F-1/A 1 v392595_f1a.htm F-1/A

As filed with the Securities and Exchange Commission on October 31, 2014.

Registration No. 333-199297

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549



 

Amendment No. 1
to
Form F-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933



 

PolyPid Ltd.

(Exact name of registrant as specified in its charter)



 

   
State of Israel   2834   Not Applicable
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

 
Amir Weisberg, Chief Executive Officer
PolyPid Ltd.
18 Hasivim Street

Petach Tikva 4959376 Israel
Tel: +972-74-7195700
  Zysman, Aharoni, Gayer and
Sullivan & Worcester LLP
1633 Broadway
New York, NY 10019
Tel: 212.660.5000
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)
  (Name, address, including zip code, and telephone number,
including area code, of agent for service)


 

Copies to:

     
Edwin L. Miller Jr., Esq.
Oded Har-Even, Esq.
Shy S. Baranov, Esq.
Zysman, Aharoni,
Gayer and
Sullivan & Worcester LLP
1633 Broadway
New York, NY 10019
Tel: 212.660.5000
Email: emiller@sandw.com
  Eran Ben-Dor, Adv.
Zysman, Aharoni,
Gayer & Co.
41-45 Rothschild Blvd.
Beit Zion
Tel-Aviv, Israel 65784
Tel: +972.3.795.5555
  Henry I. Rothman, Esq.
Joseph Walsh, Esq.
Troutman Sanders LLP
The Chrysler Building
405 Lexington Avenue
New York, NY 10174
Tel: 212.704.6000
  Barry Levenfeld
Eric Spindel
Yigal Arnon & Co.
1 Azrieli Center
Tel-Aviv, Israel 67021
Tel: +972.3.608.7777


 

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

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, 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)
  Amount of
Registration Fee(2)
Ordinary shares, par value NIS 0.1 per share(3)(4)   $ 25,090,909     $ 2,915.56  
Representative’s warrants to purchase ordinary shares(5)                  
Ordinary shares underlying Representative’s warrants(6)     1,363,636       158.45  
TOTAL   $ 26,454,545     $ 3,074.02  

(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.
(2) $2,788.80 previously paid.
(3) Pursuant to Rule 416, the securities being registered hereunder include such indeterminate number of additional securities as may be issued after the date hereof as a result of stock splits, stock dividends or similar transactions.
(4) Includes shares of ordinary shares which may be issued upon exercise of a 45-day option granted to the underwriters to cover over-allotments, if any.
(5) In accordance with Rule 457(g) under the Securities Act, because the shares of the registrant’s ordinary shares underlying the Representative’s warrants are registered hereby, no separate registration fee is required with respect to the warrants registered hereby.
(6) As estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(g) under the Securities Act. The warrants are exercisable at a per share exercise price equal to 125% of the public offering price, and the proposed maximum aggregate offering price of the representative’s warrants is $1,363,636.

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 Commission, acting pursuant to said Section 8(a), may determine.

 


 
 

TABLE OF CONTENTS

  

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 is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

   
PRELIMINARY PROSPECTUS   SUBJECT TO COMPLETION   DATED OCTOBER 31, 2014

1,818,182 Ordinary Shares

[GRAPHIC MISSING]

PolyPid Ltd. is offering its ordinary shares in an initial public offering. No public market currently exists for our ordinary shares. The estimated initial public offering price is between $10.00 and $12.00 per share.

We have applied to list our ordinary shares on the NASDAQ Capital Market under the symbol “PLPD.”

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

Investing in our ordinary shares involves a high degree of risk. See “Risk Factors” beginning on page 10 of this prospectus for a discussion of information that should be considered in connection with an investment in our ordinary shares.

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

   
  Per Share   Total
Initial public offering price   $             $          
Underwriting discounts and commissions(1)   $     $  
Proceeds to us (before expenses)   $     $  
(1) The underwriters will receive compensation in addition to the underwriting discounts and commissions, including warrants to purchase that number of our ordinary shares equal to 5% of the aggregate number of ordinary shares sold in the offering (excluding the over-allotment option) at a per share exercise price equal to 125% of the initial public offering price of the ordinary shares sold in this offering. See “Underwriting” for a description of the compensation payable to the underwriters.

Certain of our existing shareholders have indicated an interest in purchasing up to an aggregate of $7.0 million of our ordinary shares in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may sell more, less or no ordinary shares in this offering to any of these persons, or any of these persons may determine to purchase more, less or no ordinary shares in this offering. The underwriters will receive the same underwriting discounts and commissions on any shares purchased by these persons as they will on any other ordinary shares sold to the public in this offering.

We have granted a 45-day option to the underwriters to purchase up to 272,727 additional ordinary shares solely to cover over-allotments, if any.

The underwriters expect to deliver the shares to purchasers in the offering on or about            , 2014.

Sole Book-Running Manager

Aegis Capital Corp

Co-Managers

 
MLV & Co.   Chardan Capital Markets, LLC

The date of this prospectus is            , 2014.


 
 

TABLE OF CONTENTS

[GRAPHIC MISSING]

[GRAPHIC MISSING]


 
 

TABLE OF CONTENTS

TABLE OF CONTENTS



 

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

Until and including            , 2014, 25 days after the date of this prospectus, all dealers that buy, sell or trade our ordinary shares, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

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



 

BonyPid, BonyPid-1000, BonyPid-500, PLEX, and D-PLEX are trademarks of PolyPid Ltd.

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

i


 
 

TABLE OF CONTENTS

  

PROSPECTUS SUMMARY

The items in the following summary are described in more detail later in this prospectus. This summary provides an overview of selected information and does not contain all of the information you should consider before buying our ordinary shares. Therefore, you should read the entire prospectus carefully, especially the “Risk Factors” section beginning on page 10 and our financial statements and the related notes appearing at the end of this prospectus before deciding to invest in our ordinary shares.

We are an emerging specialty pharmaceutical company engaged in research and development of our product candidates based on PLEX, our proprietary drug delivery technology. PLEX (abbreviation for Polymer-Lipid Encapsulation MatriX) is able to encapsulate many types of drugs to enable targeted, localized drug delivery into the body over periods of time ranging from days to several months without changing the chemistry of the drug. The application of our PLEX technology in our product candidates enables us to optimize drug treatment regimens with release rates and durations that are pre-determined by us, a combination of attributes not currently available. We are a clinical stage company, meaning that our product candidates are yet to be approved for sale by any regulatory agency.

The localized (as opposed to systemic), controlled and constant release of drugs over extended periods is essential in many treatment regimens, such as the treatment of infections, inflammation and pain. Our PLEX technology platform is a matrix of several thousand alternating layers of polymers (plastics) and lipids (fatty substances) that entrap a therapeutic drug between them. Our preliminary studies show that our product candidates are effective using a very small fraction of the active pharmaceutical ingredients required in systemic administration. One vial of BonyPid-1000, one of our lead product candidates, utilizes slightly more than 1% of the accepted 30-day systemic regimen for the same antibiotic. One vial of BonyPid-500, one of our other lead product candidates, utilizes approximately 1.5% of the normal 10-day antibiotic regimen used in dental applications.

Our most advanced product candidates, BonyPid-1000 and BonyPid-500, address current treatment problems in orthopedics and dental implants that are not adequately addressed by current treatments (either local or systemic). Our additional product candidate D-PLEX addresses the prevention and treatment of surgical site infections generally. BonyPid-1000 and BonyPid-500 are specifically directed at combatting bacterial colonization on implanted bone substitutes and the resulting complications, as well as supporting bone recovery around dental implants, in each case by releasing a broad-spectrum antibiotic at the site to enhance healing. We expect to begin a confirmatory clinical trial for BonyPid-1000 in the second half of 2015 for a CE Mark authorizing marketing in Europe. We expect to begin a pilot clinical trial for BonyPid-500 in the second half of 2015. Both studies are expected to serve as a safety and preliminary effectiveness study as part of the approval process of the U.S. Food and Drug Administration (FDA). We expect, assuming continued favorable clinical results, that both BonyPid-1000 and BonyPid-500 will be ready for commercial release in Europe during the first half of 2017. We are also planning to begin a pilot clinical trial for D-PLEX shortly after our BonyPid-1000 and BonyPid-500 trials. Our estimates of the funds required to achieve these goals are set forth under “Use of Proceeds.”

The attributes of our PLEX platform can be used in a wide variety of products and indications in addition to orthopedics and dental implants, including infection treatment and prevention more generally. Based on our current clinical data, we believe that our product candidates have the capability to reduce the number of surgical procedures, side effects, hospitalizations and recovery times, while improving clinical and patient outcomes, thus significantly impacting health economics.

Background and Market Focus

Infection resulting from trauma or surgery remains a major health problem despite the intensive use of systemically administered antibiotics both pre- and post-surgery. Infection causes medical complications that may be fatal, and creates a significant public health burden. Furthermore, according to the FDA and its international counterparts, the increasing resistance of bacteria to antibiotics and similar drugs — called antimicrobials — is a major public health threat. Additionally, systemic administration of antimicrobials frequently involves high dosing that causes safety concerns and potential side effects, in addition to increasing the likelihood of the development of antibacterial resistance. Existing localized treatments are limited by one or several or the following factors that can affect safety or effectiveness: short maximum release periods;

1


 
 

TABLE OF CONTENTS

  

controllability of the drug release; no mechanism to prevent drug degradation; applicability to a limited number of drugs; and difficulties in bonding between the drug and the delivery mechanism.

Our current market focus is to create a range of effective, extended release pharmaceutical products for medicating tissues locally with antibiotics for infection treatment and prevention in surgical procedures. Our studies suggest that our product candidates are effective in a number of cases where systemic administration or other localized solutions have either little or no effect, are too toxic, or both. Based on our clinical and pre-clinical experience, we believe that use of our product candidates will reduce overall surgical infection rates and reduce bacterial resistance, thus benefiting patients, hospitals and healthcare organizations.

Lead Product Candidates

Our three lead product candidates are as follows:

BonyPid-1000 is a conventional bone substitute used in orthopedic surgery that has been coated with our PLEX technology and contains antibiotics. Bone substitutes are inserted into severe open bone fractures to promote bone healing, and the antibiotics protect the implants from bacterial adhesion by releasing a broad-spectrum antibiotic. This combination has also been designed for use in other orthopedic surgical procedures, such as spine surgeries and joint replacements that require the filling of bone voids and that are also prone to infection.

Penetration of antibiotics and other drugs from the blood stream into bone can be ineffective due to limited blood supply which results in inadequate delivery of sufficient dosages. The most severe open bone fracture cases frequently become infected and may require amputation of the limb despite the best available treatment and medications, both local and systemic. The antibiotics that are encapsulated by BonyPid-1000 are directly applied to the surgical site instead of being delivered through the blood supply. The entrapped antibiotics are released at an effective rate over a period of three to four weeks. In our clinical trials to date with BonyPid-1000, there have been no bone infection complications and no amputations despite the severity of the treated cases, suggesting a substantial improvement over current success rates. Additionally, the ability of BonyPid-1000 to permit immediate or early closure of the wound is an advance over current procedures and promotes earlier healing and reduces the risk of hospital-related bacterial contaminations. As a result, we believe that BonyPid-1000 has the potential to significantly reduce treatment costs because it can reduce the number of required recurring surgical procedures and the number, length and cost of hospitalizations. BonyPid-1000 also has the potential to be used in dental applications.

BonyPid-500 allows bone regrowth in bacterially-infected dental sites surrounding dental implants. Current treatments of bone resorption around these dental implants are largely ineffective and often require implant removal. BonyPid-500 acts as a scaffold to support bone recovery and delivers antibiotics locally over a prolonged period to prevent local development of device-related microbial colonization, which subsequently may result in infections and bone resorption. We expect BonyPid-500 to reduce implant procedure costs and prevent prolonged and painful follow-on dental procedures. We are currently collaborating with MIS Implants Ltd. for the development and future commercialization of BonyPid-500 in the field of peri-implantitis — one of the potential applications of BonyPid-500 in the maxiofacial market. BonyPid-500 may also potentially be used in other dental applications such as periodontitis, ridge augmentation and sinus lifts. See “Business — Collaborations.”
D-PLEX is in active development to treat infection and is directed at preventing and treating surgical site infections (known as SSI) addressing medical needs that are currently lacking effective solutions and that are of great concern to the medical community. D-PLEX is designed to provide localized infection treatment and prevention of soft tissues that will be administered locally during surgical procedures. SSI occur in varying percentages of surgical procedures despite administration of systemic antibiotics, depending on the procedure type. D-PLEX is expected to reduce the overall infection rate and overcome or reduce existing infections, including hospital-acquired resistant bacteria. D-PLEX is planned to be applied into a variety of tissues and solid organs to treat and

2


 
 

TABLE OF CONTENTS

  

prevent infections that may exist prior to, or appear after, surgery. Some possible examples include abdominal surgeries such as colectomy, appendectomy and chronic bone infection (osteomyelitis). We expect, in 2015, to enter discussions with the FDA as to our clinical path in the United States.

Target Markets

Orthopedics.  According to multiple published Millennium Research Group reports, in 2013 approximately one million annual orthopedic surgical procedures on open fractures requiring bone grafts were performed worldwide, with over 335,000 procedures in the United States. In a 2007 article in The Internet Journal of Orthopedic Surgery, it was reported that, depending on severity, up to 50% of these procedures result in bone infections. It was also reported that approximately 1,550,000 thoracolumbar and cervical spine procedures take place globally, of which around 720,000 were conducted in the United States. Two studies published in 2012 by the European Spine Journal show that between 2 – 10% of these shall incur infection, despite systemic antibiotic administration. Per the Millennium reports, approximately 328,500 hip and knee replacement revision surgeries took place, of which a total of 136,200 occurred in the United States. Almost all of these revision treatments, which are complications of primary hip and knee replacement surgeries, are expected to benefit from our product candidates.

Dental.  According to multiple Millennium Research Group reports, there were over 12 million dental implants worldwide in 2013, and approximately 10 – 20% of dental implants become infected up to five years after implantation. Millennium also reports that approximately 4.2 million dental procedures such as sinus lifts, ridge augmentation and expansion surgeries and socket extractions took place in 2013 with the United States accounting for approximately 1,4500,000 of them.

SSI.  According to the a datasheet published by the U.S. Centers for Disease Control and Prevention (CDC) in 2010 and several Millennium reports, of the 100 million interventional procedures conduced in the United States, approximately 30 million carry a risk of incurring surgical site infections (SSI) despite systemic antibiotic administration. In a 2001 report prepared for the Agency for Healthcare Research and Quality, U.S. Department of Health and Human Services, 80 – 90% of surgeries use systemic antibiotic administration. As an example, according to numerous Millennium reports, there were approximately 1,500,000 primary hip replacements conducted globally during 2013, of which approximately 300,000 took place in the United States. Although almost all of these procedures are accompanied by antibiotic administration, around 11% of these procedures will still incur infections according to the American Journal of Health-System Pharmacy published in February 2013. Similarly, according to the above CDC report, approximately 305,000 colectomy procedures are performed annually in the United States. According to a 2014 Journal of Hospital Infection review, 14 – 18% of colectomy procedures result in infections despite systemic antibiotic treatment. These are just a few of many examples of the need for an effective, localized and prolonged antibiotic treatment that our product candidates are intended to address.

Research Programs

The following programs, based on our PLEX platform, are in the early research phase:

Anti-Inflammatory Research Program. Systemic treatments are very effective for the treatment of inflamed conditions. However, wide use of anti-inflammatory agents is limited due to serious systemic side effects that include liver damage, heart disease, addiction and pain. We are developing a localized and controlled delivery of a very small, yet effective dose with minimal systemic side effects.
Anti-Cancer Research Program. Systemic anti-cancer treatments have serious side effects. Our program is designed to treat cancer by extended localized release of common chemotherapeutic agents. The program is aimed at reducing the overall dose of toxic agents for a prolonged, local delivery while achieving effectiveness that is at least comparable to systemic administration.

Intellectual Property

Various aspects of our technology are protected by five patent families, including two issued patents (U.S. and China), 2 allowed patent applications and over 30 patent applications currently pending in Australia, Canada, China, the European Patent Office, India, Israel, Japan and the United States.

3


 
 

TABLE OF CONTENTS

  

Strategy

Our goal is to become a leading specialty pharmaceutical company by developing, manufacturing and commercializing products based on our proprietary PLEX platform in the field of extended release, local drug delivery. These products are intended to address some of modern medicine’s main challenges, where current local or systemic administration has limited effect, is too toxic, or both. Our primary focus is on the field of infection management.

Our commercial strategy has two elements: internal product development and collaboration and licensing. We intend to discover, develop and commercialize novel therapeutic products either on our own or in collaboration with partners. In orthopedics, we are in late stage clinical development. We plan to establish an independent sales force in the United States, Germany, and later in France, to commercialize our products, starting with BonyPid-1000. In geographies where we do not intend to market our products ourselves, we plan to team up with commercial partners for certain applications to benefit from their existing sales force and market reach.

We expect to collaborate with pharmaceutical companies through licensing and collaboration agreements for the encapsulation of their drugs (generic or proprietary) using our PLEX platform to enable administration of drugs in a localized, targeted manner. The purpose of these collaborations is to enhance our PLEX platform into a partnered product pipeline and to generate revenues through licensing of PLEX for certain applications. As a first step in this strategy, we have recently entered into a preliminary technology evaluation agreement with a large U.S. pharmaceutical company. We envision that this technology evaluation agreement may lead to discussions on a license and collaboration contract.

Competitive Strengths

Our PLEX-based product candidates offer three distinct potential advantages that together can overcome the limitations of other local delivery solutions:

We can improve therapeutic effect by pre-determining the duration that a drug or a drug combination is most effectively released inside the body. We are capable of enabling drug delivery up to several months. For example, we have designed BonyPid-1000 with a drug release period of three to four weeks and PLEX with a drug release period of several months.
Our preliminary clinical results suggest that we enhance safety and efficacy when we pre-define the rate and quantity of drugs released. As a result, our PLEX-based product candidates release a small but effective drug dose with the benefit of reducing potential adverse side effects, toxicity and costs. One vial of BonyPid-1000 for example, utilizes slightly more than 1% of the accepted 30-day systemic antibiotic regimen.
We ensure that the drugs, encapsulated by PLEX technology, are fully active upon release by protecting them in a dry, secure, physical reservoir located at the area of the treated site. We are also able to encapsulate sensitive or unstable drugs over significant periods.

In the field addressed by BonyPid-1000, there are a number of companies that have regulatory approval to market products, incorporating anti-bacterial agents, outside the United States that are designed to assist in bone healing. These products include:

PMMA beads/Septopal (Biomet Manufacturing Corp)
Osteoset T (Wright Medical Group)
Targobone (Ossacur AG)
PerOssal (AAP implante AG)
Certamet G (BoneSupport AB)

We believe that these products can be evaluated by five different criteria, namely:

whether the product is biodegradable;
the ability to support bone growth;

4


 
 

TABLE OF CONTENTS

  

the ability to pre-determine the release profile of the active drug;
the ability to provide long-term release of up to weeks; and
the stability of the drug reservoir in a hydrated environment.

We believe that BonyPid-1000 satisfactorily achieves each of these performance measures, and that the others meet one or two of the five criteria. We believe that meeting all five criteria is essential for successful treatment. Additional detail on competition can be found below under “BonyPid-1000 — Existing approaches to support bone growth by the prevention of bone infection.”

More generally, with regard to localized, prolonged drug delivery systems, there are drug delivery solutions in the market, such as those offered by Pacira Pharmaceuticals. Pacira’s lead products, based on their DepoFoam technology, is a multivesicular liposome technology that encapsulates drugs and releases them over a period of several days. Similarly, Tyrx Inc. (acquired by Medtronic) markets a polymer-based local release solution called AIGISRx that elutes drugs over several days. We believe, however, that the technological solutions offered by these companies are less suited for the markets we are addressing and that our PLEX technology and related product candidates offer more flexible, long-term solutions.

Risks Associated with Our Business

Our ability to implement our business strategy is subject to numerous risks that you should be aware of before making an investment decision. These risks are described more fully in the section entitled “Risk Factors” immediately following this prospectus summary. These are not the only risks we face. These risks include, among others:

We are an emerging specialty pharmaceutical company and have a limited operating history on which to assess our business, have incurred significant losses since our inception, and anticipate that we will continue to incur significant losses for the foreseeable future.
Since inception, we have financed our operations almost entirely by the private placement of our preferred stock. Since inception, gross proceeds from the sale of our preferred stock were approximately $12.7 million in the aggregate. In addition, we received grants from (i) the Israeli Chief Scientist in the aggregate amount of $1.2 million and (ii) the European 7th Framework Programme in the aggregate amount of $618,000. We believe that our current capital resources, without additional financing, may not be sufficient to support our operations beyond June 30, 2015.
Even if this offering is successful, we expect that we will need to raise additional capital to complete our clinical trials, and such capital may not be available to us or available only on unfavorable terms. We currently estimate that we shall require approximately $7.5 million for clinical studies and regulatory approvals for our product candidates.
To date, we have not generated revenue from the sale of any product, and we do not expect to generate revenue unless and until we obtain marketing approval of, and commercialize, our BonyPid-1000 and BonyPid-500. We are unable to predict the extent of future losses or when we will become profitable based on the sale of any product, if at all. Even if we succeed in developing and commercializing our product candidates, we may never generate sufficient revenue to sustain profitability. As of June 30, 2014 we had an accumulated deficit of $11.0 million.
All of our product candidates are in pre-clinical or clinical development, and we cannot provide any assurance that any of our product candidates will receive any regulatory approvals.
If we are unable to obtain and maintain effective intellectual property rights for our technologies, product candidates, or any future product candidates, we may not be able to compete effectively in our markets.
Our future success depends in part upon our ability to retain our executive team and key consultants, and to attract, retain and motivate other qualified personnel.

5


 
 

TABLE OF CONTENTS

  

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

Corporate Information

We are an Israeli corporation based in Israel near Tel Aviv, and were incorporated in 2008. Our principal executive offices are located at 18 Hasivim Street, P.O. Box 7126, Petach Tikva 4959376 Israel. Our telephone number is +972-74-7195700. Our website address is www.polypid.com. The information contained on our website and available through our website is not incorporated by reference into and should not be considered a part of this prospectus, and the reference to our website in this prospectus is an inactive textual reference only.

Implications of being an Emerging Growth Company

We are an “emerging growth company” as defined in Section 2(a) of the Securities Act of 1933, or the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As such, we are eligible to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not “emerging growth companies” including, but not limited to:

the ability to provide only two years of audited financial statements in addition to any required unaudited interim financial statements with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure; and
not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements.

We intend to take advantage of these and other exemptions available to “emerging growth companies.” We could remain an “emerging growth company” for up to five years following the completion of this offering.

Implications of being a Foreign Private Issuer

Our status as a foreign private issuer also exempts us from compliance with certain laws and regulations of the Securities and Exchange Commission, or the SEC, and certain regulations of the NASDAQ Stock Market, or NASDAQ, including the proxy rules, the short-swing profits recapture rules, the composition of various board committees and certain governance requirements such as independent director oversight of the nomination of directors and executive compensation. In addition, we will not be required to file annual, quarterly and current reports and financial statements with the SEC as frequently or as promptly as registered United States companies. These exemptions will be available to us as long as we qualify as a foreign private issuer. Thus, even if we no longer qualify as an emerging growth company but remain a foreign private issuer, we will be exempt from the more stringent compensation disclosures required of companies that are not either an emerging growth company or a foreign private issuer.

6


 
 

TABLE OF CONTENTS

  

THE OFFERING

Ordinary shares offered by us    
    1,818,182 ordinary shares.
Ordinary shares to be outstanding after this offering    
    9,362,416 ordinary shares.
Over-allotment option    
    The underwriters have an option for a period of 45 days to purchase up to 272,727 additional ordinary shares to cover over-allotments, if any.
Use of proceeds    
    We expect to receive approximately $17.4 million in net proceeds from the sale of 1,818,182 ordinary shares offered by us in this offering (approximately $20.2 million if the underwriters exercise their over-allotment option in full), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, assuming the shares are offered at $11.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus. We currently expect to use the net proceeds from this offering in the following approximate amounts:
   

•  

$2.5 million to advance our research activities for our D-PLEX product candidate and our PLEX platform and for our development activities of our BonyPid-1000, BonyPid-500 and D-PLEX product candidates;

   

•  

Based on our current regulatory expectations, $7.5 million for clinical studies and regulatory approvals for our BonyPid-1000 and BonyPid-500 product candidates; and

   

•  

$2 million to establish manufacturing facilities for our D-PLEX product candidate and for a parallel plant for our BonyPid-1000 and BonyPid-500 product candidates.

    The remainder will be used for working capital and general corporate purposes.
Risk factors    
    You should read the “Risk Factors” section starting on page 10 of this prospectus for a discussion of factors to consider carefully before deciding to invest in ordinary shares.
Proposed NASDAQ Capital Market Symbol    
    “PLPD”

The number of our ordinary shares to be outstanding immediately after this offering is based on 7,544,234 ordinary shares outstanding as of June 30, 2014, and assumes or gives effect to:

the reverse split of 4.65 of our ordinary shares into 1 ordinary share, to take place upon the declaration of effectiveness of the registration statement of which this prospectus forms a part;
the conversion immediately prior to the closing of this offering of all outstanding preferred shares into 6,461,962 ordinary shares;
the exercise immediately prior to the closing of this offering of warrants to purchase convertible series A preferred shares which will immediately convert into 96,775 ordinary shares;
the exercise immediately prior to the closing of this offering of warrants to purchase convertible series B-1 preferred shares which will immediately convert into 17,755 ordinary shares; and
no exercise of 1,475,014 outstanding options under our equity incentive plans.

7


 
 

TABLE OF CONTENTS

  

All information in this prospectus assumes or gives effect to:

the filing of our amended and restated articles of association, which will occur immediately prior to the effectiveness of the registration statement of which this prospectus is a part; and
no exercise of the underwriters’ over-allotment option.

8


 
 

TABLE OF CONTENTS

  

SUMMARY FINANCIAL DATA

The following table summarizes our financial data. We have derived the following statements of operations data for the years ended December 31, 2013 and 2012 and the balance sheet data as of December 31, 2013 from our audited financial statements included elsewhere in this prospectus. We have derived the following statements of operations data for the six month periods ended June 30, 2014 and 2013 and the balance sheet data as of June 30, 2014 from our unaudited interim financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future. The following summary financial data should be read in conjunction with “Selected Consolidated Financial Data”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus.

       
  Years Ended December 31,   Six Months Ended June 30,
     2013   2012   2014   2013
     (in thousands of U.S. dollars,
except share and per share amounts)
  (in thousands of U.S. dollars,
except share and per share amounts)
Statements of Operations Data:
                                   
Research and development expenses, net   $ 2,641     $ 1,377     $ 1,499     $ 1,752  
General and administrative expenses     938       410       874       463  
Operating loss     3,579       1,787       2,373       2,215  
Financial expenses, net     305       3       235       73  
Net loss     3,884       1,790       2,608       2,288  
Basic and diluted net loss per Ordinary share   $ 4.82     $ 2.23     $ 3.81     $ 2.93  
Weighted average number of ordinary shares used in computing basic and diluted loss per share     967,742       967,742       967,742       967,742  
Pro forma basic and diluted net loss per Ordinary share (unaudited)   $ 0.66              $ 0.33           
Weighted average number of Ordinary shares used in computing basic and diluted net loss per share – pro forma (unaudited)     5,886,587                7,544,234           

       
  As of December 31, 2013   As of June 30, 2014
     Actual   Actual   Pro
Forma(1)
  Pro Forma,
As Adjusted (unaudited)(2)
     (in thousands of U.S. dollars)   (in thousands of U.S. dollars)
Balance Sheet data:
                                                     
Cash and cash equivalents   $ 1,263     $ 4,029     $ 4,092       21,523  
Total current assets   $ 1,604     $ 4,350     $ 4,413       21,844  
Total long-term assets     355       562       562       562  
Total current liabilities     502       984       984       984  
Total long-term liabilities     832       1,194       542       542  
Preferred shares warrant liability     332       652              
Convertible preferred shares     8,685       13,134              
Shareholders' equity (deficiency)   $ (8,060 )    $ (10,400 )    $ 3,449       20,880  

(1) Pro forma gives effect to: (i) the conversion immediately prior to the closing of this offering of all outstanding preferred shares into 6,461,962 ordinary shares; (ii) the exercise immediately prior to the closing of this offering of warrants to purchase convertible series A preferred shares and series B-1 preferred shares which will immediately convert into 114,530 ordinary shares;
(2) Pro forma, as adjusted, gives additional effect to the sale of ordinary shares in this offering at the assumed initial public offering price of $11.00 per share (the midpoint of the estimated price range set forth on the cover page of this prospectus), after deducting underwriting discounts and commissions and estimated offering expenses payable by us, as if the sale had occurred on June 30, 2014.

9


 
 

TABLE OF CONTENTS

RISK FACTORS

An investment in our ordinary shares involves a high degree of risk. You should carefully consider the following information about these risks, together with the other information appearing elsewhere in this prospectus, including our financial statements and related notes thereto, before deciding to invest in our ordinary shares. The occurrence of any of the following risks could have a material adverse effect on our business, financial condition, results of operations and future growth prospects. In these circumstances, the market price of our ordinary shares could decline, and you may lose all or part of your investment.

Risks Related to Our Financial Condition and Capital Requirements

We are a clinical-stage company and have a limited operating history on which to assess our business. We have incurred significant losses since our inception and anticipate that we will continue to incur significant losses for the foreseeable future.

We are an emerging specialty pharmaceutical company with a limited operating history focused on the discovery and development of advanced drug delivery systems. We have incurred net losses each year since our inception in 2008 including net losses of $3.9 million for the year ended December 31, 2013 and $2.6 million for the six-month period ended June 30, 2014. As of June 30, 2014 we have an accumulated deficit of $11 million.

We have devoted substantially all of our financial resources to design and develop our product candidates, including conducting preclinical and clinical studies and providing general and administrative support for these operations. To date, we have financed our operations primarily through the sale of equity securities, through royalty-bearing and non-royalty bearing grants that we received from Israel’s Office of the Chief Scientist of the Ministry of Economy, or the OCS, non-royalty bearing grants under the European Commission’s Seventh Framework Programme for Research (FP7) and advances from a potential collaborator. The amount of our future net losses will depend, in part, on the rate of our future expenditures and our ability to obtain funding through equity or debt financings, strategic collaborations, or grants. Biopharmaceutical and drug-device combination product development is a highly speculative undertaking and involves a substantial degree of risk. We are still in research and development, preclinical development and clinical development stages for our product candidates, we have not yet commenced pivotal clinical studies for any product candidate and it may be a significant period of time, if ever, before we complete pivotal clinical studies and have a product candidate approved for commercialization. Even if we obtain regulatory approval to market a product candidate, our future revenue will depend upon the size of any markets in which our product candidates may receive approval, and our ability to achieve sufficient market acceptance, pricing, reimbursement from third-party payors, and adequate market share for our product candidates in those markets.

We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. We anticipate that our expenses will increase substantially if and as we:

continue and expand our research of our product candidates;
initiate additional preclinical development, including toxicology, or other studies for our product candidates;
further expand our clinical trial program for our product candidates;
continue to improve our quality standards;
secure second-source manufacturing of our product candidates and initiate limited in-house manufacturing capabilities;
seek regulatory and marketing approvals for our product candidates that successfully complete clinical studies;
establish a sales, marketing, and distribution infrastructure to commercialize any products for which we may obtain marketing approval;
seek to identify, assess, acquire, license, and/or develop other product candidates;

10


 
 

TABLE OF CONTENTS

enter into license agreements;
seek to maintain, protect, and expand our intellectual property portfolio;
seek to attract and retain skilled personnel;
invest in additional infrastructure to support our operations as a public company and our product development and planned future commercialization efforts; and
experience any delays or encounter issues with any of the above, including but not limited to failed studies, complex results, safety issues, or other regulatory challenges that require longer follow-up of existing studies, additional major studies, or additional supportive studies in order to pursue marketing approval.

Further, the net losses we incur may fluctuate significantly from quarter to quarter and year to year, such that a period-to-period comparison of our results of operations may not be a good indication of our future performance.

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

Our recurring operating losses raise substantial doubt about our ability to continue as a going concern. Our financial statements include a note describing the conditions which raise this substantial doubt. As a result, our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements as of and for the year ended December 31, 2013 and for the six-month period ended June 30, 2014, with respect to this uncertainty. We have no current source of revenue to sustain our present activities, and we do not expect to generate revenue until, and unless, the FDA or other regulatory authorities approve our product candidates and we successfully commercialize our product candidates. Accordingly, our ability to continue as a going concern will require us to obtain additional financing to fund our operations. The perception of our ability to continue as a going concern may make it more difficult for us to obtain financing for the continuation of our operations and could result in the loss of confidence by investors, suppliers and employees.

We have never generated any revenue from product sales and may never be profitable.

We have no products approved for commercialization and have never generated any revenue. Our ability to generate revenue and achieve profitability depends on our ability, alone or with strategic collaboration partners, to successfully complete the development of, and obtain the regulatory and marketing approvals necessary to commercialize, one or more of our product candidates. We do not anticipate generating revenue from product sales before the first half of 2017. Our ability to generate future revenue from product sales depends heavily on our success in many areas, including but not limited to:

completing research and preclinical and toxicology and clinical development of our product candidates;
obtaining regulatory and marketing approvals for our product candidates, if and when we complete clinical studies;
developing and obtaining regulatory approval for a sustainable and scalable third-party manufacturing process and in-house manufacturing capabilities, meeting all regulatory standards for our approved product candidates, and in some instances, establishing and maintaining supply and manufacturing relationships with third parties that can conduct the process and provide adequate (in amount and quality) products to support clinical development and the market demand for our product candidates, if approved;
launching and commercializing our product candidates, if and when we obtain regulatory and marketing approval, either directly or with collaborators or distributors;
exposing, educating and training physicians to use our products;
obtaining market acceptance of our product candidates as viable treatment options;

11


 
 

TABLE OF CONTENTS

ensuring our product candidates are approved for reimbursement from governmental agencies, health care providers and insurers;
addressing any competing technological and market developments;
identifying, assessing, acquiring and/or developing new product candidates;
negotiating favorable terms in any collaboration, licensing, or other arrangements into which we may enter;
maintaining, protecting, and expanding our portfolio of intellectual property rights, including patent applications, trade secrets, and know-how;
attracting, hiring, and retaining qualified personnel; and
locating and leasing or acquiring suitable facilities to support our growth.

Even if one or more of the product candidates that we develop is approved for commercial sale, we anticipate incurring significant costs associated with commercializing any approved product candidate. Our expenses could increase beyond expectations if we are required by the FDA, the European Medicines Agency (EMA) or other regulatory agencies, domestic or foreign, or ethical committees in medical centers, to change our manufacturing processes or assays or to perform clinical, nonclinical, or other types of studies in addition to those that we currently anticipate. In cases where we are successful in obtaining regulatory approvals to market one or more of our product candidates, our revenue will be dependent, in part, upon the size of the markets in the territories for which we gain regulatory approval, the accepted price for the product, the ability to get reimbursement at any price, and whether we own the commercial rights for that territory. We may not generate significant revenue from sales of such products, even if approved. Further, if we are not able to generate revenue from the sale of any approved products, we may be forced to cease operations.

Even if this offering is successful, we expect that we will need to raise substantial additional funding before we can expect to become profitable from product sales. This additional financing may not be available on acceptable terms, or at all. Failure to obtain this necessary capital when needed may force us to delay, limit, or terminate our product development efforts or other operations.

We are currently advancing our product candidates through preclinical and clinical development and regulatory approval. Developing our product candidates is expensive, and we expect our research and development expenses to increase substantially in connection with our ongoing activities, particularly as we advance our product candidates through clinical studies and regulatory approval.

If our product candidates enter and advance through research, preclinical studies and clinical trials, either pre- or post-marketing study or studies, and regulatory approval, and ultimately commercialization, we will need substantial additional funds to expand our development, regulatory, manufacturing, marketing and sales capabilities or contract with other organizations to provide these capabilities for us. We have used substantial funds to develop our product candidates and will require significant funds to conduct further research and development and preclinical testing and clinical trials of our product candidates, to seek regulatory approvals for our product candidates and to manufacture and market products, if any, which are approved for commercial sale.

As of June 30, 2014, our cash and cash equivalents were $4 million. Our existing cash resources, and together with anticipated grants from OCS as well as participations in our research and development programs, may not be sufficient to fund our projected cash requirements through June 30, 2015. Therefore, we will require significant additional financing in the future to fund our operations. If we do not generate sufficient cash through this offering or otherwise, however, our cash on hand may not be sufficient to meet our anticipated cash needs. For this reason, Note 1b to our interim financial statements for the six months ended June 30, 2014 and to our audited financial statements for the year ended December 31, 2013 include references to substantial doubt about our ability to continue as a going concern. In addition, the independent public accountants’ report for the year ended December 31, 2013 includes an explanatory paragraph that expresses substantial doubt about our ability to continue as a going concern. We currently anticipate that, assuming consummation of the current offering, we will advance current and planned research programs, complete the clinical development of our three lead product candidates, file the appropriate submissions of

12


 
 

TABLE OF CONTENTS

such product candidates for regulatory approval, establish a manufacturing facility for the production of some of our product candidates and use the remainder for working capital and general corporate purposes.

In addition, our operating plans may change as a result of many factors that may currently be unknown to us, and we may need to seek additional funds sooner than planned. Our future funding requirements will depend on many factors, including but not limited to:

the scope, rate of progress, results and cost of our clinical studies, post marketing studies if needed, preclinical testing, toxicology studies, and other related activities of our product candidates;
the cost of manufacturing clinical supplies, and establishing commercial supply of our product candidates and any future products;
the number and characteristics of product candidates that we pursue;
the cost, timing, and outcomes of regulatory approvals for our product candidates;
the cost and timing of establishing sales, marketing, and distribution capabilities; and
the terms and timing of any collaborative, licensing, and other arrangements that we may establish.

Any additional fundraising efforts may divert our management from their day-to-day activities, which may adversely affect our ability to develop and commercialize our product candidates. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if at all. Moreover, the terms of any financing may adversely affect the holdings or the rights of our shareholders, and the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our shares to decline. The incurrence of indebtedness could result in increased fixed payment obligations, and we may be required to agree to certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell, or license intellectual property rights, and other operating restrictions that could adversely impact our ability to conduct our business. We could also be required to seek funds through arrangements with collaborative partners or otherwise at an earlier stage than otherwise would be desirable, and we may be required to relinquish rights to some of our technologies or product candidates or otherwise agree to terms unfavorable to us, any of which may have a material adverse effect on our business, operating results, and prospects. Even if we believe we have sufficient funds for our current or future operating plans, we may seek additional capital if market conditions are favorable or if we have specific strategic considerations.

If we are unable to obtain funding on a timely basis, we may be required to significantly curtail, delay, or discontinue one or more of our research, development or manufacturing programs or the commercialization of any product candidates, or be unable to expand our operations or otherwise capitalize on our business opportunities, as desired, which could materially affect our business, financial condition, and results of operations.

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

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

13


 
 

TABLE OF CONTENTS

Risks Related to the Discovery and Development of Our Product Candidates.

The approach we are taking to discover and develop novel drug delivery solutions and drug-device combination products is novel and may never lead to marketable products.

We have concentrated our efforts and product research on drug delivery technology and drug-device combination products, and our future success depends on the successful development of this technology and products based on it. To our knowledge, no regulatory authority has granted approval to any person or entity, including us, to market and commercialize therapeutics using our novel delivery system. We may never receive approval to market and commercialize any product candidate.

We are heavily dependent on the success of our product candidates, including BonyPid-1000 and BonyPid-500, which are still in research, preclinical or clinical development. We cannot give any assurance that any of our product candidates will receive regulatory approval, which is necessary before they can be commercialized.

To date, we have invested all of our efforts and financial resources to: (i) research and develop our product candidates, including BonyPid-1000 and BonyPid-500, including conducting preclinical and clinical studies and providing general and administrative support for these operations; and (ii) develop and secure our intellectual property portfolio for our product candidates. Our future success is dependent on our ability to successfully develop, obtain regulatory approval for, and then successfully commercialize one or more of our product candidates. We currently generate no revenue from sales of any drugs or drug-devices combination or technology platforms, nor from any technology licensing agreements (even though we have received certain cash advances) and we may never be able to develop or commercialize a marketable drug or drug-device combination.

Our first product candidate is in clinical development and will require additional clinical development (and in some cases additional preclinical development), managing of nonclinical, clinical and manufacturing activities, regulatory approval, obtaining adequate manufacturing supply, building of a commercial organization, and significant marketing efforts before we generate any revenue from product sales. None of our product candidates have advanced into a pivotal study. We are not permitted to market or promote any of our product candidates before we receive regulatory approval from the FDA or comparable foreign regulatory authorities, and we may never receive such regulatory approval for any of our product candidates.

Other than in connection with BonyPid-1000, we have never submitted marketing applications to the FDA or comparable foreign regulatory authorities. We cannot be certain that any of our product candidates will be successful in clinical studies or receive regulatory approval. Further, our product candidates may not receive regulatory approval even if they are successful in clinical studies. If we do not receive regulatory approvals for our product candidates, we may not be able to continue our operations.

We plan to seek regulatory approval to commercialize our product candidates in the United States, the European Union, or the EU, and in additional foreign countries. To obtain regulatory approval, we must comply with numerous and varying regulatory requirements regarding safety, efficacy, chemistry, manufacturing and controls, clinical studies, commercial sales, pricing, and distribution of our product candidates. Even if we are successful in obtaining approval in one jurisdiction, we cannot ensure that we will obtain approval in any other jurisdictions, or will pass any post-approval tests. If we are unable to obtain approval for our product candidates in multiple jurisdictions, our revenue and results of operations could be negatively affected.

The regulatory approval processes of the FDA and comparable foreign authorities are lengthy, time consuming, expensive and inherently unpredictable. If we are ultimately unable to obtain regulatory approval for our product candidates, our business will be substantially harmed.

The time required to obtain approval by the FDA and comparable foreign authorities is unpredictable, typically takes many years following the commencement of clinical studies, and depends upon numerous factors. In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions, which may cause delays in the approval or the decision not to approve a marketing application.

14


 
 

TABLE OF CONTENTS

We have not obtained regulatory approval for any product candidate, and it is possible that none of our existing product candidates or any product candidates we may seek to develop in the future will ever obtain regulatory approval.

Applications for our product candidates could fail to receive regulatory approval for many reasons, including but not limited to the following:

the FDA or comparable foreign regulatory authorities may disagree with the design or implementation of our clinical studies;
we may be unable to demonstrate to the FDA or comparable foreign regulatory authorities that a product candidate’s safety-benefit ratio for its proposed indication is acceptable;
the population studied in the clinical program may not be sufficiently broad or representative to assure safety in the full population for which we seek approval;
the FDA or comparable foreign regulatory authorities may disagree with our interpretation of data from preclinical studies or clinical studies;
the data collected from clinical studies of our product candidates may not be sufficient to support the submission of a new drug application, or NDA, or a biologics license application, or BLA, or other submission or to obtain regulatory approval in the United States or elsewhere;
the FDA and/or comparable foreign regulatory authorities may fail to approve the manufacturing processes, test procedures and specifications, or facilities of third-party manufacturers with which we contract for clinical and commercial supplies; and
the approval policies or regulations of the FDA or comparable foreign regulatory authorities may significantly change in a manner rendering our clinical data insufficient for approval.

This lengthy approval process, as well as the unpredictability of the results of clinical studies, may result in our failing to obtain regulatory approval to market any of our product candidates, which would significantly harm our business, results of operations, and prospects.

Clinical drug development involves a lengthy and expensive process with an uncertain outcome, and results of earlier studies may not be predictive of future study results.

Before obtaining marketing approval from regulatory authorities for the sale of our product candidates, we must conduct additional clinical studies to demonstrate the safety and efficacy of the product candidates. Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical study process.

Clinical trials can be delayed, prevented or terminated for a number of reasons, including, but not limited to:

inability to generate sufficient preclinical, toxicology, or other in vivo or in vitro data to support the initiation of clinical studies;
delays in reaching a consensus with regulatory agencies on the design of clinical studies;
delays in reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical study sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and clinical study sites;
delays in obtaining required Institutional Review Board, or IRB, approval at each clinical study site;
failure to recruit a Principal Investigator of suitable caliber to manage the clinical studies;
imposition of a clinical hold by regulatory agencies, after review of an investigational new drug, or IND, application, or equivalent application, or an inspection of our clinical study operations or study sites;
difficulties collaborating with patient groups and investigators;

15


 
 

TABLE OF CONTENTS

challenges recruiting and enrolling subjects to participate in clinical trials for a variety of reasons, including size and nature of subject population, proximity of subjects to clinical sites, eligibility criteria for the trial, nature of trial protocol, the availability of approved effective treatments for the relevant disease and competition from other clinical trial programs for similar indications;
failure by our CROs, other third parties, or us to adhere to current Good Clinical Practices, or cGCP, and the requirements of the clinical study protocols;
failure to perform in accordance with the FDA’s cGCP requirements or applicable regulatory guidelines in other countries;
unforeseen safety issues, including the occurrence of serious adverse events associated with the product candidate that are viewed to outweigh its potential benefits;
the cost of clinical studies of our product candidates being greater than we anticipate;
clinical studies of our product candidates producing negative or inconclusive results, which may result in us deciding, or regulators requiring us, to conduct additional clinical studies or abandon drug development programs;
failures associated with data interpretation, data management and data storage of such studies;
government or regulatory delays and changes in regulatory requirements, policies and guidelines;
failures associated with data interpretation, data management and data storage of such studies; and
lack of adequate funding to continue the clinical trial.

If we ultimately are unable to successfully complete clinical development of our product candidates, we would be forced to cease operations. Clinical study delays could also shorten any periods during which our products have patent protection and may allow our competitors to bring products to market before we do, and to successfully commercialize our product candidates.

Positive results in previous pre-clinical and clinical trials of our product candidates may not be replicated in future clinical trials of our product candidates, which could result in development delays or a failure to obtain marketing approval.

Positive results in previous pre-clinical and clinical studies of product candidates may not be predictive of similar results in future clinical trials. Also, interim results during a clinical trial do not necessarily predict final results. In general, even product candidates that have shown promising results in early-stage clinical studies may still suffer significant setbacks in subsequent registration clinical studies. There is a high failure rate for drugs, biologics and medical devices proceeding through clinical studies, and product candidates in later stages of clinical studies may fail to show the desired safety and efficacy profiles, data or results, despite having progressed through preclinical studies and initial clinical studies. A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials even after achieving promising results in early-stage development. 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 pre-clinical studies and clinical trials have nonetheless failed to obtain FDA approval for their products.

We may find it difficult to enroll patients in our clinical studies. Difficulty in enrolling patients could delay or prevent clinical studies of our product candidates.

Identifying and qualifying patients to participate in clinical studies of our product candidates is critical to our success. The timing of our clinical studies depends in part on the speed at which we can recruit patients to participate in testing our product candidates, and we may experience delays in our clinical studies if we encounter difficulties in enrollment.

We may not be able to identify, recruit, and enroll a sufficient number of patients to complete our clinical studies because of the perceived risks and benefits of the product candidate under study, the availability and efficacy of competing therapies and clinical studies, the proximity and availability of clinical study sites for

16


 
 

TABLE OF CONTENTS

prospective patients, and the patient referral practices of physicians. If patients are unwilling to participate in our studies for any reason, the timeline for recruiting patients, conducting studies, and obtaining regulatory approval of potential products will be delayed.

Our product candidates and the administration of our product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following marketing approval, if any.

Undesirable side effects including toxicology caused by our product candidates could cause us or regulatory authorities to interrupt, delay, or halt clinical studies and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other comparable foreign authorities. Results of our studies could reveal a high and unacceptable severity and prevalence of these or other side effects. In such an event, our clinical studies could be suspended or terminated, and the FDA or comparable foreign regulatory authorities could order us to cease further development of or deny or withdraw approval of our product candidates for any or all targeted indications.

The drug-related, drug-product related, formulation related and administration related side effects could affect patient recruitment, the ability of enrolled patients to complete the clinical study, or result in potential product liability claims, which could exceed our clinical trial insurance coverage. We do not currently have product liability insurance and do not anticipate obtaining product liability insurance until such time as we have received FDA or other comparable foreign authority marketing approval for one of our product candidates and such product is being provided to patients outside of clinical trials.

Additionally, if one or more of our product candidates receives marketing approval, and we or others later identify undesirable side effects caused by such products, a number of potentially significant negative consequences could result, including but not limited to:

regulatory authorities may withdraw approvals of such product;
regulatory authorities may require additional warnings on the label;
we may be required to create a Risk Evaluation and Mitigation Strategy, or REMS, plan, which could include a medication guide outlining the risks of such side effects for distribution to patients, a communication plan for healthcare providers, and/or other elements to assure safe use;
we could be sued and held liable for harm caused to patients; and
our reputation may suffer.

Any of these events could prevent us from achieving or maintaining market acceptance of the particular product candidate, if approved, and could significantly harm our business, results of operations, and prospects.

Even if we obtain regulatory approval for a product candidate, our products will remain subject to regulatory scrutiny.

If our product candidates are approved, they will be subject to ongoing regulatory requirements for manufacturing, labeling, packaging, storage, advertising, promotion, sampling, record-keeping, conduct of post-marketing studies, and submission of safety, efficacy, and other post-market information, including both federal and state requirements in the United States. Accordingly, we and others with whom we work must continue to expend time, money, and effort in all areas of regulatory compliance, including manufacturing, production, and quality control.

Any regulatory approvals that we receive for our product candidates may also be subject to limitations on the approved indicated uses for which the product may be marketed or to the conditions of approval, or contain requirements for potentially costly post-marketing testing, including Phase 4 clinical trials, and surveillance to monitor the safety and efficacy of the product candidate. We will also be required to report certain adverse reactions and production problems, if any, to the FDA, and to comply with requirements concerning advertising and promotion for our products. Promotional communications with respect to prescription drugs devices, and drug-device combinations are subject to a variety of legal and regulatory restrictions and must be consistent with the information in the product’s approved label. As such, we may not

17


 
 

TABLE OF CONTENTS

promote our products for indications or uses for which they do not have FDA approval. The holder of an approved NDA or BLA must also submit new or supplemental applications and obtain FDA approval for certain changes to the approved product, product labeling, or manufacturing process. We could also be asked to conduct post-marketing clinical studies to verify the safety and efficacy of our product candidates in general or in specific patient subsets. If we obtain initial marketing approval via the accelerated approval pathway, we could be required to conduct a successful post-marketing clinical study to confirm clinical benefit for our product candidates. An unsuccessful post-marketing study or failure to complete such a clinical study could result in the withdrawal of marketing approval. Furthermore, any new legislation addressing drug safety issues could result in delays in product development or commercialization or increased costs to assure compliance. Foreign regulatory authorities impose similar requirements.

If a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or disagrees with the promotion, marketing or labeling of a product, such regulatory agency may impose restrictions on that product or us, including requiring withdrawal of the product from the market. If we fail to comply with applicable regulatory requirements, a regulatory agency or enforcement authority may, among other things:

issue warning letters;
impose civil or criminal penalties;
suspend or withdraw regulatory approval;
suspend any of our ongoing clinical studies;
refuse to approve pending applications or supplements to approved applications submitted by us; or
seize or detain products, or require a product recall.

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

We and our collaborators are subject to significant regulation with respect to manufacturing our product candidates. Our contract manufacturing organization may not meet regulatory requirements and have limited capacity.

All entities involved in the preparation and manufacturing of therapeutics for clinical studies or commercial sale are subject to extensive regulation. A finished therapeutic product, including all components thereof, approved for commercial sale or used in late-stage clinical studies must be manufactured in accordance with current good manufacturing practices, or cGMP. In addition, manufacturers of medical devices are subject to Quality System Regulation, or QSR. These regulations govern manufacturing processes and procedures (including record keeping) and the implementation and operation of quality systems to control and assure the quality of product candidates and products approved for sale. Poor control of production processes can lead to the introduction of contaminants or to inadvertent changes in the properties or stability of our product candidates that may not be detectable in final product testing. We, our collaborators, or any contract manufacturers must supply all necessary documentation in support of an NDA, BLA, or Marketing Authorization Application, or MAA, on a timely basis and must adhere to Good Laboratory Practices, or GLP, cGMP and QSR regulations enforced by the FDA and other regulatory agencies through their facilities inspection programs. We have never produced a commercially approved pharmaceutical product or medical device and therefore have not obtained the requisite regulatory authority approvals to do so. The manufacturing facilities of our collaborators and any third-party contractors must pass a pre-approval inspection for compliance with the applicable regulations as a condition of regulatory approval of our product candidates or any of our other potential products. In addition, the regulatory authorities may, at any time, audit or inspect a manufacturing facility involved with the preparation of our product candidates or our other potential products or the associated quality systems for compliance with the regulations applicable to the activities being conducted. If these facilities do not pass a pre-approval plant inspection, regulatory approval

18


 
 

TABLE OF CONTENTS

of the products may not be granted or may be substantially delayed until any violations are corrected to the satisfaction of the regulatory authority, if ever.

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

If we, our collaborators, or any of our third-party manufacturers fail to maintain regulatory compliance, the FDA or other applicable regulatory authorities can impose regulatory sanctions including, among other things, refusal to approve a pending application for a new drug product or medical device, withdrawal of an approval, or suspension of production. As a result, our business, financial condition, and results of operations may be materially harmed.

These factors could cause us to incur higher costs and could cause the delay or termination of clinical studies, regulatory submissions, required approvals, or commercialization of our product candidates.

Risks Related to our Reliance on Third Parties

We rely on third parties to conduct our preclinical and clinical studies and perform other tasks for us. If these third parties do not successfully carry out their contractual duties, meet expected deadlines, or comply with regulatory requirements, we may not be able to obtain regulatory approval for or commercialize our product candidates, and our business could be substantially harmed.

We have relied upon and plan to continue to rely upon third-party vendors, including CROs, to monitor and manage data for our ongoing preclinical and clinical studies. We rely on these parties for execution of our preclinical and clinical studies, and control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol, legal, regulatory, and scientific standards and our reliance on the vendors and CROs does not relieve us of our regulatory responsibilities. We and our CROs and other vendors are required to comply with cGMP, QSR, the Helsinki Declaration, the International Conference on Harmonization Guideline for Good Clinical Practice, applicable European Commission Directives on Clinical Trials, laws and regulations applicable to clinical trials conducted in other territories, and GLP, which are regulations and guidelines enforced by the FDA, the Competent Authorities of the Member States of the European Economic Area, or EEA, and comparable foreign regulatory authorities for all of our product candidates in clinical development. Regulatory authorities enforce these regulations through periodic inspections of study sponsors, principal investigators, study sites, and other contractors. If we or any of our CROs or vendors fail to comply with applicable regulations, the clinical data generated in our clinical studies may be deemed unreliable and the FDA, EMA, or comparable foreign regulatory authorities may require us to perform additional clinical studies before approving our marketing applications. We cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical studies comply with cGCP regulations. In addition, our clinical studies must be conducted with products produced under cGMP regulations. Our failure to comply with these regulations may require us to repeat clinical studies, which would delay the regulatory approval process.

If any of our relationships with these third-party CROs or vendors terminate, we may not be able to enter into arrangements with alternative CROs or vendors or do so on commercially reasonable terms. In addition, our CROs are not our employees, and, except for remedies available to us under our agreements with such CROs, we cannot control whether or not they devote sufficient time and resources to our on-going clinical, nonclinical, and preclinical programs. If CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory requirements, or for other reasons, our clinical studies may be extended, delayed, or terminated, and we may not be able to obtain regulatory approval for or successfully commercialize our product candidates. CROs may also generate

19


 
 

TABLE OF CONTENTS

higher costs than anticipated. As a result, our results of operations and the commercial prospects for our product candidates would be harmed, our costs could increase, and our ability to generate revenue could be delayed.

Replacing or adding additional CROs involves additional cost and requires management time and focus. In addition, there is a natural transition period when a new CRO commences work. As a result, delays occur, which can materially impact our ability to meet our desired clinical development timelines. Though we carefully manage our relationships with our CROs, there can be no assurance that we will not encounter similar challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business, financial condition, and prospects.

We rely on third parties to manufacture the raw materials and products that we use to create our product candidates and to supply us with the medical devices used to administer such products. Our business could be harmed if those third parties fail to provide us with sufficient quantities of these materials and products or fail to do so at acceptable quality levels or prices.

We do not currently have the infrastructure or capability internally to manufacture the raw materials and other products that we use to manufacture our product candidates, and we lack the resources and the capability to manufacture the medical devices which we use to administer our products. There are a limited number of suppliers for these raw materials, products and devices, and there may be a need to identify alternate suppliers to prevent a possible disruption to our clinical studies, and, if approved, ultimately for commercial sale. In several cases, we rely on a sole provider, and there may be a need to identify additional providers in the future.

Our reliance on third parties requires us to share our trade secrets and intellectual property, which increases the possibility that a competitor will discover them or that our trade secrets and intellectual property will be misappropriated or disclosed.

Because we rely on third parties to provide us with the materials that we use to develop and manufacture our product candidates, we may, at times, share trade secrets and intellectual property with such third parties. We seek to protect our proprietary technology in part by entering into confidentiality agreements and, if applicable, material transfer agreements, collaborative research agreements, consulting agreements, or other similar agreements with our collaborators, advisors, employees, and consultants prior to beginning research or disclosing proprietary information. These agreements typically limit the rights of the third parties to use or disclose our confidential information, such as trade secrets and intellectual property. Despite the contractual provisions employed when working with third parties, the need to share trade secrets and other confidential information increases the risk that such trade secrets become known by our competitors, are inadvertently incorporated into the technology of others, or are disclosed or used in violation of these agreements. Given that our proprietary position is based, in part, on our know-how and trade secrets, a competitor’s discovery of our trade secrets or other unauthorized use or disclosure would impair our competitive position and may have a material adverse effect on our business.

Risks Related to Commercialization of Our Product Candidates

If the market opportunities for our product candidates are smaller than we believe they are, our revenue may be adversely affected, and our business may suffer.

Our projections of the number of people who have the potential to benefit from treatment with our product candidates are based on our beliefs and estimates. These estimates have been derived from a variety of sources, including the scientific literature, surveys of clinics or market research, and may prove to be incorrect. Our target patient population may be lower than expected. In addition, medical advances may reduce our target markets. For example, new processes and advances in oral antibiotic medications may limit the need for localized delivery systems such as BonyPid-1000 in some of our product candidates. Also, advances in treatments in the fields in which we are conducting research programs (such as, among others, the ones disclosed in this document) that reduce side effects and have better deliverability to target organs may limit the market for our future product candidates.

20


 
 

TABLE OF CONTENTS

We do not have experience producing our product candidates at commercial levels and may not obtain the necessary regulatory approvals or produce our product candidates at the quality, quantities, locations, and timing needed to support commercialization.

We do not currently have the experience or ability to manufacture our product candidates at commercial levels. We may encounter technical or scientific issues related to manufacturing or development that we may be unable to resolve in a timely manner or with available funds. We also have not completed all of the characterization and validation activities necessary for commercialization and regulatory approvals. If we do not conduct all such necessary activities, our commercialization efforts will be delayed or halted.

We have not entered into binding agreements with third-party manufacturers to produce the raw materials and products that we use to manufacture our product candidates.

Although we intend to rely on third-party manufacturers for the raw materials and products to support the manufacturing of our product candidates for commercialization, we have not yet entered into agreements with such manufacturers. We may be unable to negotiate binding agreements with the manufacturers to support our commercialization activities at commercially reasonable terms. Additionally, these third party manufacturers may not be able to supply us with the necessary quantities of these raw materials and products to support our own manufacturing process, or in compliance with cGMP or other pertinent regulatory requirements, and within our planned timeframe and estimated cost parameters, and the development and sales of our products, if approved, may be materially harmed.

Some of our products are more suitable for emerging countries, and in these countries there may be less availability of adequate funds or healthcare insurance to successfully adopt wide use of our products.

The potentially addressable patient population for each of our product candidates may be limited. In addition, some of our products are more suitable for emerging countries. For example, the demand for our BonyPid-1000 product candidate for open fracture markets is expected to be higher in emerging countries where there may be a higher incidence of open fractures. In these countries there may be less availability of adequate funds or healthcare insurance to successfully adopt wide use of our products.

We face intense competition and rapid technological change and the possibility that our competitors may develop products and drug delivery systems that are similar, more advanced, or more effective than ours, which may adversely affect our financial condition and our ability to successfully commercialize our product candidates.

The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. We are currently aware of various existing therapies in the market and in development that may in the future compete with our product candidates. Other approaches may also emerge for the treatment of any of the disease areas in which we focus.

We have competitors both in the United States and internationally, including major multinational pharmaceutical companies, specialty pharmaceutical companies, and biotechnology companies. Our competitors may succeed in developing, acquiring, or licensing on an exclusive basis, products that are more effective or less costly than any product candidate that we may develop, or achieve earlier patent protection, regulatory approval, product commercialization, and market penetration than we do. Additionally, technologies developed by our competitors may render our potential product candidates uneconomical or obsolete, and we may not be successful in marketing our product candidates against competitors.

We currently have no marketing and sales organization. If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell our product candidates, we may be unable to generate any revenue.

We as a company have no experience selling and marketing our product candidates, and we currently have no marketing or sales organization. To successfully commercialize any products that may result from our development programs, we will need to develop these capabilities, either on our own or with others. If our product candidates receive regulatory approval, we intend to establish a sales and marketing organization independently or by utilizing experienced third parties with technical expertise and supporting distribution capabilities to commercialize our product candidates in major markets, all of which will be expensive,

21


 
 

TABLE OF CONTENTS

difficult, and time consuming. Any failure or delay in the development of our internal sales, marketing, and distribution capabilities would adversely impact the commercialization of our products.

Further, given our lack of prior experience in marketing and selling biopharmaceutical products, our initial estimate of the size of the required sales force may be materially more or less than the size of the sales force actually required to effectively commercialize our product candidates. As such, we may be required to hire sales representatives and third party distributors to adequately support the commercialization of our product candidates, or we may incur excess costs as a result of hiring more sales representatives than necessary. With respect to certain geographical markets, we may enter into collaborations with other entities to utilize their local marketing and distribution capabilities, but we may be unable to enter into such agreements on favorable terms, if at all. If our future collaborators do not commit sufficient resources to commercialize our future products, if any, and we are unable to develop the necessary marketing capabilities on our own, we will be unable to generate sufficient product revenue to sustain our business. We may be competing with companies that currently have extensive and well-funded marketing and sales operations. Without an internal team or the support of a third party to perform marketing and sales functions, we may be unable to compete successfully against these more established companies.

The insurance coverage and reimbursement status of newly-approved products is uncertain. Failure to obtain or maintain adequate coverage and reimbursement for new or current products could limit our ability to market those products and decrease our ability to generate revenue.

Sales of our product candidates will depend substantially, both domestically and abroad, on the extent to which the costs of our product candidates will be paid for by health maintenance, managed care, pharmacy benefit, and similar healthcare management organizations, or reimbursed by government authorities, private health insurers, and other third-party payors. If coverage and reimbursement are not available, or are available only to limited levels, we may not be able to successfully commercialize our product candidates. Even if coverage is provided, the approved reimbursement amount may not be high enough to allow us to establish or maintain pricing sufficient to realize a return on our investment.

There is significant uncertainty related to the insurance coverage and reimbursement of newly approved products. In the United States, the principal decisions about coverage and reimbursement are typically made by the Centers for Medicare & Medicaid Services, or CMS, an agency within the U.S. Department of Health and Human Services, as CMS decides whether and to what extent a new product will be covered and reimbursed under Medicare. Private payors tend to follow the coverage reimbursement policies established by CMS to a substantial degree. It is difficult to predict what CMS will decide with respect to reimbursement for products such as ours. Currently, there are no separate, distinct Current Procedural Terminology, or CPT, codes that accurately describe the application or insertion of synthetic bone void fillers. The insertion of our product candidates is likely to be performed in conjunction with another more significant procedure, for which there may be existing codes. Some of these codes may include the insertion of bone void filler and for some procedures, it is likely that there is no inclusion of the insertion of a bone void filler as part of the procedure described by that code. Currently, it is not expected that Medicare will reimburse for our product candidates. It is our further understanding that several companies have attempted obtaining separate reimbursement codes that would directly cover the insertion of different bone void fillers, but have been unsuccessful.

As a result of these factors, there are no assurances that adequate third-party coverage will be available for us to establish and maintain price levels sufficient for us to realize an appropriate return on our investment in developing new therapies. Current cost containment and health care reform initiatives add additional uncertainty.

Outside the United States, international operations are generally subject to extensive governmental price controls and other market regulations, and we believe the increasing emphasis on cost-containment initiatives in Europe, Canada, and other countries has, and will continue to, put pressure on the pricing and usage of our product candidates. In many countries, the prices of medical products are subject to varying price control mechanisms as part of national health systems. In general, the prices of products under such systems are substantially lower than in the United States. Other countries allow companies to fix their own prices for medicinal products and devices, but monitor and control company profits. Additional foreign price controls or other changes in pricing regulation could restrict the amount that we are able to charge for our product

22


 
 

TABLE OF CONTENTS

candidates. Accordingly, in markets outside the United States, the reimbursement for our products candidates may be reduced compared with the United States and may be insufficient to generate commercially reasonable revenue and profits.

Moreover, increasing efforts by governmental and third-party payors in the United States and abroad to cap or reduce healthcare costs may cause such organizations to limit both coverage and the level of reimbursement for new products approved, and, as a result, they may not cover or provide adequate payment for our product candidates. We expect to experience pricing pressures in connection with the sale of any of our product candidates due to the trend toward managed healthcare, the increasing influence of health maintenance organizations, and additional legislative changes. The downward pressure on healthcare costs in general, particularly prescription drugs and surgical procedures and other treatments, has become very intense. As a result, increasingly high barriers are being erected to the entry of new products.

Healthcare legislative reform measures may have a material adverse effect on our business and results of operations.

In the United States, there have been and continue to be a number of legislative initiatives to contain healthcare costs. For example, in March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or the Health Care Reform Law, was passed, which substantially changes the way health care is financed by both governmental and private insurers, and significantly impacts the U.S. pharmaceutical industry.

In addition, other legislative changes have been proposed and adopted in the United States since the Health Care Reform Law was enacted. On August 2, 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions of Medicare payments to providers up to 2% per fiscal year. On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, or the ATRA, which, among other things, delayed for another two months the budget cuts mandated by these sequestration provisions of the Budget Control Act of 2011. On March 1, 2013, the President signed an executive order implementing sequestration, and on April 1, 2013, the 2% Medicare payment reductions went into effect. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our product candidates or additional pricing pressures.

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

The commercial success of our product candidates will depend upon the acceptance of the product by the medical community, including physicians, patients and healthcare payors. The degree of market acceptance of any approved product will depend on a number of factors, including:

demonstration of clinical safety and efficacy compared to other products;
the prevalence and severity of any adverse side effects;
limitations or warnings contained in the product’s approved labeling;
distribution and use restrictions imposed by the FDA or agreed to by us as part of a mandatory or voluntary risk management plan;
availability of alternative treatments;
pricing and cost effectiveness;
our ability to obtain sufficient third-party coverage or reimbursement; and
the willingness of patients to pay for drugs out of pocket in the absence of third-party coverage.

23


 
 

TABLE OF CONTENTS

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

Risks Related to Competition

The markets for pharmaceutical and drug-device combination products are intensely competitive. If we are unable to compete effectively with existing drugs, new treatment methods and new technologies, we may be unable to commercialize successfully any products that we develop.

The markets for pharmaceutical and medical device are intensely competitive and rapidly changing. Many large companies, academic institutions, governmental agencies and other public and private research organizations are pursuing the development of novel drugs and medical devices. Many of our competitors have:

much greater financial, technical and human resources than we have at every stage of the discovery, development, manufacture and commercialization of products;
more extensive experience in pre-clinical testing, conducting clinical trials, obtaining regulatory approvals, and in manufacturing, marketing and selling pharmaceutical and medical device products;
product candidates that are based on previously tested or accepted technologies;
products that have been approved or are in late stages of development; and
collaborative arrangements in our target markets with leading companies and research institutions.

We will face intense competition from drugs and drug device combination products that have already been, or may in the future become approved and accepted by the medical community. We also expect to face competition from new drugs and medical devices that enter the market. We believe a significant number of these products are currently under development, and may become commercially available in the future, for the treatment of conditions for which we may try to develop drugs and therapies. These drugs may be more effective, safer, less expensive, or marketed and sold more effectively, than any product candidate we develop.

Our competitors may develop or commercialize products with significant advantages over any products we develop. Our competitors may therefore be more successful in commercializing their products than us, which could adversely affect our competitive position and business. Competitive products may make any products we develop obsolete or noncompetitive before we can recover the expenses of developing and commercializing our product candidates.

We face competition from other companies that are working to develop novel drugs and technology platforms using technology in the same field as ours. If these companies develop products more rapidly than we do or their technologies, including delivery technologies, are more effective, our ability to successfully commercialize drugs may be adversely affected.

We face competition from other companies working to develop novel products using technology that competes more directly with our own. We are aware of multiple companies that are working in the field of drug delivery systems, including major pharmaceutical companies. Also, we compete with companies commercializing and/or working to develop drug delivery systems, including drug delivery systems for local (or regional) release.

Under applicable employment laws, we may not be able to enforce covenants not to compete and therefore may be unable to prevent our competitors from benefiting from the expertise of some of our former employees.

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

24


 
 

TABLE OF CONTENTS

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.

Risks Related to Our Intellectual Property

If we are unable to obtain and maintain effective patent rights for our product candidates or any future product candidates, we may not be able to compete effectively in our markets. If we are unable to protect the confidentiality of our trade secrets or know-how, such proprietary information may be used by others to compete against us.

We will rely upon a combination of patents, trade secret protection, and confidentiality agreements to protect the intellectual property related to our technologies and product candidates. Our success depends in large part on our ability to obtain and maintain patent and other intellectual property protection in the United States and in other countries with respect to our proprietary technology and product candidates.

We have sought to protect our proprietary position by filing patent applications in the United States and in other countries, with respect to our novel technologies and product candidates, which are important to our business. Patent prosecution is expensive and time consuming, and we may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and development output before it is too late to obtain patent protection.

As of September 1, 2014, our portfolio of owned patents and patent applications consists of five patent families protecting various aspects of our technology, that collectively, contain two issued patents (in the United States and China), two allowed patent applications and over 30 patent applications currently pending in Australia, Canada, China, the European Patent Office, India, Israel, Japan and the United States. We cannot offer any assurances about which, if any, patents will issue, the breadth of any such patent or whether any issued patents will be found invalid and unenforceable or will be threatened by third parties. Any successful opposition to these patents or any other patents owned by or licensed to us after patent issuance could deprive us of rights necessary for the successful commercialization of any product candidates that we may develop. Further, if we encounter delays in regulatory approvals, the period of time during which we could market a product candidate under patent protection could be reduced.

Further, the patent position of pharmaceutical and medical device companies generally is highly uncertain and involves complex legal and factual questions for which legal principles remain unsolved. This renders the patent prosecution process particularly expensive and time-consuming. There is no assurance that all potentially relevant prior art relating to our patent applications has been found, which can invalidate a patent or prevent a patent from issuing from a pending patent application. Even if patents do successfully issue, and even if such patents cover our product candidates, third parties may challenge their validity, enforceability, or scope, which may result in such patents being narrowed, found unenforceable or invalidated. Furthermore, even if they are unchallenged, our patent applications and any future patents may not adequately protect our intellectual property, provide exclusivity for our product candidates, or prevent others from designing around our claims. Any of these outcomes could impair our ability to prevent competition from third parties, which may have an adverse impact on our business.

If we cannot obtain and maintain effective patent rights for our product candidates, we may not be able to compete effectively, and our business and results of operations would be harmed.

We may not have sufficient patent terms to effectively protect our products and business.

Patents have a limited lifespan. In the United States, the natural expiration of a patent is generally 20 years after it is filed. Although various extensions may be available, the life of a patent, and the protection

25


 
 

TABLE OF CONTENTS

it affords, is limited. Even if any of our patent applications mature into issued patents, if we do not have sufficient patent terms or regulatory exclusivity to protect our products, our business and results of operations will be adversely affected.

Patent policy and rule changes could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of any issued patents.

Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of any patents that may issue from our patent applications, or narrow the scope of our patent protection. The laws of foreign countries may not protect our rights to the same extent as the laws of the United States. Publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. We therefore cannot be certain that we or our licensors were the first to make the invention claimed in our owned and licensed patent or pending applications, or that we or our licensor were the first to file for patent protection of such inventions. Assuming the other requirements for patentability are met, in the United States prior to March 15, 2013, the first to make the claimed invention is entitled to the patent, while outside the United States, the first to file a patent application is entitled to the patent. After March 15, 2013, under the Leahy-Smith America Invents Act, or the Leahy-Smith Act, enacted on September 16, 2011, the United States has moved to a first to file system. The Leahy-Smith Act also includes a number of significant changes that affect the way patent applications will be prosecuted and may also affect patent litigation. The effects of these changes are currently unclear as the United States Patent and Trademark Office, or the USPTO, must still implement various regulations, the courts have yet to address many of these provisions and the applicability of the act and new regulations on specific patents discussed herein have not been determined and would need to be reviewed. In general, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of any issued patents, all of which could have a material adverse effect on our business and financial condition.

If we are unable to maintain effective proprietary rights for our product candidates or any future product candidates, we may not be able to compete effectively in our markets.

In addition to the protection afforded by any patents that may be granted, we rely on trade secret protection and confidentiality agreements to protect proprietary know-how that is not patentable or that we elect not to patent, processes for which patents are difficult to enforce and any other elements of our product candidate discovery and development processes that involve proprietary know-how, information or technology that is not covered by patents. However, trade secrets can be difficult to protect. We seek to protect our proprietary technology and processes, in part, by entering into confidentiality agreements with our employees, consultants, scientific advisors, and contractors. We also seek to preserve the integrity and confidentiality of our data, trade secrets and intellectual property by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in these individuals, organizations and systems, agreements or security measures may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets and intellectual property may otherwise become known or be independently discovered by competitors.

Although we expect all of our employees and consultants to assign their inventions to us, and all of our employees, consultants, advisors, and any third parties who have access to our proprietary know-how, information, or technology to enter into confidentiality agreements, we cannot provide any assurances that all such agreements have been duly executed or that our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. Misappropriation or unauthorized disclosure of our trade secrets and intellectual property could impair our competitive position and may have a material adverse effect on our business. Additionally, if the steps taken to maintain our trade secrets and intellectual property are deemed inadequate, we may have insufficient recourse against third parties for misappropriating the trade secret.

26


 
 

TABLE OF CONTENTS

Intellectual property rights of third parties could adversely affect our ability to commercialize our product candidates, and we might be required to litigate or obtain licenses from third parties in order to develop or market our product candidate. Such litigation or licenses could be costly or not available on commercially reasonable terms.

It is inherently difficult to conclusively assess our freedom to operate without infringing on third party rights. Our competitive position may suffer if patents issued to third parties or other third party intellectual property rights cover our product candidates or elements thereof, or our manufacturing or uses relevant to our development plans. In such cases, we may not be in a position to develop or commercialize products or our product candidates unless we successfully pursue litigation to nullify or invalidate the third party intellectual property right concerned, or enter into a license agreement with the intellectual property right holder, if available on commercially reasonable terms. There may also be pending patent applications that if they result in issued patents, could be alleged to be infringed by our product candidates. If such an infringement claim should be brought and be successful, we may be required to pay substantial damages, be forced to abandon our product candidates or seek a license from any patent holders. No assurances can be given that a license will be available on commercially reasonable terms, if at all.

It is also possible that we have failed to identify relevant third party patents or applications. For example, U.S. applications filed before November 29, 2000 and certain U.S. applications filed after that date that will not be filed outside the U.S. remain confidential until patents issue. Patent applications in the U.S. and elsewhere are published approximately 18 months after the earliest filing for which priority is claimed, with such earliest filing date being commonly referred to as the priority date. Therefore, patent applications covering our product candidates or platform technology could have been filed by others without our knowledge. Additionally, pending patent applications which have been published can, subject to certain limitations, be later amended in a manner that could cover our platform technologies, our product candidates or the use of our product candidates. Third party intellectual property right holders may also actively bring infringement claims against us. We cannot guarantee that we will be able to successfully settle or otherwise resolve such infringement claims. If we are unable to successfully settle future claims on terms acceptable to us, we may be required to engage in or continue costly, unpredictable and time-consuming litigation and may be prevented from or experience substantial delays in pursuing the development of and/or marketing our product candidates. If we fail in any such dispute, in addition to being forced to pay damages, we may be temporarily or permanently prohibited from commercializing our product candidates that are held to be infringing. We might, if possible, also be forced to redesign our product candidates so that we no longer infringe the third party intellectual property rights. Any of these events, even if we were ultimately to prevail, could require us to divert substantial financial and management resources that we would otherwise be able to devote to our business.

Third-party claims of intellectual property infringement may prevent or delay our development and commercialization efforts.

Our commercial success depends in part on our avoiding infringement of the patents and proprietary rights of third parties. There have been many lawsuits and other proceedings involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries, including patent infringement lawsuits, interferences, oppositions, and reexamination proceedings before the USPTO and corresponding foreign patent offices. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we are developing product candidates. As the pharmaceutical and medical device industries expand and more patents are issued, the risk increases that our product candidates may be subject to claims of infringement of the patent rights of third parties.

Third parties may assert that we are employing their proprietary technology without authorization. There may be third-party patents or patent applications with claims to materials, formulations, methods of manufacture, or methods for treatment related to the use or manufacture of our product candidates. Because patent applications can take many years to issue, there may be currently pending patent applications that may later result in issued patents that our product candidates may infringe. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes upon these patents. If any third-party patents were held by a court of competent jurisdiction to cover the manufacturing process of any of our product candidates, any materials formed during the manufacturing process or any final product itself, the

27


 
 

TABLE OF CONTENTS

holders of any such patents may be able to block our ability to commercialize such product candidates unless we obtain a license under the applicable patents, or until such patents expire or are finally determined to be invalid or unenforceable.

Similarly, if any third-party patents were held by a court of competent jurisdiction to cover aspects of our formulations, processes for manufacture, or methods of use, the holders of any such patents may be able to block our ability to develop and commercialize the applicable product candidate unless we obtain a license or until such patent expires or is finally determined to be invalid or unenforceable. In either case, such a license may not be available on commercially reasonable terms or at all.

Parties making claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize one or more of our product candidates. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. In the event of a successful claim of infringement against us, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, pay royalties, redesign our infringing products or obtain one or more licenses from third parties, which may be impossible or require substantial time and monetary expenditure.

We may not be successful in obtaining or maintaining necessary rights to our product candidates through acquisitions and in-licenses.

Because our programs may require the use of proprietary rights held by third parties, the growth of our business will likely depend in part on our ability to acquire, in-license, or use these proprietary rights. In addition, our product candidates may require specific formulations to work effectively and efficiently and the rights to these formulations may be held by others. We may be unable to acquire or in-license any compositions, methods of use, processes, or other third-party intellectual property rights from third parties that we identify as necessary for our product candidates. The licensing and acquisition of third-party intellectual property rights is a competitive area, and a number of more established companies are also pursuing strategies to license or acquire third-party intellectual property rights that we may consider attractive. These established companies may have a competitive advantage over us due to their size, cash resources, and greater clinical development and commercialization capabilities.

For example, we sometimes collaborate with academic institutions to accelerate our preclinical research or development under written agreements with these institutions. Typically, these institutions provide us with an option to negotiate a license to any of the institution’s rights in technology resulting from the collaboration. Regardless of such option, we may be unable to negotiate a license within the specified timeframe or under terms that are acceptable to us. If we are unable to do so, the institution may offer the intellectual property rights to other parties, potentially blocking our ability to pursue our program.

In addition, companies that perceive us to be a competitor may be unwilling to assign or license rights to us. We also may be unable to license or acquire third-party intellectual property rights on terms that would allow us to make an appropriate return on our investment. If we are unable to successfully obtain rights to required third-party intellectual property rights, we may have to abandon development of that program and our business and financial condition could suffer.

We may be involved in lawsuits to protect or enforce our intellectual property, which could be expensive, time consuming, and unsuccessful.

Competitors may infringe our intellectual property or that of our licensors that we may acquire in the future. If we or a future licensing partner were to initiate legal proceedings against a third party to enforce a patent covering one of our product candidates, the defendant could counterclaim that the patent covering our product candidate is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness, or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO, or made a

28


 
 

TABLE OF CONTENTS

misleading statement, during prosecution. Under the Leahy-Smith Act, the validity of U.S. patents may also be challenged in post-grant proceedings before the USPTO. The outcome following legal assertions of invalidity and unenforceability is unpredictable.

Interference proceedings provoked by third parties or brought by us or declared by the USPTO may be necessary to determine the priority of inventions with respect to our patent or patent applications or those of our licensors. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms. Our defense of litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees. In addition, the uncertainties associated with litigation could have a material adverse effect on our ability to raise the funds necessary to continue our clinical trials, continue our research programs, license necessary technology from third parties, or enter into development partnerships that would help us bring our product candidates to market.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. There could also be public announcements of the results of hearings, motions, or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our ordinary shares.

We may be subject to claims that our employees, consultants, or independent contractors have wrongfully used or disclosed confidential information of third parties or that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

We employ individuals who were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although we try to ensure that our employees, consultants, and independent contractors do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or our employees, consultants, or independent contractors have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of any of our employees’ former employers or other third parties. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel, which could adversely impact our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

We may be subject to claims challenging the inventorship of our intellectual property.

We may be subject to claims that former employees, collaborators or other third parties have an interest in or right to compensation with respect to our current patent and patent applications, future patents or other intellectual property as an inventor or co-inventor. For example, we may have inventorship disputes arise from conflicting obligations of consultants or others who are involved in developing our product candidates. Litigation may be necessary to defend against these and other claims challenging inventorship or claiming the right to compensation. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees. To the extent that our employees have not effectively waived the right to compensation with respect to inventions that they helped create, they may be able to assert claims for compensation with respect to our future revenue. As a result, we may receive less revenue from future products if such claims are successful which in turn could impact our future profitability.

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

Our success is heavily dependent on intellectual property. Obtaining and enforcing patents in the pharmaceutical and medical device industries involves both technological and legal complexity. Therefore, obtaining and enforcing these patents is costly, time consuming, and inherently uncertain. In addition,

29


 
 

TABLE OF CONTENTS

the United States has recently enacted and is currently implementing wide-ranging patent reform legislation. Recent U.S. Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances and weakened the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on future actions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain patents or to enforce patents that we might obtain in the future.

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

Filing, prosecuting, and defending patents on product candidates in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States can be 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.

Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own product candidates and may also export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our product candidates. Future patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets, and other intellectual property protection, particularly those relating to biotechnology products, which could make it difficult for us to stop the marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions, whether or not successful, could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our future 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 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 around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.

Risks Related to Our Business Operations

Our future success depends in part on our ability to retain our senior management team and to attract, retain, and motivate other qualified personnel.

We are highly dependent on the members of our senior management team. The loss of their services without a proper replacement may adversely impact the achievement of our objectives. Our employees may leave our employment at any time. Recruiting and retaining other qualified employees, consultants, and advisors for our business, including scientific and technical personnel, will also be critical to our success. There is currently a shortage of skilled personnel in our industry, which is likely to continue for the foreseeable future. As a result, competition for skilled personnel is intense, and the turnover rate can be high. We may not be able to attract and retain personnel on acceptable terms given the competition among numerous pharmaceutical and medical device companies for individuals with similar skill sets. In addition, failure to succeed in preclinical or clinical studies may make it more challenging to recruit and retain qualified personnel. The inability to recruit and retain qualified personnel, or the loss of the services of any members of our senior management team without proper replacement, may impede the progress of our research, development, and commercialization objectives.

We will need to expand our organization, and we may experience difficulties in managing this growth, which could disrupt our operations.

Our future financial performance and our ability to commercialize product candidates and compete effectively will depend, in part, on our ability to effectively manage any future growth. As our development

30


 
 

TABLE OF CONTENTS

and commercialization plans and strategies develop, we expect to need additional managerial, operational, sales, marketing, financial and legal personnel. Our management may need to divert a disproportionate amount of its attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities. We may not be able to effectively manage the expansion of our operations, which may result in weaknesses in our infrastructure, operational mistakes, loss of business opportunities, loss of employees, and reduced productivity among remaining employees. Our expected growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of additional product candidates. If our management is unable to effectively manage our growth, our expenses may increase more than expected, our ability to generate and/or grow revenue could be reduced, and we may not be able to implement our business strategy.

We may not be successful in our efforts to identify, discover or license additional product candidates.

Although a substantial amount of our effort will focus on the continued clinical testing, potential approval, and commercialization of our existing product candidates, the success of our business also depends upon our ability to identify, discover or license additional product candidates. Our research programs or licensing efforts may fail to yield additional product candidates for clinical development for a number of reasons, including but not limited to the following:

our research or business development methodology or search criteria and process may be unsuccessful in identifying potential product candidates;
we may not be able or willing to assemble sufficient resources to acquire or discover additional product candidates;
our product candidates may not succeed in preclinical or clinical testing;
our product candidates may be shown to have harmful side effects or may have other characteristics that may make the products unmarketable or unlikely to receive marketing approval;
competitors may develop alternatives that render our product candidates obsolete or less attractive;
product candidates we develop may be covered by third parties’ patents or other exclusive rights;
the market for a product candidate may change during our development program so that such product may become unprofitable to continue to develop;
a product candidate may not be capable of being produced in commercial quantities at an acceptable cost, or at all; and
a product candidate may not be accepted as safe and effective by patients, the medical community, or third-party payors.

If any of these events occur, we may be forced to abandon our development efforts for a program or programs, or we may not be able to identify, license, or discover additional product candidates, which would have a material adverse effect on our business and could potentially cause us to cease operations. Research programs to identify new product candidates require substantial technical, financial, and human resources. We may focus our efforts and resources on potential programs or product candidates that ultimately prove to be unsuccessful.

We will incur significant 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, we will incur significant legal, accounting, and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and NASDAQ has imposed various requirements on public companies. In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was enacted. There are significant corporate governance and executive compensation related provisions in the Dodd-Frank Act that require the SEC to adopt additional rules and regulations in these areas such as “say on pay” and pay parity. Recent legislation permits smaller “emerging growth companies” to implement many of these requirements over a longer period and up to five years from the pricing of this offering. We intend to take advantage of this

31


 
 

TABLE OF CONTENTS

new legislation but cannot guarantee that we will not be required to implement these requirements sooner than budgeted or planned and thereby incur unexpected expenses. Stockholder activism, the current political environment, and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact the manner in which we operate our business in ways we cannot currently anticipate. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to incur substantial costs to maintain our current levels of such coverage.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures. In particular, we will be required to perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report, commencing in our annual report on Form 20-F for the year ending December 31, 2015, on the effectiveness of our internal controls over financial reporting, if then required by Section 404 of the Sarbanes-Oxley Act. Our testing may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management efforts. We currently do not have an internal audit group, and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner or if we identify, or our independent registered public accounting firm identifies deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline, and we could be subject to sanctions or investigations by NASDAQ, the SEC, or other regulatory authorities, which would require additional financial and management resources.

New laws and regulations as well as changes to existing laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act and rules adopted by the SEC and by NASDAQ, would likely result in increased costs to us as we respond to their requirements.

We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws, false claims laws, and health information privacy and security laws. If we are unable to comply, or have not fully complied, with such laws, we could face substantial penalties.

If we obtain FDA approval for any of our product candidates and begin commercializing those products in the United States, our operations may be directly or indirectly through our customers, subject to various federal and state fraud and abuse laws, including, without limitation, the federal Anti-Kickback Statute, the federal False Claims Act, and physician sunshine laws and regulations. These laws may impact, among other things, our proposed sales, marketing, and education programs. In addition, we may be subject to patient privacy regulation by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include:

the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, to induce, or in return for, the purchase or recommendation of an item or service reimbursable under a federal healthcare program, such as the Medicare and Medicaid programs;
federal civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent;
the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which created new federal criminal statutes that prohibit executing a scheme to defraud any healthcare benefit program and making false statements relating to healthcare matters;

32


 
 

TABLE OF CONTENTS

HIPAA, as amended by the Health Information Technology and Clinical Health Act, or HITECH, and its implementing regulations, which imposes certain requirements relating to the privacy, security, and transmission of individually identifiable health information;
the federal physician sunshine requirements under the Health Care Reform Laws requires manufacturers of drugs, devices, biologics, and medical supplies to report annually to the U.S. Department of Health and Human Services information related to payments and other transfers of value to physicians, other healthcare providers, and teaching hospitals, and ownership and investment interests held by physicians and other healthcare providers and their immediate family members and applicable group purchasing organizations;
state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws that may apply to items or services reimbursed by any third-party payor, including commercial insurers, state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government, or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; and
state laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures, and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.

Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that some of our business activities could be subject to challenge under one or more of such laws. In addition, recent health care reform legislation has strengthened these laws. For example, the Health Care Reform Law, among other things, amends the intent requirement of the federal anti-kickback and criminal healthcare fraud statutes. A person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. Moreover, the Health Care Reform Law provides that the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the False Claims Act.

If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from participation in government health care programs, such as Medicare and Medicaid, imprisonment, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations.

International expansion of our business exposes us to business, regulatory, political, operational, financial, and economic risks associated with doing business outside of the United States or Israel.

Other than our headquarters and other operations which are located in Israel (as further described below), we currently have limited international operations, but our business strategy incorporates potentially significant international expansion, particularly in anticipation of approval of our product candidates. We plan to retain sales representatives and third party distributors, and conduct physician and patient association outreach activities, as well as clinical trials, outside of the United States and Israel. Doing business internationally involves a number of risks, including but not limited to:

multiple, conflicting, and changing laws and regulations such as privacy regulations, tax laws, export and import restrictions, employment laws, regulatory requirements, and other governmental approvals, permits, and licenses;
failure by us to obtain regulatory approvals for the use of our products in various countries;
additional potentially relevant third-party patent rights;
complexities and difficulties in obtaining protection and enforcing our intellectual property;
difficulties in staffing and managing foreign operations;

33


 
 

TABLE OF CONTENTS

complexities associated with managing multiple payor reimbursement regimes, government payors, or patient self-pay systems;
limits in our ability to penetrate international markets;
financial risks, such as longer payment cycles, difficulty collecting accounts receivable, the impact of local and regional financial crises on demand and payment for our products, and exposure to foreign currency exchange rate fluctuations;
natural disasters, political and economic instability, including wars, terrorism, and political unrest, outbreak of disease, boycotts, curtailment of trade, and other business restrictions;
certain expenses including, among others, expenses for travel, translation, and insurance; and
regulatory and compliance risks that relate to maintaining accurate information and control over sales and activities that may fall within the purview of the U.S. Foreign Corrupt Practices Act its books and records provisions, or its anti-bribery provisions.

Any of these factors could significantly harm our future international expansion and operations and, consequently, our results of operations.

If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could have a material adverse effect on the success of our business.

Our research, development and manufacturing activities and our third-party manufacturers’ and suppliers’ activities involve the controlled storage, use, and disposal of hazardous materials, including the components of our product candidates and other hazardous compounds. We and our manufacturers and suppliers are subject to laws and regulations governing the use, manufacture, storage, handling, and disposal of these hazardous materials. In some cases, these hazardous materials and various wastes resulting from their use are stored at our and our manufacturers’ facilities pending their use and disposal. We cannot eliminate the risk of contamination, which could cause an interruption of our commercialization efforts, research and development efforts and business operations, environmental damage resulting in costly clean-up and liabilities under applicable laws and regulations governing the use, storage, handling, and disposal of these materials and specified waste products. Although we believe that the safety procedures utilized by our third-party manufacturers for handling and disposing of these materials generally comply with the standards prescribed by these laws and regulations, we cannot guarantee that this is the case or eliminate the risk of accidental contamination or injury from these materials. In such an event, we may be held liable for any resulting damages, such liability could exceed our resources, and state or federal or other applicable authorities may curtail our use of certain materials and/or interrupt our business operations. Furthermore, environmental laws and regulations are complex, change frequently, and have tended to become more stringent. We cannot predict the impact of such changes and cannot be certain of our future compliance. We do not currently carry biological or hazardous waste insurance coverage.

Our business entails a significant risk of product liability and our ability to obtain sufficient insurance coverage could have a material effect on our business, financial condition, results of operations or prospects.

Our business exposes us to significant product liability risks inherent in the development, testing, manufacturing and marketing of therapeutic treatments. Product liability claims could delay or prevent completion of our development programs. If we succeed in marketing products, such claims could result in an FDA investigation of the safety and effectiveness of our products, our manufacturing processes and facilities or our marketing programs and potentially a recall of our products or more serious enforcement action, limitations on the approved indications for which they may be used or suspension or withdrawal of approvals. Regardless of the merits or eventual outcome, liability claims may also result in decreased demand for our products, injury to our reputation, costs to defend the related litigation, a diversion of management’s time and our resources, substantial monetary awards to trial participants or patients and a decline in our stock price. We do not currently have product liability insurance and do not anticipate obtaining product liability insurance until such time as we have received FDA or other comparable foreign authority approval for a product and there is a product that is being provided to patients outside of clinical trials. Any insurance we have or may

34


 
 

TABLE OF CONTENTS

obtain may not provide sufficient coverage against potential liabilities. Furthermore, product liability insurance is becoming increasingly expensive. As a result, we may be unable to obtain sufficient insurance at a reasonable cost to protect us against losses caused by product liability claims that could have a material adverse effect on our business.

Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.

We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with FDA regulations, provide accurate information to the FDA, comply with manufacturing standards we may establish, comply with federal and state healthcare fraud and abuse laws and regulations, report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. It is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.

Risks Related to this Offering and Ownership of Our Ordinary Shares

We may be a “passive foreign investment company”, or PFIC, for U.S. federal income tax purposes in the current taxable year or may become one in any subsequent taxable year. There generally would be negative tax consequences for U.S. taxpayers that are holders of our ordinary shares if we are or were to become a PFIC.

We will be treated as a PFIC for U.S. federal income tax purposes in any taxable year in which either (1) at least 75% of our gross income is “passive income” or (2) on average at least 50% of our assets by value produce passive income or are held for the production of passive income. Passive income for this purpose generally includes, among other things, certain dividends, interest, royalties, rents and gains from commodities and securities transactions and from the sale or exchange of property that gives rise to passive income. Passive income also includes amounts derived by reason of the temporary investment of funds, including those raised in a public offering. In determining whether a non-U.S. corporation is a PFIC, a proportionate share of the income and assets of each corporation in which it owns, directly or indirectly, at least a 25% interest (by value) is taken into account. We cannot rule out that we will not be a PFIC for our current taxable year or in the future. The tests for determining PFIC status are applied annually, and it is difficult to make accurate projections of future income and assets which are relevant to this determination. In addition, our PFIC status may depend in part on the market value of our ordinary shares. Accordingly, there can be no assurance that we currently are not or will not become a PFIC in the future. If we are a PFIC in any taxable year during which a U.S. taxpayer holds our ordinary shares, such U.S. taxpayer would be subject to certain adverse U.S. federal income tax rules. In particular, if the U.S. taxpayer did not make an election to treat us as a “qualified electing fund,” or QEF, or make a “mark-to-market” election, then “excess distributions” to the U.S. taxpayer, and any gain realized on the sale or other disposition of our ordinary shares by the U.S. taxpayer: (1) would be allocated ratably over the U.S. taxpayer’s holding period for the ordinary shares; (2) the amount allocated to the current taxable year and any period prior to the first day of the first taxable year in which we were a PFIC would be taxed as ordinary income; and (3) the amount allocated to each of the other taxable years would be subject to tax at the highest rate of tax in effect for the applicable class of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed with respect to the resulting tax attributable to each such other taxable year. In addition, if the IRS determines that we are a PFIC for a year with respect to which we have determined that we were not a PFIC, it may be too late for a U.S. taxpayer to make a timely QEF or mark-to-market election. U.S. taxpayers that

35


 
 

TABLE OF CONTENTS

have held our ordinary shares during a period when we were a PFIC will be subject to the foregoing rules, even if we cease to be a PFIC in subsequent years, subject to exceptions for U.S. taxpayer who made a timely QEF or mark-to-market election. A U.S. taxpayer can make a QEF election by completing the relevant portions of and filing IRS Form 8621 in accordance with the instructions thereto. We do not intend to notify U.S. taxpayers that hold our ordinary shares if we believe we will be treated as a PFIC for any taxable year in order to enable U.S. taxpayers to consider whether to make a QEF election. In addition, we do not intend to furnish such U.S. taxpayers annually with information needed in order to complete IRS Form 8621 and to make and maintain a valid QEF election for any year in which we or any of our subsidiaries are a PFIC. U.S. taxpayers that hold our ordinary shares are strongly urged to consult their tax advisors about the PFIC rules, including tax return filing requirements and the eligibility, manner, and consequences to them of making a QEF or mark-to-market election with respect to our ordinary shares in the event that we are a PFIC. See “Taxation — U.S. Federal Income Tax Consequences — Passive Foreign Investment Company Rules” for additional information.

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

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

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

inability to obtain the approvals necessary to commence further clinical trials;
unsatisfactory results of clinical trials;
announcements of regulatory approvals or the failure to obtain them, or specific label indications or patient populations for their use, or changes or delays in the regulatory review process;
announcements of therapeutic innovations or new products by us or our competitors;
adverse actions taken by regulatory agencies with respect to our clinical trials, manufacturing supply chain or sales and marketing activities;
changes or developments in laws or regulations applicable to any candidate product in any of our platforms;
any adverse changes to our relationship with manufacturers or suppliers, especially manufacturers of candidate products;
any intellectual property infringement actions in which we may become involved;
announcements concerning our competitors or the pharmaceutical industry in general;
achievement of expected product sales and profitability or our failure to meet expectations;
our commencement of, or involvement in, litigation;
any major changes in our Board of Directors or management; and
legislation in the United States or any other territory relating to the sale or pricing of pharmaceuticals and medical devices.

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

36


 
 

TABLE OF CONTENTS

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

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

Our principal shareholders, chief executive officer and directors currently own over 70.3% of our outstanding ordinary shares and will own approximately     % of our ordinary shares upon the closing of this offering. They will therefore be able to exert significant control over matters submitted to our shareholders for approval.

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

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

The initial public offering price is substantially higher than the net tangible book value per share of our ordinary shares. Investors purchasing ordinary shares in this offering will pay a price per share that substantially exceeds the net tangible book value of our ordinary shares. As a result, investors purchasing ordinary shares in this offering will incur immediate dilution of $8.77 per share, based on the initial public offering price of $11.00 per share (the midpoint of the estimated price range set forth on the cover page of this prospectus) and our pro forma net tangible book value as of June 30, 2014. In addition, as of the date of this prospectus, options and warrants to purchase 1,502,509 of our ordinary shares at a weighted average exercise price of $1.60 per share were outstanding. The exercise of these options and warrants would result in additional dilution. As a result of this dilution, investors purchasing shares in this offering may receive significantly less than the purchase price paid in this offering in the event of liquidation. For more information, please refer to the section of this prospectus entitled “Dilution.”

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

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

Certain of our existing shareholders have indicated an interest in purchasing up to an aggregate of $7.0 million of our ordinary shares in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may sell more, less or no ordinary shares in this offering to any of these persons, or any of these persons may determine to purchase more, less or no ordinary shares in this offering. The underwriters will receive the same

37


 
 

TABLE OF CONTENTS

underwriting discounts and commissions on any shares purchased by these persons as they will on any other ordinary shares sold to the public in this offering. Any such shares purchased by these shareholders could not be resold in the public market following this offering as a result of restrictions under securities laws and lock-up agreements, but would be able to be resold following expiration of these restrictions as described in “Shares Eligible for Future Sale.”

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

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

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

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

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

We have never declared or paid cash dividends on our ordinary shares. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends in the foreseeable future. As a result, only appreciation of the price of our ordinary shares, if any, will provide a return to investors in this offering.

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

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

the provisions of the Sarbanes-Oxley Act requiring that our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting;
the “say on pay” provisions requiring a non-binding shareholder vote to approve compensation of certain executive officers and the “say on golden parachute” provisions requiring a non-binding shareholder vote to approve golden parachute arrangements for certain executive officers in connection with mergers and certain other business combinations of the Dodd-Frank Act and some of the disclosure requirements of the Dodd-Frank Act relating to compensation of our chief executive officer;

38


 
 

TABLE OF CONTENTS

Section 107 of the JOBS Act, which provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. This means that an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are electing to delay such adoption of new or revised accounting standards. As a result of this adoption, our financial statements may not be comparable to companies that comply with the public company effective date;
the requirement to provide detailed compensation discussion and analysis in proxy statements and reports filed under the Securities Exchange Act of 1934, or the Exchange Act, and instead provide a reduced level of disclosure concerning executive compensation;
our ability not to comply with new accounting principles that do not apply to public companies until such accounting principles become applicable to private companies;
any rules that may be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s report on the financial statements; and
our ability to furnish two rather than three years of income statements and statements of cash flows in various required filings.

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

Our status as a foreign private issuer also exempts us from compliance with certain SEC laws and regulations and certain regulations of NASDAQ, including the proxy rules, the short-swing profits recapture rules, and certain governance requirements such as independent director oversight of the nomination of directors and executive compensation. Furthermore, as a foreign private issuer, we are also not subject to the requirements of Regulation FD (Fair Disclosure) promulgated under the Exchange Act.

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

Risks Related to Israeli Law and Our Operations in Israel

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

Our executive offices are located in Petach Tikva, Israel. In addition, the majority of our officers and directors are residents of Israel. Accordingly, political, economic and military conditions in Israel may directly affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its trading partners could adversely affect our operations and results of operations. During the summer of 2006, Israel was engaged in an armed conflict with Hezbollah, a Lebanese Islamist Shiite militia group and political party and since March 2011, there has been a civil war in Syria, Israel’s neighboring country to the north. Occasionally, violence from Syria has spilled over into Israel, and Israel has responded militarily several times since the onset of the civil war. During November 2012 and July 2014, Israel was engaged in an armed conflict with a militia group and political party which controls the Gaza Strip. These conflicts involved missile strikes against civilian targets in various parts of Israel, including areas in which our employees and some of our consultants are located, and negatively affected business conditions in Israel. Any potential future conflict could also include such missile strikes against other parts of Israel, including the Company’s offices and laboratories. Any armed conflicts, terrorist activities or political instability in the region could adversely affect business conditions, could harm our results of operations and

39


 
 

TABLE OF CONTENTS

could make it more difficult for us to raise capital. Parties with whom we do business may sometimes decline to travel to Israel during periods of heightened unrest or tension, forcing us to make alternative arrangements when necessary in order to meet our business partners face to face. In addition, the political and security situation in Israel may result in parties with whom we have agreements involving performance in Israel claiming that they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions in such agreements.

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

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

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

Our male employees and consultants in Israel, including members of our senior management, may be obligated to perform one month, and in some cases longer periods, of annual military reserve duty until they reach the age of 40 (or older, for citizens who hold certain positions in the Israeli armed forces reserves) and, in the event of a military conflict, may be called to active duty. In response to increases in terrorist activity, there have been periods of significant call-ups of military reservists. It is possible that there will be similar large-scale military reserve duty call-ups in the future. Our operations could be disrupted by the absence of a significant number of our officers, directors, employees and consultants. Such disruption could materially adversely affect our business and operations.

Our operations are subject to currency and interest rate fluctuations.

We incur expenses in U.S. dollars, Euros and New Israeli Shekels, but our functional currency is the U.S. dollar. As a result, we are affected by foreign currency exchange fluctuations through both translation risk and transaction risk. In particular, strengthening of the New Israeli Shekel against the U.S. dollar may have a material adverse effect on our operating results.

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

Our research and development efforts have been financed in part through royalty-bearing and non-royalty-bearing grants in an aggregate amount of approximately $1.2 million that we received from the OCS as of June 30, 2014. The current OCS approved research and development grants end on December 31, 2014. With respect to the royalty-bearing grants we are committed to pay royalties at a rate of 3% to 5% on sales proceeds from our products that were developed under OCS programs up to the total amount of grants received, linked to the U.S. dollar and bearing interest at an annual rate of LIBOR applicable to U.S. dollar deposits. Regardless of any royalty payment, we are further required to comply with the requirements of the Israeli Encouragement of Industrial Research and Development Law, 5744-1984, as amended, and related regulations, or the Research Law, with respect to those past grants. When a company develops know-how, technology or products using OCS grants, the terms of these grants and the Research Law restrict the transfer of such know-how, and the transfer of manufacturing or manufacturing rights of such products, technologies or know-how outside of Israel, without the prior approval of the OCS. Therefore, the discretionary approval of an OCS committee would be required for any transfer to third parties inside or outside of Israel of know how or manufacturing or manufacturing rights related to those aspects of such technologies. We may not receive

40


 
 

TABLE OF CONTENTS

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 amounts, depending upon the value of the transferred technology or know-how, our research and development expenses, 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 or otherwise transfer 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 and our amended and restated articles of association may delay, prevent or otherwise impede a merger with, or an acquisition of, our company, which could prevent a change of control, even when the terms of such a transaction are favorable to us and our shareholders.

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

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

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

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

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

We were incorporated in Israel. Substantially all of our executive officers and directors reside outside of the United States, and all of our assets and most of the assets of these persons are located outside of the United States. Therefore, a judgment obtained against us, or any of these persons, including a judgment based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the United States

41


 
 

TABLE OF CONTENTS

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

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

42


 
 

TABLE OF CONTENTS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

our timeline for our product candidate development path, including the anticipated starting and ending dates of our anticipated clinical trials;
anticipated actions of the FDA or other regulatory bodies, including approval to conduct clinical trials, the scope of those trials and the prospects for regulatory approval of, or other regulatory action with respect to our product candidates;
the commercial launch and future sales of our existing product candidates or any other future potential product candidates;
our ability to achieve favorable pricing;
our expectations regarding the commercial supply of our products;
third-party payor reimbursement for our products;
our estimates regarding anticipated capital requirements and our needs for additional financing;
the patient market size and market adoption of our product candidates by physicians and patients;
the timing, cost or other aspects of the commercial launch of our product candidates;
completion and receiving favorable results of our anticipated clinical trials;
our expectations regarding licensing, acquisitions and strategic partnering; and
the potential purchases by certain of our existing shareholders in this offering.

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

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

43


 
 

TABLE OF CONTENTS

USE OF PROCEEDS

We expect to receive approximately $17.4 million in net proceeds from the sale of 1,818,182 ordinary shares offered by us in this offering (approximately $20.2 million if the underwriters exercise their over-allotment option in full), after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

We currently expect to use the net proceeds from this offering in the following approximate amounts:

$2.5 million to advance our research activities for our D-PLEX product candidate and our PLEX platform and for our development activities of our BonyPid-1000, BonyPid-500 and D-PLEX product candidates;
Based on our current regulatory expectations, $7.5 million for clinical studies and regulatory approvals for our BonyPid-1000 and BonyPid-500 product candidates; and
$2 million to establish manufacturing facilities for our D-PLEX product candidate and for a parallel plant for our BonyPid-1000 and BonyPid-500 product candidates.

The remainder will be used for working capital and general corporate purposes.

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

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

44


 
 

TABLE OF CONTENTS

DIVIDEND POLICY

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

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

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

45


 
 

TABLE OF CONTENTS

CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2014:

on an actual basis;
on a pro forma basis to reflect as of June 30, 2014: (i) the conversion immediately prior to the closing of this offering of all outstanding preferred shares into 6,461,962 ordinary shares; (ii) the exercise immediately prior to the closing of this offering of warrants to purchase convertible series A preferred shares and series B-1 preferred shares which will immediately convert into 114,530 ordinary shares; and
on a pro forma as adjusted basis to also give effect to the sale of ordinary shares in this offering at the initial public offering price of $11.00 per share (the midpoint of the estimated price range set forth on the cover page of this prospectus), after deducting underwriting discounts and commissions and estimated offering expenses payable by us, at the closing of the offering, as if the sale of the shares in each case had occurred on June 30, 2014.

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

     
  June 30, 2014
     Actual   Pro Forma   Pro Forma.
As Adjusted (unaudited)
     (in thousands, except share and per share data)
Preferred A, A-1, B and B-1 shares of NIS 0.1 par value     13,134              
Shareholders' equity (deficiency):
                          
Ordinary shares of NIS 0.10 par value     27       1,015       271  
Additional paid-in capital     614       13,475       31,649  
Accumulated deficit     (11,041 )      (11,041 )      (11,041 ) 
Total shareholders' equity (deficiency)     (10,400 )      3,449       20,880  
Total capitalization   $ 2,734     $ 3,449       20,880  

The number of our ordinary shares to be outstanding immediately after this offering is based on 7,544,234 ordinary shares outstanding as of June 30, 2014, and assumes or gives effect to:

the reverse split of 4.65 of our ordinary shares into 1 ordinary share, to take place upon the declaration of effectiveness of the registration statement of which this prospectus forms a part;
the conversion immediately prior to the closing of this offering of all outstanding preferred shares into 6,461,962 ordinary shares;
the exercise immediately prior to the closing of this offering of warrants to purchase convertible series A preferred shares which will immediately convert into 96,775 ordinary shares;
the exercise immediately prior to the closing of this offering of warrants to purchase convertible series B-1 preferred shares which will immediately convert into 17,755 ordinary shares; and
no exercise of 1,475,014 outstanding options under our equity incentive plans.

46


 
 

TABLE OF CONTENTS

DILUTION

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

Our pro forma net tangible book value (deficit) per share is determined by dividing our total tangible assets, less total liabilities, by the actual number of outstanding ordinary shares as of June 30, 2014, after giving retroactive effect on a pro forma basis to reflect as of June 30, 2014: (i) the conversion of all outstanding preferred shares into 6,461,962 ordinary shares; (ii) the exercise immediately prior to the closing of this offering of warrants to purchase convertible series A preferred shares and of warrants to purchase convertible series B-1 preferred shares which will immediately convert into 114,530 ordinary shares; and
on a pro forma as adjusted basis also gives effect to the sale of ordinary shares in this offering at the initial public offering price of $11.00 per share (the midpoint of the estimated price range set forth on the cover page of this prospectus), after deducting underwriting discounts and commissions and estimated offering expenses payable by us, at the closing of the offering, as if the sale of the shares in each case had occurred on June 30, 2014: (i) the conversion immediately prior to the closing of this offering of all outstanding preferred shares into 6,461,962 ordinary shares; (ii) the exercise immediately prior to the closing of this offering of warrants to purchase convertible series A preferred shares which will convert into 96,775 ordinary shares; and (iii) the exercise immediately prior to the closing of this offering of warrants to purchase convertible series B-1 preferred shares which will convert into 17,755 ordinary shares. The pro forma net tangible book value (deficit) of our ordinary shares as of June 30, 2014 was $3.4 million or $0.46 per share.

The pro forma as adjusted net tangible book value (deficit) of our ordinary shares as of June 30, 2014 was $20,880, or $2.23 per share. The pro forma as adjusted net tangible book value (deficit) gives additional effect to the sale of ordinary shares in this offering at the initial public offering price of $11.00 per share (the midpoint of the range set forth on the cover page of this prospectus), after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The difference between the initial public offering price and the pro forma as adjusted net tangible book value (deficit) per share represents an immediate dilution of $8.77 per share to new investors purchasing ordinary shares in this offering.

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

 
Assumed initial public offering price per share   $ 11.00  
Pro forma net tangible book value per share before this offering, as of June 30, 2014     0.46  
Increase in pro forma net tangible book value per share attributable to new investors in this offering     1.77  
Pro forma net tangible book value per share after offering     2.23  
Dilution in pro forma tangible book value per share to new investors   $ 8.77  

If the underwriters' over-allotment option to purchase additional shares from us is exercised in full, and based on the initial public offering price of $11.00 per share, the pro forma as adjusted net tangible book value (deficit) per share after this offering would be approximately $2.48 per share, the increase in the pro forma net tangible book value (deficit) per share attributable to new investors would be approximately $2.02 per share, and the dilution to new investors purchasing shares in this offering would be approximately $8.52 per share.

A $1.00 increase (decrease) in the assumed initial public offering price of $11.00 per ordinary share would increase (decrease) our pro forma net tangible book value per share by $0.19 and the dilution per ordinary share to new investors by $10.81, assuming that the number of ordinary shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions.

The table below summarizes as of June 30, 2014, on the pro forma as adjusted basis described above, the number of ordinary shares we issued and sold, the total consideration we received and the average price per

47


 
 

TABLE OF CONTENTS

share (1) paid by our existing shareholders and (2) to be paid by new investors purchasing our ordinary shares in this offering at the initial public offering price of $11.00 per share, before deducting underwriting discounts and commissions and estimated offering expenses payable by us.

         
  Shares Purchased   Total Consideration   Average Price
Per Share
     Number   Percent   Amount   Percent
Existing shareholders     636,364       35 %    $ 7,000,000       35 %    $ 11.00  
New investors     1,181,818       65 %      13,000,000       65 %      11.00  
Total     1,818,182       100 %    $ 20,000,000       100 %    $ 11.00  

The number of our ordinary shares to be outstanding immediately after this offering is based on 7,544,234 ordinary shares outstanding as of June 30, 2014, and assumes or gives effect to:

the reverse split of 4.65 of our ordinary shares into 1 ordinary share, to take place upon the declaration of effectiveness of the registration statement of which this prospectus forms a part;
the conversion immediately prior to the closing of this offering of all outstanding preferred shares into 6,461,962 ordinary shares;
the exercise immediately prior to the closing of this offering of warrants to purchase convertible series A preferred shares which will immediately convert into 96,775 ordinary shares;
the exercise immediately prior to the closing of this offering of warrants to purchase convertible series B-1 preferred shares which will immediately convert into 17,755 ordinary shares; and
no exercise of 1,475,014 outstanding options under our equity incentive plans.

To the extent that new options, not mentioned above, are granted under our equity benefit plans, there will be further dilution to investors purchasing ordinary shares in this offering.

Certain of our existing shareholders have indicated an interest in purchasing up to an aggregate of $7.0 million of our ordinary shares in this offering at the initial public offering price. However, because indications of interest are not binding agreements or commitments to purchase, the underwriters may sell more, less or no ordinary shares in this offering to any of these persons, or any of these persons may determine to purchase more, less or no ordinary shares in this offering. The underwriters will receive the same underwriting discounts and commissions on any shares purchased by these persons as they will on any other ordinary shares sold to the public in this offering. The foregoing discussion and tables do not reflect these or other potential purchases of ordinary shares by such shareholders in this offering.

48


 
 

TABLE OF CONTENTS

SELECTED FINANCIAL DATA

The following tables summarize our financial data. We have derived the following statements of operations data for the years ended December 31, 2013 and 2012 and the balance sheet data as of December 31, 2013 from our audited financial statements included elsewhere in this prospectus. We have derived the following statements of operations data for the six month periods ended June 30, 2014 and 2013 and the balance sheet data as of June 30, 2014 from our unaudited interim financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future. The following summary financial data should be read in conjunction with “Management's Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus. The tables have been prepared on an actual historical basis, and do not give effect to the pro forma adjustments referred to in the immediately preceding section called “Dilution.”

       
  Years Ended
December 31,
  Six Months Ended
June 30,
     2013   2012   2014   2013
     (in thousands of U.S. dollars, except share and per share amounts)
Statements of Operations Data:
                                   
Research and development expenses, net   $ 2,641     $ 1,377     $ 1,499     $ 1,752  
General and administrative expenses     938       410       874       463  
Operating loss     3,579       1,787       2,373       2,215  
Financial expenses, net     305       3       235       73  
Net Loss     3,884       1,790       2,608       2,288  
Basic and diluted net loss per Ordinary
share
  $ 4.82     $ 2.23     $ 3.81     $ 2.93  
Weighted average number of ordinary shares used in computing basic and diluted net loss per share     967,742       967,742       967,742       967,742  
Pro forma basic and diluted net loss per Ordinary share (unaudited)   $ 0.66              $ 0.33           
Weighted average number of Ordinary shares used in computing basic and diluted net loss per share – pro forma (unaudited)     5,886,587                7,544,234           

     
  Years Ended
December 31,
  Six Months Ended
June 30,
(in thousands of U.S. dollars)   2013   2012   2014
Balance Sheet Data:
                 
Cash and cash equivalents   $ 1,263     $ 977     $ 4,029  
Total current assets     1,604       1,184       4,350  
Total long-term assets     355       365       562  
Total current liabilities     502       212       984  
Total long-term liabilities     832       118       1,194  
Preferred shares warrant liability     332       46       652  
Convertible preferred shares     8,685       5,768       13,134  
Shareholders' equity (deficiency)     (8,060 )      (4,549 )      (10,400 ) 

49


 
 

TABLE OF CONTENTS

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Introduction

We are an emerging specialty pharmaceutical company engaged in research and development of our product candidates based on PLEX, our proprietary drug delivery technology. PLEX (abbreviation for Polymer-Lipid Encapsulation MatriX) is able to encapsulate many types of drugs to enable targeted, localized drug delivery into the body over periods of time ranging from days to several months. The application of our PLEX technology in our product candidates enables us to optimize drug treatment regimens with release rates and durations that are pre-determined by us, a combination of attributes not currently available. We are a clinical stage company, meaning that our product candidates are yet to be approved for sale by any regulatory agency.

To date, we have not generated revenue from the sale of any product, and we do not expect to generate significant revenue unless and until we obtain marketing approval of, and commercialize our product candidates. As of December 31, 2013, we had an accumulated deficit of $8.4 million and as of June 30, 2014, we had an accumulated deficit of $11 million. Our financing activities are described below under “Liquidity and Capital Resources.”

In February, 2013, we signed a memorandum of understanding (the “MOU”), with MIS Implants Technologies Ltd. (“MIS”). Under the terms of the MOU, and subject to continued collaboration, the Company has agreed to grant MIS an exclusive right to market a specific dental application of our technology for a certain period starting after receipt of either EMA marketing approval or FDA approval and beginning of commercialized sales in the applicable market, accordingly. Under the terms of the MOU, we are entitled to receive certain milestone-based and sales-based compensation payments. Prior to commercialization of the product, MIS may terminate the MOU, in which case we would be obligated to return all milestone payments received until such notification. In addition, under the terms of the MOU, in the event that the FDA imposes certain additional requirements with respect to a clinical trial, MIS may choose to decline to undertake the expenses related to such additional requirements, in which case the license to MIS granted by us shall exclude the U.S. territory and MIS shall not be obligated to make certain milestone payments, and we will be obligated to return any such milestone payment, to the extent received. Upon termination of the MOU, we shall retain all rights to the existing intellectual property and all intellectual property developed during the term of the MOU. Through June 30, 2014, payments totaling $367,000 were received by us as participation in R&D development from MIS. These amounts were recorded as an advance on account of the said MIS collaboration arrangement. To date, no amounts were recognized in the Statements of Operation with respect to the said MIS collaboration arrangement, as all the amounts are refundable.

Financial Overview

Operating Expenses

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

Research and Development Expenses

Our research and development expenses consist primarily of salaries and related personnel expenses, share-based compensation relating to employees and consultants, cost of third party consultants, subcontractors and materials expenses related to early research and development programs and pre-clinical studies, cost of completing chemical, manufacturing and control activities (CMC), costs of conducting clinical trials, costs of regulatory consultants and regulatory submissions, intellectual property maintenance, and other research and

50


 
 

TABLE OF CONTENTS

development expenses. The research and development expenses are net of research and development grants received from the Office of the Chief Scientist of the Ministry of Economy of the State of Israel (OCS) and participations received from the European Commission’s Seventh Framework Programme for Research (FP7).

We expect that our research and development expenses will materially increase due to new research programs requiring additional employees, further CMC development activities, and significant regulatory expense. In addition, we plan to conduct additional clinical trials in the near future, for both our lead product candidates, BonyPid-1000 and BonyPid-500.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related personnel expenses, professional service and consulting fees, including legal, accounting, audit and tax fees, facilities expenses, and other general and administrative expenses.

We expect our general and administrative expenses to increase in order to support the growth in research and development projects. In addition, we expect, professional service and consulting fees, including accounting and legal fees to increase significantly after we become a U.S. public company, and we expect increases in the number of our executive, accounting and administrative personnel due to our anticipated growth.

Financial Expense and Income

Financial expense and income consist of bank fees, exchange rate differences and revaluation of warrants.

Critical Accounting Policies and Estimate

We describe our significant accounting policies more fully in Note 2 to our financial statements for the year ended December 31, 2013. We believe that the accounting policies below are critical in order to fully understand and evaluate our financial condition and results of operations.

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

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

The critical accounting policies that were impacted by the estimates, judgments and assumptions used in the preparation of our consolidated financial statements are discussed below.

Convertible Preferred Shares and Warrants to Purchase Convertible Preferred Shares

The terms of the Preferred A, A-1, B and B-1 shares allow the holders to redeem shares, under certain circumstances, outside of our control. Therefore, the shares are classified as mezzanine equity on the balance sheet and are not included as a component of shareholders' equity (deficiency). The carrying value of the preferred shares is equal to cost. We did not adjust the carrying value to redemption value since it is not probable that the preferred shares will be redeemed.

Warrants to purchase our convertible preferred shares are classified as a liability on the balance sheet, and measured at fair value, as the underlying shares are contingently redeemable (upon a deemed liquidation event) and, therefore, may obligate us to transfer assets at some point in the future. The warrants are subject to re-measurement to fair value at each balance sheet date and any change in fair value is recognized as a component of financial expenses, net, in the statement of operation. We will continue to adjust the liability for changes in fair value until the earlier of the exercise or expiration of the warrants, or the completion of a deemed liquidation event.

The fair value of the warrants on the issuance date and on subsequent reporting dates was determined using the OPM model. The fair value of the underlying preferred share price was determined by the board of

51


 
 

TABLE OF CONTENTS

directors considering, among others, a third party valuation. The Company's enterprise value was determined based on financing transactions with third parties and price indications from bankers. The OPM method was then employed to allocate the enterprise value among the various equity classes, deriving a fully marketable value per share for the preferred shares.

Grants and Participation

Royalty-bearing grants from the Office of the Chief Scientist of the Ministry of Economy in Israel (“OCS”) for funding approved research and development projects are recognized at the time we are entitled to such grants, on the basis of the costs incurred, and are presented as a deduction from research and development expenses. Non-royalty-bearing grants from the OCS MAGNET program and from European Commission's Seventh Framework Programme for Research (FP7) for funding approved research and development projects are recognized at the time we are entitled to such grants, on the basis of the costs incurred, and are presented as a deduction from research and development expenses. Since the payment of royalties is not probable when the grants are received, we do not record a liability for amounts received from the OCS until the related revenues are recognized. In the event of failure of a project that was partly financed by the OCS, we will not be obligated to pay any royalties or repay the amounts received.

Consideration earned from participations from third parties in R&D development is recognized as reduction from R&D expenses. The excess of the recognized amount received over the amount of research and development expenses incurred during the period is recognized as other income within operating income.

Through December 31, 2013, we received payments totaling $367, as participation in R&D development from MIS. These amounts were capitalized and recorded as an advance on account of collaboration arrangement. For the six month period ended June 30, 2014, no additional amounts were received from MIS. To date, no amounts were recognized in the Statement of Operation with respect to collaboration arrangement, as all the amounts are refundable.

JOBS Act

On April 5, 2012, the U.S. Congress enacted the Jumpstart Our Business Startups Act of 2012, or the JOBS Act.

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

Share-Based Compensation and Fair Value of Ordinary Shares

We account for share-based compensation granted to employees, non-employee directors and service providers in accordance with ASC 718-10, “Compensation — Stock Compensation” (ASC 718) and ASC 505-50, “Equity-Based Payments to Non-Employees” (ASC 505-50), which requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model (OPM). The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in our statements of operations.

We recognize compensation costs net of a forfeiture rate only for those shares expected to vest using the straight line method over the requisite service period of the award, which is generally the option vesting term of three years. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

We selected the Black-Scholes-Merton model as the most appropriate fair value method for our option awards. The Black-Scholes-Merton model requires a number of assumptions, of which the most significant are the expected share price, volatility and the expected option term.

The fair value of Ordinary shares underlying the options has historically been determined by management and the board of directors with the assistance of an independent financial and economic consultant. As there

52


 
 

TABLE OF CONTENTS

has been no public market for the Company's Ordinary shares, the board of directors has determined fair value of an Ordinary share at the time of grant of the option by considering a number of objective and subjective factors including data from other comparable companies, sales of convertible Preferred shares to unrelated third parties, operating and financial performance, the lack of liquidity of share capital and general and industry specific economic outlook, amongst other factors. The fair value of the underlying Ordinary shares will be determined by the board of directors until such time as our Ordinary shares are listed on an established share exchange or national market system. Our board of directors determined the fair value of Ordinary shares based on valuations performed using the OPM method for the year ended December 31, 2013 and for the six months ended June 30, 2014.

Key assumptions

The Black-Scholes-Merton option-pricing model requires the input of highly subjective assumptions, including the fair value of the underlying ordinary shares, the expected volatility of the price of our ordinary shares, the expected term of the option, risk-free interest rates and the expected dividend yield of our ordinary shares. These estimates involve inherent uncertainties and the application of the management's judgment. If such inputs change and different assumptions are used, our share-based compensation expenses could be materially different in the future. These assumptions are estimated as follows:

Fair value of our ordinary shares.  Since our shares were not publicly traded prior to our initial public offering, we estimated the fair value of our ordinary shares, as discussed in the “Ordinary shares valuations” section below. Upon the completion of our initial public offering, our ordinary shares will be valued by reference to the publicly-traded price of our ordinary shares.
Expected term.  The expected term represents the period that our share-based awards are expected to be outstanding. As to the share-option awards granted to employees, the expected term is calculated using the average between the vesting period and the contractual term to the expected term of the options in effect at the time of grant. For option awards granted to non-employees, the expected term is equal to the remaining contractual life of the option, which is generally 10 years from the grant date.
Risk-free rate.  The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the options in each option group.
Dividend yield.  We have never declared or paid cash dividends and we do not have plans to pay cash dividends in the foreseeable future. Consequently, we used an expected dividend yield of zero.

If any of the assumptions used in the Black-Scholes-Merton model change significantly, the share-based compensation expenses in future awards may differ materially as compared with the current awards granted.

The following table presents the assumptions used to estimate the fair value of options granted to employees, non-employee directors and service providers during the periods presented:

   
  Year Ended December 31,
2013
  Six Months
Ended June 30,
2014
Expected term (in years)     5 – 10       6 – 10  
Expected volatility     116% – 122       111%  
Risk-free rate     0.85% – 2.54%       1.1% – 2.1%  
Dividend yield     0.0%       0.0%  

We incurred non-cash share-based compensation expense of $0.4 million during the year ended December 31, 2013 and non-cash share-based compensation expense of $0.3 million for the six month period ended June 30, 2014. We expect to continue to grant share options in the future, and to the extent that we do, our actual share-based compensation expenses recognized are likely to increase.

53


 
 

TABLE OF CONTENTS

Ordinary shares valuations

The following table presents the share option grants made between January 1, 2013 and June 30, 2014 and the related exercise price and estimated fair value per ordinary share at the grant date:

       
Option Grant Date   Number of Options Granted   Ordinary Shares Fair Value Per Share of Ordinary shares at Grant Date   Exercise
Price
  Aggregate
Grant Date
Fair Value(1)
March 19, 2013     860,211     $ 0.56       $0 – $2.00     $ 438,538  
October 30, 2013     33,948     $ 0.51       $2.82     $ 28,041  
December 24, 2013     101,236     $ 1.86       $2 – $2.82     $ 158,695  
May 5, 2014     466,203     $ 4.42     $ 2.82     $ 787,072  
June 22, 2014     33,226     $ 4.51     $ 2.82     $ 133,262  

(1) Aggregate grant date fair value was determined using the Black-Scholes option pricing model.

Based upon the assumed midpoint of the initial public offering price range set forth on the cover page of this prospectus ($11.00 per share), the aggregate intrinsic value of options outstanding as of June 30, 2014 was approximately $14.0 million, of which approximately $8.0 million related to vested options and approximately $6.0 million related to unvested options.

The fair value of the ordinary shares underlying our share-options was determined by our board of directors, with input from management. We believe that our board of directors has the relevant experience and expertise to determine the fair value of our ordinary share as of each respective grant date. The valuations of our ordinary shares were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, (the “AICPA Practice Aid”). The assumptions used in the valuation model are based on future expectations combined with management judgment. Our board of directors, with input from management, exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of our ordinary shares as of the date of each option grant, including the following factors:

Independent valuations performed at periodic intervals by independent third-party valuation specialist;
The prices, rights, preferences and privileges of our convertible preferred shares;
Current business conditions and projections;
Our stage of development;
The likelihood of a liquidity event for the ordinary shares underlying these options, such as an initial public offering or sale of our company, given prevailing market conditions;
Any adjustments necessary due to the lack of marketability of our ordinary shares;
The purchase of our preferred shares by third party investors in arms-length transactions;
The market performance of comparable publicly traded companies;

In the event of a qualified initial public offering, our preferred shares would convert into ordinary shares on a one to one basis, and accordingly would receive the same amount of proceeds per share as ordinary shares. In the case of a sale or liquidation of the Company, the preferred shares would receive their liquidation preferences and thereafter a fraction in the remaining proceeds with the ordinary shares on a pro-rata basis. Accordingly, we determined the fair value of our ordinary shares under two scenarios and then applied a weighted average of these values based on their relative probabilities in order to calculate the final per share value.

54


 
 

TABLE OF CONTENTS

First, we determined our Company's value in an exit scenario due to a liquidity event, such as an initial public offering (“IPO”) using the market approach and based on preliminary discussions with investment banks. In this scenario, all preferred shares, warrants to purchase preferred shares and options to purchase our ordinary shares convert into, or are deemed to be exercised for, ordinary shares. The firm value is divided by the resulting number of shares to determine a per share value.
Second, we determined our Company's value using a market approach (based on the backsolve method). The backsolve method involves making assumptions for the time to liquidity, volatility, and risk free rate and then solving for the value of equity such that value for the most recent financing equals the amount paid. In order to estimate the value of our equity value, including both ordinary and preferred shares, we relied upon our Series B-1 preferred share price determined in recent financing rounds of our Series B-1 preferred shares, which we believed to be the most indicative of our value.

We then allocated the value between all elements of our securities (preferred shares, ordinary shares, warrants for preferred shares and options for ordinary shares) using the option pricing model (“OPM”), on the assumption that our preferred shares will benefit from their liquidation preference, as follows:

Under the backsolve method we used recent share purchase transactions to solve our implied equity value. This approach takes into account the economic rights of the various classes of shares such as liquidation preferences, conversion rights and dividend rights and then allocates the value accordingly to the rights and privileges of each class of shares. Because the Series B-1 Preferred shares financing rounds were led by unrelated investors and was an arms-length transaction, we determined it was the most appropriate method to determine the fair value of our ordinary shares given the early stage nature of the company.
Under the OPM, preferred and ordinary shares are treated as a series of call options, with the preferred shares having an exercise price based on the liquidation preference of the respective preferred share. The OPM operates through a series of Black–Scholes–Merton option pricing models, with the strike prices of the options representing the upper and lower bounds of the proceed ranges that a security holder would receive upon a liquidity event. The strike prices occur at break points where the allocation of firm value changes among the various security holders. The ordinary shares are presumed to have value only if funds available for distribution to shareholders exceed the value of the respective liquidation preferences at the time of a liquidity event. The OPM requires an enterprise level input of firm value or a transaction level input of specific security value (typically, a recently issued convertible preferred security) to anchor the allocation of firm value among the various classes of securities.

In making the final determination, we also applied a discount for lack of marketability right, as applicable, to our ordinary shares.

We believe we applied a reasonable valuation method to determine the share option exercise prices on the respective share option grant dates. A combination of factors led to changes in the fair value of our ordinary shares. Certain of the significant factors considered by our board of directors to determine the fair value per share of our ordinary shares for purposes of calculating share-based compensation costs during this period included:

March 2013 grant.  Our board determined the fair value of our ordinary shares as of March 19, 2013 to be $0.56 per share. As part of this determination, our board considered an independent third party valuation conducted for this date. We based this price using the backsolve method using the OPM and according to the value derived from a third-party sale of shares in an arms' length transaction (preferred share B-1) which was carried out on February 4, 2013. We considered the overall probability of a sale transaction to be 100%. We then applied a 49% discount due to lack of marketability to arrive at a final value of $0.56 per share for our ordinary shares.

October 2013 grant.  Our board determined the fair value of our ordinary shares as of October 30, 2013 to be $0.56 per share. As part of this determination, our board considered an independent third party valuation

55


 
 

TABLE OF CONTENTS

conducted for this date. We based this price using the backsolve method using the OPM and according to the value derived from a third-party sale of shares in an arms' length transaction (preferred share B-1) which was concluded on October 7, 2013. We considered the overall probability of a sale transaction to be 100%. We then applied a 43% discount due to lack of marketability to arrive at a final value of $0.56 per share for our ordinary shares.

December 2013 grant.  Our board determined the fair value of our ordinary shares to be $1.86 per share as of Dec 24, 2013. As part of this determination, our board considered an independent third party valuation conducted for this date. For the purpose of the exit scenario, we considered preliminary valuation discussions that we held with underwriters, assuming an IPO in the fourth quarter of 2015. This resulted in an estimated fair value per ordinary share of $7.53 after discounting to present value the preliminary estimated IPO valuation, at a discount rate of 25%. For the purpose of the liquidity scenario, we used the enterprise value derived by the backsolve method from the purchase at arms’ length of our Series B-1 preferred shares pursuant to an agreement entered into in December 2013. The resulting enterprise value was allocated among the elements of our capital structure using the OPM assuming a liquidity event in two years. This resulted in a value per ordinary share of $0.88. Using the Hybrid method, we then estimated that the probability of the exit scenario was 35%, while the probability of the liquidity scenario was 65%. Applying these weightings, we arrived at a value of $3.21 per ordinary share, to which we applied a 42% discount due to lack of marketability, to arrive at a final value of $1.86 per share for our ordinary shares.

May 5, 2014 grant.  Our board determined the fair value of our ordinary shares to be $4.42 per share as of May 14, 2014. As part of this determination, our board considered an independent third party valuation conducted for this date. For the purpose of the exit scenario, we considered preliminary valuation discussions that we held with underwriters, assuming an IPO in the fourth quarter of 2014. This resulted in an estimated fair value per ordinary share of $8.28 after discounting to present value the preliminary estimated IPO valuation, at a discount rate of 25%. For the purpose of the liquidity scenario, we used the enterprise value derived by the backsolve method from the purchase at arms’ length of our Series B-1 preferred shares pursuant to an agreement entered into in May 2014. The resulting enterprise value was allocated among the elements of our capital structure using the OPM assuming a liquidity event in seven month. This resulted in a value per ordinary share of $1.12. Using the Hybrid method, we then estimated that the probability of the exit scenario was 65%, while the probability of the liquidity scenario was 35%. Applying these weightings, we arrived at a value of $5.81 per ordinary share, to which we applied a 24% discount due to lack of marketability, to arrive at a final value of $4.42 per share for our ordinary shares.

June 22, 2014 grant.  Our board determined the fair value of our ordinary shares to be $4.51 per share as of June 22, 2014. As part of this determination, our board considered an independent third party valuation conducted for this date. For the purpose of the exit scenario, we considered preliminary valuation discussions that we held with underwriters, assuming an IPO in the fourth quarter of 2014. This resulted in an estimated fair value per ordinary share of $7.91 after discounting to present value the preliminary estimated IPO valuation, at a discount rate of 25%. For the purpose of the liquidity scenario, we used the enterprise value derived by the backsolve method from the purchase at arms’ length of our Series B-1 preferred shares pursuant to an agreement entered into in June 2014. The resulting enterprise value was allocated among the elements of our capital structure using the OPM assuming a liquidity event in six month. This resulted in a value per ordinary share of $1.07. Using the Hybrid method, we then estimated that the probability of the exit scenario was 65%, while the probability of the liquidity scenario was 35%. Applying these weightings, we arrived at a value of $5.53 per ordinary share, to which we applied a 19% discount due to lack of marketability, to arrive at a final value of $4.51 per share for our ordinary shares.

Recently Adopted Accounting Pronouncements

In June 2014, the FASB issued ASU 2014-10, “Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities” (ASU 2014-10). The amendment removes the definition of a development stage entity from ASC 915, “Development Stage Entities” (ASC 915), thereby removing the distinction between development stage entities and other reporting entities under US-GAAP. In addition, the amendments eliminate the requirements for development stage entities to (1) present inception-to-date information on the statements of income, cash flows, and shareholder’s equity, (2) label the financial statements as those of a development stage entity, (3) disclose a description of the development stage

56


 
 

TABLE OF CONTENTS

activities in which the entity is engaged, and (4) disclose in the first year in which the entity is no longer a development stage entity that in prior years it had been in the development stage. These amendments are effective for annual reporting periods beginning after December 15, 2014, with early application permitted. The Company has elected to early adopt ASU No. 2014-10, and removed the inception to date information and all references to development stage.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, an updated standard on revenue recognition. ASU 2014-09 provides enhancements to the quality and consistency of how revenue is reported while also improving comparability in the financial statements of companies reporting using IFRS and US GAAP. The core principle of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and improve guidance for multiple-element arrangements. ASU 2014-09 will be effective for the Company in the first quarter of fiscal 2017 and may be applied on a full retrospective or modified retrospective approach. The Company is evaluating the impact of implementation of this standard on its financial statements.

Results of Operations

   
  Year Ended
December 31,
     2013   2012
     (in thousands US$)
Research and development expenses, net   $ 2,641     $ 1,377  
General and administrative expenses     938       410  
Operating loss     3,579       1,787  
Financial expenses, net     305       3  
Net loss   $ 3,884     $ 1,790  

   
  Six Months Ended
June 30,
     2014   2013
     (in thousands US$)
Research and development expenses, net   $ 1,499     $ 1,752  
General and administrative expenses     874       463  
Operating loss     2,373       2,215  
Financial expenses, net     235       73  
Net loss   $ 2,608     $ 2,288  

Comparison of the Year Ended December 31, 2013 to the Year Ended December 31, 2012

Research and Development Expenses

Our research and development expenses, net, for the year ended December 31, 2013 amounted to $2,641 representing an increase of $1,264, or 92%, compared to $1,377 for the year ended December 31, 2012. The increase was primarily attributable to an increase of salaries and related personnel expenses in an amount of $355 reflecting an increase in the number of employees engaged in research and development related activities from nine to fifteen, an increase in share-based compensation to employees and consultants in an amount of $298, an increase of $348 in cost to third-party consultants, an increase of $438 in chemical, manufacturing and control expenses for the manufacture of BonyPid for clinical trial and regulatory purposes, an increase in $76 in clinical trial expenses as we expanded our clinical trial program for BonyPid, an increase of $25 in costs associated with maintenance and prosecution of our intellectual property, and an increase of $152 in other research and developments costs and overhead costs related to the growth in our activities. An increase of $428 in grants received from OCS and European Commission's Seventh Framework Programme for Research reduced our research and development costs.

57


 
 

TABLE OF CONTENTS

Substantially all of our research and development costs in 2013 and 2012 were in connection with the development of our two lead product candidates, and for our research programs.

General and administrative expenses

Our general and administrative expenses for the year ended December 31, 2013 amounted to $938 representing an increase of $528, or 129%, compared to $410 for the year ended December 31, 2012. The increase was primarily attributable to an increase of salaries and related personnel expenses in an amount of $172 reflecting an increase in the number of employees required to support research and development activities as well as new employees in business development, an increase in share-based compensation to consultants in an amount of $74, an increase of $88 in costs for third-party consultants, an increase of $92 in legal and professional costs, an increase of $32 in facility and maintenance cost as we expanded our facilities related to additional employees and new activities and as an increase of $71 in other overhead costs.

Operating loss

As a result of the foregoing, our operating loss for the year ended December 31, 2013 was $3,579, as compared to $1,787 for the year ended December 31, 2012, an increase of 100%.

Financial expense and income

We recognized financial expenses of $305, including $286 related to the reevaluation of the preferred share warrant liability, for the year ended December 31, 2013, as compared to $3 for the year ended December 31, 2012.

Net loss

As a result of the foregoing, our loss for the year ended December 31, 2013 was $3,884, as compared to $1,790 for the year ended December 31, 2012, an increase of 117%.

Comparison of the Six Month Period Ended June 30, 2014 to the Six Month Period Ended June 30, 2013

Research and Development Expenses

Our research and development expenses, net, for the six month period ended June 30, 2014 amounted to $1,499 representing a decrease of $253 or 14%, compared to $1,752 for the six month period ended June 30, 2013. Our gross research and development expenses for the six month period ended June 30, 2014 amounted to $1,970 representing a decrease of $30 or 2%, compared to $2,000 for the six month period ended June 30, 2013. For the six month period ended June 30, 2014, salaries and related personnel expenses increased by an amount of $231 reflecting an increase in the number of employees engaged in research and development related activities from twelve to nineteen, share-based compensation to employees and consultants decreased by an amount of $56, costs of third-party consultants decreased by an amount of $83, chemical, manufacturing and control expenses for the manufacture of BonyPid for clinical trial and regulatory purposes decreased by an amount of $482. Clinical trial expenses increased by an amount of $153 as we expanded our clinical trial program for BonyPid, costs associated with maintenance and prosecution of our intellectual property decreased by an amount of $21, whilst other research and developments costs and overhead costs related to the growth in our activities increased by $228. An increase of $223 in grants received from OCS and European Commission’s Seventh Framework Programme for Research reduced our research and development costs.

Substantially all our research and development costs in 2014 and 2013 were in connection with the development of our lead product candidates, and our research programs.

General and administrative expenses

Our general and administrative expenses for the six month period ended June 30, 2014 amounted to $874 representing an increase of $411 or 89%, compared to $463 for the six month period ended June 30, 2013. The increase was primarily attributable to an increase of salaries and related personnel expenses in an amount of $208 reflecting an increase in the number of employees required to support research and development activities as well as new employees in business development, an increase in share-based compensation to

58


 
 

TABLE OF CONTENTS

employees in an amount of $36, an increase of $121 in costs for third-party consultants, an increase of $11 in legal and professional costs, an increase of $38 in facility and maintenance cost as we expanded our facilities related to additional employees and new activities.

Operating loss

As a result of the foregoing, our operating loss for the six month period ended June 30, 2014 was $2,373, as compared to $2,215 for the six month period ended June 30, 2013, an increase of 7%.

Financial expense and income

For the six month period ended June 30, 2014, we recognized financial expenses of $235, including $211 related to the reevaluation of the preferred share warrant liability, as compared to $73 for the six month period ended June 30, 2013 including $74 related to the reevaluation of the preferred share warrant liability,

Net loss

As a result of the foregoing, our loss for the six month period ended June 30, 2014 was $2,608, as compared to $2,288 for the six month period ended June 30, 2013, an increase of 14%.

Liquidity and Capital Resources

As of June 30, 2014, we had $4,029 in cash and cash equivalents, an increase of $2,766 compared to December 31, 2013. During the six months ending June 30, 2014 we issued 1,639,891 preferred B-1 shares for a total consideration of $4.4 million (net of issuance costs of $170). The Company believes that its current capital resources are not sufficient to support its operations beyond June 30, 2015. For this reason, Note 1b to our interim financial statements for the six months ended June 30, 2014 and to our audited financial statements for the year ended December 31, 2013 include reference to substantial doubt about our ability to continue as a going concern. In addition the independent registered public accountants’ report for the year ended December 31, 2013 includes an explanatory paragraph that expresses substantial doubt about our ability to continue as a “going concern”.

We believe that our existing cash resources and the net proceeds from the current anticipated offering, together with anticipated grants from OCS as well as participations in R&D development, will be sufficient to fund our projected cash requirements at least through June 30, 2015. We currently anticipate that, assuming consummation of the current offering, we will advance current and planned research programs, complete the clinical development of our two lead product candidates, file the appropriate submissions of such product candidates for regulatory approval, establish a manufacturing facility for the production of some of our product candidates and use the remainder for working capital and general corporate purposes.

We will require significant additional financing in the future to fund our operations. However, if we do not generate sufficient cash through this offering or otherwise, our cash on hand may not be sufficient to meet our anticipated cash needs.

The table below presents our cash flows for 2013 and 2012:

   
  Years Ended
December 31,
     2013   2012
     (in thousands US$)
Operating activities   $ (2,518 )    $ (1,857 ) 
Investing activities     (113 )      (145 ) 
Financing activities     2,917       2,578  
Net increase (decrease) in cash and cash equivalents   $ 286     $ 576  

59


 
 

TABLE OF CONTENTS

The table below presents our cash flows for the six months ended June 30, 2014 and June 30, 2013:

   
  Six Months Ended
June 30,
     2014   2013
     (in thousands US$)
Operating activities   $ (1,579 )      (1,440 ) 
Investing activities     (72 )      (14 ) 
Financing activities     4,417       1,536  
Net increase (decrease) in cash and cash equivalents   $ 2,766       82  

Operating Activities

The use of cash in operating activities resulted primarily from our net losses adjusted for non-cash charges and measurements and changes in components of working capital. Adjustments for non-cash items include depreciation, re-evaluation of preferred share warrants and share-based compensation.

Net cash used in operating activities in 2013 was $2,518, an increase of $661 as compared to $1,857 used in 2012. The increase was attributable primarily to the increased research and developments costs as well increased general and administrative costs.

In the six month period ended June 30, 2014, net cash used in operating activities was $1,579, an increase of $139 as compared to $1,440 used in the six month period ended June 30, 2013. The increase was attributable primarily to the increased general and administrative costs, offset by decrease in research and development costs.

Investing Activities

Net cash used in investing activities is primarily related to the purchase of laboratory equipment, office equipment and furniture and leasehold improvements. Net cash used in investing activities was $113 in 2013, a decrease of $32 as compared to 2012. A decrease of $97 in the purchase of equipment in 2013 as compared to 2012 was off-set by an increase of $65 in restricted cash in the same period.

In the six month period ended June 30, 2014, net cash used in investing activities was $72 related to purchase of equipment, an increase of $58, as compared to the six month period ended June 30, 2013.

Financing Activities

Net cash provided by financing activities of $2,917 in the year ended December 31, 2013 consisted of net proceeds from the issuance of preferred shares. Net cash provided by financing activities of $2,578 in the year ended December 31, 2012 consisted of net proceeds from the issuance of preferred shares and from the exercise of warrants on preferred shares.

Net cash provided by financing activities of $4,029 in the six month period ended June 30, 2014 consisted of net proceeds of $4,558 from the issuance of preferred shares, offset by $141 related to payment of deferred offering costs. Net cash provided by financing activities of $1,059 in the six month period ended June 30, 2013 consisted of net proceeds of $1,206 from the issuance of preferred shares and $330 repayment of receivables on account of shares.

Current Outlook

We have financed our operations to date primarily through proceeds from sales of our shares, and grants from OCS and FP7. We have incurred losses and generated negative cash flows from operations since inception. To date, we have not generated any revenue from the sale of products and we do not expect to generate revenues from sale of our products in the next few years.

As of June 30, 2014, we had $4,029 in cash and cash equivalents, an increase of $2,766 compared to December 31, 2013. During the six months ending June 30, 2014 we issued 1,639,891 preferred B-1 shares for a total consideration of $4.4 million (net of issuance costs of $170). The Company believes that its current capital resources are not sufficient to support its operations beyond June 30, 2015. For this reason, Note 1b to our interim financial statements for the six months ended June 30, 2014 and to our audited financial statements for the year ended December 31, 2013 include reference to substantial doubt about our ability to

60


 
 

TABLE OF CONTENTS

continue as a going concern. In addition the independent registered public accountants’ report for the year ended December 31, 2013 includes an explanatory paragraph that expresses substantial doubt about our ability to continue as a “going concern”.

We believe that our existing cash resources and the net proceeds from the current offering will be sufficient to fund our projected cash requirements at least through June 30, 2015. Nevertheless, we will require significant additional financing in the future to fund our operations if and when we obtain regulatory approval and commercialize our products. We currently anticipate that, assuming consummation of the current offering, we will advance current and planned research programs, complete the clinical development of product candidates, file the appropriate submissions for such product candidates for regulatory approval, establish a manufacturing facility for the production of some of our product candidates and use the remainder for working capital and general corporate purposes. Our future capital requirements will depend on many factors, including:

the progress and costs of our research programs, preclinical studies, clinical trials, chemical, manufacturing and control activities, regulatory submission costs and other development activities;
the scope, prioritization and number of our clinical trials;
the costs and timing of obtaining regulatory approval for our product candidates;
the costs of filing, prosecuting, enforcing and defending patent claims and other intellectual property rights;
the costs of, and timing for, strengthening our manufacturing agreements for production of sufficient clinical and commercial quantities of our product candidates;
the potential costs of contracting with third parties to provide marketing and distribution services for us or for building such capacities internally; and
the costs of acquiring or undertaking the development and commercialization efforts for additional, future therapeutic applications of our product candidates.

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

Contractual Obligations

The following table summarizes our significant contractual obligations at December 31, 2013:

         
  Total   Less than
1 year
  1 – 3
years
  4 – 5
years
  More than
5 years
     (in thousands US$)
Operating leases:
 
Facility     422       199       223              
Motor Vehicles     160       77       83              

61


 
 

TABLE OF CONTENTS

The following table summarizes our significant contractual obligations at June 30, 2014:

         
  Total   Less than
1 year
  1 – 3
years
  4 – 5
years
  More than
5 years
     (in thousands US$)
Operating leases:
 
Facility     4,756       453       1,357       894       2,052  
Motor Vehicles     231       100       131              

Off-Balance Sheet Arrangements

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

Quantitative and Qualitative Disclosure about Market Risk

We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of foreign currency exchange rates.

Foreign Currency Exchange Risk

Our results of operations and cash flow are subject to fluctuations due to changes in foreign currency exchange rates. Certain of our expenses are denominated in New Israeli Shekels. Our results of operations and cash flow are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. Approximately 40% of our expenses are denominated in New Israeli Shekels. Changes of 5% and 10% in the USD/NIS exchange rate will increase/decrease the operation expenses by 2% and 4%, respectively. We do not hedge our foreign currency exchange risk. In the future, we may enter into formal currency hedging transactions to decrease the risk of financial exposure from fluctuations in the exchange rates of our principal operating currencies. These measures, however, may not adequately protect us from the material adverse effects of such fluctuations.

Inflation-related Risks

We do not believe that the rate of inflation in Israel has had a material impact on our business to date. However, our costs in Israel will increase if inflation in Israel exceeds the devaluation of the New Israeli Shekel against the U.S. Dollar or if the timing of such devaluation lags behind inflation in Israel.

62


 
 

TABLE OF CONTENTS

BUSINESS

Overview

We are an emerging specialty pharmaceutical company engaged in research and development of our product candidates based on PLEX, our proprietary drug delivery technology. PLEX (abbreviation for Polymer-Lipid Encapsulation MatriX) is able to encapsulate many types of drugs to enable targeted, localized drug delivery into the body over extended periods of time, including periods not previously thought possible. The application of our PLEX technology in our product candidates enables us to optimize drug treatment regimens with release rates and durations that are pre-determined by us, spanning from days, to weeks and several months. We are a clinical stage company, meaning that our product candidates are yet to be approved for sale by any regulatory agencies.

The localized (as opposed to systemic), controlled and constant release of drugs over extended periods is essential in many treatment regimens, such as the treatment of infections, inflammation and pain. Our PLEX technology platform is a matrix of several thousand alternating layers of polymers (plastics) and lipids (fatty substances) that entrap a therapeutic drug between them. Our preliminary studies show that our product candidates are effective using a very small fraction of the active pharmaceutical ingredients required in systemic administration. One vial of BonyPid-1000, one of our lead product candidates, utilizes slightly more than 1% of the accepted 30-day systemic antibiotic regimen. One vial of BonyPid-500, one of our other lead product candidates, utilizes approximately 1.5% of the normal 10-day antibiotic regimen used in dental applications.

Our most advanced product candidates, BonyPid-1000 and BonyPid-500, address current treatment problems in orthopedics and dental implants that are not adequately addressed by current treatments (either local or systemic). Our additional product candidate D-PLEX addresses the prevention and treatment of surgical site infections generally. BonyPid-1000 and BonyPid-500 are specifically directed at combatting bacterial colonization on implanted bone substitutes and resulting complications, as well as supporting bone recovery around dental implants, in each case by releasing a broad-spectrum antibiotic at the site to enhance healing. We expect to begin a confirmatory clinical trial for BonyPid-1000 in the second half of 2015 for a CE Mark authorizing marketing in Europe. We expect to begin a pilot clinical trial for BonyPid-500 in the second half of 2015. Both studies are expected to serve as a safety and preliminary effectiveness study as part of the FDA approval process. We expect, assuming continued favorable clinical results, that both BonyPid-1000 and BonyPid-500 will be ready for commercial release in Europe during the first half of 2017. We are also planning to begin a pilot clinical trial for D-PLEX shortly after our BonyPid-1000 and BonyPid-500 trials. Our estimates of the funds required to achieve these goals are set forth under “Use of Proceeds.”

The attributes of our PLEX platform can be used in a wide variety of products and indications in addition to orthopedics and dental implants, including infection treatment and prevention more generally. Based on our current clinical data, we believe that our product candidates have the capability to reduce the number of surgical procedures, side effects, hospitalizations and recovery times while improving clinical and patient outcomes, thus significantly impacting health economics.

Background and Market Focus

Infection resulting from surgery remains a major health problem despite the intensive use of systemically administered antibiotics both pre- and post-surgery. Infection causes medical complications that can even be fatal, and creates a significant public health burden. Furthermore, according to the Food and Drug Administration (FDA) and its international counterparts, the increasing resistance of bacteria to antibiotics and similar drugs — called antimicrobials — is a major public health threat. Additionally, systemic administration of antimicrobials frequently involves high dosing that causes safety concerns and potential side effects, in addition to increasing the likelihood of the development of antibacterial resistance. Existing localized treatments are limited by one or several or the following factors that can affect safety or effectiveness: short maximum release periods; controllability of the drug release; no mechanism to prevent drug degradation; applicability to a limited number of drugs; and difficulties in bonding between the drug and the delivery mechanism.

63


 
 

TABLE OF CONTENTS

Our current market focus is to create a range of effective, extended release pharmaceutical products for medicating tissues locally with antibiotics for infection treatment and prevention in surgical procedures. Our studies suggest that our product candidates are effective in a number of cases where systemic administration or other localized solutions have either little or no effect, are too toxic, or both. Based on our clinical and pre-clinical experience, we believe that use of our product candidates will reduce overall surgical infection rates and reduce bacterial resistance, thus benefiting patients, hospitals and healthcare organizations.

Lead Product Candidates

Our three lead product candidates are as follows:

BonyPid-1000 is a conventional bone substitute used in orthopedic surgery that has been coated with our PLEX technology and contains antibiotics. Bone substitutes are inserted into severe open bone fractures to promote bone healing, and the antibiotics protect the implants from bacterial adhesion by releasing a broad-spectrum antibiotic. This combination has also been designed for use in other orthopedic surgical procedures, such as spine surgeries and joint replacements that require the filling of bone voids and that are also prone to infection.

Penetration of antibiotics and other drugs from the blood stream into bone can be ineffective due to limited blood supply which results in inadequate delivery of sufficient dosages. The most severe open bone fracture cases frequently become infected and may require amputation of the limb despite the best available treatment and medications, both local and systemic. The antibiotics that are encapsulated by BonyPid-1000 are directly applied to the surgical site instead of being delivered through the blood supply. The entrapped antibiotics are released at an effective rate over a period of three to four weeks. In our clinical trials to date with BonyPid-1000, there have been no bone infection complications and no amputations despite the severity of the treated cases, suggesting a substantial improvement over current success rates. Additionally, the ability of BonyPid-1000 to permit immediate or early closure of the wound is an advance over current procedures and promotes earlier healing and reduces the risk for hospital-related bacterial contaminations. As a result, BonyPid-1000 has the potential to significantly reduce treatment costs because it can reduce the number of required recurring surgical procedures and the number, length and cost of hospitalizations. BonyPid-1000 also has the potential to be used in dental applications.

BonyPid-500 allows bone regrowth in bacterially-infected dental sites surrounding dental implants. Current treatments of bone resorption around these dental implants are largely ineffective and often require implant removal. BonyPid-500 acts as a scaffold to support bone recovery and delivers antibiotics locally over a prolonged period to prevent local development of device-related microbial colonization, which subsequently result in infections and bone resorption. We expect BonyPid-500 to reduce implant procedure costs and prevent prolonged and painful follow-on dental procedures. We are currently collaborating with MIS Implants Ltd. for the development and future commercialization of BonyPid-500 in the field of peri-implantitis — one of the potential applications of BonyPid-500 in the maxiofacial market. BonyPid-500 may also potentially be used in other dental applications.
D-PLEX is in active development to treat infection and is directed at preventing and treating surgical site infections (known as SSI) addressing medical needs that are currently lacking effective solutions and that are of great concern to the medical community. D-PLEX is designed to provide localized infection treatment and prevention of soft tissues that will be administered locally during surgical procedures. SSI occur in varying percentages of surgical procedures despite administration of systemic antibiotics, depending on the procedure type. D-PLEX is expected to reduce the overall infection rate and overcome or reduce existing infections, including hospital-acquired resistant bacteria. D-PLEX is planned to be applied into a variety of tissues and solid organs to treat and prevent infections that may exist prior to, or appear after, surgery. Some possible examples include abdominal surgeries such as colectomy, appendectomy and chronic bone infection (osteomyelitis). We are currently evaluating our regulatory alternatives with regard to this product candidate. We expect, in 2015, to enter discussions with the FDA as to our clinical path in the United States.

64


 
 

TABLE OF CONTENTS

Target Markets

Orthopedics.  According to multiple published Millennium Research Group reports, in 2013 approximately one million annual orthopedic surgical procedures on open fractures requiring bone grafts were performed worldwide, with over 335,000 procedures in the United States. In a 2007 article in The Internet Journal of Orthopedic Surgery, it was reported that, depending on severity, up to 50% of these procedures result in bone infections. It was also reported that approximately 1,550,000 thoracolumbar and cervical spine procedures take place globally, of which around 720,000 were conducted in the United States. Two studies published in 2012 by the European Spine Journal show that between 2 – 10% of these shall incur infection, despite systemic antibiotic administration. According to the Millennium reports, approximately 328,500 hip and knee replacement revision surgeries took place, of which a total of 136,200 occurred in the US. Almost all of these revision treatments, which are complications of primary hip and knee replacement surgeries, are expected to benefit from our product candidates.

Dental.  According to multiple Millennium Research Group reports, there were over 12 million dental implants worldwide in 2013, and approximately 10 – 20% of dental implants become infected up to five years after implantation. Millennium also reports that approximately 4.2 million dental procedures such as sinus lifts, ridge augmentation and expansion surgeries and socket extractions took place in 2013 with the US accounting for approximately 1,4500,000 of them.

SSI.  According to the a datasheet published by the U.S. Centers for Disease Control and Prevention (CDC) in 2010 and several Millennium reports, of the 100 million interventional procedures conduced in the United States, approximately 30 million carry a risk of incurring surgical site infections (SSI) despite systemic antibiotic administration. In a 2001 report prepared for the Agency for Healthcare Research and Quality, U.S. Department of Health and Human Services, 80 – 90% of surgeries use systemic antibiotic administration. As an example, according to numerous Millennium reports, there were approximately 1,500,000 primary hip replacements conducted globally during 2013, of which approximately 300,000 took place in the United States. Although almost all of these procedures are accompanied by antibiotic administration, around 11% of these procedures will still incur infections according to the American Journal of Health-System Pharmacy published in February 2013. Similarly, according to the above CDC report, approximately 305,000 colectomy procedures are performed annually in the United States. According to a 2014 Journal of Hospital Infection review, 14 – 18% of colectomy procedures result in infections despite systemic antibiotic treatment. These are just a few of many examples of the need for an effective, localized and prolonged antibiotic treatment that our product candidates are intended to address.

Research Programs

The following programs, based on our PLEX platform, are in the early research phase:

Anti-Inflammatory Research Program.  Systemic treatments are very effective for the treatment of inflamed conditions. However, wide use of anti-inflammatory agents is limited due to serious systemic side effects that include liver damage, heart disease, addiction and pain. We are developing a localized and controlled delivery of a very small, yet effective dose with minimal systemic side effects.
Anti-Cancer Research Program.  Systemic anti-cancer treatments have serious side effects. Our program is designed to treat cancer by extended localized release of common chemotherapeutic agents. The program is aimed at reducing the overall dose of toxic agents for a prolonged, local delivery while achieving effectiveness that is at least comparable to systemic administration.

Intellectual Property

Various aspects of our technology are protected by five patent families, including two issued patents (U.S. and China), 2 allowed patent applications and over 30 patent applications currently pending in Australia, Canada, China, the European Patent Office, India, Israel, Japan and the United States.

65


 
 

TABLE OF CONTENTS

Strategy

Our goal is to become a leading specialty pharmaceutical company by developing, manufacturing and commercializing products based on our proprietary PLEX platform in the field of extended release, local drug delivery. These products are intended to address some of modern medicine’s main challenges, where current local or systemic administration has limited effect, is too toxic, or both. Our primary focus is on the field of infection management.

Our commercial strategy has two elements: internal product development and collaboration and licensing. We intend to discover, develop and commercialize novel therapeutic products either on our own or in collaboration with partners. In orthopedics, we are in late stage clinical development. We plan to establish an independent sales force in the United States, Germany, and later in France, to commercialize our products, starting with BonyPid-1000. In geographies where we do not intend to market our products ourselves we plan to team up with commercial partners for certain applications to benefit from their existing sales force and market reach.

We expect to collaborate with pharmaceutical companies through licensing and collaboration agreements for the encapsulation of their drugs (generic or proprietary) using our PLEX platform to enable administration of drugs in a localized, targeted manner. The purpose of these collaborations is to enhance our PLEX platform into a partnered product pipeline and to generate revenues through licensing of PLEX for certain applications. As a first step in this strategy, we have recently entered into a preliminary technology evaluation agreement with a large U.S. pharmaceutical company. We envision that this technology evaluation agreement may lead to discussions on a license and collaboration contract.

Competitive Strengths

Our PLEX-based product candidates offer three distinct potential advantages that together can overcome the limitations of other local delivery solutions:

We can improve therapeutic effect by pre-determining the duration that a drug or a drug combination is most effectively released inside the body. We are capable of enabling drug delivery up to several months. For example, we have designed BonyPid-1000 with a drug release period of three to four weeks and PLEX with a drug release period of several months.
Our preliminary clinical results suggest that we enhance safety and efficacy when we pre-define the rate and quantity of drugs released. As a result, our PLEX-based product candidates release a small but effective drug dose with the benefit of reducing potential adverse side effects, toxicity and costs. One vial of BonyPid-1000 for example, utilizes slightly more than 1% of the accepted 30-day systemic antibiotic regimen.
We ensure that the drugs, encapsulated by PLEX technology, are fully active upon release by protecting them in a dry, secure, physical reservoir located at the area of the treated site. We are also able to encapsulate sensitive or unstable drugs over significant periods.

In the field addressed by BonyPid-1000, a number of companies have regulatory approval to market products, incorporating anti-bacterial agents, outside the United States that are designed to assist in bone healing. These products include:

PMMA beads/Septopal (Biomet Manufacturing Corp)
Osteoset T (Wright Medical Group)
Targobone (Ossacur AG)
PerOssal (AAP implante AG)
Certamet G (BoneSupport AB)

We believe that these products can be evaluated by five different criteria, namely:

whether the product is biodegradable;
the ability to support bone growth;

66


 
 

TABLE OF CONTENTS

the ability to pre-determine the release profile of the active drug;
the ability to provide long-term release of up to weeks; and
the stability of the drug reservoir in a hydrated environment.

We believe that BonyPid-1000 satisfactorily achieves each of these performance measures, and that the others meet one or two of the five criteria. We believe that meeting all five criteria is essential for successful treatment. Additional detail on competition can be found below under “BonyPid 1000–Existing approaches to support bone growth by the prevention of bone infection.

More generally, with regard to localized, prolonged drug delivery systems, there are drug delivery solutions in the market, such as those offered by Pacira Pharmaceuticals. Pacira’s lead products, based on their DepoFoam technology, is a multivesicular liposome technology that encapsulates drugs and releases them over a period of several days. Similarly, Tyrx Inc. (acquired by Medtronic) markets a polymer-based local release solution called AIGISRx that elutes drugs over several days. We believe, however, that the technological solutions offered by these companies are less suited for the markets we are addressing and that our PLEX technology and related product candidates offer more flexible, long-term solutions.

Background

Localized drug delivery systems — concept and benefits

The ideal local drug delivery system has been a pursuit of scientists and physicians for the past five decades. Delivering drugs locally to the diseased area rather than through systemic circulation can eliminate or reduce the concomitant secondary systemic complications. An effective local drug delivery system is designed to place the appropriate drug at the right location, for the desired duration and in the appropriate concentration. In many cases, a successful drug delivery system can overcome challenging medical situations where no effective and safe medication alternatives are available. Drug delivery systems are often approached via a drug's chemical formulation, but may also involve medical devices or drug-device combination products.

The major advantages of local delivery of drugs over systemic treatments are:

Delivering the drug into a particular location where systemic administration has limited efficacy due to poor penetration from the blood stream into the needed organ or compartment;
Delivering drugs that cannot be used effectively via systemic administration due to various limitations such as solubility, sensitivity to blood factors or toxicity; and
Delivering extended effective dosing where prolonged systemic exposure may be too toxic.

Faced with increasing research and development costs, impending patent expirations, competitive pressures and increasing consumer demands for improved medications, pharmaceutical companies are relying more heavily on advanced drug delivery system technologies to help sustain their historical high growth and profit margins. Pharmaceutical companies are recognizing that these technologies can differentiate products and extend product life cycles. Use of advanced drug delivery systems by pharmaceutical companies is a valuable, cost-effective lifecycle management resource. Patients benefit from reduced adverse effects and new indications, as well as improved therapy, safety, efficacy, convenience and compliance. Drug delivery systems may also reduce the development time for new active substances. Each year, more companies assess and abandon thousands of active substances for reasons such as insolubility or unacceptable toxicity. Other drugs are abandoned because of adverse effects or high dosing frequency.

Advanced delivery systems are important for medications that are needed to reach the brain, the skeletal system and abdominal organs, which are often limited due to the low penetration of drugs from the circulatory system. To overcome the low accessibility, systemic methods have limited alternatives beside the administration of higher drug doses for significant periods in order to achieve a more effective local drug concentration. This systemic exposure may prove to be toxic and/or too expensive. Moreover, in certain instances, even systemic administration of high, unsafe doses over prolonged periods are still ineffective and may continue to run the risk of developing immune responses.

Infection resulting from surgery remains a major health problem despite the intensive use of systemically administered antibiotics both pre- and post-surgery. Infection causes medical complications that can even be

67


 
 

TABLE OF CONTENTS

fatal, and creates a significant public health burden. Furthermore, according to the FDA and its international counterparts, the increasing resistance of bacteria to antibiotics and similar drugs — called antimicrobials — is a major public health threat. Additionally, systemic administration of antimicrobials frequently involves high dosing that causes safety concerns and potential side effects, in addition to increasing the likelihood of the development of antibacterial resistance. Existing localized treatments are limited by one or several or the following factors that can affect safety or effectiveness: short maximum release periods; controllability of the drug release; no mechanism to prevent drug degradation; applicability to a limited number of drugs; and difficulties in bonding between the drug and the delivery mechanism.

Our Solution

Our PLEX localized delivery system (i) encapsulates a drug in a mechanism that is designed to be implanted exactly where it is needed, (ii) contains a drug that is protected even inside the body from pre-mature exposure and early degradation, and (iii) allows effective doses of drug to be released constantly over a sufficient period to accomplish its therapeutic purpose. Our system can customize release rates to be optimally effective as well as safe. Our PLEX system is unique in that it remains effective and safe at the treated site over the needed time period of up to several months while dispensing minimal yet locally effective drug quantities into the surrounding tissues with minimal or no systemic exposure.

Our ability to deliver a small but effective dose allows us to take advantage of the relatively small volume available in the vicinity of some of the treated organs and tissue area and to bypass the kidney activity and other body mechanisms that reduce plasma drug concentrations. The low overall dose further supports the safety of our PLEX system and opens new opportunities for therapeutic treatments that use potentially harmful drugs such as antibiotics, cytotoxic chemotherapy and growth factors. Another inherent advantage is the ability to minimize treatment costs associated with expensive drugs such as peptides and proteins. Many of these drugs, as well as nucleic-acid based drugs, are highly sensitive to the body’s systemic degradation mechanisms and therefore the local delivery as we are offering is potentially one of the most practical solution for the use of such drugs.

Our PLEX technology platform overcomes the major deficiencies that other local delivery systems typically encounter. Systems designed to localize administration are often unable to avoid an excessively large burst release upon administration and lack a sufficiently prolonged and controlled drug release that is highly beneficial to optimize therapeutic efficacy and to reduce potential toxicity. We achieve our superior results through a unique combination of technologies in which we create a matrix of alternating layers of polymers and lipids that entrap the drug between them. This “sandwich” approach can be repeated thousands of times and creates a highly organized super-molecular structure. Our proprietary PLEX matrix which is created by the assembly of the right type of lipids with the right type of polymers under specific mild physical conditions achieves unmatched performance. Our ability to create these combinations is based on the self-assembly of known polymeric and lipid components into highly organized super-molecular structures.

The advantages of our PLEX drug delivery system lie in its unique combined characteristics, namely:

Flexible entrapment, which is the ability to incorporate many types of drugs, with a large range of drug molecule size or physical characteristics. Examples of molecules we have tested successfully range from small drugs (antibiotics, steroids and others), to larger therapeutic molecules, including peptides and proteins to very large molecules such as nucleic acid-based drugs. If required, depending on the release parameters needed and the nature of the drugs, more than one drug may be entrapped; synergism and multi-factorial effects are feasible in some combinations. Other delivery systems tend to be limited to certain types of drugs only, and are not able to create the range of solutions that our platform can offer.
Formulations that accommodate unstable drugs, certain drugs are heat-sensitive, and as a result cannot be used in certain competing drug delivery solutions. Other drugs are sensitive to some organic solvents, PH levels or enzymes that are used in other products. Our technology differs from such other solutions in that it can effectively encapsulate and release drugs with these characteristics.
Flexible design, which permits local drug delivery as a coating of medical devices or other substrates.

68


 
 

TABLE OF CONTENTS

Ability to protect drugs from degradation, which we accomplish by incorporating the drug in an internal reservoir that protects it from biological and water-related destruction. This characteristic is particularly important when long-lasting activity of unstable drugs is needed, for example, to protect water sensitive drugs over weeks of delivery.
Extended long release cycles, which enable to predetermine the release of drugs in the range of several days to several months.