DRS 1 filename1.htm

As confidentially submitted to the Securities and Exchange Commission on July 10, 2013.
This draft registration statement has not been publicly filed with the Securities and Exchange Commission
and all information herein remains strictly confidential.

Registration No. 333-         

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549



 

FORM F-1

REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933



 

ENZYMOTEC LTD.

(Exact Name of Registrant as Specified in its Charter)



 

   
State of Israel   2833   Not Applicable
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)

Enzymotec Ltd.
Sagi 2000 Industrial Area
P.O. Box 6
Migdal Ha’Emeq 2310001, Israel
+972-74-717-7177

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

Enzymotec USA, Inc.
55 Madison Avenue, Suite 400
Morristown, NJ 07960
Tel: (973) 912-9400

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



 

Copies of all correspondence to:

     
Colin J. Diamond, Esq.
Joshua G. Kiernan, Esq.
White & Case LLP
1155 Avenue of the Americas
New York, NY 10036
Tel: (212) 819-8200
Fax: (212) 354-8113
  Dan Shamgar, Adv.
David S. Glatt, Adv.
Meitar Liquornik Geva
Leshem Tal
16 Abba Hillel Silver Rd.
Ramat Gan 5250608, Israel
Tel: +972-3-610-3100
Fax: +972-3-610-3111
  Phyllis G. Korff, Esq.
Yossi Vebman, Esq.
Skadden, Arps, Slate, Meagher
& Flom LLP
4 Times Square
New York, NY 10036
Tel: 212-735-3000
Fax: 212-735-2000
  Chaim Friedland, Adv.
Ari Fried, Adv.
Gornitzky & Co.
Zion House, 45 Rothschild Blvd.
Tel Aviv 6578403, Israel
Tel: +972-3-710-9191
Fax: +972-3-560-6555


 

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

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

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

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

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

CALCULATION OF REGISTRATION FEE

   
Title of each class of securities to be registered   Proposed maximum aggregate offering price(1)(2)   Amount of registration fee
Ordinary shares, par value NIS 0.01 per share   $     $  

(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) of the Securities Act.
(2) Includes ordinary shares that the underwriters may purchase pursuant to their option to purchase additional ordinary shares, if any.

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

 

 


 
 

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

Subject to Completion
Preliminary Prospectus dated July 10, 2013

P R O S P E C T U S

      Shares

[GRAPHIC MISSING]

Enzymotec Ltd.

Ordinary Shares



 

This is Enzymotec Ltd.’s initial public offering. We are selling      of our ordinary shares.

We expect the public offering price to be between $     and $     per share. No public market currently exists for the ordinary shares. After pricing of the offering, we expect that the ordinary shares will trade on the NASDAQ Global Market under the symbol “ENZY.”

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 and will therefore be subject to reduced reporting requirements.

Investing in the ordinary shares involves risks that are described in the “Risk Factors” section beginning on page 14 of this prospectus.



 

   
  Per Share   Total
Public offering price   $     $  
Underwriting discount(1)   $     $  
Proceeds, before expenses, to us   $     $  

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

The underwriters may also exercise their option to purchase up to an additional      ordinary shares from us, at the public offering price, less the underwriting discount, for 30 days after the date of this prospectus.

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

The ordinary shares will be ready for delivery on or about            , 2013.



 
 
BofA Merrill Lynch   Jefferies

Wells Fargo Securities

Canaccord Genuity

Wedbush Securities



 

The date of this prospectus is            , 2013.


 
 

TABLE OF CONTENTS

Table of contents

 
  Page
Prospectus summary     1  
Risk factors     14  
Forward-looking statements; cautionary information     37  
Use of proceeds     38  
Dividend policy     39  
Capitalization     40  
Dilution     41  
Selected consolidated financial data     43  
Management’s discussion and analysis of financial condition and results of operations     47  
Business     68  
Management     93  
Principal shareholders     113  
Certain relationships and related party transactions     116  
Description of share capital     118  
Shares eligible for future sale     124  
Taxation and government programs     127  
Underwriting     137  
Expenses related to this offering     144  
Experts     144  
Legal matters     144  
Enforceability of civil liabilities     145  
Where you can find additional information     146  
Index to consolidated financial statements     F-1  

Neither we nor the underwriters have authorized anyone to provide information different from that contained in this prospectus, any amendment or supplement to this prospectus or in any free writing prospectus prepared by us or on our behalf. Neither we nor the underwriters take any responsibility for, and can provide no assurance as to the reliability of, any information other than the information in this prospectus,any amendment or supplement to this prospectus, and any free writing prospectus prepared by us or on our behalf. Neither the delivery of this prospectus nor the sale of our ordinary shares means that information contained in this prospectus is correct after the date of this prospectus. This prospectus is not an offer to sell or the solicitation of an offer to buy these ordinary shares in any circumstances under which such offer or solicitation is unlawful.

This prospectus includes statistical data, market data and other industry data and forecasts, which we obtained from market research, publicly available information and independent industry publications and reports that we believe to be reliable sources.

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PROSPECTUS SUMMARY

This summary does not contain all of the information you should consider before investing in our ordinary shares. You should read this summary together with the more detailed information appearing in this prospectus, including “Risk factors,” “Selected consolidated financial data,” “Management’s discussion and analysis of financial condition and results of operations,” “Business” and our consolidated financial statements and the related notes included at the end of this prospectus, before making an investment in our ordinary shares. All references to “Enzymotec,” “we,” “us,” “our,” the “Company” and similar designations refer to Enzymotec Ltd. and its wholly-owned subsidiaries, Enzymotec USA, Inc. and VAYA Pharma, Inc., and, where the context so requires, its 50%-owned joint venture, Advanced Lipids AB, a Swedish company. The terms “shekels,” “Israeli shekels” and “NIS” refer to New Israeli Shekels, the lawful currency of the State of Israel, and the terms “dollar,” “US$” or “$” refer to U.S. dollars, the lawful currency of the United States. Unless derived from our financial statements or otherwise indicated, U.S. dollar translations of NIS amounts presented in this prospectus are translated using the rate of NIS3.648 to US$1.00, the exchange rate reported by the Bank of Israel on March 28, 2013.

Our Company

We are a rapidly growing and profitable nutritional ingredients and medical foods company. Our proprietary technologies, research expertise, and clinical validation process enable us to develop differentiated solutions across a variety of products. Our innovative and diverse product suite addresses the entire human life-cycle — from infancy to old age — and is comprised of novel key ingredients in products ranging from infant formula to nutritional supplements, as well as branded medical foods, sold only under a doctor’s supervision. We market our product portfolio to established global consumer companies and target large and growing consumer health and wellness markets. Our strategic partnerships, state-of-the-art good manufacturing practice (“GMP”)-compliant manufacturing facility, and global sales and marketing infrastructure enable us to develop, manufacture and market our comprehensive product solutions to our customers globally. By leveraging a shared and scalable research and development platform, we are able to grow cost-effectively and profitably.

Our clinically-validated products include bio-functional lipid-based compounds designed to address dietary needs, medical disorders and common diseases. Lipids represent a major structural component of all life and are essential for cell structure and important biological functions, including energy storage and cell signaling. Our proprietary technologies enable us to identify appropriate lipid-modifying enzymes and then improve the activity of these enzymes to enhance their efficiency, stability and recyclability, as well as to enable their use in organic media. These enhanced enzymes are then utilized to restructure lipids found in natural sources including krill, fish, vegetable sources and bovine milk. We transform the lipids from these raw materials into lipids that are familiar to the human body but cannot be extracted efficiently or in sufficient yield, are not provided in sufficient amounts through normal dietary intake or cannot otherwise be manufactured. For example, our leading infant formula ingredient product, InFat, is produced through modifying the molecular structure of vegetable oils to create an ingredient that more closely resembles a key component of human breast milk that is known to facilitate healthy infant development. Similarly, Vayarin, one of our branded medical foods, utilizes the same technologies to create a safe and stimulant-free solution for the dietary management of certain lipid imbalances associated with attention deficit hyperactivity disorder (“ADHD”) in children. Our expertise also allows us to produce lipid ingredients that have beneficial secondary characteristics, such as extended shelf life, nutrient absorption and improved scent or taste profile. We leverage our technology platform to develop new products, improve our existing leading product portfolio and create new product categories.

We were founded in 1998, launched our first product in 2003 and since then have designed, developed and launched 11 additional products, generating sales in over 30 countries. Our net revenues, adjusted EBITDA and net income for 2012 were $37.9, $7.0 and $4.8 million, respectively. We have grown net revenues by a compounded annual growth rate of 37% from 2009 to 2012, and grew net revenues by 72% in the first quarter of 2013 compared to the first quarter of 2012.

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We have two reportable segments: Nutrition and VAYA Pharma segments, both of which offer a variety of products that leverage our lipid-related expertise. Our Nutrition and VAYA Pharma segments represented 96% and 4% of net revenues in 2012, respectively.

Nutrition.  Our Nutrition segment develops and manufactures nutritional ingredient products based on lipids, such as phospholipids, which form the structural basis of cell membranes and are easily recognized, incorporated and used by the body. Our customer base for this segment includes leading infant formula and nutritional supplement companies such as Biostime and IVC. Our two best-selling nutritional ingredient products are InFat, a clinically-proven fat ingredient for infant formula, and krill oil.

Our premium infant formula ingredient products seek to more closely resemble the composition and properties of human breast milk fat, which is considered the “gold standard” in infant nutrition because of both its short and long term health and developmental benefits, to facilitate healthy infant development. Peer reviewed clinical studies published in 2012 and 2013 demonstrate that our leading formula ingredient product, InFat, provides unique benefits such as stronger bones, improved intestinal flora and reduced crying, in addition to reduced constipation, improved calcium absorption and more efficient energy intake. As a result, we believe InFat is the most significant development to infant formula ingredients since DHA and ARA were introduced to the market almost 15 years ago. The next generation of our infant formula ingredient products targets additional attributes of key lipids found in human breast milk such as improved brain development. InFat has been achieving rapid penetration in the Chinese and other Asian markets, and we believe that we have significant opportunities in other developing markets and developed markets such as North America and Europe. InFat is sold and marketed through Advanced Lipids AB, or AL, our joint venture with AarhusKarlshamn AB, or AAK, a Sweden-based, global producer of specialty oils.

Our krill oil products, which provide the benefits of Omega-3 fatty acids, have significantly improved bioavailability over competing products in the market. We use our technological and manufacturing know-how to provide additional secondary benefits such as improved scent, taste and shelf life. Our other products in this segment are targeted at improving brain health and providing benefits in memory, learning abilities and concentration. In addition, we add value to our customers through product customization, clinical validation, regulatory expertise and quality control. We believe there are significant growth opportunities in other geographic markets beyond our core markets in the United States and Australia, and also intend to capitalize on consumer trends towards supplementing their diets with premium health and wellness products.

VAYA Pharma.  VAYA Pharma, develops, manufactures and sells branded, prescription-only medical foods for the dietary management of patients with certain medical conditions or diseases having special, medically determined nutrient requirements. Although medical foods must be proven to be safe and effective as demonstrated in human clinical studies, they do not require the same expensive and time consuming regulatory approval process typical of prescription drugs. Our U.S. medical foods business generated its first revenues in 2011 and currently consists of three branded products, all based on our proprietary lipid-based technologies, which address the dietary management of the following conditions: hypertriglyceridemia (Vayarol); lipid imbalances associated with ADHD in children (Vayarin); and lipid imbalances associated with early, age-related memory impairment (Vayacog). Our products are designed to provide a safe, cost-effective, first-line dietary therapy. We are currently planning future clinical studies for two of our medical food products, to reach an expanded consumer market and to support additional marketing claims. In addition to our existing products, we have several other products to address additional indications in the development phase. We currently market VAYA Pharma products in five states in the United States and have plans to expand both in the United States and globally.

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Our Market Opportunity

Our markets are large and growing. We address multiple markets, which all have favorable characteristics:

The nutrition market encompasses a number of product categories including supplements, natural/organic foods, functional foods and natural personal care. According to the Nutrition Business Journal, the global nutrition market was a $301 billion industry in 2010. We operate within two areas of the global nutritional ingredients market, the infant nutrition market and the vitamin, minerals and supplements market:

The infant nutrition market represented approximately $39.6 billion globally in 2010 and is expected to grow at a 10.5% compound annual growth rate, or “CAGR”, in current prices, from 2012 to 2017 according to industry sources. The market is driven by global birth rates, as well as an expanding global middle class with greater financial means to focus on health and nutrition products. The Chinese market, for example, is expected to grow at an 18.6% CAGR, in current prices, from 2012 to 2017, according to the same source. According to industry sources, within infant nutrition, milk formula represented approximately $27.4 billion or 69.2% of the market in 2010. “Premiumisation” is a trend in infant nutrition, resulting from consumers placing a higher value on nutritional benefits than price, a trend that favors us with our premium lipid-based ingredients. Infant nutrition is also on a recurring innovation cycle, as key producers attempt to create excitement for their new products to drive market share. Currently, fats represent approximately 22% of the raw materials in infant formula, mainly in the form of vegetable oil blends, which is the ingredient we seek to replace.
The vitamins, minerals and supplements market represented a diverse global market of approximately $71.4 billion in 2010 and is expected to grow at a CAGR of 5.4% in current prices from 2012 to 2017 according to industry sources. Within the nutritional supplements market, omega-3 products represented $3.2 billion in 2011 and are expected to grow at a 7.3% CAGR from 2011 to 2016 according to the Global Organization for EPA and DHA omega-3s (“GOED”). The market for krill oil is expected to be the fastest growing segment in the global marine omega-3 ingredients market, according to a June 2011 report by Frost & Sullivan, growing at a CAGR of 15.7% from $90.7 million in 2010 to $187.9 million in 2015. We believe the krill oil market will continue to grow at an accelerated rate because of krill oil’s ability to offer benefits in addition to fish oil, due to its astaxanthin, vitamins A and D, and phospholipid content, as well as its relatively better sustainability message.

The medical conditions we address in our portfolio of medical foods impact significant populations:

Triglycerides, or TGs, are fats that are carried in the blood. Elevated levels can cause hypertriglyceridemia, a condition associated with an increased risk of atherosclerotic cardiovascular disease. Hypertriglyceridemia can be caused by both genetic and environmental factors, with environmental factors including obesity, sedentary lifestyle and high-caloric diets. According to an April 2011 article by the American Heart Association, about 31% of the U.S. population has elevated triglycerides, defined as TG levels above 150 mg/dL. The hypertriglyceridemia market, defined as TG levels of 200 – 500 mg/dL, comprises approximately 16% of the U.S. population. The severe hypertriglyceridemia market, defined as TG levels above 500 mg/dL, comprises around 2% of the population.
ADHD is one of the most common behavioral disorders, and 2013 data from the Federal Centers for Disease Control and Prevention estimates that 11% of school-aged children in the United States have received a diagnosis of ADHD. Additionally, according to a November 2010 report by the National Survey of Children’s Health, the percentage of parent-reported ADHD diagnosis increased from 7.8% to 9.5% from 2003 – 2007. Adult diagnosis and treatment is forecast to grow in the near future due to increased disease awareness and reduced stigmatization of the condition. GlobalData estimated in a November 2011 report that the global ADHD therapeutics market was valued at $3.9 billion in 2010, and is forecast to grow at a CAGR of 8.0% over the next eight years to reach $7.1 billion by 2018.

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Memory impairment is a significant issue globally, particularly in developed markets, where the aged population is growing. According to an article published in the Annals of Internal Medicine, in 2002 an estimated 5.4 million people (22.2%) in the United States age 71 years or older had cognitive impairment without dementia. There has also been increased frequency of brain-related disorders in China, affecting 1 in 1,000 of the population, rising to 1 in 50 among those aged over 80.

Our Competitive Strengths

Clinically-proven and safe products supported by proprietary technology.  Our innovative proprietary technology platform is leveraged by our expertise in lipid product development, lipid modification and lipid analysis and characterization. Since our inception, we have focused on identifying, developing and using enzymes as catalysts to support our lipid molecule modification capabilities. Through these highly refined and industrialized modification and purification processes, we have cost-effectively built a large portfolio of high-value products with broad applications in a variety of consumer end markets. The strength of our technology platform reflects over 14 years of industry experience, proprietary know-how, intellectual property and an in-depth understanding of our key end-markets and customer needs. Our products have demonstrated their health benefits to consumers in many pre-clinical and clinical trials: We have successfully completed 10 pivotal controlled randomized clinical trials for our products over the past nine years, as well as an additional four clinical trials that were single-arm open-labeled and have published these data in 20 peer-reviewed articles. Our extensive global regulatory expertise has enabled us to launch products in over 30 markets. We have over 150 patents and patent applications worldwide, which cover our manufacturing processes, products and technologies. We believe the combination of all these factors creates high barriers to entry.

Diversified business model.  We benefit from product, customer and geographical market diversification across our company. We develop and market multiple products that address dietary needs, medical disorders and common diseases using a variety of lipid families. We sell to various customers, consumers and geographies, offering our products globally, with particular strength in the United States, China and Australia/New Zealand as end markets. Though our geographical split by customer headquarters is 46% United States, 31% Australia/New Zealand, 18% Europe, 4% Asia and 1% Israel for fiscal year 2012, we believe our geographical split over the same time period by end consumer location is approximately half in the United States, one-quarter in Asia, one-quarter in Australia/New Zealand and a small percentage in Europe and Israel.

Integrated scalable platform and product offering.  We believe that our integrated platform including technology, research and development, and manufacturing will continue to serve as an engine of growth that feeds our product pipeline. We not only develop and invent products, but also design the processes by which they can be produced at scale, and manufacture both end products and certain catalysts based on enzymes used in our manufacturing processes. Our GMP-compliant manufacturing facility has the ability to be expanded to accommodate significant additional volume. We sell not just a product, but also customized value-added solutions including clinical support for product claims, pharmaceutical-grade manufacturing capabilities, consumer marketing support and access to further innovation.

Culture of profitable innovation.  We are focused across our organization on providing innovative products profitably. Our process development team is highly integrated with our research and development team in order to optimize the gross profit potential and return on investment of any new product. Since our founding in 1998, we have required only approximately $40 million of net investment to develop and grow our business. This investment funded our state of the art manufacturing facility, the development of our technologies and intellectual property, clinical validation and regulatory approvals of our products, and the establishment of our global commercial infrastructure. For products such as our krill oil end product and medical foods that we can manufacture most profitably, we do so ourselves. Where we believe our profits can be maximized by working with partners, we seek to do so. For example we have established a joint venture with AAK, a Sweden-based, global producer of specialty oils, pursuant to which both we and AAK contribute our capabilities — we supply the essential enzymes, science and technology, while AAK produces the end product for InFat.

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Strong customer relationships.  We have long-term relationships with leading infant nutrition, nutritional supplement and pharmaceutical companies, including Biostime, IVC and Teva. We have multi-year contracts with many of our customers and are embedded within their product development cycles, resulting in high switching costs for them and providing us with good visibility on sales. The key to our success is the support we provide across customer organizations including their sales, marketing, R&D and business development departments, as well as their senior management, to help our customers expand their businesses. This approach has led to high customer loyalty and retention and a growing customer base.

Experienced leadership and scientific advisory boards.  Our management team, led by Dr. Ariel Katz, our Chief Executive Officer, has over 130 years of cumulative experience. The majority of our senior management team has worked together for over a decade. Our board includes several industry leaders with experience in high growth companies such as Martek, Teva and Israel Corp. For each of our core product groups, we maintain a dedicated scientific advisory board composed of key opinion leaders (KOL) and industry experts.

Our Growth Strategy

Focus on large and growing consumer-driven end markets.  We focus on rapidly growing consumer end markets, including infant nutrition and consumer health and wellness. Going forward, we intend to leverage our global reach and extensive customer relationships to further penetrate these markets and accelerate our growth. For example, infant nutrition is an attractive category expected to grow at 10.5% CAGR from 2012 to 2017 in current prices according to industry sources. We believe that our infant nutrition products have the potential to outpace this industry growth as they replace conventional vegetable oils traditionally used in most infant formula. The omega-3 market is expected to grow greater than 7% annually from 2011 to 2016 according to the Global Organization for EPA and DHA omega-3s (“GOED”). Today krill oil represents only 1% of the market by volume. Given the additional benefits of our krill products in terms of stability and shelf life, nutrient absorption in the body, and scent/taste profile, we believe we have the potential to outpace industry growth as we continue to take market share. According to a March 2012 report by Biostrategies Group, a healthcare consulting firm, the medical foods market approximated $2.1 billion in the United States in 2011.

Further develop customer relationships and expand global footprint.  We sell our nutrition products to manufacturers of branded products in different markets around the world. We are highly focused on further penetrating existing customers and developing new customer relationships across new geographies. To achieve these goals, we work with our customers to tailor our products and services to meet their individual needs. Our ability to customize nutrition solutions for our existing customers has enabled us to build strong relationships and identify new opportunities to cross-sell additional products. Furthermore, we expect to continue attracting new customers as the strong brand recognition of our existing key customers, such as Biostime and IVC in our Nutrition segment, builds consumer awareness of our premium products. Sales of our infant formula products are currently strongest in China, while sales of our other nutrition products are strongest in the United States and Australia. We plan to utilize our global presence to cross-market products in our different geographies and build awareness of our premium products among branded product manufacturers. We plan to take advantage of our presence and experience selling products in markets outside of the United States to expand the distribution of our VAYA Pharma products.

Grow the medical foods segment.  VAYA Pharma, our medical foods segment, currently targets three large market opportunities relating to: ADD/ADHD, cognitive impairment and cardiovascular health. Given the early acceptance and adoption of our VAYA products by the medical community, we plan to expand our U.S. salesforce and engage in targeted educational activities to increase product awareness and drive sales. In addition, we plan to conduct additional clinical studies appropriately to expand the label claims and market opportunity of our VAYA Pharma products. Currently, approximately 30% of current sales of VAYA Pharma products in the United States receive some form of reimbursement from third-party payers. We are in discussions with both public (Medicare/Medicaid) and private health insurance providers to gain additional coverage for our VAYA Pharma products by demonstrating both cost effectiveness and benefits for patients. We plan to grow our VAYA Pharma sales outside the United States through additional strategic partnerships, such as the relationships we have developed with Teva in Israel, Daiichi Sankyo in Brazil and Elder in India.

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Maximize the potential of our VAYA products and product candidates.  We believe that several of our nutritional and medical food products could represent attractive commercial opportunities if registered and approved as pharmaceutical drugs. As such, we may in the future seek to explore a commercialization path for our products as prescription drugs, either alone or with partners, as these products move closer to full pharmaceutical approval. For example, Vayarol, our Phytosterol-Omega-3 based medical food product, has demonstrated in clinical studies the ability to manage hypertriglyceridemia and unlike some current drugs on the market, or in development, it can decrease triglycerides levels without elevating LDL (bad) cholesterol levels. We recently submitted an Investigational New Drug Application, or IND, and requested an End of Phase 2 meeting in order to ultimately receive a Special Protocol Assessment, or SPA, from the FDA, and proceed to conduct a pivotal Phase 3 clinical trial. We believe that several of our products targeting neurological disorders and diseases could also follow this path and cross over from the medical food market into the prescription drug market.

Invent and market new products.  Our proven research and development platform generates new product candidates in both of our segments. We plan to launch two new products in the next twelve months and have a pipeline of more than 10 additional products in various stages of development. Some of these products address new medical indications or provide new dietary or medical benefits, while others provide different levels/concentrations of active ingredients and offer improved secondary characteristics, such as our krill oil in powder form. We believe our new products will enable us to continue growing in our existing markets and to expand into new markets.

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RISK FACTORS

Investing in our ordinary shares involves risks. You should carefully consider the risks described in “Risk Factors” beginning on page 14 before making a decision to invest in our ordinary shares. The following is a summary of some of the principal risks we face:

We depend on third parties to obtain raw materials, in particular krill, necessary for the production of our products.
A high proportion of the sales of our InFat product is sold to end users by a single company in China.
We rely on our Swedish joint venture partner to manufacture InFat, and certain operational matters related to the joint venture are the subject of a disagreement.
Our gross profits may be adversely affected if we are only able to obtain lower quality krill meal.
Our ability to obtain krill may be affected by conservation regulation or initiatives.
We are dependent on a single facility that houses the majority of our operations.
We may not be able to expand our production or processing capabilities or satisfy growing demand.
Our product development cycle is lengthy and uncertain, and our development or commercialization efforts for our products may be unsuccessful.
We are subject to significant and increasing government regulations regarding the sale and marketing of our products.
We may not be able to protect our proprietary technology or prevent its unauthorized use by third parties.
We are currently subject to litigation, and in the future may become subject to additional litigation, regarding intellectual property rights.

Our corporate information

We were incorporated under the laws of the State of Israel on March 8, 1998. Our principal executive offices are located at the Sagi 2000 Industrial Area, P.O. Box 6, Migdal Ha’Emeq 2310001, Israel, and our telephone number is +972-74-717-7177. We have offices in Israel and the United States and a representative office in China, as well as a joint venture located in Sweden. Our website is www.enzymotec.com. Information contained on, or that can be accessed through, our website does not constitute a part of this prospectus and is not incorporated by reference herein. We have included our website address in this prospectus solely as an inactive textual reference.

Unless the context otherwise indicates or requires, “Enzymotec”, “VAYA”, “InFat”, the InFat logo, “MSO” and all product names and trade names used by us in this prospectus are our trademarks, some of which may be registered in certain jurisdictions. Although we have omitted the “®” and “TM” trademark designations for such marks in this prospectus, all rights to such trademarks are nevertheless reserved. Furthermore, the “Enzymotec” design logo is our property. This prospectus contains additional trade names and trademarks of other companies. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.

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THE OFFERING

Ordinary shares we are offering    
           ordinary shares (or      if the underwriters exercise their option to purchase additional ordinary shares in full)
Ordinary shares to be outstanding immediately after this offering    
          ordinary shares (or      if the underwriters exercise their option to purchase additional ordinary shares in full)
Use of proceeds    
    We estimate that we will receive net proceeds from this offering of approximately $      million, or approximately $      million if the underwriters exercise their option to purchase additional ordinary shares in full, based on an assumed initial public offering price of $      per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses.
    We intend to use the net proceeds from this offering to meet our anticipated increased working capital requirements resulting from the expected growth in our business and for other general corporate purposes.
Risk factors    
    Investing in our ordinary shares involves a high degree of risk and purchasers of our ordinary shares may lose part or all of their investment. See “Risk factors” for a discussion of factors you should carefully consider before deciding to invest in our ordinary shares.
Proposed NASDAQ Global Market symbol    
    We intend to apply to have our ordinary shares listed on the NASDAQ Global Market under the symbol “ENZY.”

Unless otherwise stated, the number of ordinary shares to be outstanding after this offering:

is based on 240,949 ordinary shares outstanding as of March 31, 2013 assuming the conversion of all outstanding preferred shares, including preferred shares to be issued immediately prior to the closing of this offering pursuant to the exercise of warrants held by certain of our shareholders, into ordinary shares; and
excludes 28,900 ordinary shares reserved for issuance under our share option plans as of March 31, 2013, of which options to purchase 27,155 ordinary shares have been granted at a weighted average exercise price of $145.26 per share.

As of March 31, 2013, 21,042 of our outstanding options were vested. Pursuant to the terms of our 2003 share option plan, options to purchase 3,057 ordinary shares will vest and become exercisable upon the closing of this offering and options to purchase 3,056 shares will vest and become exercisable no later than one year after that date.

Unless otherwise indicated, all information in this prospectus:

reflects the conversion of all outstanding preferred shares, including preferred shares to be issued immediately prior to the closing of this offering pursuant to the exercise of warrants held by certain of our shareholders, into 196,666 ordinary shares, which will automatically occur immediately prior to the closing of this offering;
assumes an initial public offering price of $      per ordinary share, the midpoint of the range on the cover of this prospectus;
assumes no exercise by the underwriters of their option to purchase up to an additional ordinary shares from us;
reflects the issuance of     bonus shares for each ordinary share then outstanding effected on 2013; and
gives effect to the adoption of our amended articles of association prior to the closing of this offering, which will replace our articles of association currently in effect.

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following table is a summary of our historical consolidated financial data, which is derived from our consolidated financial statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles, or U.S. GAAP. The summary consolidated financial statement data for the years ended December 31, 2011 and 2012 is derived from our audited consolidated financial statements presented elsewhere in this prospectus. The summary consolidated financial statement data for the year ended December 31, 2010 is derived from our audited consolidated financial statements not included in this prospectus. The summary consolidated financial statement data for the three months ended March 31, 2012 and 2013, and as of March 31, 2013, is derived from our unaudited interim consolidated financial statements presented elsewhere in this prospectus. In the opinion of management, these unaudited interim consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of our financial position and operating results for these periods. Results for interim periods are not necessarily indicative of the results that may be expected for the entire year.

You should read this summary financial data in conjunction with, and it is qualified in its entirety by, reference to our historical financial information and other information provided in this prospectus including, “Selected consolidated financial data,” “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements and related notes. The historical results set forth below are not necessarily indicative of the results to be expected in future periods.

         
  Year ended
December 31,
  Three months ended March 31,
     2010   2011   2012   2012   2013
     (in thousands, except per share data)
Consolidated statements of operations data:
                                            
Net revenues   $ 17,440     $ 23,019     $ 37,867     $ 8,019     $ 13,830  
Cost of revenues     11,459       13,468       19,815       3,959       7,282  
Gross profit     5,981       9,551       18,052       4,060       6,548  
Operating expenses:
                                            
Research and development, net     3,062       3,860       4,611       1,205       1,445  
Selling and marketing     2,012       3,580       5,191       1,143       1,564  
General and administrative     2,036       2,458       2,935       706       1,117  
Total operating expenses     7,380       9,898       12,737       3,054       4,126  
Income (loss) from operations     (1,399 )      (347 )      5,315       1,006       2,422  
Financial expense, net     (427 )      (416 )      (539 )      (75 )      (81 ) 
Income (loss) before taxes on income     (1826 )      (763 )      4,776       931       2,341  
Taxes on income     (141 )      (137 )      (180 )      (40 )      (75 ) 
Share in profits of equity investee     61       36       186       39       78  
Net income (loss)   $ (1,906 )    $ (864 )    $ 4,782     $ 930     $ 2,344  
Earnings (loss) per ordinary share:(1)
                                            
Basic   $ (52.85 )    $ (19.81 )    $ 22.34     $ 4.40     $ 10.15  
Diluted   $ (52.85 )    $ (19.81 )    $ 19.34     $ 3.93     $ 8.04  
Weighted average number of ordinary shares used in computing earnings (loss) per ordinary share:(1)
                                            
Basic     36,065       43,610       44,068       44,068       44,259  
Diluted     36,065       43,610       50,910       49,336       55,903  

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  Year ended
December 31,
  Three months ended March 31,
     2010   2011   2012   2012   2013
     (in thousands, except per share data)
Pro forma earnings per ordinary share (unaudited):(2)
                                            
Basic               $ 22.34           $ 10.15  
Diluted               $ 21.65           $ 9.66  
Weighted average number of ordinary shares used in computing pro forma earnings per ordinary share (unaudited)(2)
                                            
Basic                 214,079             230,900  
Diluted                 220,921             242,544  

   
  As of March 31, 2013
     Actual   Pro forma as adjusted(3)
     (in thousands)
Consolidated balance sheet data:
                 
Cash and cash equivalents   $ 10,119     $  
Current assets     33,928           
Current liabilities     10,583           
Total assets     59,187           
Total debt     4,725           
Total liabilities     15,719           
Shareholders’ equity     43,468           

(1) Basic and diluted earnings (loss) per ordinary share is computed based on the basic and diluted weighted average number of ordinary shares outstanding during each period using the two-class method for participating preferred shares. For additional information, see Notes 1q and 15 to our consolidated annual financial statements included elsewhere in this prospectus.
(2) Pro forma basic and diluted earnings per ordinary share and pro forma basic and diluted weighted average ordinary shares outstanding give effect to the conversion of all outstanding preferred shares into ordinary shares, which will automatically occur immediately prior to the closing of this offering, but does not include (i) the preferred shares to be issued upon the closing of this offering pursuant to the exercise of warrants held by certain of our shareholders, and (ii) the issuance of shares in connection with this offering. For additional information on the conversion of the preferred shares see Notes 1r and 16 to our consolidated annual financial statements included elsewhere in this prospectus.
(3) Pro forma as adjusted gives effect to (i) the issuance and sale of      ordinary shares by us in this offering at an assumed initial public offering price of $     per ordinary share after deducting underwriting discounts and commissions and estimated offering expenses payable by us, and (ii) the payment of $     to certain of our employees, including some of our executive officers, for their contribution to completing this offering.

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The following tables summarize segment data for the year ended December 31, 2012 and the three months ended March 31, 2013, which is derived from Note 4a to our audited consolidated financial statements and Note 3 to our unaudited interim consolidated financial statements, respectively, presented elsewhere in this prospectus. The financial information included in this table under the heading “Nutrition segment” includes the results of operations of AL using the proportionate consolidation method. While under the equity method used in the presentation of our consolidated statements of operations, we recognize our share in the net results of AL as a share in profits of equity investee, under U.S. GAAP, for purposes of segment reporting, we are required to present our results of operations on the same basis provided to and utilized by management to analyze the relevant segment’s results of operations, which is achieved using the proportionate consolidation method of reporting. Under the proportionate consolidation method, we recognize our proportionate share of the gross revenues of AL and record our proportionate share of the joint venture’s costs of production in our statement of operations. For more information regarding the accounting treatment of AL in our consolidated and segment statements of operations, see “Management’s discussion and analysis of financial condition and results of operations — Joint venture accounting.”

         
  Year ended December 31, 2012
     Nutrition Segment   VAYA Pharma Segment   Total Segment Results of Operations   Elimination(1)   Consolidated Results of Operations
     (in thousands) 
Net revenues   $ 44,380     $ 1,832     $ 46,212     $ (8,345 )    $ 37,867  
Cost of revenues(2)     27,297       588       27,885       (8,087 )      19,798  
Gross profit(2)     17,083       1,244       18,327       (258 )      18,069  
Operating expenses(2)     7,850       4,637       12,487             12,487  
Depreciation and amortization     1,304       118       1,422             1,422  
Adjusted EBITDA(3)   $ 10,537     $ (3,275 )    $ 7,262     $ (258 )      7,004  
Depreciation and amortization                                         (1,422 ) 
Share based payment                             (267 ) 
Income from operations                                         5,315  
Financial expenses, net                             (539 ) 
Income before taxes on income                                         4,776  
Taxes on income                                         (180 ) 
Share in profits of equity investee                             186  
Net income                           $ 4,782  

(1) Represents the change from proportionate consolidation to the equity method of accounting.
(2) Includes depreciation and amortization, but excludes share-based payment.
(3) Adjusted EBITDA is a non-GAAP financial measure. For a definition and a reconciliation of adjusted EBITDA to our income from operations, see “— Non-GAAP Financial Measures” below.

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  Three months ended March 31, 2013
     Nutrition Segment   VAYA Pharma Segment   Total Segment Results of Operations   Elimination(1)   Consolidated Results of Operations
     (in thousands)
Net revenues   $ 15,642     $ 884     $ 16,526     $ (2,696 )    $ 13,830  
Cost of revenues(2)     9,639       236       9,875       (2,596 )      7,279  
Gross profit(2)     6,003       648       6,651       (100 )      6,551  
Operating expenses(2)     2,582       1,494       4,076             4,076  
Depreciation and amortization     336       40       376             376  
Adjusted EBITDA(3)   $ 3,757     $ (806 )    $ 2,951     $ (100 )    $ 2,851  
Depreciation and amortization                                         (376 ) 
Share-based payment                             (53 ) 
Income from operations                                       $ 2,422  
Financial expenses, net                             (81 ) 
Income before taxes on income                                         2,341  
Taxes on income                                         (75 ) 
Share in profits of equity investee                             78  
Net income                           $ 2,344  

(1) Represents the change from proportionate consolidation to the equity method of accounting.
(2) Includes depreciation and amortization, but excludes share-based payment.
(3) Adjusted EBITDA is a non-GAAP financial measure. For a definition and a reconciliation of adjusted EBITDA to our income from operations, see “— Non-GAAP Financial Measures” below.

Non-GAAP Financial Measures

Adjusted EBITDA is a non-GAAP financial measure that we define as income from operations before depreciation and amortization, share-based payments, interest and taxes. We have provided a reconciliation below of adjusted EBITDA to net income, the most directly comparable U.S. GAAP financial measure.

We have included adjusted EBITDA in this prospectus because it is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operational plans. In particular, the exclusion of certain expenses in calculating adjusted EBITDA can, in our opinion, provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under U.S. GAAP as the excluded items may have significant effects on our operating results and financial condition. When evaluating our performance, you should consider adjusted EBITDA alongside other financial performance measures, including cash flow metrics, net income, income (loss) from operations and our other U.S. GAAP results.

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The following table presents a reconciliation of adjusted EBITDA to net income for each of the periods indicated:

   
  Year ended December 31, 2012   Three months ended
March 31,
2013
     (in thousands)    
Reconciliation of adjusted EBITDA:
                 
Adjusted EBITDA   $ 7,262     $ 2,951  
Accounting for joint venture     (258 )      (100 ) 
Depreciation and amortization     (1,422 )      (376 ) 
Share-based payments     (267 )      (53 ) 
Income from operations     5,315       2,422  
Financial expenses, net     (539 )      (81 ) 
Income before taxes on income     4,776       2,341  
Taxes on income     (180 )      (75 ) 
Share in profits of equity investee     186       78  
Net income   $ 4,782     $ 2,344  

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Risk factors

Investing in our ordinary shares involves a high degree of risk. You should carefully consider the following risk factors, in addition to the other information set forth in this prospectus, before purchasing our ordinary shares. If any of the following risks actually occurs, our business, financial condition and results of operations could suffer. In that case, the trading price of our ordinary shares would likely decline and you might lose all or part of your investment.

Risks relating to our business and industry

We depend on third parties to obtain raw materials, in particular krill, necessary for the production of our products.

We depend on third parties to supply krill meal, an essential raw material for the production of our krill oil, which accounted for 49.8% of our total net revenues (or 40.8% of our total segment net revenues, based on the proportionate consolidation method) in 2012. Krill are small crustaceans found in oceans throughout the world. There are two primary ocean regions where krill is harvested: the Southern Ocean (Antarctic krill) and the North Pacific Ocean, mainly off the coasts of Japan and Canada (Pacific krill). We currently purchase krill meal pursuant to a memorandum of understanding with the owners of a vessel that harvests Antarctic krill (and which processes the freshly caught krill into krill meal onboard the vessel). We also purchase krill meal from several other suppliers, subject to availability. There are a limited number of vessels capable of producing krill meal onboard. In 2013, a distribution company from which we previously purchased krill meal declared bankruptcy and although no material disruption to our krill meal supply occurred and we were able to make alternative arrangements with the owner of the vessel, if we, for any reason, are no longer able to obtain the krill meal from a supplier on terms reasonable to us, or at all, this would have a material adverse effect on our results of operations and financial condition. While we have identified potential alternative sources of krill meal, including the possibility of our purchasing frozen krill (which is more readily obtainable) and processing the frozen krill into krill meal through third-party processors onshore, this would lengthen the lead time necessary for obtaining krill meal, require us to find new third party contractors and generally create additional logistical challenges in obtaining our krill meal, which could have an adverse effect on our results of operations and financial condition. Furthermore, we cannot give any assurance regarding our ability to secure alternate supply sources at competitive prices and upon fair and reasonable contractual terms and conditions or successfully implement the requisite logistical changes required.

A high proportion of the sales of our InFat product is sold to end users by a single company in China.

In 2012, sales of InFat, the infant formula ingredient product sold by our joint venture, AL, accounted for 21.6% of our total net revenues (or 35.8% of our total segment net revenues based on the proportionate consolidation method). China is the largest market for nutrition products containing InFat. Sales of InFat are spread among a number of different non-Chinese manufacturers primarily producing products containing InFat for Chinese infant formula brands, as well as a number of different Chinese manufacturers. The infant nutrition products produced by such manufacturers and using InFat may be sold under the manufacturers’ own brand name, or manufactured for sale by third parties under such third party’s own brand name, and in some cases, the third parties have their branded product manufactured by several different manufacturers. In 2012, approximately half of total InFat net revenues were to the Chinese end-user market from sales under the brand name of a single large Chinese company. Although we expect this end customer to remain significant in the future, we expect the degree of concentration to decrease because of sales to new InFat end customers based on existing contractual commitments. Nonetheless, were this company, for any reason, to suffer a substantial decrease in sales, or to cease operations, or discontinue the inclusion of our InFat ingredient in all or a significant portion of the infant nutrition products sold under its brand name, this could significantly adversely affect our sales of the InFat product, which could materially adversely impact our business, financial condition and results of operations.

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We rely on our Swedish joint venture partner to manufacture InFat, and certain operational matters related to the joint venture are the subject of a disagreement.

All of the revenues from sales of our InFat product are derived from sales by AL. The term of this joint venture expires on December 31, 2016, subject to extension for additional three-year periods, unless we or AAK terminate the joint venture upon giving notice of termination no later than twelve months prior to the applicable expiration date. Subject to the continuation of the parties’ respective supply obligations to the joint venture agreement following its termination, there can be no assurance that AAK will continue its relationship with us beyond the expiration of the current term of the joint venture.

We are precluded from competing with AL during the term of the relationship. Further, if upon termination of the agreement we sell our share in AL to AAK pursuant to the buy/sell mechanism contained in the joint venture agreement, we would be subject, during the three-year period after the end of provision of services under the agreement, to non-competition obligations. Such obligations would preclude us from developing or producing InFat or competing products. Such non-competition obligations could limit our development and sales of new or existing products and could have a material adverse effect on our business, financial condition and results of operations.

Our joint venture is owned 50% by us and 50% by AAK. Under the joint venture arrangement with AAK, we and AAK are each responsible for particular functions related to the production, marketing and sale of the final InFat product. In particular, we are responsible for research and development, business development and marketing, and AAK is responsible for the production, management of inventory and logistics relating to the actual sales and delivery of the InFat product. We have an ongoing disagreement with AAK over certain operational matters, including responsibility for certain functions related to sales of the joint venture’s products. The operations of the joint venture have not been impacted by this disagreement, although we cannot predict whether that will continue in the future.

Irrespective of any disagreement, AAK may have economic or business interests or goals that are inconsistent with ours. Moreover, in the future, we may also participate in other joint ventures to pursue additional business opportunities. AAK or any future joint venture partner may:

take actions contrary to our policies or objectives;
undergo a change of control;
experience financial and other difficulties; or
be unable or unwilling to fulfill its obligations under the joint venture,

each of which may affect our financial condition or results of operations. In addition, no assurance can be given that the actions or decisions of our joint venture partner(s) will not affect our joint ventures in a way that hinders our corporate objectives or that causes material adverse effects on our business, financial condition or results of operations.

Our gross profits may be adversely affected if we are only able to obtain lower quality krill meal.

The quality of the krill meal we source for our krill products, meaning the level of oils found in the krill meal, impacts our gross profit as higher quality krill meal results in greater yield and less processing. The amount of oil we are able to extract from the krill meal we purchase varies based on both seasonal fluctuations in fat percentages of the krill harvested and the extraction procedure used to extract the oil. For example, in the first quarter of 2013, despite gross profits in our Nutrition segment increasing by $2.1 million to $6.0 million from $3.9 million in the first quarter of 2012, gross profit margins of that segment decreased to 38.5% in the first quarter of 2013 from 41.7% in the first quarter of 2012. This decrease was due primarily to the exceptional quality of the krill meal we sourced in the first quarter of 2012 that we were unable to obtain in subsequent periods. As a result, we had to purchase more krill meal to produce an equivalent amount of krill oil.

The first stage of processing krill meal into crude krill oil is currently carried out for us by a dedicated contract manufacturer in India. We are currently expanding our Migdal Ha’Emeq manufacturing facility and equipping it to enable us to complete the first stage of turning krill meal into crude krill oil ourselves using

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technologically advanced equipment and proprietary processes. We expect to complete this project and move a substantial portion of the crude krill oil extraction process in-house by the end of 2013. We believe that the extraction process will be more efficient due to our use of new technologies, so that our yield and extraction process will be less dependent on the quality of the krill meal we source. In addition, we believe that we will be able to sell many of the marketable byproducts of the krill oil extraction process that we currently cannot sell due to Indian export restrictions, thereby further increasing this segment’s revenues and gross profit. We are also exploring the option of sourcing frozen krill, which is more readily obtainable. Sourcing frozen krill would allow us to purchase a greater percentage of the total krill we use in a given year during the winter months when the fat percentage in the krill harvested is highest which would reduce our exposure to seasonal fluctuation. If we are unable to bring the krill oil extraction process in-house or source frozen krill effectively, our gross profit margin may continue to be affected materially by the quality of the krill we source.

Our ability to obtain krill may be affected by conservation regulation or initiatives.

A substantial part of our activities in the Nutrition segment requires the use of krill. Limits on krill harvesting established by the Commission for the Conservation of Antarctic Marine Living Resources may limit our revenue. The commission limits the amount of krill that may be harvested in Antarctic waters according to specific ocean areas. Additionally, the commission regulates the licensing of vessels eligible to harvest krill in these specific Antarctic Ocean areas. In the areas currently being fished for krill, the commission has established a combined annual catch limit of 620,000 metric tons. Presently, approximately 200,000 metric tons are being harvested annually. The substantial majority of harvested krill is used for acquaculture feed and fish bait while only a small portion is used for human consumption, the latter of which offers higher profit margins. The commission has established limits because increases in krill catches could have a negative effect on the ecosystem, including other marine life, particularly birds, seals and fish which mainly depend on krill for food. The lowering of these quotas or other developments impacting the ability to source krill, such as adoption of additional conservation measures, may reduce the future availability of krill and cause significant increases in its price. Any such development could harm our sales and gross profits.

We are dependent on a single facility that houses the majority of our operations.

Our administrative headquarters, all of our research and development laboratories and our production plant are located in a single facility in the Sagi 2000 Industrial Area, near Migdal Ha’Emeq, Israel. The manufacture of all of the products that we sell takes place at this facility, other than the final InFat product, certain grades of our Sharp GPC product, and a portion of the processing of crude krill oil and crude fish oils. Although the InFat product sold by AL is manufactured in Sweden, the production of the InFat enzymes, the core element for the manufacture of InFat, also takes place at our Migdal Ha’Emeq facility. Accordingly, we are highly dependent on the uninterrupted and efficient operation of this facility. If operations at this facility were to be disrupted as a result of equipment failures, earthquakes and other natural disasters, fires, accidents, work stoppages, power outages, acts of war or terrorism or other reasons, our business, financial condition and results of operations could be materially adversely affected. Lost sales or increased costs that we may experience during the disruption of operations may not be recoverable under our insurance policies, and longer-term business disruptions could result in a loss of customers. If this were to occur, our business, financial condition and operations could be materially negatively impacted.

We may not be able to expand our production or processing capabilities or satisfy growing demand.

We are currently expanding our Migdal Ha’Emeq manufacturing facility and equipping it to enable us to extract krill oil from krill meal ourselves using technologically advanced equipment and proprietary processes. We expect to complete this project and move a substantial portion of the krill oil extraction process in-house in the fourth quarter of 2013, after which time we expect to save the majority of the processing costs we currently pay to our Indian manufacturer. We cannot assure you that we will realize the projected cost savings or any other advantage from bringing more of the krill oil extraction process in-house. We also contemplate building an additional production plant adjacent to our existing facility in order to expand our production capacity. We cannot assure you that we will be able to obtain the requisite approvals or have the necessary capital resources for the construction of this plant, or if we do, that the plant will be built or that it will satisfy additional growing demand. Conversely, there can be no assurance, even if we build an additional plant, that

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demand for our products will increase commensurate with the increased production capability. Furthermore, we cannot assure you that these projects will be implemented in a timely and cost efficient manner, and that our current production will not be adversely affected by the operational challenges of implementing the expansion projects.

Our product development cycle is lengthy and uncertain, and our development or commercialization efforts for our products may be unsuccessful.

We are currently working on more than ten products that are in various stages of development. Research and development is a time-consuming, expensive and uncertain process that takes years to complete, with no guarantee of a favorable outcome. Because of the long product development, evolving regulatory environment, changing market conditions and other factors, there is significant uncertainty as to the future development, success and commercialization of any products we may attempt to develop or commercialize. Even if our existing products prove to be successful, we may spend years and dedicate significant financial and other resources, including the proceeds from this offering, developing products that may never be commercialized. If we are unsuccessful in developing promising products, securing any necessary regulatory approvals and commercializing such products after having invested significant resources, efficiently or not at all, such failures could have a material and adverse effect on our business, financial condition and results of operations.

Variations in the cost of raw materials for the production of InFat may have a material adverse effect on our business, financial conditions and results of operations.

The cost and variability in price of raw materials related to the production of InFat, primarily vegetable oil and fatty acids, is a key factor in the profitability of AL and of our Nutrition segment as a whole. In 2012, the cost of raw materials comprised a majority of the costs of revenues of AL. While certain of AL’s customer contracts contain pricing formulae under which the prices of products are adjusted to reflect changes in the costs of raw materials, the adjustments do not fully insulate AL from such changes. In addition, even where InFat prices are adjusted pursuant to customer contracts which contain pricing formulae, increases in price can adversely affect sales, as the increased costs to the end-user may make such products less attractive, thereby reducing demand, and also expose AL to increased competition. Such developments could have a material adverse effect on our business, financial condition and results of operations.

We anticipate that the markets in which we participate will become more competitive and we may be unable to compete effectively.

We believe that the number of companies seeking to develop products in the markets in which we compete will increase in the future. Competitors range in size from small, single product companies to large, multifaceted corporations, which have greater financial, technical, marketing and other resources than those available to us.

Our InFat product is an ingredient used in the general infant nutrition products market. The majority of the oils used in the infant nutrition market are currently vegetable oil blends, although bovine milk fat is also used to some extent. In contrast, InFat addresses the sn-2 palmitate market which currently holds less than 10% share of the infant formula oils market as a whole. We currently compete directly in the sn-2 palmitate market with IOI Loders Croklaan, however, we believe that as the market share of sn-2 palmitate grows, it will encourage more specialty oil producers to seek to develop and offer competitive products, increasing the level of competition that we face.

In the krill oil market, we primarily compete with Aker BioMarine AS (which recently merged with Aker Seafoods Holding AS), Neptune Technologies & Bioressources Inc. and Rimfrost USA, LLC (a joint venture of Avoca, Inc. and Olympic Seafood AS). In the market for our PS product line, our principal competitors are Chemi Nutraceuticals Inc., Lipoid GmbH and Lipogen Ltd.

The “medical food” category was legally established in the United States in 1988. Nevertheless, the medical foods market is relatively new and our VAYA Pharma products currently face little direct competition from other medical food manufacturers. However, as the market develops, we could face future competition from companies seeking to enter the market, in particular, large multi-national nutrition companies, such as Abbott Laboratories, Nestlé and Danone (through its clinical nutrition subsidiary, Numeco N.V.), which have

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expressed interest in the medical food segment. Such potential competitors may have greater financial, technical, marketing and other resources than those available to us and, accordingly, the ability to devote greater resources than we can to the development, promotion, sale and support of products. In addition, physicians may prefer to prescribe prescription drugs produced by pharmaceutical drug manufacturers rather than our medical food products and customers may prefer to use prescription drugs instead of our medical food products due to the present limited reimbursement by third party payers.

Any business combinations or mergers among our competitors that result in larger competitors with greater resources or distribution networks, or the acquisition of a competitor by a major technology, pharmaceutical or nutrition corporation seeking to enter the markets in which we operate, could further result in increased competition and have a material adverse effect on our business, financial condition and results of operations.

We are generally reliant upon third parties for the distribution and commercialization of our products.

Part of our strategy is to enter into and maintain arrangements that are generally exclusive with respect to a particular territory with third parties related to the marketing, sales and distribution of our products. Our revenues are dependent in part on the successful efforts of these third parties. Entering into strategic relationships can be a complex process and the interests of our distribution partners may not be or may not remain aligned with our interests. There can be no assurance that our distribution partners will market, sell and/or distribute our products successfully or choose the best means for achieving commercialization of our products. Some of our current and future distribution partners may decide to compete with us, refuse or be unable to fulfill or honor their contractual obligations to us, or reduce their commitment to, or even abandon, their relationships with us. Further, there can be no assurance that any such third-party collaboration will be on favorable terms. We may not be able to control the amount and timing of resources our distribution partners devote to our products or the efforts they expend in obtaining any requisite local approvals for our products. In addition, we may incur liabilities relating to the distribution and commercialization by our distributors of our products. While the agreements with such distributors generally include customary indemnification provisions indemnifying us for liabilities relating to the packaging of our products and their use and storage, there can be no assurance that these indemnification rights will be sufficient in amount, scope or duration to fully offset the potential liabilities associated with our distributors handling and use of our products. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our business, financial condition or results of operations.

Disruption to our IT system could adversely affect our reputation and have a material adverse impact on our business and results of operations.

Our business operations and research and development technologies rely on our IT system to collect, analyze and store our data. We do not currently utilize an offsite back-up system for our stored data and there can be no guarantee that our existing back-up storage will be effective if it becomes necessary to rely on it. Furthermore, we can provide no assurance that our current IT system is fully protected against third-party intrusions, viruses, hacker attacks, information or data theft or other similar threats. As we continue to develop our technologies, we may need to update our IT system and storage capabilities. However, if our existing or future IT system does not function properly, or if the IT system proves incompatible with new technologies, we could experience interruptions in data transmissions and slow response times, preventing us from completing routine research and business activities. Furthermore, disruption or failure of our IT system due to technical reasons, natural disaster or other unanticipated catastrophic events, including power interruptions, storms, fires, floods, earthquakes, hacker attacks or security breaches, acts of war and terrorism could significantly impair our ability to deliver our products on schedule and materially and adversely affect our relationships with our partners and customers, our business, our reputation and our results of operations.

We are not able to predict the results of clinical trials, which may prove unsuccessful or be delayed by certain factors.

We conduct clinical and pre-clinical studies to support the efficacy and safety of our products and their ingredients during their development, to extend known benefits and to uncover new benefits of our existing ingredients. While clinical trials are not always required with respect to regulatory approvals for our nutrition

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products, we use the results of these trials to maximize the product’s reach to new customers and as a basis for establishing long term supply agreements. Further, we are required to conduct clinical trials to establish the safety and efficacy of products that we seek to market as prescription drugs. It is not possible to predict, based on studies or testing in laboratory conditions, whether a proposed product will prove to be safe or effective in humans. Pre-clinical and clinical data required for FDA drug approval must be developed under strict regulatory standards and may be found, on review by health regulatory authorities, to be of insufficient quality to support an application for commercialization of a product or to substantiate claims concerning a currently marketed product’s safety or effectiveness. In addition, positive results in previous clinical studies of our products may not be predictive of similar results in future clinical trials and interim results during a clinical trial do not necessarily predict final results. A number of companies in the pharmaceutical industry have suffered significant setbacks in late-stage clinical trials even after achieving promising results in early-stage development. Our clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials. Moreover, clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain FDA approval for their products.

Clinical trials require the enrollment of patients or subjects and we may experience difficulties identifying and enrolling suitable patients for ongoing and future trials of our products, in particular for our infant formula ingredient products, where parents are frequently reluctant to permit their children to participate in trials. A number of other factors could affect the feasibility and outcome of clinical trials, including, but not limited to, design protocol, the size of the available patient (or subject) population, the eligibility criteria for participation in the clinical trials, and the availability of clinical trial sites. Administering our product candidates to humans may produce undesirable side effects. These side effects could interrupt, delay or halt clinical trials of our product candidates and could result in the FDA or other regulatory authorities denying approval of our product candidates for any or all targeted indications. Additionally, obtaining ethical review board approval for clinical trials of our products in children will be more difficult than obtaining such approvals for adult clinical trials since the requirements for regulatory approval to conduct pediatric clinical trials are more stringent. Pediatric drug development requires additional non-clinical work (such as animal studies in juvenile animals and additional reproductive toxicity work), as well as staged clinical work in determining safe dosing and monitoring. These additional tasks involve investment of significant additional resources beyond those needed for approval of the drug for adults. Our ability to commercialize any new products is dependent upon the success of product development efforts and the success of clinical studies. Existing products may be the subject of post-marketing clinical trials. If these clinical trials and product development efforts fail to produce satisfactory results, or if we are unable to maintain the financial and operational capability to complete these development efforts, we may be unable to generate revenues for existing products and potential new products.

We may not be able to achieve increased market acceptance for our products.

The degree of market acceptance for our products and those of our customers will depend upon a number of factors, including the receipt of regulatory approvals, the establishment and demonstration in the medical community of the clinical efficacy and safety of the products, and the establishment and demonstration of the potential advantages over competing products. Additionally, to gain market acceptance for our VAYA Pharma products we must establish and demonstrate the potential advantages over existing and new treatment methods and we must expand the reimbursement of government and third-party payers must expand. Based on our data, approximately 30% of current sales of VAYA Pharma products in the United States receive some form of reimbursement. In the case of our Nutrition products, market acceptance is dependent on the acceptance of the product and appropriate distribution with large retailers, competitive pricing and the extent to which the products fulfill customer expectations and demands. There can be no assurance that consumers, physicians, patients, payers, the medical community in general, distributors or retailers will accept and utilize any existing or new products that may be developed by us. Failure to achieve such market acceptance for our products could have a material adverse effect on our growth, business, financial condition or results of operations.

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We could be subject to product liability lawsuits, which could result in costly and time-consuming litigation and significant liabilities.

The development of pharmaceutical, medical food and human nutrition products involves an inherent risk of product liability claims and associated adverse publicity. Our products may be found to be harmful, or to contain harmful substances. This exposes us to substantial risk of litigation and liability and/or may force us to discontinue production of certain products. Although we have product liability insurance, this coverage may not insure us against all claims made. Product liability insurance is costly and often limited in scope. There can be no assurance that we will be able to obtain or maintain insurance on reasonable terms or to otherwise protect ourselves against potential product liability claims that could impede or prevent commercialization of a material product or line of products. Furthermore, a product liability claim could damage our reputation, whether or not such claims are covered by insurance or are with or without merit. A product liability claim against us or the withdrawal of a product from the market could have a material adverse effect on our business or financial condition. Furthermore, product liability lawsuits, regardless of their success, would likely be time consuming and expensive to resolve and would divert management’s time and attention, which could seriously harm our business.

We could incur significant costs in complying with environmental, health and safety laws or permits or as a result of satisfying any liability or obligation imposed under such laws or permits.

We are subject to extensive environmental, health and safety laws and regulations in a number of jurisdictions, primarily Israel, governing, among other things, the use, storage, registration, handling and disposal of chemicals, waste materials and sewage; chemicals, air, water and ground contamination; air emissions and the cleanup of contaminated sites, including any contamination that results from spills due to our failure to properly dispose of chemicals, waste materials and sewage. In particular, our operations at our Migdal Ha’Emeq manufacturing facility use chemicals and produce emissions, waste materials and sewage, and accordingly require permits from various governmental authorities. These authorities conduct periodic inspections in order to review and ensure our compliance with the various regulations. Our manufacturing processes include pollutant emissions which at peak capacity approach maximum permitted levels. Accordingly, we intend to invest approximately $0.9 million in the installation of an emissions treatment solution in our current facility.

These laws, regulations and permits could potentially require the expenditure by us of significant amounts for compliance and/or remediation. Laws and regulations relating to environmental matters are often subject to change. In the event of any changes or new laws or regulations, we could be subject to new compliance measures or to penalties for activities which were previously permitted. If we fail to comply with such laws, regulations or permits, we may be subject to fines and other civil, administrative or criminal sanctions, including the revocation of permits and licenses necessary to continue our business activities. In addition, we may be required to pay damages or civil judgments in respect of third-party claims, including those relating to personal injury (including exposure to hazardous substances we use, store, handle, transport, manufacture or dispose of), property damage or contribution claims. Some environmental laws allow for strict, joint and several liability for remediation costs, regardless of comparative fault. We may be identified as a potentially responsible party under such laws. Such developments could have a material adverse effect on our business, financial condition and results of operations.

We depend on international sales, which expose us to risks associated with the business environment in those countries.

Our revenues are derived from sales in multiple countries around the world, primarily through exports from Israel to distributors. The majority of our sales are to customers outside the United States and less than 1% of our sales are to customers in Israel. We anticipate that international sales will continue to account for the majority of our revenues in the foreseeable future.

Our international operations and sales are subject to a number of risks, including:

potentially longer accounts receivable collection periods and greater difficulties in their collection;
potential instability of local economies;

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impact of potential military or civil conflicts and other political risks;
disruptions or delays in shipments caused by customs brokers, work stoppages or government agencies;
potential imposition by governments of controls that prevent or restrict the transfer of funds;
regulatory limitations imposed by foreign governments and unexpected changes in regulatory requirements, tariffs, customs, duties, tax laws and other trade barriers;
difficulties in staffing and managing foreign operations;
laws and business practices favoring local competition and potential preference for locally produced products;
potentially adverse tax consequences;
difficulties in protecting or enforcing intellectual property rights in certain foreign countries, particularly in Asia; and
fluctuations in exchange rates, described below.

If we fail to overcome the challenges that we encounter in our international sales operations, our business and results of operations could be materially adversely affected.

Global economic and social conditions could adversely impact sales of our products, especially if they are branded as premium products.

The uncertain direction and relative weakness of the global economy, difficulties in the financial services sector and credit markets and other macroeconomic factors could adversely affect our business. The prospects for economic growth in the United States, Europe and other countries remain uncertain. Without global economic growth, the anticipated growth in the sales of our products could be adversely affected or delayed, especially given the premium branding of some of our products. For example, the inclusion of our InFat ingredients, which may be twice as expensive as certain vegetable oil blends, in infant nutrition products tends to increase the price of the end product and, in difficult economic times, a manufacturer may be unwilling to take such measures, if its principal competitors continue to sell lower priced products.

We depend on our management team and other skilled personnel to operate our business effectively, and we may be unable to retain existing, or hire additional, skilled personnel.

Our success depends upon the continued service and performance of our senior management and other key personnel. The loss of the services of any of these personnel could delay or prevent the continued successful implementation of our growth strategy, or could otherwise affect our ability to manage our company effectively and to carry out our business plan. Members of our senior management team may resign at any time and there can be no assurance that we will be able to continue to retain such personnel.

Our growth and success also depend on our ability to attract and retain additional highly qualified and skilled technical, scientific, sales, managerial and finance personnel. Competition for skilled personnel is intense and the unexpected loss of an employee with a particular skill could materially adversely affect our operations until a replacement can be found and trained. If we cannot retain our existing skilled scientific and technical personnel and attract and retain sufficiently additional skilled scientific and technical personnel, as required, for our research and development and manufacturing operations on acceptable terms, we may not be able to continue to develop and commercialize our existing products or new products. Further, any failure to effectively integrate new personnel could prevent us from successfully growing our company.

Under applicable employment laws, we may not be able to enforce covenants not to compete.

We generally enter into non-competition agreements with our employees. These agreements prohibit our employees, if they cease working for us, from competing directly with us or working for our competitors or clients for a limited period. We may be unable to enforce these agreements under the laws of the jurisdictions in which our employees work and it may be difficult for us to restrict our competitors from benefitting from

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the expertise our former employees or consultants developed while working for us. For example, Israeli courts have required employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of the employer which have been recognized by the courts, such as the secrecy of a company’s confidential commercial information or the protection of its intellectual property. If we cannot demonstrate that such interests will be harmed, we may be unable to prevent our competitors from benefiting from the expertise of our former employees or consultants and our ability to remain competitive may be diminished.

Potential future acquisitions of companies or technologies may distract our management, may disrupt our business and may not yield the returns expected.

We may acquire or make investments in businesses, technologies or products, whether complementary or otherwise, as a means to expand our business, if appropriate opportunities arise. We cannot give assurances that we will be able to identify future suitable acquisition or investment candidates, or, if we do identify suitable candidates, that we will be able to make the acquisitions or investments on reasonable terms or at all. In addition, we have no prior experience in integrating acquisitions and we could experience difficulties incorporating an acquired company’s personnel, operations, technology or product offerings into our own or in retaining and motivating key personnel from these businesses. We may also incur unanticipated liabilities. The financing of any such acquisition or investment, or of a significant general expansion of our business, may not be readily available on favorable terms. Any significant acquisition or investment, or major expansion of our business, may require us to explore external financing sources, such as an offering of our equity or debt securities. We cannot be certain that these financing sources will be available to us or that we will be able to negotiate commercially reasonable terms for any such financing, or that our actual cash requirements for an acquisition, investment or expansion will not be greater than anticipated. In addition, any indebtedness that we may incur in such a financing may inhibit our operational freedom, while any equity securities that we may issue in connection with such a financing would dilute our shareholders. Any such difficulties could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations. Furthermore, we cannot provide any assurance that we will realize the anticipated benefits and/or synergies of any such acquisition or investment.

If we fail to manage our growth effectively, our business could be disrupted.

We have experienced growth in our business and our future financial performance and ability to commercialize our products and to compete effectively will depend, in part, on our ability to manage any future growth effectively. We have made and expect to continue to make significant investments to enable our future growth through, among other things, new product innovation, clinical trials for new products and expansion of our manufacturing facility. We must also be prepared to further increase production capabilities, expand our work force and to train, motivate and manage additional employees as the need for additional personnel arises. Our personnel, facilities, systems, procedures and controls may not be adequate to support our future operations. Any failure to manage future growth effectively could have a material adverse effect on our business and results of operations.

The covenants contained in agreements that govern the terms our indebtedness may restrict our future operations.

The agreements that govern the terms of our indebtedness contain a number of restrictive covenants imposing operating and financial restrictions on us, including restrictions that may limit our ability to engage in acts that may be in our long-term best interests, including our ability to:

incur or guarantee additional debt or issue disqualified stock;
create or incur certain liens;
engage in mergers, acquisitions, amalgamations, asset sales or sale and leaseback transactions; and
engage in transactions with affiliates.

These covenants are subject to a number of qualifications and exceptions. The operating and financial restrictions and covenants in our existing debt agreements and any future financing agreements may adversely affect our ability to finance future operations or capital needs or to engage in other business activities.

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Risks related to government regulation

We are subject to significant and increasing government regulations regarding the sale and marketing of our products.

The selling and marketing of our products are generally subject to comprehensive laws, regulations and standards enforced by various regional, national and local regulatory bodies, including the Food and Drug Administration, or FDA, the Federal Trade Commission, or FTC, and U.S. Department of Agriculture, or USDA, in the United States, the European Commission in the European Union, the Therapeutic Goods Administration, or TGA, in Australia, the Ministry of Health in China, and the Ministry of Health in Israel, compliance with which is costly and burdensome. See “Business — Government regulation” below. Furthermore, legal and regulatory demands are increasing in a number of countries with respect to our products, and legislative bodies may repeal laws or enact new laws that would impact the sale and marketing of our products or development of new products. Additionally, regulatory authorities may change processes, regulations, and policies related to our products, which could impact product development, commercialization and business operations and require us to make changes to our products, the claims we make regarding our products or our operations. In addition, there is a lack of harmonization among the laws, regulations and standards in the principal countries in which we sell our products.

Nutrition Segment

Where regulatory approvals are required for our nutrition products, the process of obtaining such approvals can be costly and time consuming and there is no guarantee of approval. Such processes therefore could delay or prevent the production and commercialization of new products. In addition, if we fail to comply with any legal or regulatory requirement, or obtain any necessary regulatory approval we could be subject to various enforcement actions, including warning letters, fines, product recalls or seizures, interruption in or suspension of product manufacturing capabilities, other operating restrictions, injunctions, delays in obtaining or inability to obtain product approvals, other civil penalties and criminal sanctions. Any such enforcement action may result in significant unanticipated expenditures and may have a material adverse effect on our reputation, operations, financial situation or operating results.

The regulatory requirements we face similarly may impact our reputation, operations, financial situation or operating results. For example, legislation in the United States requires companies that manufacture or distribute dietary supplements, including certain products of our Nutrition segment, to report serious adverse events allegedly associated with their products to the FDA and maintain recordkeeping procedures for all alleged adverse events (serious and non-serious). As a result, consumers, the press or government regulators may misinterpret reports of adverse events as evidence that the ingredient or product caused the reported event, which could lead to consumer confusion, damage to our reputation, banned or recalled ingredients or products, increased insurance costs, class action litigation and a potential increase in product liability litigation, among other things.

Further, we comply with current GMP guidelines for food for human consumption and are subject to periodic self-assessment. We are subject to regular inspections with respect to our GMP compliance by the Israeli Ministry of Health. For more information regarding the regulations affecting our nutrition products, see “Business — Government regulation — Nutrition segment.”

VAYA Pharma Segment

The products offered by our VAYA Pharma segment are sold by prescription in the United States as “medical foods,” on the basis of their meeting the criteria for “medical foods” in the Federal Food, Drug, and Cosmetic Act (FDCA) and FDA regulations. The term medical food is defined in the FDCA as a food which is formulated to be consumed or administered enterally under the supervision of a physician and which is intended for the specific dietary management of a disease or condition for which distinctive nutritional requirements, based on recognized scientific principles, are established by medical evaluation. See “Business — Our products — VAYA Pharma segment” below. Medical foods are not required to undergo premarket review or approval by the FDA.

We believe that our VAYA Pharma products meet the criteria for “medical foods” established by the FDCA, and that the labeling and marketing of our medical foods is consistent with FDA regulatory

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requirements. However, our offering of one or more of these products as “medical food” could be challenged by the FDA. The FDA could take the position that one or more of the products may not be lawfully sold in the United States as “medical food.” If such a challenge were to occur and we are not able to demonstrate to the FDA’s satisfaction that the product(s) meet the regulatory requirements for “medical foods,” we would need to suspend further sale and distribution of the alleged violative products in, and could be required to withdraw such product or products from the U.S. market. We could seek to re-position the products as “dietary supplements,” a distinct category of “food” under the FDCA and FDA regulations. This would require new labels, labeling and revised claims for the products, and would impose other regulatory requirements on us not applicable to “medical foods.” In the alternative, we could commence the process of seeking FDA approval of the product(s) as a “drug,” a procedure that requires pre-clinical safety data and clinical studies to show safety and efficacy. The drug development process can be lengthy and may involve the expenditure of substantial monetary and other resources. Furthermore, the process is uncertain, as there can be no assurance that the product or products will ultimately be approved by the FDA as drugs. The United States is the principal market for the sales of the products of our VAYA Pharma segment and the cessation of such sales, even for a limited period, could have a material adverse effect on our operations, financial situation, operating results and business prospects. In addition, were we to be unsuccessful in obtaining FDA approval in the United States, this could significantly adversely affect the sale of the products outside the United States.

The FTC regulates certain aspects of the advertising and marketing of our products. Under the Federal Trade Commission Act, a company must be able to substantiate both the express and implied claims that are conveyed by an advertisement. It is not uncommon for the FTC to conduct an investigation of the claims that are made about products in new and emerging areas of science that involve a potentially vulnerable population such as infants and children, or that relate to conditions impacting significant portions of the population. Any adverse action by the FTC could have a negative impact on our results of operations and financial condition.

Sales in the United States of the products of our VAYA Pharma segment are significantly impacted by the reimbursement policies of government healthcare or private health insurers.

The products offered by our VAYA Pharma segment are sold in the United States on the basis of their meeting the requirements for “medical food,” as interpreted and enforced by the FDA. Medical foods are not required to undergo premarket review or approval by the FDA, as is required for prescription drugs. However, primarily because our VAYA Pharma products are not approved as prescription drugs by the FDA, most consumers purchasing these products in the United States are currently unable to obtain reimbursement from third-party payers under government healthcare or private insurance plans, which generally do not provide reimbursement for medical foods. Based on our data approximately 30% of current sales of VAYA Pharma products in the United States receive some form of reimbursement. While we are attempting to broaden acceptance of our VAYA Pharma products as eligible for reimbursement by third-party payers, no assurance can be given that we will be successful in our efforts. We believe that, unless we are able to obtain widespread reimbursement for our VAYA Pharma products in the United States, future sales and profitability of our VAYA Pharma products will be significantly adversely impacted and we will be unable to achieve our projected sales of these products, which could have a material adverse effect on our business, financial condition and results of operations.

Should any of our products receive FDA approval as a prescription drug, such pharmaceutical products may still not qualify for reimbursement or the terms of such reimbursement may prevent the product from being sold at a cost-effective price.

We have recently started the process of seeking FDA approval for one of our VAYA Pharma products, Vayarol, as a prescription drug. See “Business — Government regulation” below. There can be no assurance that this process will be successful. If we do receive FDA approval for Vayarol, or any of our other VAYA Pharma products, as a prescription drug, consumers purchasing such products in the United States may be able to obtain more easily reimbursement from third-party payers under government healthcare or private insurance plans. However, we would then be subject to the reimbursement policies of such third-party payers and their efforts to contain or reduce the costs of health care. In addition, certain U.S. federal and state laws currently apply to the pricing and reporting of price information for prescription drugs. There also have been, and we

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expect that there will continue to be, a number of U.S. federal and state proposals to further increase government control over pricing and profitability of prescription drugs. Moreover, the emphasis on managed health care in the United States has increased and will continue to increase the pressure on the pricing of pharmaceuticals. Third-party payers are increasingly challenging the prices charged for medical products. To the extent that we succeed in obtaining FDA prescription drug approval for any of our products, there can be no assurance that such product will qualify for reimbursement from third-party payers, or if it does, whether the terms of such reimbursement will be considered cost-effective or will be sufficient to allow the sale of these products by us on a competitive basis.

Risks related to our intellectual property

We may not be able to protect our proprietary technology or prevent its unauthorized use by third parties.

Our commercial success depends in part on our ability to obtain and maintain patent protection and trade secret protection for our intellectual property and proprietary technologies, our products and their uses, as well as our ability to operate without infringing upon the proprietary rights of others. We rely on a combination of patent, copyright, trademark and trade secret laws, non-disclosure and confidentiality agreements, licenses, assignments of invention agreements and other restrictions on disclosure and use to protect our intellectual property rights.

We have been granted over 50 patents in more than a dozen countries and have applications for more than 100 additional patents pending worldwide. However, there can be no assurance that patent applications relating to our products, processes or technologies will result in patents being issued, or that any patents that have been issued will be adequate to protect our intellectual property or that we will enjoy patent protection for any significant period of time. Additionally, any issued patents may be challenged by third parties, and patents that we hold may be found by a judicial authority to be invalid or unenforceable. Other parties may independently develop similar or competing technology or design around any patents that may be issued to or held by us. Our current patents will expire or they may otherwise cease to provide meaningful competitive advantage, and we may be unable to adequately develop new technologies and obtain future patent protection to preserve our competitive advantage or avoid adverse effects on our business.

Composition-of-matter patents are generally considered to be the strongest form of intellectual property protection for products such as ours, as such patents provide protection without regard to any method of use. Certain of our products (such as Vayarol, Vayarin, PS and InFat) are covered by issued composition-of-matter patents in certain jurisdictions and pending applications in other jurisdictions. However, we cannot be certain that the claims in our patent applications covering composition-of-matter of our product candidates will be considered patentable by patent offices and courts in the United States or in foreign countries, nor can we be certain that the claims in our issued composition-of-matter patents will not be found invalid or unenforceable if challenged. If any of our composition-of-matter patents or pending applications was subject to a successful challenge or failed to issue, our business and competitive advantage could be significantly affected.

In addition to seeking patents for some of our proprietary technologies, processes and products, we also rely on trade secrets, including unpatented know-how, technology and other proprietary information in attempting to develop and maintain a competitive position. However, trade secret protection is risky and uncertain and the disclosure or independent development of our proprietary technology could have a material adverse impact on our business and results of operations. Any party with whom we have executed a non-disclosure and non-use agreements may breach those agreements and disclose our proprietary technology, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and a favorable outcome is not guaranteed. In addition, if any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent such third party, or those to whom they communicate such technology or information, from using that technology or information to compete with us.

We cannot be certain that the steps that we have taken will prevent the misappropriation or other violation of our confidential information and other intellectual property, particularly in foreign countries, such as China, in which laws may not protect our proprietary rights as fully as in the United States and other developed economies. Moreover, if we lose any key personnel, we may not be able to prevent the

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unauthorized disclosure or use of our technical knowledge or other trade secrets by those former employees. If we are unable to maintain the security of our proprietary technology, this could materially adversely affect our competitive advantage, business and results of operations.

We are currently subject to litigation, and in the future may become subject to additional litigation, regarding intellectual property rights.

In recent years, there has been significant litigation in the United States and abroad involving patents and other intellectual property rights in the industries in which we operate. We are involved in ongoing legal proceedings in the United States concerning our krill oil products with one of our principal competitors in that market, Neptune (see “Business — Legal proceedings” below). Starting in October 2011, Neptune filed a series of complaints alleging patent infringement by one or more of our krill oil products in the U.S. District Court for the District of Delaware. In addition, in April 2013, we received a Notice of Institution of Investigation from the U.S. International Trade Commission regarding a similar complaint filed by Neptune in that forum. If any of the patents asserted by Neptune are found to be valid, infringed and enforceable, we may be subject to monetary damages in the form of lost profits or a reasonable royalty, as determined by the District Court. Neptune may also be granted injunctive relief which would prevent us from selling the infringing products in the United States, a significant market for our krill oil products. Moreover, defending against these claims or similar claims in the future may be time-consuming, costly and may divert management’s time and attention from our business. In addition to any monetary damages awarded against us, in some instances we have also agreed to be financially responsible for any damages awarded against certain of our customers as a result of the purchase, importation, use, sale or offer to sell of our products if they are found to infringe certain of Neptune’s intellectual property rights. As a result, and regardless of outcome, these proceedings could materially adversely impact our business and financial results.

We may also, in the future, be a party to litigation to determine the scope and validity of our own intellectual property, which, if resolved adversely to us, could invalidate or render unenforceable our intellectual property or generally preclude us from restraining competitors from commercializing products using technology developed by us. In addition, because patent applications can take many years until the patents issue, there may be applications now pending of which we are unaware, which may later result in issued patents that our products may infringe. If any of our products infringe a valid and enforceable patent, or if we wish to avoid potential intellectual property litigation or alleged infringement, we may not be able to sell applicable products unless and until we can obtain a license, which we may not be able to obtain on commercially reasonable terms, if at all. Alternatively, we could be forced to pay substantial royalties or redesign a product to avoid infringement. A successful claim of infringement against us, or our failure or inability to develop non-infringing technology or license the infringed technology, on acceptable terms and on a timely basis, if at all, could materially adversely affect our business and results of operations. These outcomes could also directly and indirectly benefit our competitors, including, for example, by obtaining judgments against or payments from us, reputational harm to us and our products, and/or gaining market share from us. Furthermore, litigation to establish or challenge the validity of patents, to defend against infringement, enforceability or invalidity claims or to assert infringement, invalidity or enforceability claims against others, if required, regardless of its success, would likely be time-consuming and expensive to resolve and would divert management’s time and attention, which could seriously harm our business.

In addition to our existing agreements related to the Neptune litigation, we may in the future agree to be financially responsible for any damages awarded against certain of our customers, and in some cases the cost of defense for such customers, as a result of the purchase, importation, use, sale or offer to sell of our products that a third party claims infringes its intellectual property rights. If any of the products at issue are found to infringe the valid and enforceable intellectual property right of such third party, the payment of such damages could have a materially adverse impact on our financial results and business.

It is possible that the products currently marketed or under development by us may in the future be found to infringe patents issued or licensed to others or otherwise violate the intellectual property rights of others. Likewise, it is possible that other parties may independently develop similar technologies, duplicate our technologies or, with respect to patents that are issued to us or rights licensed to us, design around the patented aspects of the technologies. Third parties may also obtain patents that we may need to license from them in order to conduct our business.

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

As is the case with other companies in the markets in which we participate, our success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents involves technological and legal complexity, and is costly, time consuming, and inherently uncertain. Patent policy also continues to evolve in the United States and many foreign jurisdictions and the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain. For example, the U.S. Supreme Court has ruled on several patent cases in recent years, including narrowing the scope of patent protection available in certain circumstances or weakening the rights or remedies of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Furthermore, decisions by the U.S. Congress, the federal courts, and the U.S. Patent and Trademark Office or comparable authorities in foreign jurisdictions could change the laws and regulations governing patents in unpredictable ways that may weaken or undermine our ability to obtain new patents or to enforce our existing patents and patents we might obtain in the future.

We may not be able to protect our intellectual property rights throughout the world.

Filing, prosecuting, maintaining and defending patents on each of our products in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States are less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Also, it may not be possible to effectively enforce intellectual property rights in some foreign countries at all or to the same extent as in the United States and other countries. Consequently, we are unable to prevent third parties from using our inventions in all countries, or from selling or importing products made using our inventions in the jurisdictions in which we do not have (or are unable to effectively enforce) patent protection. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop, market or otherwise commercialize their own products, and we may be unable to prevent those competitors from importing those infringing products into territories where we have patent protection but enforcement is not as strong as in the United States. These products may compete with our products and our patents and other intellectual property rights may not be effective or sufficient to prevent them from competing in those jurisdictions. Moreover, competitors or others in the chain of commerce may raise legal challenges against our intellectual property rights or may infringe upon our intellectual property rights, including through means that may be difficult to prevent or detect.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions, including China, a significant market for our InFat and other products. The legal systems of certain countries, including China, have not historically favored the enforcement of patents or other intellectual property rights, which could hinder us from preventing the infringement of our patents or other intellectual property rights in those countries and result in substantial risks to us.

Furthermore, proceedings to enforce our patent rights in the United States or foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing, and could provoke third parties to assert patent infringement or other claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights in the United States and around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license from third parties.

Risks related to an investment in our ordinary shares

An active, liquid and orderly trading market for our ordinary shares may not develop, which may inhibit the ability of our shareholders to sell ordinary shares following this offering.

Prior to this offering there has been no public market for our ordinary shares. An active, liquid or orderly trading market in our ordinary shares may not develop upon completion of this offering, or if it does develop,

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it may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital by selling shares of capital stock and may impair our ability to acquire other companies by using our shares as consideration.

The market price of our ordinary shares may be subject to fluctuation and you could lose all or part of your investment.

The initial public offering price for the shares will be determined by negotiations between us and representatives of the underwriters and may not be indicative of prices that will prevail in the trading market. The price of our ordinary shares may decline following this offering. The stock market in general has been, and the market price of our ordinary shares in particular will likely be, subject to fluctuation, whether due to, or irrespective of, our operating results and financial condition. The market price of our ordinary shares on the NASDAQ Global Market may fluctuate as a result of a number of factors, some of which are beyond our control, including, but not limited to:

actual or anticipated variations in our and our competitors’ results of operations and financial condition;
market acceptance of our products;
the mix of products that we sell, and related services that we provide;
changes in earnings estimates or recommendations by securities analysts, if our ordinary shares are covered by analysts;
the results of operations of AL;
development of technological innovations or new competitive products by others;
announcements of technological innovations or new products by us;
publication of the results of pre-clinical or clinical trials for any of our products or products under development;
failure by us to achieve a publicly announced milestone;
delays between our expenditures to develop and market new or enhanced products and the generation of sales from those products;
developments concerning intellectual property rights, including our involvement in litigation;
regulatory developments and the decisions of regulatory authorities as to the approval or rejection of new or modified products;
changes in the amounts that we spend to develop, acquire or license new products, technologies or businesses;
changes in our expenditures to promote our products;
our sale or proposed sale, or the sale by our significant shareholders, of our ordinary shares or other securities in the future;
changes in key personnel;
success or failure of research and development projects of us or our competitors;
the trading volume of our ordinary shares; and
general economic and market conditions and other factors, including factors unrelated to our operating performance.

These factors and any corresponding price fluctuations may materially and adversely affect the market price of our ordinary shares and result in substantial losses being incurred by our investors. In the past, following

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periods of market volatility, public company shareholders have often instituted securities class action litigation. If we were involved in securities litigation, it could impose a substantial cost upon us and divert the resources and attention of our management from our business.

If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our ordinary shares, the price of our ordinary shares could decline.

The trading market for our ordinary shares will rely in part on the research and reports that equity research analysts publish about us and our business. We do not have control over these analysts and we do not have commitments from them to write research reports about us. The price of our ordinary shares could decline if one or more equity research analysts downgrades our ordinary shares or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.

Future sales of our ordinary shares could reduce the market price of our ordinary shares.

If our existing shareholders, particularly our directors, their affiliates, or our executive officers, sell a substantial number of our ordinary shares in the public market, the market price of our ordinary shares could decrease significantly. The perception in the public market that our shareholders might sell our ordinary shares could also depress the market price of our ordinary shares and could impair our future ability to obtain capital, especially through an offering of equity securities. Substantially all of our shares outstanding prior to this offering and our shares issuable upon the exercise of vested options are subject to lock-up agreements with the underwriters that restrict the ability of their holders to transfer such shares for 180 days after the date of this prospectus. Consequently, upon expiration of the lock-up agreements, an additional approximately      of our ordinary shares will be eligible for sale in the public market of which approximately      will be subject to restrictions on volume and manner of sale pursuant to Rule 144 under the Securities Act. Furthermore, pursuant to the terms of our 2003 share option plan, options to purchase 3,057 ordinary shares will vest and become exercisable upon the closing of this offering and options to purchase 3,056 shares will vest and become exercisable no later than one year after that date. The holders of substantially all of these options have signed lock-up agreements with the underwriters that restrict their ability to transfer the shares underlying such options for 180 days after the date of this prospectus. However, we intend to file one or more registration statements on Form S-8 with the SEC covering all of the ordinary shares issuable under our share option plans and such shares will be available for resale following the expiration of the restrictions on transfer. The market price of our ordinary shares may drop significantly when the restrictions on resale by our existing shareholders lapse and these shareholders are able to sell our ordinary shares into the market. In addition, a sale by the company of additional ordinary shares or similar securities in order to raise capital might have a similar negative impact on the share price of our ordinary shares. A decline in the price of our ordinary shares might impede our ability to raise capital through the issuance of additional ordinary shares or other equity securities, and may cause you to lose part or all of your investment in our ordinary shares.

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

The initial public offering price of our ordinary shares in this offering is considerably greater than the net tangible book value per share of our outstanding ordinary shares immediately after this offering. Accordingly, investors in this offering will incur immediate dilution of $      per share, based on an assumed initial public offering price of $      per share, the midpoint of the estimated initial public offering price range shown on the cover of this prospectus. In addition, if outstanding options to purchase our ordinary shares are exercised in the future, you will experience additional dilution. See “Dilution.”

The significant share ownership positions of Galam and XT Hi-Tech Investments (1992) Ltd. may limit your ability to influence corporate matters.

After giving effect to this offering, Galam Management and Marketing Agricultural Cooperative Society Ltd. and Galam Ltd. (together, “Galam”) and XT Hi-Tech Investments (1992) Ltd. own or control, directly and indirectly,     % and     % of our outstanding ordinary shares respectively (or     % and     % if the underwriters fully exercise their option to purchase additional ordinary shares). Accordingly, if Galam and XT Hi-Tech Investments (1992) Ltd. vote the shares that they own or control together, they will be able to significantly influence the outcome of matters required to be submitted to our shareholders for approval,

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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 ordinary shares.

We have broad discretion as to the use of the net proceeds from this offering and may not use them effectively.

We currently intend to use the net proceeds from this offering to meet our anticipated increased working capital requirements resulting from the expected growth in our business and for other general corporate purposes. However, our management will have broad discretion in the application of the net proceeds. Our shareholders may not agree with the manner in which our management chooses to allocate the net proceeds from this offering. The failure by our management to apply these funds effectively could have a material adverse effect on our business, financial condition and results of operation. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income.

We will incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.

As a public company whose ordinary shares are listed in the United States, we will incur accounting, legal and other expenses that we did not incur as a private company, including costs associated with our reporting requirements under the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act. We also anticipate that we will incur costs associated with corporate governance requirements, including requirements under Section 404 and other provisions of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well as rules implemented by the SEC and the NASDAQ Global Market, and provisions of Israeli corporate law applicable to public companies. We expect that these rules and regulations will increase our legal and financial compliance costs, introduce new costs such as investor relations and stock exchange listing fees, and will make some activities more time-consuming and costly. We are currently evaluating and monitoring developments with respect to these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

As an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 effective on April 5, 2012, or the JOBS Act, we may take advantage of certain temporary exemptions from various reporting requirements, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes Oxley Act (and the rules and regulations of the SEC thereunder). When these exemptions cease to apply, we expect to incur additional expenses and devote increased management effort toward ensuring compliance with them. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs.

Changes in the laws and regulations affecting public companies will result in increased costs to us as we respond to their requirements. These laws and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. We cannot predict or estimate the amount or timing of additional costs we may incur in order to comply with such requirements.

We have never paid cash dividends on our share capital, and we do not anticipate paying any cash dividends in the foreseeable future.

We have never declared or paid cash dividends on our share capital, nor do we anticipate paying any cash dividends on our share capital in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. As a result, capital appreciation, if any, of our ordinary shares will be investors’ sole source of gain for the foreseeable future. In addition, Israeli law limits our ability to declare and pay dividends, and may subject our dividends to Israeli

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withholding taxes and our payment of dividends (out of tax-exempt income) may subject us to certain Israeli taxes, to which we would not otherwise be subject (see “Dividend policy”, “Description of share capital —Dividend and liquidation rights” and “Taxation and government programs — Israeli tax considerations and government programs”).

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

As a foreign private issuer, we will be permitted, and intend, to follow certain home country corporate governance practices instead of those otherwise required under the Listing Rules of the NASDAQ Stock Market for domestic U.S. issuers. For instance, we intend to follow home country practice in Israel with regard to the quorum requirement for shareholder meetings. As permitted under the Israeli Companies Law, our articles of association to be effective upon the closing of this offering will provide that the quorum for any meeting of shareholders shall be the presence of at least two shareholders present in person, by proxy or by a voting instrument, who hold at least 25% of the voting power of our shares instead of 33 1/3% of the issued share capital requirement. We may in the future elect to follow home country practices in Israel with regard to other matters, including the formation of compensation, nominating and corporate governance committees, separate executive sessions of independent directors and non-management directors and the requirement to obtain shareholder approval for certain dilutive events (such as for the establishment or amendment of certain equity-based compensation plans, issuances that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or more interest in the company and certain acquisitions of the stock or assets of another company). Following our home country governance practices as opposed to the requirements that would otherwise apply to a U.S. company listed on the NASDAQ Global Market may provide less protection to you than what is accorded to investors under the Listing Rules of the NASDAQ Stock Market applicable to domestic U.S. issuers.

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

We would lose our foreign private issuer status if a majority of our directors or executive officers are U.S. citizens or residents and we fail to meet additional requirements necessary to avoid loss of foreign private issuer status. Although we have elected to comply with certain U.S. regulatory provisions, our loss of foreign private issuer status would make such provisions mandatory. The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer may be significantly higher. If we are not a foreign private issuer, we will be required to file periodic reports and registration statements on U.S. domestic issuer forms with the SEC, which are more detailed and extensive than the forms available to a foreign private issuer. We may also be required to modify certain of our policies to comply with good governance practices associated with U.S. domestic issuers. Such conversion and modifications will involve additional costs. In addition, we may lose our ability to rely upon exemptions from certain corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers.

We are an “emerging growth company” and the reduced disclosure requirements applicable to emerging growth companies may make our ordinary shares less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various requirements that are applicable to other public companies that are not “emerging growth companies.” Most of such requirements relate to disclosures that we would only be required to make if we cease to be a foreign private issuer in the future. Nevertheless, as a foreign private issuer that is an emerging growth company, we will not be required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, for up to five fiscal years after the date of this

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offering. We will remain an emerging growth company until the earliest of: (a) the last day of our fiscal year during which we have total annual gross revenues of at least $1.0 billion; (b) the last day of our fiscal year following the fifth anniversary of the closing of this offering; (c) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (d) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act. When we are no longer deemed to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above. We cannot predict if investors will find our ordinary shares less attractive as a result of our reliance on exemptions under the JOBS Act. If some investors find our ordinary shares less attractive as a result, there may be a less active trading market for our ordinary shares and our share price may be more volatile.

We have not yet determined whether our existing internal controls over financial reporting systems are compliant with Section 404 of the Sarbanes-Oxley Act, and we cannot provide any assurance that there are no material weaknesses or significant deficiencies in our existing internal controls.

Pursuant to Section 404 of the Sarbanes-Oxley Act and the related rules adopted by the SEC and the Public Company Accounting Oversight Board, starting with the second annual report that we file with the SEC after the closing of this offering, our management will be required to report on the effectiveness of our internal control over financial reporting. In addition, once we no longer qualify as an “emerging growth company” under the JOBS Act and lose the ability to rely on the exemptions related thereto discussed above, our independent registered public accounting firm will also need to attest to the effectiveness of our internal control over financial reporting under Section 404. We have not yet commenced the process of determining whether our existing internal controls over financial reporting systems are compliant with Section 404 and whether there are any material weaknesses or significant deficiencies in our existing internal controls. This process will require the investment of substantial time and resources, including by our Chief Financial Officer and other members of our senior management. As a result, this process may divert internal resources and take a significant amount of time and effort to complete. In addition, we cannot predict the outcome of this determination and whether we will need to implement remedial actions in order to implement effective controls over financial reporting. The determination and any remedial actions required could result in us incurring additional costs that we did not anticipate, including the hiring of outside consultants. Irrespective of compliance with Section 404, any failure of our internal controls could have a material adverse effect on our stated results of operations and harm our reputation. As a result, we may experience higher than anticipated operating expenses, as well as higher independent auditor fees during and after the implementation of these changes. If we are unable to implement any of the required changes to our internal control over financial reporting effectively or efficiently or are required to do so earlier than anticipated, it could adversely affect our operations, financial reporting and/or results of operations and could result in an adverse opinion on internal controls from our independent auditors.

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 75% or more of our gross income is passive income, or at least 50% of the average quarterly value of our assets (which may be determined in part by the market value of our ordinary shares, which is subject to change) are held for the production of, or produce, passive income, we would be characterized as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes. Our status as a PFIC may also depend on how quickly we use the cash proceeds from this offering in our business. Based on certain estimates of our gross income and gross assets, our intended use of proceeds of this offering, and the nature of our business, we do not expect that we will be classified as a PFIC for the taxable year ending December 31, 2013. However, because PFIC status is based on our income, assets and activities for the entire taxable year, it is not possible to determine whether we will be characterized as a PFIC for the 2013 taxable year until after the close of the year. There can be no assurance that we will not be considered a PFIC for any taxable year. 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 a 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 “Taxation and government programs — U.S. federal income tax consequences”), and having interest charges apply to distributions by us and the proceeds of share sales. Certain elections exist that may alleviate some of the adverse consequences of

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PFIC status and would result in an alternative treatment (such as mark-to-market treatment) of our ordinary shares; however, we do not intend to provide the information necessary for U.S. holders to make qualified electing fund elections if we are classified as a PFIC. See “Taxation and government programs — U.S. federal income tax consequences — Passive foreign investment company consequences.”

Risks primarily related to our operations in Israel

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

Our headquarters, manufacturing and principal research and development facilities are located in northern Israel. In addition, the majority of our key employees, officers and directors are residents of Israel. Accordingly, political, economic and military conditions in Israel may directly affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its trading partners could adversely affect our operations and results of operations. In addition, our operations may be adversely affected by the call-up of certain of our employees, including members of our senior management, to active military services in the case of such hostilities.

During the Second Lebanon War of 2006, between Israel and Hezbollah, a militant Islamic movement, rockets were fired from Lebanon into Israel causing casualties and major disruption of economic activities in northern Israel. An escalation in tension and violence between Israel and the militant Hamas movement (which controls the Gaza Strip) and other Palestinian Arab groups, culminated with Israel’s military campaign in Gaza in December 2008 and again in November 2012 in an endeavor to prevent continued rocket attacks against Israel’s southern towns. Direct negotiations between Israel and the Palestinian Authority with the ultimate aim of reaching an official “final status settlement” are currently suspended and it is by no means clear if, and when, they will be restarted. In addition, Israel faces threats from more distant neighbors, in particular, Iran, an ally of Hezbollah and Hamas.

Popular uprisings in various countries in the Middle East and North Africa are affecting the political stability of those countries. Such instability may lead to deterioration in the political and trade relationships that exist between the State of Israel and these countries. Furthermore, 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 the region continue or intensify. Such restrictions may seriously limit our ability to sell our products to customers in those countries. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners, or significant downturns in the economic or financial condition of Israel, could adversely affect our operations and product development, cause our revenues to decrease and adversely affect the share price of publicly traded companies having operations in Israel, such as us. Similarly, Israeli corporations are limited in conducting business with entities from several countries. For example, in 2008, the Israeli legislator provided a law forbidding any investments in entities that transact business with Iran.

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

Exchange rate fluctuations between the U.S. dollar and the Israeli shekel, the Euro and other non-U.S. currencies may negatively affect our earnings.

The dollar is our functional and reporting currency. Although most of our revenues and a portion of our expenses are denominated in U.S. dollars, a significant portion of our cost of revenues and operating expenses is incurred in Israeli shekels. As a result, we are exposed to the risks that the shekel may appreciate relative to the dollar, or, if the shekel instead devalues relative to the dollar, that the inflation rate in Israel may exceed such rate of devaluation of the shekel, or that the timing of such devaluation may lag behind inflation in

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Israel. In any such event, the dollar cost of our operations in Israel would increase and our dollar-denominated results of operations would be adversely affected. We cannot predict any future trends in the rate of inflation in Israel or the rate of devaluation (if any) of the shekel against the dollar. For example, although the dollar appreciated against the shekel in 2011, the rate of devaluation of the dollar against the shekel was approximately 2.3% in 2012, which was compounded by inflation in Israel at a rate of approximately 1.6%. This had the effect of increasing the dollar cost of our operations in Israel. If the dollar cost of our operations in Israel increases, our dollar-measured results of operations will be adversely affected. Our operations also could be adversely affected if we are unable to effectively hedge against currency fluctuations in the future.

Although most of our revenues and a portion of our expenses are denominated in dollars, we do have substantial revenues and certain expenses that are denominated in other currencies apart from the dollar and the shekel, particularly the euro. Therefore, our operating results and cash flows are also subject to fluctuations due to changes in the relative values of the dollar and these foreign currencies. These fluctuations could negatively affect our operating results and could cause our revenues and net income or loss to vary from quarter to quarter. Furthermore, to the extent that we increase our revenues in certain countries, such as several countries in the Asia Pacific region, where our sales are denominated in dollars, a strengthening of the dollar versus other currencies could make our products less competitive in those foreign markets and collection of receivables more difficult.

We engage in currency hedging activities. These measures, however, may not adequately protect us from material adverse effects due to the impact of inflation in Israel or from fluctuations in the relative values of the dollar and foreign currencies in which we transact business, and may result in a financial loss. For further information, see “Management’s discussion and analysis of financial condition and results of operations” elsewhere in this prospectus.

We may become subject to claims for remuneration or royalties for assigned service invention rights by our employees, which could result in litigation and adversely affect our business.

We enter into assignment of invention agreements with our employees pursuant to which such individuals agree to assign to us all rights to any inventions created in the scope of their employment or engagement with us. A significant portion of our intellectual property has been developed by our employees in the course of their employment for us. Under the Israeli Patent Law, 5727-1967, or the Patent Law, inventions conceived by an employee during the scope of his or her employment with a company are regarded as “service inventions,” which belong to the employer, absent a specific agreement between the employee and employer giving the employee service invention rights. The Patent Law also provides that if there is no such agreement between an employer and an employee, the Israeli Compensation and Royalties Committee, or the Committee, a body constituted under the Patent Law, shall determine whether the employee is entitled to remuneration for his inventions. Recent decisions by the Committee have created uncertainty in this area, as it held that employees may be entitled to remuneration for their service inventions despite having specifically waived any such rights. Further, the Committee has not yet determined the method for calculating this Committee-enforced remuneration. Although our employees have agreed to assign to us service invention rights, we may face claims demanding remuneration in consideration for assigned inventions. As a consequence of such claims, we could be required to pay additional remuneration or royalties to our current and/or former employees, or be forced to litigate such claims, which could negatively affect our business.

The government tax benefits that we currently receive require us to meet several conditions and may be terminated or reduced in the future.

Some of our operations in Israel, referred to as “Approved Enterprises” and “Benefited Enterprises,” carry certain tax benefits under the Law for the Encouragement of Capital Investments, 5719-1959, or the Investment Law. Based on an evaluation of the relevant factors under the Investment Law, including the level of foreign (i.e. non-Israeli) investment in our company, we have determined that our effective tax rate to be paid with respect to all Israeli operations under these benefits programs is 0%, based on the available level of benefits under the law. Substantially all of our income before taxes can be attributed to these programs. If we do not meet the requirements for maintaining these benefits, they may be reduced or cancelled and the relevant operations would be subject to Israeli corporate tax at the standard rate, which is currently set at 25% for 2013. The Israeli government has proposed raising the rate to 26.5% in 2014 and thereafter. In addition to

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being subject to the standard corporate tax rate, we could be required to refund any tax benefits that we have already received, plus interest and penalties thereon. Even if we continue to meet the relevant requirements, the tax benefits that our current “Approved Enterprise” and “Benefited Enterprise” receive may not be continued in the future at their current levels or at all. If these tax benefits were reduced or eliminated, the amount of taxes that we pay would likely increase, as all of our operations would consequently be subject to corporate tax at the standard rate, which could adversely affect our results of operations. Additionally, if we increase our activities outside of Israel, for example, by way of acquisitions, our increased activities may not be eligible for inclusion in Israeli tax benefit programs. See “Taxation and government programs — Israeli tax considerations and government programs — Tax benefits under the Law for the Encouragement of Capital Investments, 5719-1959” for additional information concerning these tax benefits.

We received Israeli government grants for certain research and development activities. The terms of those grants require us to satisfy specified conditions and to pay penalties in addition to repayment of the grants upon certain events.

Our research and development efforts were and are financed in part through grants from Israel’s Office of the Chief Scientist, or OCS.

Even following full repayment of any OCS grants, we must nevertheless continue to comply with the requirements of the Israeli Law for the Encouragement of Industrial Research and Development, 1984, and related regulations, or the Research Law. When a company develops know-how, technology or products using OCS grants, the terms of these grants and the Research Law restrict the transfer outside of Israel of such know-how, and the manufacturing or manufacturing rights of such products, technologies or know-how, without the prior approval of the OCS. Therefore, if aspects of our technologies are deemed to have been developed with OCS funding, the discretionary approval of an OCS committee would be required for any transfer to third parties outside of Israel of know-how or manufacturing or manufacturing rights related to those aspects of such technologies. We may not receive those approvals. Furthermore, the OCS may impose certain conditions on any arrangement under which it permits us to transfer technology or development out of Israel.

The transfer of OCS-supported technology or know-how outside of Israel may involve the payment of significant penalties and other amounts, depending upon the value of the transferred technology or know-how, the amount of OCS support, the time of completion of the OCS-supported research project and other factors. These restrictions and requirements for payment may impair our ability to sell our technology assets outside of Israel or to outsource or transfer development or manufacturing activities with respect to any product or technology outside of Israel. Furthermore, the consideration available to our shareholders in a transaction involving the transfer outside of Israel of technology or know-how developed with OCS funding (such as a merger or similar transaction) may be reduced by any amounts that we are required to pay to the OCS.

Provisions of Israeli law, our amended articles of association as well as covenants contained in our loan agreements may delay, prevent or otherwise impede a merger with, or an acquisition of, us, even when the terms of such a transaction are favorable to us and our shareholders.

Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to such types of transactions. For example, a tender offer for all of a company’s issued and outstanding shares can only be completed if the acquirer receives positive responses from the holders of at least 95% of the issued share capital. Completion of the tender offer also requires approval of a majority of the offerees that do not have a personal interest in the tender offer, unless at least 98% of the company’s outstanding shares are tendered. Furthermore, the shareholders, including those who indicated their acceptance of the tender offer (unless the acquirer stipulated in its tender offer that a shareholder that accepts the offer may not seek appraisal rights), may, at any time within six months following the completion of the tender offer, petition an Israeli court to alter the consideration for the acquisition. See “Description of share capital — Acquisitions under Israeli law” for additional information.

Our amended articles of association provide that our directors (other than external directors) are elected on a staggered basis, such that a potential acquiror cannot readily replace our entire board of directors at a

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single annual general shareholder meeting. This could prevent a potential acquiror from receiving Board approval for an acquisition proposal that our Board opposes.

Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to our shareholders whose country of residence does not have a tax treaty with Israel exempting such shareholders from Israeli tax. For example, Israeli tax law does not recognize tax-free share exchanges to the same extent as U.S. tax law. With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of a number of conditions, including, in some cases, a holding period of two years from the date of the transaction during which sales and dispositions of shares of the participating companies are subject to certain restrictions. Moreover, with respect to certain share swap transactions, the tax deferral is limited in time, and when such time expires, the tax becomes payable even if no disposition of the shares has occurred.

Our credit facility agreements also impose limitations on us with respect to mergers, acquisitions and dispositions. These and other similar provisions could delay, prevent or impede an acquisition of us or our merger with another company, even if such an acquisition or merger would be beneficial to us or to our shareholders.

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

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

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

The rights and responsibilities of the holders of our ordinary shares are governed by our amended articles of association and by Israeli law. These rights and responsibilities differ in some material respects from the rights and responsibilities of shareholders in 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 a general meeting of shareholders on matters such as amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers and acquisitions and related party transactions requiring shareholder approval. In addition, a shareholder who is aware that it possesses the power to determine the outcome of a shareholder vote or to appoint or prevent the appointment of a director or executive officer in the company has a duty of fairness toward the company. There is limited case law available to assist us in understanding the nature of this duty or the implications of these provisions. These provisions may be interpreted to impose additional obligations and liabilities on holders of our ordinary shares that are not typically imposed on shareholders of U.S. corporations.

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Forward-looking statements; cautionary information

We make forward-looking statements in this prospectus that are subject to risks and uncertainties. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terms including “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” and similar expressions. The statements we make regarding the following matters are forward-looking by their nature:

our expectations regarding future growth, including our ability to develop new products;
our ability to obtain raw materials and manage related costs;
our ability to maintain and expand relationships with our existing customers and to develop relationships with new customers;
our ability to maintain and grow our reputation and the acceptance of our products;
our ability to commercialize our products as prescription drugs;
our expectations regarding the outcome of litigation or other legal proceedings;
our ability to maintain adequate protection of our intellectual property; and
our intended use of proceeds of this offering.

The preceding list is not intended to be an exhaustive list of all of our forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties, including those described in “Risk factors.” In addition, the sections of this prospectus entitled “Prospectus summary” and “Business” contain information obtained from independent industry sources that we have not independently verified.

You should not put undue reliance on any forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or will occur. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus, to conform these statements to actual results or to changes in our expectations.

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Use of proceeds

We estimate that we will receive net proceeds from this offering of approximately $     million, or $     million if the underwriters exercise their option to purchase additional ordinary shares in full, based on an assumed initial public offering price of $     , the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses. A $1.00 increase (decrease) in the assumed initial public offering price of $     would increase (decrease) the net proceeds that we receive from the offering by $     million, assuming that the number of ordinary shares offered, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses.

We expect to use the net proceeds from this offering to meet our anticipated increased working capital requirements resulting from the expected growth in our business and for other general corporate purposes. Our management will have significant flexibility in applying the net proceeds. Pending the uses described above, we intend to invest the net proceeds in interest-bearing investment-grade securities or deposits.

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Dividend policy

We have never declared or paid cash dividends to our shareholders and we do not intend to pay cash dividends in the foreseeable future. We intend to reinvest any earnings in developing and expanding our business. Any future determination relating to our dividend policy will be at the discretion of our board of directors and will depend on a number of factors, including future earnings, our financial condition, operating results, contractual restrictions, capital requirements, business prospects, our strategic goals and plans to expand our business, applicable law and other factors that our board of directors may deem relevant.

See “Risk factors — Risks related to an investment in our ordinary shares — We have never paid cash dividends on our share capital, and we do not anticipate paying any cash dividends in the foreseeable future. Therefore, if our share price does not appreciate, our investors may not gain and could potentially lose their investment in our ordinary shares” for an explanation concerning the payment of dividends under Israeli law.

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Capitalization

The following table presents our capitalization as of March 31, 2013:

on an actual basis;
on a pro forma basis, to give effect to the conversion of all outstanding preferred shares into 189,784 ordinary shares immediately prior to the closing of this offering; and
on a pro forma as adjusted basis, to give further effect to (i) the issuance of 6,882 ordinary shares pursuant to the exercise of warrants held by certain of our shareholders, (ii) the issuance of      ordinary shares in this offering, at an assumed initial public offering price of $     per share, the midpoint of the estimated initial public offering price range, after deducting underwriting discounts and commissions and estimated offering expenses and (iii) the payment of $     to certain of our employees, including some of our executive officers, for their contribution to completing this offering.

This table should be read in conjunction with “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

     
  As of March 31, 2013
     Actual   Pro forma   Pro forma
as adjusted
     (in thousands, except share and per share data)
Shareholders’ equity:
                          
Ordinary shares, NIS 0.01 par value: 3,399,618 shares authorized (actual and pro forma) and     shares authorized (pro forma as adjusted); 44,283 shares issued and outstanding (actual), 234,067 shares issued and outstanding (pro forma) and     shares issued and outstanding (pro forma as adjusted);   $  *     $  *     $  
Preferred shares, NIS 0.01 par value: 225,382 shares authorized, 189,784 issued and outstanding (actual); no shares authorized, issued and outstanding (pro forma and pro forma as
adjusted)
     *        *        
Additional paid-in capital     54,368       54,368  
Accumulated other comprehensive income (loss)     (215 )      (215 )          
Accumulated deficit     (10,685 )      (10,685 )          
Total shareholders’ equity     43,468       43,468           
Total capitalization   $ 59,187     $ 59,187     $         

* Represents less than one thousand U.S. dollars.

The preceding table excludes 28,900 ordinary shares reserved for issuance under our share option plans as of March 31, 2013, of which options to purchase 27,155 ordinary shares have been granted at a weighted average exercise price of $145.26 per share.

A $1.00 increase (decrease) in the assumed initial public offering price of $     would increase (decrease) the pro forma as adjusted amount of each of additional paid-in capital, total shareholders’ equity and total capitalization by $     million, assuming that the number of ordinary shares offered, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses.

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Dilution

If you invest in our ordinary shares in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share and the net tangible book value per ordinary share after this offering. Our pro forma consolidated net tangible book value as of March 31, 2013 was $     million, or $     per ordinary share. Pro forma consolidated net tangible book value per ordinary share was calculated by:

subtracting our consolidated liabilities from our consolidated tangible assets; and
dividing the difference by the number of ordinary shares outstanding.

Pro forma consolidated net tangible book value per ordinary share furthermore reflects the conversion of all outstanding preferred shares, including 6,882 preferred shares to be issued pursuant to the exercise of warrants held by certain of our shareholders, into 196,666 ordinary shares, as if such conversion had occurred as of March 31, 2013.

After giving effect to adjustments relating to this offering, our pro forma consolidated net tangible book value on March 31, 2013 would have been approximately $     million, equivalent to $     per ordinary share. The adjustments made to determine our pro forma consolidated net tangible book value are as follows:

an increase in consolidated tangible assets to reflect the net proceeds of this offering received by us as described under “Use of proceeds;” and
the addition of the      ordinary shares offered in this prospectus to the number of ordinary shares outstanding.

The following table illustrates the immediate increase in our pro forma consolidated net tangible book value of $     per ordinary share and the immediate pro forma dilution to new investors:

   
Assumed initial public offering price per ordinary share            $  
Pro forma consolidated net tangible book value per ordinary share as of March 31, 2013   $           
Increase in consolidated net tangible book value per ordinary share attributable to the offering                  
Pro forma consolidated net tangible book value per ordinary share as of March 31, 2013 after giving effect to the offering                  
Dilution per ordinary share to new investors         $        

A $1.00 increase (decrease) in the assumed initial public offering price of $     per ordinary share (the midpoint of the range on the cover of this prospectus) would increase (decrease) the consolidated net tangible book value attributable to this offering by $     per ordinary share, the pro forma consolidated net tangible book value after giving effect to this offering by $     per ordinary share and the dilution per ordinary share to new investors in this offering by $     , assuming that the number of ordinary shares offered remains the same and after deducting underwriting discounts and commissions and estimated offering expenses.

The table below summarizes, as of March 31, 2013, the differences for our existing shareholders and new investors in this offering, with respect to the number of ordinary shares purchased from us, the total consideration paid and the average per ordinary share price paid before deducting fees and offering expenses.

         
  Shares purchased   Total consideration   Average price per share
     Number   %   Amount   %
Existing shareholders                  %    $                 %    $  
New investors                                             
Total              100 %    $       100 %       

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The above discussion and tables are based on 44,238 ordinary shares issued and outstanding as of March 31, 2013.

The discussion and table above assume no exercise of the underwriters’ option to purchase additional ordinary shares. If the underwriters exercise their option to purchase additional ordinary shares in full, the pro forma number of our ordinary shares held by new investors will increase to      , or approximately     %, of the total pro forma number of our ordinary shares outstanding after this offering.

The preceding table excludes 28,900 ordinary shares reserved for issuance under our share option plans as of March 31, 2013, of which options to purchase 27,155 ordinary shares have been granted at a weighted average exercise price of $145.26 per share.

If all of such outstanding options were exercised, pro forma consolidated net tangible book value per share would be $     , dilution per ordinary share to new investors would be $     , the number of shares held by our existing shareholders would increase to     , constituting     % of our total issued shares (while new shareholders in this offering would only hold     % of our issued shares), the total consideration amount paid by existing shareholders would increase to $     , or     % of total consideration received by us for our shares (while the percentage of consideration paid by new shareholders in this offering would decrease to     %) and the average price per share paid by our existing shareholders would instead be $     .

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Selected consolidated financial data

The following table sets forth our selected consolidated financial data, which is derived from our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The selected consolidated financial statement data as of and for the years ended December 31, 2011 and 2012 is derived from our audited consolidated financial statements presented elsewhere in this prospectus. The selected consolidated financial statement data as of and for the year ended December 31, 2010 has been derived from audited consolidated financial statements not included in this prospectus. The selected consolidated financial statement data for the three months ended March 31, 2012 and 2013, and as of March 31, 2013, has been derived from our unaudited interim consolidated financial statements presented elsewhere in this prospectus. In the opinion of management, these unaudited interim consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of our financial position and operating results for these periods. Results for interim periods are not necessarily indicative of the results that may be expected for the entire year.

You should read this selected financial data in conjunction with, and it is qualified in its entirety by, reference to our historical financial information and other information provided in this prospectus including “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements and related notes. The historical results set forth below are not necessarily indicative of the results to be expected in future periods.

         
  Year ended
December 31,
  Three months ended March 31,
     2010   2011   2012   2012   2013
     (in thousands, except per share data)
Consolidated statements of operations data:
                                            
Net revenues   $ 17,440     $ 23,019     $ 37,867     $ 8,019     $ 13,830  
Cost of revenues     11,459       13,468       19,815       3,959       7,282  
Gross profit     5,981       9,551       18,052       4,060       6,548  
Operating expenses:
                                            
Research and development, net     3,062       3,860       4,611       1,205       1,445  
Selling and marketing     2,012       3,580       5,191       1,143       1,564  
General and administrative     2,036       2,458       2,935       706       1,117  
Total operating expenses     7,380       9,898       12,737       3,054       4,126  
Income (loss) from operations     (1,399 )      (347 )      5,315       1,006       2,422  
Financial expense, net     (427 )      (416 )      (539 )      (75 )      (81 ) 
Income (loss) before taxes on income     (1826 )      (763 )      4,776       931       2,341  
Taxes on income     (141 )      (137 )      (180 )      (40 )      (75 ) 
Share in profits of equity investee     61       36       186       39       78  
Net income (loss)   $ (1,906 )    $ (864 )    $ 4,782     $ 930     $ 2,344  
Earnings (loss) per ordinary share:(1)
                                            
Basic   $ (52.85 )    $ (19.81 )    $ 22.34     $ 4.40     $ 10.15  
Diluted   $ (52.85 )    $ (19.81 )    $ 19.34     $ 3.93     $ 8.04  
Weighted average number of ordinary shares used in computing earnings (loss) per ordinary share:(1)
                                            
Basic     36,065       43,610       44,068       44,068       44,259  
Diluted     36,065       43,610       50,910       49,336       55,903  

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  Year ended
December 31,
  Three months ended March 31,
     2010   2011   2012   2012   2013
     (in thousands, except per share data)
Pro forma earnings per ordinary share (unaudited):(2)
                                            
Basic               $ 22.34           $ 10.15  
Diluted               $ 21.65           $ 9.66  
Weighted average number of ordinary shares used in computing pro forma earnings per ordinary share (unaudited)(2)
                                            
Basic                 214,079             230,900  
Diluted                 220,921             242,544  

       
  As of December 31,   As of March 31,
     2010   2011   2012   2013
     (in thousands)
Consolidated balance sheet data:
                                   
Cash and cash equivalents   $ 1,980     $ 4,787     $ 2,729     $ 10,119  
Current assets     14,900       21,801       26,649       33,928  
Current liabilities     9,132       12,276       11,546       10,583  
Total assets     38,652       45,629       50,970       59,187  
Total debt     9,500       11,200       5,900       4,725  
Total liabilities     15,618       18,100       16,789       15,719  
Shareholders’ equity   $ 23,034     $ 27,529     $ 34,181     $ 43,468  

(1) Basic and diluted earnings (loss) per ordinary share is computed based on the basic and diluted weighted average number of ordinary shares outstanding during each period using the two-class method for participating preferred shares. For additional information, see Notes 1q and 15 to our consolidated annual financial statements included elsewhere in this prospectus.
(2) Pro forma basic and diluted earnings per ordinary share and pro forma basic and diluted weighted average ordinary shares outstanding give effect to the conversion of all outstanding preferred shares into ordinary shares, which will automatically occur immediately prior to the closing of this offering, but does not include (i) the preferred shares to be issued upon the closing of this offering pursuant to the exercise of warrants held by certain of our shareholders, and (ii) the issuance of shares in connection with this offering. For additional information on the conversion of the preferred shares see Notes 1r and 16 to our consolidated annual financial statements included elsewhere in this prospectus.

The following tables summarize segment data for the year ended December 31, 2012 and the three months ended March 31, 2013, which is derived from Note 4a to our audited consolidated financial statements and Note 3 to our unaudited interim consolidated financial statements, respectively, presented elsewhere in this prospectus. The financial information included in this table, under the heading “Nutrition segment” includes the results of operations of AL using the proportionate consolidation method. While under the equity method used in the presentation of our consolidated statements of operations, we recognize our share in the net results of AL as a share in profits of equity investee, under U.S. GAAP, for purposes of segment reporting, we are required to present our results of operations on the same basis provided to and utilized by management to analyze the relevant segment’s results of operations, which is achieved using the proportionate consolidation method of reporting. Under the proportionate consolidation method, we recognize our proportionate share of the gross revenues of AL and record our proportionate share of the joint venture’s costs of production in our statement of operations. For more information regarding the accounting treatment of AL in our consolidated and segment statements of operations, see “Management’s discussion and analysis of financial condition and results of operations — Joint venture accounting.”

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  Year ended December 31, 2012
     Nutrition Segment   VAYA Pharma Segment   Total Segment Results of Operations   Elimination(1)   Consolidated Results of Operations
     (in thousands)
Net revenues   $ 44,380     $ 1,832     $ 46,212     $ (8,345 )    $ 37,867  
Cost of revenues(2)     27,297       588       27,885       (8,087 )      19,798  
Gross profit(2)     17,083       1,244       18,327       (258 )      18,069  
Operating expenses(2)     7,850       4,637       12,487             12,487  
Depreciation and amortization     1,304       118       1,422             1,422  
Adjusted EBITDA(3)   $ 10,537     $ (3,275 )    $ 7,262     $ (258 )      7,004  
Depreciation and amortization                                         (1,422 ) 
Share based payment                             (267 ) 
Income from operations                                         5,315  
Financial expenses, net                             (539 ) 
Income before taxes on income                                         4,776  
Taxes on income                                         (180 ) 
Share in profits of equity investee                             186  
Net income                           $ 4,782  

(1) Represents the change from proportionate consolidation to the equity method of accounting.
(2) Includes depreciation and amortization, but excludes share-based payment.
(3) Adjusted EBITDA is a non-GAAP financial measure. For a definition and a reconciliation of adjusted EBITDA to our income from operations, see “— Non-GAAP Financial Measures” below.

         
  Three months ended March 31, 2013
     Nutrition Segment   VAYA Pharma Segment   Total Segment Results of Operations   Elimination(1)   Consolidated Results of Operations
     (in thousands)
Net revenues   $ 15,642     $ 884     $ 16,526     $ (2,696 )    $ 13,830  
Cost of revenues(2)     9,639       236       9,875       (2,596 )      7,279  
Gross profit(2)     6,003       648       6,651       (100 )      6,551  
Operating expenses(2)     2,582       1,494       4,076             4,076  
Depreciation and amortization     336       40       376             376  
Adjusted EBITDA(3)   $ 3,757     $ (806 )    $ 2,951     $ (100 )    $ 2,851  
Depreciation and amortization                                         (376 ) 
Share-based payment                             (53 ) 
Income from operations                                       $ 2,422  
Financial expenses, net                             (81 ) 
Income before taxes on income                                         2,341  
Taxes on income                                         (75 ) 
Share in profits of equity investee                             78  
Net income                           $ 2,344  

(1) Represents the change from proportionate consolidation to the equity method of accounting.
(2) Includes depreciation and amortization, but excludes share-based payment.
(3) Adjusted EBITDA is a non-GAAP financial measure. For a definition and a reconciliation of adjusted EBITDA to our income from operations, see “— Non-GAAP Financial Measures” below.

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Non-GAAP Financial Measures

Adjusted EBITDA is a non-GAAP financial measure that we define as income from operations before depreciation and amortization, share-based payments, interest and taxes. We have provided a reconciliation below of adjusted EBITDA to net income, the most directly comparable U.S. GAAP financial measure.

We have included adjusted EBITDA in this prospectus because it is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operational plans. In particular, the exclusion of certain expenses in calculating adjusted EBITDA can, in our opinion, provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under U.S. GAAP as the excluded items may have significant effects on our operating results and financial condition. When evaluating our performance, you should consider adjusted EBITDA alongside other financial performance measures, including cash flow metrics, net income, income (loss) from operations and our other GAAP results.

The following table presents a reconciliation of adjusted EBITDA to income from operations for each of the periods indicated:

   
  Year ended December 31, 2012   Three months ended
March 31,
2013
     (in thousands)
Reconciliation of adjusted EBITDA:
                 
Adjusted EBITDA   $ 7,262     $ 2,951  
Accounting for joint venture     (258 )      (100 ) 
Depreciation and amortization     (1,422 )      (376 ) 
Share-based payments     (267 )      (53 ) 
Income from operations     5,315       2,422  
Financial expenses, net     (539 )      (81 ) 
Income before taxes on income     4,776       2,341  
Taxes on income     (180 )      (75 ) 
Share in profits of equity investee     186       78  
Net income   $ 4,782     $ 2,344  

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Management’s discussion and analysis of financial condition and results of operations

You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this prospectus. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly those in the “Risk Factors.”

Company overview and development

We are a leading global supplier of specialty lipid-based products and solutions. We develop, manufacture and market innovative bio-functional lipid ingredients, as well as final products, based on sophisticated proprietary processes and technologies. We deliver our products and solutions through the following two reportable segments:

Nutrition segment.  This segment develops and manufactures nutritional ingredients for infant formulas and dietary supplements. These ingredients include InFat, a proprietary, clinically-proven infant formula fat ingredient that more closely resembles human breast milk fat to facilitate healthy infant development and premium phosopholipid-based bioactive ingredients for nutritional supplements. Our best-selling nutritional ingredient for dietary supplements is krill oil, which provides the benefits of omega-3 fatty acids. Our other nutritional ingredients for dietary supplements are targeted at improving brain health and providing benefits in memory, learning abilities and concentration.
VAYA Pharma segment.  This segment develops, manufactures and sells branded lipid-based medical foods for the dietary management of medical disorders and common diseases. This is a research-based, specialty pharmaceutical segment, which currently offers medical foods products for the cardiovascular and neurological markets. Our VAYA Pharma products are currently the only products sold by us for use by end users.

The following are the key milestones in our business and financial development:

We were founded in 1998.
In 2003, we initiated sales of our nutritional ingredients for dietary supplements, our first products offered for sale.
In 2004, we generated our first revenues from InFat.
In 2007, we entered into a joint venture arrangement with our Swedish joint venture partner, AarhusKarlshamn AB, or AAK, a global producer of specialty vegetable fats and established our Swedish joint venture, Advanced Lipids AB or AL. Our InFat product is now offered exclusively through our joint venture.
In 2008, we initiated Enzymotec USA, Inc.’s operations in the United States.
In 2009, we completed the building of our headquarters and manufacturing facility in Migdal Ha’Emeq, Israel, where we produce many of our products. Moving into this facility significantly increased our manufacturing capacity and streamlined our operations.
In the first quarter of 2011, we initiated sales of our VAYA Pharma products in the United States.
In 2012, we initiated our manufacturing facility expansion project. Construction for this expansion began in the first quarter of 2013, and we expect to complete construction in the fourth quarter of 2013. This expansion will enable us to increase our manufacturing capacity and move the majority of the krill oil extraction process, which we currently outsource, in-house.

Our net revenues have grown year over year from $17.4 million in 2010 to $37.9 million in 2012, representing a 47% compound annual growth rate, or CAGR, for that period. Our adjusted EBITDA for that

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period, under the proportionate consolidation method, has grown from approximately $0.4 million in 2010 to approximately $7.3 million in 2012. Our net income has grown from a net loss of $1.9 million in 2010 to net income of $4.8 million in 2012.

Components of our statement of operations

Net revenues

Revenues are recorded net of reserves for returns (primarily related to rights granted to distributors of VAYA Pharma products which have been negligible to date), and net of cash discounts and distribution fees.

Nutrition segment

We sell many of our Nutrition products, including our krill oil, to companies that manufacture and market dietary supplements and to distributors of these ingredients and products. Sales of our InFat product are made through AL to companies that provide balanced infant nutrition products, primarily in China. We expect net revenues to increase as additional infant nutrition brands choose to use InFat as a differentiating factor for their premium products. For an explanation of our commercial arrangement with our joint venture and how we account for our joint venture, see “— Joint venture accounting” below.

VAYA Pharma segment

We sell our VAYA Pharma products in the United States as medical food through wholesalers of pharmaceutical products. Outside of the United States, we sell our VAYA Pharma products to pharmaceutical companies in various countries. We rely upon those pharmaceutical companies not only to distribute our products, but for substantially all selling and marketing activities related to our VAYA Pharma products in those countries. Under U.S. law, distributors of medical food have the right to return unused products. Accordingly, we recognize revenues from the sale of VAYA Pharma products in the United States, net of provisions for returns that can be reasonably estimated, cash discounts and distribution fees to wholesalers.

Net revenues by geographical region

The following table presents net revenues by geographic breakdown of customers in dollars and as a percentage of net revenues for the periods indicated. This data refers to the location of the customer to whom we directly sell and does not take into consideration the location of the end-user (to the extent it is different).

               
  Year ended December 31,   Three months ended March 31,
     2011   2012   2012   2013
     Net revenues   Percentage   Net revenues   Percentage   Net revenues   Percentage   Net revenues   Percentage
     ($ in thousands)
Geographical region
                                                                       
North America   $ 14,394       63 %    $ 17,487       46 %    $ 4,898       61 %    $ 7,933       58 % 
Europe     3,557       16       6,828       18       1,262       16       2,789       20  
Australia and New Zealand     1,474       6       11,763       31       997       12       2,622       19  
Asia     3,094       13       1,497       4       727       9       340       2  
Israel     500       2       292       1       134       2       146       1  
Total   $ 23,019       100 %    $ 37,867       100 %    $ 8,019       100 %    $ 13,830       100 % 

  

Many of the sales made by our European, Australian and New Zealand customers are made into Asia and we believe that approximately one-quarter of our net revenues are derived from end customers in Asia.

Costs of revenues and gross profit

Our costs of revenues consist of costs of raw materials, as well as labor, utility and maintenance costs associated with the operation of our manufacturing facility, depreciation and shipping and handling. We allocate depreciation of our manufacturing facility, which is used by each of our segments, to each segment on the basis of actual use. The key driver of cost of revenues is the level of production, as increased output requires additional raw materials and labor.

Our gross profit is influenced by a number of factors. The most important of these is the cost of raw materials. The main factors influencing the cost of revenues and gross profit of each of our segments are set forth below.

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Nutrition

Gross profit of our Nutrition segment is primarily a function of the cost of raw materials, which comprised 64% of the costs of revenues in the year ended December 31, 2012 under the proportionate consolidation method. With respect to our InFat product, the cost of raw materials comprised a majority of the costs of revenues of AL in 2012. While certain of AL’s customer contracts contain pricing formulae under which the prices of products are adjusted to reflect changes in the costs of raw materials, the adjustments do not fully insulate AL from such changes. In addition, even where InFat prices are adjusted pursuant to customer contracts that contain pricing formulae, increases in price can adversely affect sales and also expose AL to increased competition. AL’s gross profit is also influenced by the mix of products sold, as the InFat products with the higher levels of concentration of our proprietary sn-2 palmitate component carry higher profit margins than the other InFat blends that we offer.

Further, a material portion of our costs of revenues for our nutritional ingredients is comprised of the costs of sourcing raw krill meal and extracting krill oil from the meal. We currently purchase krill meal pursuant to an agreement with the owners of a vessel that harvests Antarctic krill and processes the freshly caught krill into krill meal. Pursuant to this agreement, the price we pay for krill meal is based on a minimum fixed price through the end of 2016 that is subject to upward adjustment depending on the quality of the krill meal.

Currently, our costs related to our krill products also include payments to our Indian manufacturer for processing krill meal and extracting krill oil. In addition, the quality of the krill meal we source, meaning the level of oils found in the krill meal, impacts our gross profit as higher quality krill meal results in greater yield and less processing. We are currently expanding our Migdal Ha’Emeq manufacturing facility and equipping it to enable us to extract krill oil ourselves using technologically advanced equipment and processes. We expect to complete this project and move a substantial portion of the krill oil extraction process in-house in the fourth quarter of 2013, after which time we expect to save the majority of the processing costs, which were approximately $0.9 million in 2012, that we currently pay to our Indian manufacturer. In addition, we believe that we will be able to sell many of the marketable byproducts of the krill oil extraction process that we currently cannot sell due to Indian export restrictions, thereby further increasing revenues and gross profit. We also believe that the extraction process will be more efficient due to our use of new technologies, so that our yield and extraction process will be less dependent on the quality of the krill meal we source. Accordingly, we believe that this move will positively impact the gross profit of our Nutrition segment.

VAYA Pharma

The gross profit of VAYA Pharma is influenced primarily by the sale prices of its products. The gross profit from sales of VAYA Pharma products in the United States is higher than the gross profit from sales in other markets due to the fact that we perform sales and marketing of VAYA Pharma products in the United States through our dedicated sales staff, and accordingly charge higher sales prices to our wholesale distributors than to distributors in other countries who perform sales and marketing functions for us. The costs of revenues are primarily comprised of costs of production, which accounted for 67% of costs of revenues in 2012, and encapsulation, packaging and bottling of these products, which accounted for substantially the entire balance of the segment’s costs of revenues in 2012.

Operating expenses

Research and development expenses

Research and development expenses consist primarily of salaries and other employee benefits of our research and development personnel, costs of clinical trials and laboratory expenses, which include materials and depreciation of laboratory equipment. Research and development expenses are presented net of grants received from Israel’s OCS. For additional information regarding these grants, see “— Government Grants.” We charge all research and development expenses to operations as they are incurred. Currently, the majority of our research and development expenses are incurred by our Nutrition segment. We expect research and development expenses to increase in absolute terms but to remain relatively constant as a percentage of our consolidated net revenues.

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Selling and marketing expenses

Selling and marketing expenses consist primarily of salaries and other employee benefits of our sales and marketing personnel, global marketing expenses and sales commissions. The majority of our selling and marketing expenses are generated by our VAYA Pharma segment, which maintains a dedicated sales and marketing staff in the United States consisting of medical representatives. As part of our growth strategy, we intend to increase our dedicated U.S. VAYA Pharma sales and marketing staff and therefore expect selling and marketing expenses to increase in absolute terms and as a percentage of our consolidated net revenues.

General and administrative expenses

General and administrative expenses consist primarily of salaries and other employee benefits for our managerial and administrative personnel, together with associated overhead costs. Other significant general and administrative costs include professional fees for accounting and legal services. As our sales grow, we expect our general and administrative expenses to increase in absolute terms, but to decrease as a percentage of our consolidated net revenues. We also expect an increase in our general and administrative expenses as a result of the additional costs associated with being a public company in the United States. We have agreed to pay a total of $     to certain of our employees, including some of our executive officers, for their contribution to completing this offering. We have agreed to pay a further bonus of $0.5 million to certain of our employees if our market capitalization exceeds an agreed upon level for at least 30 trading days within 24 months following this offering.

Financial expense, net

Financial expenses consist of foreign currency exchange transactions, interest paid in respect of both long-term liabilities under our September 2009 bank financing agreement and short-term liabilities under our short-term working capital credit facility. Furthermore, in September 2012, we entered into a construction financing agreement, however, we have not yet drawn any amounts under this facility. Financial income has been immaterial to date. For more information regarding these facilities, please see “— Liquidity and capital resources.”

Currency exchange rates

As our functional currency for all of our operations other than AL is the U.S. dollar, any movements in the currencies of other countries in which we operate can have an impact on our operating results. While the majority of our sales are in U.S. dollars and most of our expenses are in U.S. dollars, we do have exposure to the euro and NIS. In addition, the functional currency of AL, is the Swedish Krona, and therefore the results of operations of our Nutrition segment, as reported in Note 4 to our annual consolidated financial statements included elsewhere in this prospectus, are also influenced by fluctuations of the U.S. dollar against the Swedish Krona. For a discussion of our efforts to reduce our exposure to exchange rate fluctuations, see “— Quantitative and qualitative disclosure about market risk”.

Taxes on income

The standard corporate tax rate in Israel for the 2013 tax year is 25% and for the 2011 and 2012 tax years it was 24% and 25%, respectively. According to recent announcements by the Israeli Ministry of Finance, the rate may be increased to 26.5% in 2014 and thereafter.

As discussed in greater detail below under “Taxation and government programs — Israeli tax considerations and government programs,” we have received various tax benefits under the Investment Law. Under the Investment Law, our effective tax rate to be paid with respect to our Israeli taxable income under these benefits programs is 0%. The majority of the benefits we receive under the Investment Law are pursuant to programs that are scheduled to expire in 2022.

Under the Investment Law and other Israeli legislation, we are entitled to certain additional tax benefits, including accelerated depreciation and amortization rates for tax purposes on certain assets, deduction of public offering expenses in three equal annual installments and amortization of other intangible property rights for tax purposes.

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Our non-Israeli subsidiaries are taxed according to the tax laws in their respective jurisdictions of organization. We estimate our effective tax rate for the coming years based on our planned future financial results in existing and new markets and the key factors affecting our tax liability. Accordingly, we estimate that our effective tax rate will range between 3% and 5% of our income before taxes on income for the years 2013 through 2016.

Share in profits of equity investee

Under U.S. GAAP, we are required to account for the results of operations of AL, using the equity method, meaning that we recognize our share in the net results of AL as a share in profits of equity investee. See “— Joint venture accounting” below.

Joint venture accounting

Under our joint venture arrangement with AAK, each joint venture partner is responsible for particular functions related to the production, marketing and sale of the final InFat product. The direct costs of production of each partner are factored into the division of the joint venture’s revenues, as described below.

We manufacture enzymes that we supply to AAK, which then produces the final InFat product at its dedicated facility in Sweden using those enzymes together with other raw materials that AAK is responsible for sourcing. AAK is also responsible for all labor and other costs of production, including freight and logistics, as well as for capital expenditures for increased capacity, inventory storage and management, receivables collection and product liability insurance. We are responsible for research and development, as well as business development (including penetration of new markets) and marketing activities.

Once it has produced the final product, AAK sells it to AL, which sells the product to three types of customers: (i) companies that manufacture the end product themselves, (ii) companies that outsource manufacturing of the end product and (iii) outsourced manufacturers of the end product. The difference between revenues from sales and the overall direct production costs of the joint venture partners represents the profit of AL, which is allocated between us and AAK on a 50:50 basis. This settlement does not include our operating expenses incurred in relation to the JV nor does it include depreciation or financing costs of AAK. Therefore, we are responsible for funding our operating expenses associated with our role in the joint venture and AAK is responsible for funding its other operating costs not directly related to the production of InFat, depreciation and financing costs.

Under U.S. GAAP, we are required to account for the results of operation of AL using the equity method, meaning that we recognize our share in the net results of AL as a share of profits of an equity investee. Accordingly, the revenues we recognize from the arrangement under U.S. GAAP are the amounts we charge to AAK, or our direct costs of production plus our share of the JV profits. Revenue from sales to AAK is recognized upon the sale of the product by AL to its customers. For purposes of segment reporting under U.S. GAAP, which requires presentation on the same basis provided to and utilized by management to analyze the relevant segment’s results of operations, we account for the results of operations of AL using the proportionate consolidation method.

Under the proportionate consolidation method, we recognize our proportionate share (50%) of the gross revenues of AL and record our proportionate share (50%) of the joint venture’s costs of production in our income statement.

Since under the equity method we do not include our proportionate share of the revenues, costs of revenues and operating expenses of the JV in our results of operation, our consolidated U.S. GAAP results of operations reflect lower revenues and a higher gross profit margin than our results of operation accounted for on a proportionate consolidation basis, as shown for purposes of segment reporting.

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Results of operations

The following table sets forth certain consolidated statement of income data as a percentage of total net revenues for the periods indicated. All items are included in or derived from our consolidated statements of operations. The period-to-period comparison of financial results is not necessarily indicative of future results.

       
  Year ended December 31,   Three months ended March 31,
     2011   2012   2012   2013
Net revenues     100.0 %      100.0 %      100.0 %      100.0 % 
Cost of revenues     58.5       52.3       49.4       52.7  
Gross profit     41.5       47.7       50.6       47.3  
Operating expenses
                                   
Research and development, net     16.8       12.2       15.0       10.4  
Selling and marketing     15.5       13.7       14.3       11.3  
General and administrative     10.7       7.8       8.8       8.1  
Total operating expenses     43.0       33.7       38.1       29.8  
Income (loss) from operations     (1.5 )      14.0       12.5       17.5  
Financial expense, net     (1.8 )      (1.4 )      (0.9 )      (0.6 ) 
Income (loss) before taxes on income     (3.3 )      12.6       11.6       16.9  
Taxes on income     (0.6 )      (0.5 )      (0.5 )      (0.6 ) 
Share in profits of equity investee     0.1       0.5       0.5       0.6  
Net income (loss)     (3.8 )%      12.6 %      11.6 %      16.9 % 

Three months ended March 31, 2013 compared with three months ended March 31, 2012

Net revenues

Total net revenues increased by $5.8 million, or 72.5%, to $13.8 million in the three months ended March 31, 2013 from $8.0 million in the three months ended March 31, 2012. The increase was due primarily to significant increases in volume of sales in our Nutrition segment.

Nutrition segment

Based on the equity method of accounting for our joint venture, net revenues of our Nutrition segment in the three months ended March 31, 2013 were $12.9 million, representing an increase of 68.4% over net revenues of $7.7 million in the three months ended March 31, 2012. Based on the proportionate consolidation method, net revenues of our Nutrition segment in the three months ended March 31, 2013 were $15.6 million, representing an increase of 66.3% over net revenues of $9.4 million in the three months ended March 31, 2012. The change was due to an increase of $2.7 million in the volume of sales of InFat by AL, reflecting increased market penetration due to growing awareness of the benefits of InFat, especially in the Chinese market, as well an increase of $3.3 million in the volume of sales of krill, driven primarily by increased volume of sales to new customers in the United States and continued increases in the volume of sales in the Australian and New Zealand markets reflecting increased demand for premium omega-3 products in those markets. We expect net revenues to increase as additional infant nutrition brands choose to use InFat as a differentiating factor for their premium products and as a result of the increased demand for premium omega-3 products and global momentum for brain food.

VAYA Pharma segment

Net revenues in the three months ended March 31, 2013 were $0.9 million for our VAYA Pharma segment, representing an increase of 167.9% over net revenues of $0.3 million in the three months ended March 31, 2012. The increase in net revenues was primarily due to increased volume of sales in the United States, reflecting continued execution of our VAYA Pharma U.S. business plan.

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Cost of revenues and gross profit

The following table presents net revenues, cost of revenues and gross profit in dollars and as a percentage of net revenues for the periods indicated, and the percentage change in such amounts period-over-period:

           
  Three months ended March 31,   Increase in   As a percentage of net revenues
Three months ended
March 31,
     2012   2013   dollars   percentage   2012   2013
     ($ in thousands)               
Net revenues   $ 8,019     $ 13,830     $ 5,811       72.5 %                   
Cost of revenues     3,959       7,282       3,323       83.9       49.4 %      52.7 % 
Gross profit   $ 4,060     $ 6,548     $ 2,488       61.3 %      50.6 %      47.3 % 

Gross profit increased by $2.5 million, or 61.3%, to $6.5 million, in the three months ended March 31, 2013, from $4.1 million in the three months ended March 31, 2012. The change in absolute gross profit reflects our increased volume of sales. The decrease in gross profit margin from 50.6% to 47.3% was due primarily to changes in the mix of products sold, as our net revenues in the three months ended March 31, 2013 reflected a significant increase in the volume of sales of our krill products, which carry a lower margin than some of our other products. In addition, gross profit margins were affected by the quality of the krill meal we sourced because higher quality krill meal results in greater krill oil yield, as described above.

Nutrition segment

Based on the equity method of accounting for our joint venture, gross profit of our Nutrition segment in the three months ended March 31, 2013 increased by $2.0 million to $5.9 million from $3.9 million in the three months ended March 31, 2012, and gross profit margin decreased to 45.6% in the three months ended March 31, 2013 from 50.3% in the three months ended March 31, 2012. Based on the proportionate consolidation method, gross profit of our Nutrition segment in the three months ended March 31, 2013 increased by $2.1 million to $6.0 million, from $3.9 million in the three months ended March 31, 2012, and gross profit margin decreased to 38.4% in the three months ended March 31, 2013 from 41.7% in the three months ended March 31, 2012. The increase in absolute gross profit was due to increased volume of sales of our Nutrition products. The decrease in gross profit margin was due primarily to the exceptional quality of the krill meal we sourced in the three months ended March 31, 2012, which resulted in an unusually high production yield. The decrease was also due to changes in the mix of InFat products sold, as InFat concentrate, which carries a higher margin than other InFat products, represented a slightly lower percentage of the quarter’s net revenues.

We believe that gross margins will increase in the future, once we bring the krill oil extraction process in-house, as we expect that our proprietary technological proce