual Report have been prepared in accordance with the international financial reporting standards (“IFRS”) as issued by the international accounting standards board (“IASB”). None of the financial information in this Annual Report has been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).

Unless otherwise noted, NIS amounts presented in this Annual Report are translated at the rate of $1.00 = NIS 3.456, the exchange rate published by the Bank of Israel as of December 31, 2019.

v

PART I

Item 1. Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

A. Selected Financial Data

The following table summarizes our consolidated financial data. We have derived the summary consolidated statements of operations data for the years ended December 31, 2019, 2018 and 2017 and the consolidated balance sheets data as of December 31, 2019 and 2018 from our audited consolidated financial statements included elsewhere in this Annual Report. We have derived the summary consolidated statements of operations data for the years ended December 31, 2016 and 2015 and the summary consolidated balance sheet data as of December 31, 2017, 2016 and 2015 from our audited consolidated financial statements not included in this Annual Report.

We have included, in our opinion, all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair presentation of the financial information set forth in those summary consolidated statements. Our historical results are not necessarily indicative of the results that should be expected in the future, and our interim results are not necessarily indicative of the results that should be expected for the full year.

1

The summary of our consolidated financial data set forth below should be read together with our consolidated financial statements and the related notes, as well as the section entitled “Item 5. Operating and Financial Review and Prospects,” included elsewhere in this Annual Report.

	Year Ended December 31,
	2019			2018			2017			2016			2015
	(U.S. Dollars in thousands, except per share data)
Consolidated Statements of Operations Data:
Revenues from Proprietary Products	$	97,696		$	90,784		$	79,559		$	55,958		$	42,952
Revenues from Distribution		29,491			23,685			23,266			21,536			26,954
Total revenues		127,187			114,469			102,825			77,494			69,906
Cost of revenues from Proprietary Products		52,425			52,796			51,335			37,723			30,901
Cost of revenues from Distribution		25,025			20,201			19,402			18,411			23,640
Total cost of revenues		77,450			72,997			70,737			56,134			54,541
Gross profit		49,737			41,472			32,088			21,360			15,365
Research and development expenses		13,059			9,747			11,973			16,245			16,530
Selling and marketing expenses		4,370			3,630			4,398			3,243			3,652
General and administrative expenses		9,194			8,525			8,273			7,353			6,607
Other expense		330			311			-			-			-
Operating income (loss)		22,784			19,259			7,444			(5,481	)		(11,424	)
Financial income		1,146			830			500			470			18
Income (expense) in respect of securities measured at fair value, net		(5	)		(178	)		(80	)		(13	)		68
Income (expense) in respect of currency exchange and translation differences and derivatives instruments, net		(651	)		602			(612	)		127			624
Financial expense		(293	)		(172	)		(82	)		(114	)		(556	)
Income (loss) before taxes on income		22,981			20,341			7,170			(5,011	)		(11,270	)
Taxes on income		730			(1,955	)		269			1,722			-
Net income (loss)		22,251			22,296			6,901			(6,733	)	$	(11,270	)
Income (loss) attributable to equity holders		22,251			22,296			6,901			(6,733	)	$	(11,270	)
Income (loss) per share attributable to equity holders:
Basic	$	0.55		$	0.55		$	0.18		$	(0.18	)	$	(0.31	)
Diluted	$	0.55		$	0.55		$	0.18		$	(0.18	)	$	(0.31	)
Weighted-average number of ordinary shares used to compute income (loss) per share attributable to equity holders:
Basic		40,320,888			40,275,374			37,970,697			36,418,833			36,245,813
Diluted		40,581,627			40,445,417			38,045,097			36,418,833			36,245,813
Consolidated Statements of Cash Flows:
Cash flows from operating activities	$	27,571		$	10,546		$	3,608		$	1,897		$	(13,979	)
Cash flows from investing activities		(564	)		(5,176	)		(15,608	)		1,637			11,253
Cash flows from financing activities		(1,530	)		(587	)		15,320			1,490			(6,355	)
Consolidated Balance Sheet Data:
Cash, cash equivalents, restricted cash and short-term investments	$	73,907		$	50,592		$	43,019		$	28,632		$	28,306
Trade receivables		23,210			27,674			30,662			19,788			23,071
Working capital (1)		110,823			87,321			67,486			49,871			57,655
Total assets		173,797			138,116			122,110			99,696			101,992
Total liabilities		38,478			25,740			32,618			32,953			29,485
Total shareholders’ equity		135,319			112,376			89,492			66,743			72,507
Other Data:
Adjusted net income (loss)(2) (3)	$	23,414		$	23,244		$	7,384		$	(5,663	)	$	(9,363	)
Adjusted EBITDA(2)	$	28,466		$	23,910		$	11,450		$	(909	)	$	(6,290	)

(1) Working capital is defined as total current assets minus total current liabilities.

(2) We present adjusted net income (loss) and adjusted EBITDA because we use these non-IFRS financial measures to assess our operational performance, for financial and operational decision-making, and as a means to evaluate period-to-period comparisons on a consistent basis. Management believes these non-IFRS financial measures are useful to investors because: (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making; and (2) they exclude the impact of non-cash items that are not directly attributable to our core operating performance and that may obscure trends in the core operating performance of the business.

2

Non-IFRS financial measures have limitations as an analytical tool and should not be considered in isolation from, or as a substitute for, our IFRS results. We expect to continue reporting non-IFRS financial measures, adjusting for the items described below, and we expect to continue to incur expenses similar to certain of the non-cash, non-IFRS adjustments described below. Accordingly, unless otherwise stated, the exclusion of these and other similar items in the presentation of non-IFRS financial measures should not be construed as an inference that these items are unusual, infrequent or non-recurring. Adjusted net income (loss) and adjusted EBITDA are not recognized terms under IFRS and do not purport to be an alternative to IFRS net income (loss) as an indicator of operating performance or any other IFRS measure. Moreover, because not all companies use identical measures and calculations, the presentation of adjusted net income (loss) or adjusted EBITDA may not be comparable to other similarly titled measures of other companies.

Adjusted net income (loss) is defined as net income (loss), plus non-cash share-based compensation expenses. Our management believes that excluding non-cash charges related to share-based compensation provides useful information to investors because of its non-cash nature, varying available valuation methodologies among companies and the subjectivity of the assumptions and the variety of award types that a company can use under the relevant accounting guidance, which may obscure trends in our core operating performance.

(3) Adjusted EBITDA is defined as net income (loss), plus income tax expense, plus financial expense, net, plus depreciation and amortization expense, plus non-cash share-based compensation expenses, plus or minus income or expense in respect of exchange and translation differences and derivatives instruments not designated as hedging. Management believes that adjusted EBITDA provides useful information to investors for the same reasons discussed above for adjusted net income (loss).

The following tables set forth adjusted net income (loss) and adjusted EBITDA and also reconcile these figures to the IFRS measure net income (loss):

	Year Ended December 31,
	2019		2018		2017		2016			2015
	(U.S. Dollars in thousands)
Net income (loss)	$	22,251	$	22,296	$	6,901	$	(6,733	)	$	(11,270	)
Non-cash share-based compensation expenses		1,163		948		483		1,071			1,907
Adjusted net income (loss)	$	23,414	$	23,244	$	7,384	$	(5,663	)	$	(9,363	)

	Year Ended December 31,
	2019			2018			2017		2016			2015
	(U.S. Dollars in thousands)
Net income (loss)	$	22,251		$	22,296		$	6,901	$	(6,733	)	$	(11,270	)
Income tax expense		730			(1,955	)		269		1,722			-
Financial expense, net		(197	)		(1,082	)		274		(470	)		(154	)
Depreciation and amortization expense		4,519			3,703			3,523		3,501			3,227
Non-cash share-based compensation expenses		1,163			948			483		1,071			1,907
Adjusted EBITDA	$	28,466		$	23,910		$	11,450	$	(909	)	$	(6,290	)

B. Capitalization and Indebtedness

Not applicable.

C. Reasons for the Offer and Use of Proceeds

Not applicable.

D. Risk Factors

You should consider carefully the risks and uncertainties described below, together with all of the other information in this Annual Report, including the consolidated financial statements and the related notes included elsewhere in this Annual Report. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks actually occurs, our business, financial condition, results of operations, and future prospects could be materially and adversely affected.

3

Risks Related to Our Proprietary Products Segment

Our business is currently highly concentrated on our flagship product, GLASSIA, and in our largest geographic region, the United States. Any adverse market event with respect to such product or the United States would have a material adverse effect on our business (see next risk factor for the effect of transition of GLASSIA manufacturing to Takeda in 2021).

We rely heavily upon the sales of our AAT intravenous product, GLASSIA. Revenue from our intravenous AAT products for the treatment of AATD comprised approximately 58%, 60% and 64% of our total revenues for the years ended December 31, 2019, 2018 and 2017, respectively. If GLASSIA were to lose significant sales, or were to be substantially or completely displaced in the market, we would lose a significant and material source of our total revenues. Similarly, if GLASSIA were to become the subject of litigation and/or an adverse governmental ruling requiring us to cease the manufacturing, export or sales of GLASSIA, our business would be adversely affected.

In addition, we have a partnership arrangement with Takeda, pursuant to which Takeda is the sole distributor of GLASSIA in the United States, Canada, Australia and New Zealand. The partnership agreement was originally executed in 2010 with Baxter International Inc. (“Baxter”). During 2015, Baxter assigned all its rights under the partnership agreement to Baxalta US Inc. (“Baxalta”), an independent public company which spun-off from Baxter. In 2016, Shire completed its acquisition of Baxalta, and as a result, all of Baxalta’s rights under the partnership agreement were assigned to Shire. In January 2019, Takeda completed its acquisition of Shire. Revenue derived from our partnership with Takeda, which consists of sales of GLASSIA, milestone revenue and technology transfer services accounted for approximately 54%, 56% and 59% of our total revenues in the years ended December 31, 2019, 2018 and 2017, respectively. Additionally, we depend upon Takeda for the supply of fraction IV plasma for our production of GLASSIA to be sold in the United States. See also the following risks “— Based on current agreement with Takeda, we will cease to produce GLASSIA for Takeda after 2021 as Takeda begins its own production of GLASSIA, which will result in a significant reduction of our revenues and profitability, as well as excess manufacturing plant capacity, which will reduce manufacturing efficiencies.” and “In our Proprietary Products segment, we currently rely on Takeda, which accounts for a significant portion of our total sales, and any disruption to our relationships with Takeda would have an adverse effect on our results of operations and profitability.”

We also rely heavily on sales in the United States, which comprised approximately 66%, 66% and 59% of our total revenues for the years ended December 31, 2019, 2018 and 2017, respectively. If our U.S. sales were significantly impacted by material changes to government or private payor reimbursement, other regulatory developments, competition or other factors, then our business would be adversely affected.

Based on current agreement with Takeda, we will cease to produce GLASSIA for Takeda after 2021 as Takeda begins its own production of GLASSIA, which will result in a significant reduction of our revenues and profitability, as well as excess manufacturing plant capacity, which will reduce manufacturing efficiencies.

In September 2019, we announced the extension of our strategic supply agreement with Takeda for GLASSIA in the U.S., pursuant to which we will continue to produce GLASSIA for Takeda through 2021. Based on the licensing and technology transfer agreement signed in 2010, Takeda is planning to complete the technology transfer of GLASSIA, and pending FDA approval, will initiate its own production of GLASSIA for the U.S. market in 2021. Accordingly, following the transition of manufacturing to Takeda, we will terminate the manufacturing of GLASSIA for Takeda, and based on the agreement between the companies, upon initiation of sales of GLASSIA manufactured by Takeda, Takeda will pay royalties to us at a rate of 12% on net sales through August 2025, and at a rate of 6% thereafter until 2040, with a minimum of $5 million annually, for each of the years from 2022 to 2040. Based on current GLASSIA sales in the United States and forecasted future growth, we project receiving royalties from Takeda in the range of $10 million to $20 million per year for 2022 to 2040.

4

The transition of GLASSIA manufacturing to Takeda and the transition of the agreement to royalties phase, will result in a significant reduction of our revenue and profitability. As an illustration, in the event the transition of the agreement to its royalty phase would have taken place in 2019, our revenues would have been reduced by $68.1 million (which is the total revenues generated by GLASSIA sales to Takeda during the year ended December 31, 2019), our gross profit would have been reduced by a range of $27 million to $29 million. Such revenues and gross profitability reduction would have been offset by royalties that would have been paid by Takeda in the range of $10 million to $20 million. We also may suffer from reduced effectiveness in our manufacturing facility which may cause us to incur operating losses. See — “In our Proprietary Products segment, we currently rely on Takeda, which accounts for a significant portion of our total sales, and any disruption to our relationships with Takeda would have an adverse effect on our results of operations and profitability”, and “We may have excess manufacturing plant capacity in our manufacturing facility, which may result in significant operating losses.”

We may have excess manufacturing plant capacity in our manufacturing facility, which may result in significant operating losses.

After 2021, Takeda has no obligation to purchase a minimum amount of GLASSIA, and we estimate that Takeda will begin selling GLASSIA produced in its own manufacturing facility as early as 2022 and will only pay us royalties. As Takeda transitions to producing GLASSIA in its own facilities, we will incur a substantial reduction in revenues (as well as costs of goods sold) driven by the reduction in GLASSIA manufacturing. Our revenues will decrease and our operating results may be materially and adversely impacted if we are unable to continue operating our manufacturing facility at its current capacity and/or level of profitability, or otherwise to reduce direct and indirect costs relating to our manufacturing facility in line with any reduction in demand. In 2020, the reduced plant utilization (as well as the expected change in product sales mix) is anticipated to result in an overall decrease in the Propriety Products segment’s full-year gross margins of approximately three to five percentage points as compared to 2019.

Following the transition of GLASSIA manufacturing to Takeda, we plan to utilize the excess manufacturing capacity in our manufacturing plant to support the growth of our other existing proprietary products, including KEDRAB. While we are capable of manufacturing more of these products, there is no assurance that there will be increased market demand for these products in the currently existing markets in which we distribute our products or other markets. The manufacturing of excess quantities of products which may not be sold due to lower demands may results in the need to write-down the value of inventories which may result in significant operating losses.

We believe the risk of not adequately adjusting to lower plant utilization could result in inefficiencies, reduced profitability or operating losses. In addition, these changes may require significant layoffs, which may be expensive and may lead to labor issues and strikes which could affect our ability to continue to manufacture products and may lead to increase costs, reduced profitability and operating losses.

Manufacturing of new plasma-derived products in our manufacturing facility requires a lengthy and challenging technology transfer project and obtaining necessary regulatory approvals, both of which may not materialize.

We are exploring opportunities to manufacture in our manufacturing plant other new plasma-derived products which we have not previously manufactured. The manufacturing of other plasma-derived products in our plant, including, a hyper-immune globulin product for which we executed a 12-year contract manufacturing agreement with an undisclosed partner, requires a lengthy and challenging technology transfer project through which we transfer the know-how and capabilities to manufacture the new product. Such projects are usually complex and involve investment of significant time (approximately two to four years) and resources. There is no assurance that such technology transfer projects will be successful and will allow us to manufacture the new product according to its required specifications.

Such technology transfer projects require obtaining regulatory approval by the FDA and/or EMA or other relevant regulatory agencies. Obtaining such regulatory approval may require activities such as the manufacturing of comparable batches and/or performing comparability non-clinical and/or clinical studies between the product manufactures by its existing manufacturer and the product manufactured at our manufacturing facility. There is no assurance that we will be able to provide supporting comparability results that meet all regulatory requirements needed to obtain the regulatory approval required to be able to commence commercial manufacturing of new plasma-derived products in our manufacturing plant.

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In addition, there can be no assurance that we will be able to find and secure agreements for the manufacturing of other plasma-derived products to be manufactured in our manufacturing plant for various reasons, such as lack of relevant products, technological differences, capacity constraints, or inability to secure adequate commercial terms.

If we are unable to secure new agreements for manufacturing of new plasma-derived products or are unable to adequately complete the required technology transfer projects or subsequently obtain the required regulatory approvals, we will not be able to utilize the excess capacity of our manufacturing plant and may suffer reduced profitability or operating losses.

We may face manufacturing stoppages and other challenges associated with audits or inspections by regulatory bodies.

The regulatory authorities may, at any time and from time to time, following approval of a product for sale, audit the facilities in which the product is manufactured. If any such inspection or audit of our facilities identifies a failure to comply with applicable regulations or if a violation of our product specifications or applicable regulations occurs independently of such an inspection or audit, the relevant regulatory authority may require remedial measures that may be costly or time consuming for us to implement and that may include the temporary or permanent suspension of commercial sales or the temporary or permanent closure of a facility. Any such remedial measures imposed upon us with whom we contract could materially harm our business.

In our Proprietary Products segment, we currently rely on Takeda, which accounts for a significant portion of our total sales, and any disruption to our relationships with Takeda would have an adverse effect on our results of operations and profitability.

Pursuant to our partnership arrangement with Takeda, Takeda is the sole distributor of GLASSIA in the United States, Canada, Australia and New Zealand. Sales to Takeda accounted for approximately 54%, 56% and 59% of our total revenues in the years ended December 31, 2019, 2018 and 2017, respectively. We also depend upon Takeda for the supply of fraction IV plasma for our production of GLASSIA to be sold in the United States. See “—We would become supply-constrained and our financial performance would suffer if we were unable to obtain adequate quantities of source plasma or plasma derivatives or specialty ancillary products approved by the FDA, the EMA or the regulatory authorities in Israel, or if our suppliers were to fail to modify their operations to meet regulatory requirements or if prices of the source plasma or plasma derivatives were to raise significantly.”

If we fail to maintain our relationship with Takeda, we could face significant costs in finding a replacement distributor for the markets Takeda serves for GLASSIA and a replacement supplier of fraction IV plasma for GLASSIA. Delays in establishing a relationship with a new distributor and supplier could lead to a decrease in our sales and a deterioration in our market share compared to one or more of our competitors. Any of the foregoing developments could have an adverse effect upon our sales, margins and profitability.

As Takeda transitions to producing GLASSIA in its own facilities, we will incur substantial reduction in revenues (as well as costs of goods sold), driven by the reduction in GLASSIA manufacturing. While we will receive royalty payments from Takeda based on its GLASSIA sales until 2040, and we may be able to partially offset the decrease in revenues by expanding sales of other products and in other territories, our revenues will decrease and our operating results may be materially and adversely impacted if we are unable to continue operating our manufacturing facility at its current capacity and/or level of profitability, or otherwise reduce fixed costs relating to our manufacturing facility in line with any reduction in demand.

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In our Proprietary Products segment, we rely on Kedrion for the sales of our KEDRAB product in the United States, and any disruption to our relationships with Kedrion would have an adverse effect on our future results of operations and profitability.

Pursuant to the strategic distribution and supply agreement with Kedrion for the clinical development and marketing in the United States of KEDRAB, Kedrion is the sole distributor of KEDRAB in the United States. Sales to Kedrion accounted for approximately 13% and 10% of our total revenues in the years ended December 31, 2019 and 2018, respectively. We are dependent on Kedrion for its marketing and sales of KEDRAB in the United States.

We also depend upon a subsidiary of Kedrion for the supply of the hyper-immune plasma which is used for the production of KEDRAB to be sold in the United States. See “—We would become supply-constrained and our financial performance would suffer if we were unable to obtain adequate quantities of source plasma or plasma derivatives or specialty ancillary products approved by the FDA, the EMA or the regulatory authorities in Israel, or if our suppliers were to fail to modify their operations to meet regulatory requirements or if prices of the source plasma or plasma derivatives were to raise significantly.”

If we fail to maintain our relationship with Kedrion, we could face significant costs in finding a replacement distributor for the sales of KEDRAB in the United States and a replacement supplier of the hyper-immune plasma which is used for the production of KEDRAB. Delays in establishing a relationship with a new distributor and supplier could lead to a decrease in our sales and a deterioration in our market share compared to one or more of our competitors. Any of the foregoing developments could have an adverse effect upon our sales, margins and profitability.

In our Proprietary Products segment, we rely on third party distributers for the distribution and sales of our products in ex-U.S. markets (other than the Israeli market), and any disruption to our relationships with these third party distributers would have an adverse effect on our future results of operations and profitability.

We engage third party distributors in ex-U.S. markets to distribute and sell our Proprietary Products. Sales through distributors in ex-U.S. markets (other than the Israeli market) accounted for approximately 13%, 17% and 24% of our total revenues in the years ended December 31, 2019, 2018 and 2017, respectively. We are dependent of these third parties for marketing, distribution and sales of our products in these markets.

In addition to distribution and sales, these third party distributors are, in most cases, responsible for the regulatory registration of our products in the local markets in which they operate, as well as responsible for participation in tenders for sale of our products. Failure of the third party distributors to obtain and maintain such regulatory approvals and/or win tenders or provide competitive prices to our products may adversely affect our ability to sell our Proprietary Products in these markets, which in turn will negatively affect our revenues and profitability. In addition, our inability to sell our Proprietary Products in these markets may reduce our manufacturing plant utilization and effectiveness, and may lead to additional reduction of profitability.

Our Proprietary Products segment operates in a highly competitive market.

We compete with well-established drug companies, including two to four large competitors for each of our products in the Proprietary Products segment. These large competitors include CSL Behring Ltd. (“CSL”), Takeda, and Grifols S.A. (“Grifols”), which acquired a competitor, Talecris Biotherapeutics, Inc. (“Talecris”) in 2011, and Kedrion. We compete against these companies for, among other things, licenses, expertise, clinical trial patients and investigators, consultants and third-party strategic partners. We also compete with these companies for market share for certain products in the Proprietary Products segment. Our large competitors have advantages in the market because of their size, financial resources, markets and the duration of their activities and experience in the relevant market, especially in the United States and countries of the European Union. As a result, they may be able to devote more funds to research and development and new production technologies, as well as to the promotion of their products and business. These competitors may also be able to sustain for longer periods a deliberate substantial reduction in the price of their products or services. Some of them also have an additional advantage regarding the availability of raw materials, as they own companies that collect plasma and/or plants which fractionate plasma.

Our products generally do not benefit from patent protection and compete against similar products produced by other providers. Additionally, the development by a competitor of a similar or superior product or increased pricing competition may result in a reduction in our net sales or a decrease in our profit margins. For example, we believe that our two main competitors in the AAT market are Grifols and CSL. We estimate that Grifols’ AAT by infusion product for the treatment of AATD, Prolastin A1PI, accounts for at least 50% market share in the United States and more than 70% of sales in the worldwide market for the treatment of AATD, which also includes sales of Prolastin in different European countries. Apart from its sales through Talecris’ historical business, Grifols is also a local producer of the product in the Spanish market and operates in Brazil. CSL’s intravenous AAT product is mainly sold in the United States. In 2015, CSL’s intravenous AAT product was granted centralized marketing authorization in Europe and CSL launched the product in a few European countries during 2016. There is another, smaller local producer in the French market, LFB S.A. In addition, we estimate that each of Grifols and CSL owns approximately 200-250 operating plasma collection centers located across the United States.

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Similarly, if a new AAT formulation or a new route of administration with significantly improved characteristics is adopted (including, for example, aerosol inhalation), the market share of our current AAT product, GLASSIA, could be negatively impacted. While we are in the process of developing Inhaled AAT for AATD, our competitors may also be attempting to develop similar products. For example, several of our competitors may have completed early stage clinical trials for the development of an inhaled formulation of AAT for different indications. While these products are in the early stages of development, they may eventually be successfully developed and launched. Furthermore, even if we are able to commercialize Inhaled AAT for AATD prior to the development of comparable products by our competitors, sales of Inhaled AAT for AATD, subject to approval of such product by the applicable regulatory authorities, could adversely impact our revenue and growth of sales of GLASSIA or GLASSIA -related royalties.

In addition, our plasma-derived protein therapeutics face, or may face in the future, competition from existing or newly developed non-plasma products and other courses of treatments. New treatments, such as gene therapy, small molecules, correctors, monoclonal or recombinant products, may also be developed for indications for which our products are now used. Our competitors are attempting to develop similar products or products that could be a substitute for AAT product. For example, several of our competitors are conducting clinical trials for the development of gene therapy or correctors for AATD. While these products are in the early stages of development, they may eventually be successfully developed and launched, and could adversely impact our revenue and growth of sales of GLASSIA or GLASSIA -related royalties as well as affect our ability to launch our Inhaled AAT product, if approved.

We believe that there are two main competitors for KamRAB/KEDRAB, our anti-rabies products, worldwide: Grifols, whose product we estimate comprises approximately 75%-85% of the anti-rabies market in the United States, and CSL, which sells its anti-rabies product in Europe and elsewhere. In addition, Sanofi Pasteur, the vaccines division of Sanofi S.A., has a product registered for the United States market, but the product is primarily sold in Europe and not currently sold in significant quantities in the United States. There are a number of local producers in other countries that make similar anti-rabies products, most of which are based on equine serum. Over the past several years, a number of companies have made attempts and some are still in the process of developing monoclonal antibodies for an anti-rabies treatment. These products, if approved, may be as effective as the currently available plasma derived anti-rabies vaccine and may potentially be significantly cheaper, and as such may result in loss of market share of KamRAB/KEDRAB.

While Kedrion is our strategic partner for KEDRAB, it is also one of our competitors for KamRho(D). In addition to its sales in the United States, Kedrion also markets a competing product in several EU countries as well as other countries world-wide. We believe there are three additional main suppliers of competitive products in this market: Grifols, CSL and Saol Therapeutics. There are also local producers in other countries that make similar products mostly intended for local markets.

We do not currently sell any propriety recombinant products. We have begun developing recombinant version of AAT, through external services of a Contract Development and Manufacturing Organization (“CDMO”), but we cannot be certain that such product will ever be approved or commercialized. See “Item 4. Information on the Company — Our Product Pipeline and Development Program — Recombinant AAT.” The main advantage of recombinant AAT is its potentially wider availability, and ease of large scale manufacturing. As a result, our product offerings may remain plasma-derived, even if our competitors offer competing recombinant or other non-plasma products or treatments.

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Our products involve biological intermediates that are susceptible to contamination, which could adversely affect our operating results.

Plasma and its derivatives, such as fraction IV, are raw materials that are susceptible to damage and contamination and may contain microorganisms that cause diseases in humans, commonly known as human pathogens, any of which would render such materials unsuitable as raw material for further manufacturing. Almost immediately after collection from a donor, plasma and plasma derivatives must be stored and transported at temperatures that are at least -20 degrees Celsius (-4 degrees Fahrenheit). Improper storage or transportation of plasma or plasma derivatives by us or third-party suppliers may require us to destroy some of our raw material. In addition, plasma and plasma derivatives are also suitable for use only for certain periods of time once removed from storage. If unsuitable plasma or plasma derivatives are not identified and discarded prior to release to our manufacturing processes, it may be necessary to discard intermediate or finished products made from such plasma or plasma derivatives, or to recall any finished product released to the market, resulting in a charge to cost of goods sold and harm to our brand and reputation. Furthermore, if we distribute plasma-derived protein therapeutics that are produced from unsuitable plasma because we have not detected contaminants or impurities, we could be subject to product liability claims and our reputation would be adversely affected.

Despite overlapping safeguards, including the screening of donors and other steps to remove or inactivate viruses and other infectious disease-causing agents, the risk of transmissible disease through plasma-derived protein therapeutics cannot be entirely eliminated. If a new infectious disease was to emerge in the human population, the regulatory and public health authorities could impose precautions to limit the transmission of the disease that would impair our ability to manufacture our products. Such precautionary measures could be taken before there is conclusive medical or scientific evidence that a disease poses a risk for plasma-derived protein therapeutics. In recent years, new testing and viral inactivation methods have been developed that more effectively detect and inactivate infectious viruses in collected plasma. There can be no assurance, however, that such new testing and inactivation methods will adequately screen for, and inactivate, infectious agents in the plasma or plasma derivatives used in the production of our plasma-derived protein therapeutics. Additionally, this could trigger the need for changes in our existing inactivation and production methods, including the administration of new detection tests, which could result in delays in production until the new methods are in place, as well as increased costs that may not be readily passed on to our customers.

Plasma and plasma derivatives can also become contaminated through the manufacturing process itself, such as through our failure to identify and purify contaminants through our manufacturing process or failure to maintain a high level of sterility within our manufacturing facilities.

Once we have manufactured our plasma-derived protein therapeutics, they must be handled carefully and kept at appropriate temperatures. Our failure, or the failure of third parties that supply, ship, store or distribute our products, to properly care for our plasma-derived products, may result in the requirement that such products be destroyed.

While we expect small amounts of work-in-process inventories scraps in the ordinary course of business because of the complex nature of plasma and plasma derivatives, our processes and our plasma-derived protein therapeutics, unanticipated events may lead to write-offs and other costs materially in excess of our expectations. We have, in the past, experienced situations that have caused us to write off the value of our products. Such write-offs and other costs could materially adversely affect our operating results. Furthermore, contamination of our plasma-derived protein therapeutics could cause consumers or other third parties with whom we conduct business to lose confidence in the reliability of our manufacturing procedures, which could materially adversely affect our sales and operating results.

Our ability to continue manufacturing and distributing our plasma-derived protein therapeutics depends on our continued adherence to current Good Manufacturing Practice regulations.

The manufacturing processes for our products are governed by detailed written procedures and regulations that set forth current Good Manufacturing Practice standards (“cGMP”) requirements for blood products, including plasma and plasma derivative products. Failure to adhere to established procedures or regulations, or to meet a specification set forth in cGMP requirements, could require that a product or material be rejected and destroyed. There are relatively few opportunities for us to rework, reprocess or salvage nonconforming materials or products. Any failure in cGMP inspection will affect marketing in other territories, including the U.S. and Israel.

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Our adherence to cGMP regulations and the effectiveness of our quality control systems are periodically assessed through inspections of our manufacturing facility in Beit Kama, Israel by the FDA, the IMOH and regulatory authorities of other countries. Such inspections could result in deficiency citations, which would require us to take action to correct those deficiencies to the satisfaction of the applicable regulatory authorities. If serious deficiencies are noted or if we are unable to prevent recurrences, we may have to recall products or suspend operations until appropriate measures can be implemented. The FDA could also stop the import of products into the United States if there are potential deficiencies. Such deficiencies may also affect our ability to obtain government contracts in the future. We are required to report certain deviations from procedures to the FDA. Even if we determine that the deviations were not material, the FDA could require us to take certain measures to address the deviations. Since cGMP reflects ever-evolving standards, we regularly need to update our manufacturing processes and procedures to comply with cGMP. These changes may cause us to incur additional costs and may adversely impact our profitability. For example, more sensitive testing assays (if and when they become available) may be required or existing procedures or processes may require revalidation, all of which may be costly and time-consuming and could delay or prevent the manufacturing of a product or launch of a new product.

The biologic properties of plasma and plasma derivatives are variable, which may impact our ability to consistently manufacture our products in accordance with the approved specifications.

While our manufacturing processes were developed to meet certain product specifications, variations in the biologic properties of the plasma or plasma derivatives as well as the manufacturing processes themselves may result in out of specification results during the manufacturing of our products. While we expect certain work-in-process inventories scraps in the ordinary course of business because of the complex nature of plasma and plasma derivatives, our processes and our plasma-derived protein therapeutics, unanticipated events may lead to write-offs and other costs materially in excess of our expectations. We have, in the past, experienced situations that have caused us to write off the value of our products. Such write-offs and other costs could materially adversely affect our operating results.

The biologic properties of plasma and plasma derivatives are variable, which may adversely impact our levels of product yield from our plasma or plasma derivative supply.

Due to the nature of plasma, there will be variations in the biologic properties of the plasma or plasma derivatives we purchase that may result in fluctuations in the obtainable yield of desired fractions, even if cGMP is followed. Lower yields may limit production of our plasma-derived protein therapeutics because of capacity constraints. If these batches of plasma with lower yields impact production for extended periods, we may not be able to fulfill orders on a timely basis and the total capacity of product that we are able to market could decline and our cost of goods sold could increase, thus reducing our profitability.

Usage of our products may lead to serious and unexpected side effects, which could materially adversely affect our business and may, among other factors, lead to our products being recalled and our reputation being harmed, resulting in an adverse effect on our operating results.

The use of our plasma-derived protein therapeutics may produce undesirable side effects or adverse reactions or events. For the most part, these side effects are known, are expected to occur at some frequency and are described in the products’ labeling. Known side effects of a number of our plasma-derived protein therapeutics include headache, nausea and additional common protein infusion related events, such as flu-like symptoms, dizziness and hypertension. The occurrence of known side effects on a large scale could adversely affect our reputation and public image, and hence also our operating results.

In addition, the use of our plasma-derived protein therapeutics may be associated with serious and unexpected side effects, or with less serious reactions at a greater than expected frequency. This may be especially true when our products are used in critically ill patient populations. When these unexpected events are reported to us, we typically make a thorough investigation to determine causality and implications for product safety. These events must also be specifically reported to the applicable regulatory authorities, and in some cases, also to the public by media channels. If our evaluation concludes, or regulatory authorities perceive, that there is an unreasonable risk associated with one of our products, we would be obligated to withdraw the impacted lot or lots of that product or, in certain cases, to withdraw the product entirely. Furthermore, it is possible that an unexpected side effect caused by a product could be recognized only after extensive use of the product, which could expose us to product liability risks, enforcement action by regulatory authorities and damage to our reputation.

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We are subject to a number of existing laws and regulations in multiple jurisdictions, non-compliance with which could adversely affect our business, financial condition and results of operations, and we are susceptible to a changing regulatory environment, which could increase our compliance costs or reduce profit margins.

Any new product must undergo lengthy and rigorous testing and other extensive, costly and time-consuming procedures mandated by the FDA and similar authorities in other jurisdictions, including the EMA and the regulatory authorities in Israel. Our facilities must be approved and licensed prior to production and remain subject to inspection from time to time thereafter. Failure to comply with the requirements of the FDA or similar authorities in other jurisdictions, including a failed inspection or a failure in our reporting system for adverse effects of our products experienced by the users of our products, or any other non-compliance, could result in warning letters, product recalls or seizures, monetary sanctions, injunctions to halt the manufacture and distribution of products, civil or criminal sanctions, import or export restrictions, refusal or delay of a regulatory authority to grant approvals or licenses, restrictions on operations or withdrawal of existing approvals and licenses. Furthermore, we may experience delays or additional costs in obtaining new approvals or licenses, or extensions of existing approvals and licenses, from a regulatory authority due to reasons that are beyond our control such as changes in regulations or a shutdown of the U.S. federal government, including the FDA, or similar governing bodies or authorities in other jurisdictions. In addition, we rely to a large extent on Takeda for purposes of most of our regulatory compliance for GLASSIA and product development and approvals in the United States relating to GLASSIA. Any failure by Takeda to properly advise us regarding, or properly perform tasks related to, regulatory compliance requirements, could adversely affect us. If our relationship with Takeda terminated for any reason, we may be unable to maintain regulatory compliance on a cost-effective basis, if at all. Any of these actions could cause direct liabilities, a loss in our ability to market GLASSIA, or a loss of customer confidence in us or GLASSIA, which could materially adversely affect our sales, future revenues, reputation, and results of operations. Similarly, we rely on other third-party vendors, for example, in the production, handling, and distributions of GLASSIA. If any of these companies incur enforcement action from regulatory authorities due to noncompliance, this could negatively affect product sales, our reputation and results of operations. In addition, we rely on other distributors of our products, such as Kedrion in the United States, for purposes of our regulatory compliance for the products they distribute in the territories in which they operate. Any failure by such distributors to properly advise us regarding, or properly perform tasks related to, regulatory compliance requirements, could adversely affect us.

Any changes in our production processes for our products must be approved by the FDA and/or similar authorities in other jurisdictions. Failure to comply with any requirements as to production process changes dictated by the FDA or similar authorities in other jurisdictions could also result in warning letters, product recalls or seizures, monetary sanctions, injunctions to halt the manufacture and distribution of products, civil or criminal sanctions, refusal or delay of a regulatory authority to grant approvals or licenses, restrictions on operations or withdrawal of existing approvals and licenses.

In addition, changes in the regulation of our activities, such as increased regulation affecting safety requirements or new regulations such as limitations on the prices charged to customers in the United States, Israel or other jurisdictions in which we operate, could materially adversely affect our business. In addition, the requirements of different jurisdictions in which we operate may become less uniform, creating a greater administrative burden and generating additional compliance costs, which would have a material adverse effect on our profit margins.

We would become supply-constrained and our financial performance would suffer if we were unable to obtain adequate quantities of source plasma or plasma derivatives or specialty ancillary products approved by the FDA, the EMA or the regulatory authorities in Israel, or if our suppliers were to fail to modify their operations to meet regulatory requirements or if prices of the source plasma or plasma derivatives were to raise significantly.

Our products that generate the majority of our revenues depend on our access to U.S. or European source plasma or its derivative, fraction IV. Our plasma and fraction IV are purchased from third-party licensed suppliers, which are also responsible for the fractionation process, pursuant to multiple purchase agreements. We have entered into a number of plasma supply agreements with various third parties in the United States and Europe, some of which are also strategic partners in the distribution of our proprietary products. These agreements contain various termination provisions, including upon a material breach of either party, force majeure and, with respect to supply agreements with strategic partners, the failure or delay on the part of either party to obtain the applicable regulatory approvals or the termination of the principal strategic relationship. If we are unable to obtain adequate quantities of source plasma or fraction IV plasma approved by the FDA, the EMA or the regulatory authorities in Israel from these providers, we may be unable to find an alternative cost-effective source.

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In order for plasma and fraction IV plasma to be used in the manufacturing of our plasma-derived protein therapeutics, the individual centers at which the plasma is collected must be licensed and approved by the relevant regulatory authorities, such as the FDA or the EMA. When a new plasma collection center is opened, and on an ongoing basis after its licensure, it must be inspected by the FDA, the EMA or the regulatory authorities in Israel for compliance with cGMP and other regulatory requirements. An unsatisfactory inspection could prevent a new center from being licensed or lead to the suspension or revocation of an existing license. If we or relevant regulatory authorities determine that a plasma collection center did not comply with cGMP in collecting plasma, we may be unable to use and may ultimately destroy plasma collected from that center, which may impact on our ability to timely meet our manufacturing and supply obligations. Additionally, if noncompliance in the plasma collection process is identified after the impacted plasma has been pooled with compliant plasma from other sources, entire plasma pools, in-process intermediate materials and final products could be impacted, such as through product destruction or rework. Consequently, we could experience significant inventory impairment provisions and write-offs, which could adversely affect our business and financial results.

In addition, the plasma supplier’s fractionation process must also meet standards of the FDA, the EMA or the regulatory authorities in Israel. If a plasma supplier is unable to meet such standards, we will not be able to use the plasma derivatives provided by such supplier, which may impact on our ability to timely meet our manufacturing and supply obligations.

If we were unable to obtain adequate quantities of source plasma or plasma derivatives approved by the FDA, the EMA or the regulatory authorities in Israel, we would be limited in our ability to maintain or increase current manufacturing levels of our plasma derivative products, as well as in our ability to conduct the research required to maintain our product pipeline. As a result, we could experience a substantial decrease in total revenues or profit margins, a potential breach of distribution agreements, a loss of customers, a negative effect on our reputation as a reliable supplier of plasma derivative products or a substantial delay in our production and strategic growth plans.

The ability to increase plasma collections may be limited, our supply of plasma and plasma derivatives could be disrupted or the cost of plasma and plasma derivatives could increase substantially, as a result of numerous factors, including a reduction in the donor pool, increased regulatory requirements, decreased number of plasma supply sources due to consolidation and new indications for plasma-derived protein therapeutics, which could increase demand for plasma and plasma derivatives and lead to shortages.

We are also dependent on a number of suppliers who supply specialty ancillary products used in the production process, such as specific gels and filters. Each of these specialty ancillary products is provided by a single, exclusive supplier. If these suppliers were unable to provide us with these specialty ancillary products, if our relationships with these suppliers deteriorate, or these suppliers’ operations are negatively affected by regulatory enforcement due to noncompliance, the manufacture and distribution of our products would be materially adversely affected, which would adversely affect our sales and results of operations. See “—If we experience equipment difficulties or if the suppliers of our equipment or disposable goods fail to deliver key product components or supplies in a timely manner, our manufacturing ability would be impaired and our product sales could suffer.”

Some of our required specialty ancillary products and other materials used in the manufacturing process are commonly used in the healthcare industry world-wide. If the global demand for these products increases due to healthcare issues and epidemics, such as the recent coronavirus (2019-nCoV) outbreak, our ability to secure adequate supply at reasonable cost of such products may be negatively affected, which would materially adversely affect our ability to manufacture and distribute our products, which would adversely affect our sales and results of operations.

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In addition, regulatory requirements, including cGMP regulations, continually evolve. Failure of our plasma suppliers to adjust their operations to conform to new standards as established and interpreted by applicable regulatory authorities would create a compliance risk that could impair our ability to sustain normal operations.

In addition, if the purchase prices of the source plasma or plasma derivatives that we use to manufacture our proprietary products were to raise significantly, we may not be able to pass along these increased plasma and plasma-derivative prices to our customers. Prices in many of our principal markets are subject to local regulation and certain pharmaceutical products, such as plasma-derived protein therapeutics, are subject to price controls. Any inability to pass costs on to our customers due to these factors or others would reduce our profit margins. In addition, most of our competitors have the ability to produce their own source plasma or plasma derivatives, and therefore their products’ prices would not be impacted by such a price raise, and as a result any pricing changes by us in order to pass higher costs on to our customers could render our products noncompetitive in certain territories.

We have been required to conduct post-approval clinical trials of GLASSIA and KEDRAB as a commitment to continuing marketing such products in the United States, and we may be required to conduct post-approval clinical trials as a condition to licensing or distributing other products.

When a new product is approved, the FDA or other regulatory authorities may require post-approval clinical trials, sometimes called Phase IV clinical trials. For example, the FDA has required that we conduct Phase IV clinical trials of GLASSIA, which began in 2015, and for KEDRAB, which began in 2017. Such Phase IV clinical trials are aimed at collecting additional safety data, such as the immune response in the body of a human or animal, commonly referred to as immunogenicity, viral transmission, levels of the protein in the lung, or epithelial lining fluid, and certain efficacy endpoints requested by the FDA. If the results of such trials are unfavorable and demonstrate a previously undetected risk or provide new information that puts patients at risk, or if we fail to complete such trials as instructed by the FDA, this could result in receiving a warning letter from the FDA and the loss of the approval to market the product in the United States and other countries, or the imposition of restrictions, such as additional labeling, with a resulting loss of sales. Other products we develop may face similar requirements, which would require additional resources and which may not be successful. We may also receive approval, which is conditional on successful additional data or clinical development, and failure in such further development may require similar changes to our product label or result in revocation of our marketing authorization.

The nature of producing plasma-derived protein therapeutics may prevent us from responding in a timely manner to market forces and effectively managing our production capacity.

The production of plasma-derived protein therapeutics is a lengthy and complex process. Our ability to match our production of plasma-derived protein therapeutics to market demand is imprecise and may result in a failure to meet the market demand for our plasma-derived protein therapeutics or potentially in an oversupply of inventory. Failure to meet market demand for our plasma-derived protein therapeutics may result in customers transitioning to available competitive products, resulting in a loss of segment share or distributor or customer confidence. In the event of an oversupply in the market, we may be forced to lower the prices we charge for some of our plasma-derived protein therapeutics, record asset impairment charges or take other action which may adversely affect our business, financial condition and results of operations.

Risks Related to Our Distribution Segment

Our Distribution segment is dependent on a few suppliers, and any disruption to our relationship with these suppliers, or their inability to supply us with the products we sell, in a timely manner, in adequate quantities and/or at a reasonable cost, would have a material adverse effect on our business, financial condition and results of operations.

Sales of products supplied by Bio Products Laboratories Ltd. (“BPL”) and Biotest A.G., which are sold in our Distribution segment, together represented approximately 19%, 17% and 17% and of our total revenues for the years ended December 31, 2019, 2018 and 2017, respectively. While we have distribution agreements with each of our suppliers, these agreements do not obligate these suppliers to provide us with minimum amounts of our Distribution segment products. Purchases of our Distribution segment products from our suppliers are typically on a purchase order basis. We work closely with our suppliers to develop annual forecasts, but these forecasts are not obligations or commitments. However, if we fail to submit purchase orders that meet our annual forecasts or if we fail to meet our minimum purchase obligations, we could lose exclusivity or, in certain cases, the distribution agreement could be terminated.

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These suppliers may experience capacity constraints that result in their being unable to supply us with products in a timely manner, in adequate quantities and/or at a reasonable cost. Contributing factors to supplier capacity constraints may include, among other things, industry or customer demands in excess of machine capacity, labor shortages, changes in raw material flows or shortages in raw materials which may result from different market conditions including, but not limited to, shortages resulting from increased global demand for these raw materials due to global healthcare issues and epidemics, such as the recent coronavirus (2019-nCoV) outbreak. These suppliers may also choose not to supply us with products at their discretion or raise prices to a level that would render our products noncompetitive. Any significant interruption in the supply of these products could result in us being unable to meet the demands of our customers, which would have a material adverse effect on our business, financial condition and results of operations as a result of being required to pay of fines or penalties, be subject to claims of reach of contract, loss of reputation or even termination of agreement.

If our relationship with either distributor deteriorated, our distribution sales could be adversely affected. If we fail to maintain our existing relationships with these suppliers, we could face significant costs in finding a replacement supplier, and delays in establishing a relationship with a new supplier could lead to a decrease in our sales and a deterioration in our market share compared to one or more of our competitors.

Additionally, our future growth in the Distribution segment is dependent on our ability to successfully engage other manufacturers for distribution in Israel of other products. Failure to engage new suppliers may have an adverse effect on our revenue growth and profitability.

Certain of our sales in our Distribution segment rely on our ability to win tender bids based on the price and availability of our products in annual public tender processes.

Certain of our sales in our Distribution segment rely on our ability to win tender bids during the annual tender process in Israel, as well as on sales made to sick funds, hospitals and to the IMOH. Our ability to win bids may be materially adversely affected by competitive conditions in such bid process. Our existing and new competitors may also have significantly greater financial resources than us, which they could use to promote their products and business. Greater financial resources would also enable our competitors to substantially reduce the price of their products or services. If our competitors are able to offer prices lower than us, our ability to win tender bids during the annual tender process will be materially affected, and could reduce our total revenues or decrease our profit margins.

Certain of our products in both segments have historically been subject to price fluctuations as a result of changes in the production capacity available in the industry, the availability and pricing of plasma, development of competing products and the availability of alternative therapies. Higher prices for plasma-derived protein therapeutics have traditionally spurred increases in plasma production and collection capacity, resulting over time in increased product supply and lower prices. As demand continues to grow, if plasma supply and manufacturing capacity do not commensurately expand, prices tend to increase. Additionally, consolidation in plasma companies has led to a decrease in the number of plasma suppliers in the world, as either manufacturers of plasma-based pharmaceuticals purchase plasma suppliers or plasma suppliers are shut down in response to the number of manufacturers of plasma-based pharmaceuticals decreasing, which may lead to increased prices. We may not be able to pass along these increased plasma and plasma-derivative prices to our customers, which would reduce our profit margins.

Sales of our Distribution segment products are made through public tenders of Israeli hospitals and health maintenance organizations on an annual basis or in the private market based on detailing activity made by our medical representatives. The prices we can offer, as well as the availability of products, are key factors in the tender process. If our suppliers in the Distribution segment cannot sell us products at a competitive price or cannot guarantee sufficient quantities of products, we may lose the tenders.

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Our Distribution segment is dependent on a few customers, and any disruption to our relationship with these customers, or our inability to supply, in a timely manner, in adequate quantities and/or at a reasonable cost, would have a material adverse effect on our business, financial condition and results of operations.

The Israeli market for drug products includes a relatively small number of Health Maintenance Organizations (“HMOs”) and several hospitals. Sales to Clalit Health Services, an Israeli HMO, accounted for approximately 46%, 43% and 34% of our Distribution Segment revenues in the years ended December 31, 2019, 2018 and 2017, respectively.

If our relationship with any of our Israeli customers deteriorated, our distribution sales could be adversely affected. Failure to maintain our existing relationships with these customers could lead to a decrease in our revenues and profitability.

Before we may sell products in the Distribution segment, we must register the products with the IMOH and there can be no assurance that such registration will be obtained.

Before we may sell products in the Distribution segment in Israel, we must register the products, at our own expense, with the IMOH. We cannot predict how long the registration process of the IMOH may take or whether any such registration ultimately will be obtained. The IMOH has substantial discretion in the registration process and we can provide no assurance of success of registration. Our business, financial condition or results of operations could be materially adversely affected if we fail to receive IMOH registration for the products in the Distribution segment.

Our Distribution segment is a low-margin business and our profit margins may be sensitive to various factors, some of which are outside of our control.

Our Distribution segment is characterized by high volume sales with relatively low profit margins. Volatility in our pricing may have a direct impact on our profitability. Prolonged periods of product cost inflation may have a negative impact on our profit margins and results of operations to the extent we are unable to pass on all or a portion of such product cost increases to our customers. In addition, if our product mix changes, we may face increased risks of compression of our margins, as we may be unable to achieve the same level of profit margins as we are able to capture on our existing products. Our inability to effectively price our products or to reduce our expenses due to volatility in pricing could have a material adverse impact on our business, financial condition or results of operations.

We may be subject to milestone payments in connection with our Distribution segment products irrespective of whether the commercialization is successful.

Certain of our agreements in the Distribution segment require us to make milestone payments in advance of product launch. In some cases we may not be able to obtain reimbursement for such payments. To the extent that we are not ultimately able to recoup these payments, our business, financial position and results of operations may be adversely affected.

We may face competition in our Distribution segment.

In the Distribution segment, we face competition for our distribution products that are marketed in Israel and compete for market share. We believe that there are a number of companies active in the Israeli market distributing the products of several manufacturers whose comparable products compete with our products in the Distribution segment. In the plasma area, these manufacturers include Grifols, Takeda, CSL, Omrix Biopharmaceuticals Ltd. (a Johnson & Johnson company), while in other specialties we may be competing against products produced by some of the largest pharmaceutical manufacturers in the world, such as, Novartis AG, AstraZeneca AB, Sanofi UK and GlaxoSmithKline. Each of these competitors sells its products through a local subsidiary or a local representative in Israel. Our existing and new competitors may have significantly greater financial resources than us, which they could use to promote their products and business or reduce the price of their products or services. If we are unable to maintain or increase our market share, we may need to reduce prices and may suffer reduced profitability or operating losses, which could have a material adverse impact on our business, financial condition or results of operations.

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Risk Related to Development, Regulatory Approval and Commercialization of Product Candidates

There can be no assurance that our current ongoing discussions with the FDA regarding the continued development of our Inhaled AAT for AATD product candidate will materialize and result in FDA allowing our pivotal clinical study to proceed under an IND.

We completed a Phase II clinical trial of our Inhaled AAT for AATD in the United States, which met its primary endpoint. However, when we presented the data from the European Phase II/III study to the FDA in April 2016, the FDA expressed concerns and questions about that data, primarily related to the safety and efficacy of Inhaled AAT for the treatment of AATD and the risk/benefit balance to patients based on that data. In order to address the FDA’s concerns and questions, in April 2017, we submitted to the agency the results of the U.S. Phase II data together with a proposed Phase III synopsis. The FDA then provided us with guidance for further development of the synopsis and requested that we submit a complete proposed study protocol for the next phase prior to enabling us to continue clinical development and initiate the Phase III study in the United States. In July 2017, we submitted a full study protocol, and in August 2017, in response to the study protocol and previous submission, the FDA issued a letter stating that it continues to have concerns and questions about the safety and efficacy of the Inhaled AAT for AATD. We provided the FDA with data and information related to their concerns and in April 2018, the FDA issued a response letter providing further guidance regarding the proposed pivotal Phase III protocol, as well as additional questions focused on the Inhaled AAT product characteristics. This correspondence indicated that, while several issues had been addressed, the FDA had continued concerns and questions related to the safety profile of Inhaled AAT for AATD. Following a thorough assessment of the FDA response, we provided the requested information and data and implemented the proposed changes in the study protocol during the second half of 2018. In April 2019, the FDA stated that we satisfactorily addressed the concerns and questions regarding the Inhaled AAT for AATD, and based on the feedback received from the FDA regarding anti-drug antibodies (ADA) to the Inhaled AAT for AATD, we intend to concurrently conduct a sub-study in North America in which approximately 30 patients will be evaluated for the effect of ADA on AAT levels in plasma with Inhaled AAT for AATD and IV AAT treatments. We expect to receive further feedback from the FDA related to our Human Factor Study (“HFS”), which we completed in the third quarter of 2019, which was required to support the combination product, consisting of our Inhaled AAT and the investigational eFlow nebulizer system of PARI.

We will need to receive authorization from the FDA in order to further proceed with the clinical development of Inhaled AAT for AATD in the United States. However, the FDA may decide that the risk/benefit balance to patients based on the comprehensive data we have submitted does not ease the FDA’s concerns and accordingly, the FDA will not approve the IND for our planned Phase III study in the United States of our Inhaled AAT for AATD product candidate.

Clinical trials are expensive to conduct and may not result in receipt of regulatory approval.

Before obtaining regulatory approval for the sale of our product candidates, including Inhaled AAT for AATD, or for the marketing of existing products for new indications, we must conduct, at our own expense, extensive preclinical tests to demonstrate the safety of our product candidates in animals and clinical trials to demonstrate the safety and efficacy of our product candidates in humans. We cannot predict how long the approval processes of the FDA, the EMA, the regulatory authorities in Israel or any other applicable regulatory authority or agency for any of our product candidates will take or whether any such approvals ultimately will be granted. The FDA, the EMA, the regulatory authorities in Israel and other regulatory agencies have substantial discretion in the relevant drug approval process over which they have authority, and positive results in preclinical testing or early phases of clinical studies offer no assurance of success in later phases of the approval process. The approval process varies from country to country and the requirements governing the conduct of clinical trials, product manufacturing, product licensing, pricing and reimbursement vary greatly from country to country.

Preclinical and clinical testing is expensive, is difficult to design and implement, can take many years to complete and is uncertain as to outcome. A failure of one or more of our clinical trials can occur at any stage of testing. For example, the Phase II/III clinical trial in Europe for Inhaled AAT for AATD did not meet its primary or secondary endpoints and we subsequently withdrew the MAA in Europe for our Inhaled AAT for AATD.

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We may encounter unforeseen events that delay or prevent us from receiving regulatory approval for our product candidates.

We have experienced other unforeseen events that have delayed our ability to receive regulatory approval for certain of our product candidates, and may in the future experience similar or other unforeseen events during, or as a result of, preclinical testing or the clinical trial process that could delay or prevent our ability to receive regulatory approval or commercialize our product candidates, including that:

● delays may occur in obtaining our clinical materials;

● our preclinical tests or clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional preclinical testing or clinical trials or to abandon strategic projects;

● the number of patients required for our clinical trials may be larger than we anticipate, enrollment in our clinical trials may be slower or more difficult than we anticipate, or participants may withdraw from our clinical trials at higher rates than we anticipate;

● delays may occur in reaching agreement on acceptable clinical trial agreement terms with prospective sites or obtaining institutional review board approval;

● our strategic partners may not achieve their clinical development goals and/or comply with their relevant regulatory requirements, which could affect our ability to conduct our clinical trials or obtain marketing authorization;

● we may be forced to suspend or terminate our clinical trials if the participants are being exposed to unacceptable health risks or if any participant experiences an unexpected serious adverse event;

● regulators or institutional review boards may require that we hold, suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements;

● regulators may not authorize us to commence or conduct a clinical trial within a country or at a prospective trial site, or according to the clinical trial outline we propose;

● undetected or concealed fraudulent activity by a clinical researcher, if discovered, could preclude the submission of clinical data prepared by that researcher, lead to the suspension or substantive scientific review of one or more of our marketing applications by regulatory agencies, and result in the recall of any approved product distributed pursuant to data determined to be fraudulent;

● the cost of our clinical and preclinical trials may be greater than we anticipate;

● an audit of preclinical tests or clinical studies by the FDA, the EMA, the regulatory authorities in Israel or other regulatory authorities may reveal noncompliance with applicable regulations, which could lead to disqualification of the results of such studies and the need to perform additional tests and studies; and

● our product candidates may not achieve the desired clinical benefits, or may cause undesirable side effects, or the product candidates may have other unexpected characteristics.

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If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we contemplate, if we are unable to successfully complete our clinical trials or other testing, if the results of these trials or tests are not positive or are only modestly positive or if safety concerns arise, we may:

● be delayed in obtaining regulatory or marketing approval for our product candidates;

● be unable to obtain regulatory and marketing approval;

● decide to halt the clinical trial or other testing;

● be required to conduct additional trials under a conditional approval;

● be unable to obtain reimbursement for our products in all or some countries;

● only obtain approval for indications that are not as broad as we initially intend;

● have the product removed from the market after obtaining marketing approval from the FDA, the EMA, the regulatory authorities in Israel or other regulatory authorities; and

● be delayed in, or prevented from, the receipt of clinical milestone payments from our strategic partners.

Our ability to enroll patients in our clinical trials in sufficient numbers and on a timely basis is subject to a number of factors, including the size of the patient population, the time of year during which the clinical trial is commenced, the hesitance of certain patients to leave their current standard of care for a new treatment, and the number of other ongoing clinical trials competing for patients in the same indication and eligibility criteria for the clinical trial.  In addition, patients may drop out of our clinical trials at any point, which could impair the validity or statistical significance of the trials.  Delays in patient enrollment or unexpected drop-out rates may result in longer development times.

Our product development costs will also increase if we experience delays in testing or approvals. There can be no assurance that any preclinical test or clinical trial will begin as planned, not need to be restructured or be completed on schedule, if at all. Because we generally apply for patent protection for our product candidates during the development stage, significant preclinical or clinical trial delays also could lead to a shorter patent protection period during which we may have the exclusive right to commercialize our product candidates, if approved, or could allow our competitors to bring products to market before we do, impairing our ability to commercialize our products or product candidates. For example, in the past, we have experienced delays in the commencement of clinical trials, such as a delay in patient enrollment for our clinical trials in Europe and the United States for Inhaled AAT for AATD.

Pre-clinical studies, including studies of our product candidates in animal models of disease, may not accurately predict the result of human clinical trials of those product candidates. In particular, new indications for our AAT products that are entering into Phase I and II clinical trials may be found not to be safe and/or efficacious when studied further in Phase III trials. To satisfy FDA or other applicable regulatory approval standards for the commercial sale of our product candidates, we must demonstrate in adequate and controlled clinical trials that our product candidates are safe and effective. Success in early clinical trials, including Phase II trials, does not ensure that later clinical trials will be successful. Initial results from Phase I and II clinical trials also may not be confirmed by later analysis or subsequent larger clinical trials. A number of companies in the pharmaceutical industry, including us, have suffered significant setbacks in advanced clinical trials, even after obtaining promising results in earlier clinical trials.

We may not be able to commercialize our product candidates in development for numerous reasons.

Even if preclinical and clinical trials are successful, we still may be unable to commercialize a product because of difficulties in obtaining regulatory approval for its production process or problems in scaling that process to commercial production. In addition, the regulatory requirements for product approval may not be explicit, may evolve over time and may diverge among jurisdictions and our third-party contractors, such as contract research organizations, may fail to comply with regulatory requirements or meet their contractual obligations to us.

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Even if we are successful in our development and regulatory strategies, we cannot provide assurance that any products we may seek to develop or are currently developing, such as Inhaled AAT for AATD, will ever be successfully commercialized. We may not be able to successfully address patient needs, persuade physicians and payors of the benefit of our product, and lead to usage and reimbursement. If such products are not eventually commercialized, the significant expense and lack of associated revenue could materially adversely affect our business.

We may not be able to successfully build and implement a commercial organization or commercialization program, with or without collaborating partners. The scale-up from research and development to commercialization requires significant time, resources, and expertise, which will rely, to a large extent, on third parties for assistance to help us in our efforts. Such assistance includes, but is not limited to, persuading physicians and payors of the benefit of our product to lead to utilization and reimbursement, developing a healthcare compliance program, and complying with post-marketing regulatory requirements.

If we are unable to successfully introduce new products and indications or fail to keep pace with advances in technology, our business, financial condition and results of operations may be adversely affected.

We operate in highly innovative businesses. We currently rely on sales of GLASSIA for the treatment of AATD for a significant portion of our total revenues. However, our continued growth depends in large part on our ability to develop and obtain regulatory approvals of new products, new enhancements and/or new indications for our products and product candidates. Obtaining regulatory approval in any jurisdiction, including from the EMA or the FDA, involves significant uncertainty and may be time consuming and require significant expenditures. See “—Research and development efforts invested in our pipeline of specialty and other products may not achieve expected results.” We have experienced delays at various stages of obtaining regulatory approval in the past, and failure to obtain regulatory approval of the Inhaled AAT for AATD product or of any of our other product candidates or additional indications in a timely manner or at all would materially adversely impact our business prospects. For example, the Phase II/III clinical trial in Europe for Inhaled AAT for AATD did not meet its primary or other pre-defined endpoints and, following our discussions with the EMA in regards to the study results, in June 2017, we withdrew the MAA in Europe for our Inhaled AAT for AATD. When we presented the data from the European Phase II/III study to the FDA, the agency expressed concerns and questions about that data, primarily related to the safety and efficacy of our Inhaled AAT for the treatment of AATD and the risk/benefit balance to patients based on that data. In April 2019, the FDA stated that we satisfactorily addressed the concerns and questions regarding the Inhaled AAT for AATD, and based on the feedback received from the FDA regarding anti-drug antibodies (ADA) to the Inhaled AAT for AATD, we intend to concurrently conduct a sub-study in North America in which approximately 30 patients will be evaluated for the effect of ADA on AAT levels in plasma with Inhaled AAT for AATD and IV AAT treatments. We expect to receive further feedback from the FDA related to our Human Factor Study (“HFS”), which we completed in the third quarter of 2019, which was required to support the combination product, consisting of our Inhaled AAT and the investigational eFlow nebulizer system of PARI. See also “—We may not be able to commercialize our product candidates in development for numerous reasons.”

The development of innovative products and technologies that improve efficacy, safety, patients’ and clinicians’ ease of use and cost-effectiveness, involve significant technical and business risks. The success of new product offerings will depend on many factors, including our ability to properly anticipate and satisfy customer needs, adapt to new technologies, obtain regulatory approvals on a timely basis, demonstrate satisfactory clinical results, manufacture products in an economic and timely manner, engage qualified distributors for different territories and establish our sales force to sell our products, and differentiate our products from those of our competitors. If we cannot successfully introduce new products, adapt to changing technologies or anticipate changes in our current and potential customers’ requirements, our products may become obsolete and our business could suffer.

Research and development efforts invested in our pipeline of specialty and other products may not achieve expected results.

We must invest increasingly significant resources to develop specialty products through our own efforts and through collaborations with third parties in the form of partnerships or otherwise. The development of specialty pharmaceutical products involves high-level processes and expertise and carries a significant risk of failure. For example, the average time from the pre-clinical phase to the commercial launch of a specialty pharmaceutical product can be 15 years or longer, and involves multiple stages: not only intensive preclinical, clinical and post clinical testing, but also highly complex, lengthy and expensive regulatory approval processes as well as reimbursement proceedings, which can vary from country to country. The longer it takes to develop a pharmaceutical product, the longer it may take for us to recover our development costs and generate profits, and, depending on various factors, we may not be able to ever recover such costs or generate profits.

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During each stage of development, we may encounter obstacles that delay the development process and increase expenses, leading to significant risks that we will not achieve our goals and may be forced to abandon a potential product in which we have invested substantial amounts of time and money. These obstacles may include the following: preclinical-study failures; difficulty in enrolling patients in clinical trials; delays in completing formulation and other work needed to support an application for approval; adverse reactions or other safety concerns arising during clinical testing; insufficient clinical trial data to support the safety or efficacy of a product candidate; other failures to obtain, or delays in obtaining, the required regulatory approvals for a product candidate or the facilities in which a product candidate is manufactured; regulatory restrictions which may delay or block market penetration and the failure to obtain sufficient intellectual property rights for our products.

Accordingly, there can be no assurance that the continued development of our IV AAT (GLASSIA) for the treatment of GvHD, lung transplantation rejection, organ preservation and recombinant AAT will be successful and will result in an FDA and/or EMA approvable indication.

Because of the amount of time and expense required to be invested in augmenting our pipeline of specialty and other products, including the unique know-how which may be required for such purpose, we may seek partnerships or joint ventures with third parties from time to time, and consequently face the risk that some or all of these third parties may fail to perform their obligations, or that the resulting arrangement may fail to produce the levels of success that we are relying on to meet our revenue and profit goals.

We rely on third parties to conduct our preclinical and clinical trials. The failure of these third parties to successfully carry out their contractual duties or meet expected deadlines could substantially harm our business because we may not obtain regulatory approval for, or commercialize, our product candidates in a timely manner or at all.

We rely upon third-party contractors, such as university researchers, study sites, physicians and contract research organizations (“CROs”), to conduct, monitor and manage data for our current and future preclinical and clinical programs. We expect to continue to rely on these parties for execution of our preclinical and clinical trials, and we control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol and legal, regulatory and scientific standards, and our reliance on such third-party contractors does not relieve us of our regulatory responsibilities. With respect to clinical trials, we and our CROs are required to comply with current Good Clinical Practices (“GCP”), which are regulations and guidelines enforced by the FDA, the EMA and comparable foreign regulatory authorities for all of our products in clinical development. Regulatory authorities enforce these GCP through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any of our CROs fail to comply with applicable GCP, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical trials comply with GCP requirements.

These third-party contractors are not our employees, we cannot effectively control whether or not they devote sufficient time and resources to our ongoing clinical, nonclinical and preclinical programs, and except for remedies available to us under our agreements with such third-party contractors, we may be unable to recover losses that result from any inadequate work on such programs. If such third-party contractors do not successfully carry out their contractual duties or obligations or meet expected deadlines or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory requirements or for other reasons, our development efforts and clinical trials may be extended, delayed or terminated and we may not be able to obtain regulatory approval for or successfully commercialize our product candidates. As a result, our results of operations and the commercial prospects for our product candidates would be harmed, our costs could increase and our ability to generate revenues could be delayed. To the extent we are unable to successfully identify and manage the performance of such third-party contractors in the future, our business may be adversely affected.

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We may not obtain orphan drug status for our products, or we may lose orphan drug designations, which would have a material adverse effect on our business.

One of the incentives provided by an orphan drug designation is market exclusivity for seven years in the United States and ten years in the European Union for the first product in a class approved for the treatment of a rare disease. Although several of our products and product candidates, including Inhaled AAT for AATD, have been granted the designation of an orphan drug, we may not be the first product licensed for the treatment of particular rare diseases in the future or our approved indication may vary from that subject to the orphan designation. In such cases, then with limited exception, we would not be able to take advantage of market exclusivity and instead another sponsor would receive such exclusivity.

Additionally, although the marketing exclusivity of an orphan drug would prevent other sponsors from obtaining approval of the same drug compound for the same indication, such exclusivity would not apply in the case that a subsequent sponsor could demonstrate clinical superiority or a market shortage occurs and would not prevent other sponsors from obtaining approval of the same compound for other indications or the use of other types of drugs for the same use as the orphan drug. In the event we are unable to fill demand for any orphan drug, it is possible that the FDA or the EMA may view such unmet demand as a market shortage, which could impact our market exclusivity.

The FDA and the EMA may also, in the future, revisit any orphan drug designation that they have respectively conferred upon a drug and retain the ability to withdraw the relevant designation at any time. Additionally, the U.S. Congress has considered, and may consider in the future, legislation that would restrict the duration or scope of the market exclusivity of an orphan drug, and, thus, we cannot be sure that the benefits to us of the existing statute in the United States will remain in effect. Furthermore, some court decisions have raised questions about FDA’s interpretation of the orphan drug exclusivity provisions, which could potentially affect our ability to secure orphan drug exclusivity.

If we lose our orphan drug designations or fail to obtain such designations for our new products and product candidates, our ability to successfully market our products could be significantly affected, resulting in a material adverse effect on our business and results of operations.

The commercial success of the products that we may develop, if any, will depend upon the degree of market acceptance by physicians, patients, healthcare payors, opinion leaders, patients’ organizations and others in the medical community that any such product obtains.

Any products that we bring to the market may not gain market acceptance by physicians, patients, healthcare payors, opinion leaders, patients’ organizations and others in the medical community. If these products do not achieve an adequate level of acceptance, we may not generate material product revenue and we may not sustain profitability. The degree of market acceptance of our product candidates, if approved for commercial sale, will depend on a number of factors, some of which are beyond our control, including:

● the prevalence and severity of any side effects;

● the efficacy, potential advantages and timing of introduction to the market of alternative treatments;

● our ability to offer our product candidates for sale at competitive prices;

● relative convenience and ease of administration of our products;

● the willingness of physicians to prescribe our products;

● the willingness of patients to use our products;

● the strength of marketing and distribution support; and

● third-party coverage or reimbursement.

If we are not successful in achieving market acceptance for any new products that we have developed and that have been approved for commercial sale, we may be unable to recover the large investment we will have made and have committed ourselves to making in research and development efforts and our growth strategy will be adversely affected.

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Each inhaled formulation of AAT, including Inhaled AAT for AATD, is being developed with a specific nebulizer produced by PARI, and the occurrence of an adverse market event or PARI’s non-compliance with its obligations would have a material adverse effect on the commercialization of any inhaled formulation of AAT.

We are dependent upon PARI GmbH (“PARI”) for the commercialization of any inhaled formulation of AAT, including our second generation AATD product, Inhaled AAT for AATD. We have an agreement with PARI, pursuant to which it is required to obtain the appropriate clearance to market PARI’s proprietary eFlow® device, which is a device required for the administration of inhaled formulation of AAT, from the EMA and FDA for use with Inhaled AAT for AATD. See “Item 4. Information on the Company — Strategic Partnerships — PARI.” Failure of PARI to achieve these authorizations will have a material adverse effect on the commercialization of any inhaled formulation of AAT, including Inhaled AAT for AATD, which would harm our growth strategy.

Additionally, pursuant to the agreement, PARI is obligated to manufacture and supply all of the market demand for the eFlow device for use in conjunction with any inhaled formulation of AAT and we are required to purchase all of our volume requirements from PARI. Any event that permanently, or for an extended period, prevents PARI from supplying the required quantity of devices would have an adverse effect on the commercialization of any inhaled formulation of AAT, including Inhaled AAT for AATD.

Risks Related to Our Financial Position and Capital Resources

We have incurred significant losses since our inception and while we were profitable in the year ended December 31, 2019, we may incur losses in the future and thus may never achieve sustained profitability.

As of December 31, 2019, our cash and cash equivalents and short-term investments were $73.9 million. Since inception, we have incurred significant operating losses. While our net profit was $22.2 million, $22.3 million and $6.9 million for the years ended December 31, 2019, 2018 and 2017, respectively, as of December 31, 2019, we had an accumulated deficit of $61.1 million. There can be no assurance that we could continue to generate profitability in future years.

Our business requires substantial capital, including potential investments in large capital projects, to operate and grow and to achieve our strategy of realizing increased operating leverage.

In order to obtain FDA, EMA and other regulatory approvals for product candidates and new indications for existing products, we may be required to enhance the facilities in which and processes by which we manufacture existing products, to develop new product delivery mechanisms for existing products, to develop innovative product additions and to conduct clinical trials. We face a number of obstacles that we will need to overcome in order to achieve our operating goals, including but not limited to the successful development of experimental products for use in clinical trials, the design of clinical study protocols acceptable to the FDA, the EMA and other regulatory authorities, the successful outcome of clinical trials, scaling our manufacturing processes to produce commercial quantities or successfully transition technology, obtaining FDA, EMA and other regulatory approvals of the resulting products or processes and successfully marketing an approved or new product with applicable new processes. To finance these various activities, we may need to incur future debt or issue additional equity. We may not be able to structure our debt obligations on favorable economic terms and any offering of additional equity would result in a dilution of the equity interests of our current shareholders. A failure to fund these activities may harm our growth strategy, competitive position, quality compliance and financial condition.

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In addition, our manufacturing facility requires continued investment and upgrades. Moreover, any enhancements to our manufacturing facilities necessary to obtain FDA or EMA approval for product candidates or new indications for existing products could require large capital projects. We may also undertake such capital projects in order to maintain compliance with cGMP or expand capacity. Capital projects of this magnitude involve technology and project management risks. Technologies that have worked well in a laboratory or in a pilot plant may cost more or not perform as well, or at all, in full scale operations. Projects may run over budget or be delayed. We cannot be certain that any such project will be completed in a timely manner or that we will maintain our compliance with cGMP, and we may need to spend additional amounts to achieve compliance. Additionally, by the time multi-year projects are completed, market conditions may differ significantly from our initial assumptions regarding competitors, customer demand, alternative therapies, reimbursement and public policy, and as a result capital returns may not be realized. In addition, to fund large capital projects, we may similarly need to incur future debt or issue additional dilutive equity. A failure to fund these activities may harm our growth strategy, competitive position, quality compliance and financial condition.

Our current working capital may not be sufficient to complete our research and development with respect to any or all of our pipeline products or to commercialize our products.

As of December 31, 2019, we had cash and short-term investments of $73.9 million, compared to cash and short-term investments of approximately $50.6 million as of December 31, 2018. We plan to fund our future operations through continued sale and distribution of our proprietary and distribution products, commercialization and or out-licensing of our pipeline product candidates, and raising additional capital through the sale of equity or debt. These amounts may not be sufficient to complete the research and development of all of our candidates, and there can be no assurances of the financial success of our commercialization activities or our ability to access the equity and debt capital markets on terms acceptable to us, if at all. To the extent we are unable to fund our research and development, our future product development activities could be materially adversely affected. 

Raising additional capital would cause dilution to our existing shareholders, and raising debt or funds through collaborations or strategic alliances and licensing arrangements may restrict our operations or require us to relinquish rights.

We have filed a registration statement on Form F-3 with the U.S. Securities and Exchange Commission (“SEC”) utilizing a “shelf” registration process, and such shelf registration statement was declared effective on July 13, 2017. Under this shelf registration process, we may offer from time to time up to an aggregate of $100,000,000 of our ordinary shares in one or more offerings. Pursuant to such shelf registration statement, in August 2017, we issued an aggregate of 3,833,334 ordinary shares in an underwritten public offering (including the exercise of the over-allotment option). To the extent that we raise additional funds through the sale of equity or securities that are convertible into or exchangeable for, or that represent the right to receive, ordinary shares or substantially similar 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. The shelf registration statement will remain effective until July 2020. If we do not file a new shelf registration statement prior to July 2020, the existing shelf registration statement will expire and we will not be able to publicly raise capital or issue debt until a new registration statement is filed and becomes effective. There can be no assurance that we will be eligible to file an automatically effective shelf registration statement at a future date when we may need to raise funds publicly.

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Risks Related to Our Business and Industry

Product liability claims or product recalls involving our products, or products we distribute, could have a material adverse effect on our business.

Our business exposes us to the risk of product liability claims that are inherent in the manufacturing, distribution and sale of plasma-derived therapeutic protein products and other drug products. We face an inherent risk of product liability exposure related to the testing of our product candidates in human clinical trials and an even greater risk when we commercially sell any products, including those manufactured by others that we distribute in Israel. If we cannot successfully defend ourselves against claims that our product candidates or products caused injuries, or if the indemnities we have negotiated do not adequately cover losses, we could incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

● decreased demand for our plasma-derived protein therapeutics and any product candidates that we may develop;

● injury to our reputation;

● difficulties in recruitment of new participants to our future clinical trials and withdrawal of current clinical trial participants;

● costs to defend the related litigation;

● substantial monetary awards to trial participants or patients;

● difficulties in finding distributors for our products;

● difficulties in entering into strategic partnerships with third parties;

● diversion of management’s attention;

● loss of revenue;

● the inability to commercialize any products that we may develop; and

● higher insurance premiums.

Plasma is biological matter that is capable of transmitting viruses, infections and pathogens, whether known or unknown. Therefore, plasma derivative products, if not properly tested, inactivated, processed, manufactured, stored and transported, could cause serious disease and possibly death to the patient. Further, even when such steps are properly effected, viral and other infections may escape detection using current testing methods and may not be susceptible to inactivation methods. Any transmission of disease through the use of one of our products or third-party products sold by us could result in claims against us by or on behalf of persons allegedly infected by such products.

In addition, we sell and distribute third-party products in Israel, and the laws of Israel could also expose us to product liability claims for those products. Furthermore, the presence of a defect (or a suspicion of a defect) in a product could require us to carry out a recall of such product. A product liability claim or a product recall could result in substantial financial losses, negative reputational repercussions, loss of business and an inability to retain customers. Although we maintain insurance for certain types of losses, claims made against our insurance policies could exceed our limits of coverage or be outside our scope of coverage. Additionally, as product liability insurance is expensive and can be difficult to obtain, a product liability claim could increase our required premiums or otherwise decrease our access to product liability insurance on acceptable terms. In turn, we may not be able to maintain insurance coverage at a reasonable cost and may not be able to obtain insurance coverage that will be adequate to satisfy liabilities that may arise.

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Regulatory approval for our products is limited by the FDA and similar authorities in other jurisdictions to those specific indications and conditions for which clinical safety and efficacy have been demonstrated, and the prescription or promotion of off-label uses could adversely affect our business.

Any regulatory approval of our products is limited to those specific diseases and indications for which our products have been deemed safe and effective by the FDA or similar authorities in other jurisdictions. In addition to the regulatory approval required for new formulations, any new indication for an approved product also requires regulatory approval. Once we produce a plasma-derived protein therapeutic, we rely on physicians to prescribe and administer it as the product label directs and for the indications described on the labeling. To the extent any off-label (i.e., unapproved) uses and departures from the approved administration directions become pervasive and produce results such as reduced efficacy or other adverse effects, the reputation of our products in the marketplace may suffer. In addition, off-label uses may cause a decline in our revenues or potential revenues, to the extent that there is a difference between the prices of our product for different indications.

Furthermore, while physicians may choose to prescribe drugs for uses that are not described in the product’s labeling and for uses that differ from those approved by regulatory authorities, our ability to promote the products is limited to those indications that are specifically approved by the FDA or other regulators. Although regulatory authorities generally do not regulate the behavior of physicians, they do restrict communications by companies on the subject of off-label use. If our promotional activities fail to comply with these regulations or guidelines, we may be subject to warnings from, or enforcement action by, these authorities. In addition, failure to follow FDA rules and guidelines relating to promotion and advertising can lead to other negative consequences that could hurt us, such as the suspension or withdrawal of an approved product from the market, enforcement letters, and corrective actions. Other regulatory authorities may impose separately penalties including, but not limited to, fines, disgorgement of money, operating restrictions, or criminal prosecution.

Regulatory inspections or audits conducted by regulatory bodies and our partners may lead to monetary losses and inability to adequately manufacture or sell our products.

The regulatory authorities, including the FDA and EMA, as well as our partners may, at any time and from time to time, audit or inspect our facilities. Such audits or inspections may lead to disruption of work, and if we fail to pass such audits or inspections, the relevant regulatory authority or partner may require remedial measures that may be costly or time consuming for us to implement, and may result in the temporary or permanent suspension of the manufacture, sale and distribution of our products.

The loss of one or more of our key employees could harm our business.

We depend on the continued service and performance of our key employees, including Amir London, our Chief Executive Officer and our other senior management. We have entered into employment agreements with all of our senior management, including Mr. London, and other key employees. Either party, however, can terminate these agreements for any reason. The loss of key members of our executive management team could disrupt our operations or product development and have an adverse effect on our ability to grow our business.

Our ability to attract, recruit, retain and develop qualified employees is critical to our success and growth.

We compete in a market that involves rapidly changing technological and regulatory developments that require a wide ranging set of expertise and intellectual capital. In order for us to successfully compete and grow, we must attract, recruit, retain and develop the necessary personnel who can provide the needed expertise across the entire spectrum of our intellectual capital needs. While we have a number of our key personnel who have substantial experience with our operations, we must also develop and exercise our personnel to provide succession plans capable of maintaining continuity in the midst of the inevitable unpredictability of human capital. However, the market for qualified personnel is competitive, and we may not succeed in recruiting additional experienced or professional personnel, retaining current personnel or effectively replacing current personnel who depart with qualified or effective successors. Many of the companies with which we compete for experienced personnel have greater resources than us.

Our effort to retain and develop personnel may also result in significant additional expenses, which could adversely affect our profitability. There can be no assurance that qualified employees will continue to be employed or that we will be able to attract and retain qualified personnel in the future. Failure to retain or attract qualified personnel could have a material adverse effect on our business, financial condition and results of operations.

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We are subject to risks associated with doing business globally.

Our operations are subject to risks inherent to conducting business globally and under the laws, regulations and customs of various jurisdictions and geographies. These risks include fluctuations in currency exchange rates, changes in exchange controls, loss of business in government and public tenders that are held annually in many cases, nationalization, expropriation and other governmental actions, availability of raw materials, changes in taxation, importation limitations, export control restrictions, changes in or violations of applicable laws, including the U.S. Foreign Corrupt Practices Act (“FCPA”), the U.K. Bribery Act of 2010, pricing restrictions, economic and political instability, disputes between countries, diminished or insufficient protection of intellectual property, and disruption or destruction of operations in a significant geographic region regardless of cause, including war, terrorism, riot, civil insurrection or social unrest. Failure to comply with, or material changes to, the laws and regulations that affect our global operations could have an adverse effect on our business, financial condition or results of operations.

Laws and regulations governing the conduct of international operations may negatively impact our development, manufacture and sale of products outside of the United States and require us to develop and implement costly compliance programs.

We must comply with numerous laws and regulations in Israel and in each of the other jurisdictions in which we operate or plan to operate. The creation and implementation of any required compliance programs is costly, and the programs are often difficult to enforce, particularly where we must rely on third parties.

For example, the FCPA prohibits any U.S. individual or business from paying, offering, authorizing payment or offering anything of value, directly or indirectly, to any foreign official, political party or candidate for the purpose of influencing any act or decision of the foreign entity in order to assist the individual or business in obtaining or retaining business. The FCPA also requires companies whose securities are listed in the United States to comply with certain accounting provisions. For example, such companies must maintain books and records that accurately and fairly reflect all transactions of the company, including international subsidiaries, and devise and maintain an adequate system of internal accounting controls for international operations. The anti-bribery provisions of the FCPA are enforced primarily by the U.S. Department of Justice, and the SEC is involved with enforcement of the books and records provisions of the FCPA.

Compliance with the FCPA and similar laws is expensive and difficult, particularly in countries in which corruption is a recognized problem. In addition, the FCPA presents particular challenges in the pharmaceutical industry, because, in many countries, hospitals are operated by the government, and doctors and other hospital employees are considered as foreign officials. Additionally, pharmaceutical products are usually marketed by the local distributors through government tenders, and the majority of pharmaceutical companies’ clients are HMOs which are foreign government officials under the FCPA. Certain payments to hospitals in connection with clinical trials and other work, and certain payments to HMOs have been deemed to be improper payments to government officials and have led to FCPA enforcement actions.

The failure to comply with laws governing international business practices may result in substantial penalties, including suspension or debarment from government contracting. Violation of the FCPA can result in significant civil and criminal penalties. Indictment alone under the FCPA can lead to suspension of the right to do business with the U.S. government until the pending claims are resolved. Conviction of a violation of the FCPA can result in long-term disqualification as a government contractor. The termination of a government contract or relationship as a result of our failure to satisfy any of our obligations under laws governing international business practices would have a negative impact on our operations and harm our reputation and ability to procure government contracts. Additionally, the SEC also may suspend or bar issuers from trading securities on U.S. exchanges for violations of the FCPA’s accounting provisions.

We are subject to foreign currency exchange risk.

We receive payment for our sales and make payments for resources in a number of different currencies. While our sales and expenses are primarily denominated in U.S. dollars, our financial results may be adversely affected by fluctuations in currency exchange rates as a portion of our sales and expenses are denominated in other currencies, including the NIS and the Euro. Market volatility and currency fluctuations may limit our ability to cost-effectively hedge against our foreign currency exposure and, in addition, our ability to hedge our exposure to currency fluctuations in certain emerging markets may be limited. Hedging strategies may not eliminate our exposure to foreign exchange rate fluctuations and may involve costs and risks of their own, such as devotion of management time, external costs to implement the strategies and potential accounting implications. Foreign currency fluctuations, independent of the performance of our underlying business, could lead to materially adverse results or could lead to positive results that are not repeated in future periods.

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Events in global credit markets may impact our ability to obtain financing or increase the cost of future financing, including interest rate fluctuations based on macroeconomic conditions that are beyond our control.

During periods of volatility and disruption in the U.S., European, or global credit markets, obtaining additional or replacement financing may be more difficult and the cost of issuing new debt could be higher than the costs we incur under our current debt. The higher cost of new debt may limit our ability to have cash on hand for working capital, capital expenditures and acquisitions on terms that are acceptable to us.

Developments in the economy may adversely impact our business.

Our operating and financial performance may be adversely affected by a variety of factors that influence the general economy in the United States, Europe and worldwide, including global and local economic slowdowns, challenges faced banks and the health of markets for the sovereign debt. Many of our largest markets, including the United States and Europe, previously experienced dramatic declines in the housing market, high levels of unemployment and underemployment, and reduced earnings, or, in some cases, losses, for businesses across many industries, with reduced investments in growth.

A recessionary economic environment may adversely affect demand for our plasma-derived protein therapeutics. As a result of job losses, patients in the U.S. may lose medical insurance and be unable to purchase needed medical products or may be unable to pay their share of deductibles or co-payments. Hospitals may steer patients adversely affected by the economy to less costly therapies, resulting in a reduction in demand, or demand may shift to public health hospitals, which purchase our products at a lower government price. A recessionary economic environment may also lead to price pressure for reimbursement of new drugs, which may adversely affect the demand for our future plasma-derived protein therapeutics.

The recent coronavirus (2019-nCoV) outbreak may adversely impact our business.

The recent coronavirus (2019-nCoV) outbreak and its continued progress may have an adverse impact on our business in many aspects, including, but not limited to the following:

● While we do not procure raw materials, products or services from China and we do not sell or distribute our products in the Chinese market, some of our raw materials, auxiliary materials and auxiliary products (the “Auxiliary Supplies”) required for the manufacturing of our products may be required by public and private health care service providers in order to treat or prevent 2019-cCoV. Increased demand for these Auxiliary Supplies may negatively affect our ability to secure adequate supply at reasonable cost of such Auxiliary Supplies, which would materially adversely affect our ability to manufacture and distribute our products, and would adversely affect our sales and results of operations.

● While we do not procure products or Auxiliary Supplies from the Chinese market, some of our suppliers in our Proprietary Products segment and the Distribution Products segment, may be procuring products or Auxiliary Supplies from the Chinese market. These suppliers’ inability to continue to secure supplies from the Chinese market may have an effect on their ability to supply us and our ability to continue manufacture and distribute products, which would adversely affect our sales and results of operations.

● While currently there has not been a significant 2019-nCoV outbreak in Israel, certain precautions are being taken by the IMOH, such as requiring individuals who returned from trips in certain countries, or who may have been exposed to the 2019-nCoV, or may have developed symptoms associated with being infected by the 2019-nCoV, to undergo a minimum of 14 days isolation period in order to minimize the spread of the epidemic. Such isolation period and potential infection of individuals in Israel may affect our employees and our ability to continuously and effectively operate. which would materially adversely affect our ability to manufacture and distribute our products, and would adversely affect our sales and results of operations.

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If our manufacturing facility in Beit Kama, Israel were to suffer a serious accident, contamination, force majeure event (including, but not limited to, a war, terrorist attack, earthquake, major fire or explosion etc.) materially affecting our ability to operate and produce saleable plasma-derived protein therapeutics, all of our manufacturing capacity could be shut down for an extended period.

We rely on a single manufacturing facility in Beit Kama, which is located in southern Israel, approximately 20 miles east of the Gaza Strip. All of our revenues in our Proprietary Products segment as well as future revenues from contract manufacturing services to be performed by us for any third party partner, are derived from products manufactured at this facility and some of the products that are imported by us under our Distribution segment, are packed and stored in this manufacturing facility. If this facility were to suffer an accident or a force majeure event such as war, terrorist attack, earthquake, major fire or explosion, major equipment failure or power failure lasting beyond the capabilities of our backup generators or similar event, or contamination, our revenues would be materially adversely affected. In this situation, our manufacturing capacity could be shut down for an extended period, we could experience a loss of raw materials, work in process or finished goods and imported products inventory and our ability to operate our business would be harmed. In addition, in any such event, the reconstruction of our manufacturing facility and storage facilities, and the regulatory approval of the new facilities could be time-consuming. During this period, we would be unable to manufacture our plasma-derived protein therapeutics.

Our insurance against property damage and business interruption insurance may be insufficient to mitigate the losses from any such accident or force majeure event. We may also be unable to recover the value of the lost plasma or work-in-process inventories, as well as the sales opportunities from the products we would be unable to produce or distribute, or the loss of customers during such period.

Failure to adequately or timely adapt our manufacturing capacity to match changes in demand for our manufactured products and/or continued manufacturing at or close to our plant’s maximum capacity may have a material adverse effect on our business.

Our product offerings in our Proprietary Products segment are predicted to increase. A failure to increase our manufacturing volume as needed or continued manufacturing at or close to our plant’s maximum capacity levels may lead to an inability to supply products, may have an adverse effect on our business and could cause substantial harm to our business reputation and result in breach of our sales agreements and the loss of future customers and orders.

If we experience equipment difficulties or if the suppliers of our equipment or disposable goods fail to deliver key product components or supplies in a timely manner, our manufacturing ability would be impaired and our product sales could suffer.

For certain equipment and supplies, we depend on a limited number of companies that supply and maintain our equipment and provide supplies such as chromatography resins, filter media, glass bottles and stoppers used in the manufacture of our plasma-derived protein therapeutics. If our equipment were to malfunction, or if our suppliers stop manufacturing or supplying such machinery, equipment or any key component parts, the repair or replacement of the machinery may require substantial time and cost, and could disrupt our production and other operations. Alternative sources for key component parts or disposable goods may not be immediately available. In addition, any new equipment or change in supplied materials may require revalidation by us or review and approval by the FDA, the EMA, the regulatory authorities in Israel or other regulatory authorities, which may be time-consuming and require additional capital and other resources. We may not be able to find an adequate alternative supplier in a reasonable time period, or on commercially acceptable terms, if at all. As a result, shipments of affected products may be limited or delayed. Our inability to obtain our key source supplies for the manufacture of products may require us to delay shipments of products, harm customer relationships and force us to curtail operations.

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If our shipping or distribution channels were to become inaccessible due to an accident, act of terrorism, strike or any other force majeure event, our supply, production and distribution processes could be disrupted.

Our plasma raw materials must be transported at a temperature of -20 degrees Celsius (-4 degrees Fahrenheit) to ensure the preservation of their proteins. Not all shipping or distribution channels are equipped to transport plasma at these temperatures. If any of our shipping or distribution channels become inaccessible because of a serious accident, act of terrorism, strike or any other force majeure event, we may experience disruptions in our continued supply of plasma and other raw materials, delays in our production process or a reduction in our ability to distribute our plasma-derived protein therapeutics to our customers.

A breakdown in our information technology (IT) systems could result in a significant disruption to our business.

Our operations are highly dependent on our information technology (IT) systems. If we were to suffer a breakdown in our systems, storage, distribution or tracing, we could experience significant disruptions affecting all our areas of activity, including our manufacturing, research, accounting and billing processes and potentially cause disruptions to our manufacturing process for products currently in production. We may also suffer from partial loss of information and data due to such disruption.

Our business and operations would suffer in the event of computer system failures, cyber-attacks on our systems or deficiency in our cyber security measures.

Despite the implementation of security measures, our internal computer systems, and those of third parties on which we rely, are vulnerable to damage from computer viruses, unauthorized access, malware, natural disasters, fire, terrorism, war and telecommunication, electrical failures, cyber-attacks or cyber-intrusions over the Internet, attachments to emails, persons inside our organization, or persons with access to systems inside our organization. The risk of a security breach or disruption, particularly through cyber-attacks or cyber intrusion, including by computer hackers, foreign governments, and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. To the extent that any disruption or security breach results in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could incur liability due to lost revenues resulting from the unauthorized use or theft of sensitive business information, remediation costs, and litigation risks including potential regulatory action by governmental authorities. In addition, any such disruption, security breach or other incident could delay the further development of our future product candidates due to theft or corruption of our proprietary data or other loss of information. Our business and operations could also be harmed by any reputational damage with customers, investors or third parties with whom we work, and our competitive position could be adversely impacted.

Failure to maintain the security of patient-related information or compliance with security requirements could damage our reputation with customers, cause us to incur substantial additional costs and become subject to litigation.

Pursuant to applicable privacy laws, we must comply with comprehensive privacy and security standards with respect to the use and disclosure of protected health information. If we do not comply with existing or new laws and regulations related to protecting privacy and security of personal or health information, we could be subject to monetary fines, civil penalties, or criminal sanctions. We may be required to comply with the data privacy and security laws of other countries in which we operate or from which we receive data transfers. For example, the General Data Protection Regulation (“GDPR”) which took effect May 25, 2018, has broad application and enhanced penalties for noncompliance. The GDPR, which is wide-ranging in scope, governs the collection and use of personal data in the European Union and imposes operational requirements for companies that receive or process personal data of residents of the European Union. The GDPR may apply to our clinical development operations. In addition, the Israeli Privacy Protection Regulations (Information Security), 2017, which apply to our operations in Israel, require us to take certain security measures to secure the processing of personal data. While we take reasonable and prudent steps to protect personal information and use such information in accordance with applicable privacy laws, a compromise in our security systems that results in patient personal information being obtained by unauthorized persons or our failure to comply with security requirements for financial transactions could adversely affect our reputation with our clients and result in litigation against us or the imposition of penalties, all of which may adversely impact our results of operations, financial condition and liquidity. In addition, given that the privacy laws and regulations in the jurisdictions in which we operate are new and subject to further judicial review and interpretation, it may be determined at a future time that although we take prudent measures to comply with such laws and regulations, such measures will not be sufficient to meet future elaborations or interpretations of such laws and regulations.

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Uncertainty surrounding and future changes to healthcare law in the United States may adversely affect our business.

The healthcare regulatory environment in the U.S. is currently subject to significant uncertainty and the industry may in the future continue to experience fundamental change as a result of regulatory reform. In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the “healthcare reform law”), a sweeping measure intended to expand healthcare coverage within the United States, primarily through the imposition of health insurance mandates on employers and individuals and expansion of the Medicaid program. The healthcare reform law, among other things: (i) addressed a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected; (ii) increased the minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program and extends the rebate program to individuals enrolled in Medicaid managed care organizations; (iii) established annual fees and taxes on manufacturers of certain branded prescription drugs; (iv) expanded the availability of lower pricing under the 340B drug pricing program by adding new entities to the program; and (v) established a new Medicare Part D coverage gap discount program, in which manufacturers must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D. On April 1, 2016, final regulations issued by the Centers for Medicare and Medicaid Services to implement the changes to the Medicaid Drug Rebate Program under the healthcare reform law became effective. In addition, the new law established an abbreviated licensure pathway for products that are drugs made by a living organism or derived from a living organism, commonly referred to as biosimilars, to become FDA-approved biological products, with provisions covering exclusivity periods and a specific reimbursement methodology for biosimilars.

However, some provisions of the healthcare reform law have yet to be fully implemented, and President Donald Trump has vowed to repeal the healthcare reform law. On January 20, 2017, President Trump signed an executive order stating that the administration intended to seek prompt repeal of the healthcare reform law, and, pending repeal, directed the U.S. Department of Health and Human Services and other executive departments and agencies to take all steps necessary to limit any fiscal or regulatory burdens of the healthcare reform law. On October 12, 2017, President Trump signed another executive order directing certain federal agencies to propose regulations or guidelines to permit small businesses to form association health plans, expand the availability of short-term, limited duration insurance, and expand the use of health reimbursement arrangements, which may circumvent some of the requirements for health insurance mandated by the healthcare reform law. The U.S. Congress has also made several attempts to repeal or modify the healthcare reform law. In addition, there is ongoing litigation regarding the implementation and constitutionality of the healthcare reform law. While the law is still in effect pending the ultimate resolution of the litigation, the outcome of the litigation is unknown, and cannot be predicted. There is no guarantee whether the healthcare reform law will remain in effect or be repealed or replaced. In the coming years, additional changes could be made to U.S. governmental healthcare programs and U.S. healthcare laws that could significantly impact the success of our products. We cannot predict what other legislation relating to our business or to the health care industry may be enacted, or what effect such legislation may have on our business, prospects, operating results and financial condition.

In addition, federal, state and foreign governmental authorities are likely to continue efforts to control the price of drugs and reduce overall healthcare costs. These efforts could have an adverse impact on our ability to market products and generate revenues in the United States and foreign countries.

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Certain of our business practices could become subject to scrutiny by regulatory authorities, as well as to lawsuits brought by private citizens under federal and state laws. Failure to comply with applicable law or an adverse decision in lawsuits may result in adverse consequences to us.

The laws governing our conduct in the United States are enforceable by criminal, civil and administrative penalties. Violations of laws such as the Federal Food, Drug and Cosmetic Act (the “FDCA”), the Federal False Claims Act (the “FCA”), the Public Health Service Act (the “PHS Act”), the Physician Payments Sunshine Act or a provision of the U.S. Social Security Act known as the “Anti-Kickback Law,” or any regulations promulgated under their authority may result in jail sentences, fines or exclusion from federal and state health care programs, as may be determined by the Department of Health and Human Services, the Department of Defense, other federal and state regulatory authorities and the federal and state courts. There can be no assurance that our activities will not come under the scrutiny of regulators and other government authorities or that our practices will not be found to violate applicable laws, rules and regulations or prompt lawsuits by private citizen “relators” under federal or state false claims laws.

For example, under the Anti-Kickback Law, and similar state laws and regulations, even common business arrangements, such as discounted terms and volume incentives for customers in a position to recommend or choose drugs and devices for patients, such as physicians and hospitals, can result in substantial legal penalties, including, among others, exclusion from Medicare and Medicaid programs, if those business arrangements are not appropriately structured; therefore, our arrangements with referral sources must be structured with care to comply with applicable requirements. Also, certain business practices, such as payment of consulting fees to healthcare providers, sponsorship of educational or research grants, charitable donations, interactions with healthcare providers that prescribe products for uses not approved by the FDA and financial support for continuing medical education programs, must be conducted within narrowly prescribed and controlled limits and reported in accordance with the Physician Payments Sunshine Act to avoid any possibility of wrongfully influencing healthcare providers to prescribe or purchase particular products or as a reward for past prescribing. Significant enforcement activity has been the result of actions brought by relators, who file complaints in the name of the United States (and if applicable, particular states) under federal and state False Claims Act statutes and can be entitled to receive a significant portion (often as great as 30%) of total recoveries. Also, violations of the False Claims Act can result in treble damages, and each false claim submitted can be subject to a penalty of up to $22,927 per claim. Through the Physician Payments Sunshine Act, the healthcare reform law imposes reporting and disclosure requirements for pharmaceutical and medical device manufacturers with regard to a broad range of payments, ownership interests, and other transfers of value made to certain U.S. physicians and teaching hospitals. A number of states have similar laws in place and often require reporting for other categories of healthcare professionals, such as nurses. Additional and stricter prohibitions could be implemented by federal and state authorities. On the other hand, as President Trump has vowed to repeal the healthcare reform law, it is uncertain whether such data collection obligations would be repealed or replaced with new regulations. Where practices have been found to involve improper incentives to use products, government investigations and assessments of penalties against manufacturers have resulted in substantial damages and fines. Many manufacturers have been required to enter into consent decrees, corporate integrity agreements, or orders that prescribe allowable corporate conduct. Failure to satisfy requirements under the FDCA can also result in penalties, as well as requirements to enter into consent decrees or orders that prescribe allowable corporate conduct.

To market and sell our products outside the United States, we must obtain and maintain regulatory approvals and comply with regulatory requirements in such jurisdictions. The approval procedures vary among countries in complexity and timing. We may not obtain approvals from regulatory authorities outside the United States on a timely basis, if at all, and in such case, we would be precluded from commercializing products in those markets. In addition, some countries, particularly the countries of the European Union, regulate the pricing of prescription pharmaceuticals. In these countries, pricing discussions with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies. Such trials may be time-consuming and expensive and may not show an advantage in cost-efficacy for our products. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, in either the United States or the European Union, we could be adversely affected. Also, under the FCPA, the United States has regulated conduct by U.S. businesses occurring outside of the United States, generally prohibiting remuneration to foreign officials for the purpose of obtaining or retaining business.

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To enhance compliance with applicable health care laws, and mitigate potential liability in the event of noncompliance, regulatory authorities, such as the Department of Health and Human Services’ Office of Inspector General (“OIG”), have recommended the adoption and implementation of a comprehensive health care compliance program that generally contains the elements of an effective compliance and ethics program described in Section 8B2.1 of the U.S. Sentencing Commission Guidelines Manual. Increasing numbers of U.S.-based pharmaceutical companies have such programs. We have not adopted U.S. healthcare compliance and ethics programs that generally incorporate the HHS OIG’s recommendations. Even if we do, having such a program can be no assurance that we will avoid any compliance issues.

We could be adversely affected if other government or private third-party payors decrease or otherwise limit the amount, price, scope or other eligibility requirements for reimbursement for the purchasers of our products.

Prices in many of our principal markets are subject to local regulation and certain pharmaceutical products, such as plasma-derived protein therapeutics, are subject to price controls. In the United States, where pricing levels for our products are substantially established by third-party payors, a reduction in the payors’ amount of reimbursement for a product may cause groups or individuals dispensing the product to discontinue administration of the product, to administer lower doses, to substitute lower cost products or to seek additional price-related concessions. These actions could have a negative effect on our financial results, particularly in cases where our products command a premium price in the marketplace or where changes in reimbursement rates induce a shift in the site of treatment. The existence of direct and indirect price controls and pressures over our products has affected, and may continue to materially adversely affect, our ability to maintain or increase gross margins.

Also, the intended use of a drug product by a physician can affect pricing. Physicians frequently prescribe legally available therapies for uses that are not described in the product’s labeling and that differ from those tested in clinical studies and approved by the FDA or similar regulatory authorities in other countries. These off-label uses are common across medical specialties, and physicians may believe such off-label uses constitute the preferred treatment or treatment of last resort for many patients in varied circumstances. Reimbursement for such off-label uses is often not allowed by government payors. If reimbursement for off-label uses of products is not allowed by Medicare or other third-party payors, including those in the United States or the European Union, we could be adversely affected. For example, CMS could initiate an administrative procedure known as a National Coverage Determination (“NCD”), by which the agency determines which uses of a therapeutic product would be reimbursable under Medicare and which uses would not. This determination process can be lengthy, thereby creating a long period during which the future reimbursement for a particular product may be uncertain.

Current and future accounting pronouncements and other financial reporting standards, especially but not only concerning revenue recognition, might negatively impact our financial results.

We regularly monitor our compliance with applicable financial reporting standards and review new pronouncements and drafts thereof that are relevant to us. As a result of new standards, changes to existing standards (including the new IFRS 15 on revenue from contracts with customers that we adopted in 2018 and IFRS 16 on leases that we adopted in 2019) and changes in their interpretation, we might be required to change our accounting policies, particularly concerning revenue recognition, to alter our operational policies so that they reflect new or amended financial reporting standards, or to restate our published financial statements. Such changes might have an adverse effect on our reputation, business, financial position, and profit, or cause an adverse deviation from our revenue and operating profit target.

We are subject to extensive environmental, health and safety, and other laws and regulations.

Our business involves the controlled use of hazardous materials, various biological compounds and chemicals. The risk of accidental contamination or injury from these materials cannot be eliminated. If an accident, spill or release of any regulated chemicals or substances occurs, we could be held liable for resulting damages, including for investigation, remediation and monitoring of the contamination, including natural resource damages, the costs of which could be substantial. We are also subject to numerous environmental, health and workplace safety laws and regulations, including those governing laboratory procedures, exposure to blood-borne pathogens and the handling of biohazardous materials and chemicals. Although we maintain workers’ compensation insurance to cover the costs and expenses that may be incurred because of injuries to our employees resulting from the use of these materials, this insurance may not provide adequate coverage against potential liabilities. Additional or more stringent federal, state, local or foreign laws and regulations affecting our operations may be adopted in the future. We may incur substantial capital costs and operating expenses and may be required to obtain consents to comply with any of these or certain other laws or regulations and the terms and conditions of any permits required pursuant to such laws and regulations, including costs to install new or updated pollution control equipment, modify our operations or perform other corrective actions at our respective facilities. In addition, fines and penalties may be imposed for noncompliance with environmental, health and safety and other laws and regulations or for the failure to have, or comply with the terms and conditions of, required environmental or other permits or consents. We are subject to future audits by the Environmental Health Department of the Regional Health Bureau of the IMOH and the Ministry of Environmental Protection of Israel and may be required to perform certain actions from time to time in order to comply with these guidelines and their requirements. We do not expect the costs of complying with these guidelines to be material to our business. See “Item 4. Information on the Company — Environmental.”

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Under the Israeli Economic Competition Law, 5758-1988, as amended (the “Competition Law”), a company that supplies or acquires more than 50% of any product or service in Israel in a relevant market may be deemed to be a monopoly. In addition, any company that has “significant market power” (within the meaning of the Competition Law), even if it does not hold market share that is greater than 50%, shall be deemed to be a monopolist under the Competition Law. A monopolist is prohibited from participating in certain business practices, including unreasonably refusing to sell products or provide services over which a monopoly exists, charging unfair prices for such products or services, and abusing its position in the market in a manner that might reduce business competition or harm the public. In addition, the General Director of the Israeli Competition Authority may determine that a company is a monopoly and has the right to order such company to change its conduct in matters that may adversely affect business competition or the public, including by imposing restrictions on its conduct. Depending on the analysis and the definition of the relevant product markets in which we operate, we may be deemed to be a “monopoly” under the Competition Law with respect to certain of our products. Furthermore, following an amendment to the Competition Law that became effective in August 2015, which repealed the statutory exemption that existed under the Competition Law for restrictive arrangements that were mutually exclusive arrangements, we may face difficulties in certain cases negotiating distribution agreements with foreign pharmaceutical manufacturers.

We have entered into a collective bargaining agreement with the employees’ committee and the Histadrut (General Federation of Labor in Israel), and we have incurred and could in the future incur labor costs or experience work stoppages or labor strikes as a result of any disputes in connection with such agreement.

In December 2013, we signed a collective bargaining agreement with the employees’ committee established by our employees at our Beit Kama production facility in Israel and the Histadrut (General Federation of Labor in Israel) (“Histadrut”), which expired in December 2017. In November 2018, we signed a new collective bargaining agreement with the employees’ committee and the Histadrut, which will expire in December 2021. We have experienced labor disputes and work stoppages in the past and in July 2018, during the course of our negotiations with the Histadrut and the employees’ committee on the extension of the initial collective bargaining agreement beyond the December 2017 expiration, the employee’s committee commenced a labor strike, which continued for approximately one month. As a result of the labor strike, in the year ended December 31, 2018, we had a $1.8 million write-off of indirect manufacturing costs and $0.8 million of process materials scraps. Any future disputes with the committee and the Histadrut over the implementation or the interpretation or the renewal of the collective bargaining agreement may lead to additional labor costs and/or work stoppages, which could adversely affect our business operations, including through a loss of revenue and strained relationships with customers.

Tax legislation in the United States may impact our business.

On December 22, 2017, the U.S. President signed into law federal tax legislation commonly referred to as the Tax Cuts and Jobs Act. The Tax Cuts and Jobs Act provides for significant and wide-ranging changes to the U.S. Internal Revenue Code. The reforms are complex, and it will take some time to assess the implications thoroughly. While we are not currently a U.S. tax filer there can be no assurance that these tax reforms will not give rise to significant consequences, both immediately and going forward in terms of the our taxation expense. The Tax Cuts and Jobs Act could be subject to potential amendments and technical corrections, any of which could lessen or increase adverse impacts of the law.

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Risks Related to Intellectual Property

Our success depends in part on our ability to obtain and maintain protection in the United States and other countries for the intellectual property relating to or incorporated into our technology and products, including the patents protecting our manufacturing process.

Our success depends in large part on our ability to obtain and maintain protection in the United States and other countries for the intellectual property covering or incorporated into our technology and products, especially intellectual property related to our manufacturing processes. At present, we consider our patents relating to our manufacturing process to be material to the operation of our business as a whole.

However, the patent landscape in the biotechnology and pharmaceutical fields is highly complicated and uncertain and involves complex legal, factual and scientific questions. Changes in either patent laws or in the interpretation of patent laws in the United States and other countries may diminish the value and strength of our intellectual property or narrow the scope of our patent protection. In addition, we may fail to apply for or be unable to obtain patents necessary to protect our technology or products or enforce our patents due to lack of information about the exact use of our processes by third parties. Even if patents are issued to us or to our licensors, they may be challenged, narrowed, invalidated, held to be unenforceable or circumvented, which could limit our ability to prevent competitors from using similar technology or marketing similar products, or limit the length of time our technologies and products have patent protection. Additionally, many of our patents relate to the processes we use to produce our products, not to the products themselves. In many cases, the plasma-derived products we produce or develop in the future will not, in and of themselves, be patentable. Since many of our patents relate to processes or uses thereof, if a competitor is able to utilize a process that does not rely on our protected intellectual property, that competitor could sell a plasma-derived product similar to one we have developed or sell it without infringing these patents.

Patent rights are territorial; thus, any patent protections we have will only be enforceable in those countries in which we have secured patents. In addition, the laws of certain countries do not protect our intellectual property rights to the same extent as do the laws of the U.S. and the European Union. Competitors may successfully challenge our patents, produce similar drugs or products that do not infringe our patents, or produce drugs in countries where we have not applied for patent protection or that do not recognize or provide enforcement mechanisms for our patents. Furthermore, it is not possible to know the scope of claims that will be allowed in published applications or which claims of granted patents, if any, will be deemed enforceable in a court of law.

Due to the extensive time needed to develop, test and obtain regulatory approval for our therapeutic candidates or any product we may sell or market, any patents that protect our therapeutic candidates or any product we may sell or market may expire early during commercialization. This may reduce or eliminate any market advantages that such patents may give us. Following patent expiration, we may face increased competition through the entry of generic products into the market and a subsequent decline in market share and profits.

In some cases we may rely on our licensors or partners to conduct patent prosecution, patent maintenance or patent defense on our behalf. Therefore, our ability to ensure that these patents are properly prosecuted, maintained, or defended may be limited, which may adversely affect our rights in our therapeutic candidates and potential approved for marketing products. Any failure by our licensors or development or commercialization partners to properly conduct patent prosecution, maintenance, enforcement, or defense could materially harm our ability to obtain suitable patent protection covering our therapeutic candidates or products or ensure freedom to commercialize the products in view of third-party patent rights, thereby materially reducing our potential profits.

Our patents also may not afford us protection against competitors or other third parties with similar technology. Because patent applications in the United States and many other jurisdictions are typically not published until 18 months after their filing, if at all, and because publications of discoveries in scientific literature often lag behind actual discoveries, neither we nor our licensors can be certain that we or they were the first to make the inventions claimed in our or their issued patents or pending patent applications, or that we or they were the first to file for protection of the inventions set forth in such patent applications. As a result, the patents we own and license may be invalidated in the future, and the patent applications we own and license may not be granted. For example, if a third party has also filed a patent application covering an invention similar to one covered in one of our patent applications, we may be required to participate in an adversarial proceeding, known as an “interference proceeding,” declared by the U.S. Patent and Trademark Office (“USPTO”) or its foreign counterparts to determine priority of invention. In 2012, the Leahy-Smith America Invents Act (“AIA”) created a new legal proceeding, the inter partes review petition, that allows third parties to challenge the validity of patents before the Patent Trials and Appeals Board.

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The costs of these proceedings could be substantial and our efforts in them could be unsuccessful, resulting in a loss of our anticipated patent position. In addition, if a third party prevails in such a proceeding and obtains an issued patent, we may be prevented from practicing technology or marketing products covered by that patent. Additionally, patents and patent applications owned by third parties may prevent us from pursuing certain opportunities such as entering into specific markets or developing or commercializing certain products or reducing the cost effectiveness of the relevant business as a result of needing to make royalty payments or other business conciliations. Finally, we may choose to enter into markets where certain competitors have patents or patent protection over technology that may impede our ability to compete effectively.

Our patents expire at various dates between 2024 and 2029. However, because of the extensive time required for development, testing and regulatory review of a potential product, it is possible that, before any of our products can be commercialized, any related patent may expire or remain in force for only a short period following commercialization, thereby limiting advantages of the patent. Our pending and future patent applications may not lead to the issuance of patents or, if issued, the patents may not be issued in a form that will provide us with any competitive advantage. We also cannot guarantee that: any of our present or future patents or patent claims or other intellectual property rights will not lapse or be invalidated, circumvented, challenged or abandoned; our intellectual property rights will provide competitive advantages or prevent competitors from making or selling competing products; our ability to assert our intellectual property rights against potential competitors or to settle current or future disputes will not be limited by our agreements with third parties; any of our pending or future patent applications will be issued or have the coverage originally sought; our intellectual property rights will be enforced in jurisdictions where competition may be intense or where legal protection may be weak; or we will not lose the ability to assert our intellectual property rights against, or to license our technology to, others and collect royalties or other payments. In addition, our competitors or others may design around our patents or protected technologies. Effective protection of our intellectual property rights may also be unavailable, limited or not applied in some countries, and even if available, we may fail to pursue or obtain necessary intellectual property protection in such countries. In addition, the legal systems of certain countries do not favor the aggressive enforcement of patents and other intellectual property rights, and the laws of foreign countries may not protect our rights to the same extent as the laws of the United States. As a result, our intellectual property may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours. In order to preserve and enforce our patent and other intellectual property rights, we may need to make claims, apply certain patent or other regulatory procedures or file lawsuits against third parties. Such proceedings could entail significant costs to us and divert our management’s attention from developing and commercializing our products. Lawsuits may ultimately be unsuccessful, and may also subject us to counterclaims and cause our intellectual property rights to be challenged, narrowed, invalidated or held to be unenforceable.

Additionally, unauthorized use of our intellectual property may have occurred or may occur in the future, including, for example, in the production of counterfeit versions of our products. Counterfeit products may use different and possibly contaminated sources of plasma and other raw materials, and the purification process involved in the manufacture of counterfeit products may raise additional safety concerns, over which we have no control. Although we have taken steps to minimize the risk of unauthorized uses of our intellectual property, including for the production of counterfeit products, any failure to identify unauthorized use of, and otherwise adequately protect, our intellectual property could adversely affect our business, including reducing the demand for our products. Additionally, any reported adverse events involving counterfeit products that purported to be our products could harm our reputation and the sale of our products in particular and consumer willingness to use plasma-derived therapeutics in general. Moreover, if we are required to commence litigation related to unauthorized use, whether as a plaintiff or defendant, such litigation would be time-consuming, force us to incur significant costs and divert our attention and the efforts of our management and other employees, which could, in turn, result in lower revenue and higher expenses.

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In addition to patented technology, we rely on our unpatented proprietary technology, trade secrets, processes and know-how.

We rely on proprietary information (such as trade secrets, know-how and confidential information) to protect intellectual property that may not be patentable, or that we believe is best protected by means that do not require public disclosure. We generally seek to protect this proprietary information by entering into confidentiality agreements, or consulting, services, material transfer agreements or employment agreements that contain non-disclosure and non-use provisions, as well as ownership provisions, with our employees, consultants, service providers, contractors, scientific advisors and third parties. However, we may fail to enter into the necessary agreements, and even if entered into, these agreements may be breached or otherwise fail to prevent disclosure, third-party infringement or misappropriation of our proprietary information, may be limited as to their term and may not provide an adequate remedy in the event of unauthorized disclosure or use of proprietary information. We have limited control over the protection of trade secrets used by our third-party manufacturers, suppliers, other third parties which are granted with license to use our know-how and former employees and could lose future trade secret protection if any unauthorized disclosure of such information occurs. In addition, our proprietary information may otherwise become known or be independently developed by our competitors or other third parties. To the extent that our employees, consultants, service providers, contractors, scientific advisors and other third parties 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. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain protection for our proprietary information could adversely affect our competitive business position. Furthermore, laws regarding trade secret rights in certain markets where we operate may afford little or no protection to our trade secrets.

We also rely on physical and electronic security measures to protect our proprietary information, but we cannot provide assurance that these security measures will not be breached or provide adequate protection for our property. There is a risk that third parties may obtain and improperly utilize our proprietary information to our competitive disadvantage. We may not be able to detect or prevent the unauthorized use of such information or take appropriate and timely steps to enforce our intellectual property rights. See-“Our business and operations would suffer in the event of computer system failures, cyber-attacks on our systems or deficiency in our cyber security measures.”

Changes in either U.S. or foreign patent law or in the interpretation of such laws could diminish the value of patents in general, thereby impairing our ability to protect our products.

Our success, like the success of many other biotechnology companies, is heavily dependent on intellectual property and on patents in particular. The procurement and enforcement of patents in the biotechnology industry is complex from a technological and legal standpoint, and the process is therefore costly, time-consuming and inherently uncertain. In addition, on September 16, 2011, the AIA was signed into law. The AIA included a number of significant changes to U.S. patent law, including provisions that affect the way patent applications are prosecuted. An important change introduced by the AIA is that, as of March 16, 2013, the United States transitioned to a “first-to-file” system for deciding which party should be granted a patent when two or more patent applications are filed by different parties claiming the same invention. A third party that files a patent application with the USPTO after that date but before us could therefore be awarded a patent covering an invention of ours even if we had made the invention before it was made by the third party. As a result of this change of law, if we do not promptly file a patent application at the time of a new product’s invention, and if a third party subsequently invented and patented such product, we would lose our right to patent such invention.

The AIA also introduced new limitations on where a patentee may file a patent infringement suit and new opportunities for third parties to challenge any issued patent in the USPTO. Such changes apply to all of our U.S. patents, even those issued before March 16, 2013. Because of a lower evidentiary standard necessary to invalidate a patent claim in USPTO proceedings compared to the evidentiary standard in U.S. federal court, a third party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO to hold a claim invalid even though the same evidence would be insufficient to invalidate the claim if first presented in a district court action. Accordingly, a third party may attempt to use the USPTO procedures to invalidate our patent claims that would not have been invalidated if first challenged by the third party as a defendant in a district court action.

Depending on decisions by the U.S. Congress, federal courts, the USPTO, or similar authorities in foreign jurisdictions, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents and enforce our existing and future patents.

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If we are unable to protect our trademarks from infringement, our business prospects may be harmed.

We own trademarks that identify certain of our products, our business name and our logo, and have registered these trademarks in certain key markets. Although we take steps to monitor the possible infringement or misuse of our trademarks, it is possible that third parties may infringe, dilute or otherwise violate our trademark rights. Any unauthorized use of our trademarks could harm our reputation or commercial interests. In addition, our enforcement against third-party infringers or violators may be unduly expensive and time-consuming, and the outcome may be an inadequate remedy. Even if trademarks are issued to us or to our licensors, they may be challenged, narrowed, cancelled, held to be unenforceable or circumvented.

We may be subject to claims that we infringe, misappropriate or otherwise violate the intellectual property rights of third parties.

The conduct of our business, our products or product candidates may infringe or be accused of infringing one or more claims of an issued patent or may fall within the scope of one or more claims in a published patent application that may be subsequently issued and to which we do not hold a license or other rights. For example, certain of our competitors and other third parties own patents and patent applications in areas relating to critical aspects of our business and technology, including the separation and purification of proteins, the composition of AAT and the use of AAT for different indications, and these competitors may in the future allege that we are infringing on their patent rights. We may also be subject to claims that we are infringing, misappropriating or otherwise violating other intellectual property rights, such as trademarks, copyrights or trade secrets. Third parties could therefore bring claims against us or our strategic partners that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages. Further, if such a claim were brought against us or our strategic partners, we or they could be forced to permanently or temporarily stop or delay manufacturing, exportation or sales of the product or product candidate that is the subject of the dispute or suit.

In addition, we are a party to certain license agreements that may impose various obligations upon us as a licensee, including the obligation to bear the cost of maintaining the patents subject to the license and to make milestone and royalty payments. If we fail to comply with these obligations, the licensor may terminate the license, in which event we might not be able to market any product that is covered by the licensed intellectual property.

If we are found to be infringing, misappropriating or otherwise violating the patent or other intellectual property rights of a third party, or in order to avoid or settle claims, we or our strategic partners may choose or be required to seek a license, execute cross-licenses or enter into a covenant not to sue agreement from a third party and be required to pay license fees or royalties or both, which could be substantial. These licenses may not be available on acceptable terms, or at all. Even if we or our strategic partners were able to obtain a license, the rights may be nonexclusive, which could result in our competitors gaining access to the same intellectual property. Ultimately, we could be prevented from commercializing a product, or be forced to cease some aspect of our business operations, if, as a result of actual or threatened claims, we or our strategic partners are unable to enter into licenses on acceptable terms.

There have been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical and biotechnology industries. In addition, to the extent that we gain greater visibility and market exposure as a public company in the United States, we face a greater risk of being involved in such litigation. In addition to infringement claims against us, we may become a party to other patent litigation and other proceedings, including interference, opposition, cancellation, re-examination and similar proceedings before the USPTO and its foreign counterparts and other regulatory authorities, regarding intellectual property rights with respect to our products. The cost to us of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace or to conduct our business in accordance with our plans and budget, and patent litigation and other proceedings may also absorb significant management time.

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Some of our employees, consultants and service providers, were previously employed or hired at universities, medical institutes, or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. While we take steps to prevent them from using the proprietary information or know-how of others in their work for us, we may be subject to claims that we or they have inadvertently or otherwise used or disclosed intellectual property, trade secrets or other proprietary information of any such employee’s former employer or former ordering service or that they have breached certain non-compete obligations to their former employers. Litigation may be necessary to defend against these claims and, even if we are successful in defending ourselves, could result in substantial costs to us or be distracting to our management. If we fail to defend any such claims successfully, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel.

Risks Related to Our Ordinary Shares

The requirements of being a public company in the United States, as well as in Israel, may strain our resources and distract our management, which could make it difficult to manage our business and could have a negative effect on our results of operations and financial condition.

As a public company whose shares are being traded in the United States, as well as in Israel, we are required to comply with various regulatory and reporting requirements, including those required by the SEC. Complying with these reporting and regulatory requirements is time consuming, and may result in increased costs to us and could have a negative effect on our business, results of operations and financial condition. As a public company in the United States, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the requirements of the Sarbanes-Oxley Act of 2002 (“SOX”). These requirements may place a strain on our systems and resources. The Exchange Act requires that we file annual and current reports, and file or make public certain additional information, with respect to our business and financial condition. SOX requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting. To maintain and improve the effectiveness of our disclosure controls and procedures, we may need to commit significant resources, hire additional staff and provide additional management oversight. These activities may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations. Furthermore, as our business changes and if we expand either through acquisitions or by means of organic growth, our internal controls may become more complex and we will require significantly more resources to ensure our internal controls remain effective. Failure to implement required new or improved controls, or difficulties encountered in their implementation, could adversely affect our operating results or cause us to fail to meet our reporting obligations. If we identify material weaknesses, the disclosure of that fact, even if quickly remediated, could reduce the market’s confidence in our financial statements and negatively affect our share price.

Additionally, as of December 31, 2018, we were no longer an “emerging growth company,” as defined in the JOBS Act, and are now required to comply with additional disclosure and reporting requirements, including, but not limited to, being required to comply with the auditor attestation requirements of Section 404 of SOX (and the rules and regulations of the SEC thereunder). These additional reporting requirements may increase our legal and financial compliance costs and cause management and other personnel to divert attention from operational and other business matters to devote substantial time to these public company requirements.

Our share price may be volatile.

The market price of our ordinary shares is highly volatile and could be subject to wide fluctuations in price as a result of various factors, some of which are beyond our control. These factors include:

● actual or anticipated fluctuations in our financial condition and operating results;

● overall conditions in the specialty pharmaceuticals market;

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● loss of significant customers or changes to agreements with our strategic partners;

● changes in laws or regulations applicable to our products;

● actual or anticipated changes in our growth rate relative to our competitors’;

● announcements of clinical trial results, technological innovations, significant acquisitions, strategic alliances, joint ventures or capital commitments by us or our competitors;

● changes in key personnel;

● fluctuations in the valuation of companies perceived by investors to be comparable to us;

● the issuance of new or updated research reports by securities analysts;

● disputes or other developments related to proprietary rights, including patents, litigation matters and our ability to obtain intellectual property protection for our technologies;

● announcement of, or expectation of, additional financing efforts;

● sales of our ordinary shares by us or our shareholders, including pursuant to the registration statement on Form F-3 that we filed in November 2016;

● share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;

● recalls and/or adverse events associated with our products;

● the expiration of contractual lock-up agreements with our executive officers and directors; and

● general political, economic and market conditions.

Furthermore, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market price of equity securities of many companies. Broad market and industry fluctuations, as well as general economic, political and market conditions, may negatively impact the market price of our ordinary shares.

In the past, companies that have experienced volatility in the market price of their shares have been subject to securities class action litigation or derivative actions. We, as well as our directors and officers, may also be the target of these types of litigation and actions in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

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 be negatively impacted.

The trading market for our ordinary shares may 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, if they do, 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 negatively impact our share price or trading volume

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Future sales of our ordinary shares in the public market could cause our share price to fall.

Sales by us or the shareholders of a substantial number of our ordinary shares in the public market, either on the Tel Aviv Stock Exchange (the “TASE”) or Nasdaq, 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. As of December 31, 2019, we had 40,353,101 ordinary shares outstanding.

We have filed a registration statement on Form F-3 with the SEC utilizing a “shelf” registration process, and such shelf registration statement was declared effective on July 13, 2017. Under this shelf registration process, we may offer from time to time up to an aggregate of $100,000,000 of our ordinary shares in one or more offerings. In August 2017, pursuant to such shelf registration statement, we completed an underwritten public offering of an aggregate of 3,833,334 ordinary shares (including the exercise of the over-allotment option) for total gross proceeds of approximately $17.3 million. The shelf registration statement will remain effective until July 2020.

Furthermore, except for shares held by our affiliates as contemplated by Rule 144 under the U.S. Securities Act of 1933, as amended (the “Securities Act”), all of the ordinary shares that are outstanding as of December 31, 2019, as well as the 2,336,554 ordinary shares issuable upon exercise of outstanding options and the 145,896 restricted shares granted to certain officers and directors, are freely tradable in the United States without restrictions or further registration under the Securities Act. As of February 26, 2020, approximately 34% of our outstanding ordinary shares are beneficially owned by affiliates. These entities could resell the shares into the public markets in the United States in the future in accordance with the requirements of Rule 144, which include certain limitations on volume.

In addition, pursuant to a registration rights agreement we entered into with FIMI Opportunity Funds on January 20, 2020, they have “demand” and “piggyback” registration rights covering the ordinary shares of our company held by them. All shares of FIMI Opportunity Funds sold pursuant to an offering covered by a registration statement would be freely transferable. Sales of a substantial number of shares of our ordinary shares, or the perception that the FIMI Opportunity Funds may exercise their registration rights, could put downward pressure on the market price of our ordinary shares and could impair our future ability to raise capital through an offering of our equity securities.

The significant share ownership positions and board representation of the FIMI Opportunity Funds, Leon Recanati and the Hahn family may limit our shareholders’ ability to influence corporate matters.

The FIMI Opportunity Funds (three of whose partners are members of our board of directors), Leon Recanati, the Chairman of our board of directors, and the Hahn family (including Jonathan Hahn, a member of our board of directors), beneficially owned, directly and indirectly, 21.13%, 8.15 % and 5.06% of our outstanding ordinary shares, respectively, as of February 26, 2020. For additional information, see “Item 7. Major Shareholders and Related Party Transactions — Major Shareholders.” Accordingly, the FIMI Opportunity Funds, Leon Recanati, and the Hahn family through their equity ownership and board representation, individually and collectively, have significant influence over the outcome of matters required to be submitted to our shareholders for approval, including decisions relating to the election of our board of directors and the outcome of any proposed merger or consolidation of our company. Their interests may not be consistent with those of our other shareholders. In addition, these parties’ significant interest in us may discourage third parties from seeking to acquire control of us, which may adversely affect the market price of our shares. On March 6, 2013, a shareholders agreement was entered into, effective March 4, 2013, pursuant to which Mr. Recanati and any company controlled by him (collectively, the “Recanati Group”), on the one hand, and Damar Chemicals Inc. (“Damar”), TUTEUR S.A.C.I.F.I.A (“Tuteur”) (companies controlled by the Hahn family) and their affiliates (collectively, the “Damar Group”), on the other hand, have each agreed to vote the ordinary shares beneficially owned by them in favor of the election of director nominees designated by the other group as follows: (i) three director nominees, so long as the other group beneficially owns at least 7.5% of our outstanding share capital, (ii) two director nominees, so long as the other group beneficially owns at least 5.0% (but less than 7.5%) of our outstanding share capital, and (iii) one director nominee, so long as the other group beneficially owns at least 2.5% (but less than 5.0%) of our outstanding share capital. In addition, to the extent that after the designation of the foregoing director nominees there are additional director vacancies, each of the Recanati Group and Damar Group have agreed to vote the ordinary shares beneficially owned by them in favor of such additional director nominees designated by the party who beneficially owns the larger voting rights in our company. We are not party to such agreement or bound by its terms. As a result of such voting agreement, the Recanati Group and the Damar Group and their affiliates together have significant influence over the election of directors of the company.

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

Our ordinary shares have been traded on the TASE since August 2005, and on Nasdaq since May 2013. Trading in our ordinary shares on these markets takes place in different currencies (U.S. dollars on Nasdaq and NIS on the TASE), and at different times (as a result of different time zones, trading days and public holidays in the United States and Israel). The trading prices of our ordinary shares on these two markets may differ due to these and other factors. Any decrease in the price of our ordinary shares on the TASE could cause a decrease in the trading price of our ordinary shares on Nasdaq, and a decrease in the price of our ordinary shares on Nasdaq could likewise cause a decrease in the trading price of our ordinary shares on the TASE.

Our U.S. shareholders may suffer adverse tax consequences if we are characterized as a passive foreign investment company.

Generally, if, for any taxable year, at least 75% of our gross income is passive income, or at least 50% of the value of our assets is attributable to assets that produce passive income or are held for the production of passive income, we would be characterized as a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes. If we are characterized as a PFIC, our U.S. shareholders may suffer adverse tax consequences, including having gains realized on the sale of our ordinary shares treated as ordinary income, rather than capital gain, the loss of the preferential rate applicable to dividends received on our ordinary shares by individuals who are U.S. Holders (as defined in “Item 10. Additional Information — E. Taxation — United States Federal Income Taxation”), and having interest charges apply to distributions by us and the proceeds of share sales. See “Item 10. Additional Information — E. Taxation — United States Federal Income Taxation.”

We are a “foreign private issuer” and have disclosure obligations that are different from those of U.S. domestic reporting companies. As a result, we may not provide you the same information as U.S. domestic reporting companies or we may provide information at different times, which may make it more difficult for you to evaluate our performance and prospects.

We are a foreign private issuer and, as a result, are not subject to the same requirements as U.S. domestic issuers. Under the Exchange Act, we are subject to reporting obligations that, in certain respects, are less detailed and/or less frequent than those of U.S. domestic reporting companies. For example, we are not required to issue quarterly reports, proxy statements that comply with the requirements applicable to U.S. domestic reporting companies, or individual executive compensation information that is as detailed as that required of U.S. domestic reporting companies. We also have four months after the end of each fiscal year to file our annual reports with the SEC and are not required to file current reports as frequently or promptly as U.S. domestic reporting companies. Furthermore, our directors and executive officers will not be required to report equity holdings under Section 16 of the Exchange Act and will not be subject to the insider short-swing profit disclosure and recovery regime.

As a foreign private issuer, we are also exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors are not privy to specific information about an issuer before other investors. However, we are still subject to the anti-fraud and anti-manipulation rules of the SEC, such as Rule 10b-5 under the Exchange Act. Since many of the disclosure obligations imposed on us as a foreign private issuer differ from those imposed on U.S. domestic reporting companies, you should not expect to receive the same information about us and at the same time as the information provided by U.S. domestic reporting companies.

As we are a “foreign private issuer” and follow certain home country corporate governance practices instead of otherwise applicable SEC and Nasdaq corporate governance requirements, our shareholders may not have the same protections afforded to shareholders of domestic U.S. issuers that are subject to all SEC and Nasdaq corporate governance requirements.

As a foreign private issuer, we have the option to, and we do, follow Israeli corporate governance practices rather than certain corporate governance requirements of Nasdaq, except to the extent that such laws would be contrary to U.S. securities laws, and provided that we disclose the requirements we are not following and describe the home country practices we follow instead. We have relied on this “foreign private issuer exemption” with respect to all the items listed under the heading “Item 16G. Corporate Governance,” including with respect to shareholder approval requirements in respect of equity issuances and equity-based compensation plans, the requirement to have independent oversight on our director nominations process and to adopt a formal written charter or board resolution addressing the nominations process, the quorum requirement for meetings of our shareholders and the Nasdaq requirement to have a formal charter for the compensation committee. We may in the future elect to follow home country practices in Israel with regard to other matters. As a result, our shareholders may not have the same protections afforded to shareholders of companies that are subject to all Nasdaq corporate governance requirements. See “Item 16G. Corporate Governance.”

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We have never paid cash dividends on our ordinary shares and we do not anticipate paying any dividends in the foreseeable future. Consequently, any gains from an investment in our ordinary shares will likely depend on whether the price of our ordinary shares increases, which may not occur.

We have never declared or paid any cash dividends on our ordinary shares and do not intend to pay any cash dividends. Any agreements that we may enter into in the future may contain terms prohibiting or limiting the amount of dividends that may be declared or paid on our ordinary shares. In addition, Israeli law limits our ability to declare and pay dividends, and may subject our dividends to Israeli withholding taxes. We anticipate that we will retain all of our future earnings for use in the development of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors. Accordingly, investors must rely on sales of their ordinary shares after price appreciation, which may never occur, as the only way to realize any future gains on their investments.

Risks Relating to Our Incorporation and Location in Israel

Conditions in Israel could adversely affect our business.

We are incorporated under Israeli law and our principal offices and manufacturing facilities are located in Israel. Accordingly, political, economic and military conditions in Israel directly affect our business. Since the State of Israel was established in 1948, a number of armed conflicts have occurred between Israel and its Arab neighbors. Although Israel has entered into various agreements with Egypt, Jordan and the Palestinian Authority, there has been terrorist activity with varying levels of severity over the years. During July and August 2014, Israel engaged in an armed conflict with Hamas in the Gaza Strip, resulting in thousands of rockets being fired from the Gaza Strip and missile strikes against civilian targets in various parts of Israel, which disrupted most day-to-day civilian activity, particularly in southern Israel, the location of our manufacturing facility. In the event that our facilities are damaged as a result of hostile action or hostilities otherwise disrupt the ongoing operation of our facilities or the airports and seaports on which we depend to import and export our supplies and products, our ability to manufacture and deliver products to customers could be materially adversely affected. Additionally, the operations of our Israeli suppliers and contractors may be disrupted as a result of hostile action or hostilities, in which event our ability to deliver products to customers may be materially adversely affected.

Several countries, principally in the Middle East, restrict doing business with Israel and Israeli companies, and additional countries may impose restrictions on doing business with Israel and Israeli companies if hostilities in Israel or political instability in the region continues or increases. These restrictions may limit materially our ability to obtain raw materials from these countries or sell our products to companies in these countries. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners, or significant downturn in the economic or financial condition of Israel, could adversely affect our operations and product development, cause our sales to decrease and adversely affect the share price of publicly traded companies having operations in Israel, such as us.

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

As of December 31, 2019, we had 429 employees, all of whom were based in Israel. Certain of our employees may be called upon to perform up to 36 days (and in some cases more) of annual military reserve duty until they reach the age of 40 (and in some cases, up to 45 or older) and, in emergency circumstances, could be called to active duty. In response to increased tension and hostilities, there have been occasional call-ups of military reservists, and it is possible that there will be additional call-ups in the future. Our operations could be disrupted by the absence of a significant number of our employees related to their, or their spouse’s, military service or the absence for extended periods of one or more of our key employees for military service. Such disruption could materially adversely affect our business and results of operations. Additionally, the absence of a significant number of the employees of our Israeli suppliers and contractors related to military service or the absence for extended periods of one or more of their key employees for military service may disrupt their operations, in which event our ability to deliver products to customers may be materially adversely affected. The tax benefits that are available to us require us to continue to meet various conditions and may be terminated or reduced in the future, which could increase our costs and taxes.

The tax benefits that are available to us require us to continue to meet various conditions and may be terminated or reduced in the future, which could increase our costs and taxes.

One of our Israeli facilities was granted “Approved Enterprise” status by the Investment Center of the Ministry of Economy and Industry (formerly named the Ministry of Industry, Trade and Labor) of the State of Israel (the “Investment Center”), under the Israeli Law for the Encouragement of Capital Investments, 1959 (the “Investment Law”), which made us eligible for a grant and certain tax benefits under that law for a certain investment program. The investment program provided us with a grant in the amount of 24% of our approved investments, in addition to certain tax benefits, which applied to the turnover resulting from the operation of such investment program, for a period of up to ten consecutive years from the first year in which we generated taxable income. The tax benefits under the Approved Enterprise status expired at the end of 2017.

Additionally, we have obtained a tax ruling from the Israel Tax Authority according to which, among other things, our activity has been qualified as an “industrial activity,” as defined in the Investment Law, and is also eligible for tax benefits as a “Privileged Enterprise,” which apply to the turnover attributed to such enterprise, for a period of up to ten years from the first year in which we generated taxable income. The tax benefits under the Privileged Enterprise status are scheduled to expire at the end of 2020 and 2023.

In order to remain eligible for the tax benefits of a Privileged Enterprise, we must continue to meet certain conditions stipulated in the Investment Law and its regulations, as amended, and must also comply with the conditions set forth in the tax ruling. These conditions include, among other things, that the production, directly or through subcontractors, of all our products should be performed within certain regions of Israel. If we do not meet these requirements, the tax benefits would be reduced or canceled and we could be required to refund any tax benefits that we received in the past, in whole or in part, linked to the Israeli consumer price index, together with interest. Further, these tax benefits may be reduced or discontinued in the future. For example, while we do not expect that the transfer of manufacturing of GLASSIA to Takeda, or the grant to Takeda of the right to use our technology for such manufacturing, would result in the reduction or loss of these tax benefits, according to the tax ruling that we obtained, we may lose those benefits if it is determined that we do not comply with the conditions set forth in the tax ruling If these tax benefits are canceled, our Israeli taxable income would be subject to regular Israeli corporate tax rates. The standard corporate tax rate for Israeli companies was 26.5% for 2015, it decreased to 25% in 2016 and 24% in 2017, and further decreased to 23% in 2018 and thereafter. For more information about applicable Israeli tax regulations, see “Item 10. Additional Information — E. Taxation — Israeli Tax Considerations and Government Programs.”

In the future, we may not be eligible to receive additional tax benefits under the Investment Law if we increase certain of our activities outside of Israel. Additionally, in the event of a distribution of a dividend from the abovementioned tax exempt income, in addition to withholding tax at a rate of 20% (or a reduced rate under an applicable double tax treaty), we will be subject to tax on the otherwise exempt income (grossed-up to reflect the pre-tax income that we would have had to earn in order to distribute the dividend) at the corporate tax rate applicable to our Approved/Privileged Enterprise’s income, which would have been applied had we not enjoyed the exemption. Similarly, in the event of our liquidation or a share buyback, we will be subject to tax on the grossed up amount distributed or paid at the corporate tax rate which would have been applied to our Privileged Enterprise’s income had we not enjoyed the exemption. For more information about applicable Israeli tax regulations, see “Item 10. Additional Information — E. Taxation — Israeli Tax Considerations and Government Programs.”

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Tax matters, including changes in tax laws, adverse determinations by taxing authorities and imposition of new taxes could adversely affect our results of operations and financial condition. Furthermore, we may not be able to fully utilize our net operating loss carryforwards.

We are subject to the tax laws and regulations of the State of Israel and numerous other jurisdictions in which we do business. Many judgments are required in determining our provision for income taxes and other tax liabilities, and the applicable tax authorities may not agree with our tax positions. In addition, our tax liabilities are subject to other significant risks and uncertainties, including those arising from potential changes in laws and/or regulations in the State of Israel and the other countries in which we do business, the possibility of adverse determinations with respect to the application of existing laws, changes in our business or structure and changes in the valuation of our deferred tax assets and liabilities. As of December 31, 2019, we had net operating loss carryforwards (“NOLS”) for tax purposes of approximately $47 million. If we are unable to fully utilize our NOLs to offset taxable income generated in the future, our future cash taxes could be materially and negatively impacted. For further detail regarding our NOLs, see Note 21 in our consolidated financial statements included in this Annual Report.

It may be difficult to enforce a U.S. judgment against us and our officers and directors in Israel or the United States, or to assert U.S. securities laws claims in Israel or serve process on our officers and directors.

We are incorporated in Israel. Most of our directors and executives officers and the Israeli experts named in this Annual Report reside outside the United States. The majority of our assets and the assets of these persons are located outside the United States. Therefore, it may be difficult for an investor, or any other person or entity, to enforce a U.S. court judgment based upon the civil liability provisions of the U.S. federal securities laws against us or any of these persons in a U.S. or Israeli court, or to effect service of process upon these persons in the United States. Additionally, it may be difficult for an investor, or any other person or entity, to assert U.S. securities law claims in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on an alleged violation of U.S. securities laws on the grounds that Israel is not the most appropriate forum in which to bring such a claim. Even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact 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 addressing the matters described above.

Your rights and responsibilities as our shareholder are governed by Israeli law, which may differ in some respects from the rights and responsibilities of shareholders of U.S. corporations.

Since we are incorporated under Israeli law, the rights and responsibilities of our shareholders are governed by our articles of association and Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders of U.S.-based corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith and in a customary manner in exercising its rights and performing its obligations towards the company and other shareholders and to refrain from abusing its power in the company, including, among other things, in voting at the general meeting of shareholders on certain matters, such as an amendment to the company’s articles of association, an increase of the company’s authorized share capital, a merger of the company and approval of related party transactions that require shareholder approval. A shareholder also has a general duty to refrain from discriminating against other shareholders. In addition, a controlling shareholder or a shareholder who knows that it possesses the power to determine the outcome of a shareholders vote, or who has the power to appoint or prevent the appointment of an office holder in the company or has other powers towards the company, has a duty to act in fairness towards the company. However, Israeli law does not define the substance of this duty of fairness. See “Item 6. Directors, Senior Management and Employees — Fiduciary Duties and Approval of Specified Related Party Transactions under Israeli Law — Duties of Shareholders.” 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 our shareholders that are not typically imposed on shareholders of U.S. corporations.

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Provisions of Israeli law and our articles of association may delay, prevent or make undesirable an acquisition of all or a significant portion of our shares or assets.

Certain provisions of Israeli law and our articles of association could have the effect of delaying or preventing a change in control and may make it more difficult for a third party to acquire us or for our shareholders to elect different individuals to our board of directors, even if doing so would be beneficial to our shareholders, and may limit the price that investors may be willing to pay in the future for our ordinary shares. For example, Israeli corporate law regulates mergers and requires that a tender offer be effected when more than a specified percentage of shares in a public company are purchased. Under our articles of association, a merger shall require the approval of two-thirds of the voting rights represented at a meeting of our shareholders and voting on the matter, in person or by proxy, and any amendment to such provision shall require the approval of 60% of the voting rights represented at a meeting of our shareholders and voting on the matter, in person or by proxy. Further, Israeli tax considerations may make potential transactions undesirable to us or to some of our shareholders whose country of residence does not have a tax treaty with Israel granting tax relief to such shareholders from Israeli tax. With respect to certain mergers, while Israeli tax law permits tax deferral, the deferral is contingent on certain restrictions on future transactions, including with respect to dispositions of shares received as consideration, for a period of two years from the date of the merger. See “Item 10. Additional Information — B. Memorandum and Articles of Association — Acquisitions Under Israeli Law.”

Item 4. Information on the Company

Corporate Information

We were incorporated under the laws of the State of Israel on December 13, 1990 under the name Kamada Ltd. In August 2005, we successfully completed an initial public offering on the TASE. In June 2013, we successfully completed an initial public offering in the United States on Nasdaq. The address of our principal executive office is 2 Holzman St., Science Park, P.O. Box 4081, Rehovot 7670402, Israel, and our telephone number is +972 8 9406472. Our website address is www.kamada.com. The reference to our website is intended to be an inactive textual reference and the information on, or accessible through, our website is not intended to be part of this Annual Report.

We have irrevocably appointed Puglisi & Associates as our agent to receive service of process in any action against us in any United States federal or state court. The address of Puglisi & Associates is 850 Library Avenue, Suite 204, P.O. Box 885, Newark, Delaware 19715.

Capital Expenditures

For a discussion of our capital expenditures, see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources.”

Business Overview

We are a plasma-derived biopharmaceutical company focused on orphan indications, with an existing marketed product portfolio and a late-stage product pipeline. Our proprietary products are produced using our advanced proprietary technologies and know-how for the separation and purification of proteins derived from human plasma. We develop and produce our plasma-derived protein therapeutics in our advanced cGMP compliant, FDA-approved production facility located in Beit Kama, Israel. We use our proprietary platform technology and know-how for the extraction and purification of proteins from human plasma to produce AAT in a high purity liquid form which is a protein derived from human plasma with known and newly discovered therapeutic roles given its immuno-modulatory, anti-inflammatory, tissue protective and antimicrobial properties. In addition, using our technology, we extract and purify hyper immunoglobulin such as Anti-Rabies IgG, as well as other plasma-derived proteins.

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Our business development strategy is focused on creating new growth opportunities through the identification of new product opportunities for our manufacturing plant and seeking complementary products via licensing and acquisition. We expect that our business growth, following the transition of GLASSIA manufacturing to Takeda during 2021, will also be driven by an expected increase in proprietary product sales in international markets, an anticipated continued increase in KEDRAB sales in the U.S., the commercial manufacturing of a new specialty hyper-immune globulin product at our facility beginning in 2023, expected growth in our Distribution segment, and the royalties to be paid to us by Takeda on GLASSIA sales. In addition, we remain focused on the AATD field, as we believe we have developed extensive commercial, scientific, manufacturing, clinical and regulatory experience (based on multiple clinical trials we performed in the United States and Europe) in that field. Accordingly, we aim to become the leading innovator in this field by developing different therapeutic approaches to AATD independently, or through collaborations with strategic partners. We are also continuing to explore the development of AAT for other indications, such as GvHD, lung transplantation rejection, organ preservation and/or the development of new immunoglobulins (IgG) through strategic collaborations. To that end, we are investing in additional indications/and products, primarily to the point of developing sufficient data, to enable us to attract such strategic partners.

We operate in two segments: the Proprietary Products segment, in which we develop and manufacture plasma-derived therapeutics and have a product line consisting of six plasma-derived biopharmaceutical products that we market in more than 20 countries; and the Distribution segment, in which we leverage our expertise and presence in the Israeli market by distributing drugs manufactured by third-parties for use in Israel.

We derived approximately 66%, 66% and 59% of our total revenues in the years ended December 31, 2019, 2018 and 2017, respectively, from sales in the United States, approximately 4%, 3% and 5% of our total revenues in the years ended December 31, 2019, 2018 and 2017, respectively, from sales in Europe, approximately 2%, 3% and 5% of our total revenues in the years ended December 31, 2019, 2018 and 2017, respectively, from sales in Asia (excluding Israel), approximately 3%, 3% and 5% of our total revenues in the years ended December 31, 2019, 2018 and 2017, respectively, from sales in Latin America and approximately 25%, 25% and 26% of our total revenues in the years ended December 31, 2019, 2018 and 2017, respectively, from sales in Israel.

Our flagship product, GLASSIA, was the first liquid, ready-to-use, intravenous plasma-derived AAT product approved by the FDA (GLASSIA is also approved for self-administration). GLASSIA is an intravenous AAT product that is indicated for chronic augmentation and maintenance therapy in adults with emphysema due to AATD. AAT is a naturally occurring protein found in a derivative of plasma known as fraction IV. AAT regulates the activity of certain white blood cells known as neutrophils and reduces cell inflammation. Patients with genetic AATD suffer from a chronic inflammatory state, lung tissue damage and a decrease in lung function. We market GLASSIA through a strategic partnership with Takeda in the United States. Our 2019 revenues from the sale of GLASSIA to Takeda totaled $68.1 million, as compared to $63.3 million during 2018. Based on our recently amended exclusive manufacturing, supply and distribution agreement with Takeda, we project that total revenues from sales of GLASSIA to Takeda for the years 2020 will be approximately $65 million and between $25 million to $50 million during 2021, based on Takeda’s needs. Based on the licensing and technology transfer agreement between the parties, Takeda is planning to complete the technology transfer of GLASSIA, and pending FDA approval, will initiate its own production of GLASSIA for the U.S. market in 2021. Accordingly, based on the agreement between the companies, upon initiation of sales of GLASSIA manufactured by Takeda, it will pay royalties to Kamada at a rate of 12% on net sales through August 2025, and at a rate of 6% thereafter until 2040, with a minimum of $5 million annually for each of the years from 2022 to 2040.

The transition of the agreement to its royalties phase will result in a reduction of our revenue from Takeda and our operating results may be materially and adversely impacted if we are unable to reduce fixed costs relating to our manufacturing facility in line with any reduction in demand. While our topline revenues will be substantially reduced, we project that based on current GLASSIA sales in the U.S. and forecasted future growth, we will receive royalties from Takeda in the range of $10 million to $20 million per year for 2022 to 2040. As an illustration, in the event the transition of the agreement to its royalty phase would have taken place in 2019, our revenues would have been reduced by $68.1 million (which is the total revenues generated by GLASSIA sales to Takeda during the year ended December 31, 2019), our gross profit would have been reduced by a range of $27 million to $29 million. Such revenues and gross profitability reduction would have been offset by royalties that would have been paid by Takeda in the range of $10 million to $20 million.

We also market GLASSIA in other counties through local distributors. Total revenues derived from sales of GLASSIA in all other countries during 2019 was $5.5 million as compared to $5.0 million during 2018.

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Our second leading product is KamRAB, a prophylactic treatment against rabies infection that is administered to patients after exposure to an animal suspected of being infected with rabies. KamRAB is a protein therapeutic derived from hyper-immune plasma, which is plasma that contains high levels of antibodies from donors that have been previously vaccinated by an active rabies vaccine. KamRAB is administered by a one-time injection. KamRAB has been sold by us in various markets outside the United States through local distributors since 2003. In July 2011, we signed a strategic distribution and supply agreement with Kedrion for the clinical development and marketing in the United States of KamRAB, and in August 2017 we received FDA approval for anti-rabies immunoglobulin as a post-exposure prophylaxis against rabies infection. In April 2018, we launched KamRAB in the United States, under the trademark “KEDRAB.” Our overall revenues from sales of KEDRAB to Kedrion during 2019 and 2018 were $16.4 million and $11.8 million, respectively. Sales of KEDRAB by Kedrion in the United States during the year 2019 and 2018 totaled $31.4 million and $15.5 million, respectively. These sales represent approximately 20% and 10% market shares, respectively.

In December 2019, we entered into a binding term sheet for a 12-year contract manufacturing agreement with an undisclosed partner to manufacture a FDA-approved and commercialized specialty hyper-immune globulin product. Following the execution of the required technology transfer from the current manufacturer, and pending receipt of all required FDA approvals, we expect to commence commercial manufacturing of the product in early 2023. This binding term sheet supports our strategy to leverage our experience and available manufacturing capacity at our FDA-approved manufacturing facility to initiate the production of additional plasma-derived products following the transition of GLASSIA manufacturing to Takeda during 2021. Based on the current market sales volume of this specialty hyper-immune globulin product, we estimate that its manufacturing opportunity will add approximately $8 million to $10 million to our annual revenues, with estimated gross margin level similar to the average gross margins of our Proprietary Products segment.

In addition to our commercial operation, we invest in research and development of new product candidates and new indication for existing products activities. Our lead investigational product candidate is Inhaled AAT for AATD. We believe that this second generation AAT product is currently the only aerosolized AATD treatment in advanced stages of clinical development. We believe that Inhaled AAT for AATD, if approved, will increase patient convenience and reduce the need for patients to use intravenous infusions of AAT products, thereby decreasing the need for clinic visits or nurse home visits and reducing medical costs. In addition, because Inhaled AAT for AATD would be delivered directly to the affected tissue through a nebulizer using a lower AAT dosage, we believe that this product, if approved, will enable us to treat significantly more patients from the same amount of plasma and production capacity and therefore, may be more cost effective for patients and payors and may increase our profitability.

We completed a pivotal Phase II/III clinical trial for Inhaled AAT for AATD in Europe and filed the Marketing Authorization Application (“MAA”) with the EMA in March 2016. The Phase II/III clinical trial in Europe, however, did not meet its primary or other pre-defined endpoints. Following our discussions with the EMA in regards to the study results, in July 2017, we withdrew the MMA in Europe for our Inhaled AAT for AATD, which relied on this single pivotal clinical trial. Following extensive discussions with the EMA, we concluded that the EMA did not view the data submitted as sufficient, in terms of safety and efficacy, for approval of the MAA, and that the supplementary data needed for approval required an additional clinical trial. Subsequently, and following several discussions with EMA, in July 2018, we received positive scientific advice from the Committee for Medicinal Products for Human Use (“CHMP”) of the EMA related to the development plan for our proposed pivotal Phase III study for our Inhaled AAT for AATD. We requested scientific advice (protocol assistance) from the CHMP following the results of the previous Phase II/III (EU) and Phase II (US) (see below) studies conducted by us with respect to a proposed subsequent Phase III study design. The CHMP notified us that it concurred with the overall design of the proposed study, including its objectives, patient population, proposed endpoints and their clinical importance, and the safety monitoring plan. The CHMP had some minor comments, which we addressed in the final study protocol. See “—Our Product Pipeline and Development Program—Inhaled Formulations of AAT—AATD” and “Risk Factors— Risk Related to Development, Regulatory Approval and Commercialization of Product Candidates.”

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In the United States, we completed a Phase II clinical trial of our Inhaled AAT for AATD, which met its primary endpoint. However, when we presented the data from the European Phase II/III study to the FDA in April 2016, the FDA expressed concerns and questions about that data, primarily related to the safety and efficacy of Inhaled AAT for the treatment of AATD and the risk/benefit balance to patients based on that data. We understood that the FDA’s questions and concerns need to be resolved before the agency would allow us to proceed with additional clinical development of Inhaled AAT in the United States. In order to address the FDA’s concerns and questions, in April 2017, we submitted to the agency the results of the U.S. Phase II data, together with a proposed Phase III synopsis. The FDA then provided us in June 2017 with guidance for further development of the synopsis and requested that we submit a complete proposed study protocol for the next phase prior to enabling us to continue clinical development and initiate the Phase III study in the United States. In July 2017, we submitted a full study protocol, and in August 2017, in response to the study protocol and previous submission, the FDA issued a letter stating that it continues to have concerns and questions about the safety and efficacy of the Inhaled AAT. We have provided the FDA with data and information related to their concerns and in April 2018, the FDA issued a response letter providing further guidance regarding the proposed pivotal Phase III protocol, as well as additional questions focused on the Inhaled AAT product characteristics. This correspondence indicated that, while several issues had been addressed, the FDA had continued concerns and questions related to the safety profile of Inhaled AAT for AATD. Following a thorough assessment of the FDA response, we provided the requested information and data and implemented the proposed changes in the study protocol during the second half of 2018. In April 2019, we received a letter from the FDA stating that we had satisfactorily addressed the concerns and questions with respect to the proposed Phase III clinical trial. In addition, the FDA requested that prior to the initiation of the planned Phase III study, we complete a Human Factor Study (HFS) to support the combination product, consisting of our Inhaled AAT and the investigational eFlow nebulizer system of PARI Pharma GmbH. We expect to receive further feedback from the FDA related to our HFS, which we completed in the third quarter of 2019 and its results were submitted to the FDA at such time.

During December 2019, the first patient was randomized in Europe into our pivotal Phase 3 InnovAATe clinical trial evaluating the safety and efficacy of our proprietary inhaled Alpha-1 Antitrypsin (AAT) therapy for the treatment of Alpha-1 Antitrypsin Deficiency (AATD). The study is being led by Jan Stolk, M.D., Department of Pulmonology, Member of European Reference Network LUNG, Leiden University Medical Center, The Netherlands. InnovAATe is a randomized, double-blind, placebo-controlled, pivotal Phase 3 trial designed to assess the efficacy and safety of Inhaled AAT in patients with AATD and moderate lung disease. Up to 250 patients will be randomized 1:1 to receive either Inhaled AAT at a dose of 80mg once daily, or placebo, over two years of treatment. The primary endpoint of the InnovAATe trial is lung function measured by FEV1. Secondary endpoints include lung density changes as measured by CT densitometry, as well as other parameters of disease severity, such as additional pulmonary functions, exacerbation rate and six minute walk test. The safety profile will be monitored continuously by a Data Monitoring Committee with predefined rules to be applied after the first 60 subjects have completed six months of treatment. Based on recent feedback received from the FDA regarding anti-drug antibodies (ADA) to Inhaled AAT, we intend to concurrently conduct a sub-study in North America in which approximately 30 patients will be evaluated for the effect of ADA on AAT levels in plasma with Inhaled AAT and IV AAT treatments.

In the past, we have also completed Phase II clinical studies in Israel for additional novel indications, using formulations of AAT through inhalation for cystic fibrosis in 2008 and bronchiectasis in 2009. At present, the development of cystic fibrosis and bronchiectasis products is suspended as we prioritize other products.

We also test our liquid, intravenous plasma-derived AAT product for other indications utilizing AATs known and newly-discovered therapeutic roles given its immunomodulatory, anti-inflammatory, tissue-protective and antimicrobial properties:

● Acute Graft versus Host Disease (aGvHD) - In November 2016, we initiated a Phase II/III clinical trial for the treatment of aGvHD in collaboration with Shire (now part of Takeda) in the United States. In June 2017, Shire informed us of its decision not to continue with the study. As the result of this decision, the study was halted. In January 2018, we announced a collaboration with a consortium of prominent hospitals led by Mount Sinai Hospital and initiated an investigator initiated Phase II clinical study to evaluate our AAT product for preemption of steroid refractory aGvHD (SR-aGvHD) utilizing a novel blood biomarker developed algorithm that may identify patients at high risk of developing SR-aGvHD and non-relapse mortality. During 2019, we concluded enrollment for this clinical trial and expect topline results to be available during 2020.

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● Lung Transplantation Rejection - We have also initiated a Phase II clinical study with our intravenous AAT product to prevent lung transplantation rejection. In January 2018, we announced interim results from this study, which showed that our intravenous AAT demonstrated favorable safety and tolerability profile in 10 patients during first six months of treatment, consistent with previously observed results in other indications. In February 2019, we announced additional interim results from such study suggesting improvement in multiple key clinical outcomes. Final results are anticipated during 2020.

● Organ preservation – In December 2018, we extended an ongoing investigator initiated, proof-of-concept study evaluating the potential benefit of AAT on liver preservation and transplant rejection prevention. We collaborated with the Massachusetts General Hospital (MGH) which is conducting and funding a study being led by James F. Markmann, M.D., Ph.D., Chief, Division of Transplant Surgery, MGH, who is the Claude E. Welch Professor of Surgery at Harvard Medical School. The purpose of the ongoing study is to assess the effect of AAT on liver graft quality and viability and to evaluate the liver graft for markers of Ischemia-Reperfusion Injury (IRI) and tissue damage. Organ preservation methods pre-transplant are continuously improving due to advanced technologies, such as ex-vivo perfusion systems. This study is evaluating the effect of AAT produced by us on a liver graft once administered into an ex-vivo perfusion system.

With respect to the development of our AAT product for GvHD, prevention of lung transplantation rejection, and organ preservation, our continued investment would be limited primarily to the point where such further development could generate sufficient data to enable us to attract strategic partner(s) to collaborate in the further development of those programs.

In prior years we tested our AAT product for the indication of newly diagnosed type-1 diabetes patients. We do not plan to further invest in this indication.

In preparation for future anticipated increased demand for AAT potentially resulting from greater awareness of AAT deficiency, as well as potential additional indications for Alpha 1 Antitrypsin, which are currently in clinical development, we have also initiated development of recombinant human Alpha 1 Antitrypsin (“rhAAT”). We engaged Cellca (CDMO located in Germany, part of Sartorius Stedim BioTech Group) to pursue the cell line development of rhAAT in Chinese Hamsters Ovaries (“CHO”) with high productivity and adequate product quality.

Our Product Portfolio

Our products include plasma-derived protein therapeutics produced in our Proprietary Products segment or licensed products, majority of which are plasma-derived marketed and sold in our Distribution segment in Israel.

Proprietary Products Segment

Our products in the Proprietary Products segment consist of plasma-derived protein therapeutics derived from human serum, that are administered by injection or infusion. We also manufacture anti-snake venom products from equine based serum.

We currently have products that target four product categories: respiratory, immunoglobulins, critical care and other. Our flagship product in the Proprietary Products segment is GLASSIA, sales of which, for the years ended December 31, 2019, 2018 and 2017, accounted for approximately 75%, 75% and 83% of our total revenues, in the Proprietary Products segment, respectively. Revenue from sales of GLASSIA (including sales to Takeda for further distribution in the U.S. market) comprised approximately 58%, 60% and 64% of our total revenues for the years ended December 31, 2019, 2018 and 2017, respectively. Revenues from sales of KEDRAB to Kedrion for further distribution in the U.S. market for the years ended December 31, 2019 and 2018, accounted for approximately 13% and 10% of our total revenues, respectively. Sales of KamRAB and KamRho (D) for the years ended December 31, 2019, 2018 and 2017 accounted for the substantial balance of total revenues in the Proprietary Products segment.

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Product	Indication	Active Ingredient	Geography
Respiratory
GLASSIA (or Ventia/Respikam in certain countries)	Intravenous AATD	Alpha-1 Antitrypsin (Human)	United States, Israel, Russia, Brazil, Argentina, Uruguay**, South Africa, Colombia**, Albania**, Kazakhstan**
Immunoglobulins
KamRAB/KEDRAB	Prophylaxis of rabies disease	Anti-rabies immunoglobulin (Human)	United States, Israel, India, Thailand, El Salvador*, South Africa*, Bosnia, Russia, Mexico*, Georgia*, Sri Lanka*, Ukraine, Turkey, South Korea and Canada**, Argentina, Australia, Brazil, Chile, Nepal and Venezuela.
KamRho (D) IM	Prophylaxis of hemolytic disease of newborns	Rho(D) immunoglobulin (Human)	Israel, Brazil*, India, Argentina, Paraguay*, Chile*, Russia, Nigeria, Sri Lanka*, Thailand**, Costa Rica** and the Palestinian Authority
KamRho (D) IV	Treatment of immune thermobocytopunic purpura	Rho(D) immunoglobulin (Human)	Israel, India and Argentina*
Snake bite antiserum	Treatment of snake bites by the Vipera palaestinae and the Echis coloratus	Anti-snake venom	Israel
Other Products
Human transferrin (diagnostical grade)	Not for human use	Transferrin	United States

* We have regulatory approval, but did not market the product in this country in 2019.

** Product was registered, but we have not yet started sales.

Respiratory — GLASSIA

GLASSIA is an intravenous AAT product produced from fraction IV plasma that is indicated by the FDA for chronic augmentation and maintenance therapy in adults with emphysema due to congenital AATD. While GLASSIA does not cure AATD, it supplements the patient’s insufficient physiological levels of AAT and is administered as a chronic treatment. As such, the patient must take GLASSIA indefinitely over the course of his or her life in order to maintain the benefits provided by it.

In the United States and Europe, we believe that AATD is currently significantly under-diagnosed and under-treated, as we estimate that only approximately 8% and 2.5-3% of all potential cases of AATD are treated in the United States and Europe, respectively, with an aggregate of up to an estimated 180,000 to 190,000 patients suffering from AATD, of which less than 10% have been diagnosed. According to the Centers for Medicare and Medicaid Services published payment allowance limits for Medicare part B, the average sale price, as of January 2020, of 10 mg of GLASSIA is $4.855, resulting in an annual cost of between $80,000 and $100,000 per AATD patient. In the United States, in some of the European countries and in Israel, we believe that the majority of the cost of treatment is covered by medical insurance programs.

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We estimate that the potential world market for AAT products is significantly larger than current consumption indicates. We believe that the primary reasons for this are the non-availability of AAT products in many countries, under diagnosis of patients suffering from AATD, expensive and protracted registration processes required to commence sales of AAT products in new markets and the absence of insurance reimbursement in various countries. As AATD can be diagnosed with a simple blood test, we expect diagnosis of AATD to continue to increase going forward as awareness of AAT increases. Based on recent published data, the estimated annual rate of increase of AATD treated patients is estimated at 6-8%.

GLASSIA was the first approved liquid AAT, which is ready for infusion and does not require reconstitution and mixing before injection, as is required from most other competing products. Additionally, in June 2016, the FDA approved an expanded label of GLASSIA for self-infusion at home after appropriate training. GLASSIA has a number of advantages over other intravenous AAT products, including the reduction of the risk of contamination during the preparation and infection during the infusion, reduced potential for allergic reactions due to the absence of stabilizing agents, simple and easy use by the patient or nurse, and the possible reduction of the nurse’s time during home visits, in the clinic or in the hospital and the ability to self- infusion at home.

Currently, GLASSIA has been approved in nine countries. It is sold in five of those countries and also is sold in one additional country, where it has not been approved, on a non-registered named-patient basis. The majority of sales of GLASSIA are in the United States, where GLASSIA was approved by the FDA in July 2010 and sales began in September 2010. As part of the approval, the FDA requested that we conduct post-approval Phase IV clinical trials, as is common in the pharmaceutical industry, aimed at collecting additional safety and efficacy data for GLASSIA. In 2010, we submitted our proposed Phase IV clinical trials to the FDA. Such Phase IV clinical trials began in 2015. As a result of low patient recruitment for such study, in 2019 Takeda submitted a revised protocol to the FDA, which is currently under discussion between Takeda and the FDA. Pursuant to our agreement with Takeda, the Phase IV clinical trials are financed and managed by Takeda, provided that if the cost of such Phase IV clinical trials exceeds a pre-defined amount, we will participate in financing such trial up to a certain amount by offsetting such amounts from future milestones, sales of GLASSIA or royalties from Takeda.

We market GLASSIA in the United States through our partnership with Takeda. We market GLASSIA in Israel by ourselves and in other countries through local distributors. Sales to Takeda accounted for approximately 54%, 56% and 59% of our total revenues in the years ended December 31, 2019, 2018 and 2017, respectively. We plan to submit GLASSIA for marketing approval in additional countries. Revenues from sales of GLASSIA worldwide have grown from approximately $0.6 million in 2009 to $73.6 million in 2019, representing 55% compound annual growth rate.

Immunoglobulins

KamRAB

KamRAB is a prophylactic treatment against rabies infection that is administered to patients after exposure to an animal suspected of being infected with rabies. KamRAB is a protein therapeutic derived from hyper-immune plasma, which is plasma that contains high levels of antibodies from donors that have been previously vaccinated by an active rabies vaccine. KamRAB is administered by a one-time injection, and the precise dosage is a function of the patient’s weight.

According to the World Health Organization, each year, more than 10 million people worldwide are exposed to potential rabies infection. We believe that there are market opportunities for KamRAB in developing countries, as well as in Canada and Australia. In many developing countries, patients do not receive treatment for suspected rabies due to the lack of availability of healthcare resources.

We began selling KamRAB in certain countries in Asia and Latin America in 2003, and subsequently obtained regulatory approvals to market KamRAB in seven additional countries, We currently sell KamRAB in eleven countries, including certain countries where registration is not required.

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In July 2011, we signed a strategic distribution and supply agreement with Kedrion for the clinical development and marketing in the United States of KamRAB, pursuant to which Kedrion agreed to bear all the costs required for the Phase II/III clinical trials. See “— Strategic Partnerships — Kedrion.”. In August 2017, we received marketing approval for KamRAB in the United States (under the trademark “KEDRAB”) and in April 2018, KEDRAB was launched in the United States and initial shipments reached healthcare practitioners across the country. The FDA approval of KEDRAB for post-exposure prophylaxis (PEP) against rabies infection in 2017 was based on the results of a phase 2/3 study which demonstrated that KEDRAB was non-inferior to the comparator HRIG product in achieving Rabies Virus Neutralizing Antibody (RVNA) levels of ≥0.5 IU/mL on day 14, when each was co-administered with a rabies vaccine. KEDRAB was found to be well-tolerated with a safety profile similar to that of the comparator HRIG product. In addition, we recently completed the enrollment of 30 pediatric subjects in an FDA-required post-marketing trial in the U.S. with the primary objective of confirming the safety of KEDRAB in children aged 0 to 17 years. Results of this study are expected in the second half of 2020.

We believe that receiving FDA approval for marketing the product will assist us in our efforts to register KamRAB in additional countries where KamRAB is not currently registered, which we believe would lead to additional sales worldwide. In November 2017, we signed a supply agreement for sales of KamRAB outside of the United States with an undisclosed international organization. The agreement extends through 2020 and is expected to generate additional sales for KamRAB. In November 2018, we received marketing approval for KamRAB in Canada and following winning a recent supply tender we expect to start selling the product in Canada during 2020. We were also recently approved to supply KamRAB through the PAHO, the specialized international health agency for the Americas. We initiated sales of KamRAB through PAHO during 2019 and we expect sales to continue in 2020.

KamRho (D)

KamRho (D) is indicated for (i) the prevention of hemolytic disease of the newborn (“HDN”), which is a blood disease that occurs where the blood type of the mother is incompatible with the blood type of the fetus; and (ii) the treatment of immune thrombocytopenic purpura (“ITP”), which is thought to be an autoimmune blood disease in which the immune system destroys the blood’s platelets, which are necessary for normal blood clotting. KamRho (D) is produced from hyper-immune plasma and is administered through intra-muscular injection (KamRho (D) IM) or through intravenous infusion (KamRho (D) IV).

According to academic research, approximately 15% of Caucasian women are Rh-negative and, if left untreated, HDN would affect one percent of all newborns and would be responsible for the death of one baby out of every 2,200 births. In addition, academic research estimates that ITP affects approximately five out of every 100,000 children per year, and two of every 100,000 adults per year worldwide, although some will recover without treatment. We have completed the registration process for Kam Rho (D) in several countries and sell it in eight countries, including Israel, Latin America, Asia, Africa and Eastern Europe.

Snake Bite Antiserum

Our snake bite antiserum product is used for the treatment of humans that have been bitten by the most common Israeli viper (Vipera palaestinae) and by the Israeli Echis (Echis coloratus). The venom of these snakes is poisonous and causes, among other symptoms, severe immediate pain with rapid swelling. These snake bites can lead to death if left untreated. Our snake bite antiserum is produced from hyper-immune serum that has been derived from horses that were immunized against Israeli viper and Israeli Echis venom. This product is the only treatment on the market for Vipera palaestinae and Echis coloratus snake bites in Israel.

We developed the snake bite antiserum pursuant to an agreement with the Israeli Ministry of Health (IMOH) entered into in March 2009. We completed construction of the production facilities and laboratories for the product, and successfully passed the IMOH inspections. We began production in August 2011 and commenced sales to the IMOH in 2012. The agreement with the IMOH is automatically renewable for up to ten additional one-year periods until December 31, 2020, unless the IMOH has provided us with a prior notice of non-renewal of the agreement, prior any automatic renewal term.

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Other Products

In recent years, we sold small quantities of Human Transferrin, which is used as a cultural medium for diagnostic assays and cell cultures.

Distribution Segment

Our Distribution segment is comprised of sales in Israel of pharmaceutical products manufactured by third parties. We engage third party manufacturers, register their products with the IMOH, import the products to Israel and distribute them to local health care provider organizations, hospitals and pharmacists. Our primary products in the Distribution segment include pharmaceuticals for critical use delivered by injection, infusion or inhalation. Currently, most of the products in our Distribution segment are produced from plasma or plasma-derivatives, and are manufactured by European companies. IVIG is our primary product in the Distribution segment, comprising approximately 62%, 58% and 54% of total revenues in the Distribution segment for the years ended December 31, 2019, 2018 and 2017, respectively. Sales of IVIG accounted for approximately 14%, 12% and 12% of our total revenues for the years ended December 31, 2019, 2018 and 2017, respectively.

Over the past several years we continued to extend our Distribution segment products portfolio to non-plasma derived products as provided in the table below. In December 2019, we entered into an agreement with Alvotech, a global biopharmaceutical company, to commercialize Alvotech’s portfolio of six biosimilar product candidates in Israel, upon receipt of regulatory approval from the IMOH. Alvotech’s pipeline includes biosimilar product candidates aimed at treating autoimmunity, oncology and, inflammatory conditions. Subject to approval by the IMOH, we expect to launch the first of these products, PF708, in Israel during 2022. PF708 is a biosimilar candidate to teriparatide, an FDA approved product marketed by Eli Lilly and Company under the brand name Forteo®/Forsteo® for the treatment of osteoporosis in patients with a high risk of fracture. PF708 recently received an FDA approval and is known by the brand name, Bonsity™. Following receipt of FDA marketing approval by Alvotech, the remaining five products included in the agreement are, subject to approval by the IMOH, expected to be launched in Israel during the years 2023-2025.

The following table sets forth our primary products in our Distribution segment.

Product	Indication	Active Ingredient
Respiratory
Bramitob	Management of chronic pulmonary infection due to pseudomonas aeruginosa in patients six years and older with cystic fibrosis	Tobramycin
FOSTER	Regular treatment of asthma where use of a combination product (inhaled corticosteroid and long-acting beta2-agonist) is appropriate	Beclomethasone dipropionate, Formoterol fumarate
PROVOCHOLINE	Diagnosis of bronchial airway hyperactivity in subjects who do not have clinically apparent asthma	METHACHOLINE CHLORIDE
Immunoglobulins
IVIG 5%	Treatment of various immunodeficiency-related conditions	Gamma globulins (IgG) (human)
Varitect	Preventive treatment after exposure to the virus that causes chicken pox and zoster herpes	Varicella zoster immunoglobulin (human)
Zutectra	Prevention of hepatitis B virus (HBV) re-infection in HBV-DNA negative patients 6 months after liver transplantation for hepatitis B induced liver failure	Human hepatitis B immunoglobulin
Hepatect CP	Prevent contraction of Hepatitis B by adults and children older than two years	Hepatitis B immunoglobulin (human)
Megalotect	Contains antibodies that neutralize cytomegalovirus viruses and prevent their spread in immunologically impaired patients	CMV immunoglobulin (human)
RUCONEST	Treatment of acute angioedema attacks in adults with hereditary angioedema (HAE) due to C1 esterase inhibitor deficiency	CONESTAT ALFA

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Critical Care
Heparin sodium injection	Treatment of thrombo-embolic disorders such as deep vein thrombosis, acute arterial embolism or thrombosis, thrombophlebitis, pulmonary embolism, fat embolism. Prophylaxis of deep vein thrombosis and thromboembolic events	Heparin sodium
Albumin and Albumin 4%	Maintains a proper level in the patient’s blood plasma	Human serum Albumin
Coagulation Factors
Factor VIII	Treatment of Hemophilia Type A diseases	Coagulation Factor VIII (human)
Factor IX	Treatment of Hemophilia Type B disease	Coagulation Factor IX (human)
Vaccinations
IXIARO	Active immunization against Japanese encephalitis in adults, adolescents, children and infants aged 2 months and older	Japanese encephalitis purified inactivated vaccine

Contract Manufacturing Services

In preparation for the transition of GLASSIA manufacturing to Takeda, expected by 2021, and in accordance with our business development strategy focused on creating new growth opportunities through identification of new product opportunities for our manufacturing plant, we are proactively exploring opportunities to leverage our experience and manufacturing capacity to initiate the production of new plasma-derived products. As such, in December 2019, we entered into a binding term sheet for a 12-year contract manufacturing agreement with an undisclosed partner to manufacture an FDA-approved and commercialized specialty hyper-immune globulin product. Following the execution of the required technology transfer from the current manufacturer, and pending receipt of all required FDA approvals, we expect to commence commercial manufacturing of the product in early 2023. Based on the current market sales volume of this specialty hyper-immune globulin product, we estimate that its manufacturing will add approximately $8 million to $10 million to our annual revenues, with estimated gross margin level similar to the average gross margins of our Proprietary Products segment.

Our Product Pipeline and Development Program

We are in various stages of pre-clinical and clinical development of new product candidates for our Proprietary Products segment. The following table sets forth our primary product pipeline in our Proprietary Products segment and each such product’s stage of development:

 

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Inhaled Formulations of AAT for AATD

We are in the process of development of inhaled formulations of AAT administered through the use of a nebulizer. The nebulizer was developed by PARI for several indications in the respiratory field, including the treatment of AATD, cystic fibrosis and bronchiectasis.

We have been able to leverage our expertise gained from the production of GLASSIA to develop a stable, high purity Inhaled AAT for AATD, an inhaled AAT product candidate for the treatment of AATD. Existing treatment for AATD require weekly intravenous infusions of AAT therapeutics. We believe that Inhaled AAT for AATD, if approved, will significantly improve the patient’s disease condition and the quality of life of the patients versus current invasive weekly treatment that requires uncomfortable infusion, consumption of time and administration by a medical professional. If approved, Inhaled AAT for AATD is estimated to be the first AAT product that is not required to be delivered intravenously but, instead is administered by a user-friendly, lightweight and silent nebulizer in up to two short daily sessions. We believe that Inhaled AAT for AATD, if approved, will increase patient convenience and reduce or replace the need for patients to use intravenous infusions of AAT products, decreasing the need for clinic visits or nurse home visits and reducing medical costs. Because of the smaller amount of AAT product used in Inhaled AAT for AATD (since it is applied directly to the site of action rather than administered systematically) we believe that this product, if approved, will enable us to treat significantly more patients from the same amount of plasma and production capacity and may be more cost effective for patients and payors and may increase our profitability.

The current standard care for AATD in the United States and in certain European countries is intravenous infusion of an AAT therapeutic. We estimate that only 2% of the AAT dose reaches the lung when administered intravenously. We have conducted a U.S. phase II clinical study demonstrating that administration of inhaled formulations of AAT through inhalation results in greater dispersion of AAT to the target lung tissue including the lower lobes and lung periphery. Accordingly, we believe that an inhaled formulation of AAT would require a significantly lower therapeutic dose and would be more effective in reducing inflammation of the lung tissue and inhibiting the uncontrolled neutrophil elastase that causes the breakdown of the lung tissue and the emphysema. In addition, self-administration by inhalation is more convenient than intravenous infusion and would also reduce the burden on healthcare providers to administer treatments.

Inhaled AAT for AATD has been designated as an orphan drug for the treatment of AATD in the United States and Europe.

A double blind placebo controlled and randomized Phase II/III pivotal trial, under EMA guidance, started in January 2010 and was completed at the end of 2013. A total of 168 patients participated in the trial in seven countries in Europe and Canada. Subjects in this trial were administered with a daily dose of Inhaled AAT for AATD or equivalent dose of placebo for 50 consecutive weeks. The primary endpoint for the trial was the time from randomization to the first event-based exacerbation with a severity of moderate or severe. Other endpoints, which were secondary and tertiary, included other exacerbation measures, lung function, CT scan and quality of life. The trial was 80% powered based on the number of exacerbation events collected in the study, in order to detect a difference between the two groups one year later. A 20% difference between the two groups was required to prove efficacy and is considered to be clinically meaningful and would allow the decision to prescribe treatment. An open label extension of an additional 50 weeks on active drug was offered to study participants in most sites once they completed the initial 50 week period. Treatment in the open label extension of the trial was completed in November 2014.

Results from our double blind part of the trial indicated that the primary endpoint was not met, although a potentially encouraging signal was seen in lung function measurement. We reported in September 2014 the results of the study, stating that the primary endpoint of “time to the first moderate or severe exacerbation event” did not show a statistically significant difference between inhaled formulation of AAT and placebo in the Intent-to-Treat (“ITT”) population and that the study did not show statistically significant differences between inhaled formulation of AAT and placebo in the secondary exacerbation endpoints measured in the ITT population.

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Despite not meeting the primary or secondary endpoints for the ITT population, lung function parameters, including Forced Expiratory Volume in One Second (“FEV1”) % of Slow Vital Capacity (“SVC”), FEV1 % predicted, FEV1 (liters) and Diffusing capacity (“DLCO”), which were collected to support safety endpoints, showed concordance of a potential treatment effect in the reduction of the inflammatory injury to the lung that is known to be associated with a reduced loss of respiratory function.

Our inhaled formulation of AAT therapy showed clinically relevant changes in various lung function measurements for the entire ITT population, a few of which were statistically significant. This suggests evidence of potential therapeutic activity resulting in a clinically relevant and meaningful effect.

Based on such results, we held pre-submission meetings with the European rapporteur and co-rapporteur in December 2014 with regard to filing MAA with the EMA for our Inhaled AAT for AATD. The co-rapporteurs advised that they would consider the entire study data once submitted, including post hoc analysis and will not reject the application simply because the primary endpoint of the study was not met. They agreed that the application fulfills the requirements relating to unmet medical need and benefit to public health and that it may meet the scope of approval if we convincingly prove the positive benefit-risk balance of the product, by the time of MAA filing. The co-rapporteurs have requested the addition of supplemental data analyses that may address the benefit-risk balance and support the already available safety and efficacy data.

We performed these post hoc analyses in accordance with guidance received following the meeting with the European rapporteur and co-rapporteur. Results of the post hoc analyses indicate that after one year of daily inhalation of our Inhaled AAT for AATD, clinically and statistically significant improvements were seen in spirometric measures of lung function, particularly in bronchial airflow measurements FEV1 (L), FEV1% predicted and FEV1/SVC. These favorable results were even more evident when analyzing the overall treatment effect throughout the full year.

For lung function, overall one year effect:

● FEV1 (L) rose significantly in AAT treated patients and decreased in placebo treated patients (+15ml for AAT vs. -27ml for placebo, a 42 ml difference, p=0.0268)

● There was a trend towards better FEV1% predicted (0.54% for AAT vs. -0.62% for placebo, a 1.16% difference, p=0.065)

● FEV1/SVC% rose significantly in AAT treated patients and decreased in placebo treated patients (0.62% for AAT vs. -0.87% for placebo, a 1.49% difference, p=0.0074)

For lung function change at week 50 vs. baseline:

● There was a trend towards reduced FEV1 (L)decline (-12ml for AAT vs. -62ml for placebo, a 50 ml difference, p=0.0956)

● There was a trend towards a reduced decline in FEV1% predicted (-0.1323% for AAT vs. -1.6205% for placebo, a 1.4882% difference, p=0.1032)

● FEV1/SVC% rose significantly in AAT treated patients and decreased in placebo treated patients (0.61% for AAT vs. -1.07% for placebo, a 1.68% difference, p=0.013)

Additional data collected throughout the trial for exacerbation symptom score and well-being score. The changes in symptoms of dyspnea and well-being are suggested as those that most influence the change in patients’ health, and quality of life status and determine the need for additional therapy. The results showed trends in favor of the AAT-treated group for both dyspnea and well-being but were not statistically significant. The improvement in dyspnea and well-being further correlates with the fact that patients inhaling AAT had better preserved airflow than patients inhaling placebo.

During March 2014, we initiated Phase II trials in the United States. The trial was completed in May 2016. This trial was intended to serve as a supplementary trial to the European Phase II/III trial and was designed to incorporate parameters required by the FDA. This Phase II, double-blind, placebo-controlled study explored the ELF and plasma concentration as well as safety of Inhaled AAT in AATD subjects. The subjects received one of two doses of Inhaled AAT or placebo. The study involved the inhalation of 80 mg or 160 mg of human AAT or placebo twice daily via the eFlow device for 12 weeks. Following the 12 week double blind period, the subjects were offered to participate in an additional 12 weeks open label period during which they receive only Inhaled AAT therapy. In December 2015, we completed the enrollment of patients for the U.S. Phase II clinical trial, and in August 2016, we reported positive top-line results, according to which we met the primary endpoint.

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AATD patients treated with our Inhaled AAT product in such U.S. Phase II clinical trial, demonstrated a significant increase in endothelial lining fluid (“ELF”) AAT antigenic level compared to the placebo group [median increase 4551 nM, p-value<0.0005 (80 mg/day, n=12), and 13454 nM, p-value<0.002 (160mg/day, n=12)]. These results are more than twice the increase of ELF antigenic AAT level (+2600 nM) observed in Kamada’s previously completed intravenous (“IV”) AAT pivotal study (60mg/kg/week). Antigenic AAT represents the total amount of AAT in the lung, both active and inactive. The study results also showed that our Inhaled AAT is the most efficient way of delivering therapeutic amounts of AAT to the primary sites of potential lung injury. In addition, ELF Anti-Neutrophil Elastase inhibitory (“ANEC”) level also increased significantly [median increase 2766 nM, p-value<0.0005 (80mg/day) and 3557 nM., p-value<0.004 (160 mg/day)]. The increase in ELF ANEC level was also more than twice that demonstrated in our previously completed IV AAT pivotal study. The ANEC level represents the active AAT that can counterbalance further damage by neutrophil elastase.

The updated data included in our poster presentation of May 2017 demonstrated that ELF-AAT, neutrophil elastase (NE)-AAT and ANEC complexes concentration significantly increased in subjects receiving the 80 mg and 160 mg doses, (median increase of 38.7 neutrophil migration (nM), p-value<0.0005 (80 mg/day, n=12), and median increase of 46.2 nM, p-value<0.002 (160 mg/day, n=10)). This is a specific measure of the anti-proteolytic effect in the ELF and represents the amount of NE that was broken down by AAT. The increase in levels of functional AAT was six times higher (160 mg per day) than is achievable with intravenous (IV) AAT. In addition, ELF NE decreased significantly. Also, the 80 mg data demonstrated a significant reduction in the percentage of neutrophils. Finally, aerosolized M-specific AAT was detected in the plasma of all subjects receiving Inhaled AAT, consistent with what was seen in the Phase II/III clinical trial of our Inhaled AAT conducted in the EU.

We filed the MAA for our Inhaled AAT for AATD during the first quarter of 2016 and in June 2017 we withdrew the MAA, as following extensive discussions with the EMA, we concluded that the EMA did not view the data submitted as sufficient, in terms of safety and efficacy, for approval of the MAA, and that the supplementary data needed for approval required an additional clinical trial. While the post-hoc data provided by us from the European clinical trial showed a statistically significant and clinically meaningful improvement in lung function, the EMA was of the opinion that an overall positive conclusion on the effect of Inhaled AAT for AATD could not be reached based on that post-hoc analysis, and that the treatment of AATD patients with our Inhaled AAT product should be further evaluated in the clinic in order to obtain comprehensive long-term efficacy and safety data. The EMA was of the opinion that the study failed to show beneficial effects in the population studied. In addition, there were concerns about the tolerability and safety profile of the AAT, mainly in patients with severe lung disease. In addition, the EMA raised concerns about the high rate of patients with antibodies (ADA) responding to AAT, which might reduce its effects or make patients more prone to allergic reactions, despite evidence that none of the patients with such ADA response had allergic reaction nor a lower level of AAT in the serum.

Subsequently, and following several discussions with EMA, in July 2018, we received positive scientific advice from the CHMP of the EMA related to the development plan for our proposed pivotal Phase III study for our Inhaled AAT for AATD. We requested scientific advice (protocol assistance) from the CHMP following the results of the previous Phase II/III (EU) and Phase II (US) studies with respect to a proposed subsequent Phase III study design. The CHMP notified us that it concurred with the overall design of the proposed study, including its objectives, patient population, proposed endpoints and their clinical importance, and the safety monitoring plan. The CHMP had some minor comments, which we intend to address in the final study protocol.

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When we presented the data from the European Phase II/III study to the FDA, the agency expressed concerns and questions about that data, primarily related to the safety and efficacy of Inhaled AAT for the treatment of AATD and the risk/benefit balance to patients based on that data. In order to address the agency’s concerns and questions, in April 2017, we submitted to the agency the results of the U.S. Phase II data together with a proposed Phase III synopsis. In July 2017, we submitted to the FDA for review a proposed pivotal Phase III protocol for our Inhaled AAT product. In August 2017, in response to the study protocol and previous submission, the FDA issued a letter to us stating that it continues to have concerns and questions about the safety and efficacy of the Inhaled AAT. We have provided the FDA with data and information related to their concerns and in April 2018, the FDA issued a response letter providing further guidance regarding the proposed pivotal Phase III protocol, as well as additional questions focused on the Inhaled AAT product characteristics. This correspondence indicated that, while several issues had been addressed, the FDA has continued concerns and questions related to the safety profile of Inhaled AAT for AATD. Following a thorough assessment of the FDA response, we provided the requested information and data and implemented the proposed changes in the study protocol during the second half of 2018. In April 2019, we received a letter from the FDA stating that we had satisfactorily addressed the concerns and questions with respect to the proposed Phase III clinical trial. In addition, the FDA requested that prior to the initiation of the planned Phase III study, we complete a Human Factor Study (HFS) to support the combination product, consisting of our Inhaled AAT and the investigational eFlow nebulizer system of PARI Pharma GmbH. We expect to receive further feedback from the FDA related to our HFS, which we completed in the third quarter of 2019 and its results were submitted to the FDA at such time.

During December 2019, the first patient was randomized in Europe into our pivotal Phase 3 InnovAATe clinical trial evaluating the safety and efficacy of our proprietary inhaled Alpha-1 Antitrypsin (AAT) therapy for the treatment of Alpha-1 Antitrypsin Deficiency (AATD). The study is being led by Jan Stolk, M.D., Department of Pulmonology, Member of European Reference Network LUNG, Leiden University Medical Center, The Netherlands. InnovAATe is a randomized, double-blind, placebo-controlled, pivotal Phase 3 trial designed to assess the efficacy and safety of Inhaled AAT in patients with AATD and moderate lung disease. Up to 250 patients will be randomized 1:1 to receive either Inhaled AAT at a dose of 80mg once daily, or placebo, over two years of treatment. The primary endpoint of the InnovAATe trial is lung function measured by FEV1. Secondary endpoints include lung density changes as measured by CT densitometry, as well as other parameters of disease severity, such as additional pulmonary functions, exacerbation rate and six minute walk test. The safety profile will be monitored continuously by a Data Monitoring Committee with predefined rules to be applied after the first 60 subjects have completed six months of treatment. Based on recent feedback received from the FDA regarding anti-drug antibodies (ADA) to Inhaled AAT, the Company intends to concurrently conduct a sub-study in North America in which approximately 30 patients will be evaluated for the effect of ADA on AAT levels in plasma with Inhaled AAT and IV AAT treatments.

AAT by Infusion for Treatment of Graft-Versus-Host Disease

GvHD is a common complication following an allogeneic tissue transplant. It is commonly associated with stem cell transplant, but the term also applies to other forms of tissue graft. Immune cells (white blood cells) in the tissue (the graft) recognize the recipient (the host) as “foreign”. The transplanted immune cells then attack the host’s body cells.

GvHD occurs in 30-70% of patients who undergo a medical procedure of allogeneic hematopoietic stem cell transplantation (HSCT), usually as a treatment to hematologic disorders. HSCT is a stem cell transplantation that is usually derived from an external (allogeneic) bone marrow donor. One of the most common and dangerous complications of HSCT is GvHD. Acute GvHD is expressed in damage to the recipients’ tissues including damage to the liver, gastrointestinal system, skin and mucosal tissues, and is a major cause of death in these patients.

Intravenously administered glucocorticoids, such as prednisone, are the standard treatment in acute GvHD and chronic GvHD. The use of glucocorticoids is intended to suppress the T-cell-mediated immune attack on the host tissues; however, in high doses, this immune-suppression raises the risk of infections and cancer relapse. In addition, 40% - 60% of the patients do not respond to steroid treatment and consequently have very low survival rates.

Preliminary human and animal studies indicate that AAT may reduce the severity of acute GvHD. The immuno-modulatory effect of AAT may attenuate inflammation by lowering levels of pro-inflammatory mediators such as cytokines, chemokines and proteases associated with this severe complication. GvHD is a disease of unmet medical need and both the disease and current therapy options carry considerable side effects.

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The European Commission, acting on the recommendation from the Committee for Orphan Medicinal Products of the EMA, has designated our proprietary human IV AAT as an orphan medicinal product to treat GvHD. We received Orphan Drug designation from the FDA for our AAT by IV to treat GvHD. The orphan designation allows the awarded pharmaceutical company to benefit from incentives offered by the European Union to develop the designated medicine for the rare indication.

In January 2018, we announced a collaboration with the Mount Sinai Acute GvHD International Consortium (“MAGIC”) for the conduct of a clinical trial assessing the safety and preliminary efficacy of our AAT product as preemptive therapy for patients at high-risk for the development of steroid-refractory acute GvHD (“SR-aGvHD”). The study is an open-label, single-arm study including 30 patients diagnosed to be at high-risk for SR-aGvHD according to biomarkers developed by Mount Sinai. The patients were treated with our IV AAT for 8 weeks with a follow-up period of one year after undergoing BMT. The primary endpoint measures the proportion of patients who developed SR-aGvHD by day 100 post-BMT. Other endpoints include safety, severity of GvHD and mortality. The study was conducted in five leading U.S. centers, all of which are members of MAGIC, which consists of 23 Bone Marrow Transplantation (“BMT”) centers in the United States, Europe and Asia, and conducts clinical trials to prevent and treat GvHD following BMT. As an investigator-initiated study, such study was co-funded by Mount Sinai and our company, and sponsored by the Icahn School of Medicine at Mount Sinai (ISMMS). The study completed enrollment as planned, in the third quarter of 2019. Top line results are expected during 2020.

The Principal Investigator of the study is John Levine, M.D., M.S., Professor of Pediatrics and Medicine, Hematology and Medical Oncology at the Tisch Cancer Institute at ISMMS and Co-Director of MAGIC. The laboratory aspects of the study were led by James L.M. Ferrara, M.D., Professor of Pediatrics, Oncological Sciences and Medicine, Hematology and Medical Oncology at the Tisch Cancer Institute at ISMMS, and Co-Director of MAGIC. The study is based on an innovative approach of early intervention driven by biomarkers. Drs. Ferrara and Levine have developed an algorithm to diagnose patients at risk for non-relapse mortality on day seven following BMT. The MAGIC algorithm utilizes proprietary biomarkers for prediction of mortality risk. Non-relapse mortality is closely related to non-responsiveness to steroids, which are the current standard of care for aGvHD. Early intervention, based on risk prediction and prior to the development of the clinical symptoms of aGvHD, could prevent patients from further disease deterioration. To date, the MAGIC database includes data from over 2,500 BMT recipients. Pursuant to the agreement with ISMMS, we received the exclusive right to develop and commercialize AAT for GvHD using the MAGIC biomarkers.

AAT for Treatment of Lung Transplantation Rejection

Lung transplantation rejection occurs when the recipient’s immune system attacks the transplanted lung resulting in destruction of the transplanted lung tissue. Around 20% of lung transplant recipients will experience an episode of acute rejection within the first year and approximately 48% and 76% of the recipients will experience chronic rejection within five and 10 years respectively. Chronic rejection is also known as BOS (Bronchiolitis Obliterans Syndrome).

A lung transplant is considered only for people with severe, end-stage lung disease, when patients will most likely die without the surgery and no other options are available. The most common lung diseases for which people undergo lung transplant are Chronic Obstructive Pulmonary Disease, Idiopathic pulmonary fibrosis, cystic fibrosis and Idiopathic Pulmonary Arterial Hypertension.

To protect the new lung, patients are prescribed a variety of medications which suppress the body’s natural immune response. These medications are called “immunosuppressants,” and they are intended to trick the immune system into believing that the new organ is not foreign, and therefore it is not attacked. After transplantation, the patient will have to take immunosuppressant medications for the rest of the patient’s life.

In 2015, we entered into collaboration with Takeda on a Phase II clinical trial of our proprietary AAT treatment for the prevention of lung transplantation rejection that is currently performed in Israel. Under the agreement, Takeda and we collaborate in the development and funding of the study.

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This Phase II study was initiated in April 2016. In January 2018, we reported the interim results for such Phase II study and in February 2019, we reported additional interim results from such study. Topline results are expected to be published in the second half of 2019. The study is a randomized, open-label, single-site study of 30 lung transplant recipients to evaluate the safety and efficacy of IV AAT on top of standard-of-care (SOC) versus SOC. The study is randomized 2:1 with 20 patients in the treatment group receiving IV AAT treatment every other day for 14 days, then once every two weeks until week eight, followed thereafter by monthly treatments. The ten patients in the control group will be treated with SOC, which includes systemic corticosteroids and immunosuppressants. Following one year of AAT treatment, there will be a one-year follow-up. The primary endpoints of the study include safety and tolerability, the incidence of acute lung transplantation rejection and changes in Forced Expiratory Volume (FEV1) from baseline and overall effect (a measure of Bronchiolitis Obliterans (chronic rejection)). Additional endpoints measured will include various inflammatory biomarkers and functional capacity.

The principal investigator in this study is Prof. Mordechai R. Kramer, M.D., Director of the Institute of Pulmonary Medicine, Rabin Medical Center - Beilinson Hospital. Prof. Kramer, a renowned expert in pulmonary care and a top specialist in his field, is a full Professor at Tel Aviv University, Sackler Faculty of Medicine. He completed several fellowships in the U.S. in pulmonary care and lung transplantation, and has published many articles in leading scientific publications.

In May 2017, the last patient of the 30 patients to be recruited entered the study and began treatment. In January 2018, we reported interim results which summarize data from the first six months of treatment for the initial 16 patients in the study. Ten of these 16 patients were in the AAT+SOC group, and six were in the SOC arm. To date, six patients have died (four patients in the AAT+SOC arm, and two in the SOC group) from common transplant-related complications unrelated to treatment with IV AAT.

Out of the 10 total patients who lived throughout the six-month treatment period, four experienced acute rejection post transplantation, but survived and their situation improved and stabilized. Two of the patients who experienced the acute rejections were in the AAT+SOC arm, but their situation resolved without the need to change treatment; the other two patients were in the SOC group and their situation resolved, with one of them changing treatment. Moreover, pulmonary function, which is a key indicator of acute or chronic rejection, improved and was found to be stable in all 10 patients who are alive following six months of treatment.

Our AAT demonstrated a favorable safety and tolerability profile, consistent with the results observed in previous clinical studies in different indications. None of the adverse events (AEs) or serious adverse events (SAEs) observed to date were considered to be related to treatment with IV AAT. During the six months of treatment, the six patients in the SOC group had a total of 28 AEs, while the 10 patients in the AAT+SOC arm had a total of 36 AEs. This represents a rate of 3.6 AEs and 2.5 AEs per 100 days of treatment in the SOC and AAT+SOC arms, respectively. Out of the 28 AEs in the SOC group, four were SAEs, while out of the 36 AEs in the AAT+SOC arm, three were SAEs. This represents a rate of 0.51 SAEs and 0.2 SAEs per 100 days of treatment in the SOC and AAT+SOC arms, respectively.

In May 2018, the last patient enrolled in the study completed one year of treatment and began the one-year follow-up period. During this one-year treatment period, none of the adverse events (“AEs”) or serious adverse events (“SAEs”) observed were considered to be related to treatment with IV-AAT. Acute rejection rates and pulmonary infections were similar in both study groups; five events of acute rejection were observed in five AAT+SOC patients (26%) versus four events in three SOC patients (30%), and pulmonary infections were observed in 10 AAT+SOC patients (53%) versus five SOC patients (50%). Pulmonary function showed a trend towards improved FEV1% of predicted value in the AAT+SOC group at week 4 and week 48 post-transplantation compared to the SOC group (at week 4: 59.4 ± 3.8 for AAT+SOC versus 45.6 ± 3.3 for SOC; at week 48: 58.0 ± 13.0 for AAT+SOC versus 52.1 ± 3.9 for SOC). When compared to SOC, treatment with AAT+SOC demonstrated a trend towards a lower percentage of patients with Primary Graft Dysfunction (“PGD”) grade 3 on day 3 (15% of the patients with AAT+SOC versus 30% of the patients with SOC treatment), and a shorter mechanical ventilation time post-surgery (median of 1 day with AAT+SOC versus 4.5 days with SOC treatment). In addition, the AAT+SOC group demonstrated a trend towards improved Six Minute Walk Test (“6MWT”) results at the end of week 48 as compared to the SOC group (445±115 meters for AAT+SOC versus 371±144 meters for SOC). Throughout the one-year treatment period, 44 AEs were reported in the SOC group, while a total of 107 AEs were reported in the AAT+SOC group. This represents a rate of 1.5 and 1.8 AEs per 100 treatment days in the SOC and AAT+SOC groups, respectively. Out of the 44 AEs in the SOC group, 12 were serious adverse events (SAEs), while out of the 107 AEs in the AAT+SOC group, 31 were SAEs. This represents a rate of 0.4 and 0.5 SAEs per 100 treatment days in the SOC and AAT+SOC groups, respectively. During the one-year treatment period of the study, five patients in the AAT+SOC group and two patients in the SOC group, died. During the follow-up period, to date, three additional patients from the AAT+SOC group have died. All deaths were considered as resulting from common transplant-related complications and unrelated to treatment with IV-AAT.

Final results from this study are expected during 2020.

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Liquid AAT for Organ Preservation Prior to Transplantation

In September 2018, we reported on the extension of an ongoing investigator initiated, proof-of-concept study evaluating the potential benefit of AAT on liver preservation and transplant rejection prevention. We work in collaboration with Massachusetts General Hospital (MGH), which is conducting and funding the study led by James F. Markmann, M.D., Ph.D., Chief, Division of Transplant Surgery, MGH, who is the Claude E. Welch Professor of Surgery at Harvard Medical School. The purpose of the study is to assess the effect of AAT on liver graft quality and viability and to evaluate the liver graft for markers of Ischemia-Reperfusion Injury (IRI) and tissue damage. Organ preservation methods pre-transplantation are continuously improving due to advanced technologies, such as ex-vivo perfusion systems. This study is evaluating the effect of AAT produced by us on a liver graft once administered into an ex-vivo perfusion system.

AAT has been found to have anti-inflammatory, tissue-protective, immune-modulatory, and anti-apoptotic properties. These characteristics may decrease inflammation by lowering levels of pro-inflammatory cytokines and proteases associated with organ injury during harvest and transplantation, the prevalent causes of organ transplant rejection. In the first cohort of the study, organ viability parameters (e.g. liver function tests and hemodynamics, which represent risks for failure or dysfunction after transplantation), inflammatory pathway analysis and histology, were all measured and yielded positive trends. The second cohort of the study aims to assess the effect of AAT with a different dosing.

Recombinant AAT

According to our strategic decision to focus on AATD, and in preparation for future anticipated increased demand for AAT potentially resulting from greater awareness of AAT deficiency, as well as potential additional indications for Alpha 1 Antitrypsin, which are currently in clinical development, we have initiated development recombinant human Alpha 1 Antitrypsin (“rhAAT”).

To ensure the success of this project, we have previously developed analytical tools (physicochemical, biochemical, in-vitro, and in-vivo) that will support the selection and characterization of functional rhAAT. In addition, we have established a significant understanding on several expression systems and finally selected Cellca (CDMO located in Germany, part of Sartorius Stedim BioTech Group) to pursue the cell line development of the rhAAT in Chinese Hamsters Ovaries (“CHO”) with high productivity and adequate product quality.

Strategic Partnerships

We currently have strategic partnerships with a number of different companies regarding the development and/or distribution of our products in both the Proprietary Products and Distribution segments. Certain of the strategic partnerships relating to our Proprietary Products segment are discussed below.

Takeda (GLASSIA)

We have a partnership arrangement with Takeda. The partnership agreement was originally executed on August 23, 2010 with Baxter. During 2015, Baxter assigned all its rights under the partnership agreement to Baxalta, an independent public company which spun-off from Baxter. In 2016, Shire completed the acquisition of Baxalta, and as a result, all of Baxalta’s rights under the partnership agreement were assigned to Shire. In January 2019, Takeda completed its acquisition of Shire.

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The partnership arrangement with Takeda includes three main agreements: (1) an exclusive manufacturing, supply and distribution agreement, pursuant to which we will manufacture GLASSIA for sale to Takeda for further distribution in the United States, Canada, Australia and New Zealand; (2) a technology license agreement, which grants Takeda licenses to use our knowledge and patents to produce, develop and sell GLASSIA ; and (3) a fraction IV-I paste supply agreement, pursuant to which Takeda will supply us with fraction IV plasma, a plasma derivative, produced by Takeda, as discussed under “— Manufacturing and Supply — Raw Materials — Fraction IV plasma for GLASSIA.”. As between us and Takeda, we retain all rights, including distribution rights, to any inhaled formulation of AAT in development, including Inhaled AAT for AATD. See — See “Item 3. Key Information — D. Risk Factors —We will cease to produce GLASSIA for Takeda through 2021 as Takeda begins its own production of GLASSIA in that period.”

Sales to Takeda accounted for approximately 54%, 56% and 59% of our total revenues for the years ended December 31, 2019, 2018 and 2017, respectively.

Exclusive Manufacturing, Supply and Distribution Agreement

Pursuant to the exclusive manufacturing, supply and distribution agreement, we received an upfront and milestone payments of $25 million in total related to distribution rights. Additionally, Takeda is obligated to purchase a minimum amount of GLASSIA per year. Under the agreement, Takeda is also obligated to fund required Phase IV clinical trials related to GLASSIA up to a specified amount. If the costs of such clinical trials are in excess of this amount, we have agreed to fund a portion of the costs. Under the agreement, we have committed to reimburse Takeda for its GLASSIA marketing efforts up to a limited amount during the years 2017-2020. During the years since the initial execution of the agreement, the parties agreed to several amendments to the agreement, mainly related to supply quantities of GLASSIA by us to Takeda and transfer pricing. On August 30, 2019, we signed the sixth amendment to the exclusive manufacturing, supply and distribution agreement with Takeda to extend the period of minimum purchases by Takeda of GLASSIA until the end of 2021 and increase the minimum purchases under the distribution agreement. Pursuant to the amendment, our 2019 revenues from the sale of GLASSIA to Takeda totaled $68.1 million and we project that total revenues from sales of GLASSIA to Takeda for 2020 will be approximately $65 million and between $25 million to $50 million for 2021, based on Takeda’s needs. According to the terms of the agreement, following its compliance with its purchasing obligations until the end of 2021, Takeda will have no further obligation to purchase a minimum amount of GLASSIA ; however, Takeda’s failure to purchase a specified minimum amount of GLASSIA over a period of 24 consecutive months until the expiration of the agreement provides us with the right to terminate the agreement.

Pursuant to the technology license agreement described below, Takeda is planning to complete the technology transfer of GLASSIA manufacturing, and pending FDA approval, will initiate its own production of GLASSIA for the U.S. market in 2021, following which we do not anticipate to continue to manufacture and supply GLASSIA to Takeda under the exclusive manufacturing, supply and distribution agreement.

The distribution agreement expires in 2040. In addition to customary termination provisions, either party may terminate the agreement, subject to certain exceptions, in whole or solely with respect to one or more countries covered by the distribution agreement, if regulatory approval in one or more countries covered by the distribution agreement is withdrawn or rejected and not reversed. Takeda has the right to terminate the agreement, upon prior written notice and after a period of time, in the event that GLASSIA is determined to materially infringe upon a third party’s intellectual property rights. In addition to the minimum purchase termination right discussed above, we have the right to terminate the agreement upon prior written notice if Takeda infringes upon our intellectual property.

Following termination of the agreement, Takeda is obligated to cease marketing, promoting or otherwise using GLASSIA and, at our election, sell all remaining inventory of GLASSIA in the market or back to us at the relevant purchase price.

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Technology License Agreement

The technology license agreement provides an exclusive license to Takeda, with the right to sub-license to certain manufacturing parties, of our intellectual property and know-how regarding the manufacture and additional development of GLASSIA for use in Takeda’s production and sale of GLASSIA in the United States, Canada, Australia and New Zealand. Pursuant to the technology license agreement, we are entitled to receive payments for the achievement of certain milestones for an aggregate of up to $20.0 million, of which $15.0 million are development-based milestones related to the transfer of technology to Takeda and $5.0 million are sales-based milestones. To date, we have received $14.5 million of the total aggregate milestone payments under the agreement.

Takeda is planning to complete the technology transfer of GLASSIA manufacturing, and pending FDA approval, will initiate its own production of GLASSIA for the U.S. market in 2021. Accordingly, based on the technology license agreement between the companies, and in addition to the above mentioned milestone payments, upon initiation of commercial sales of GLASSIA manufactured by Takeda, Takeda will pay royalties to us at a rate of 12% on net sales through August 2025, and at a rate of 6% thereafter until 2040, with a minimum of $5 million annually, for each of the years from 2022 to 2040.

The intellectual property rights for any improvements on the manufacturing process or formulations that we disclose to Takeda belong to the party that develops the improvements, with each party agreeing to cross-license the developed improvements to the other party. We retain an option to license any intellectual property developed by Takeda under the agreement that is not considered an improvement on the licensed technology. Additionally, Takeda owns any intellectual property it develops using the licensed technology for new indications for the intravenous AAT product, for which we retain an option to license at rates to be negotiated. Any technology related to new indications for the intravenous AAT product developed by us during the royalty payments period will be part of the licensed technology covered by the technology license agreement.

The technology license agreement expires in 2040. Either party may terminate the agreement, in whole or solely with respect to one or more countries covered by the distribution agreement, pursuant to customary termination provisions. Takeda also has the right to terminate the agreement, upon prior written notice, in the event that: (i) our manufacturing process technology for GLASSIA is determined to materially infringe upon a third party’s intellectual property rights, and we have not obtained a license to such third party’s intellectual property or provided an alternative non-infringing manufacturing process; (ii) there are certain decreases in GLASSIA sales in the United States unless such decreases are due to transfers to Inhaled AAT for AATD; or (iii) the regulatory approval process in the United States has been withdrawn or rejected as a result of our inaction or lack of diligent effort, provided such withdrawal or rejection was not primarily caused by the breach by Takeda of its obligations. We have the right to terminate the agreement, upon prior written notice: (i) if Takeda contests or infringes upon our intellectual property; (ii) if regulatory approval in one or more countries covered by the technology license agreement is withdrawn or rejected and not reversed, provided it was not primarily caused by the breach by us of our obligations; (iii) in the event that GLASSIA produced by Takeda, other than as a result of our manufacturing process technology, is determined to materially infringe upon a third party’s intellectual property rights, provided that the termination right is limited only to the country in which such judgment is binding; or (iv) if the first sale of GLASSIA produced by Takeda did not occur by June 15, 2017 and Takeda has not used commercially reasonable efforts to sell by that date. Following any termination, other than expiration of the agreement, all licensed rights will revert to us. Upon expiration of the agreement, we are obligated to grant to Takeda a non-exclusive, perpetual, royalty free license.

Kedrion (KEDRAB)

On July 18, 2011, we signed an agreement with Kedrion, an international pharmaceutical company engaged in the manufacture of life saving drugs based on human plasma which complement our products, and which are marketed in Europe, the United States and approximately 40 other countries worldwide. The agreement provides for exclusive cooperation on completing the clinical development, and marketing and distribution of our anti-rabies pharmaceutical, KamRAB, in the United States under the name KEDRAB, if the product is approved. Pursuant to the agreement, Kedrion will bear all the costs of the Phase 2/3 clinical trials in the United States of our product for rabies. Costs related to any Phase IV clinical trials, if required, and the FDA Prescription Drug User fee that is required for all FDA new drug approvals, will be divided equally between us and Kedrion. An addendum to the agreement was executed dated as of October 15, 2016, with respect to the performance of a safety clinical trial for the treatment of pediatric patients in the United States. According to such addendum, Kedrion and us agreed to equally share the cost of such trial. A second addendum to the agreement was executed dated as of October 11, 2018, with respect to the purchases prices of KEDRAB under the agreement.

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The agreement provides exclusive rights to Kedrion to market and sell KEDRAB in the United States. We retain intellectual property rights to KEDRAB. Kedrion is obligated to purchase a minimum amount of KEDRAB per year during the term of the agreement.

In 2014, the Phase 2/3 study was completed and successfully met the trial’s primary endpoint of non-inferiority when measured against an IgG reference product, and in September 2016, the BLA was submitted to the FDA. In August 2017, we received FDA approval of anti-rabies immunoglobulin as a post-exposure prophylaxis against rabies infection. In April 2018, we launched KEDRAB in the United States. See “Item 4. Information on the Company — immunoglobulins — KEDRAB”. Our overall revenues from the sales of KEDRAB to Kedrion during 2019 and 2018 were $16.4 million and $11.8 million, respectively. Sales of KEDRAB by Kedrion in the United States during the years 2019 and 2018 totaled $31.4 million and $15.5 million, respectively. These sales represent approximately 20% and 10% market share, respectively.

The term of the agreement is for six years following the receipt of FDA approval, subject to Kedrion’s option to extend the agreement by two years. In addition to customary termination provisions, either party can terminate the agreement for any reason prior to the commencement of clinical trials for FDA approval. Kedrion also has the right to terminate the agreement, upon prior written notice, (i) for any reason after receipt of FDA approval, (ii) in the event that the FDA Biologics License Application is suspended or revoked and cannot be reinstated within a certain period of time, or (iii) a major regulatory change occurs that materially and adversely increases the clinical trial costs. We have the right to terminate the agreement in the event that (i) a major regulatory change occurs that materially and adversely increases the manufacturing costs of KEDRAB, (ii) a major regulatory change occurs that poses considerable difficulties on submission of an application for FDA approval or (iii) clinical trials are not initiated within a certain time after either receipt by Kedrion of enough product or FDA approval to begin clinical trials.

PARI

On November 16, 2006, we entered into a license agreement with PARI (the “Original PARI Agreement”) regarding the clinical development of an inhaled formulation of AAT, including Inhaled AAT for AATD, using PARI’s “eFlow” nebulizer. Under the Original PARI Agreement, we received an exclusive worldwide license, subject to certain preexisting rights, including the right to grant sub-licenses, to use the “eFlow” nebulizer, including the associated technology and intellectual property, for the clinical development, registration and commercialization of inhaled formulations of AAT to treat AATD and respiratory deterioration, and to commercialize the device for use with such inhaled formulations. The agreement also provided for PARI’s cooperation with us during the pre-clinical phase and Phase I clinical trials of inhaled formulations of AAT, where each of the parties was responsible for developing and adapting its own product and bore the costs involved.

Pursuant to the Original PARI Agreement, we agreed to pay PARI royalties from sales of inhaled formulations of AAT, after certain deductions, at the rates specified in the agreement. We have agreed to pay PARI tiered royalties ranging from the low single digits up to the high single digits based on the annual net sales of inhaled formulations of AAT for the applicable indications. The royalties will be paid for each country separately, until the later of (1) the expiration of the last of certain specified patents covering the “eFlow” nebulizer, or (2) 15 years following the first commercial sale of an inhaled formulation of AAT in that country (the “PARI royalties period”). During the PARI royalties period, PARI is obligated to pay us specified percentages of its annual sales of the “eFlow” nebulizer for use with inhaled formulations of AAT above a certain threshold defined in the agreement and after certain deductions. On February 21, 2008, we entered into an addendum to the Original PARI Agreement (together with the Original PARI Agreement, the “PARI Agreement”), which extended the exclusive global license granted to us to use the “eFlow” nebulizer, including the associated technology and intellectual property, for the clinical development, registration and commercialization of inhaled formulations of AAT for two additional indications of lung disease, namely cystic fibrosis and bronchiectasis. At present, the development of cystic fibrosis and bronchiectasis products is suspended as we prioritize other products. Pursuant to the addendum, each party will be responsible for developing and adapting its own product for the additional indications and will bear the costs involved. Additionally, we and PARI will supply, each at its own expense, inhaled formulations of AAT and the “eFlow” nebulizers, respectively, and in the quantities required for all phases of clinical studies worldwide. In addition, PARI will provide to us, at its expense, technical and regulatory support regarding the “eFlow” nebulizer. Sales of the inhaled formulation of AAT for the additional indications will be added to sales of the first two indications covered by the original agreement as the basis for calculating the royalties to be paid by us to PARI.

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The PARI Agreement expires when the PARI royalties period ends. Either party can terminate the PARI Agreement upon customary termination provisions. Additionally, upon the occurrence of any one of the following events, PARI has the right to negotiate with us in good faith about whether to continue our collaboration: (i) PARI’s costs of the required clinical trials exceed a certain amount, unless we or a third party incurs such expenses on behalf of PARI; (ii) an inhaled formulation of AAT is not successfully registered with any regulatory authorities by 2016; (iii) there are no commercial sales of inhaled formulations of AAT within a certain period after successful registration with any regulatory authority; or (iv) we cease development of inhaled formulations of AAT for a certain period of time. If, within 180 days of PARI’s request to negotiate, we do not agree to continue the collaboration, PARI has the option either to render the license they grant to us non-exclusive or to terminate the agreement. We have the right to terminate the agreement, upon prior written notice, (i) in the event that the “eFlow” nebulizer is determined to infringe upon a third party’s intellectual property rights, (ii) an injunction barring the use of the “eFlow” nebulizer has been in place for a certain period of time, (iii) a clinical trial for inhaled formulations of AAT fails as a result of, after a cure period, the “eFlow” nebulizer not conforming to specifications or PARI’s inability to supply the “eFlow” nebulizer; or (iv) failure by PARI to register the “eFlow” nebulizer within a certain period of time after receiving Phase III results for Inhaled AAT for AATD. Following any termination, all licensed rights will revert to PARI, unless we terminate the agreement as a result of PARI’s bankruptcy, payment failure or material breach, in which case we retain the license rights to the “eFlow” nebulizer as long as we continue making royalty payments.

In addition, in May, 2019, we signed a Clinical Study Supply Agreement (“CSSA”) with PARI for the supply of the required quantities of PARI’s “eTrack” controller kits and the “PARItrack” web portal associated with PARI’s “eFlow” nebulizer required for our pivotal Phase 3 InnovAATe clinical trial and for the FDA required HFS. The CSSA is a supplement agreement to the Original PARI Agreement and will expire upon the expiration or termination of the Original PARI Agreement.

On February 21, 2008, we signed a commercialization and supply agreement with PARI that provides for the commercial supply of the “eFlow” nebulizer and its spare parts to patients who are treated with the inhaled formulation of AAT, following its approval, either through its own distributors, our distributors or independent distributors in countries where PARI does not have a distributor. The commercialization and supply agreement expires upon the earlier of (1) the end of four years from (x) the end of the last PARI royalties period, or (y) the termination of the PARI Agreement by one party due to the other party declaring bankruptcy, failing to make a payment after a 30-day cure period or breach of a material provision after a 30-day cure period, or (2) the termination of the PARI Agreement pursuant to its terms, other than for reasons as previously described, in which case the commercialization and supply agreement terminates simultaneously with the PARI Agreement provided that PARI ensures availability of the “eFlow” nebulizer and its associated spare parts and service to anyone being treated with the inhaled formulation of AAT at the time of such termination, for the warranty period of the device or for a longer period, if required by the applicable law or the relevant regulatory authority.

Manufacturing and Supply

We have a production plant located in Beit Kama, Israel. We operate the main production facility on a campaign-basis so that at any time the facility is assigned to produce only one product. The division of facility time among the various products is determined based on orders received, sales forecasts and development needs. During 2014, we completed the build out of a new logistic facility in our plant in Beit Kama that supports our logistic needs. During each year we have routine maintenance shut downs of our plant, which may last up to a few weeks.

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Our production plant passed various Health Authorities inspections. The plant was initially inspected by the US FDA during 2010, and in March 2017 the FDA completed an inspection of our facility in connection with our GLASSIA and KEDRAB products with no critical observations. The Israeli MOH conducted a GMP inspections in each of 2011, July 2013, February 2016 and November 2018, with no critical observations. In July 2018, Health Canada (the department of the government of Canada with responsibility for national public health) completed an audit in connection with the KamRAB product, with no critical observations. In February 2019, the Croatian health agency completed a GMP inspection of our facility in connection with GLASSIA and our Inhaled AAT for AATD product, with no critical observations. In March 2019, the Mexican heath agency completed a GMP inspection of our facility in connection with the KamRAB product, with no critical observations. The Kazakhstan health agency has also completed a GMP inspection in April 2019, with no critical observations.

Any changes in our production processes for our products must be approved by the FDA and/or similar authorities in other jurisdictions. From time to time we make certain required modifications to our manufacturing process and are required to make certain filings to report such changes to the FDA and/or other similar authorities.

Raw Materials

The main raw materials in our Proprietary Products segment are hyper-immune plasma and fraction IV. We also use other raw materials, including both natural and synthetic materials. We purchase raw materials from suppliers who are regulated by the FDA, EMA and other regulatory authorities. Our suppliers are approved in their countries of origin and by the IMOH. The raw materials must comply with strict regulatory requirements. We require our raw materials suppliers to comply with the cGMP rules, and we audit our suppliers from time to time. We are dependent on the regular supply and availability of raw materials in our Proprietary Products segment.

We maintain relationships with several suppliers in order to ensure availability and reduce reliance on specific suppliers. We are dependent, however, on a number of suppliers who supply specialty ancillary products prepared for the production process, such as specific gels and filters. See “Item 3. Key Information — D. Risk Factors — We would become supply-constrained and our financial performance would suffer if we were unable to obtain adequate quantities of source plasma or plasma derivatives or specialty ancillary products approved by the FDA, the EMA or the regulatory authorities in Israel, or if our suppliers were to fail to modify their operations to meet regulatory requirements or if prices of the source plasma or plasma derivatives were to raise significantly.”

In the years ended December 31, 2019, 2018 and 2017, we incurred $31.5 million, $25.5 million and $19.9 million of expenses for the purchase of raw materials, respectively.

Plasma derived Fraction IV paste for GLASSIA manufacturing

On August 23, 2010, in conjunction with the partnership arrangement with Takeda, we signed a fraction IV paste supply agreement with Takeda for the supply of fraction IV for use in the production of GLASSIA to be sold in the United States. Under this agreement, Takeda also supplies us with fraction IV to continue the development, pre-clinical and clinical studies of GLASSIA and other AAT derived products and for the production, sale and distribution of GLASSIA in jurisdictions other than those which are covered under the exclusive manufacturing, supply and distribution agreement with Takeda as well as for and other AAT derived products (e.g., Inhaled AAT). Takeda receives no payment for the supply of fraction IV plasma to be used by us for the manufacture of GLASSIA to be sold to Takeda. If we require fraction IV for other purposes, we are entitled to purchase it from Takeda at a predetermined price. While we are dependent on Takeda for the supply of fraction IV plasma, Takeda is currently dependent on us to produce GLASSIA for sale in the United States, as it does not yet have its own FDA approved production capabilities of GLASSIA. Takeda is planning to complete the technology transfer of GLASSIA manufacturing, and pending FDA approval, will initiate its own production of GLASSIA for the U.S. market in 2021.

The supply agreement terminates on August 23, 2040, subject to an option for earlier termination in the event of a material breach.

We have an additional fraction IV plasma supplier, which supplies us with fraction IV plasma that is used for production of GLASSIA marketed in non-U.S. countries. We are in the process of exploring the entry into a long-term supply agreements for fraction IV plasma with additional suppliers.

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Hyper-immune Plasma

We have a number of suppliers in the United States for hyper-immune plasma with which we have long-term supply agreements. Hyper-immune plasma is used for the production of KamRAB and KamRho(D). In addition to long-term supply agreements, we work to secure availability of hyper-immune plasma on an annual basis by providing forecasts to our suppliers based on our customers’ actual and forecasted orders. We continue to seek to enter into long-term supply agreements for hyper-immune plasma with additional plasma-collection companies.

In January 2012, we entered into a plasma purchase agreement with KedPlasma, a subsidiary of Kedrion, for the supply of anti-rabies hyper-immune plasma required for the manufacturing of KamRAB (including for manufacturing of KEDRAB for sale to Kedrion for further distribution in the U.S. market). The agreement provides for a commitment to supply certain minimum annual quantities at predetermined prices, and was extended multiple times and is currently in effect through the end of 2020.

Research and Development

Our research and development activity includes conducting pre-clinical and clinical trials and other development activities for our pipeline products, including Inhaled AAT for AATD, intravenous plasma-derived AAT for various indications, and rhAAT, advanced understanding of the mechanism of action of AAT, improving existing products and processes, development work at the request of regulatory authorities and strategic partners, as well as communication with regulatory authorities related to our commercial products as well as clinical programs. We incurred approximately $13.1 million, $9.7 million and $12 million research and development expenses in the years ended December 31, 2019, 2018 and 2017, respectively.

Marketing and Distribution

In the Proprietary Products segment, we receive orders for our products and, other than for GLASSIA and KEDRAB sales in the U.S. market, we received requests for participation in tenders for the supply of plasma-derived protein therapeutics from potential distributors and from existing distributors. We sell GLASSIA to Takeda and to other distributors in additional non-U.S. countries. We sell KEDRAB to Kedrion and sell KamRAB and KamRho to other distributers in additional non-U.S. countries.

For our products, we market, in most cases, by means of agreements with local distributors in each country through a tender process and the private market. The tender process is conducted on a regular basis by the distributors, sometimes on an annual basis. For existing customers, our existing relationship does not guarantee additional orders from the same customers in these tenders. The decisive parameter is generally the price proposed in the tender. The distributor purchases plasma-derived protein therapeutics from us and sells them to its customers (either directly or by means of sub-distributors). In most cases, we do not sign agreements with the end users, and as such, we do not fix the price to the end user or its terms of payment and are not exposed to credit risks of the end users. In the vast majority of cases, our agreements with the local distributors award the various distributors exclusivity in the distribution of our plasma-derived protein therapeutics in the relevant country. The distribution agreements are, usually made for a specific initial period and are subsequently renewed for certain agreed periods, where the parties have the right to cancel or renew the agreements with prior notice of a number of months. In these markets, we do not actively participate in the marketing to the end users, except for supplying marketing assistance where the cost is negligible or in some cases, reimburse the local distributor for an agreed amount of its actual marketing expenses. In Israel, we market our plasma-derived protein therapeutics independently to the healthcare providers and medical centers, or through a logistic partner company that specializes in the supply of equipment and pharmaceuticals to healthcare providers.

Most of our sales outside of Israel are made against open credit and some in documentary credit or advance payment. Most of our sales inside Israel are made against open credit or cash. The credit given to some of our customers abroad (except for sales in documentary credit or advanced payment) is mostly secured by means of a credit insurance policy and in certain cases with bank guarantees.

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In the Distribution segment, we market our products in Israel to health maintenance organizations and hospitals on our own or through third party logistic associates. We sell certain of our Distribution segment products through offers to participate in public tenders that occur on an annual basis or through direct orders. The public tender process involves health maintenance organizations and hospitals soliciting bids from several potential suppliers, including us, and selecting the winning bid based on several attributes, whereas the primarily attributes are, price and availability. The annual public tender process is also used by our existing customers to determine their suppliers. As a result, our existing relationships with customers in our Distribution segment do not guarantee additional orders from such customers year to year.

We have supply and distribution agreements with our suppliers in our Distribution segment, including with each of our two largest suppliers to be their exclusive distributor in Israel for a number of their manufactured products; however, we purchase our Distribution segment products from those suppliers on a purchase order basis. We work closely with those suppliers to develop annual forecasts, but these forecasts do not obligate our suppliers to provide us with their products.

Customers

For the year ended December 31, 2019, sales to Takeda, Kedrion and Clalit Health Services, an Israeli HMO, accounted for 54%, 13% and 11%, respectively, of our total revenues. For the year ended December 31, 2018, sales to Takeda and Kedrion accounted for 56% and 10%, respectively, of our total revenues. For the year ended December 31, 2017, sales to Takeda and Clalit Health Services accounted for 59% and 9%, respectively, of our total revenues.

Takeda and Kedrion are currently our major customers in the Proprietary Products segment. Our other customers in the Proprietary Products segment are our distributors in Argentina, Russia, Thailand, India and Brazil as well as healthcare providers and medical centers in Israel. In other geographies, most of the sales of our products are conducted through local distributors. These arrangements are further described above under “— Marketing and Distribution.”

Our primary customers in the Distribution segment are health maintenance organizations and hospitals in Israel, including Clalit Health Services and Maccabi Healthcare Services.

Competition

The worldwide market for pharmaceuticals in general, and biopharmaceutical and plasma products in particular, has in recent years undergone a process of mergers and acquisitions among companies active in such markets. This trend has led to a reduction in the number of competitors in the market, but the strengthening of the remaining competitors, mainly for specific immunoglobulin products.

Proprietary Products Segment

We believe that there are two to four large competitors for each of our products in the Proprietary Products segment. These large competitors include CSL Behring Ltd., Grifols S.A., which acquired a previous competitor, Talecris Biotherapeutics, Inc. in 2011, and Kedrion (other than for KEDRAB). These competitors are multi-national companies that specialize in plasma derived protein therapeutics and are distributing their plasma derived pharmaceutical products worldwide. We have not seen significant changes in the activities of our competitors in recent years. Additionally, our strategic alliance with Takeda and Kedrion in the United States has strengthened our GLASSIA and KEDRAB competitive positioning in the market.

Our large competitors have advantages in the market because of their size, financial resources, markets and the duration of their activities and experience in the relevant market, especially in the United States and countries of the European Union. Most of them have an additional advantage regarding the availability of raw materials, as they fractionate plasma internally and own plasma collection centers and/or companies that collect or produce raw materials such as plasma.

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The following describes details known to us about our most significant competitors for each of our main Proprietary Products segment products.

GLASSIA. GLASSIA has several competitors, including plasma derived companies such as Grifols, CSL and Takeda, all of which have competing plasma derived AAT products approved for AATD and are marketed in the U.S. as well in some countries in the EU. We estimate that: Grifols’ AAT by infusion product for the treatment of AATD, Prolastin, accounts for at least 50% market share in the United States and more than 70% of sales worldwide, and until 2015 it was the only AAT product that was approved for sale in both – key European countries and the United States. In September 2017 Grifols announced that the FDA approved a liquid formulation of its AAT product. Apart from its sales of the past Talecris product, Grifols is also a local producer of an additional AAT product, Trypsone, which is marketed in Spain and in some Latin American countries, including Brazil. CSL’s AAT by IV product, Zemaira, is mainly sold in the United States, and during 2015 received centralized marketing authorization approval in the European Union. CSL launched the product in few selected EU markets during 2016 under the brand name Respreeza. Takeda is our strategic partner for sales of GLASSIA and it also serves existing patients in the United States with its own proprietary product, Aralast. As far as we know Takeda is proactively marketing GLASSIA in the United States, while maintaining existing patients on Aralast. In addition, we are aware of a smaller local producer of AAT in the French market, Laboratoire Français du Fractionnement et des Biotechnologies, S.A (“LFB”). We do not believe any new suppliers are expected to enter the United States market for plasma derived AAT by infusion in the near future. As part of the approval of our competitors’ intravenous AAT products for the treatment of AATD, they (like us) were required by the FDA to conduct Phase IV clinical trials aimed to collect efficacy data. CSL Phase IV study results were not accepted by the FDA as proof of required efficacy while Grifols SPARTA phase IV study is ongoing. In summary, to the best of our knowledge, to date, our other competitors did not yet initiate or have not yet completed their trials or their results have not yet been published.

In addition, we have several other competitors such as Vertex Pharmaceuticals, Inhibrx, ApicBio and Mereo, all of which have development stage programs for new medications for treatment of AATD. Based on available public information, Vertex, a Boston, MA headquartered company, is in early stage clinical development of VX-814 and VX-864, two AATD small molecules utilizing a correction approach to prevent protein misfolding in the liver of AATD patients, which can otherwise aggregate and ultimately be pro-inflammatory in the lung. Vertex believes small molecule correctors for protein misfolding could address both liver and lung disease manifestations, possibly avoiding the need for conventional augmentation therapy, further differentiating its product candidates as a novel therapeutic approach. Inhibrx, a California based company, is in early clinical development of INBRX-101 a recombinantly produced AAT replacement protein specifically designed to address the limitations of plasma derived AAT replacement therapy. The modifications introduced into INBRX-101 aim to improve the pharmacokinetic profile (PK) and neutrophil elastase inhibitory function. This could offer superior clinical activity to the current commercial plasma derived AAT by providing sustained enhanced serum concentration with a less frequent, monthly dosing regimen. Apic Bio, a Boston, MA based company is in early stage development of APB-101 a “liver-sparing” gene therapy designed as a one-time treatment for Alpha-1 patients. In pre-clinical studies, APB-101 demonstrated the ability to reduce levels of the mutant Alpha-1 protein (Z-AAT) and at the same time program liver cells to produce the correct Alpha-1 protein (M-AAT). Mereo, a UK based company, is in clinical stage of development of MPH-966 as an oral neutrophil elastase inhibitor being explored for the potential treatment of AATD. These product candidates, if approved, may have an adverse effect on the AATD market and reduce or eliminate the need for the currently approved plasma derived AAT augmentation therapy, and thus may affect our ability to continue and generate revenues and earnings from our GLASSIA. In addition, these product candidates, if approved, may have a negative effect on our ability to continue the development of our Inhaled AAT, and if approved, to market Inhaled AAT and obtain a meaningful market share.

KamRAB/KEDRAB. We believe that there are two main competitors for this anti-rabies product worldwide: Grifols, whose product we estimate comprises of approximately 75%-85% of the anti-rabies market in the United States, and CSL, which sells its anti-rabies product in Europe and elsewhere. Sanofi Pasteur, the vaccines division of Sanofi S.A., has a product registered for the United States market, but the product is primarily sold in Europe and not currently sold in significant quantities in the United States. There are a number of local producers in other countries that make similar anti-rabies products. Most of these products are based on equine serum, which we believe results in inferior products, as compared to products made from human plasma. Over the past several years, a number of companies have made attempts and some are still in the process of developing monoclonal antibodies for an anti-rabies treatment. These products, if approved, may be as effective as the currently available plasma derived anti-rabies vaccine and may potentially be significantly cheaper, and as such may result in loss of market share of KamRAB/KEDRAB.

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KamRho(D). While Kedrion is our strategic partners for KEDRAB, it is also one of our competitors for KamRho(D). In addition to its sales in the United States, Kedrion also markets a competing product in several EU countries as well as other countries world-wide. We believe there are three additional main suppliers of competitive products in this market: Grifols, CSL and Saol Therapeutics. There are also local producers in other countries that make similar products mostly intended for local markets.

Distribution Segment

We believe that there are a number of companies active in the Israeli market distributing the products of several manufacturers whose comparable products compete with our products in the Distribution segment. In the plasma area, these manufacturers include Grifols, Takeda, CSL, Omrix Biopharmaceuticals Ltd. (a Johnson & Johnson company), while in other specialties we may be competing against products produced by some of largest pharmaceutical manufacturers in the world, such as, Novartis AG, AstraZeneca AB, Sanofi UK and GlaxoSmithKline. These competing manufacturers have advantages of size, financial resources, market share, broad product selection and extensive experience in the market, although we believe that we have established expertise in the Israeli market. Each of these competitors sells its products through a local subsidiary or a local representative in Israel.

Government Regulation

Government authorities in the United States, at the federal, state and local level, and in other countries extensively regulate, among other things, the research, development, testing, manufacture, quality control, approval, labeling, packaging, storage, record-keeping, promotion, advertising, distribution, post-approval monitoring and reporting, marketing and export and import of products such as those we sell and are developing. Except for compassionate use or non-registered named-patient cases, any pharmaceutical candidate that we develop must be approved by the FDA before it may be legally marketed in the United States and by the appropriate regulatory agencies of other countries before it may be legally marketed in such other countries. In addition, any changes or modifications to a product that has received regulatory clearance or approval that could significantly affect its safety or effectiveness, or would constitute a major change in its intended use, may require the submission of a new application in the United States and/or in other countries for pre-market approval. The process of obtaining such approvals can be expensive, time consuming and uncertain.

U.S. Drug Development Process

In the United States, pharmaceutical products are regulated by the FDA under the Federal Food, Drug, and Cosmetic Act and other laws, including, in the case of biologics, the Public Health Service Act. All of our products for human use and product candidates in the United States, including GLASSIA, are regulated by the FDA as biologics. Biologics require the submission of a BLA and approval or license by the FDA prior to being marketed in the United States. Manufacturers of biologics may also be subject to state regulation. Failure to comply with regulatory requirements, both before and after product approval, may subject us and/or our partners, contract manufacturers and suppliers to administrative or judicial sanctions, including FDA delay or refusal to approve applications, warning letters, product recalls, product seizures, import restrictions, total or partial suspension of production or distribution, fines and/or criminal prosecution.

The steps required before a biologic drug may be approved for marketing for an indication in the United States generally include:

1. preclinical laboratory tests and animal tests;

2. submission to the FDA of an IND application for human clinical testing, which must become effective before human clinical trials may commence;

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3. adequate and well-controlled human clinical trials to establish the safety and efficacy of the product;

4. submission to the FDA of a BLA or supplemental BLA;

5. FDA pre-approval inspection of product manufacturers; and

6. FDA review and approval of the BLA or supplemental BLA.

Preclinical studies include laboratory evaluation, as well as animal studies to assess the potential safety and efficacy of the product candidate. Preclinical safety tests must be conducted in compliance with FDA regulations regarding good laboratory practices. The results of the preclinical tests, together with manufacturing information and analytical data, are submitted to the FDA as part of an IND which must become effective before human clinical trials may be commenced. The IND will automatically become effective 30 days after receipt by the FDA, unless the FDA before that time raises concerns about the drug candidate or the conduct of the trials as outlined in the IND. The IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can proceed. There can be no assurance that submission of an IND will result in FDA authorization to commence clinical trials or that, once commenced, other concerns will not arise that could lead to a delay or a hold on the clinical trials.

Clinical trials involve the administration of the investigational product to healthy volunteers or to patients, under the supervision of qualified principal investigators. Each clinical study at each clinical site must be reviewed and approved by an independent institutional review board, prior to the recruitment of subjects. Numerous requirements apply including, but not limited to, good clinical practice regulations, privacy regulations, and requirements related to the protection of human subjects, such as informed consent.

Clinical trials are typically conducted in three sequential phases, but the phases may overlap and different trials may be initiated with the same drug candidate within the same phase of development in similar or differing patient populations.

● Phase I studies may be conducted in a limited number of patients, but are usually conducted in healthy volunteer subjects. The drug is usually tested for safety and, as appropriate, for absorption, metabolism, distribution, excretion, pharmacodynamics and pharmacokinetics.

● Phase II usually involves studies in a larger, but still limited, patient population to evaluate preliminarily the efficacy of the drug candidate for specific, targeted indications; to determine dosage tolerance and optimal dosage; and to identify possible short-term adverse effects and safety risks.

● Phase III trials are undertaken to further evaluate clinical efficacy of a specific endpoint and to test further for safety within an expanded patient population at geographically dispersed clinical study sites.

Phase I, Phase II or Phase III testing may not be completed successfully within any specific time period, if at all, with respect to any of our product candidates. Results from one trial are not necessarily predictive of results from later trials, the FDA may require additional testing or a larger pool of subjects beyond what we proposed as the clinical development process proceeds, thereby requiring more time and resources to complete the trials. Furthermore, the FDA may suspend clinical trials at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk, or may not allow the importation of the clinical trial materials if there is non-compliance with applicable laws.

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The results of the preclinical studies and clinical trials, together with other detailed information, including information on the manufacture and composition of the product, are submitted to the FDA as part of a BLA requesting approval to market the product candidate for a proposed indication. Under the Prescription Drug User Fee Act, as amended, the fees payable to the FDA for reviewing a BLA, as well as annual fees for commercial manufacturing establishments and for approved products, can be substantial. The BLA review fee alone can exceed $2,400,000, subject to certain limited deferrals, waivers and reductions that may be available. Each BLA submitted to the FDA for approval is typically reviewed for administrative completeness and reviewability within 45 to 60 days following submission of the application. If found complete, the FDA will “file” the BLA, thus triggering a full review of the application. The FDA may refuse to file any BLA that it deems incomplete or not properly reviewable at the time of submission. The FDA’s established goals are to review and act on 90% of priority BLA applications and priority original efficacy supplements within six months of the 60-day filing date and receipt date, respectively. The FDA’s goals are to review and act on 90% of standard BLA applications and standard original efficacy supplements within 10 months of the 60-day filing date and receipt date, respectively. The FDA, however, may not be able to approve a drug within these established goals, and its review goals are subject to change from time to time. Further, the outcome of the review, even if generally favorable, may not be an actual approval but an “action letter” that describes additional work that must be done before the application can be approved. Before approving a BLA, the FDA may inspect the facilities at which the product is manufactured or facilities that are significantly involved in the product development and distribution process, and will not approve the product unless cGMP compliance is satisfactory. The FDA may deny approval of a BLA if applicable statutory or regulatory criteria are not satisfied, or may require additional testing or information, which can delay the approval process. FDA approval of any application may include many delays or never be granted. If a product is approved, the approval will impose limitations on the indicated uses for which the product may be marketed, will require that warning statements be included in the product labeling, may impose additional warnings to be specifically highlighted in the labeling (e.g., a Black Box Warning), which can significantly affect promotion and sales of the product, may require that additional studies be conducted following approval as a condition of the approval, may impose restrictions and conditions on product distribution, prescribing or dispensing in the form of a risk management plan, or otherwise limit the scope of any approval. To market a product for other uses, or to make certain manufacturing or other changes requires prior FDA review and approval of a BLA Supplement or new BLA. Further post-marketing testing and surveillance to monitor the safety or efficacy of a product is required. Also, product approvals may be withdrawn if compliance with regulatory standards is not maintained or if safety or manufacturing problems occur following initial marketing. In addition, new government requirements may be established that could delay or prevent regulatory approval of our product candidates under development.

As part of the Patient Protection and Affordable Care Act (the “healthcare reform law”), Public Law No. 111-148, under the subtitle of Biologics Price Competition and Innovation Act of 2009 (“BPCIA”), a statutory pathway has been created for licensure, or approval, of biological products that are biosimilar to, and possibly interchangeable with, earlier biological products approved by the FDA for sale in the United States. Also under the BPCIA, innovator manufacturers of original reference biological products are granted 12 years of exclusive use before biosimilars can be approved for marketing in the United States. There have been proposals to shorten this period from 12 years to seven years. The objectives of the BPCI are conceptually similar to those of the Drug Price Competition and Patent Term Restoration Act of 1984, commonly referred to as the “Hatch-Waxman Act,” which established abbreviated pathways for the approval of drug products. A biosimilar is defined in the statute as a biological product that is highly similar to an already approved biological product, notwithstanding minor differences in clinically inactive components, and for which there are no clinically meaningful differences between the biosimilar and the approved biological product in terms of the safety, purity, and potency. Under this approval pathway, biological products can be approved based on demonstrating they are biosimilar to, or interchangeable with, a biological product that is already approved by the FDA, which is called a reference product. If we obtain approval of a BLA, the approval of a biologic product biosimilar to one of our products could have a significant impact on our business. The biosimilar product may be significantly less costly to bring to market and may be priced significantly lower than our products.

Both before and after the FDA approves a product, the manufacturer and the holder or holders of the BLA for the product are subject to comprehensive regulatory oversight. For example, quality control and manufacturing procedures must conform, on an ongoing basis, to cGMP requirements, and the FDA periodically inspects manufacturing facilities to assess compliance with cGMP. Accordingly, manufacturers must continue to spend time, money and effort to maintain cGMP compliance. In addition, a BLA holder must comply with post-marketing requirements, such as reporting of certain adverse events. Such reports can present liability exposure, as well as increase regulatory scrutiny that could lead to additional inspections, labeling restrictions, or other corrective action to minimize further patient risk.

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Special Development and Review Programs

Orphan Drug Designation

The FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition that affects fewer than 200,000 individuals in the United States, or if it affects more than 200,000 individuals in the United States and there is no reasonable expectation that the cost of developing and making the drug for this type of disease or condition will be recovered from sales in the United States. In the United States, orphan drug designation must be requested before submitting a BLA or supplemental BLA.

In the European Union, the Committee for Orphan Medicinal Products grants orphan drug designation to promote the development of products that are intended for the diagnosis, prevention or treatment of a life-threatening or chronically debilitating condition affecting not more than five in 10,000 persons in the European Union community. Additionally, this designation is granted for products intended for the diagnosis, prevention or treatment of a life-threatening, seriously debilitating or serious and chronic condition and when, without incentives, it is unlikely that sales of the drug in the European Union would be sufficient to justify the necessary investment in developing the drug or biological product.

We received an orphan drug designation in the United States and Europe for multiple indications. Inhaled AAT for AATD has received an orphan drug designation in the United States and Europe. The inhaled formulation of AAT for the treatment of cystic fibrosis has received an orphan drug designation in the United States and Europe. The inhaled formulation of AAT for the treatment of bronchiectasis has received an orphan drug designation in the United States. The additional indication for GLASSIA for the treatment of newly diagnosed cases of Type-1 Diabetes has received an orphan drug designation in the United States. In addition, the indication for AAT for the treatment of Graft versus Host Disease has received an orphan drug designation in the United States and Europe, and the indication for AAT for the treatment of Prophylactic Graft versus Host Disease has received an orphan drug designation in the United States.

In the United States, orphan drug designation entitles a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax advantages and user-fee waivers. In addition, if a product and its active ingredients receive the first FDA approval for the indication for which it has orphan designation, the product is entitled to orphan drug exclusivity, which means the FDA may not approve any other application to market the same drug for the same indication for a period of seven years, except in limited circumstances, such as a showing of clinical superiority over the product with orphan exclusivity. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process. In addition, the FDA may rescind orphan drug designation and, even with designation, may decide not to grant orphan drug exclusivity even if a marketing application is approved. Furthermore, the FDA may approve a competitor product intended for a non-orphan indication, and physicians may prescribe the drug product for off-label uses, which can undermine exclusivity and hurt orphan drug sales. There has also been litigation that has challenged the FDA’s interpretation of the orphan drug exclusivity regulatory provisions, which could potentially affect our ability to obtain exclusivity in the future.

In the European Union, orphan drug designation also entitles a party to financial incentives such as reduction of fees or fee waivers and 10 years of market exclusivity is granted following drug or biological product approval. This period may be reduced to six years if the orphan drug designation criteria are no longer met, including where it is shown that the product is sufficiently profitable not to justify maintenance of market exclusivity or a safer, more effective or otherwise clinically superior product is available.

In the European Union, an application for marketing authorization can be submitted after the application for orphan drug designation has been submitted, while the designation is still pending, but should be submitted prior to the designation application in order to obtain a fee reduction. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process.

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Post-Approval Requirements

Any drug products for which we receive FDA approvals are subject to continuing regulation by the FDA. Certain requirements include, among other things, record-keeping requirements, reporting of adverse experiences with the product, providing the FDA with updated safety and efficacy information on an annual basis or more frequently for specific events, product sampling and distribution requirements, complying with certain electronic records and signature requirements and complying with FDA promotion and advertising requirements. These promotion and advertising requirements include, among others, standards for direct-to-consumer advertising, prohibitions against promoting drugs for uses or in patient populations that are not described in the drug’s approved labeling (known as “off-label use”), and other promotional activities. Failure to comply with FDA requirements can have negative consequences, including the immediate discontinuation of noncomplying materials, adverse publicity, warning letters from or other enforcement by the FDA, mandated corrective advertising or communications with doctors, and civil or criminal penalties. Such enforcement may also lead to scrutiny and enforcement by other government and regulatory bodies. Although physicians may prescribe legally available drugs for off-label uses, manufacturers may not encourage, market or promote such off-label uses.

The manufacturing of our product candidates is required to comply with applicable FDA manufacturing requirements contained in the FDA’s cGMP regulations. Our product candidates are either manufactured at our production plant in Beit Kama, Israel, or, for products where we have entered into a strategic partnership with a third party to cooperate on the development of a product candidate, at a third-party manufacturing facility. These regulations require, among other things, quality control and quality assurance, as well as the corresponding maintenance of comprehensive records and documentation. Drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are also required to register their establishments and list any products they make with the FDA and to comply with related requirements in certain states. These entities are further subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMP and other laws. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain cGMP compliance. Discovery of problems with a product after approval may result in serious and extensive restrictions on a product, manufacturer or holder of an approved BLA, as well as lead to potential market disruptions. These restrictions may include suspension of a product until the FDA is assured that quality standards can be met, continuing oversight of manufacturing by the FDA under a “consent decree,” which frequently includes the imposition of costs and continuing inspections over a period of many years, as well as possible withdrawal of the product from the market. In addition, changes to the manufacturing process generally require prior FDA approval before being implemented. Other types of changes to the approved product, such as adding new indications and additional labeling claims, are also subject to further FDA review and approval, including possible user fees.

The FDA also may require a Boxed Warning (e.g., a specific warning in the label to address a specific risk, sometimes referred to as a “Black Box Warning”), which has marketing restrictions, and post-marketing testing, or Phase IV testing, as well as a Risk Evaluation and Minimization Strategy (REMS) plans and surveillance to monitor the effects of an approved product or place conditions on an approval that could otherwise restrict the distribution or use of the product.

Other U.S. Healthcare Laws and Compliance Requirements

In the United States, our activities are potentially subject to regulation and enforcement by various federal, state and local authorities in addition to the FDA, including the Centers for Medicare and Medicaid Services other divisions of the United States Department of Health and Human Services (e.g., the Office of Inspector General), the U.S. Federal Trade Commission, the U.S. Department of Justice and individual United States Attorney’s offices within the Department of Justice, state attorneys general and state and local governments. To the extent applicable, we must comply with the fraud and abuse provisions of the Social Security Act, the federal False Claims Act, the privacy and security provisions of the Health Insurance Portability and Accountability Act, and similar state laws, each as amended. Pricing and rebate programs must comply with the Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990 and the Veterans Health Care Act of 1992, each as amended, as well as the “Anti-Kickback Law” provisions of the Social Security Act. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. Under the Veterans Health Care Act (“VHCA”), drug companies are required to offer certain pharmaceutical products at a reduced price to a number of federal agencies, including the United States Department of Veterans Affairs and United States Department of Defense, the Public Health Service and certain private Public Health Service-designated entities in order to participate in other federal funding programs including Medicare and Medicaid. Legislative changes have purported to require that discounted prices be offered for certain United States Department of Defense purchases for its TRICARE program via a rebate system. Participation under the VHCA requires submission of pricing data and calculation of discounts and rebates pursuant to complex statutory formulas, as well as the entry into government procurement contracts governed by the Federal Acquisition Regulations. Furthermore, the FCPA prohibits any U.S. individual or business from paying, offering, authorizing payment or offering of anything of value, directly or indirectly, to any foreign official, political party or candidate for the purpose of influencing any act or decision of the foreign entity in order to assist the individual or business in obtaining or retaining business. The FCPA presents particular challenges in the pharmaceutical industry, because, in many countries, hospitals are operated by the government, and doctors and other hospital employees are considered foreign officials. Certain payments to hospitals in connection with clinical trials and other work have been deemed to be improper payments to government officials and have led to FCPA enforcement actions. The failure to comply with laws governing international business practices may result in substantial penalties, including civil and criminal penalties.

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In order to distribute products commercially, we must comply with federal and state laws and regulations that require the registration of manufacturers and wholesale distributors of pharmaceutical products in a state, including, in certain states, manufacturers and distributors which ship products into the state even if such manufacturers or distributors have no place of business within the state. Federal and some state laws also impose requirements on manufacturers and distributors to establish the pedigree of product in the chain of distribution, including some states that require manufacturers and others to adopt new technology capable of tracking and tracing product as it moves through the distribution chain. Several states have enacted legislation requiring pharmaceutical companies to establish marketing compliance programs, file periodic reports with the state, make periodic public disclosures on sales, marketing, pricing, clinical trials and other activities, and/or register their sales representatives, as well as to prohibit pharmacies and other healthcare entities from providing certain physician prescribing data to pharmaceutical companies for use in sales and marketing, and to prohibit certain other sales and marketing practices. Additionally, the federal Physician Payments Sunshine Act and implementing regulations promulgated pursuant to Section 6002 of the healthcare reform law requires the tracking and reporting of certain transfers of value made to U.S. physicians and/or certain teaching hospitals as well as ownership by a physician or a physician’s family member in a pharmaceutical manufacturer. Finally, all of our activities are potentially subject to federal and state consumer protection and unfair competition laws. These laws may affect our sales, marketing, and other promotional activities by imposing administrative and compliance burdens on us. In addition, given the lack of clarity with respect to these laws and their implementation, our reporting actions could be subject to the penalty provisions of the pertinent state, and federal authorities.

Europe/Rest of World Government Regulation

In addition to regulations in the United States, we are subject to a variety of regulations in other jurisdictions governing, among other things, clinical trials and any commercial sales and distribution of our products.

Whether or not we obtain FDA approval for a product, we must obtain approval of a product by the comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of the product in those countries. For example, in the European Union, a clinical trial application (“CTA”) must be submitted to each member state’s national health authority and an independent ethics committee. The CTA must be approved by both the national health authority and the independent ethics committee prior to the commencement of a clinical trial in the member state. The approval process varies from country to country and the time may be longer or shorter than that required for FDA approval. In addition, the requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country. In all cases, clinical trials are conducted in accordance with GCP and the applicable regulatory requirements and the ethical principles that have their origin in the Declaration of Helsinki.

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To obtain marketing approval of a drug under European Union regulatory systems, we may submit marketing authorization applications either under a centralized, decentralized or national procedure. The centralized procedure provides for the grant of a single marketing authorization that is valid for all European Union member states. The centralized procedure is compulsory for medicines produced by certain biotechnological processes, products designated as orphan medicinal products, and products with a new active substance indicated for the treatment of certain diseases, and optional for those products that are highly innovative or for which a centralized process is in the interest of patients. For our products and product candidates that have received or will receive orphan designation in the European Union, they will qualify for this centralized procedure, under which each product’s marketing authorization application will be submitted to the EMA. Under the centralized procedure in the European Union, the maximum time frame for the evaluation of a marketing authorization application is 210 days (excluding clock stops, when additional written or oral information is to be provided by the applicant in response to questions asked by the Scientific Advice Working Party of the Committee of Medicinal Products for Human Use (“CHMP”)). Accelerated evaluation might be granted by the CHMP in exceptional cases, when a medicinal product is expected to be of a major public health interest, defined by three cumulative criteria: the seriousness of the disease, such as heavy disabling or life-threatening diseases, to be treated; the absence or insufficiency of an appropriate alternative therapeutic approach; and anticipation of high therapeutic benefit. In this circumstance, the EMA ensures that the opinion of the CHMP is given within 150 days.

The decentralized procedure provides possibility for approval by one or more other, or concerned, member states of an assessment of an application performed by one member state, known as the reference member state. Under this procedure, an applicant submits an application, or dossier, and related materials, including a draft summary of product characteristics, and draft labeling and package leaflet, to the reference member state and concerned member states. The reference member state prepares a draft assessment and drafts of the related materials within 120 days after receipt of a valid application. Within 90 days of receiving the reference member state’s assessment report, each concerned member state must decide whether to approve the assessment report and related materials. If a member state cannot approve the assessment report and related materials on the grounds of potential serious risk to public health, the disputed points may eventually be referred to the European Commission, whose decision is binding on all member states.

For other countries outside of the European Union, such as countries in Eastern Europe, Latin America or Asia, the requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary from country to country. In all cases, again, the clinical trials are conducted in accordance with GCPs and the applicable regulatory requirements and the ethical principles that have their origin in the Declaration of Helsinki.

If we fail to comply with applicable foreign regulatory requirements, we may be subject to, among other things, fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.

Pharmaceutical Coverage, Pricing and Reimbursement

Significant uncertainty exists as to the coverage and reimbursement status of product candidates for which we obtain regulatory approval. In the United States and markets in other countries, sales of any products for which we receive regulatory approval for commercial sale will depend, in part, on the coverage and reimbursement decisions made by payors. In the United States, third-party payors include government health administrative authorities, managed care providers, private health insurers and other organizations. The process for determining whether a payor will provide coverage for a drug product may be separate from the process for setting the price or reimbursement rate that the payor will pay for the drug product. Payors may limit coverage to specific drug products on an approved list, or formulary, which might not include all of the FDA-approved drug products for a particular indication. Third-party payors are increasingly challenging the price and examining the medical necessity and cost-effectiveness of medical products and services, in addition to their safety and efficacy. We may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of our products, in addition to the costs required to obtain the FDA approvals. Our product candidates may not be considered medically necessary or cost-effective. A payor’s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will be approved. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development.

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Several significant laws have been enacted in the United States which affect the pharmaceutical industry and additional federal and state laws have been proposed in recent years. For example, as a result of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“MMA”), a Medicare prescription drug benefit (Medicare Part D) became effective at the beginning of 2006. Medicare is the federal health insurance program for people who are 65 or older, certain younger people with disabilities, and people with End-Stage Renal Disease. Medicare coverage and reimbursement for some of the costs of prescription drugs may increase demand for any products for which we receive FDA approval. However, we would be required to sell products to Medicare beneficiaries through entities called “prescription drug plans,” which will likely seek to negotiate discounted prices for our products.

Federal, state and local governments in the United States continue to consider legislation to limit the growth of healthcare costs, including the cost of prescription drugs. Future legislation and regulation could further limit payments for pharmaceuticals such as the product candidates that we are developing. In addition, court decisions have the potential to affect coverage and reimbursement for prescription drugs. It is unclear whether future legislation, regulations or court decisions will affect the demand for our product candidates once commercialized.

As another example, in March 2010, President Obama signed into law the Patient Protection and Affordable Care Act and the Healthcare and Education Reconciliation Act of 2010 (collectively referred to as the “health care reform law”). The health care reform law made significant changes to the United States healthcare system, such as imposing new requirements on health insurers, expanding the number of individuals covered by health insurance, modifying healthcare reimbursement and delivery systems, and establishing new requirements designed to prevent fraud and abuse. In addition, provisions in the health care reform law promote the development of new payment and healthcare delivery systems, such as the Medicare Shared Savings Program, bundled payment initiatives and the Medicare pay for performance initiatives.

The health care reform law and the related regulations, guidance and court decisions have had, and will continue to have, a significant impact on the pharmaceutical industry. In addition to the general reforms briefly described above, provisions of the health care reform law directly address drugs. For example, the health care reform law:

● increases the minimum level of Medicaid rebates payable by manufacturers of brand-name drugs from 15.1% to 23.1%;

● requires Medicaid rebates for covered outpatient drugs to be extended to Medicaid managed care organizations;

● requires manufacturers of drugs covered under Medicare Part D to participate in a coverage gap discount program, under which they must agree to offer 50% point-of-sale discounts off negotiated prices of applicable brand drugs to eligible Medicare beneficiaries during their coverage gap period; and

● imposes a non-deductible annual fee on pharmaceutical manufacturers or importers who sell “branded prescription drugs” to specified federal government programs.

On April 1, 2016, final regulations issued by the Centers for Medicare and Medicaid Services to implement the changes to the Medicaid Drug Rebate Program under the healthcare reform law became effective.

Some provisions of the healthcare reform law have yet to be fully implemented, and President Donald Trump has vowed to repeal the healthcare reform law. On January 20, 2017, President Donald Trump signed an executive order stating that the administration intended to seek prompt repeal of the healthcare reform law, and, pending repeal, directed by the U.S. Department of Health and Human Services and other executive departments and agencies to take all steps necessary to limit any fiscal or regulatory burdens of the healthcare reform law. On October 12, 2017, President Trump signed another Executive Order directing certain federal agencies to propose regulations or guidelines to permit small businesses to form association health plans, expand the availability of short-term, limited duration insurance, and expand the use of health reimbursement arrangements, which may circumvent some of the requirements for health insurance mandated by the healthcare reform law. The U.S. Congress has also made several attempts to repeal or modify the healthcare reform law. In addition, there is ongoing litigation regarding the implementation and constitutionality of the healthcare reform law. While the law is still in effect pending the ultimate resolution of the litigation, the outcome of the litigation is unknown and cannot be predicted. It is uncertain whether new legislation will be enacted to replace the healthcare reform law and whether any such legislation would affect coverage and reimbursement for prescription drugs or otherwise include provisions intended to limit the growth of healthcare costs.

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Different pricing and reimbursement schemes exist in other countries. In the European Community, governments influence the price of pharmaceutical products through their pricing and reimbursement rules and control of national healthcare systems that fund a large part of the cost of those products to consumers. Some jurisdictions operate positive and negative list systems under which products may only be marketed once a reimbursement price has been agreed. To obtain reimbursement or pricing approval, some of these countries may require the completion of clinical trials that compare the cost-effectiveness of a particular product candidate to currently available therapies. Other member states allow companies to fix their own prices for medicines, but monitor and control company profits. The downward pressure of healthcare costs in general, particularly prescription drugs, has become very intense. As a result, increasingly high barriers are being erected to the entry of new products. In addition, in some countries, cross-border imports from low-priced markets exert a commercial pressure on pricing within a country.

The marketability of any drug candidates for which we receive regulatory approval for commercial sale may suffer if the government and third-party payors fail to provide adequate coverage and reimbursement. In addition, emphasis on managed care in the United States has increased and we expect will continue to increase the pressure on pharmaceutical pricing. Coverage policies and third-party reimbursement rates may change at any time. Even if favorable coverage and reimbursement status is attained for one or more products for which we receive regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future.

Intellectual Property

Our success depends, at least in part, on our ability to protect our proprietary technology and intellectual property, and to operate without infringing or violating the proprietary rights of others. We rely on a combination of patent, trademark, trade secret and copyright laws, know-how, intellectual property licenses and other contractual rights (including confidentiality and invention assignment agreements) to protect our intellectual property rights.

Patents

As of December 31, 2019, we owned for use within our field of business nine families of patents or patent applications, which are registered or applied for in the United States and also in the European Union, Russia, Turkey, Israel, certain Latin American countries, Canada, Australia and other countries, six PCT patent applications and two US provisional applications. At present, one patent protecting our manufacturing process is considered to be material to the operation of our business as a whole. Such patent has been issued in a variety of jurisdictions, including Australia, Austria, Belgium, Canada, Denmark, Estonia, Israel, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Slovenia, Poland, Spain, Portugal, Sweden, Switzerland, Turkey, the United Kingdom and the United States, and expires in 2024.

Our patents generally relate to the separation and purification of proteins and their respective pharmaceutical compositions. Our patents and patent applications further relate to the use of our products and their delivery methods. Our patents and patent applications are expected to expire at various dates between 2024 and 2029. We also rely on trade secrets to protect certain aspects of our separation and purification technology.

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The patent positions of companies like ours are generally uncertain and involve complex legal and factual questions. Our ability to maintain and solidify our proprietary position for our technology will depend on our success in obtaining effective claims and enforcing those claims once granted. We do not know whether any of our patent applications or any patent applications that we license will result in the issuance of any patents and there is no guarantee that patent applications that were filed with the patent offices, which are still pending, will be eventually granted and will be registered. Additionally, our issued patents and those that may be issued in the future may be challenged, opposed, narrowed, circumvented or found to be invalid or unenforceable, which could limit our ability to stop competitors from marketing related products or the length of term of patent protection that we may have for our products. We cannot be certain that we were the first to invent the inventions claimed in our owned patents or patent applications and/or the first to file said patent applications. In addition, our competitors or other third parties may independently develop similar technologies that don’t fall within the scope of the technology protected under our patents, or duplicate any technology developed by us, and the rights granted under any issued patents may not provide us with any meaningful competitive advantages against these competitors. Furthermore, because of the extensive time required for research and development, testing and regulatory review of a potential product until authorization for marketing, it is possible that, before any of our products can be commercialized, any related patent may expire or remain in force for only a short period following commercialization, thereby reducing any advantage of the patent.

Trademarks

We rely on trade names, trademarks and service marks to protect our name brands. Our registered trademarks in several countries, such as United States and the European Union, Israel, and certain Latin American countries, include the trademarks GLASSIA, RESPIKAM, KAMRAB, KEDRAB, RESPIRA, KamRHO VENTIA, KAMADA and Rebinolin.

Trade Secrets and Confidential Information

We rely on, among other things, confidentiality and invention assignment agreements to protect our proprietary know-how and other intellectual property that may not be patentable, or that we believe is best protected by means that do not require public disclosure. For example, we require our employees, consultants and service providers to execute confidentiality agreements in connection with their engagement with us. Under such agreement, they are required, during the term of the commercial relationship with us and thereafter, to disclose and assign to us inventions conceived in connection with their services to us. However, there can be no assurance that these agreements will be fulfilled or shall be enforceable, or that these agreements will provide us with adequate protection. See “Item 3. Key Information — D. Risk Factors — In addition to patented technology, we rely on our unpatented proprietary technology, trade secrets, processes and know-how.”

We may be unable to obtain, maintain and protect the intellectual property rights necessary to conduct our business, and may be subject to claims that we infringe or otherwise violate the intellectual property rights of others, which could materially harm our business. For a more comprehensive summary of the risks related to our intellectual property, see “Item 3. Key Information — D. Risk Factors.”

Property

Our production plant was built on land that Kamada Assets (2001) Ltd. (“Kamada Assets”), our 74%-owned subsidiary, leases from the Israel Land Administration pursuant to a capitalized long-term lease. Kamada Assets subleases the property to us. The property covers an area of approximately 16,880 square meters. The initial sublease expires in 2058 and we have an option to extend the sublease for an additional term of 49 years. The production plant includes our manufacturing facility, manufacturing support systems, packaging, warehousing and logistics areas, laboratory facilities and an area for the manufacture of snake bite anti-serum, as well as office buildings.

Since January 2017, we have leased approximately 2,200 square meters of a building located in the Kiryat Weizmann Science Park in Rehovot, Israel, which replaced our former Ness Ziona premises. This property houses our head office, our research and development laboratory and additional departments such as our research and development, clinical, medical, regulatory and business development departments. We sublease approximately 500 square meters of such premises to a third party renter.

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Environmental

We believe that our operations comply in material respects with applicable laws and regulations concerning the environment. While it is impossible to predict accurately the future costs associated with environmental compliance and potential remediation activities, compliance with environmental laws is not expected to require significant capital expenditures and has not had, and is not expected to have, a material adverse effect on our earnings or competitive position.

Organizational Structure

Our significant subsidiaries are set forth below. All subsidiaries are either 100 percent owned by us or controlled by us. All companies are incorporated and registered in the country in which they operate as listed below:

Legal Name	Jurisdiction
Kamada Biopharma Limited	England and Wales
Kamada Inc.	Delaware
Kamada Ireland Limited	Ireland
Kamada Assets (2001) Ltd.	Israel

Legal Proceedings

We are subject to various claims and legal actions during the ordinary course of our business. We believe that there are currently no claims or legal actions that would have a material adverse effect on our financial position, operations or potential performance.

Item 4A. Unresolved Staff Comments

Not applicable.

Item 5. Operating and Financial Review and Prospects

The following discussion of our financial condition and results of operations should be read in conjunction with “Item 3. Key Information—A. Selected Financial Data” and our consolidated financial statements and the related notes to those statements included elsewhere in this Annual Report. In addition to historical consolidated financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Item 3. Key Information—D. Risk Factors” and elsewhere in this Annual Report.

The audited consolidated financial statements for the years ended December 31, 2019, 2018 and 2017 in this Annual Report have been prepared in accordance with IFRS as issued by the IASB. None of the financial information in this Annual Report has been prepared in accordance with U.S. GAAP.

Overview

We are a plasma-derived biopharmaceutical company focused on orphan indications, with an existing marketed product portfolio and a late-stage product pipeline. We use our proprietary platform technology and know-how for the extraction and purification of proteins from human plasma to produce Alpha-1 Antitrypsin (AAT) in a highly-purified, liquid form, as well as other plasma-derived immune globulins. Our flagship product is GLASSIA, the first liquid, ready-to-use, intravenous plasma-derived AAT product approved by the FDA. We market GLASSIA in the U.S. through a strategic partnership with Takeda and in other counties through local distributors. our second leading product is KamRab, a rabies immune globulin (Human) for post-exposure prophylaxis against rabies infection. KAMRAB is FDA approved and is being marketed in the U.S. under the brand name KEDRAB through a strategic partnership with Kedrion. In addition to GLASSIA and KEDRAB, we have a product line of four other plasma-derived pharmaceutical products administered by injection or infusion that are marketed through distributors in more than 15 countries, including Israel, Russia, Brazil, India and other countries in Latin America and Asia. We have late-stage products in development, including an inhaled formulation of AAT for the treatment of AAT deficiency. In addition, our intravenous AAT is in development for other indications, such as GvHD, prevention of lung transplant rejection and type-1 diabetes. We also leverage our expertise and presence in the plasma-derived protein therapeutics market by distributing more than 20 complementary products in Israel that are manufactured by third parties. For further details on our business, products and product candidates, see “Item 4 – Information on the Company.”

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Our Segments

We operate in two segments: the Proprietary Products segment, in which we develop and manufacture plasma-derived therapeutics and market them in more than 15 countries, and the Distribution segment, in which we distribute imported drugs in Israel, which are manufactured by third-parties, the majority of which are produced from plasma or its derivative products.

Segment performance is evaluated based on revenues and gross profit (loss). Items that are not allocated to our segments consist mainly of research and development costs, sales and marketing expenses, general and administrative costs, financial expenses, net and tax on income, each of which are managed on a group basis. For the year ended December 31, 2019, we derived $97.7 million of revenues from our Proprietary Products segment, or 77% of total revenues, and $29.5 million of revenues from our Distribution segment, or 23% of total revenues. For the year ended December 31, 2018, we derived $90.8 million of revenues from our Proprietary Products segment, or 79% of total revenues, and $23.7 million of revenues from our Distribution segment, or 21% of total revenues. For the year ended December 31, 2017, we derived $79.5 million of revenues from our Proprietary Products segment, or 77% of total revenues, and $ 23.3 million of revenues from our Distribution segment, or 23% of total revenues.

Factors Affecting Our Results of Operations

Demand for our Products

Over the past few years, we have seen an increase in demand for products in our Proprietary Products segment. For full-year 2020, we expect total revenue to be in the range of $132 million and $137 million. The year-over-year revenue growth in 2020 as compared to 2019 is expected to be driven by increased sales of our Proprietary IgG products portfolio and GLASSIA in international markets, expected growth of the Distribution segment in Israel, and increased sales in the U.S. of KEDRAB. We project that total revenues from sales of GLASSIA to Takeda during 2020 will be approximately $65 million, and between $25 million to $50 million during 2021, based on Takeda’s needs. Takeda is planning to complete the technology transfer of GLASSIA, and pending FDA approval, will initiate its own production of GLASSIA for the U.S. market in 2021. Accordingly, following the transition of manufacturing to Takeda, we will terminate the manufacturing and sale of GLASSIA to Takeda resulting in a significant reduction in revenues. Pursuant to the agreement, upon initiation of sales of GLASSIA manufactured by Takeda, Takeda will pay us royalties at a rate of 12% on net sales through August 2025, and at a rate of 6% thereafter until 2040, with a minimum of $5 million annually, for each of the years from 2022 to 2040. Although the transition of the agreement to its royalties phase will result in a reduction of our revenue from Takeda, based on current GLASSIA sales in the U.S. and forecasted future growth, we project receiving royalties from Takeda in the range of $10 million to $20 million per year for 2022 to 2040.

The AAT augmentation market for AATD in the United States, which is the primary market for GLASSIA, has grown by more than 6-8% annually in the last few years, and we expect that the overall market for GLASSIA will continue to increase due to new patient identification. In the United States and Europe, we believe that AATD is currently significantly under-identified and under-treated, as we estimate that only approximately 6% and 2.5% of all potential cases of AATD are treated in the United States and Europe, respectively, with an aggregate of up to an estimated 180,000-190,000 patients suffering from AATD, of which less than 10% have been diagnosed. We expect that our market opportunity for our AAT products, including GLASSIA and Inhaled AAT for AATD (if approved), will continue to grow as awareness of AATD expands due to factors such as marketing activities, inexpensive and effective diagnosis tools, and improved training. In addition, various awareness and patient identification programs initiated by companies producing AATD treatments are expected to increase demand for GLASSIA and, once approved, Inhaled AAT for AATD.

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It is estimated that there are approximately 40,000 rabies post-exposure prophylaxis treatments administered in the U.S. each year, representing a total market of approximately $150 million per year. Sales of KEDRAB, by Kedrion in the U.S. during the year 2019 and 2018 totaled $31.4 million and $15.5 million, respectively. These sales represents approximately 20% and 10% market share, respectively. We expect that our market share for KEDRAB will continue to grow in the coming years.

Sales of our Distribution segment products are made through public tenders of Israeli hospitals and HMOs on an annual basis. The prices we can offer, as well as the availability of products, are key factors in meeting the local demand of the Israeli market. Our Distribution segment experienced a 25% growth in sales during 2019, despite the growing competition. The Distribution segment may continue to grow if we will be able to increase our product portfolio or win more tenders.

Strategic Partnerships

In July 2010, we received FDA approval for the marketing of GLASSIA in the United States. Following this approval, we entered into a 30 year strategic arrangement with Takeda (originally executed with Baxter, which subsequently assigned the agreement to Baxalta, which was subsequently acquired by Shire, which was acquired by Takeda), for the marketing and distribution of GLASSIA in the United States, Canada, Australia and New Zealand and for the licensing of our technology, granting Takeda rights to manufacture GLASSIA for sales in these territories. We began recognizing revenues from sales of GLASSIA in the United States under this strategic arrangement with Takeda in September 2010. From the inception of the strategic arrangement through December 31, 2019, we have received $39.5 million from Takeda for distribution rights, a portion of which has been accrued as deferred revenue, and for achieving milestones set forth in the distribution and licensing agreements. We have recognized cumulative revenues until December 31, 2019 from Takeda in the amount of $380.1 million. We currently generate revenues from sales of GLASSIA to Takeda, and incur cost of revenues to produce it. We project that total revenues from sales of GLASSIA to Takeda during 2020 will be approximately $65 million, and between $25 million to $50 million during 2021, based on Takeda’s needs. Based on the licensing and technology transfer agreement signed by us and Takeda in 2010, Takeda is planning to complete the technology transfer of GLASSIA, and pending FDA approval, will initiate its own production of GLASSIA for the U.S. market in 2021. Accordingly, based on the agreement between the companies, upon initiation of sales of GLASSIA manufactured by Takeda, it will pay royalties to us at a rate of 12% on net sales through August 2025, and at a rate of 6% thereafter until 2040, with a minimum of $5 million annually, for each of the years from 2022 to 2040. Although the transition of the agreement to its royalties phase will result in a reduction of our revenue from Takeda, based on current GLASSIA sales in the U.S. and forecasted future growth, we project that we will receive royalties from Takeda in the range of $10 million to $20 million per year for 2022 to 2040. See “Item 3. Key Information — D. Risk Factors — In our Proprietary Products segment, we currently rely on one of our strategic partners that accounts for a significant portion of our total sales and our distribution plan for our principal product candidate relies on another strategic partner, and any disruption to our relationships with these distributors would have an adverse effect on our results of operations and profitability.”

In addition, in July 2011, we signed a strategic agreement with Kedrion to cooperate in the clinical development and exclusive marketing and sales in the United States of KEDRAB, our hyper-immune anti-rabies prophlaxis treatment, which was launched in the United States in April 2018. We have recognized cumulative revenues until December 31, 2019 from sales of KEDRAB to Kedrion in the amount of approximately $28 million.

Product Development Costs

Since our company was founded, we have focused on developing a broad portfolio of plasma-derived protein therapeutics for a variety of indications. The development of plasma-derived protein therapeutics is characterized by significant up-front product development costs, including, for example, costs for conducting pre-clinical and clinical trials to obtain regulatory approvals, regulatory expenses, costs for materials for development, external consulting and services fees and opportunity costs for reallocating our production facility to produce clinical trial materials and conforming our production processes for regulatory purposes. In order to reduce costs related to the development and regulatory approval of new protein therapeutics, in some cases we seek to share development costs with strategic partners, such as Takeda for post marketing required clinical trials for GLASSIA in the United States and Kedrion for the clinical trials for KEDRAB in the United States required for product approval and post marketing commitments. See “Item 4. Information on the Company — Strategic Partnerships — Takeda (GLASSIA)” and “Business — Strategic Partnerships — Kedrion (KEDRAB).”

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Product development costs may fluctuate from period to period, as our product candidates pass through various stages of development. For example, for the years ended December 31, 2019, 2018 and 2017, we incurred research and development expenses related to clinical trials related to Inhaled AAT for AATD in Europe and the United States, AAT for the treatment of newly diagnosed Type-1 diabetes and lung transplantation rejection and GvHD. We expect to continue to incur research and development expenses related to clinical trials, as well as other ongoing, planned or future clinical trials with regards to our product pipeline. See “Item 4. Information on the Company — Our Product Pipeline and Development Program.”

Product Competition

The worldwide market for pharmaceuticals in general and biopharmaceutical and plasma products in particular has undergone a process of mergers and acquisitions among companies active in such markets. This trend has led to a reduction in the number of competitors in the market, and the strengthening of the remaining competitors, mainly for specific immunoglobulin products.

While there are additional producers of AAT products approved in the United States and Europe, including Takeda, we have not seen significant changes in these producers’ activities in the market. Additionally, our strategic alliance with Takeda has strengthened GLASSIA’s competitive positioning in the market. See “Item 3. Key Information — D. Risk Factors — In our Proprietary Products segment, we currently rely on one of our strategic partners that accounts for a significant portion of our total sales and our distribution plan for our principal product candidate relies on another strategic partner, and any disruption to our relationships with these distributors would have an adverse effect on our results of operations and profitability.”

Costs of Raw Materials

In our Proprietary Products segment, a significant portion of our manufacturing costs are for raw materials consisting of plasma or fraction IV of plasma. The consolidation among plasma companies has led to a decrease in the number of independent plasma collection centers in the world.

In order to ensure the availability of plasma and fraction IV, we have secured supply of plasma and fraction IV from multiple suppliers, including from Takeda for the manufacturing of GLASSIA and Kedrion for the manufacturing of KEDRAB.

In our Distribution segment, our costs are for the purchase of products for sale from our suppliers. Our annual purchases are forecasted each year with each supplier, but individual product purchases during the year are made on a purchase order basis. For these instances, we tend not to have minimum purchase obligations, and as such, are able to respond accordingly to pricing fluctuations that occur year to year. Historically, we have not seen significant price fluctuations from our two largest suppliers. Unless absent of material changes in the market, such as a significant increase in the price of plasma or plasma-derivatives shall occur, we do not expect a significant increase in the cost of purchasing products.

Key Components of Our Results of Operations

Revenues

In our Proprietary Products segment, we generate revenues from the sale of products to strategic partners and distributors, as well as from the licensing of our technology. We derived a significant portion of our total revenues from sales of GLASSIA to Takeda. Sales to Takeda accounted for approximately 54%, 56% and 59% of our total revenues in the years ended December 31, 2019, 2018 and 2017, respectively. Revenue from all sales of GLASSIA comprised approximately 58%, 60% and 64% of our total revenues for the years ended December 31, 2019, 2018 and 2017, respectively. Sales of KEDRAB to Kedrion during the years ended December 31, 2019 and 2018 accounted for approximately 13% and 10% of our total revenues, respectively.

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Revenues from our Proprietary Products segments also include a recognized portion of prior upfront and milestone payments from strategic partners.

Revenues are presented net of any discounts and/or marketing contribution payments extended to our partners and distributors.

In our Distribution segment, we generate revenues from the sale in Israel of imported products produced by third parties. During the three year period ended December 31, 2019, sales of IVIG accounted for approximately 14%, 12% and 12% of our total revenues for the years ended December 31, 2019, 2018 and 2017, respectively.

For full-year 2020, we expect total revenue to be in the range of $132 million and $137 million. The year-over-year revenue growth in 2020 as compared to 2019 is expected to be driven by increased sales of our Proprietary IgG products portfolio and GLASSIA in international markets, expected growth of the Distribution segment in Israel, and increased sales in the U.S. of KEDRAB. We project that total revenues from sales of GLASSIA to Takeda during 2020 will be approximately $65 million, and between $25 million to $50 million during 2021, based on Takeda’s needs. Based on the licensing and technology transfer agreement signed by us and Takeda in 2010, Takeda is planning to complete the technology transfer of GLASSIA, and pending FDA approval, will initiate its own production of GLASSIA for the U.S. market in 2021. Accordingly, based on the agreement between the companies, upon initiation of sales of GLASSIA manufactured by Takeda, it will pay royalties to us at a rate of 12% on net sales through August 2025, and at a rate of 6% thereafter until 2040, with a minimum of $5 million annually, for each of the years from 2022 to 2040. Although the transition of the agreement to its royalties phase will result in a reduction of our revenue from Takeda, based on current GLASSIA sales in the U.S. and forecasted future growth, we project that we will receive royalties from Takeda in the range of $10 million to $20 million per year for 2022 to 2040. In the future, while the planned transition of GLASSIA manufacturing to Takeda is expected to decrease our revenue and profitability during the years 2021 and 2022, our continued business development efforts are expected to result in resumed revenue and profitability growth beginning in 2023. This growth will be driven by an expected increase in Proprietary Product sales in international markets, an anticipated continued increase in KEDRAB sales in the U.S., the commercial manufacturing of the new specialty hyper-immune globulin product at our facility beginning in 2023, expected growth in our Distribution segment, and the royalties to be paid to us by Takeda on GLASSIA sales.

Cost of Revenues

Cost of revenues in our Proprietary Products segment includes expenses for the manufacturing of products such as raw materials, payroll, utilities, laboratory costs and depreciation. Cost of revenues also includes provisions for the costs associated with manufacturing scraps and inventory write offs. Costs of revenues in our Distribution segment consists of costs of products acquired, packaging and labeling for sales by us in Israel.

In addition to the successful strategic partnerships with Takeda and Kedrion and successful penetration to the U.S. market, we have focused during the years ended December 31, 2019, 2018 and 2017 on increasing our production outputs and improving efficiencies.

Gross Profit

Gross profit is the difference between total revenues and the cost of revenues. Gross profit is mainly affected by volume of sales and launching new products, cost of raw materials and plant maintenance and overhead. We have seen an increase in gross profitability in recent years as a result of the increase in our sales and the corresponding reduction in per unit costs attributable to greater production output.

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Our gross margins are generally higher in our Proprietary Products segment (46%, 42% and 35% for the years ended December 31, 2019, 2018 and 2017, respectively) than in our Distribution segment (15%, 15%, 17% for the years ended December 31, 2019, 2018, and 2017, respectively).

In 2020, the expected change in product sales mix, as well as reduced plant utilization, is anticipated to result in an overall decrease in the Propriety Products segment’s full-year gross margins of approximately three to five percentage points as compared to 2019.

In our Distribution segment we will seek to increase our gross margins through the potential addition of new, more profitable products, to our portfolio, thereby improving product mix.

Research and Development Expenses

Research and development expenses are incurred for the development of new products and newly revised processes for existing products and includes expenses for pre-clinical and clinical trials, development activities in the different fields, the advanced understanding of the mechanism of action of our products, improving existing products and processes, development work at the request of regulatory authorities and strategic partners, as well as communication with regulatory authorities related to our commercial products and clinical programs. In addition, such expenses include development materials, payroll for research and development personnel, including scientists and professionals for product registration and approval, external advisors and the allotted cost of our manufacturing facility for research and development purposes. While research and development expenses are unallocated on a segment basis, the activities generally relate to our existing or in development proprietary products.

Research and development expenses increased in 2019 specifically due to the initiation of our pivotal Phase 3 InnovAATe clinical trial. In 2020, due to the planned acceleration of this clinical study, we expect an approximately 20% to 25% increase in research and development expenses, as compared to 2019. Actual spending could differ if our plans change or if we potentially reduce our anticipated funding on research for existing products or partner with other parties to fund development of current product candidates.

Selling and Marketing Expenses

Selling and marketing expenses principally consist of expenditures incurred for sales incentive, advertising, marketing or promotional activities, shipping and handling costs, product liability insurance and business development activities, as well as marketing authorization fees to regulatory agencies. Due to our strategic partnerships in our Proprietary Products segment, we expect these costs to remain at a similar level other than ongoing effort to increase sales of existing products. However, we may incur higher expenses in the future, mainly due to the distribution of our products outside the U.S. market which is done through local distributers. We market our products in our Distribution segment to HMOs and hospitals in Israel.

General and Administrative Expenses

General and administrative expenses consist of compensation for employees in executive and administrative functions (including payroll, bonus, equity compensation and other benefits), office expenses, professional consulting services, public company costs, legal and audit fees as well as employee welfare costs. We expect general and administrative expenses to remain stable.

Financial Income

Financial income is comprised of interest income on amounts invested in bank deposits and short-term investments.

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Income (expense) in respect of securities measured at fair value, net

Income (expense) in respect of securities measured at fair value, net comprised the changes in the fair value of financial assets measured at fair value through other comprehensive income.

Income (expense) in respect of currency exchange differences and derivatives instruments, net

Income (expense) in respect of currency exchange differences and derivatives instruments, net are comprised of changes on balances in currencies other than our functional currency. Changes in the fair value of derivatives instruments not designated as hedging instruments are reported to profit or loss.

Financial Expenses

Financial expenses are comprised of bank charges, changes in the time value of provisions, the portion of changes in the fair value of financial assets or liabilities at fair value through other comprehensive income and interest and amortization of bank loans and leases.

Taxes on Income

We have not been required to pay income taxes since 1997 other than tax withheld in a foreign jurisdiction in 2012 and 2016 and a $1.3 million payment to the Israel Tax Authority in 2016 as a settlement agreement for the tax years 2004-2006. In 2018, we initially recognized a deferred tax asset for a portion of our carryforward losses and in 2019, we recognized a tax expense as a portion of the deferred tax asset on account of earnings that were offset against the carryforward losses.

One of our Israeli facilities has Approved Enterprise status granted by the Israel Investment Center under the Investment Law, which made us eligible for a grant and certain tax benefits under that law for a certain investment program. The investment program provided us with a grant in the amount of 24% of our approved investments, in addition to certain tax benefits, which applied to the turnover resulting from the operation of such investment program, for a period of up to ten consecutive years from the first year in which we generated taxable income. The tax benefits under the Approved Enterprise status expired at the end of 2017. Additionally, we have obtained a tax ruling from the Israel Tax Authority according to which, among other things, our activity has been qualified as an “industrial activity,” as defined in the Investment Law, and is also eligible for tax benefits as a Privileged Enterprise, which apply to the turnover attributed to such enterprise, for a period of up to ten years from the first year in which we generated taxable income. The tax benefits under the Privileged Enterprise status are scheduled to expire at the end of 2020 and 2023. As of the date of this Annual Report, we have not utilized any tax benefits under the Investment Law, other than the receipt of grants attributable to our Approved Enterprise status.

We may be subject to withholding taxes for payments we receive from foreign countries. If certain conditions are met, these taxes may be credited against future tax liabilities under tax treaties and Israeli tax laws. However, due to our net operating loss carryforwards, it is uncertain whether we will be able to receive such credit and therefore, we may incur tax expenses.

As we further expand our sales into other countries, we could become subject to taxation based on such country’s statutory rates and our effective tax rate could fluctuate accordingly.

As of December 31, 2019, we have net operating loss carryforwards for tax purposes of approximately $47.4 million. The net operating loss carryforwards have no expiration date. Following the full utilization of our net operating loss carryforwards, we expect that our effective income tax rate in Israel will reflect the benefits discussed above.

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Results of Operations

The following table sets forth certain statement of operations data:

	Year Ended December 31,
	2019			2018			2017
	(U.S. Dollars in thousands)
Revenues from Proprietary Products segment	$	97,696		$	90,784		$	79,559
Revenues from Distribution segment		29,491			23,685			23,266
Total revenues		127,187			114,469			102,825
Cost of revenues from Proprietary Products segment		52,425			52,796			51,335
Cost of revenues from Distribution segment		25,025			20,201			19,402
Total cost of revenues		77,450			72,997			70,737
Gross profit		49,737			41,472			32,088
Research and development expenses		13,059			9,747			11,973
Selling and marketing expenses		4,370			3,630			4,398
General and administrative expenses		9,194			8,525			8,273
Other expense		330			311			-
Operating income (loss)		22,784			19,259			7,444
Financial income		1,146			830			500
Income (expense) in respect of securities measured at fair value, net		(5	)		(172	)		(82	)
Income (expense) in respect of currency exchange differences and derivatives instruments, net		(651	)		602			(612	)
Financial expense		(293	)		(178	)		(80	)
Income (loss) before taxes on income		22,981			20,341			7,170
Taxes on income		730			(1,955	)		269
Net income (loss)	$	22,251		$	22,296		$	6,901

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

Segment Results

	Change
	2019 vs. 2018
	2019		2018		Amount			Percent
	(U.S. Dollars in thousands)
Revenues:
Proprietary Products	$	97,696	$	90,784	$	6,912			8	%
Distribution		29,491		23,685		5,806			25	%
Total		127,187		114,469		12,718			11	%
Cost of Revenues:
Proprietary Products		52,425		52,796		(371	)		-1	%
Distribution		25,025		20,201		4,824			24	%
Total		77,450		72,997		4,453			6	%
Gross Profit:
Proprietary Products	$	45,271	$	37,988	$	7,283			19	%
Distribution		4,466		3,484		982			28	%
Total	$	49,737	$	41,472	$	8,265			20	%

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Revenues

In the year ended December 31, 2019, we generated $127.2 million of total revenues, compared to $114.5 million in the year ended December 31, 2018, an increase of $12.7 million, or approximately 11%. This increase was primarily due to a $6.9 million increase in our Proprietary Products segment revenues, mainly due increase of sales of KEDRAB and GLASSIA in United States during 2019, and a $5.8 million increase in our Distribution segment, mainly attributable to increased sales of IVIG product.

Cost of Revenues

In the year ended December 31, 2019, we incurred $77.5 million of cost of revenues, compared to $73.0 million in the year ended December 31, 2018, an increase of $4.4 million, or approximately 6%. The increase is mainly attributable to a $4.8 million in increase in cost of revenues in our Distribution segment, primarily due to an increase in volume of sales, offset in part by a decrease of $0.4 million in the Proprietary segment, mainly attributed to improved manufacturing efficiencies.

Gross profit

Gross profit in our Proprietary Products segment increased by $7.3 million in 2019, primarily due to the sales of GLASSIA and KEDRAB in the United States and resulting in improved products sales mix and improved manufacturing efficiencies. Gross profit in our Distribution segment increased by $1.0 million in 2019, primarily due to increased sales volume. As a percentage of total revenues, gross margin increased to 39.1 % for the year ended December 31, 2019 from 36.2% for the year ended December 31, 2018. Gross margin for the Proprietary Products segment, as a percentage of revenues from that segment, was 46.3% and 41.8% for the years ended December 31, 2019 and 2018, respectively. Gross margin for the Distribution segment, as a percentage of revenues from that segment, was 15.1% and 14.7% for the years ended December 31, 2019 and 2018, respectively. The increase in gross profit margin was primarily driven by an increase in the Proprietary Products segment revenues and high profitability of KEDRAB.

Research and Development Expenses

In the year ended December 31, 2019, we incurred $13.1 million of research and development expenses, compared to $9.7 million in the year ended December 31, 2018, an increase of $3.4 million, or approximately 34%. This increase was primarily due to a $3.2 million increase in clinical trial expenses, mainly attributed to an increase in expenses in connection with the initiation of our pivotal Phase 3 InnovAATe clinical trial of approximately $2.8 million and costs associated with a proof-of-concept clinical trial of our IV-AAT as preemptive therapy for patients at high-risk for the development of steroid-refractory acute GvHD of approximately $0.3 million. Research and development expenses accounted for approximately 10.2% and 8.5% of total revenues for the years ended December 31, 2019 and 2018, respectively.

Set forth below are the research and development expenses associated with our major development programs in the years ended December 31, 2019 and 2018:

	Year ended December 31,
	2019		2018
	(U.S. Dollars in thousands)
Inhaled AAT	$	3,192	$	356
AAT IV for treatment of GvHD		666		356
Anti-Rabies		272		208
Recombinant AAT		352		223
AAT IV for lung transplantation rejection		34		194
Unallocated salary		5,816		5,823
Unallocated facility cost allocated to research and development		2,146		1,990
Unallocated other expenses		581		597
Total research and development expenses	$	13,059	$	9,747

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Unallocated expenses are expenses that are not managed by project and are allocated between various tasks that are not always related to a major project. In the years ended December 31, 2019 and 2018, we incurred $5.8 million and $5.8 million, respectively, of unallocated salary expenses which represent all research and development salary expenses, $2.1 million and $2.0 million, respectively, of facility costs allocated to research and development and $0.6 million and $0.6 million, respectively, of unallocated other expenses.

Our current intentions with respect to our major development programs are described in “Business — Our Product Pipeline and Development Program”. In 2020, due to the planned acceleration of this clinical study, we expect an approximately 20% to 25% increase in research and development expenses, as compared to 2019. However, we cannot determine with full certainty the duration and completion costs of the current or future clinical trials of our major development programs or if, when, or to what extent we will generate revenues from the commercialization and sale of any product candidates. We or our strategic partners may never succeed in achieving marketing approval for any product candidates. The duration, costs and timing of clinical trials and our major development programs will depend on a variety of factors, including the uncertainties of future clinical and preclinical studies, uncertainties in clinical trial enrollment rates and significant and changing government regulation and whether our current or future strategic partners are committed to and make progress in programs licensed to them, if any. In addition, the probability of success for each product candidate will depend on numerous factors, including competition, manufacturing capability and commercial viability. See “Item 3. Key Information — D. Risk Factors — Risk Related to Development, Regulatory Approval and Commercialization of Product Candidates.”

We will determine which programs to pursue and how much to fund each program in response to the scientific, pre-clinical and clinical outcome and results of each product candidate, as well as an assessment of each product candidate’s commercial potential. We cannot forecast with any degree of certainty which of our product candidates, if any, will be subject to future collaborations or how such arrangements would affect our development plans or capital requirements.

Selling and Marketing Expenses

In the year ended December 31, 2019, we incurred $4.4 million of selling and marketing expenses, compared to $3.6 million in the year ended December 31, 2018, an increase of $0.8 million, or approximately 20%. This increase was primarily due to a $0.4 million increase in registration and marketing fees and a $0.4 million increase in marketing and advertising expenses. Selling and marketing expenses accounted for approximately 3.43% and 3.2% of total revenues for the years ended December 31, 2019 and 2018, respectively

General and Administrative Expenses

In the year ended December 31, 2019, we incurred $9.2 million of general and administrative expenses, compared to $8.5 million in the year ended December 31, 2018, an increase of $0.7 million, or approximately 8%. This increase was primarily due to an increase of $0.4 million in salary and related expenses and $0.3 million in professional fees and employees welfare. General and administrative expenses accounted for approximately 7.2% and 7.4% of total revenues for the years ended December 31, 2019 and 2018, respectively.

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Other expenses

In each of the years ended December 31, 2019, and 2018 we incurred $0.3 million of other expenses related to an ongoing technology transfer project preformed with an external service provider that is planned to be completed during 2020.

Financial Income

In the years ended December 31, 2019 and December 31, 2018, we generated $1.1 million and $0.8 million of financial income, respectively, from our short term investment portfolio and bank deposits.

Income (expense) in respect of securities measured at fair value, net

In the year ended December 31, 2019, we incurred $5 thousand of expenses in respect of securities measured at fair value, net, compared to $0.2 million in the year ended December 31, 2018.

Income (expense) in respect of currency exchange differences and derivatives instruments, net

In the year ended December 31, 2019, we incurred $0.6 million of expenses in respect of currency exchange differences on balances in other currencies versus the U.S. dollar and derivatives impact compared to income of $0.6 million in the year ended December 31, 2018.

Financial Expenses

In the year ended December 31, 2019, we incurred $0.3 million of financial expenses, compared to $0.2 million in the year ended December 31, 2018.

Taxes on Income

In the year ended December 31, 2019, we recognized $0.7 million tax expenses. In the year ended December 31, 2018, we recognized a deferred tax asset representing a portion of carryforward losses that we estimate that we will realize in the coming years, resulting in tax income of $2.0 million for such period.

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

Segment Results

	Change 2018 vs. 2017
	2018		2017		Amount			Percent
	(U.S. Dollars in thousands)
Revenues:
Proprietary Products	$	90,784	$	79,559	$	11,225			14	%
Distribution		23,685		23,266		419			2	%
Total	$	114,469	$	102,825	$	11,644			11	%
Cost of Revenues:
Proprietary Products	$	52,796	$	51,335	$	1,461			3	%
Distribution		20,201		19,402		799			4	%
Total	$	72,997	$	70,737	$	2,260			3	%
Gross Profit:
Proprietary Products	$	37,988	$	28,224	$	9,764			35	%
Distribution		3,484		3,864		(380	)		(10	)%
Total	$	41,472	$	32,088	$	9,384			29	%

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Revenues

In the year ended December 31, 2018, we generated $114.5 million of total revenues, compared to $102.8 million in the year ended December 31, 2017, an increase of $11.7 million, or approximately 11%. This increase was primarily due to a $11.2 million increase in our Proprietary Products segment revenues, mainly due to the launch of KEDRAB in United States during 2018, and a $0.5 million increase in our Distribution segment, mainly attributable to increased sales of new products and a different product mix.

Cost of Revenues

In the year ended December 31, 2018, we incurred $73.0 million of cost of revenues, compared to $70.7 million in the year ended December 31, 2017, an increase of $2.3 million, or approximately 3%. The cost of revenues in our Proprietary Products segment increased by $1.5 million, primarily due to an increase in volume of sales. The cost of revenues in our Distribution segment increased by $0.8 million, primarily due to an increase in volume of sales.

Costs of revenues in the year ended December 31, 2018 included a $1.8 million write-off of indirect manufacturing costs and $0.8 million of process materials scraps as a result of a labor strike that caused lower than standard production level during the third quarter of 2018.

Gross profit

Gross profit in our Proprietary Products segment increased by $9.8 million in 2018, primarily due to the launch of KEDRAB in the United States in April 2018, improved manufacturing efficiencies and our ability to increase sale prices in ROW markets. Gross profit in our Distribution segment decreased by $0.4 million in 2018, primarily due to a different mix of sales with lower gross margin. As a percentage of total revenues, gross margin increased to 36.2% for the year ended December 31, 2018 from 31.2% for the year ended December 31, 2017. Gross margin for the Proprietary Products segment, as a percentage of revenues from that segment, was 41.8% and 35.5% for the years ended December 31, 2018 and 2017, respectively. Gross margin for the Distribution segment, as a percentage of revenues from that segment, was 14.7% and 16.6% for the years ended December 31, 2018 and 2017, respectively. The increase in gross profit margin was primarily driven by an increase in the Proprietary Products segment revenues and high profitability of KEDRAB.

Research and Development Expenses

In the year ended December 31, 2018, we incurred $9.7 million of research and development expenses, compared to $12 million in the year ended December 31, 2017, a decrease of $2.3 million, or approximately 19%. This decrease was primarily due to a $1.2 million decrease in clinical trial expenses, mainly attributed to a decrease in expenses in connection with the Inhaled AAT clinical trial and its relevant consultants as a result of its deferral to 2019, partially offset by an increase in labor costs. Research and development expenses accounted for approximately 8.5% and 11.6% of total revenues for the years ended December 31, 2018 and 2017, respectively.

Set forth below are the research and development expenses associated with our major development programs in the years ended December 31, 2018 and 2017:

	Year ended December 31,
	2018		2017
	(U.S. Dollars in thousands)
Inhaled AAT	$	356	$	949
AAT for newly diagnosed Type-1 Diabetes		48		475
AAT IV for lung transplantation rejection		194		586
AAT IV for treatment of GvHD		356		148
Anti Rabies		208		340
Recombinant		223		102
Unallocated salary		5,823		6,413
Unallocated facility cost allocated to research and development		1,990		2,325
Unallocated other expenses		549		635
Total research and development expenses	$	9,747	$	11,973

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Research and development expenses for Inhaled AAT for AATD decreased by $0.6 million in 2018 due to continued discussions with the FDA regarding its concerns that delayed the execution of the planned clinical trial. Research and development expenses for Type-1 Diabetes decreased by $0.4 in 2018 due to the completion of the clinical trial in 2017. Research and development expenses for Anti Rabies decreased by $0.1 million in 2018 due to low requirement rate for the FDA’s post marketing commitment for pediatric study. Research and development expenses for GvHD increased by $0.2 million due to the initiation of a proof-of-concept trial for the treatment of acute GvHD. Research and development expenses for recombinant human Alpha 1 Antitrypsin increased by $0.1 million in 2018 due to a development plan initiated in 2018. Unallocated expenses are expenses that are not managed by project and are allocated between various tasks that are not always related to a major project. In the years ended December 31, 2018 and 2017, we incurred $5.8 million and $6.4 million, respectively, of unallocated salary expenses which represent all research and development salary expenses, $2.0 million and $2.3 million, respectively, of facility costs allocated to improvements in processes and $0.5 million and $0.6 million, respectively, of unallocated other expenses.

Selling and Marketing Expenses

In the year ended December 31, 2018, we incurred $3.6 million of selling and marketing expenses, compared to $4.4 million in the year ended December 31, 2017, a decrease of $0.8 million, or approximately 17%. This decrease was primarily due to a $0.7 million decrease in regulatory fees and decrease of $0.2 million of marketing support to distributors. Selling and marketing expenses accounted for approximately 3.2% and 4.3% of total revenues for the years ended December 31, 2018 and 2017, respectively.

General and Administrative Expenses

In the year ended December 31, 2018, we incurred $8.5 million of general and administrative expenses, compared to $8.3 million in the year ended December 31, 2017, a moderate increase of $0.2 million, or approximately 3%. This increase was primarily due to an increase of $0.2 million in payments to external consultants and share-based payments expense. General and administrative expenses accounted for approximately 7.4% and 8.0% of total revenues for the years ended December 31, 2018 and 2017, respectively.

Other expenses

In the year ended December 31, 2018, we incurred $0.3 million of other expenses, primarily due to an ongoing technology transfer project preformed with an external service provider that is planned to be completed during 2020.

Financial Income

In the years ended December 31, 2018 and December 31, 2017, we generated $0.8 million and $0.5 million of financial income, respectively, from our short term investment portfolio and bank deposits.

Income (expense) in respect of securities measured at fair value, net

In the year ended December 31, 2018, we incurred $0.2 million of expenses in respect of securities measured at fair value, net, compared to $0.1 million in the year ended December 31, 2017.

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Expense in respect of currency exchange differences and derivatives instruments, net

In the year ended December 31, 2018, we generated $0.6 million of income in respect of currency exchange differences on balances in other currencies versus the U.S. dollar and derivatives impact compared to expense of $0.6 million in the year ended December 31, 2017.

Financial Expenses

In the year ended December 31, 2018, we incurred $0.3 million of financial expenses, compared to $0.2 million in the year ended December 31, 2017.

Taxes on Income

In the year ended December 31, 2018, we recognized a deferred tax asset representing a portion of carryforward losses that we estimate that we will realize in the coming years, resulting in tax income of $2.0 million for such period. In the year the ended December 31, 2017, we had $0.3 million taxes on income mainly due to surplus expenses.

Quarterly Results of Operations

The following tables set forth unaudited quarterly consolidated statements of operations data for the four quarters of fiscal years 2019 and 2018. We have prepared the statement of operations data for each of these quarters on the same basis as the audited consolidated financial statements included elsewhere in this Annual Report and, in the opinion of management, each statement of operations includes all adjustments, consisting solely of normal recurring adjustments, necessary for the fair statement of the results of operations for these periods. This information should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this Annual Report. These quarterly operating results are not necessarily indicative of our operating results for any future period.

	Three Months Ended
	December 31, 2019			September 30, 2019			June 30,      2019			March 31,     2019			December 31, 2018			September 30, 2018			June 30,       2018			March 31,     2018
	(U.S. Dollars in thousands)
Revenues from Proprietary Products	$	25,175		$	24,859		$	27,281		$	20,381		$	43,138		$	9,454		$	25,978		$	12,214
Revenues from Distribution		6,896			8,207			7,972			6,416			5,073			5,521			7,864			5,227
Total revenues		32,071			33,066			35,253			26,797			48,211			14,975			33,842			17,441
Cost of revenues from Proprietary Products		14,013			13,234			14,688			10,490			22,290			7,869			16,458			6,179
Cost of revenues from Distribution		5,969			6,968			6,965			5,123			4,665			4,587			6,703			4,246
Total cost of revenues		19,982			20,202			21,653			15,613			26,955			12,456			23,161			10,425
Gross profit		12,089			12,864			13,600			11,184			21,256			2,519			10,681			7,016
Research and development expenses		3,329			3,477			3,487			2,766			2,573			2,323			2,097			2,754
Selling and marketing expenses		929			1,161			1,188			1,092			906			818			936			970
General and administrative expenses		2,343			2,230			2,527			2,094			2,393			1,902			2,166			2,064
Other expense (income)		3			299			5			23			-			-			311			-
Operating income (loss)		5,485			5,697			6,393			5,209			15,384			(2,524	)		5,171			1,228
Financial income		259			328			274			285			203			214			184			229
Financial expenses		(76	)		(68	)		(72	)		(77	)		(27	)		(39	)		(46	)		(60	)
Income (expense) in respect of securities measured at fair value, net		(2	)		55			(6	)		(52	)		(26	)		(45	)		(9	)		(97	)
Income (expense) in respect of currency exchange differences and derivatives instruments, net		(148	)		25			(216	)		(312	)		267			3			375			(44	)
Income (loss) before taxes on income		5,518			6,037			6,373			5,053			15,801			(2,391	)		5,675			1,256
Taxes on income		156			214			230			130			(1,944	)		-			(11	)		-
Net income (loss)	$	5,362		$	5,823		$	6,143		$	4,923		$	17,745		$	(2,391	)	$	5,686		$	1,256

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Liquidity and Capital Resources

Our primary uses of cash are to fund working capital requirements, research and development expenses and capital expenditures. Historically, we have funded our operations primarily through cash flow from operations (including sales of our proprietary products and distribution products), payments received in connection with strategic partnerships (including milestone payments from collaboration agreements), issuances of ordinary shares (including our 2005 initial public offering and listing on the Tel Aviv Stock Exchange, our 2013 initial public offering in the United States and listing on Nasdaq, our 2017 underwritten public offering and our 2020 private placement), and the issuance of convertible debentures and warrants to purchase our ordinary shares. The balance of cash and cash equivalents and short-term investments as of December 31, 2019, 2018 and 2017 totaled $73.9 million, $50.6 million and $43.0 million, respectively. We plan to fund our future operations through continued sales and distribution of our proprietary and distribution products, commercialization and or out-licensing of our pipeline product candidates, and raising additional capital through the issuance of equity or debt.

Our strategic partnership agreement with Takeda includes payments for the achievement of certain milestones. Since inception and through December 31, 2019, we received an aggregate of $39.5 million in payments under these agreements, and there are $5.5 million in payments under these agreements that we could potentially receive if we achieve additional milestones as set forth in such agreements. See “Item 4. Information on the Company— Strategic Partnerships — Takeda (GLASSIA ).”

Our capital expenditures for the years ended December 31, 2019, 2018 and 2017 were $2.3 million, $2.9 million and $4.1 million, respectively. Our capital expenditures currently relate primarily to the maintenance and improvements of our facilities. We expect our capital expenditures to remain substantially similar in the near term as such capital expenditures are planned to be attributable mainly to the maintenance and improvements of our facilities.

We believe our current cash and cash equivalents and short-term investments will be sufficient to satisfy our liquidity requirements for the next 12 months.

Cash Flows from Operating Activities

Net cash provided by operating activities was $ 27.6 million for the year ended December 31, 2019. This net cash provided by operating activities reflects net income of $22.3 million, $6.3 million of non-cash expenses and an increase in inventories of $14.0 million which are expected to be sold in 2020, a decrease in trade receivables of $5.1 million and an increase in trade payables of $6.3 million.

Net cash provided by operating activities was $ 10.5 million for the year ended December 31, 2018. This net cash provided by operating activities reflects a net income of $22.3 million and non-cash expenses of $1.7 million and an increase in inventory of $8.2 million that we expect to sell in 2019.

Net cash provided by operating activities was $3.6 million for the year ended December 31, 2017. This net cash provided by operating activities reflects a net income of $6.9 million and non-cash expenses of $4.6 million and an increase in trade receivables of $9.9 million that were collected at the beginning of 2018.

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Cash Flows from Investing Activities

Net cash used in investing activities was $0.6 million for the year ended December 31, 2019, which comprises of proceeds from short term investment of $1.7 million and purchase of property, plant and equipment of $2.3 million.

Net cash used in investing activities was $5.2 million for the year ended December 31, 2018. This net cash used in investing activities reflects $2.3 million net cash invested in short-term investments and investment in property, plant and equipment of $2.9 million.

Net cash used in investing activities was $15.6 million for the year ended December 31, 2017. This net cash used in investing activities reflects $11.5 million net cash invested in short-term investments and investment in property, plant and equipment of $4.2 million.

Cash Flows from Financing Activities

Net cash used in financing activities was $1.5 million for the year ended 2019, mainly due to repayments of long-term loans and leases in the amount to $1.5 million.

Net cash used in financing activities was $0.6 million for the year ended 2018. This net cash used in financing activities reflects $0.6 million repayments of long-term loans.

Net cash provided by financing activities was $15.3 million for the year ended 2017. This net cash provided by financing activities reflects $15.6 million net proceeds from the issuance of shares offset by a $0.5 million repayment of long-term loans.

Contractual Obligations and Commitments

The following is a summary of our contractual obligations and commitments as of December 31, 2019 (in thousands):

	Total		Less than 1 Year		1 – 3 Years		4-5 Years		More than 5 Years
	(U.S. Dollars in thousands)
Purchase commitments		31,404		-		-		-		-
Long-term debt obligations (1)		767		506		261		-		-
Leases obligations		5,711		1,198		1,797		1,352		1,364
Total		37,882		1,704		2,058		1,352		1,364

(1) Includes interest payments on our long term loans which bear annually fixed interest rate in the range of 3.15%-3.55%.

Purchase commitments are obligations under purchase agreements or purchase orders not yet fulfilled that are non-cancelable. Operating leases consist of contractual obligations from offices and vehicles leases agreements.

We are also obligated to make certain severance or pension payments to our Israeli employees upon their retirement under Israeli law. Due to the uncertainty of the timing of future cash flows associated with these payments (see Note 2q and Note 16 in our consolidated financial statements included in this Annual Report), we are unable to make reasonably reliable estimates for the period of cash settlement, if any, with respect to such obligations.

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Seasonality

We have experienced in the past, and expect to continue to experience, certain fluctuations in our quarterly revenues. See “Item 5. Operating and Financial Review and Prospects - Quarterly Results of Operations”.

Off-Balance Sheet Arrangements

As of December 31, 2019, we have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Critical Accounting Policies and Estimates

This discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with IFRS as issued by the IASB. The preparation of these financial statements requires management to make estimates that affect the reported amounts of our assets, liabilities, revenues and expenses. Significant accounting policies employed by us, including the use of estimates, are presented in the notes to the consolidated financial statements included elsewhere in this Annual Report. We periodically evaluate our estimates, which are based on historical experience and on various other assumptions that management believes to be reasonable under the circumstances. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management’s subjective or complex judgments, resulting in the need for management to make estimates about the effect of matters that are inherently uncertain. If actual performance should differ from historical experience or if the underlying assumptions were to change, our financial condition and results of operations may be materially impacted. In addition, some accounting policies require significant judgment to apply complex principles of accounting to certain transactions, such as acquisitions, in determining the most appropriate accounting treatment.

A detailed description of our accounting policies is provided in Note 2 of our consolidated financial statements appearing elsewhere in this Annual Report. The following provides an overview of certain accounting policies that we believe are the most critical for understanding and evaluating our financial condition and results of operations.

Revenue Recognition

Revenues are recognized when the customer obtains control over the promised goods or services. In determining the amount of revenue from contracts with customers, we evaluate whether it is a principal or an agent in the arrangement. We are a principal when we control the promised goods or services before transferring them to the customer. In these circumstances, we recognize revenue for the gross amount of the consideration.

On the contract’s inception date, we assess the goods or services promised in the contract with the customer and identify the performance obligations. Revenues are recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer.

We include variable consideration, such as milestone payments or volume rebates, in the transaction price, only when it is highly probable that its inclusion will not result in a significant revenue reversal in the future when the uncertainty has been subsequently resolved. For contracts that consist of more than one performance obligation, at contract inception we allocate the contract transaction price to each performance obligation identified in the contract on a relative stand-alone selling price basis.

For most contracts, revenue recognition occurs at a point in time when control of the asset is transferred to the customer, generally on delivery of the goods. For agreements with a strategic partner, performance obligations are generally satisfied over time, given that the customer either simultaneously receives or consumes the benefits provided by us, or receives assets with no alternative use, for which we have an enforceable right to payment for performance completed to date.

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With respect to our agreement with Takeda, we identified the following performance obligations in the contract: (a) the grant of a license to Takeda for distribution of GLASSIA in certain territories and the supply of predetermined minimum quantities; (b) the grant of a license to Takeda for the use our knowledge and patents, and the provision of consulting services to Takeda with respect to the transfer of technology; and (c) the supply of a predetermined quantity of GLASSIA for the purpose of clinical trials performed by Takeda.

For the Takeda agreement, when determining the transaction price we took into consideration the following elements: (a) variable consideration – certain amounts of the promised consideration in the Takeda agreement, such as milestone payments and volume rebates, are variable, and were allocated to a single performance obligation or to a distinct goods or services within it; (b) significant financing component – we concluded that certain advance payments received from Takeda provide us with the benefit of financing. Therefore, we adjusted the transaction price for the effects of the time value of money; and (c) non-cash consideration – we identified raw materials provided by Takeda as non-cash consideration. This consideration is measured at fair value. We allocate the transaction price to the different performance obligation identified. This allocation is based on relative stand-alone selling price. We also concluded that we transfer the goods and services over time. This is because Takeda either receives and consumes the benefits provided by us as it is being performed, or because our performance creates assets with no alternative use and we have an enforceable right to payment for performance completed to date.

Clinical Trial Accruals and Related Expenses

We incurred costs for clinical trial activities performed by third parties (or CROs), based upon estimates made as of the reporting date of the work completed over the life of the respective study in accordance with agreements established with the CRO. We determine the estimates of clinical activities incurred at the end of each reporting period through discussion with internal personnel and outside service providers as to the progress or stage of completion of trials or services, as of the end of each reporting period, pursuant to contracts with numerous clinical trial centers and CROs and the agreed upon fee to be paid for such services.

To date, we have not experienced significant changes in our estimates of clinical trial accruals after a reporting period. However, due to the nature of estimates, we cannot assure you that we will not make changes to our estimates in the future as we become aware of additional information about the status or conduct of our clinical trials.

Inventories

Inventories are measured at the lower of cost and net realizable value. The cost of inventories is comprised of costs required to purchase raw materials and other indirect costs required to manufacture the product (including salaries), in addition, such costs may include the costs of purchase and shipping and handling. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated selling costs.

We periodically evaluate the condition and age of inventories and make provisions for slow-moving inventories accordingly. Unfavorable changes in market conditions may result in a need for additional inventory reserves that could adversely impact our gross margins. Conversely, favorable changes in demand could result in higher gross margins when we sell products.

Inventory that is produced following a change in manufacturing process prior to final approval of regulatory authorities is subject to our estimates as to the probability of receipt of such approval. We periodically reassess the probability of such approval and the remaining shelf life of such inventory. If regulatory approval is not granted, the cost of this inventory will be charged to research and development expenses.

Impairment of Non-financial Assets

We evaluate the need to record an impairment of the carrying amount of non-financial assets whenever events or changes in circumstances indicate that the carrying amount is not recoverable. If the carrying amount of non-financial assets exceeds their recoverable amount, the assets are reduced to their recoverable amount. The recoverable amount is the higher of fair value less costs of sale and value in use. In measuring value in use, the expected future cash flows are discounted using a pre-tax discount rate that reflects the risks specific to the asset. The recoverable amount of an asset that does not generate independent cash flows is determined for the cash-generating unit to which the asset belongs. Impairment losses are recognized in profit or loss.

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An impairment loss of an asset, other than goodwill, is reversed only if there have been changes in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized. Reversal of an impairment loss, as above, will not be increased above the lower of the carrying amount that would have been determined (net of depreciation or amortization) had no impairment loss been recognized for the asset in prior years and its recoverable amount. The reversal of impairment loss of an asset presented at cost is recognized in profit or loss.

We had no impairment of non-financial assets in 2019.

Share-based Payment Transactions

Our employees and directors are entitled to remuneration in the form of equity-settled share-based payment transactions (options and restricted shares).

The cost of equity-settled transactions is measured at the fair value of the equity instruments granted at grant date. We use the binomial model when estimating the grant date fair value of equity settled share options. We selected the binomial option pricing model as the most appropriate method for determining the estimated fair value of our share-based awards without market conditions. We use the share price at the grant date when estimating the grant date fair value of equity settled restricted shares.

The determination of the grant date fair value of options using an option pricing model is affected by estimates and assumptions regarding a number of complex and subjective variables. These variables include the expected volatility of our share price over the expected term of the options, share option exercise and cancellation behaviors, expected exercise multiple, risk-free interest rates, expected dividends and the price of our ordinary shares on the TASE, which are estimated as follows:

● Expected Life. The expected life of the share options is based on historical data, and is not necessarily indicative of the exercise patterns of share options that may occur in the future.

● Volatility. The expected volatility of the share prices reflects the assumption that the historical volatility of the share prices on the TASE is reasonably indicative of expected future trends.

● Risk-free interest rate. The risk-free interest rate is based on the yields of non-index-linked Bank of Israel treasury bonds with maturities similar to the expected term of the options for each option group.

● Expected forfeiture rate. The post-vesting forfeiture rate is based on the weighted average historical forfeiture rate.

● Dividend yield and expected dividends. We have not recently declared or paid any cash dividends on our ordinary shares and do not intend to pay any cash dividends. We have therefore assumed a dividend yield and expected dividends of zero.

● Share price on the TASE. The price of our ordinary shares on the TASE used in determining the grant date fair value of options is based on the price on the grant date.

If any of the assumptions used in the binomial model change significantly, share-based compensation for future awards may differ materially compared with the awards granted previously.

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The cost of equity-settled transactions is recognized in profit or loss, together with a corresponding increase in equity, during the period which the performance and/or service conditions are to be satisfied, ending on the date on which the relevant grantee become fully entitled to the award. The cumulative expense recognized for equity-settled transactions at the end of each reporting period until the vesting date reflects the extent to which the vesting period has expired and our best estimate of the number of equity instruments that will ultimately vest. The expense or income recognized in profit or loss represents the change between the cumulative expense recognized at the end of the reporting period and the cumulative expense recognized at the end of the previous reporting period.

No expense is recognized for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether the market condition is satisfied, provided that all other vesting conditions (service and/or performance) are satisfied.

If we modify the conditions on which equity-instruments were granted, an additional expense is recognized for any modification that increases the total fair value of the share-based payment arrangement or is otherwise beneficial to the grantee at the modification date.

If a grant of an equity instrument is cancelled, it is accounted for as if it had vested on the cancellation date, and any expense not yet recognized for the grant is recognized immediately. However, if a new grant replaces the cancelled grant and is identified as a replacement grant on the grant date, the cancelled and new grants are accounted for as a modification of the original grant, as described above.

Post-employment Benefits Liabilities

Our post-retirement benefit plans are normally financed by contributions to insurance companies and classified as defined contribution plans or as defined benefit plans.

We operate a defined benefit plan in respect of severance pay pursuant to the Israeli Severance Pay Law. See Note 2r and Note 16 in our consolidated financial statements included in this Annual Report for more details.

The present value of our severance pay depends on a number of factors that are determined on an actuarial basis using a number of assumptions. The assumptions used in determining the net cost or income for severance pay and plan assets include a discount rate. Any changes in these assumptions will impact the carrying amount of severance pay and plan assets.

Other key assumptions inherent to the valuation include employee turnover, inflation, expected long term returns on plan assets and future payroll increases. The expected return on plan assets is determined by considering the expected returns available on assets underlying the current investments policy. These assumptions are given a weighted average and are based on independent actuarial advice and are updated on an annual basis. Actual circumstances may vary from these assumptions, giving rise to a different severance pay liability.

Accounting for Income Taxes

At the end of each reporting period, we are required to estimate our income taxes. There are transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business, determined according to complex tax laws and regulations. Where the effect of these laws and regulations is unclear, we use estimates in determining the liability for the tax to be paid on our past profits, which we recognize in our financial statements. We believe the estimates, assumptions and judgments are reasonable, but this can involve complex issues which may take a number of years to resolve. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred income tax provisions in the period in which such determination is made. In addition, at the end of each reporting period, we estimate our ability to utilize our carryforward losses and accordingly account for the relevant amount of deferred taxes. When calculating the deferred tax asset, we estimate the effective tax rate to be applied for the years in which we expect the carryforward loss to be utilized, considering the impact of the Israeli Law for the Encouragement of Capital Investments, 1959 (as amended) and rulings that we received from the Israel Tax Authority.

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We follow IFRIC 23, “Uncertainty over Income Tax Treatments” (“the Interpretation”) issued by the IASB, The Interpretation clarifies the accounting for recognition and measurement of assets or liabilities in accordance with the provisions of IAS 12, “Income Taxes”, in situations of uncertainty involving income taxes. The Interpretation provides guidance on: (i) considering whether some tax treatments should be considered collectively; (ii) measurement of the effects of uncertainty involving income taxes on the financial statements; and (iii) accounting for changes in facts and circumstances in respect of the uncertainty.

As of December 31, 2019 and 2018, the application of IFRIC 23 did not have a material effect on the financial statements.

Short-term investments

Our short-term bank investments include deposits that have a maturity of more than three months from the deposit date but less than one year and financial assets measured at fair value through other comprehensive income that include debt securities. Debt financial instruments are subsequently measured at fair value through profit or loss (“FVPL”), amortized cost or fair value through other comprehensive income (“FVOCI”). The classification is based on two criteria: our business model for managing the assets; and whether the instruments’ contractual cash flows represent solely payments of principal and interest on the principal amount outstanding (“SPPI”).

The classification and measurement of our debt financial assets are as follows:

● Debt instruments measured at amortized cost for financial assets that are held within a business model with the objective to hold the financial assets in order to collect contractual cash flows that meet the SPPI criteria. This category includes our trade and other receivables.

● Debt instruments measured at FVOCI, with gains or losses recycled to profit or loss on the recognition. Financial assets in this category are our quoted debt instruments that meet the SPPI criteria and are held within a business model both to collect cash flows and to sell. Interest earned whilst holding available for sale financial investments is reported as interest income using the effective interest rate method.

Our policy is to record an allowance for expected credit loss (“ECL”) for all debt financial assets not measured at FVPL. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and the cash flows that we actually expect to receive. For other debt financial assets (i.e., debt securities measured at FVOCI), the ECL is based on the 12-month ECL. The 12-month ECL is the portion of lifetime ECLs that results from default events on a financial instrument that are possible within 12 months after the reporting date. As of December 31, 2019, we have not recorded an ECL allowance.

Leases

As of January 1, 2019, we applied IFRS 16, “Leases”. We account for a contract as a lease when the contract terms convey the right to control the use of an identified asset for a period of time in exchange for consideration.

On the inception date of the lease, we determine whether the arrangement is a lease or contains a lease, while examining if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. In our assessment of whether an arrangement conveys the right to control the use of an identified asset, we assess whether we have the following two rights throughout the lease term:

(a) The right to obtain substantially all the economic benefits from use of the identified asset; and

(b) The right to direct the identified asset’s use.

For leases in which we are the lessee, we recognize on the commencement date of the lease a right-of-use asset and a lease liability, excluding leases whose term is up to 12 months and leases for which the underlying asset is of low value. For these excluded leases, we have elected to recognize the lease payments as an expense in profit or loss on a straight-line basis over the lease term. In measuring the lease liability, we have elected to apply the practical expedient in IFRS 16 and do not separate the lease components from the non-lease components (such as management and maintenance services, etc.) included in a single contract.

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On the commencement date, the lease liability includes all unpaid lease payments discounted at the interest rate implicit in the lease, if that rate can be readily determined, or otherwise using our incremental borrowing rate. After the commencement date, we measure the lease liability using the effective interest rate method.

On the commencement date, the right-of-use asset is recognized in an amount equal to the lease liability plus lease payments already made on or before the commencement date and initial direct costs incurred less any lease incentives received. The right-of-use asset is measured applying the cost model and depreciated over the shorter of its useful life or the lease term. We test for impairment of the right-of-use asset whenever there are indications of impairment pursuant to the provisions of IAS 36.

Following the initial application of IFRS 16, on January 1, 2019, we recognized the right of used asset and lease liability in the amount of $4.2 million and $4.7 million, respectively (see Note 2w, and Note 14b in our consolidated financial statements included in this Annual Report).

Item 6. Directors, Senior Management and Employees

Executive Officers and Directors

The following table sets forth certain information relating to our executive officers and directors as of February 26, 2020.

Name	Age	Position
Executive Officers:
Amir London	51	Chief Executive Officer
Chaime Orlev	49	Chief Financial Officer
Michal Ayalon, PhD	53	Vice President, Research and Development and IP
Yael Brenner	54	Vice President, Quality
Hanni Neheman	50	Vice President, Marketing & Sales
Eran Nir	47	Vice President, Operations
Orit Pinchuk	55	Vice President, Regulatory Affairs and PVG
Ariella Raban	44	Vice President, Human Resources
Dr. Michal Stein	46	Vice President, Medical Director for Immunology
Dr. Naveh Tov	55	Vice President, Clinical Development and Medical Director for Pulmonary Diseases
Directors:
Leon Recanati*	71	Chairman, Chairman of Compensation Committee
Lilach Asher Topilsky*	49	Director
Avraham Berger*	68	Director, Chairman of Audit Committee
Amiram Boehm *	48	Director
Ishay Davidi*	57	Director
Karnit Goldwasser*	43	Director
Jonathan Hahn	37	Director, Chairman of the Strategy Committee
David Tsur	70	Director

* Independent director under the Nasdaq listing requirements.

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Executive Officers

Amir London has served as our Chief Executive Officer since July 2015. Prior to that, Mr. London served as our Senior Vice President, Business Development since December 2013. Mr. London brings with him over 20 years of senior management and international business development experience. From 2011 to 2013, Mr. London served as the Chief Operating Officer of Fidelis Diagnostics, a U.S.-based provider of innovative in-office medical diagnostic services. Earlier in his career, from 2009 to 2011, Mr. London was the Chief Executive Officer of Promedico, a leading Israeli-based $350 million healthcare distribution company, and the General Manager of Cure Medical, from 2006 to 2009, providing contract manufacturing services for clinical studies, as well as home-care solutions. From 1995 to 2006, Mr. London was a Partner with Tefen, an international publicly-traded operations management consulting firm, responsible for the firm’s global biopharma practice. Mr. London holds a B.Sc. degree in Industrial and Management Engineering from the Technion – Israel Institute of Technology.

Chaime Orlev has served as our Chief Financial Officer since December 2017. Prior to that, Mr. Orlev had served in senior finance roles for nearly 20 years, with approximately 12 years spent in the life sciences industry. Most recently, from September 2016 to November 2017, Mr. Orlev served as Chief Financial Officer and Vice President Finance and Administration at Bioblast Pharma Ltd. (Nasdaq: ORPN), a clinical-stage, orphan disease-focused biotechnology company. Prior to that, from 2010, Mr. Orlev served as Vice President Finance and Administration at Chiasma (Nasdaq: CHMA), a clinical-stage biopharmaceutical company focused on treating rare and serious chronic diseases. In this role, Mr. Orlev helped lead the company’s 2015 over $100 million initial public offering and listing on Nasdaq, and participated in the negotiations and closing of the licensing agreement for the company’s lead product to F. Hoffmann-La Roche. Previously, Mr. Orlev was Chief Financial Officer at Oramed Pharmaceuticals Inc. (Nasdaq: ORMP), which has developed an innovative technology to transform injectable treatments into oral therapies. In this role, he led multiple capital raises. Mr. Orlev is a certified public accountant in Israel, holds an MBA degree from the Leon Recanati Graduate School of Business Administration at the Tel Aviv University and a BA degree in Business Administration from the College of Management in Israel.

Dr. Michal Ayalon has served as our Vice President, Research and Development and IP since February 2019. Prior to joining us, from 2018 to 2019, Dr. Ayalon served as Head of R&D at 89bio Ltd., where Dr. Ayalon led the overall development strategy of the company and managed all R&D functions, including medical, clinical, pre-clinical, CMC, regulatory, and project management. Prior to that, from 2016 to 2018, Dr. Ayalon served as Project Champion at Teva Pharmaceutical Industries Ltd.,, where she led novel biologics and biosimilar projects in oncology, respiratory and metabolic disease. In 2015, Dr. Ayalon served as Vice President of Research & Development at Galmed Pharmaceuticals Ltd., where she led the pre-clinical as well as CMC activities and managed the clinical operation group. Prior to that, Dr. Ayalon worked for Immune Pharmaceuticals, Inc. (from 2012 to 2015), BioLineRx and Compugen Ltd. Dr. Ayalon received her B.Sc., M.Sc. and Ph.D. from Tel-Aviv University, Faculty of Life Sciences. Dr. Ayalon completed her postdoctoral research at Weizmann Institute of Science in the Department of Molecular Biology of the Cell. Dr. Ayalon is the author of multiple patents and publications.

Yael Brenner has served as our Vice President, Quality since March 2015. Ms. Brenner has more than 20 years of experience in Quality Management, including Quality Assurance and Quality Control managerial positions in the pharmaceutical industry. Prior to joining Kamada, from 2007 to 2015, Ms. Brenner was at Teva Pharmaceuticals Industries, lastly as Senior Director Quality Operations of Teva Kfar Sava Site, managing over 400 employees in Quality Assurance, Quality Control and Regulatory Affairs. Ms. Brenner holds B.Sc. and M.Sc. degrees in Chemistry from the Technion - Israel Institute of Technology, and in addition is a Certified Quality Engineer (CQE) from the American and Israeli Societies for Quality.

Hanni Neheman has served as our Vice President, Marketing & Sales since January 2020. Ms. Neheman joined us in August 2014 and served as Head of Business Operations, Israel. Ms. Neheman has more than 20 years of expertise in different positions in the field of marketing and sales in the pharmaceutical industry. Prior to joining us, Ms. Neheman served as a Commercial Manager at Neopharm Israel. Ms. Neheman holds a B.A degree in Occupational Therapy from the Technion Israel Institute of Technology and Executive M.B.A from Derby University.

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Eran Nir has served as our Vice President, Operations since November 1, 2016. Mr. Nir has over 14 years of operations management experience in the pharmaceutical and medical industries. Mr. Nir’s recent roles include management of TEVA’s Pharmaceutical plant in Jerusalem from 2002 to 2011, VP Operations of Amelia Cosmetics from 2014 to 2015 and management of a medical equipment plant of Philips Medical Systems from 2015 to 2016. Mr. Nir’s extensive experience spans across the management of large scale FDA and EMA- approved manufacturing facilities, tech-transfer of new products from development to production and the implementation of world-class operational excellence systems. Mr. Nir holds a B.Sc. degree in Industrial and Management Engineering and a MBA degree in Business Management, both from Ben-Gurion University.

Orit Pinchuk has served as our Vice President, Regulatory Affairs and PVG since October 2014. Ms. Pinchuk has experience of more than 20 years in the pharmaceutical industry, fulfilling key positions that cover, among others, disciplines of Regulatory Affairs and Compliance. Prior to joining Kamada, Ms. Pinchuk was at Teva Pharmaceuticals Industries, from 1993 to 2014, where she served as Director of Compliance and Regulatory Affairs, Operation Israel and Senior Director Regulatory Affairs, Research and Development and Operation Israel. Ms. Pinchuk has extensive experience with FDA, EMA and Canada Health Authorities. Ms. Pinchuk holds a B.Tech degree in Textile Chemistry from Shenkar College for Engineering and Design and M.Sc. degree in Applied Chemistry from the Hebrew University of Jerusalem.

Ariella Raban has served as our Vice President, Human Resources since May 2018. Ms. Raban joined us in March 2014 and served as Human Resources Manager at our manufacturing facility in Beit Kama. Ms. Raban has more than a decade of expertise in different positions in the field of human resources in the pharmaceutical industry. Prior to joining us, Ms. Raban served as a Human Resources Manager at Teva Pharmaceuticals Industries Ltd. Ms. Raban holds a B.A. degree in Humanities Social Science from Ben-Gurion University.

Dr. Michal Stein has served as our Vice President, Medical Director for Immunology, since June 2017. Prior to that, from 2013 to 2017 Dr. Stein served as Medical Director at Sanofi-Aventis Israel Ltd. In this position, Dr. Stein led the medical affairs and pharmacovigilance departments, overseeing all aspects of product life-cycle management and compliance with pharmacovigilance regulations. From 2009 through 2013, Dr. Stein held multiple positions of increasing responsibility at Merck Sharp & Dohme, including Pharmacovigilance Country Lead, Medical & Scientific Liaisons Team Leader and Medical Affairs Manager, with expertise in vaccines, women’s health and HIV. From 2005 through 2009, Dr. Stein served as Medical Affairs Manager, with expertise in oncology, at Roche Pharmaceuticals. Prior to that, from 2001 through 2005, Dr. Stein was a practicing physician in Israel, first at Rabin Medical Center, Belinson Campus, and then at Schneider Children’s Medical Center. Dr. Stein holds an MD degree from Sackler school of Medicine, Tel Aviv University.

Dr. Naveh Tov has served as our Vice President, Clinical Development and Medical Director for Pulmonary Diseases, since July 2016. Prior to joining us, Dr. Tov has served as our Medical Director in a part- time consultancy role, from 2007. Dr. Tov served in both active hospital academic and clinical positions at Bnei Zion Medical Center, Haifa, Israel from 1994 through 2016. Dr. Tov specializes in Internal, Pulmonary and Sleep Medicine and served as Head of the Pulmonary Unit and as Deputy of Internal Ward C at Bnei Zion Medical Center, for 14 years from 2002 through 2016. During these years, Dr. Tov served in academia and held appointments at the Ruth and Bruce Rappaport Faculty of Medicine of The Technion – Israel Institute of Technology. Dr. Tov is a member of the American Thoracic Society and the European Respiratory Society. Dr. Tov holds an M.D. and a Ph.D. from the Ruth and Bruce Rappaport Faculty of Medicine of The Technion – Israel Institute of Technology.

Directors

Leon Recanati has served on our Board of Directors since May 2005 and has served as Chairman since March 2013, and serves as the Chairman of our Compensation Committee. Mr. Recanati currently serves as a board member of Evogene Ltd., a plant genomics company listed on the TASE and New York Stock Exchange. Mr. Recanati is also a board member of the following private companies: GlenRock Israel Ltd., GlenRock Medical, Gov, Govli Limited, Rainbow Medical Ltd., RelTech Holdings Ltd., Legov Ltd., Insight Capital Ltd., and Shavit Capital Funds. Mr. Recanati currently serves as the Chairman and Chief Executive Officer of GlenRock. Previously, Mr. Recanati was Chief Executive Officer and/or Chairman of IDB Holding Corporation; Clal Industries Ltd.; Azorim Investment Development and Construction Co Ltd.; Delek Israel Fuel Corporation; and Super-Sol Ltd. Mr. Recanati also founded Clal Biotechnologies Industries Ltd., a biotechnology investment company operating in Israel. Mr. Recanati holds an MBA degree from the Hebrew University of Jerusalem and Honorary Doctorates from the Technion – Israel Institute of Technology and Tel Aviv University.

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Lilach Asher Topilsky has served on our board of directors since December 2019. Ms. Topilsky is a Senior partner in the FIMI Opportunity Funds, Israel’s largest group of private equity funds, as of December 2019. Until the end of November 2019, Ms. Asher Topilsky served as the President and CEO of Israel Discount Bank (TASE), one of the leading banking groups in Israel, as the Chairman at IDBNY BANKCORP and as a director at IDB Bank New York, all since February 2014. Ms. Asher Topilsky also served as the Chairman of Mercantile Bank from 2014-2016. Ms. Asher Topilsky currently serves as the Chairman of the board of directors of G1 Ltd. (TASE) and as director at Tel Aviv University. Prior to joining Israel Discount Bank, Ms. Asher Toplisky served as a member of the management of Bank Hapoalim (TASE) as Deputy Chief Executive Officer and Head of Retail Banking Division (2009-2013) and Head of Strategy and Planning Division (2007-2009). Ms. Asher Topilsky also served as a Strategy Consultant at The Boston Consulting Group (BCG, Chicago 1997-1998) and at Shaldor Strategy Consulting (Israel 1995-1996). Ms. Asher Topilsky holds BA degree in Management and Economics from Tel Aviv University and MBA degree from Kellogg School of Management, Northwestern University, Chicago, USA.

Avraham Berger has served on our board of directors since August 2016, and serves as the Chair of our Audit Committee and as a member of our Compensation Committee. Until 2014, Mr. Berger served as a senior partner and Chief Executive Officer of PwC Israel, for more than 20 years. Mr. Berger joined PwC Israel in 1976 and led it from 1991. Mr. Berger has vast experience in mergers and acquisitions and complex public offerings, both in Israel and abroad. Mr. Berger lectures at professional forums and has published several articles in the professional press. Mr. Berger also serves as Chairman of the board of directors of TopAudio Ltd. and serves as director on the board of Weizmann Institute of Science. Mr. Berger holds a BA degree in Accounting and Economics from Tel Aviv University and is a certified public accountant in Israel.

Amiram Boehm has served on our board of directors since December 2019. Mr. Bohem is a Partner in the FIMI Opportunity Funds, Israel’s largest group of private equity funds, since 2004. Mr. Boehm served as the Managing Partner and Chief Executive Officer of FITE GP (2004), and serves as a director at Gilat Satellite Communications (NASDAQ), Ham-Let (Israel-Canada) Ltd. (TASE), Hadera Paper Ltd (TASE)., Rekah Pharmaceuticals Ltd. (TASE), TAT Technologies Ltd. (NASDAQ, TASE), PCB Technologies Ltd. (TASE) and DIMAR Ltd, DelekSan Ltd. and Galam Ltd. Mr. Boehm previously served as a director of Ormat Technologies Inc. (NYSE, TASE), Scope Metal Trading Ltd. (TASE), Inter Industries, Ltd. (TASE), Global Wire Ltd. (TASE), Telkoor Telecom Ltd. (TASE) and Solbar Industries Ltd. (previously traded on the TASE) and Novolog Ltd (TASE). Prior to joining FIMI, from 1999 until 2004, Mr. Boehm served as Head of Research of Discount Capital Markets, the investment arm of Israel Discount Bank. Mr. Boehm holds a BA degree in Economics and LLB degree from Tel Aviv University and a Joint MBA degree from Northwestern University and Tel Aviv University.

Ishay Davidi has served on our board of directors since December 2019. Mr. Davidi is the Founder and has served as Chief Executive Officer of the FIMI Opportunity Funds, Israel’s largest group of private equity funds, since 1996. Mr. Davidi currently serves as Chairman of the board of directors of Hadera Paper Ltd. (TASE) and Polyram Plastics Ltd., Dimar Cutting Tools Ltd., and as director at Gilat Satellite Communications Ltd. (NASDAQ), Ham-Let (Israel-Canada) Ltd. (TASE), Rekah Pharmaceuticals Ltd. (TASE), Tadir-Gan Precision materials (TASE), C. Mer Industries Ltd. (TASE), GI Ltd., (TASE), SOS Ltd., DelekSan Ltd., Bet Shemesh Engines Holdings (TASE) and P.C.B Technologies Ltd. Mr. Davidi previously served as the Chairman of the board of directors of Inrom Ltd., Retalix Ltd. (previously traded on NASDAQ and TASE) from August 2008 until January 2010, of Tefron Ltd. (New York Stock Exchange and TASE) and of Tadir-Gan Ltd. (TASE), and as a director at Pharm Up Ltd. (TASE), Ormat Industries Ltd. (previously traded on TASE), Retalix, Tadiran Communications Ltd. (TASE), Lipman Electronic Engineering Ltd. (NASDAQ and TASE), Merhav Ceramic and Building Materials Center Ltd. (TASE), TAT Technologies Ltd. (NASDAQ and TASE), Orian C.M. Ltd. (TASE), Ophir Optronics Ltd., Overseas Commerce Ltd Ltd. (TASE), Scope Metals Group Ltd. (TASE) and Formula Systems Ltd. (NASDAQ and TASE). Prior to establishing FIMI, from 1993 until 1996, Mr. Davidi was the Founder and Chief Executive Officer of Tikvah Fund, a private Israeli investment fund. From 1992 until 1993 Mr. Davidi was the Chief Executive Officer of Zer Science Industries Ltd., a developer of diagnostics equipment for the healthcare industry. Mr. Davidi holds a BSc degree in Industrial and Management Engineering from Tel Aviv University and MBA degree from Bar Ilan University.

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Karnit Goldwasser has served on our board of directors since December 2019. Ms. Goldwasser serves as an independent consultant and environmental engineer for various agencies and organizations. Ms. Goldwasser is a director at Orian DB Schenker (since September 2017), Delek San Recycling Ltd. (since December 2016) and ELA Recycling Corporation (since April 2015). Ms. Goldwasser served as a director at the government-owned Environmental Services Company Ltd., as chair of the Safety Committee (2010-2016), and as a member of the Tel Aviv-Jaffa City Council, holding the environmental portfolio (2013-2016). Ms. Goldwasser also served as a director in several Tel Aviv-Jaffa municipality corporations: Dan Municipal Sanitation Association, as chair of the audit committee; Tel Aviv-Jaffa Economic Development Authority; and Ganei Yehoshua Co. Ltd. Ms. Goldwasser holds a B.Sc. degree in Environmental Engineering, focusing on chemistry, mathematics and environmental engineering, and M.Sc. degree in Civil Engineering, specializing in Hydrodynamics and Water Resources, both from the Technion – Israel Institute of Technology, and MA degree in Public Policy and Administration from the Lauder School of Government Diplomacy and Strategy, IDC Herzliya. Ms. Goldwasser also completed the Directors Program at LAHAV, School of Management, Tel Aviv University.

Jonathan Hahn has served on our Board of Directors since March 2010, and serves as the Chairman of our Strategy Committee. Mr. Hahn serves as the President and a director of Tuteur, where he has been since 2013. Prior to that, Mr. Hahn served as Strategic Planning Manager at Tuteur and held a business development position at Forest Laboratories, Inc., based in New York. Mr. Hahn holds a BA degree from San Andrés University and an MBA degree from New York University — Stern School of Business, with specializations in Finance and Entrepreneurship.

David Tsur has served as on our board of directors since July 2015, as Active Deputy Chairman on a half-time basis until December 31, 2019, and serves as a member of our Strategy Committee. Prior to that, Mr. Tsur served as our Chief Executive Officer and a director since our inception. Prior to co-founding Kamada in 1990, Mr. Tsur served as Chief Executive Officer of Arad Systems and RAD Chemicals Inc. Mr. Tsur previously served as the Chairman of the Board of Directors of CollPlant Ltd., a company listed on the TASE and OTC market. Mr. Tsur has also held various positions in the Israeli Ministry of Economy and Industry (formerly named the Ministry of Industry and Trade), including Chief Economist and Commercial Attaché in Argentina and Iran. Mr. Tsur holds a BA degree in Economics and International Relations and an MBA degree in Business Management, both from the Hebrew University of Jerusalem.

Under a shareholders’ agreement entered into on March 6, 2013, the Recanati Group, on the one hand, and the Damar Group, on the other hand, have each agreed to vote the ordinary shares beneficially owned by them in favor of the election of director nominees designated by the other group as follows: (i) three director nominees, so long as the other group beneficially owns at least 7.5% of our outstanding share capital, (ii) two director nominees, so long as the other group beneficially owns at least 5.0% (but less than 7.5%) of our outstanding share capital, and (iii) one director nominee, so long as the other group beneficially owns at least 2.5% (but less than 5.0%) of our outstanding share capital. In addition, to the extent that after the designation of the foregoing director nominees there are additional director vacancies, each of the Recanati Group and Damar Group have agreed to vote the ordinary shares beneficially owned by them in favor of such additional director nominees designated by the party who beneficially owns the larger voting rights in our company. See “Item 7. Major Shareholders and Related Party Transactions — Related Party Transactions — Shareholder Agreement.”

Board of Directors

Under our articles of association, the number of directors on our board of directors must be no less than five and no more than 11. Our board of directors currently consists of eight directors, six of whom qualify as “independent directors” under the Nasdaq listing requirements, such that we comply with the Nasdaq Listing Rule that requires that a majority of our board of directors be comprised of independent directors, within the meaning of Nasdaq Listing Rules.

Our directors are elected by the vote of a majority of the ordinary shares present, in person or by proxy, and voting at a shareholders’ meeting. Each director holds office until the first annual general meeting of shareholders following his or her appointment, unless the tenure of such director expires earlier pursuant to the Companies Law or unless he or she is removed from office as described below.

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Vacancies on our board of directors, including vacancies resulting from there being fewer than the maximum number of directors permitted by our articles of association, may generally be filled by a vote of a simple majority of the directors then in office.

A general meeting of our shareholders may remove a director from office prior to the expiration of his or her term in office by a resolution adopted by holders of a majority of our shares voting on the proposed removal, provided that the director being removed from office is given a reasonable opportunity to present his or her case before the general meeting.

External Directors

Under the Companies Law, companies incorporated under the laws of the State of Israel that are “public companies,” must appoint at least two external directors who meet the qualification requirements in the Companies Law.

However, according to regulations promulgated under the Companies Law, a company whose shares are traded on certain stock exchanges outside Israel (including the Nasdaq Global Select Market, such as our company) that does not have a controlling shareholder and that complies with the requirements of the laws of the foreign jurisdiction where the company’s shares are listed, as they apply to domestic issuers, with respect to the appointment of independent directors and the composition of the audit committee and compensation committee, may elect to exempt itself from the requirements of Israeli law with respect to (i) the requirement to appoint external directors and that one external director serve on each committee of the board of directors authorized to exercise any of the powers of the board of directors; (ii) certain limitations on the employment or service of an external director or his or her spouse, children or other relatives, following the cessation of the service as an outside director, by or for the company, its controlling shareholder or an entity controlled by the controlling shareholder; (iii) the composition, meetings and quorum of the audit committee; and (iv) the composition and meetings of the compensation committee. If a company has elected to avail itself from the requirement to appoint external directors and at the time a director is appointed all members of the board of directors are of the same gender, a director of the other gender must be appointed.

On January 30, 2017, following analysis of our qualification to rely on the exemption, our board of directors determined to adopt the exemption. If in the future we were to have a controlling shareholder, we would again be required to comply with the requirements relating to external directors and the composition of the audit committee and compensation committee under Israeli law.

Audit Committee

We have an audit committee consisting of Mr. Avraham Berger, Ms. Karnit Goldwasser and Mr. Leon Recanati. Mr. Avraham Berger serves as the chairman of the audit committee.

In accordance with regulations promulgated under the Companies Law described above, we elected to “opt out” from the Israeli Companies Law requirement to appoint external directors and related rules concerning the composition of the audit committee and compensation committee. Under such exemption, among other things, the composition of our audit committee must comply with the requirements of SEC and Nasdaq rules.

Under the Exchange Act and Nasdaq listing requirements, we are required to maintain an audit committee consisting of at least three independent directors, each of whom is financially literate and one of whom has accounting or related financial management expertise. Our board of directors has affirmatively determined that each member of our audit committee qualifies as an “independent director” for purposes of serving on an audit committee under the Exchange Act and Nasdaq listing requirements. Our board of directors has determined that Avraham Berger qualifies as an “audit committee financial expert,” as defined in Item 407(d)(5) of Regulation S-K. All members of our audit committee meet the requirements for financial literacy under the applicable rules and regulations of the SEC and Nasdaq.

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Audit Committee Role

Our audit committee generally provides assistance to our board of directors in fulfilling its legal and fiduciary obligations in matters involving our accounting, auditing, financial reporting and internal control functions by reviewing the services of our independent accountants and reviewing their reports regarding our accounting practices and systems of internal control over financial reporting. Our audit committee also oversees the audit efforts of our independent accountants. Our audit committee also acts as a corporate governance compliance committee and oversees the implementation and amendment, from time to time, of our policies for compliance with Israeli and U.S. securities laws and applicable Nasdaq corporate governance requirements, including non-use of inside information, reporting requirements, our engagement with related parties, whistleblower complaints and protection, and is also responsible for the handling of any incidents that may arise in violation of our policies or applicable securities laws. Our board of directors has adopted an audit committee charter setting forth the specific responsibilities of the audit committee consistent with the Companies Law, and the rules and regulations of the SEC and the Nasdaq listing requirements, which include:

● oversight of our independent auditors and recommending the engagement, compensation or termination of engagement of our independent auditors to the board of directors or shareholders for their approval, as applicable, in accordance with the requirements of the Companies Law;

● pre-approval of audit and non-audit services to be provided by the independent auditors;

● reviewing and recommending to the board of directors approval of our quarterly and annual financial reports; and

● overseeing the implementation and amendment of our policies for compliance with Israeli and U.S. securities laws and applicable Nasdaq corporate governance requirements.

Additionally, under the Companies Law, the role of the audit committee includes: (1) determining whether there are delinquencies in the business management practices of our company, including in consultation with our internal auditor or our independent auditor, and making recommendations to the board of directors to improve such practices; (2) determining whether to approve certain related party transactions (including transactions in which an office holder has a personal interest) and whether any such transaction is an extraordinary or material transaction under the Companies Law; (3) determining whether a competitive process must be implemented for the approval of certain transactions with controlling shareholders or in which a controlling shareholder has a personal interest (whether or not the transaction is an extraordinary transaction), under the supervision of the audit committee or other party determined by the audit committee and in accordance with standards determined by the audit committee, or whether a different process determined by the audit committee should be implemented for the approval of such transactions; (4) determining the process for the approval of certain transactions with controlling shareholders that the audit committee has determined are not extraordinary transactions but are not immaterial transactions; (5) where the board of directors approves the work plan of the internal auditor, examining such work plan before its submission to the board of directors and proposing amendments thereto; (6) examining our internal controls and internal auditor’s performance, including whether the internal auditor has sufficient resources and tools to dispose of its responsibilities; (7) examining the scope of our auditor’s work and compensation and submitting its recommendation with respect thereto to the corporate body considering the appointment thereof (either the board of directors or the shareholders at the general meeting); and (8) establishing procedures for the handling of employees’ complaints as to the management of our business and the protection to be provided to such employees.

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Compensation Committee

We have a compensation committee consisting of Mr. Leon Recanati, Mr. Avraham Berger, Ms. Karnit Goldwasser and Ms. Lilach Asher-Topilsky. Mr. Recanati serves as the chairman of the compensation committee.

In accordance with regulat