Indicate by check mark
if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark
if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Indicate by check
mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Indicate by check
mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.
¨
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.
See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 if the Act).
The aggregate market
value of the registrant’s outstanding common stock held by non-affiliates of the registrant computed by reference to the
price at which the common stock was last sold as of the last business day of the registrant’s most recently completed second
fiscal quarter was $256,834,156 (based on a closing price of $5.01 per share for the registrant’s common stock on the NYSE
MKT on June 29, 2012).
As of March 1, 2013,
the registrant had 63,430,118 shares of common stock outstanding.
The registrant’s
definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A for the 2013 annual
meeting of stockholders is incorporated by reference in Part III of this Form 10-K to the extent stated herein.
SIGNATURES
cautionary
STATEMENT regarding forward-looking statements
This Annual Report
on Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995 (“PSLRA”), Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section
21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), about our expectations, beliefs or intentions
regarding, among other things, our product development efforts, business, financial condition, results of operations, strategies
or prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical
or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results
as of the date they are made. Because forward-looking statements relate to matters that have not yet occurred, these statements
are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results
expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially
from the activities and results anticipated in forward-looking statements. Risks and uncertainties, the occurrence of which could
adversely affect our business, include the following:
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our limited operating history;
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our lack of any commercialized products or technologies;
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our product candidates are at an early stage of product development and may never be commercialized;
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that we may be unable to develop product candidates that will achieve commercial success in a timely and cost-effective manner,
or ever;
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our need to raise additional capital to meet our business requirements in the future, and such capital raising may be costly
or difficult to obtain and could dilute current stockholders’ ownership interests;
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if we fail to obtain necessary funds for our operations, we will be unable to maintain and improve our patented technology,
and we will be unable to develop and commercialize our products and technologies;
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our dependence on key members of our management and advisory team;
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our potential inability to enforce employees’ covenants not to compete and therefore may be unable to prevent our competitors
from benefiting from the expertise of some of our former employees;
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our current lack of sales, marketing or distribution capabilities;
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potential product liability claims if our product candidates cause harm to patients;
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our product candidates will remain subject to ongoing regulatory requirements even if they receive marketing approval, and
if we fail to comply with these requirements, we could lose these approvals, and the sales of any approved commercial products
could be suspended;
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clinical trials are very expensive, time-consuming and difficult to design and implement and, as a result, we may suffer delays
or suspensions in future trials which would have a material adverse effect on our ability to generate revenues;
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the manufacture of our product candidates is an exacting and complex process, and if we or one of our materials suppliers encounters
problems manufacturing its products, our business could suffer;
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our reliance on third parties to implement our manufacturing and supply strategies;
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our inability to successfully integrate any acquisitions of technologies or products;
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our inability to successfully grow and expand our business;
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our inability to obtain adequate insurance;
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our holding company structure and our dependence on cash flow from our wholly owned subsidiaries to meet our obligations;
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our inability to maintain an effective system of internal controls;
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the impact of potential political, economic and military instability in the State of Israel, where key members of our senior
management and our research and development facilities are located;
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recent disruptions in the financial markets and global economic conditions;
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our dependence on our license of core technology from Washington University;
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our failure to obtain or maintain or protect our patents, licensing agreements and other intellectual property;
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the cost of potential litigation required to protect our intellectual property or to defend against claims alleging that we
have violated the intellectual property rights of others;
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our inability to enforce confidentiality agreements, which could result in third parties using our intellectual property to
compete against us;
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uncertainty regarding international patent protection;
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our inability to protect intellectual property rights of the third parties from whom we license certain of our intellectual
property or with whom we have entered into other strategic relationships;
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our inability to obtain required regulatory approvals in the United States to market our proposed product candidates;
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the impact of government regulations and delays associated with obtaining required regulatory approvals in the United States
necessary to market our proposed product candidates;
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the impact of competition and continuous technological change;
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the impact of healthcare reform, which could adversely impact how much or under what circumstances healthcare providers will
prescribe or administer our products;
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compliance with federal anti-kickback laws and regulations;
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the volatility of our common stock;
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that we do not anticipate paying dividends on our common stock;
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a lack of security analyst coverage of our company;
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potential dilution of your ownership interest because of future issuances of additional shares of our common stock and our
preferred stock;
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that our principal stockholders have significant voting power and may take actions that may not be in the best interest of
other stockholders;
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sales by stockholders who had previously been subject to restrictions on the sale of their shares and who may now sell those
shares into the public market;
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the other factors referenced in this prospectus, including, without limitation, under “Risk Factors;” and
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other risks detailed from time to time in the reports filed by us with the Securities and Exchange Commission, which we refer
to as the SEC.
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We believe these forward-looking
statements are reasonable; however, you should not place undue reliance on any forward-looking statements, which are based on current
expectations. Furthermore, forward-looking statements speak only as of the date they are made. If any of these risks or uncertainties
materialize, or if any of our underlying assumptions are incorrect, our actual results may differ significantly from the results
that we express in, or imply by, any of our forward-looking statements. These and other risks are detailed in this Annual Report
on Form 10-K, in the documents that we incorporate by reference into this Annual Report on Form 10-K and in other documents that
we file with the Securities and Exchange Commission. We do not undertake any obligation to publicly update or revise these forward-looking
statements after the date of this Annual Report on Form 10-K to reflect future events or circumstances. We qualify any and all
of our forward-looking statements by these cautionary factors.
PART I
Item 1. Business
Unless the context
otherwise requires, all references in this Annual Report on Form 10-K to the “Company”, “Prolor”, “we,”
“us” and “our” refer to PROLOR Biotech, Inc., a Nevada corporation (formerly Modigene Inc.), including
its direct and indirect wholly owned subsidiaries, Modigene, Inc., a Delaware corporation, which we refer to as Modigene Delaware,
and Prolor Biotech Ltd., which we refer to as Prolor Ltd.
Overview
We are a development
stage biopharmaceutical company utilizing patented technology to develop longer-acting, proprietary versions of already-approved
therapeutic proteins that currently generate billions of dollars in annual global sales. We have obtained certain exclusive worldwide
rights from Washington University in St. Louis, Missouri to use a short, naturally-occurring amino acid sequence (peptide) that
has the effect of slowing the removal from the body of the therapeutic protein to which it is attached. This Carboxyl Terminal
Peptide (CTP) can be readily attached to a wide array of existing therapeutic proteins, stabilizing the therapeutic protein in
the bloodstream and extending its life span without additional toxicity or loss of desired biological activity. We are using the
CTP technology to develop new, proprietary versions of certain existing therapeutic proteins that have longer life spans than therapeutic
proteins without CTP. We believe that our products will have greatly improved therapeutic profiles and distinct market advantages.
We believe our products
in development will provide several key advantages over our competitor’s existing products:
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significant reduction in the number of injections required to achieve the same or superior therapeutic
effect from the same dosage;
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faster commercialization with greater chance of success and lower costs than those typically associated
with a new therapeutic protein; and
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manufacturing using industry-standard biotechnology-based protein production processes.
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Merck & Co. has
developed the first novel protein containing CTP, named ELONVA®, a long-acting CTP-modified version of the fertility drug follicle
stimulating hormone (FSH). On January 28, 2010, Merck received marketing authorization from the European Commission for ELONVA®
with unified labeling valid in all European Union Member States.
Our internal product
development program is currently focused on extending the life span of the following biopharmaceuticals, in an effort to provide
patients with improved therapies that may enhance their quality of life:
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Human Growth Hormone (hGH)
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Anti-Obesity Peptide Oxyntomodulin
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Interferon β and Erythropoietin (EPO)
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Atherosclerosis and rheumatoid arthritis long-acting therapies
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We believe that the
CTP technology will be broadly applicable to these as well as other best-selling therapeutic proteins in the market.
Discovery, Development and Clinical Experience with CTP
Technology
Our core technology
was developed by Washington University in St. Louis, while investigating the female hormone hCG, which facilitates pregnancy by
maintaining production of progesterone and stimulating development of the fetus.
hCG has a life span
of up to 2 days, meaning that the body is slow to break it down. LH is another female hormone having a chemical composition (amino
acid sequence) very close to that of hCG. LH has a very short life span of 20 minutes. Scientists at Washington University discovered
that the only difference between hCG and LH is a short amino-acid sequence present in hCG and not in LH which they called “CTP”
for Carboxyl-Terminal Peptide. This is shown schematically below. When produced in mammalian cells, this CTP is heavily modified
by sugars being added (a process called glycosylation). Through numerous experiments, it was confirmed that CTP was responsible
for the longer life span of hCG as compared to LH. Washington University then performed additional experimentation adding CTP to
different therapeutic proteins and the results showed that the CTP-modified proteins had dramatically increased life span.
Prolor’s core technology is the use
of CTP to slow the removal of therapeutic proteins from the body without increasing toxicity or altering the overall biological
activity
Our scientific founder,
Dr. Fuad Fares, was a post-doctoral student at Washington University and worked on these findings and experiments. When Dr. Fares
returned to Israel in 2001, he formed Prolor Ltd. to license the CTP technology from Washington University for certain therapeutic
indications.
In July 2008, Schering-Plough,
now part of Merck, announced successful top-line data from its Phase III ENGAGE trial demonstrating that women receiving a single
injection of FSH-CTP (now branded ELONVA®) achieved the same pregnancy rates as women receiving seven consecutive daily injections
of FSH, a primary endpoint of the study. This 1,509 patient trial was the largest double-blind fertility trial ever conducted.
On January 28, 2010, Merck received marketing authorization from the European Commission for ELONVA® with unified labeling
valid in all European Union Member States. We are now the exclusive licensee for the utilization of CTP technology in all therapeutic
proteins, peptides and their modified forms except for human FSH, LH, TSH and hCG.
Opportunity Background
Overview of Therapeutic
Proteins
Therapeutic proteins
are proteins that are either extracted from human cells or engineered and produced in the laboratory for pharmaceutical use. The
majority of therapeutic proteins are recombinant human proteins manufactured using non-human cell lines that are engineered to
contain certain human genetic sequences which cause them to produce the desired protein. Recombinant proteins are an important
class of therapeutics used to replace deficiencies in critical blood borne growth factors and to strengthen the immune system to
fight cancer and infectious disease. Therapeutic proteins are also used to relieve patients’ suffering from many conditions,
including various cancers (treated by monoclonal antibodies and interferons), heart attacks, strokes, cystic fibrosis and Gaucher’s
disease (treated by enzymes and blood factors), diabetes (treated by insulin), anemia (treated by erythopoietins), and hemophilia
(treated by blood clotting factors).
The U.S. Food and Drug
Administration (FDA) has approved 75 therapeutic proteins, also known as biopharmaceuticals, and there are more than 500 additional
proteins under development. To date, much of the growth has been in sales of erythopoietins (used to treat anemia) and insulins
(used to treat diabetes). Many of the proteins currently on the market will lose the protection of certain patent claims over the
next 15 years. In addition, many marketed proteins are facing increased competition from next-generation versions or from other
therapeutic proteins approved for the same disease indications.
Because proteins are
broken down in the gastrointestinal system, therapeutic proteins must be administered by injection. Once in the bloodstream, therapeutic
proteins are broken down by enzymes and cellular activity, as well as filtered out of the blood by the kidneys. Therefore, injections
must be given frequently to achieve effective therapeutic levels. We believe that a large market opportunity exists for new versions
of proven therapeutic proteins that remain active longer, thereby reducing the number of required injections and optimizing therapeutic
results and patient acceptability. However, existing approaches to creating modified therapeutic proteins are generally based on
the addition of synthetic, non-protein elements that result in problems such as loss of desired biological activity, toxicity of
the modified protein and increased manufacturing complexity and cost. Despite these challenges, several longer-lasting modified
therapeutic proteins currently on the market have been demonstrated to be successful. Each of these improved therapeutics was custom-designed
with great effort.
Attempts to Extend
the Life Span of Therapeutic Proteins
Several strategies
have been devised in recent years to extend the life span of therapeutic proteins by slowing their clearance from the body. These
strategies have included two main techniques:
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Increasing the size of the therapeutic protein. This is achieved either by attaching large polymeric
chains to the protein (PEGylation) or by attaching other large, non-active proteins that have longer life spans compared to the
target therapeutic protein.
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Altering the physical structure of the therapeutic protein. This is achieved by adding carbohydrate
structures to the therapeutic protein (glycosylation) through modifications of the original genetic sequence of the protein. These
additional “sugar chains” slow the clearance of the therapeutic protein from the bloodstream.
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Limitations of
Existing Life Span Extension Solutions
There are several fundamental
issues with the existing technologies that attempt to create longer-lasting versions of therapeutic proteins. If the size of the
protein is increased by way of attaching large polymeric chains or another protein, the end result is a very large protein. Because
most therapeutic proteins work by binding to specific receptors, the new “bulkiness” may prevent them from achieving
the desired result. The smaller the protein, the more significant the effect of the size increase may be. Successful attempts at
increasing the size of therapeutic proteins, while preserving substantial activity, have been relatively few, and have been with
proteins that are already large. Moreover, the biological activity of the modified protein has been significantly less than that
of the unmodified protein and therefore requires a higher injected dose as compared to the unmodified protein’s usual dosage.
One typical method to achieve the desired size increase is to add long polymers of polyethylene glycol (PEG) to a protein; however,
this method has historically resulted in the creation of foreign structures to which the immune system may adversely react. When
this happens, the immune system works to remove the modified protein from the bloodstream, defeating the purpose of the original
modification. It can also lead to additional negative effects, such as reaction at the injection site.
Another technique,
glycosylation, requires custom alterations (point mutations) to the protein’s genetic structure to increase its life span.
The resulting modified protein is entirely new and often generates unexpected adverse reactions, resulting in potentially toxic
effects. To date, creating a protein with a longer life span that is not toxic has been a lengthy trial and error process.
Although the existing
modification technologies have been tried on almost all therapeutic proteins, only three “blockbuster” modified proteins
have been commercially successful: two developed by Amgen Inc. and one independently developed by Schering-Plough Corporation and
Roche Pharmaceuticals. Each of these three longer-lasting therapeutic proteins has become a widely used therapeutic:
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utilizing PEGylation, Schering-Plough and Roche independently developed PEG-INTRON and PEGASYS,
therapeutic proteins with a longer life span than that of regular Alpha interferon (used for treating Hepatitis B and C);
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utilizing PEGylation, Amgen developed Neulasta, an anti-neutropenia therapeutic protein with a
longer life span than that of regular G-CSF; and
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utilizing additional glycosylation, Amgen developed Aranesp, an anti-anemia therapeutic protein
with a longer life span than that of regular EPO.
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Our Solution
Our solution to creating
proprietary, enhanced longevity protein therapeutics is CTP, a short, naturally-occurring amino acid sequence that has the effect
of slowing the removal and/or breakdown of the therapeutic protein to which it is attached. Using standard recombinant DNA techniques,
the CTP peptide can be readily attached in one or more copies to a wide array of existing therapeutic proteins. When these proteins
are produced in mammalian cells, the CTP portion undergoes a natural process in which special carbohydrate chains are attached
(O-linked glycosylation). This additional CTP piece, along with its carbohydrate chains, stabilizes the therapeutic protein in
the bloodstream and greatly extends its life span, without additional toxicity or loss of its desired biological activity. This
is quite distinct from other methods used to extend protein life span, which require the addition to the therapeutic drug of large
proteins or of synthetic, non-protein elements that may result in problems such as loss of desired biological activity or toxicity
of the modified protein, as well as increased manufacturing complexity and cost. Moreover, CTP-modified proteins can be manufactured
using established and widely used mammalian protein expression systems (cell lines). Therefore, we believe that the technology
risks are minimized, while the benefits of the CTP technology can be substantial.
There are two existing
biopharmaceuticals that utilize CTP technology. The first product is hCG, of which CTP is naturally a part. Besides being present
normally in high amounts during pregnancy, it is also given therapeutically to women or men as a fertility treatment (sold by Merck-Serono,
Merck & Co. and Ferring). The second product is ELONVA® (FSH-CTP), which is approved for marketing in Europe as described
above. The data from the use of these two products in humans give us confidence that the CTP technology may be able to address
the major problems faced by the other attempted approaches to increase protein lifespan. Data from these products reassures us
that CTP can be used safely in humans and that it is effective in extending the serum lifetime and activity in humans.
We believe the clinical
development program for our drugs will be faster, less expensive and more predictable than those conducted for existing therapeutic
proteins. We can base the design of our studies, the inclusion criteria, clinical endpoints and sample sizes, on the knowledge
gained from development of the predecessor drugs, with the assurance that these have been accepted by regulatory authorities in
the past. In addition there are usually surrogate markers for clinical efficacy that have been defined and accepted by the medical
community. These can provide easier and faster ways of learning at an early stage the correct dosing range and frequency. In some
cases, they can even be used as definitive clinical trial endpoints. We believe that these factors will drive down the time and
costs associated with clinical trials.
Research & Development: Our Development Programs
We are currently pursuing
the development and commercialization of six products: Human Growth Hormone, Factor IX, anti-obesity peptide Oxyntomodulin, Factor
VIIa, Interferon
β
, Erythropoietin, and anti-atherosclerosis and rheumatoid arthritis therapeutics.
Human Growth
Hormone (hGH)
Market Opportunity
Growth hormone deficiency
(GHD) is a pituitary disorder resulting in short stature in children and other physical ailments in both children and adults. GHD
occurs when the production of growth hormone, secreted by the pituitary gland, is disrupted. Since growth hormone plays a critical
role in stimulating body growth and development, and is involved in the production of muscle protein and in the breakdown of fats,
a decrease in the hormone affects numerous body processes.
Recombinant human growth
hormone (hGH) is used for the long-term treatment of children and adults with growth failure due to inadequate secretion of endogenous
growth hormone. The primary indications it treats in children are growth hormone deficiency, kidney disease, Prader-Willi Syndrome
and Turner’s Syndrome. In adults, the primary indications are replacement of endogenous growth hormone and the treatment
of AIDS-induced weight loss.
In addition to its
current use, hGH has been proven to promote a number of lifestyle benefits including weight loss, increased energy levels, enhanced
sexual performance, improved cholesterol, younger, tighter, thicker skin and reduced wrinkles and cellulite. We expect the hGH
market to expand significantly as hGH moves beyond therapeutic treatment to include the treatment of lifestyle issues.
Current Products
Prior to the advent
of recombinant versions, growth hormone was purified from human cadavers. For the past 20 years, recombinantly produced protein
has been supplied to the market by an increasing number of companies. Current products on the U.S. market are Nutropin (Genentech),
Genotropin (Pfizer), Humatrope (Eli Lilly), Norditropin (Novo Nordisk), Serostim (Merck-Serono) and Omnitrope (Novartis).
Our hGH-CTP Program
Patients using hGH
receive daily injections six or seven times a week. This is particularly burdensome for pediatric patients. We believe a significant
market opportunity exists for a longer-lasting version of hGH that would require fewer injections.
In August 2011, we
reported positive top-line results from a Phase II study of our longer-acting version of hGH, referred to as hGH-CTP. The objectives
of the randomized open-label, multicenter Phase II trial were to measure the safety and tolerability of hGH-CTP in growth hormone
deficient adults and to assess dose ranging and dose response in order to identify the dose range that will be targeted in the
planned Phase III trial. The three main cohorts in the trial received a single weekly dose of hGH-CTP for a period of four weeks,
containing 30%, 45% or 100% of the equivalent cumulative commercial hGH dose these patients would usually inject each day over
the course of seven days (referred to as the “30%,” “45%” and “100%” cohorts, respectively.)
The top-line data reflect results from 39 patients, with 13 patients in each cohort composed of 11 males and two females. The Phase
II data showed that a single weekly injection of hGH-CTP has the potential to replace seven consecutive daily injections of currently
hGH. In January 2012, we announced positive top-line results from a post-Phase II clinical study of hGH-CTP in growth hormone deficient
adults. The data showed that two injections of hGH-CTP per month have the potential to replace 30 consecutive daily injections
of currently marketed hGH.
In May 2012, we announced
top-line results from the four–month treatment extension of our Long-Acting Human Growth Hormone Phase II Clinical Trial,
which demonstrated that a single weekly injection of hGH-CTP has the potential to replace seven consecutive daily injections of
currently marketed hGH. We believe that these results further validate the dosing regimen for our planned Phase III trial.
In March 2012 we initiated
a Phase II trial of hGH-CTP in children with growth hormone deficiency. This trial is currently expected to conclude in 2013.
Factor IX
Market Opportunity
Hemophilia is a group
of
hereditary
genetic
disorders
that impair the body's ability to control
blood
clotting or
coagulation
. People with hemophilia do not produce
adequate amounts of Factor VIII or Factor IX proteins, which are necessary for effective blood clotting. In severe hemophiliacs,
even a minor injury can result in blood loss lasting days or weeks, and complete healing may not occur, leading to the potential
for debilitating permanent damage to joints and other organs and premature death. According to the World Health Organization, more
than 400,000 people worldwide have hemophilia, corresponding to an incidence of 15 to 20 in every 100,000 males born worldwide.
Hemophilia B
is associated with inadequate Factor IX and occurs
at an incidence of about 1 in 20,000–34,000 male births. Hemophilia B is largely an inherited disorder but, in approximately
30% of cases, there is no family history; and the condition is the result of a spontaneous gene mutation. The availability of recombinant
Factor VIII and Factor IX has enabled many hemophiliacs to live near-normal lives, but frequent injections are required.
Current Products
Produced by Others
Recombinant Factor
IX is offered to Hemophilia B patients by Pfizer, under the brand name BeneFIX® (“BeneFIX”).
Our Factor
IX-CTP Program
In February 2012, we
reported positive results from a comparative study of our biobetter longer-acting version of the hemophilia drug Factor VIIa (Factor
VIIa-CTP) in hemophilic mice. The study was designed to measure the potential increase in survival rates, thrombin levels and in
vivo recovery of Factor VIIa-CTP when compared with commercially available recombinant Factor VIIa. In vivo recovery is a pharmacokinetic
parameter used by researchers that compares actual clotting activity post-dosing to anticipated clotting activity. The study showed
that, compared to commercially available Factor VIIa, hemophilic mice receiving PROLOR’s Factor VIIa-CTP demonstrated:
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a superior survival rate over a longer time period following a bleeding challenge;
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superior and longer-lasting generation of thrombin, a key pro-clotting enzyme; and
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significantly higher in vivo recovery.
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We are currently planning to initiate a
Phase II clinical trial of Factor VIIa-CTP in 2014.
Our Business Strategy
Our goal is to become
a leader in the development and commercialization of longer-lasting, proprietary versions of already approved therapeutic proteins
that currently generate billions of dollars in annual global sales, through the utilization of our CTP technology. Key elements
of our strategy are to:
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Develop and commercialize improved versions of biopharmaceuticals that dramatically reduce
the number of injections required to achieve the same therapeutic effect from the existing drugs
. Based on the clinical
track record of our CTP technology, as evidenced by the results of Merck’s FSH-CTP European marketing approval, we believe
that the addition of CTP to therapeutic proteins significantly enhances the lifespan of those proteins, without any adverse effects.
We expect these modified proteins to offer significant advantages, including less frequent dosing and possibly improved efficacy,
over the original versions of the drugs now on the market, as well as to meet or exceed the pharmacokinetic profile of next-generation
versions of the drugs now on the market.
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Leverage extensive existing clinical and regulatory experience with the original drugs to
bring our improved versions of these biopharmaceuticals to market more quickly, at lower costs and with a clearer path to regulatory
approval
. Because there is a large knowledge base on the original products, the preclinical, clinical and regulatory requirements
needed to obtain marketing approval are very well defined. In particular, clinical study designs, inclusion criteria and endpoints
can be used that have already been accepted by regulatory authorities. There typically exist accepted surrogate markers for clinical
efficacy, which can sometimes even be used as definitive trial endpoints, but at the least are highly informative of proper dose
range and frequency. All of these factors drive down the time and costs associated with clinical trials, which represent up to
90% of product development costs for a typical therapeutic protein. In addition to lowering the costs and time to market, we believe
the strategy of targeting drugs with proven safety and efficacy provides a better prospect of clinical success of our proprietary
development portfolio as compared to de novo protein drug development. The possibility of delays due to regulatory safety concerns
is also reduced as the FDA gains comfort with the safety profile of CTP-modified proteins (CTP is naturally present in the body,
on the approved drug hCG and on FSH-CTP). We estimate that the average time to market and cost of clinical trials for our products
could be up to 50% less than that required to develop a new therapeutic protein.
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Seek attractive partnership opportunities
. We believe that the CTP technology is
applicable to most therapeutic proteins and peptides that have been approved to date by the FDA, including many of the best-selling
therapeutic proteins in the market. We believe that the proprietary rights provided by CTP technology, together with the clinical
and compliance benefits, will be attractive to potential partners, either the originator of the therapeutic protein or their prospective
competitors. We will seek to build a portfolio of commercially attractive partnerships in a blend of co-developments and licenses.
Where possible, we will seek partnerships that allow us to participate significantly in the commercial success of each of the compounds.
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Leverage our core competencies
. We believe that our CTP technology improves the drug
properties of therapeutic proteins. We will continue to use our CTP technology to develop improved versions of protein drugs with
proven safety and efficacy and to improve the therapeutic profiles of new drugs that will be developed by our partners. We will
also continue to conduct exploratory drug development research in therapeutic peptides and Fab fragments of monoclonal antibodies,
where our CTP technology, intellectual property and internal expertise provide us with opportunities.
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Our Partnering Strategy
In addition to commercializing
the three therapeutic proteins and one peptide discussed above, there are many additional product candidates we can pursue in an
opportunistic fashion. We plan to pursue partnering deals with biotechnology companies that have a strategic interest in using
our solution to develop longer-lasting versions of their existing therapeutic proteins or peptides, or those in development. We
anticipate such partnerships will provide significant revenues in the form of license fees, milestone payments and royalties on
sales, which will help to subsidize our research and development costs.
Intellectual Property
We license from Washington
University the intellectual property that is necessary to conduct our business. In 2001, we initially licensed from Washington
University core intellectual property pursuant to a non-exclusive license agreement, and, in 2004, we amended this license to make
us the exclusive licensee of the two key CTP patents in connection with 11 therapeutic proteins. Pursuant to the prior license
agreement, Modigene Delaware issued a total of 221,979 shares of its common stock to Washington University (378,796 shares of our
common stock on a post-merger basis). In February 2007, we entered into a new license agreement, which we refer to as the License
Agreement, with Washington University that superseded the prior license agreement. Pursuant to the new License Agreement, Washington
University granted us the exclusive license to three CTP patents and expanded the field of use to all natural and non-natural therapeutic
proteins and peptides (other than LH, FSH, TSH and hCG). Under the License Agreement, we have the right to sub-license the licensed
patents. The License Agreement terminates in 2018 when the last of the patents licensed to us under the License Agreement expires,
unless terminated earlier. Under the License Agreement, we were required to pay an initial fee of $100,000 in installments over
the 18 months following the effective date of the License Agreement. In addition, we are required to pay annual license maintenance
fees of $30,000 (payable semi annually until the first commercial sale); royalty fees of 1.5% to 5% from net revenues (with certain
required minimum royalties after the first commercial sale of $10,000, $20,000 and $40,000 for the first, second, and third year
and beyond, respectively), and sub-licensing fees of 7.5% to 20% on sub-licensing payments. Pursuant to the License Agreement,
we will also be responsible for milestone payments of $15,000 for each molecule at investigational new drug application (IND) filing,
$30,000 at the initiation of a Phase II clinical trial and $40,000 at the initiation of a Phase III clinical trial.
Pursuant to our License
Agreement with Washington University, we have obtained an exclusive license to the key CTP patents that have been issued by the
U.S. Patent and Trademark Office, U.S. #5,712,122, U.S. #5,759,818 and U.S. #6,225,449. We believe these patents provide
broad and comprehensive coverage of the CTP technology, and we intend to aggressively enforce our intellectual property rights
if necessary. In addition, unrelated to the patents from Washington University, we own and have filed, and will likely continue
to file, patent applications covering specific CTP-modified molecules and CTP innovations, such as configurations, compositions
and methods. Seven of these patents, covering hGH (#7,553,940, #8,097,435 and #8,114,836 and #8,304,386) , EPO (#7,553,941, #8,110,376),
interferons (#8,048,848), and CTP cytokine (#8,048,849 and # 8,323,636) have been issued by the U.S. Patent Office in 2009, 2011
and 2012.
Competition
The
pharmaceutical industry is highly competitive. We face significant competition from pharmaceutical companies and
biotechnology companies that are researching and developing therapeutic proteins with enhanced life spans. Several
pharmaceutical companies, such as Amgen, Eli Lilly and Company (through its acquisition of Applied Molecular Evolution),
Nektar Therapeutics, Teva Pharmaceutical Industries Ltd., Flamel Technologies S.A., Nautilus Biotech S.A. and Ambrx Inc. have
marketed products or are involved with the development of therapeutic proteins with enhanced life spans.
These companies, as
well as potential entrants into our market, have longer operating histories, larger customer or use bases, greater brand recognition
and significantly greater financial, marketing and other resources than we do. Many of these current or potential competitors can
devote substantially greater resources to the development and promotion of their products than we can.
Additionally, there
has been consolidation within the pharmaceutical industry and larger, well-established and well-financed entities may continue
to acquire, invest in or form joint ventures to gain access to additional technology or products. Any of these trends would increase
the competition we face and could adversely affect our business and operating results.
Government Regulation
Regulation by governmental
authorities in the United States and other countries will be a significant factor in the production and marketing of our products
and our ongoing research and development activities. All of our products require rigorous preclinical and clinical testing, subject
to regulatory clearance or approval, and regulatory approval by governmental agencies prior to commercialization and are subject
to pervasive and continuing regulation upon approval. The lengthy process of conducting clinical trials, seeking approval and the
subsequent compliance with applicable statutes and regulations, if approval is obtained, are very costly and require the expenditure
of substantial resources.
In the United States,
the Public Health Service Act and the Federal Food, Drug, and Cosmetic Act, as amended, and the regulations promulgated thereunder,
and other federal and state statutes and regulations govern, among other things, the safety and effectiveness standards for our
products and the raw materials and components used in the production of, testing, manufacture, labeling, storage, record keeping,
approval, advertising and promotion of our products on a product-by-product basis.
Preclinical tests include
in vitro
(i.e., laboratory) and
in vivo
(i.e., animal) evaluation of the product candidate, its chemistry, formulation
and stability, and animal studies to assess potential safety and efficacy. Certain preclinical tests must be conducted in compliance
with good laboratory practice regulations. Violations of these regulations can, in some cases, lead to invalidation of the studies,
requiring them to be replicated. After laboratory analysis and preclinical testing, we intend to file an IND with the FDA to begin
human testing. Typically, a manufacturer conducts a three-phase human clinical testing program which itself is subject to numerous
laws and regulatory requirements, including adequate monitoring, reporting, record keeping and informed consent. In Phase 1, small
clinical trials are conducted to determine the safety and proper dose ranges of our product candidates. In Phase 2, clinical trials
are conducted to assess safety and gain preliminary evidence of the efficacy of our product candidates. In Phase 3, clinical trials
are conducted to provide sufficient data for the statistically valid evidence of safety and efficacy. The time and expense required
for us to perform this clinical testing can vary and is substantial. We cannot be certain that we will successfully complete Phase
1, Phase 2 or Phase 3 testing of our product candidates within any specific time period, if at all. Furthermore, the FDA, the Institutional
Review Board responsible for approving and monitoring the clinical trials at a given site, the Data Safety Monitoring Board, where
one is used, or the Company may suspend the clinical trials at any time on various grounds, including a finding that subjects or
patients are exposed to unacceptable health risk.
We cannot take any
action to market any new drug or biologic product in the United States until our appropriate marketing application has been approved
by the FDA. The FDA has substantial discretion over the approval process and may disagree with our interpretation of the data submitted.
The process may be significantly extended by requests for additional information or clarification regarding information already
provided. As part of this review, the FDA may refer the application to an appropriate advisory committee, typically a panel of
clinicians. Satisfaction of these and other regulatory requirements typically takes several years, and the actual time required
may vary substantially based upon the type, complexity and novelty of the product. Government regulation may delay or prevent marketing
of potential products for a considerable period of time and impose costly procedures on our activities. We cannot be certain that
the FDA or other regulatory agencies will approve any of our products on a timely basis, if at all. Success in preclinical or early
stage clinical trials does not assure success in later-stage clinical trials. Even if a product receives regulatory approval, the
approval may be significantly limited to specific indications or uses and these limitations may adversely affect the commercial
viability of the product. Delays in obtaining, or failures to obtain regulatory approvals, would have a material adverse effect
on our business.
Even after we obtain
FDA approval, we may be required to conduct further clinical trials (i.e., Phase 4 trials) and provide additional data on safety
and effectiveness. We are also required to gain separate clearance for the use of an approved product as a treatment for indications
other than those initially approved. In addition, side effects or adverse events that are reported during clinical trials can delay,
impede or prevent marketing approval. Similarly, adverse events that are reported after marketing approval can result in additional
limitations being placed on the product’s use and, potentially, withdrawal of the product from the market. Any adverse event,
either before or after marketing approval, can result in product liability claims against us.
In addition to regulating
and auditing human clinical trials, the FDA regulates and inspects equipment, facilities, laboratories and processes used in the
manufacturing and testing of such products prior to providing approval to market a product. If after receiving FDA approval, we
make a material change in manufacturing equipment, location or process, additional regulatory review may be required. We also must
adhere to current Good Manufacturing Practice (cGMP) regulations and product-specific regulations enforced by the FDA through its
facilities inspection program. The FDA also conducts regular, periodic visits to re-inspect our equipment, facilities, laboratories
and processes following the initial approval. If, as a result of these inspections, the FDA determines that our equipment, facilities,
laboratories or processes do not comply with applicable FDA regulations and conditions of product approval, the FDA may seek civil,
criminal or administrative sanctions and/or remedies against us, including the suspension of our manufacturing operations.
The requirements that
we and our collaborators must satisfy to obtain regulatory approval by government agencies in other countries prior to commercialization
of our products in such countries can be rigorous, costly and uncertain. In the European countries, Canada and Australia, regulatory
requirements and approval processes are similar in principle to those in the United States. Additionally, depending on the type
of drug for which approval is sought, there are currently two potential tracks for marketing approval in the European countries:
mutual recognition and the centralized procedure. These review mechanisms may ultimately lead to approval in all European Union
countries, but each method grants all participating countries some decision-making authority in product approval. Foreign governments
also have stringent post-approval requirements including those relating to manufacture, labeling, reporting, record keeping and
marketing. Failure to substantially comply with these on-going requirements could lead to government action against the product,
the Company and/or its representatives.
The levels of revenues
and profitability of biopharmaceutical companies may be affected by the continuing efforts of government and third party payers
to contain or reduce the costs of health care through various means. For example, in certain foreign markets, pricing or profitability
of therapeutic and other pharmaceutical products is subject to governmental control. In the United States, there have been, and
we expect that there will continue to be, a number of federal and state proposals to implement similar governmental control. In
addition, in the United States and elsewhere, sales of therapeutic and other pharmaceutical products are dependent in part on the
availability and adequacy of reimbursement from third party payers, such as the government or private insurance plans. Third party
payers are increasingly challenging established prices, and new products that are more expensive than existing treatments may have
difficulty finding ready acceptance unless there is a clear therapeutic benefit. We cannot assure you that any of our products
will be considered cost effective, or that reimbursement will be available or sufficient to allow us to sell them competitively
and profitably.
We are also subject
to various federal, state, and international laws pertaining to health care “fraud and abuse,” including anti-kickback
laws and false claims laws. The federal Anti-kickback law, which governs federal healthcare programs (e.g., Medicare, Medicaid),
makes it illegal to solicit, offer, receive or pay any remuneration in exchange for, or to induce, the referral of business, including
the purchase or prescription of a particular drug. Many states have similar laws that are not restricted to federal healthcare
programs. Federal and state false claims laws prohibit anyone from knowingly and willingly presenting, or causing to be presented
for payment to third party payers (including Medicare and Medicaid), claims for reimbursed drugs or services that are false or
fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services. If the
government or a whistleblower were to allege that we violated these laws there could be a material adverse effect on us, including
our stock price. Even an unsuccessful challenge could cause adverse publicity and be costly to respond to, which could have a materially
adverse effect on our business, results of operations and financial condition. A finding of liability under these laws can have
significant adverse financial implications for the Company and can result in payment of large penalties and possible exclusion
from federal healthcare programs. We will consult counsel concerning the potential application of these and other laws to our business
and our sales, marketing and other activities and will make good faith efforts to comply with them. However, given their broad
reach and the increasing attention given by law enforcement authorities, we cannot assure you that some of our activities will
not be challenged or deemed to violate some of these laws.
We are also subject
to numerous federal, state, local, and international laws and regulations relating to safe working conditions, manufacturing practices,
environmental protection, import and export controls, fire hazard control, the experimental use of animals and the use and disposal
of hazardous or potentially hazardous substances. We believe that our procedures comply with the standards prescribed by federal,
state, or local laws, rules, and/or regulations; however, the risk of injury or accidental contamination cannot be completely eliminated.
Currently, we have no costs with respect to environmental law compliance. At our current stage of product development, we cannot
accurately estimate what our future costs relating to environmental law compliance may be.
We have currently received
no approvals to market our products from the FDA or other foreign regulators.
We currently employ
25 full-time and two part-time employees, including seven with Ph.D. degrees and twelve with M.Sc. degrees, focused on research
and development, and three focused on general management and business development. None of our employees is represented by a labor
union, and we consider our employee relations to be good. We also utilize a number of consultants to assist with research and development
and commercialization activities. We believe that our future success will depend in part on our continued ability to attract, hire
and retain qualified personnel. All of our employees are located in Israel, and all of our research and development activities
are conducted at the offices of Prolor Ltd., our Israeli subsidiary.
Corporate History
We were originally
incorporated under the laws of the State of Nevada in August 2003 as LDG, Inc., referred to as LDG, which was engaged in the graphics
design, marketing and advertising business. On February 26, 2007, LDG, Inc. changed its name to Modigene Inc, and on May 9, 2007,
its wholly owned subsidiary Modigene Acquisition Corp. merged with and into Modigene Delaware. Modigene Delaware survived the merger,
following which the original business of LDG was abandoned in its entirety, and we have operated the business of Modigene Delaware
and its wholly owned subsidiary, Prolor Ltd. (formerly “ModigeneTech Ltd.”).
On June 10, 2009, we
changed our name from Modigene Inc. to PROLOR Biotech, Inc., and on June 12, 2009 the trading symbol for our common stock on the
OTCBB changed from MODG to PBTH. On March 29, 2010 we listed for trading on the NSYE MKT under the trading symbol PBTH, and on
May 27, 2010 we listed for trading on the Tel-Aviv Stock Exchange.
Available Information
A copy of this Annual
Report on Form 10-K, as well as our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports
filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 are available free of charge on the internet
at our website, www.prolor-biotech.com, as soon as reasonably practicable after we electronically file these reports with, or furnish
these reports to, the SEC. The reference to our website address does not constitute incorporation by reference of the information
contained on the website and such information is not part of this Annual Report on Form 10-K. Our reports filed with the SEC may
be read or copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation
of the SEC’s Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. Alternatively, you may access these
reports at the SEC’s website at www.sec.gov.
Item 1A. Risk Factors
Risks Related to Our Company and Our Business
We have a limited operating
history, and we do not expect to become profitable in the near future.
We are a development
stage biopharmaceutical company with a limited operating history. We are not profitable and have incurred losses since our inception.
We have not generated any revenue since our inception, and we continue to incur research and development and general and administrative
expenses related to our operations. We expect to continue to incur losses for the foreseeable future, and these losses will likely
increase as we move toward the commercialization of any of our products in development. If our product candidates fail in clinical
trials or do not gain regulatory clearance or approval, or if our product candidates do not achieve market acceptance, we may never
become profitable. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods.
Accordingly, it is difficult to evaluate our business prospects. Moreover, our prospects must be considered in light of the risks
and uncertainties encountered by an early-stage company and in highly regulated and competitive markets, such as the biopharmaceutical
market, where regulatory approval and market acceptance of our products are uncertain. There can be no assurance that our efforts
will ultimately be successful or result in revenues or profits.
We have not yet commercialized
any products or technologies, and we may never become profitable.
We have not yet commercialized
any products or technologies, and we may never be able to do so. We do not know when or if we will complete any of our product
development efforts, obtain regulatory approval for any product candidates incorporating our technologies or successfully commercialize
any approved products. Even if we are successful in developing products that are approved for marketing, we will not be successful
unless these products gain market acceptance. The degree of market acceptance of these products will depend on a number of factors,
including:
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the timing of regulatory approvals in the countries, and for the uses, we seek;
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the competitive environment;
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the establishment and demonstration in the medical community of the safety and clinical efficacy of our products and their
potential advantages over existing therapeutic products;
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the adequacy and success of distribution, sales and marketing efforts; and
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the pricing and reimbursement policies of government and third-party payors, such as insurance companies, health maintenance
organizations and other plan administrators.
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Physicians, patients,
thirty-party payors or the medical community in general may be unwilling to accept, utilize or recommend any of our products or
products incorporating our technologies. As a result, we are unable to predict the extent of future losses or the time required
to achieve profitability, if at all. Even if we successfully develop one or more products that incorporate our technologies, we
may not become profitable.
We license our core technology
from Washington University, and we could lose our rights to this license if a dispute with Washington University arises or if we
fail to comply with the financial and other terms of the license.
We license our core
intellectual property from Washington University. We initially entered into a non-exclusive license agreement with Washington University
in 2001 and, in 2004, we amended the license to extend the CTP technology to eleven therapeutic proteins and make it exclusive.
In February 2007, we entered into the revised and expanded License Agreement with Washington University, pursuant to which we and
Washington University expanded the exclusive license, adding additional patents and expanding the applicability of licensed CTP
technology to all proteins and peptides having a native or non-native amino acid sequence, excluding Follicle Stimulating Hormone
(FSH), Luteinizing Hormone (LH), Thyroid Stimulating Hormone (TSH) and Chorionic Gonadotropin (hCG). The License Agreement imposes
certain payment, reporting, confidentiality and other obligations on us. In the event that we were to breach any of the obligations
and fail to cure, Washington University would have the right to terminate the License Agreement upon 90 days’ notice. In
addition, Washington University has the right to terminate the License Agreement upon our bankruptcy or receivership. If any dispute
arises with respect to our arrangement with Washington University, such dispute may disrupt our operations and would likely have
a material and adverse impact on us if resolved in a manner that is unfavorable to our Company. Most of our current product candidates
are partly based on the intellectual property licensed under the License Agreement, and if the License Agreement were terminated,
it would have a material adverse effect on our business, prospects and results of operations.
Our product candidates are at
an early stage of product development and may never be commercialized.
All of our product
candidates are at early stages of product development and may never be commercialized. Initially, we plan to develop product candidates
through studies, testing and clinical lead product candidate selection, and then to license them to other companies. The progress
and results of any future pre-clinical testing or future clinical trials are uncertain, and the failure of our product candidates
to receive regulatory approvals will have a material adverse effect on our business, operating results and financial condition
to the extent we are unable to commercialize any products. None of our product candidates has received regulatory approval for
commercial sale. In addition, all of our product candidates are in the early stages of development, and we face the risks of failure
inherent in developing therapeutic proteins based on new technologies. Our product candidates are not expected to be commercially
available for several years, if at all.
In addition, our product
candidates must satisfy rigorous standards of safety and efficacy before they can be approved by the U.S. Food and Drug Administration,
or the FDA, and international regulatory authorities for commercial use. The FDA and foreign regulatory authorities have full discretion
over this approval process. We will need to conduct significant additional research, involving testing in animals and in humans,
before we can file applications for product approval. Typically, in the pharmaceutical industry, there is a high rate of attrition
for product candidates in pre-clinical testing and clinical trials. Also, satisfaction of regulatory requirements typically takes
many years, is dependent upon the type, complexity and novelty of the product and requires the expenditure of substantial resources.
Success in pre-clinical testing and early clinical trials does not ensure that later clinical trials will be successful. For example,
a number of companies in the pharmaceutical industry, including biotechnology companies, have suffered significant setbacks in
advanced clinical trials, even after promising results in earlier trials and in interim analyses. In addition, delays or rejections
may be encountered based upon additional government regulation, including any changes in FDA policy, during the process of product
development, clinical trials and regulatory approvals.
In order to receive
FDA approval or approval from foreign regulatory authorities to market a product candidate or to distribute our products, we must
demonstrate through pre-clinical testing and through human clinical trials that the product candidate is safe and effective for
the treatment of a specific condition.
We might be unable to develop
product candidates that will achieve commercial success in a timely and cost-effective manner, or ever.
Even if regulatory
authorities approve our product candidates, they may not be commercially successful. Our product candidates may not be commercially
successful because physicians, government agencies and other third-party payors may not accept them. A product approval, assuming
one issues, may limit the uses for which the product may be distributed thereby adversely affecting the commercial viability of
the product. Third parties may develop superior products or have proprietary rights that preclude us from marketing our products.
We also expect that most of our product candidates will be very expensive, if approved. Patient acceptance of and demand for any
product candidates for which we obtain regulatory approval or license will depend largely on many factors, including but not limited
to the extent, if any, of reimbursement of therapeutic protein and treatment costs by government agencies and other third-party
payors, pricing, the effectiveness of our marketing and distribution efforts, the safety and effectiveness of alternative products,
and the prevalence and severity of side effects associated with our products. If physicians, government agencies and other third-party
payors do not accept our products, we will not be able to generate significant revenue.
It is highly likely that we
will need to raise additional capital to meet our business requirements in the future, and such capital raising may be costly or
difficult to obtain and could dilute current stockholders’ ownership interests.
Our future capital
requirements will depend on many factors, including the progress and results of our clinical trials, the duration and cost of discovery
and preclinical development, and laboratory testing and clinical trials for our product candidates, the timing and outcome of regulatory
review of our product candidates, the number and development requirements of other product candidates that we pursue, and the costs
of commercialization activities, including product marketing, sales, and distribution. Because of the numerous risks and uncertainties
associated with the development and commercialization of our product candidates, we are unable to estimate the amounts of increased
capital outlays and operating expenditures associated with our anticipated clinical trials. It is highly likely that we will need
to raise additional funds through public or private debt or equity financings to meet various objectives including, but not limited
to:
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funding laboratory testing, clinical and pre clinical trials;
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research and development of new products;
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pursuing growth opportunities, including more rapid expansion;
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acquiring complementary businesses;
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making capital improvements to improve our infrastructure;
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hiring qualified management and key employees;
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responding to competitive pressures;
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complying with regulatory requirements such as licensing and registration; and
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maintaining compliance with applicable laws.
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Any additional capital
raised through the sale of equity or equity-linked securities may dilute our current stockholders’ ownership in us and could
also result in a decrease in the market price of our common stock. The terms of those securities issued by us in future capital
transactions may be more favorable to new investors and may include preferences, superior voting rights and the issuance of warrants
or other derivative securities, which may have a further dilutive effect.
Furthermore, any debt
or equity financing that we may need may not be available on terms favorable to us, or at all. If we are unable to obtain required
additional capital, we may have to curtail our growth plans or cut back on existing business, and we may not be able to continue
operating if we do not generate sufficient revenues from operations needed to stay in business.
We may incur substantial
costs in pursuing future capital financing, including investment banking fees, legal fees, accounting fees, securities law compliance
fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection
with certain securities we issue, such as convertible notes and warrants, which may adversely impact our financial condition.
If we fail to obtain necessary
funds for our operations, we will be unable to maintain and improve our patented technology, and we will be unable to develop and
commercialize our products and technologies.
Our present and future
capital requirements depend on many factors, including:
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the level of research and development investment required to develop our product candidates, and maintain and improve our patented
technology position;
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the costs of obtaining or manufacturing therapeutic proteins for research and development and at commercial scale;
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the results of preclinical and clinical testing, which can be unpredictable in therapeutic protein development;
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changes in product candidate development plans needed to address any difficulties that may arise in manufacturing, preclinical
activities, clinical studies or commercialization;
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our ability and willingness to enter into new agreements with strategic partners and the terms of these agreements;
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our success rate in preclinical and clinical efforts associated with milestones and royalties;
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the costs of investigating patents that might block us from developing potential product candidates;
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the costs of recruiting and retaining qualified personnel;
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the time and costs involved in obtaining regulatory approvals;
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the costs of filing, prosecuting, defending, and enforcing patent claims and other intellectual property rights; and
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our need or decision to acquire or license complementary technologies or new therapeutic protein targets.
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If we are unable to
obtain the funds necessary for our operations, we will be unable to maintain and improve our patented technology, and we will be
unable to develop and commercialize our products and technologies, which would materially and adversely affect our business, liquidity
and results of operations.
We depend on key members of
our management and advisory team and will need to add and retain additional leading experts.
We are highly dependent
on our executive officers and other key management and technical personnel. Our failure to retain our Chief Executive Officer,
Abraham (Avri) Havron, or our President, Shai Novik, or any other key management and technical personnel could have a material
adverse effect on our future operations. Our success is also dependent on our ability to attract, retain and motivate highly trained
technical, marketing, sales and management personnel, among others, to produce our product candidates and, if our product candidates
are produced and approved for marketing, to market our products and to continue to produce enhanced releases of our products. We
presently do not maintain “key person” life insurance policies on any of our personnel.
Our success also depends
on our ability to attract, retain and motivate personnel required for the development, maintenance and expansion of our activities.
There can be no assurance that we will be able to retain our existing personnel or attract additional qualified employees. The
loss of key personnel or the inability to hire and retain additional qualified personnel in the future could have a material adverse
effect on our business, financial condition and results of operation.
Under current U.S. and Israeli
law, we may not be able to enforce employees’ 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 have entered into
non-competition agreements with our key employees. These agreements prohibit our key employees, if they cease working for us, from
competing directly with us or working for our competitors for a limited period. Under applicable U.S. and Israeli law, we may be
unable to enforce these agreements. If we cannot enforce our non-competition agreements with our employees, then we may be unable
to prevent our competitors from benefiting from the expertise of our former employees, which could materially adversely affect
our business, results of operations and ability to capitalize on our proprietary information.
We do not currently have sales,
marketing or distribution capabilities, and we may be unable to effectively sell, market and distribute our product candidates
in the future, and the failure to do so would have an adverse effect on our business and results of operations.
If we are unable to
develop sales, marketing and distribution capabilities or enter into agreements with third parties to perform these functions,
we will not be able to successfully commercialize any of our product candidates. We do not currently have sales, marketing or distribution
capabilities. In order to successfully commercialize any of our product candidates, we must either internally develop sales, marketing
and distribution capabilities or make arrangements with third parties to perform these services.
If we do not develop
a marketing and sales force with technical expertise and supporting distribution capabilities, we will be unable to market any
of our product candidates directly. To promote any of our potential products through third parties, we will have to locate acceptable
third parties for these functions and enter into agreements with them on acceptable terms, and we may not be able to do so. In
addition, any third-party arrangements we are able to enter into may result in lower revenues than we could achieve by directly
marketing and selling our potential products.
We may suffer losses from product
liability claims if our product candidates cause harm to patients.
Any of our product
candidates could cause adverse events, such as immunologic or allergic reactions. These reactions may not be observed in clinical
trials, but may nonetheless occur after commercialization. If any of these reactions occur, they may render our product candidates
ineffective or harmful in some patients, and our sales would suffer, materially adversely affecting our business, financial condition
and results of operations.
In addition, potential
adverse events caused by our product candidates could lead to product liability lawsuits. If product liability lawsuits are successfully
brought against us, we may incur substantial liabilities and may be required to limit commercialization of our product candidates.
Our business exposes us to potential product liability risks, which are inherent in the testing, manufacturing, marketing and sale
of pharmaceutical products. We may not be able to avoid product liability claims. Product liability insurance for the pharmaceutical
and biotechnology industries is generally expensive, if available at all. We do not currently have any product liability insurance
because we are not yet conducting trials on humans. When we begin human trials, we will endeavor to obtain sufficient product liability
insurance. If we are unable to obtain sufficient insurance coverage on reasonable terms or to otherwise protect against potential
product liability claims, we may be unable to commercialize our product candidates. A successful product liability claim brought
against us in excess of our insurance coverage, if any, may cause us to incur substantial liabilities, and, as a result, our business,
liquidity and results of operations would be materially adversely affected.
Our product candidates will
remain subject to ongoing regulatory requirements even if they receive marketing approval, and if we fail to comply with these
requirements, we could lose these approvals, and the sales of any approved commercial products could be suspended.
Even if we receive
regulatory approval to market a particular product candidate, the product will remain subject to extensive regulatory requirements,
including requirements relating to manufacturing, labeling, packaging, adverse event reporting, storage, advertising, promotion,
distribution and recordkeeping. Even if regulatory approval of a product is granted, the approval may be subject to limitations
on the uses for which the product may be marketed or the conditions of approval, or may contain requirements for costly post-marketing
testing and surveillance to monitor the safety or efficacy of the product, which could negatively impact us or our collaboration
partners by reducing revenues or increasing expenses, and cause the approved product candidate not to be commercially viable. In
addition, as clinical experience with a drug expands after approval, typically because it is used by a greater number and more
diverse group of patients after approval than during clinical trials, side effects and other problems may be observed after approval
that were not seen or anticipated during pre-approval clinical trials or other studies. Any adverse effects observed after the
approval and marketing of a product candidate could result in limitations on the use of or withdrawal of any approved products
from the marketplace. Absence of long-term safety data may also limit the approved uses of our products, if any. If we fail to
comply with the regulatory requirements of the FDA and other applicable U.S. and foreign regulatory authorities, or previously
unknown problems with any approved commercial products, manufacturers or manufacturing processes are discovered, we could be subject
to administrative or judicially imposed sanctions or other setbacks, including the following:
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Restrictions on the products, manufacturers or manufacturing process;
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Civil or criminal penalties, fines and injunctions;
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Product seizures or detentions;
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Import or export bans or restrictions;
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Voluntary or mandatory product recalls and related publicity requirements;
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Suspension or withdrawal of regulatory approvals;
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Total or partial suspension of production, and
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Refusal to approve pending applications for marketing approval of new products or supplements to approved applications.
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If we or our collaborators
are slow to adapt, or are unable to adapt, to changes in existing regulatory requirements or adoption of new regulatory requirements
or policies, marketing approval for our product candidates may be lost or cease to be achievable, resulting in decreased revenue
from milestones, product sales or royalties, which would have a material adverse effect on our results of operations.
Clinical trials are very expensive,
time-consuming and difficult to design and implement, and, as a result, we may suffer delays or suspensions in future trials which
would have a material adverse effect on our ability to generate revenues.
Human clinical trials
are very expensive and difficult to design and implement, in part because they are subject to rigorous regulatory requirements.
Additionally, the clinical trial process is time-consuming, and, while we are optimistic about our ability to complete our clinical
trials relatively quickly as compared to average trial lengths for clinical trials, failure can occur at any stage of the trials,
and we may encounter problems that cause us to abandon or repeat clinical trials. The commencement and completion of clinical trials
may be delayed by several factors, including:
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unforeseen safety issues;
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determination of dosing issues;
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lack of effectiveness or efficacy during clinical trials;
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failure of third party suppliers to perform final manufacturing steps for the drug substance;
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slower than expected rates of patient recruitment;
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inability to monitor patients adequately during or after treatment;
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failure of third party contract research organizations to properly implement or monitor the clinical trial protocols;
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failure of institutional review boards to approve our clinical trial protocols;
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inability or unwillingness of medical investigators and institutional review boards to follow our clinical trial protocols;
and
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lack of sufficient funding to finance the clinical trials.
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In addition,
we or regulatory authorities may suspend our clinical trials at any time if it appears that we are exposing participants
to unacceptable or uncertain health risks or if the regulatory authorities find deficiencies in our regulatory submissions or
the conduct of these trials. Any suspension of clinical trials will delay possible regulatory approval, if any, and adversely
impact our ability to develop products and generate revenue.
The manufacture of our product
candidates is an exacting and complex process, and, if we or one of our materials suppliers encounters problems manufacturing our
products, our business could suffer.
The FDA and foreign
regulators require manufacturers to register manufacturing facilities. The FDA and foreign regulators also inspect these facilities
to confirm compliance with requirements that the FDA or foreign regulators establish. We or our materials suppliers may face manufacturing
or quality control problems causing product production and shipment delays or a situation where we or the supplier may not be able
to maintain compliance with the FDA’s or foreign regulators’ requirements necessary to continue manufacturing our drug
substance. Drug manufacturers are subject to ongoing periodic unannounced inspections by the FDA, the U.S. Drug Enforcement Agency,
or DEA, and corresponding foreign regulators to ensure strict compliance with requirements and other governmental regulations and
corresponding foreign standards. Any failure to comply with DEA requirements or FDA or foreign regulatory requirements could adversely
affect our clinical research activities and our ability to market and develop our product candidates.
We may rely on third parties
to implement our manufacturing and supply strategies.
If
our current and future licensing, manufacturing and supply strategies are unsuccessful, then we may be unable to complete any future
pre-clinical or clinical trials or commercialize our product candidates in a timely manner, if at all. Completion of any potential
future pre-clinical, clinical trials and commercialization of our product candidates will require access to, or development of,
facilities to manufacture a sufficient supply of our product candidates, or the ability to license them to other companies to perform
these functions. We do not have the resources, facilities or experience to manufacture our product candidates on our own and do
not intend to develop or acquire facilities for the manufacture of product candidates for pre-clinical trials, clinical trials
or commercial purposes in the foreseeable future. We intend to continue to license technology and to rely on contract manufacturers
to produce sufficient quantities of our product candidates necessary for any pre-clinical or clinical testing we undertake in the
future. Such contract manufacturers may be the sole source of production and they may have limited experience at manufacturing,
formulating, analyzing, filling and finishing our types of product candidates.
We
also intend to rely on third parties to supply the components that we will need to develop, test and commercialize all of our product
candidates. There may be a limited supply of these components. We might not be able to enter into agreements that provide us assurance
of availability of such components in the future from any supplier. Our potential suppliers may not be able to adequately supply
us with the components necessary to successfully conduct our pre-clinical and clinical trials and/or to commercialize our product
candidates. If we cannot acquire an acceptable supply of components to produce our product candidates, we will not be able to complete
pre-clinical and clinical trials and will not be able to commercialize our product candidates.
If we acquire or license additional
technology or product candidates, we may incur a number of costs, may have integration difficulties and may experience other risks
that could harm our business and results of operations.
We may acquire and
license additional product candidates and technologies. Any product candidate or technology we license or acquire will likely require
additional development efforts prior to commercial sale, including extensive clinical testing and approval by the FDA and applicable
foreign regulatory authorities, if any. All product candidates are prone to risks of failure inherent in pharmaceutical product
development, including the possibility that the product candidate or product developed based on licensed technology will not be
shown to be sufficiently safe and effective for approval by regulatory authorities. In addition, we cannot assure you that any
product candidate that we develop based on acquired or licensed technology that is granted regulatory approval will be manufactured
or produced economically, successfully commercialized or widely accepted in the marketplace. Moreover, integrating any newly acquired
product candidates could be expensive and time-consuming. If we cannot effectively manage these aspects of our business strategy,
our business may not succeed.
Furthermore, proposing,
negotiating and implementing an economically viable acquisition or license can be a lengthy, costly and complex process. Other
companies, including those with substantially greater financial, marketing and sales resources, may compete with us for the acquisition
or license of product candidates and/or technologies. We may not be able to acquire the rights to alternative product candidates
and/or technologies on terms that we find acceptable, or at all. Our failure to acquire or license alternative product candidates
and/or technologies could have a material adverse effect on our business, prospects and financial condition.
We may not be able to successfully
grow and expand our business.
We may not be able
to successfully expand. Successful implementation of our business plan will require management of growth, which will result in
an increase in the level of responsibility for management personnel. To manage growth effectively, we will be required to continue
to implement and improve our operating and financial systems and controls to expand, train and manage our employee base. The management,
systems and controls currently in place or to be implemented may not be adequate for such growth, and the steps taken to hire personnel
and to improve such systems and controls might not be sufficient. If we are unable to manage our growth effectively, it will have
a material adverse effect on our business, results of operations and financial condition.
We may encounter difficulties
in managing our growth. These difficulties could increase our losses.
We may experience rapid
and substantial growth in order to achieve our operating plans, which will place a strain on our human and capital resources. If
we are unable to manage this growth effectively, our losses could materially increase. Our ability to manage our operations and
growth effectively requires us to continue to expend funds to enhance our operational, financial and management controls, reporting
systems and procedures and to attract and retain sufficient numbers of talented employees. If we are unable to scale up and implement
improvements to our control systems in an efficient or timely manner, or if we encounter deficiencies in existing systems and controls,
then we will not be able to make available the products required to successfully commercialize our technology. Failure to attract
and retain sufficient numbers of talented employees will further strain our human resources and could impede our growth or result
in ineffective growth.
If we are unable to obtain adequate
insurance, our financial condition could be adversely affected in the event of uninsured or inadequately insured loss or damage.
Our ability to effectively recruit and retain qualified officers and directors could also be adversely affected if we experience
difficulty in obtaining adequate directors’ and officers’ liability insurance.
We may not be able
to obtain insurance policies on terms affordable to us that would adequately insure our business and property against damage, loss
or claims by third parties. To the extent our business or property suffers any damages, losses or claims by third parties, which
are not covered or adequately covered by insurance, our financial condition may be materially adversely affected.
We may be unable to
maintain sufficient insurance as a public company to cover liability claims made against our officers and directors. If we are
unable to adequately insure our officers and directors, we may not be able to retain or recruit qualified officers and directors
to manage the Company.
We are a holding company that
depends on cash flows from our wholly owned subsidiary to meet our obligations.
We are a holding company
with no material assets other than the stock of our wholly owned subsidiary. Accordingly, all our operations are conducted by Modigene
Delaware, our wholly owned subsidiary (and its wholly owned subsidiary, Prolor Ltd.). We currently expect that the earnings and
cash flow of our subsidiary will primarily be retained and used by it in its operations, including servicing any debt obligations
it may have now or in the future. Accordingly, although we do not anticipate paying any dividends in the foreseeable future, our
subsidiary may not be able to generate sufficient cash flow to distribute funds to us in order to allow us to pay future dividends
on, or make any distributions with respect to our common stock.
If we fail to maintain an effective
system of internal controls, we may not be able to accurately report our financial results or detect fraud. Consequently, investors
could lose confidence in our financial reporting and this may decrease the trading price of our stock.
We must maintain effective
internal controls to provide reliable financial reports and detect fraud. Our failure to properly maintain an effective system
of internal controls could harm our operating results and cause investors to lose confidence in our reported financial information.
In addition, such failure may cause us to suffer violations of the U.S. federal securities laws to the extent we are unable to
maintain effective internal controls. Any such loss of confidence or violations would have a negative effect on the trading price
of our stock.
Potential political, economic
and military instability in the State of Israel, where key members of our senior management and our research and development facilities
are located, may adversely affect our results of operations.
We maintain office
and research and development facilities in the State of Israel. Political, economic and military conditions in Israel may directly
affect our ability to conduct business. Since the State of Israel was established in 1948, a number of armed conflicts have occurred
between Israel and its Arab neighbors. Any hostilities involving Israel or the interruption or curtailment of trade between Israel
and its present trading partners, or a significant downturn in the economic or financial condition of Israel, could affect adversely
our operations. Ongoing and revived hostilities or other Israeli political or economic factors could harm our operations and product
development and cause our revenues to fail to develop or decrease if we have already begun sales.
Disruptions in the financial
markets and economic conditions could affect our ability to raise capital and could disrupt or delay the performance of our third-party
contractors and suppliers.
Economic downturns,
such as the global economic downturn that generally characterized the period beginning in late 2008 through 2010, may result in,
among other things, deterioration of the credit markets, extreme volatility in security prices, severely diminished liquidity and
credit availability, ratings downgrades of certain investments and declining valuations of others. If the actions taken by governments
to ameliorate the effects of such downturns, such as the actions taken by the U.S. government in the 2008-2009 period, are not
successful, economic declines may cause a significant adverse impact on our ability to raise capital, if needed, on a timely basis
and on acceptable terms or at all. In addition, we rely and intend to rely on third-parties, including our clinical research organizations,
third-party manufacturers and second source suppliers, and certain other important vendors and consultants. Global markets have
remained somewhat volatile and, as a result, there may be a disruption or delay in the performance of our third-party contractors
and suppliers. If such third-parties are unable to satisfy their contractual commitments to us, our business could be severely
adversely affected.
Risks Related to Our Intellectual Property
We license our core technology
from Washington University, and we could lose our rights to this license if a dispute with Washington University arises or if we
fail to comply with the financial and other terms of the license.
We license our core
intellectual property from Washington University. We initially entered into a non-exclusive license agreement with Washington University
in 2001, and in 2004 we amended the license to extend the CTP technology to eleven therapeutic proteins and make it exclusive.
In February 2007, we entered into a revised and expanded license agreement with Washington University, which we refer to as the
License Agreement, pursuant to which we and Washington University expanded the exclusive license, adding additional patents, and
expanding the applicability of licensed CTP technology to all proteins and peptides having a native or non-native amino acid sequence,
excluding Follicle Stimulating Hormone (FSH), Luteinizing Hormone (LH), Thyroid Stimulating Hormone (TSH) and Chorionic Gonadotropin
(hCG). The License Agreement imposes certain payment, reporting, confidentiality and other obligations on us. In the event that
we were to breach any of the obligations and fail to cure, Washington University would have the right to terminate the License
Agreement upon 90 days’ notice. In addition, Washington University has the right to terminate the License Agreement upon
our bankruptcy or receivership. If any dispute arises with respect to our arrangement with Washington University, such dispute
may disrupt our operations and would likely have a material and adverse impact on us if resolved in a manner that is unfavorable
to our Company. All of our current product candidates are partly based on the intellectual property licensed under the License
Agreement, and if the License Agreement were terminated, it would have a material adverse effect on our business, prospects and
results of operations.
The failure to obtain or maintain
patents, licensing agreements and other intellectual property could impact our ability to compete effectively.
To compete effectively,
we need to develop and maintain a proprietary position with regard to our own technologies, intellectual property, licensing agreements,
product candidates and business. Legal standards relating to the validity and scope of claims in the CTP technology field are still
evolving. Therefore, the degree of future protection for our proprietary rights in our core technologies and any products that
might be made using these technologies is also uncertain. The risks and uncertainties that we face with respect to our patents
and other proprietary rights include the following:
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while the patents we license have been issued, the pending patent applications we have filed may not result in issued patents
or may take longer than we expect to result in issued patents;
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we may be subject to interference proceedings;
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we may be subject to opposition proceedings in foreign countries;
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any patents that are issued may not provide meaningful protection;
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we may not be able to develop additional proprietary technologies that are patentable;
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other companies may challenge patents licensed or issued to us or our customers;
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other companies may independently develop similar or alternative technologies, or duplicate our technologies;
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other companies may design around technologies we have licensed or developed; and
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enforcement of patents is complex, uncertain and expensive.
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We cannot be certain
that patents will be issued as a result of any of our pending applications, and we cannot be certain that any of our issued patents,
whether issued pursuant to our pending applications or licensed from Washington University, will give us adequate protection from
competing products. For example, issued patents, including the patents licensed from Washington University, may be circumvented
or challenged, declared invalid or unenforceable, or narrowed in scope. In addition, since publication of discoveries in the scientific
or patent literature often lags behind actual discoveries, we cannot be certain that we were the first to make our inventions or
to file patent applications covering those inventions.
It is also possible
that others may obtain issued patents that could prevent us from commercializing our products or require us to obtain licenses
requiring the payment of significant fees or royalties in order to enable us to conduct our business. As to those patents that
we have licensed, our rights depend on maintaining our obligations to the licensor under the applicable license agreement, and
we may be unable to do so.
In addition to patents
and patent applications, we depend upon trade secrets and proprietary know-how to protect our proprietary technology. We require
our employees, consultants, advisors and collaborators to enter into confidentiality agreements that prohibit the disclosure of
confidential information to any other parties. We require our employees and consultants to disclose and assign to us their ideas,
developments, discoveries and inventions. These agreements may not, however, provide adequate protection for our trade secrets,
know-how or other proprietary information in the event of any unauthorized use or disclosure.
Costly litigation may be necessary
to protect our intellectual property rights and we may be subject to claims alleging the violation of the intellectual property
rights of others.
We may face significant
expense and liability as a result of litigation or other proceedings relating to patents and other intellectual property rights
of others. In the event that another party has also filed a patent application or been issued a patent relating to an invention
or technology claimed by us in pending applications, we may be required to participate in an interference proceeding declared by
the U.S. Patent and Trademark Office to determine priority of invention, which could result in substantial uncertainties and costs
for us, even if the eventual outcome were favorable to us. We, or our licensors, also could be required to participate in interference
proceedings involving issued patents and pending applications of another entity. An adverse outcome in an interference proceeding
could require us to cease using the technology or to license rights from prevailing third parties.
The cost to us of any
patent litigation or other proceeding relating to our licensed patents or patent applications, even if resolved in our favor, could
be substantial. Our ability to enforce our patent protection could be limited by our financial resources, and may be subject to
lengthy delays. If we are unable to effectively enforce our proprietary rights, or if we are found to infringe the rights of others,
we may be in breach of our License Agreement.
A third party may claim
that we are using inventions claimed by their patents and may go to court to stop us from engaging in our normal operations and
activities, such as research, development and the sale of any future products. Such lawsuits are expensive and would consume time
and other resources. There is a risk that the court will decide that we are infringing the third party’s patents and will
order us to stop the activities claimed by the patents. In addition, there is a risk that a court will order us to pay the other
party damages for having infringed their patents.
Moreover, there is
no guarantee that any prevailing patent owner would offer us a license so that we could continue to engage in activities claimed
by the patent, or that such a license, if made available to us, could be acquired on commercially acceptable terms. In addition,
third parties may, in the future, assert other intellectual property infringement claims against us with respect to our product
candidates, technologies or other matters.
We rely on confidentiality agreements
that could be breached and may be difficult to enforce, which could result in third parties using our intellectual property to
compete against us.
Although we believe
that we take reasonable steps to protect our intellectual property, including the use of agreements relating to the non-disclosure
of confidential information to third parties, as well as agreements that purport to require the disclosure and assignment to us
of the rights to the ideas, developments, discoveries and inventions of our employees and consultants while we employ them, the
agreements can be difficult and costly to enforce. Although we seek to obtain these types of agreements from our contractors, consultants,
advisors and research collaborators, to the extent that employees and consultants utilize or independently develop intellectual
property in connection with any of our projects, disputes may arise as to the intellectual property rights associated with our
products. If a dispute arises, a court may determine that the right belongs to a third party. In addition, enforcement of our rights
can be costly and unpredictable. We also rely on trade secrets and proprietary know-how that we seek to protect in part by confidentiality
agreements with our employees, contractors, consultants, advisors or others. Despite the protective measures we employ, we still
face the risk that:
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these agreements may be breached;
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these agreements may not provide adequate remedies for the applicable type of breach;
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our trade secrets or proprietary know-how will otherwise become known; or
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our competitors will independently develop similar technology or proprietary information.
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International patent protection
is particularly uncertain, and if we are involved in opposition proceedings in foreign countries, we may have to expend substantial
sums and management resources.
Patent law outside
the United States is in some cases different than in the United States and is currently undergoing review and revision in many
countries. Further, the laws of some foreign countries may not protect our intellectual property rights to the same extent as the
laws of the United States. For example, certain countries do not grant patent claims that are directed to the treatment of humans.
We may participate in opposition proceedings to determine the validity of our foreign patents or our competitors’ foreign
patents, which could result in substantial costs and diversion of our efforts.
We may be unable to protect
the intellectual property rights of the third parties from whom we license certain of our intellectual property or with whom we
have entered into other strategic relationships.
Certain of our intellectual
property rights are currently licensed from Washington University, and, in the future, we intend to continue to license intellectual
property from Washington University and/or other key strategic partners. We are, and will continue to be, reliant upon such third
parties to protect their intellectual property rights to any licensed technology. Such third parties may determine not to protect
the intellectual property rights that we license from them and we may be unable defend such intellectual property rights on our
own or we may have to undertake costly litigation to defend the intellectual property rights of such third parties. There can be
no assurances that we will continue to have proprietary rights to any of the intellectual property that we license from such third
parties or otherwise have the right to use through similar strategic relationships. Any loss or limitations on use with respect
to our right to use such intellectual property licensed from third parties or otherwise obtained from third parties with whom we
have entered into strategic relationships could have a material adverse effect on our business, operating results and financial
condition.
Risks Related to Our Industry
We are subject to government
regulations, and we may experience delays in obtaining required regulatory approvals in the United States to market our proposed
product candidates.
Various aspects of
our operations are or may become subject to federal, state or local laws, rules and regulations, any of which may change from time
to time. Costs arising out of any regulatory developments could be time-consuming, expensive and could divert management resources
and attention and, consequently, could adversely affect our business operations and financial performance.
Delays in regulatory
approval, limitations in regulatory approval and withdrawals of regulatory approval may have a negative impact on our results.
If we experience significant delays in testing or approvals, our product development costs, or our ability to license product candidates,
will increase. If the FDA grants regulatory approval of a product, this approval will be limited to those disease states and conditions
for which the product has demonstrated, through clinical trials, to be safe and effective. Any product approvals that we receive
in the future could also include significant restrictions on the use or marketing of our products. Product approvals, if granted,
can be withdrawn for failure to comply with regulatory requirements or upon the occurrence of adverse events following commercial
introduction of the products. Failure to comply with applicable FDA or other applicable regulatory requirements may result in criminal
prosecution, civil penalties, recall or seizure of products, total or partial suspension of production or injunction, as well as
other regulatory action against our product candidates or us. If approval is withdrawn for a product, or if a product were seized
or recalled, we would be unable to sell or license that product and our revenues would suffer. In addition, outside the United
States, our ability to market any of our potential products is contingent upon receiving market application authorizations from
the appropriate regulatory authorities and these foreign regulatory approval processes include all of the risks associated with
the FDA approval process described above.
We face significant competition
and continuous technological change.
If our competitors
develop and commercialize products faster than we do, or develop and commercialize products that are superior to our product candidates,
our commercial opportunities will be reduced or eliminated. The extent to which any of our product candidates achieve market acceptance
will depend on competitive factors, many of which are beyond our control. Competition in the pharmaceutical industry is intense
and has been accentuated by the rapid pace of technology development. Our competitors include large integrated pharmaceutical companies,
biotechnology companies that currently have drug and target discovery efforts, universities, and public and private research institutions.
Almost all of these entities have substantially greater research and development capabilities and financial, scientific, manufacturing,
marketing and sales resources than we do, as well as more experience in research and development, clinical trials, regulatory matters,
manufacturing, marketing and sales. These organizations also compete with us to:
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attract parties for acquisitions, joint ventures or other collaborations;
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license proprietary technology that is competitive with the technology we are developing;
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attract and hire scientific talent.
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Our competitors may
succeed in developing and commercializing products earlier and obtaining regulatory approvals from the FDA more rapidly than we
do. Our competitors may also develop products or technologies that are superior to those we are developing, and render our product
candidates or technologies obsolete or non-competitive. If we cannot successfully compete with new or existing products, our marketing
and sales will suffer and we may not ever be profitable.
We expect the healthcare industry
to face increased scrutiny over reimbursement and healthcare reform, which could adversely impact how much or under what circumstances
healthcare providers will prescribe or administer our products.
In both the United
States and other countries, sales of our products will depend in part upon the availability of reimbursement from third party payors,
which include government health administration authorities, managed care providers and private health insurers. Third party payors
are increasingly challenging the price and examining the cost effectiveness of medical products and services.
Increasing expenditures
for healthcare have been the subject of considerable public attention in the United States. Both private and government entities
are seeking ways to reduce or contain healthcare costs. Numerous proposals that would effect changes in the U.S. healthcare system
have been introduced or proposed in Congress and in some state legislatures, including reductions in the cost of prescription products
and changes in the levels at which consumers and healthcare providers are reimbursed for purchases of pharmaceutical products.
In 2010, Congress enacted
and the President signed into law the Patient Protection and Affordable Care Act, as amended, which will significantly expand access
to health care coverage but may lead to reduction in reimbursement for supplies, including pharmaceuticals, and services. The Centers
for Medicare & Medicaid Services, or CMS, is in the process of issuing regulations to implement the new law which will affect
Medicare, Medicaid and other third-party payors. Medicare, which is the single largest third-party payment program and administered
by CMS, covers prescription drugs in one of two ways. Medicare part B covers outpatient prescription drugs that are administered
by physicians and Medicare part D covers other outpatient prescription drugs, but through private insurers. Medicaid, a health
insurance program for the poor, is funded jointly by CMS and the states, but is administered by the states; states are authorized
to cover outpatient prescription drugs, but that coverage is subject to caps and to substantial rebates.
Although we cannot
predict the full effect on our business of the implementation of existing legislation, including the Affordable Care Act or the
enactment of additional legislation, we believe that legislation or regulations that reduces reimbursement for our products could
adversely affect how much or under what circumstances healthcare providers will prescribe or administer our products. This could
materially and adversely impact our business by reducing our ability to generate revenue, raise capital, obtain additional collaborators
and market our products. In addition, we believe the increasing emphasis on managed care in the United States has and will continue
to put pressure on the price and usage of pharmaceutical products, which may adversely impact product sales.
We are subject to federal anti-kickback
laws and regulations. Our failure to comply with these laws and regulations could have adverse consequences to us.
There are extensive
federal and state laws and regulations prohibiting fraud and abuse in the healthcare industry that can result in significant criminal
and civil penalties. These federal laws include: the anti-kickback statute, which prohibits certain business practices and relationships,
including the payment or receipt of remuneration for the referral of patients whose care will be paid by Medicare or other federal
healthcare programs; the physician self-referral prohibition, commonly referred to as the Stark Law; the anti-inducement law, which
prohibits providers from offering anything to a Medicare or Medicaid beneficiary to induce that beneficiary to use items or services
covered by either program; the False Claims Act, which prohibits any person from knowingly presenting or causing to be presented
false or fraudulent claims for payment by the federal government, including the Medicare and Medicaid programs; and the Civil Monetary
Penalties Law, which authorizes the United States Department of Health and Human Services to impose civil penalties administratively
for fraudulent or abusive acts.
Sanctions for violating
these federal laws include criminal and civil penalties that range from punitive sanctions, damage assessments, money penalties,
imprisonment, denial of Medicare and Medicaid payments, or exclusion from the Medicare and Medicaid programs, or both. As federal
and state budget pressures continue, federal and state administrative agencies may also continue to escalate investigation and
enforcement efforts to root out waste and to control fraud and abuse in governmental healthcare programs. Private enforcement of
healthcare fraud has also increased, due in large part to amendments to the civil False Claims Act in 1986 that were designed to
encourage private persons to sue on behalf of the government. A violation of any of these federal and state fraud and abuse laws
and regulations could have a material adverse effect on our liquidity and financial condition. An investigation into the use by
physicians of any of our products once commercialized may dissuade physicians from either purchasing or using them, and could have
a material adverse effect on our ability to commercialize those products.
Risks Related to Our Common Stock
Our stock price has been, and
may continue to be, volatile, and you could lose all or part of your investment.
The market price for
our common stock on the NYSE MKT has been extremely volatile, ranging from a low of $4.25 per share to a high of $6.69 per share
during the 52-week trading period ended December 31, 2012. We expect that the market price of our common stock will continue to
be volatile due to factors including, but not limited to, the following:
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actual or anticipated variations in our operating results;
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announcements of developments by us or our competitors;
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announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
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adoption of new accounting standards affecting our industry;
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additions or departures of key personnel;
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introduction of new products by us or our competitors;
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changes in market valuations of companies in our industry;
|
|
·
|
future issuances of our common stock or other securities; and
|
|
·
|
other events or factors, many of which are beyond our control.
|
We do not expect to pay dividends
on our common stock, and investors will be able to receive cash in respect of their shares of our common stock only upon the sale
of the shares.
Cash dividends have
never been declared or paid on our common stock, and we do not anticipate such a declaration or payment in the foreseeable future.
We expect to use future earnings, if any, to fund business growth. Therefore, an investor in our common stock will obtain an economic
benefit from the common stock only after an increase in its trading price and only by selling the common stock. We cannot assure
stockholders of a positive return on their investment when they sell their shares, nor can we assure stockholders that they will
not lose the entire amount of their investment.
Securities analysts may not
initiate coverage or continue to cover our common stock, and this may have a negative impact on its market price.
The trading market
for our common stock will depend in part on the research and reports that securities analysts publish about our business and us.
We do not have any control over these analysts. There is no guarantee that securities analysts will cover our common stock. If
securities analysts do not cover our common stock, the lack of research coverage may adversely affect its market price. If we are
covered by securities analysts, and our stock is the subject of an unfavorable report, our stock price would likely decline. If
one or more of these analysts ceases to cover us or fails to publish regular reports on us, we could lose visibility in the financial
markets, which could cause our stock price and/or trading volume to decline. In addition, because we became public through a “reverse
merger,” we may have additional difficulty attracting the coverage of securities analysts.
Stockholders may experience
dilution of ownership interests because of the future issuance of additional shares of our common stock and our preferred stock.
In May 2012, we issued
7,475,000 shares of our common stock, and, in the future, we may issue additional shares of our authorized but previously unissued
equity securities, resulting in the dilution of the ownership interests of our present stockholders. We are currently authorized
to issue an aggregate of 310,000,000 shares of capital stock consisting of 300,000,000 shares of common stock and 10,000,000 shares
of preferred stock with preferences and rights to be determined by our Board of Directors. As of March 1, 2013, there were 63,430,118
shares of our common stock outstanding and a total of 5,834,644 shares subject to outstanding options and warrants. We may also
issue additional shares of our common stock or other securities that are convertible into or exercisable for common stock in connection
with hiring or retaining employees, acquisitions, capital raising or for other business purposes. The issuance of any such additional
shares of our common stock may create downward pressure on the trading price of the common stock. There can be no assurance that
we will not be required to issue additional shares, warrants or other convertible securities in the future in conjunction with
any capital raising efforts, including at a price (or exercise prices) below the price at which shares of our common stock are
then traded on the NYSE MKT.
Our common shares are thinly
traded and, therefore, relatively illiquid.
As of March 1, 2013,
there were 63,430,118 shares of our common stock outstanding. While our common shares trade on the NYSE MKT, our stock is thinly
traded (less than one percent of our issued and outstanding common shares traded on an average daily basis during the three months
immediately preceding the date of this Annual Report on Form 10-K), and you may have difficulty in selling your shares. The low
trading volume of our common stock is outside of our control, and may not increase in the near future or, even if it does increase
in the future, may not be maintained.
Our principal stockholders have
significant voting power and may take actions that may not be in the best interests of other stockholders.
Our officers, directors,
principal stockholders and their affiliates control approximately 19% of our outstanding common stock. If these stockholders act
together, they will be able to exert significant control over our management and affairs requiring stockholder approval, including
approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a
change in control and might adversely affect the market price of our common stock. This concentration of ownership may not be in
the best interests of all our stockholders. Unaffiliated holders of our common stock have no effective voice in our management.
Additionally, sales by our insiders or affiliates could adversely affect the market price of our common stock.
A significant number of our
shares are eligible for sale, which could depress the market price of our stock.
Sales of a significant
number of shares of our common stock in the public market could harm the market price of our stock. As additional shares of our
common stock become available for resale in the public market, the supply of the common stock will increase, which could decrease
its price. Further, shares may be offered by selling stockholders from time to time in the open market pursuant to Rule 144, and
these sales may have a depressive effect on the market for the shares of our common stock.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our executive offices
and our research and development laboratory are located at 7 Golda Meir Street, Weizmann Science Park, Nes-Ziona, Israel 74140
and our phone number is (866) 644-7811. The facility is approximately 12,000 square feet. We pay a monthly lease of $17,000, for
this space. This lease expires on March 31, 2013 but may be extended yearly by mutual agreement.
Item 3. Legal Proceedings
From time to time we
may be named in claims arising in the ordinary course of business. Currently, no legal proceedings, government actions, administrative
actions, investigations or claims are pending against us or involve us that, in the opinion of our management, could reasonably
be expected to have a material adverse effect on our business or financial condition.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is
listed on the NYSE MKT under the symbol “PBTH”. The table below sets forth, for the quarters indicated, the high and
low sales prices for our common stock, as reported by the NYSE MKT.
Quarter Ended
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
$
|
5.36
|
|
|
$
|
4.25
|
|
September 30, 2012
|
|
$
|
5.32
|
|
|
$
|
4.66
|
|
June 30, 2012
|
|
$
|
6.07
|
|
|
$
|
4.64
|
|
March 31, 2012
|
|
$
|
6.69
|
|
|
$
|
4.36
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
$
|
5.14
|
|
|
$
|
3.11
|
|
September 30, 2011
|
|
$
|
6.50
|
|
|
$
|
3.95
|
|
June 30, 2011
|
|
$
|
6.40
|
|
|
$
|
4.06
|
|
March 31, 2011
|
|
$
|
6.75
|
|
|
$
|
4.55
|
|
Number of Holders
As of March 1, 2013,
our common stock was held by 117 stockholders of record.
Dividends
We have never declared
or paid dividends on our common stock. We do not intend to pay cash dividends on our common stock for the foreseeable future, and
we intend to retain any future earnings to fund the development and growth of our business. The payment of dividends if any, on
the common stock will rest solely within the discretion of our board of directors and will depend, among other things, upon our
earnings, capital requirements, financial condition, and other relevant factors.
Item 6. Selected Financial Data
The following table
states our selected consolidated financial data, which has been derived from our audited consolidated financial statements. The
table reflects our consolidated results of operations for the periods indicated and should be read together with our consolidated
financial statements and notes thereto as well as Item 7. “Management’s Discussion and Analysis of Financial Condition
and Results of Operations.”
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Net Income (Loss)
|
|
$
|
(18,271,434
|
)
|
|
$
|
(15,063,055
|
)
|
|
$
|
(7,559,131
|
)
|
|
$
|
(7,484,718
|
)
|
|
$
|
(7,033,536
|
)
|
Net Income (Loss) per common share
|
|
$
|
(0.3
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.20
|
)
|
|
|
As of December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
35,916,698
|
|
|
$
|
15,024,571
|
|
|
$
|
26,813,109
|
|
|
$
|
4,044,957
|
|
|
$
|
8,325,489
|
|
Current Liabilities
|
|
$
|
2,335,028
|
|
|
$
|
2,218,612
|
|
|
$
|
1,597,712
|
|
|
$
|
75,655
|
|
|
$
|
366,895
|
|
Long Term Obligations
|
|
$
|
381,399
|
|
|
$
|
284,677
|
|
|
$
|
220,838
|
|
|
$
|
140,237
|
|
|
$
|
90,732
|
|
Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operation
The following discussion
and analysis of our financial condition and results of operations should be read in conjunction with our historical consolidated
financial statements and related notes thereto in “Item 8. Financial Statements and Supplementary Data.” The discussion
below contains forward-looking statements that are based upon our current expectations and are subject to uncertainty and changes
in circumstances. Actual results may differ materially from these expectations due to inaccurate assumptions and known or unknown
risks and uncertainties, including those identified in “Cautionary Statement Regarding Forward-Looking Statements”
and “Item 1A. Risk Factors.”
The discussion and
analysis of the Company’s financial condition and results of operations are based on the Company’s financial statements,
which the Company has prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial
statements requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and
expenses during the reporting periods. On an ongoing basis, the Company evaluates such estimates and judgments, including those
described in greater detail below. The Company bases its estimates on historical experience and on various other factors that the
Company believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying
value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
Overview
We are a development
stage biopharmaceutical company utilizing patented technology to develop longer-acting, proprietary versions of already-approved
therapeutic proteins that currently generate billions of dollars in annual global sales. We have obtained certain exclusive worldwide
rights from Washington University in St. Louis, Missouri to use a short, naturally-occurring amino acid sequence (peptide) that
has the effect of slowing the removal from the body of the therapeutic protein to which it is attached. This Carboxyl Terminal
Peptide (CTP) can be readily attached to a wide array of existing therapeutic proteins, stabilizing the therapeutic protein in
the bloodstream and extending its life span without additional toxicity or loss of desired biological activity. We are using the
CTP technology to develop new, proprietary versions of certain existing therapeutic proteins that have longer life spans than therapeutic
proteins without CTP. We believe that our products will have greatly improved therapeutic profiles and distinct market advantages.
We believe our products
in development will provide several key advantages over our competitor’s existing products:
|
·
|
significant reduction in the number of injections required to achieve the same or superior therapeutic
effect from the same dosage;
|
|
·
|
faster commercialization with greater chance of success and lower costs than those typically associated
with a new therapeutic protein; and
|
|
·
|
manufacturing using industry-standard biotechnology-based protein production processes.
|
Merck & Co. has
developed the first novel protein containing CTP, named ELONVA®, a long-acting CTP-modified version of the fertility drug follicle
stimulating hormone (FSH). On January 28, 2010, Merck received marketing authorization from the European Commission for ELONVA®
with unified labeling valid in all European Union Member States.
Our internal product
development program is currently focused on extending the life span of the following biopharmaceuticals, in an effort to provide
patients with improved therapies that may enhance their quality of life:
|
·
|
Human Growth Hormone (hGH)
|
|
·
|
Anti-Obesity Peptide Oxyntomodulin
|
|
·
|
Interferon β and Erythropoietin (EPO)
|
|
·
|
Atherosclerosis and rheumatoid arthritis long-acting therapies
|
We believe that the
CTP technology will be broadly applicable to these as well as other best-selling therapeutic proteins in the market.
Plan of Operation
During 2013, the Company
intends to continue the development of its primary clinical and preclinical programs. These programs include a variety of operating
tasks such as optimization of expression levels, toxicity and efficacy animal models, completion of purification processes, GMP
production of compounds and clinical studies. The Company’s cash resources, including expected payments from the OCS are
expected to be sufficient to maintain the Company’s operations through the fourth quarter of 2013. The Company is not planning
any major purchase or sale of equipment during that timeframe, and its employee headcount is not expected to change.
Critical Accounting Policies
The historical financial
statements of the Company included with this Annual Report on Form 10-K have been prepared in accordance with U.S. generally accepted
accounting principles. The significant accounting policies followed in the preparation of the financial statements, on a consistent
basis, are described below.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could
differ from those estimates.
Financial Statements
in United States Dollars:
The functional currency
of the Company is the U.S dollar, as the U.S. dollar is the primary currency of the economic environment in which the Company has
operated and expects to continue to operate in the foreseeable future. The majority of Prolor Ltd.’s operations are currently
conducted in Israel in New Israeli Shekel and in Euro. Financing and investing activities including loans and equity transactions
from the parent company are made in U.S. dollars, there are no funds generated by the foreign subsidiary in operating activities,
and it is unable to exist without these cash infusions. Accordingly, the functional and reporting currency of the Company is the
parent company's currency, which is the U.S. dollar. Monetary accounts maintained in currencies other than the dollar are remeasured
into U.S. dollars. All transaction gains and losses from the remeasurement of monetary balance sheet items are reflected in the
statements of operations as financial income or expenses, as appropriate.
Principles of Consolidation:
The consolidated financial statements include the accounts of Modigene Delaware and its wholly owned subsidiary, Prolor Ltd.. Intercompany
transactions and balances have been eliminated upon consolidation.
Cash Equivalents:
For purposes of reporting within the statement of cash flows, the Company considers all cash on hand, cash accounts not subject
to withdrawal restrictions or penalties, and all highly liquid debt instruments purchased with a maturity of three months or less
to be cash and cash equivalents.
Property and Equipment:
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated by the straight-line method
over the estimated useful lives of the assets. The annual depreciation rates are as follows:
|
|
%
|
|
|
|
|
|
|
Office furniture and equipment
|
|
|
6-15
|
|
|
|
|
|
|
Laboratory equipment
|
|
|
15
|
|
|
|
|
|
|
Computers and electronic equipment
|
|
|
33
|
|
|
|
|
|
|
Leasehold improvements
|
|
|
15
|
|
The Company reviews
the carrying value of its long-lived assets, including intangible assets subject to amortization, for impairment whenever events
and circumstances indicate that the carrying value of the assets may not be recoverable. Recoverability of these assets is measured
by comparing the carrying value of the assets to the undiscounted cash flows estimated to be generated by those assets over their
remaining economic life. If the undiscounted cash flows are not sufficient to recover the carrying value of the assets, the assets
are considered impaired. The impairment loss is measured by comparing the fair value of the assets to their carrying value. Fair
value is determined by either a quoted market price or a value determined by a discounted cash flow technique, whichever is more
appropriate under the circumstances involved. No impairments were recognized for the period from May 31, 2005 (inception date)
to December 31, 2012.
Research and Development
Costs and Participation:
Research and development (“R&D”) costs are expensed as they are incurred and consist
of salaries, benefits and other personnel related costs, fees paid to consultants, clinical trials and related clinical manufacturing
costs, license and milestone fees, and facilities and overhead costs. R&D expenses consist of independent R&D costs and
costs associated with collaborative R&D and in-licensing arrangements. Participation from government for development of approved
projects is recognized as a reduction of expenses as the related costs are incurred.
Severance Pay:
Under Israeli law and
labor agreements, the Company is required to pay severance payments to each employee who was employed by the Company for over one
year and has been terminated by the Company or resigned under certain specified circumstances. The Company’s liability for
these severance payments is covered mainly by deposits with insurance companies in the name of the employee and/or through the
purchase of insurance policies. The liability related to these severance payments is calculated on the basis of the latest salary
of the employee multiplied by the number of years of employment as of the balance sheet date. The liability for employee severance
payments included in the balance sheet represents the total amount due for such severance payments, while the assets held for severance
benefits included in the balance sheet represents the Company’s contributions to insurance policies. The Company may make
withdrawals from these funds only upon complying with the Israeli severance pay law or labor agreements.
According to agreements
with certain named executive officers and key employees, upon retirement, such employees will be entitled to receive a lump-sum
payment; therefore, the Company does not accumulate severance pay for those employees, and the sum will be expensed at a time when
the Company has to pay such payments according to the employment agreements. Since July 1, 2009 all new employment agreements have
implemented Section 14 of the Israeli Severance Pay Law, mandating that upon termination of such employees’ employment, the
Company shall release to them all the amounts accrued in their insurance policies. The severance pay liabilities and deposits covered
by these plans are not reflected in the balance sheet as the severance pay risks have been irrevocably transferred to the severance
funds.
Income
Taxes:
The Company accounts for income taxes in accordance with the provisions of ASC 740-10, Income Taxes. ASC 740-10
requires companies to recognize deferred tax assets and liabilities based on the differences between financial reporting and tax
bases of assets and liabilities. These differences are measured using the enacted tax rates and laws that are expected to be in
effect when the temporary differences are expected to reverse. A valuation allowance is established against net deferred tax assets,
if based on the weighted available evidence, it is more likely than not that all or a portion of the deferred tax assets will not
be realized.
Concentrations of
Credit Risk:
Financial instruments that potentially subjected the Company, Modigene Delaware and Prolor Ltd. to concentrations
of credit risk consist principally of cash and cash equivalents.
Cash and cash equivalents
are invested in major banks in Israel and the United States. Such deposits in the United States are not insured. Management believes
that the financial institutions that hold the Company’s investments are financially sound and, accordingly, minimal credit
risk exists with respect to these investments.
The Company has no
off-balance sheet concentration of credit risk such as foreign exchange contracts or other foreign hedging arrangements.
Fair Value Measurement:
As defined in ASC 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”), fair value is based on the price
that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at
the measurement date. In order to increase consistency and comparability in fair value measurements, ASC 820-10 establishes a fair
value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are
described below:
Level 1: Quoted
prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy
gives the highest priority to Level 1 inputs.
Level 2: Other
inputs that are observable, directly or indirectly, such as quoted prices for similar assets and liabilities or market corroborated
inputs.
Level 3: Unobservable
inputs are used when little or no market data is available, which requires the Company to develop its own assumptions about how
market participants would value the assets or liabilities. The fair value hierarchy gives the lowest priority to Level 3 inputs.
In
determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use
of unobservable inputs to the extent possible in its assessment of fair value.
Royalty-bearing
Grants:
Royalty-bearing grants from the Government of Israel for participation in development of approved projects are recognized
as a reduction of expenses as the related costs are incurred. Funding is recognized at the time Prolor Ltd. is entitled to such
grants, on the basis of the costs incurred.
Loss per Share
:
Basic and diluted losses per share are presented in accordance with ASC 260-10 “Earnings per share”. Outstanding stock
options and warrants have been excluded from the calculation of the diluted loss per share because all such securities are antidilutive.