ITEM 1A. Risk Factors
In conducting our business, we face many risks that may interfere with our business objectives. Some of these risks could materially and adversely affect our business, financial condition and results
of operations. In particular, we are subject to various risks resulting from changing economic, political, industry, business and financial conditions. The risks and uncertainties described below are not the only ones we face.
You should carefully consider the following factors and other information in this Quarterly Report. If any of the negative events referred to below occur, our business, financial condition and
results of operations could suffer. In any such case, the trading price of our ordinary shares could decline.
Risks Related to the Merger
The consummation of the merger with Menlo is contingent upon the satisfaction of a number of conditions, including certain conditions that are outside of our control. As a
result, one or more conditions to closing of the merger may not be satisfied and the merger may not be completed.
We cannot provide any assurance that the merger will be completed or that there will not be a delay in the completion of the merger. The ability to consummate the merger is subject to risks and
uncertainties, including, but not limited to, the risks that the conditions to the merger are not satisfied, or if possible, waived, including, among others, (a) the approval of our shareholders of the merger; (b) the approval of the shareholders
of Menlo of the issuance of Menlo common stock; (c) the effectiveness of the registration statement relating to the Menlo common stock to be issued in the merger; and (d) the absence of governmental restraints or prohibitions preventing the
consummation of the merger. Neither we nor Menlo can predict whether and when these other conditions will be satisfied.
If the merger is not completed for any reason, we may be subjected to a number of material risks. The price of our ordinary shares may decline to the extent that the current market price reflects a
market assumption that the merger will be completed. In addition, some costs related to the merger must be paid by us whether or not the merger is completed. Furthermore, we may experience negative reactions from our shareholders and/or
employees.
The Merger Agreement contains provisions that restrict our ability to pursue alternatives to the merger and, in specified circumstances, could require us to pay Menlo a
termination fee of up to $3.7 million.
Under the Merger Agreement, we are restricted, subject to certain exceptions, from soliciting, initiating, knowingly encouraging, facilitating, discussing or negotiating, or furnishing information
with regard to, any inquiry, proposal or offer for an alternative transaction from any person or entity. The Merger Agreement further provides that, upon termination of the Merger Agreement under specified circumstances, including termination of
the Merger Agreement by (i) Menlo after a change in the recommendation of our Board of Directors, (ii) us, to accept and enter into a binding agreement to be acquired by a third party who submitted a superior proposal (subject to the terms and
conditions of the merger) or (iii) (A) if a takeover proposal is made for us and is publicly known and is not withdrawn at the time of our shareholders’ meeting, (B) the merger agreement is terminated due to the failure of our shareholders to
approve the merger or by Menlo due to a material breach of the Merger Agreement by us (including the “no solicitation” provisions) and (C) we enter into or consummate an alternative transaction within 12 months following such date of termination,
we may be required to pay Menlo a termination fee equal to $3.7 million in cash.
There can be no assurance that the expected benefits of the merger will occur or be fully or timely realized.
The success of the merger will depend, in part, on the ability of us and Menlo to successfully integrate the businesses of Foamix and Menlo. If we and Menlo are not able to successfully combine the
businesses of Foamix and Menlo in an efficient and effective manner, the anticipated benefits, synergies, operational efficiencies and cost savings may not be realized fully or at all, or may take longer to realize than expected, and the share
price, revenues, levels of expenses and results of operations of Menlo may be adversely affected.
The combination of two independent businesses is a complex, costly and time consuming process, and the management of Menlo may face significant challenges in implementing such
integration, including, without limitation:
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diversion of management's attention from ongoing business concerns and performance shortfalls at one or both of Foamix and Menlo as a result of the devotion of management's attention to the merger;
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difficulties in achieving anticipated cost savings, synergies, business opportunities and growth prospects;
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challenges of managing a larger post-merger company addressing differences in business culture and retaining key personnel;
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conforming standards, controls, procedures and accounting and other policies and compensation structures between Foamix and Menlo; and
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coordinating geographically separate organizations.
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Many of these factors will be outside of the control of us or Menlo and any one of them could result in increased costs and diversion of management's time and energy, as well as decreases in the
amount of expected revenues which could materially impact our and Menlo’s business, financial conditions and results of operations. In addition, the actual integration may result in additional and unforeseen expenses, and the anticipated benefits
of the integration plan may not be realized. Actual growth and cost savings, if achieved, may be lower and may take longer to achieve than anticipated. Difficulties in the integration process and other disruptions resulting from the merger could
adversely affect Menlo’s relationships with employees, distributors and other persons with whom we or Menlo has a business relationship.
Our shareholders cannot be sure of the value of the consideration they will receive in the merger or of the ownership or voting interest they will have in Menlo. Additionally, our
shareholders will receive common stock of Menlo as a result of the merger, which has rights different from our ordinary shares.
Because the market price of Menlo common stock and Foamix ordinary shares will fluctuate, our shareholders cannot be sure of the value of the consideration they will receive in the merger. In
addition, because the exchange ratio is fixed, the number of shares of Menlo common stock to be received by holders of our ordinary shares in the merger will not change between now and the time the merger is completed to reflect changes in the
trading prices of our ordinary shares or Menlo common stock. Stock price changes may result from a variety of factors, including general market and economic conditions, operations and prospects of us and Menlo and an evolving regulatory landscape.
Market assessments of the benefits of the merger and the likelihood that the merger will be consummated, as well as general and industry specific market and economic conditions, may also impact market prices of our ordinary shares and Menlo common
stock. Many of these factors are beyond our and Menlo's control.
In addition, in connection with the merger, our shareholders may receive contingent stock rights, if the Efficacy Determination is not received prior to the closing of the Merger and prior to May
31, 2020. If the contingent stock rights become convertible pursuant to the contingent stock rights agreement (or the Efficacy Determination is received prior to the closing of the merger and prior to May 31, 2020), our shareholders will receive
additional shares of Menlo common stock as consideration in connection with the merger. The value of any contingent stock right depends on the trading price of Menlo common stock on the date of conversion. Additionally, if the contingent stock
rights become convertible pursuant to the contingent stock rights agreement, our shareholders will obtain increased ownership and voting interest in Menlo. The contingent stock rights may not become convertible. Because the Efficacy
Determination may not be received by the time our shareholders vote on the Merger, or by the time we consummate the Merger, our shareholders may not know, at the time of voting or at the time of closing, whether they will get additional shares of
Menlo Common Stock in the Merger as a result of the Efficacy Determination.
Upon completion of the merger, the rights of our shareholders will be governed by the articles of incorporation and by-laws of Menlo. The rights associated with our ordinary shares are different
from the rights are associated with Menlo common stock. In addition, the laws of Delaware differ from the laws in effect in Israel and may afford less or different rights and protections to holders of securities in Menlo.
We will be subject to business uncertainties and contractual restrictions until the merger is consummated.
Uncertainty about the effect of the merger on employees, distributors and other persons with whom we have a business relationship as well as regulatory permits, licenses, and other contracts,
particularly for which the merger could be deemed a "change-in-control" under the applicable terms and conditions, may have an adverse effect on us and consequently on Menlo. These uncertainties may impair our ability to attract, retain and
motivate key personnel until the consummation of the merger and for a period of time thereafter, and could cause others that deal with the parties to delay or defer certain business decisions or decide to terminate, modify or renegotiate their
relationships with us, decide not to conduct business with us or take other actions as a result of the merger, which could negatively affect Menlo and/or our revenues, earnings and cash flows, as well as the market price of our ordinary shares,
regardless of whether the merger is consummated. Retention of employees could be challenging during the pendency of the merger due to uncertainty about their future roles. If key employees depart because of issues related to the uncertainty and
difficulty of integration or a desire not to remain with the businesses, Menlo's business following the consummation of the merger could be negatively impacted.
In addition, the Merger Agreement restricts us, without the consent of Menlo, from amending our organizational documents, declaring or paying dividends, repurchasing securities, issuing securities,
incurring debt outside of certain agreed exceptions, making loans, disposing of any material assets, leasing property, settling any litigation, making capital expenditures over a specified threshold and taking other specified actions until the
earlier of the completion of the merger or the termination of the Merger Agreement. These restrictions may prevent or delay pursuit of strategic corporate or business opportunities that may arise prior to the consummation of the merger and may
impair our ability to attract, retain and motivate key personnel. Adverse effects arising during the pendency of the merger could be exacerbated by any delays in consummation of the merger or termination of the Merger Agreement.
We and Menlo will incur substantial transaction fees and costs in connection with the merger.
We and Menlo expect to incur a number of non-recurring transaction-related costs associated with completing the merger, combining the operations of the two organizations and achieving desired
synergies. These fees and costs will be substantial. Non-recurring transaction costs include, but are not limited to, fees paid to legal, financial and accounting advisors, retention, severance and other integration-related costs, filing fees and
printing costs. Additional unanticipated costs may be incurred in the integration of our business and Menlo’s business. There can be no assurance that the elimination of certain duplicative costs, as well as the realization of other efficiencies
related to the integration of the two businesses, will offset the incremental transaction-related costs over time. Thus, any net benefit may not be achieved in the near term, the long term or at all.
Risks Related to Our Business and Industry
We are largely dependent on the success of our drug product, AMZEEQ for the treatment of acne, and our product candidate FMX103 for the treatment of rosacea.
We have invested a majority of our efforts and financial resources in the research and development of AMZEEQ for the treatment of moderate-to-severe acne, which received
approval from the FDA, on October 18, 2019 for the treatment of inflammatory lesions of non-nodular moderate-to-severe acne vulgaris in patients nine years of age and older, and FMX103 for the treatment of moderate-to-severe papulopustular rosacea
in adults, for which we submitted an NDA, that was accepted by the FDA in October 2019. We plan to dedicate our resources toward (i) commercialization efforts for AMZEEQ; (ii) pre-commercialization efforts
for FMX103 in anticipation of potential FDA approval; and (iii) advancing our pipeline candidates. The success of our business depends largely on our ability to successfully commercialize AMZEEQ and to obtain regulatory approval for and
successfully commercialize FMX103 in a timely manner. If we fail to do so, we may not be able to obtain adequate funding to continue to operate our business.
We have limited commercial sales experience, which makes it difficult to evaluate our current business, predict our future prospects and forecast our
financial performance and growth.
To date, we have not generated any revenues from the sale of our drug products. Our lead product, AMZEEQ, was approved by the FDA in October 2019 but is not yet commercially
available. We plan to launch AMZEEQ in the first quarter of 2020, but there is no assurance that launch will occur on the timing we anticipate, and we may encounter delays or hurdles related to our launch that affect that timing. Successful
commercialization of AMZEEQ or any future products is subject to many risks. Although many of our employees have launched and commercialized products during their employment at other organizations, Foamix has not, as an organization, launched or
commercialized a product, and there is no guarantee that we will be able to do so successfully with AMZEEQ or any of our product candidates.
We are currently building our commercial team and hiring our U.S. sales force, and therefore, we will need to train and further develop the team and any new hires in order to
successfully coordinate the launch and commercialization of AMZEEQ and, if approved, any of our product candidates. Even if we are successful in building out our commercial team, there are many factors that could cause the launch and
commercialization of AMZEEQ or any future products to be unsuccessful, including a number of factors that are outside our control. The commercial success of AMZEEQ depends on, among other things, the extent to which patients and physicians accept
and adopt AMZEEQ. For example, if the expected patient population is smaller than we estimate or if physicians are unwilling to prescribe or patients are unwilling to take AMZEEQ, the commercial potential of AMZEEQ will be limited. In addition, we
also do not know how physicians, patients and payors will respond to the pricing of AMZEEQ. Thus, significant uncertainty remains regarding the commercial potential of AMZEEQ. Moreover, our ability to effectively generate revenues from AMZEEQ will
depend on our ability to, among other things:
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achieve and maintain compliance with regulatory and other requirements;
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create market demand for and achieve market acceptance of AMZEEQ through our marketing and sales activities and other arrangements established for the promotion of AMZEEQ;
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compete with other acne treatments (either in the present or in the future);
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train, deploy and support a qualified sales force;
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maintain and obtain agreements with third-party manufacturers that can produce commercial supplies of AMZEEQ at a scale sufficient to meet our anticipated demand and on terms acceptable to us and that can develop, validate and
maintain commercially viable manufacturing processes that are compliant with current Good Manufacturing Practice, or cGMP, regulations, including our exclusive agreement with ASM for the supply of the finished product of AMZEEQ and our
third party agreements with the suppliers of AMZEEQ’s active pharmaceutical ingredient, or API;
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implement and maintain agreements with wholesalers, distributors and group purchasing organizations on commercially reasonable terms;
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ensure that our entire supply chain efficiently and consistently delivers AMZEEQ to our customers;
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receive coverage and adequate reimbursement for AMZEEQ from commercial health plans and governmental health programs;
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successfully educate physicians and patients about the benefits, risks, administration and use of AMZEEQ;
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obtain acceptance of AMZEEQ as safe and effective by patients and the medical community;
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receive positive publicity related to AMZEEQ relative to the publicity related to our competitors’ products; and
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maintain and defend our patent protection and obtain regulatory exclusivity for AMZEEQ and our other product candidates.
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Any disruption in our ability to generate revenues from the sale of AMZEEQ will have a material and adverse impact on our results of operations.
We are currently building our sales, marketing and distribution capabilities, and if we are unable to expand such capabilities, our business, results of operations and financial
condition may be materially adversely affected.
In order to successfully market AMZEEQ, we must continue to build and develop our sales, marketing, distribution, managerial, compliance, and related capabilities or make
arrangements with third parties to perform these services. If we are unable to establish adequate sales, marketing, and distribution capabilities, whether independently or with third parties, we may not be able to appropriately commercialize AMZEEQ
and may not become profitable.
Included in our strategy in the United States is the establishment of a specialized internal sales force to commercialize AMZEEQ, and we will need to conduct further activities
to build and develop our sales force. These efforts will continue to be expensive and time-consuming, and we cannot be certain that we will be able to successfully develop this capability. AMZEEQ is a newly-marketed drug and, therefore, none of the
members of our sales force has ever promoted AMZEEQ prior to its commercial launch. In addition, we must train our sales force to ensure that a consistent and appropriate message about AMZEEQ is being delivered to our potential customers. If we are
unable to effectively train our sales force and equip them with effective materials, including medical and sales literature to help them inform and educate potential customers about the benefits of AMZEEQ and its proper administration, our efforts
to successfully commercialize AMZEEQ could be harmed, which would negatively impact our ability to generate product revenue.
Additionally, even after initial development of our sales force and the commercial launch of AMZEEQ, we will need to maintain and further develop our sales force, and we will
be competing with other pharmaceutical and biotechnology companies to recruit, hire, train and retain marketing and sales personnel. In the event we are unable to effectively develop and maintain our commercial team, including our U.S. sales force,
our ability to effectively commercialize AMZEEQ would be limited, and we would not be able to generate product revenues successfully. There are risks involved both with establishing our own sales and marketing capabilities and with entering into
arrangements with third parties to perform these services. For example, any efforts to develop a sales and marketing organization would be subject to numerous risks, including, but not limited to, the following:
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recruiting and training a sales force is expensive and time consuming and could delay our product launch;
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we may be unable to recruit, retain or motivate adequate numbers of effective and qualified sales and marketing personnel;
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we may be unable to provide adequate training to sales and marketing personnel;
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our sales personnel may be unable to obtain access to physicians or convince adequate numbers of physicians to prescribe AMZEEQ;
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there may be unforeseen costs and expenses associated with creating an independent sales and marketing organization; and
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we may incur significant unexpected expenses if the commercial launch of AMZEEQ is delayed or does not occur for any reason.
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If we do not establish sales, marketing and distribution capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in
commercializing our proposed products.
We have not obtained regulatory approvals to market FMX103 or our pipeline product candidates, and we may be delayed in obtaining or fail to obtain such
regulatory approvals and to commercialize these product candidates.
The process of developing, obtaining regulatory approval for and commercializing FMX103 and our other product candidates is long, complex, costly and uncertain, and delays or
failure can occur at any stage. Furthermore, the research, testing, manufacturing, labeling, marketing, sale and distribution of drugs are subject to extensive and rigorous regulation by the FDA. We are not permitted to market any of our product
candidates in the United States until we receive approval of the applicable NDA from the FDA. To gain approval of an NDA or other equivalent regulatory approval, we must provide the FDA with clinical data that demonstrates the continued safety and
efficacy of the product for the intended indication.
While we have received FDA approval to market AMZEEQ, we have not received formal regulatory clearance to market FMX103 from the FDA. Our other product candidates are at
earlier stages of development and therefore subject to similar or even greater uncertainty and risk than FMX103.
Although we received positive Phase III clinical trial results for FMX103, the results of those clinical trials may be unsatisfactory to the FDA even if we believe those
clinical trials were successful. The FDA may require that we conduct additional clinical, nonclinical, manufacturing, validation or drug product quality studies and submit that data before considering or reconsidering any NDA we may submit.
Depending on the extent of these additional studies, approval of any applications that we submit may be significantly delayed or may require us to expend more resources than we have available. It is also possible that additional studies we conduct
may not be considered sufficient by the FDA to provide regulatory approval.
If any of these outcomes occur, we would not receive approval for FMX103 or our other product candidates and may be forced to cease operations.
Changes in funding for the FDA, the SEC and other government agencies could hinder their ability to hire and retain key leadership and other personnel,
prevent new products and services from being developed or commercialized in a timely manner or otherwise prevent those agencies from performing normal functions on which the operation of our business may rely, which could negatively impact our
business.
The ability of the FDA to review and approve new products can be affected by a variety of factors, including government budget and funding levels, ability to hire and retain
key personnel and accept payment of user fees, and statutory, regulatory, and policy changes. Average review times at the agency have fluctuated in recent years as a result. In addition, government funding of the SEC and other government agencies
on which our operations may rely, including those that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable.
Disruptions at the FDA and other agencies may also slow the time necessary for new drugs to be reviewed and/or approved by necessary government agencies, which would adversely
affect our business. For example, over the last several years, including beginning on December 22, 2018, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA and the SEC, have had to furlough critical
FDA, SEC and other government employees and stop critical activities. If a prolonged government shutdown occurs, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions including our NDA which
was accepted in October 2019 seeking approval for our product candidate FMX103 for the treatment of moderate-to-severe papulopustular rosacea in adults, and such delays could have a material adverse effect on our business. Further, future
government shutdowns could impact our ability to access the public markets and obtain necessary capital in order to properly capitalize and continue our operations.
If the FDA does not conclude that FMX103 satisfies the requirements under Section 505(b)(2) of the Federal Food Drug and Cosmetics Act, or Section 505(b)(2),
or if the requirements for FMX103 under Section 505(b)(2) are not as we expect, the approval pathway will likely take significantly longer, cost significantly more and entail significantly greater complications and risks than anticipated, and in
either case may not be successful.
We have submitted an NDA for FMX103 under the FDA’s 505(b)(2) regulatory pathway. The Drug Price Competition and Patent Term Restoration Act of 1984, also known as the
Hatch-Waxman Act, added Section 505(b)(2) to the Federal Food, Drug and Cosmetic Act, or FDCA. Section 505(b)(2) permits the filing of an NDA where at least some of the information required for approval comes from studies that were not conducted by
or for the applicant, and for which the applicant has not received a right of reference, which could expedite the development program for FMX103 by potentially decreasing the amount of clinical data that we would need to generate in order to obtain
FDA approval. If the FDA does not allow us to pursue the Section 505(b)(2) regulatory pathway, we may need to conduct additional clinical trials, provide additional data and information, and meet additional standards for regulatory approval. If
this were to occur, the time and financial resources required to obtain FDA approval for FMX103, and complications and risks associated with this product candidate, would likely increase significantly. Moreover, inability to pursue the Section
505(b)(2) regulatory pathway could result in new competitive products reaching the market more quickly than our product candidate, which would likely harm our competitive position and prospects. Even if we are allowed to pursue the Section
505(b)(2) regulatory pathway, our product candidate may not receive the requisite approvals for commercialization.
In addition, notwithstanding the approval of AMZEEQ and certain other products by the FDA under Section 505(b)(2) over the last few years, certain competitors and others have
objected to the FDA’s interpretation of Section 505(b)(2). If the FDA’s interpretation of Section 505(b)(2) is successfully challenged, the FDA may be required to change its 505(b)(2) policies and practices, which could delay or even prevent the
FDA from approving any NDA that we submit under Section 505(b)(2). In addition, the pharmaceutical industry is highly competitive, and Section 505(b)(2) NDAs are subject to special requirements designed to protect the patent rights of
sponsors of previously approved drugs that are referenced in a Section 505(b)(2) NDA and we may be required to certify against patents listed in the FDA’s Orange Book. These requirements may give rise to patent litigation and mandatory delays in
approval of our NDAs for up to 30 months depending on the outcome of any litigation. It is not uncommon for a manufacturer of an approved product to file a citizen petition with the FDA seeking to delay approval of, or impose additional approval
requirements for, pending competing products. If successful, such petitions can significantly delay, or even prevent, the approval of the new product. However, even if the FDA ultimately denies such a petition, the FDA may substantially delay
approval while it considers and responds to the petition. In addition, even if we are able to utilize the Section 505(b)(2) regulatory pathway for FMX103, there is no guarantee this would ultimately lead to faster product development or earlier
approval.
Moreover, even if FMX103 is approved under Section 505(b)(2), the approval may be subject to limitations on the indicated uses for which the product may be marketed or to other
conditions of approval, or may contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the products.
We may not receive market exclusivity for our product candidates under the Hatch-Waxman Act since our lead product candidates are based
on an “old antibiotic” and therefore potential competitors may develop generic versions of our product(s) after launch that, if approved, could compete directly with our product(s) sooner than we expect.
Statutory exclusivity provides the holder of an approved NDA limited protection from new competition in the marketplace for the innovation represented by its approved drug
product and precludes approval of certain 505(b)(2) applications and ANDAs, including for a generic version of the drug product, for prescribed periods of time. During the exclusivity period, the FDA may not approve a Section 505(b)(2) application
or ANDA to the extent it is subject to exclusivity, or in the case of exclusivity for a new chemical entity may not receive a Section 505(b)(2) application or ANDA. Changes to a drug resulting from new clinical studies (other than bioavailability
studies) that were “essential to approval,” and conducted or sponsored by the applicant, such as a new dosage form, strength, route of administration, dosing regimen or indication, are associated with a three-year period of exclusivity during which
the FDA cannot approve an ANDA or 505(b)(2) application for the change.
Drugs based on an “old antibiotic,” such as minocycline, are subject to an additional limitation and will not receive three-year exclusivity for a “condition of use” that was
approved before October 8, 2008. Prior to 2008, drugs based on an “old antibiotic” were not eligible for Hatch-Waxman Act exclusivity. In 2008, the Q1 Program Supplemental Funding Act of 2008 made drugs containing old antibiotics eligible for
three-year exclusivity under certain conditions, but excluded from eligibility for that exclusivity any “condition of use” approved for such drugs before October 8, 2008. The statute does not define “condition of use” but the U.S. District Court
has provided guidance in Viropharma, Inc. v. Hamburg, 898 F. Supp.2d (District of Columbia, 2012). In Viropharma, the court held that a supplemental new drug
approval for the drug Vancocin was not eligible for three-year exclusivity because the supplemental new drug application at issue did not constitute a “significant new use” for the drug. The court held that the “inclusion of more specific dosing
information that was within the range specified in the prior label,” “new instructions on monitoring patients’ renal function,” and “new instructions for the continuation of treatment in older patients” did not effect a “significant new use” but
rather served only to “refine labeling regarding already approved conditions of use.” The FDA also emphasized that had the company sought approval for a new indication or a new dosing regimen, it would have had to comply with other statutory
requirements (including by providing new pediatric data), and that since the company did not have to provide the clinical data, it did not merit the three-year exclusivity for old antibiotics.
We believe that the clinical data submitted for our product candidates will satisfy the exclusivity requirements for old antibiotics. Our Phase III clinical trials for AMZEEQ
provided new clinical (including new pediatric) data that supported a topical route of administration, a new dosing regimen and a significantly lower concentration of minocycline than the prior oral form. FMX103 is indicated for the treatment of
moderate-to-severe papulopustular rosacea, which is a new indication for minocycline. While we believe that any clinical data submitted to support FMX103 and each of our other pipeline products containing an old antibiotic will provide the required
new significant benefits and uses to qualify for the three-year non-patent exclusivity, if the FDA and the U.S. courts do not agree with us, the product candidate would not be protected by three-year exclusivity under the Hatch Waxman Act. While we
would continue to be able to enforce our patents listed in the FDA’s Orange Book against infringement by third-parties, including a 30-month or any further stay or injunction from a court during the pendency of litigation, the FDA could approve an
ANDA for a generic version of our product and a company could launch the product at risk and we may not be able to obtain an injunction to prevent the launch, which would allow a generic into the market sooner than we expect. In addition, even if
the FDA awards three-year exclusivity to each of these products, its scope will depend on how the FDA defines the exclusivity-protected change. If the FDA defines this change more narrowly than we anticipate, the three-year exclusivity could
provide less protection against generic competition than expected. Moreover, even if we obtain three years marketing exclusivity an ANDA may be submitted at any time before the expiration of market exclusivity.
Because our Phase III clinical trials for AMZEEQ and FMX103 were not conducted head-to-head with the current standard of care drugs, we may not compare our
results to those of existing drugs for promotional purposes, which may affect our sales and marketing efforts.
None of our Phase III clinical trials for AMZEEQ and FMX103 were conducted in head-to-head comparison with the drugs considered the current standard of care for the relevant
indications, namely oral Solodyn for moderate-to-severe acne, and topical antimicrobials (such as Metrogel, generic metronidazole and Finacea) for rosacea. This means that none of the patient groups participating in these trials were or are being
treated with the standard of care drugs alongside the groups treated with our product candidates.
The FDA generally requires adequate, well-controlled head-to-head clinical trials to support comparative claims regarding marketed products. As a result, we may not make
promotional claims that compare AMZEEQ, FMX103 or any of our other product candidates that are commercialized in the future to the current standards of care or other competitor products which may negatively impact sales of our products.
Our ability to finance our operations and generate revenues depends on the commercial success of AMZEEQ and on the clinical and commercial success of FMX103
and our other product candidates, and failure to achieve such success will negatively impact our business.
Although we received FDA approval of AMZEEQ, we expect to continue to incur losses for the near future, which will delay our profitability. Moreover, it is possible that even
if we succeed in developing and commercializing one or more of our other product candidates, we may never become profitable. Our near-term prospects, including our ability to finance our operations and generate revenues, depend on the successful
commercialization of AMZEEQ and on the successful regulatory approval and commercialization of FMX103. The success of AMZEEQ, FMX103 and our other product candidates depends on a number of factors, many of which are beyond our control, including:
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the effectiveness of our marketing, sales and distribution strategy and operations;
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our ability to maintain, independently or via third parties, a commercially viable manufacturing process that is compliant with cGMP;
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our success in educating health care providers and patients about the benefits, administration and use of AMZEEQ and, if approved, FMX103 and our other product candidates;
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the FDA’s acceptance of our parameters for regulatory approval relating to FMX103 and our other product candidates, including our proposed indications, primary endpoint assessments, primary endpoint measurements and regulatory
pathways;
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the FDA’s acceptance of the number, design, size, conduct and implementation of our clinical trials for our clinical-stage product candidates, our trial protocols and the interpretation of data from preclinical studies or clinical
trials;
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the FDA’s acceptance of the sufficiency of the data we collected from our preclinical studies and clinical trials to support the submission of an NDA without requiring additional preclinical or clinical trials;
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the FDA’s willingness to schedule an advisory committee meeting in a timely manner to evaluate and decide on the approval of an NDA;
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the recommendation of the FDA advisory committee to approve our application without limiting the approved labeling, specifications, distribution or use of the products, or imposing other restrictions;
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the FDA’s satisfaction with the NDA submission for FMX103 or our other product candidates;
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the prevalence and severity of adverse events associated with AMZEEQ, FMX103 and our other product candidates;
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the timely and satisfactory performance by third party contractors of their obligations in relation to our clinical trials and our manufacturing and supply of AMZEEQ and our product candidates;
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our ability to raise additional capital on acceptable terms in order to achieve our goals;
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the availability, perceived advantages, relative cost, safety and efficacy of alternative and competing treatments;
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our ability to take advantage of the 505(b)(2) regulatory pathway and obtain regulatory marketing exclusivity for our products under the Hatch-Waxman Act;
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our ability to create, obtain, protect and enforce our intellectual property rights with respect to AMZEEQ, FMX103 or our other product candidates;
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the prevalence and severity of signs and symptoms associated with AMZEEQ, FMX103 and our other product candidates;
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our ability to bring an action timely for patent infringement arising out of the filing of ANDAs by generic companies seeking approval to market generic versions of our products before the expiry of our patents; and
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our ability to avoid third party claims of patent infringement or intellectual property violations.
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If we fail to achieve these objectives or to overcome the challenges presented above, many of which are beyond our control, in a timely manner, we could experience significant delays or an
inability to successfully commercialize AMZEEQ or our product candidates. Accordingly, we may not be able to generate sufficient revenues through the sale of AMZEEQ, FMX103 or our other product candidates to enable us to continue our business.
We may encounter delays in completing clinical trials for our product candidates and may even be prevented from commencing such trials due to factors that are
largely beyond our control.
We have in the past and may in the future experience delays in completing our ongoing clinical trials and in commencing future clinical trials. We experienced significant
delays in our Phase III clinical program for AMZEEQ, first due to quality control issues with certain active ingredients supplied to us by a third party and due to insufficient results in one of the co-primary endpoints, namely IGA treatment
success, in one of the two initial Phase III trials, after which we conducted an additional Phase III clinical trial. Such difficulties may arise again in future trials for other indications and for our product candidates.
We rely on clinical research organizations, or CROs, and clinical trial sites to ensure the proper and timely conduct of our clinical trials. While we have agreements governing
the committed activities of our CROs, we have limited influence over their actual performance. A failure of one or more of our clinical trials can occur at any time during the clinical trial process. Clinical trials can be delayed or aborted for a
variety of other reasons, including delay or failure to:
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obtain regulatory approval to commence a trial;
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reach agreement on acceptable terms with prospective CROs and clinical trial sites, the terms of which may be subject to extensive negotiation and vary significantly among different CROs and trial sites;
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obtain institutional review board, or IRB, approval at each site;
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enlist suitable patients to participate in a trial;
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have patients complete a trial or return for post-treatment follow-up;
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ensure clinical sites observe trial protocol or continue to participate in a trial;
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address any patient safety concerns that arise during the course of a trial;
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address any conflicts with new or existing laws or regulations;
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add a sufficient number of clinical trial sites; or
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manufacture sufficient quantities of the product candidate for use in clinical trials.
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Patient enrollment is also a significant factor in the timing of clinical trials and is affected by many factors, including the size and nature of the patient population, the
proximity of patients to clinical sites, the eligibility criteria for the trial, the design of the clinical trial, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages of the drug being studied in
relation to available alternatives, including any new drugs or treatments that may be approved for the indications we are investigating.
We may also encounter delays if a clinical trial is suspended or terminated by us, by the IRBs of the institutions in which such trials are being conducted, by the trial’s data
safety monitoring board, or by the FDA. Such authorities may suspend or terminate one or more of our clinical trials due to a number of factors, including our failure to conduct the clinical trial in accordance with relevant regulatory requirements
or clinical protocols, inspection of the clinical trial operations or trial site by the FDA resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a drug,
changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial.
If we experience delays in carrying out or completing any clinical trial of our product candidates, the commercial prospects of our product candidates may be harmed, and our
ability to generate product revenues from any of these product candidates will be delayed. In addition, any delays in completing our clinical trials will increase our costs, slow down our product candidate development and approval process and
jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may significantly harm our business and financial condition. In addition, many of the factors that cause, or lead to, a delay in the commencement or
completion of clinical trials may also ultimately lead to the denial of regulatory approval of our product candidates.
AMZEEQ and FMX103 and other product candidates may produce undesirable side effects that we may not have detected in our clinical trials. This could prevent
us from gaining market acceptance for AMZEEQ or or marketing approval for our product candidates, or from maintaining such acceptance and approval, and could substantially increase commercialization costs and even force us to cease operations.
To date, AMZEEQ and FMX103 have not been associated with drug-related systemic side effects and only a few cases of mild and temporary skin reactions have been reported, most
of which disappeared on their own within 12 weeks from the beginning of the treatment. AMZEEQ and FMX103 have both been observed to have a generally favorable safety profile, with the most commonly reported
adverse events related to upper respiratory tract infections, and there were no treatment-related serious adverse events reported. Nonetheless, upon commercialization of AMZEEQ, and, if
approved, FMX103 or other product candidates, the clinical exposure of the drugs will be significantly expanded to a wider and more diverse group of patients than those participating in the clinical trials, which may reveal undesirable side effects
caused by these products that were not previously observed or reported in the current clinical trials.
The FDA and foreign regulatory agency regulations require that we report certain information about adverse medical events if our products may have caused or contributed to
those adverse events. The timing of our obligation to report would be triggered by the date on which we become aware of the adverse event as well as the nature of the event. We may fail to report adverse events we become aware of within the
prescribed timeframe. We may also fail to appreciate that we have become aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from the use
of our products. If we fail to comply with our reporting obligations, the FDA or a foreign regulatory agency could take action including criminal prosecution, the imposition of civil monetary penalties or seizure of our products.
Additionally, in the event we discover the existence of adverse medical events or side effects caused by AMZEEQ or one of our product candidates, a number of other potentially
significant negative consequences could result, including:
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sales of the product may be more modest than originally anticipated;
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the FDA may suspend or withdraw their approval of the product;
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the FDA may require the addition of labeling statements, such as warnings or contraindications or distribution and use restrictions;
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the FDA may require us to issue specific communications to healthcare professionals, such as letters alerting them to new safety information about our product, changes in usage or other important information;
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the FDA may issue negative publicity regarding the affected product, including safety communications;
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we may be limited with respect to the safety-related claims that we can make in our marketing or promotional materials;
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we may be required to change the way the product is administered, conduct additional preclinical studies or clinical trials or restrict or cease the distribution or use of the product;
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perception of our products by physicians and patients may be adversely affected; and
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we could be sued and held liable for harm caused to patients.
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Any of these events could prevent us from achieving or maintaining market acceptance of the affected product or product candidate and could substantially increase
commercialization costs or even force us to cease operations.
Even if FMX103 or our other product candidates receive marketing approval, we may continue to face future developmental and regulatory difficulties. In
addition, we are subject to government regulations and we may experience delays in obtaining required regulatory approvals to market our proposed product candidates.
Even if we receive approval of any regulatory filing for FMX103 or any of our other product candidates, the FDA may grant approval contingent on the performance of additional
costly post-approval clinical trials or REMS to monitor the safety or efficacy of the product, which could negatively impact us by reducing revenues or increasing expenses, and cause the product not to be commercially viable. Absence of long-term
safety data may further limit the approved uses of our products, if any.
The FDA may also approve FMX103 or any of our other product candidates for a more limited indication or a narrower patient population than we originally requested, or may not
approve the labeling that we believe is necessary or desirable for the successful commercialization of our product candidates. Furthermore, any such approved product, including AMZEEQ, will remain subject to extensive regulatory requirements,
including requirements relating to manufacturing, labeling, packaging, adverse event reporting, storage, advertising, promotion, distribution and recordkeeping.
If we fail to comply with the regulatory requirements of the FDA, or if we discover previously unknown problems with any approved commercial products, manufacturers or
manufacturing processes, we could be subject to administrative or judicially imposed sanctions or other setbacks, which could require us to take corrective actions, including to:
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suspend or impose restrictions on operations, including costly new manufacturing requirements;
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refuse to approve pending applications or supplements to applications;
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suspend any ongoing clinical trials;
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suspend or withdraw marketing approval;
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seek an injunction or impose civil or criminal penalties or monetary fines;
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seize or detain products;
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ban or restrict imports and exports;
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issue warning letters or untitled letters;
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suspend or impose restrictions on operations, including costly new manufacturing requirements; or
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refuse to approve pending applications or supplements to applications.
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In addition, various aspects of our operations are 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 and expensive and could divert management resources and attention and, consequently, could adversely affect our business operations and financial performance.
Even though AMZEEQ has received FDA approval, and even if FMX103 or our other product candidates receive regulatory approval, they may fail to achieve the
broad degree of physician adoption and use and market acceptance necessary for commercial success.
Even though we have obtained FDA approval for AMZEEQ, and even if we obtain FDA approval for FMX103 or any of our other product candidates, the commercial success of such
products will depend significantly on their broad adoption and use by dermatologists, pediatricians and other physicians for approved indications, including AMZEEQ for the treatment of moderate-to-severe acne in patients nine years of age and older
and FMX103 for the treatment of moderate-to-severe rosacea in adults, as well as any other therapeutic indications that we may seek to pursue.
Moreover, if the treatment of acne with AMZEEQ or rosacea with FMX103 is deemed to be an elective procedure, the cost of which is borne by the patient, it will not be
reimbursable through government or private health insurance.
The degree and rate of physician and patient adoption of AMZEEQ, and, if approved, FMX103 and any of our other product candidates, will depend on a number of factors,
including:
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the clinical indications for which the product is approved;
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the safety and efficacy of our product as compared to existing therapies for those indications;
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the prevalence and severity of adverse side effects;
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patient satisfaction with the results and administration of our product and overall treatment experience, including relative convenience, ease of use and avoidance of, or reduction in, adverse side effects;
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patient demand for the treatment of moderate-to-severe acne and rosacea or other indications;
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the effectiveness of our sales and marketing efforts, especially the success of any targeted marketing efforts directed toward dermatologists, pediatricians, other physicians, clinics and any direct-to-consumer marketing efforts we
may initiate;
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overcoming biases of physicians and patients towards topical treatments for moderate-to-severe acne, rosacea or other indications and their willingness to adopt new therapies for these indications;
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the cost of treatment in relation to alternative treatments, the extent to which these costs are covered and adequately reimbursed by third party payors, and patients’ willingness to pay for our products;
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proper training and administration of our products by dermatologists, pediatricians and medical staff; and
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the revenues and profitability that our products will offer physicians as compared to alternative therapies.
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We may decide not to continue developing or commercializing any of our product candidates at any time during development or of any of our products after
approval, which would reduce or eliminate our potential return on investment for those product candidates or products.
We have in the past and may again in the future decide to discontinue the development of any of our product candidates in our pipeline or not to continue to commercialize any
approved product. In December 2017, we discontinued further in-house development of FMX102 for the treatment of impetigo and FMX104 for the treatment of chemotherapy-induced rash due to our reassessment of the limited market opportunities for these
products in light of our then-existing limited cash and resources. In the future, we may discontinue development of other product candidates for a variety of reasons, such as the appearance of new technologies that make our product less
commercially viable, an increase in competition from generic or other competing products, changes in or failure to comply with applicable regulatory requirements, the discovery of unforeseen side effects during clinical development or after the
approved product has been marketed or the occurrence of adverse events at a rate or severity level that is greater than experienced in prior clinical trials. If we discontinue a program in which we have invested significant resources, we will
receive a limited return on our investment and we will have missed the opportunity to have allocated those resources to other product candidates in our pipeline that may have had potentially more productive uses.
If we are not successful in developing, acquiring regulatory approval for and commercializing additional product candidates beyond AMZEEQ or FMX103, our
ability to expand our business and achieve our strategic objectives will be impaired.
Although we will devote a substantial portion of our resources on the commercialization of AMZEEQ and on the potential approval of FMX103 for the treatment of
moderate-to-severe rosacea, another key element of our strategy is to discover, develop and commercialize products based on our proprietary foam or other topical platforms to serve additional dermatology indications and therapeutic markets. We are
seeking to do so through our internal research programs, but our resources are limited, and our current programs are primarily geared towards commercializing AMZEEQ and seeking regulatory approval for FMX103. We may also explore strategic
collaborations for the development or acquisition of new products and product candidates, but we may not be successful in entering into such relationships. While we have received FDA approval for AMZEEQ and our NDA for FMX103 for the treatment of
rosacea has been accepted by the FDA, all of our other potential product candidates remain in earlier stages of development. Research programs to identify product candidates require substantial technical, financial and human resources, regardless
of whether any product candidates are ultimately identified. Our research programs may initially show promise in identifying potential product candidates, yet may fail to yield product candidates for clinical development for many reasons,
including:
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the research methodology used may not be successful in identifying potential product candidates;
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competitors may develop alternatives that render our product candidates obsolete or less attractive;
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product candidates we develop may nevertheless be covered by third parties’ patents or other proprietary rights;
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a product candidate may in a subsequent trial be shown to have harmful side effects or other characteristics that indicate it is unlikely to be effective or otherwise does not meet applicable regulatory criteria;
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a product candidate may not be capable of being produced in commercial quantities at an acceptable cost, or at all;
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a product candidate may not be accepted as safe and effective by patients, the medical community or third party payors, if applicable;
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intellectual property rights, such as patents, which are necessary to protect our interests in a product candidate, may be difficult to obtain or unobtainable or if obtained may be difficult to enforce or unenforceable;
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intellectual property rights, such as patents, may fail to provide adequate protection, may be challenged and one or more claims may be revoked or the patent may be held to be invalid; and
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intellectual property rights of third parties may potentially block our entry into certain markets, or make such entry economically impracticable.
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AMZEEQ and, if approved, FMX103 will face significant competition and our failure to compete effectively may prevent us from achieving
significant market penetration and expansion.
The approved indication of AMZEEQ is to treat inflammatory lesions of non-nodular moderate-to-severe acne in patients 9 years of age and older, and the expected indication of
FMX103 is to treat moderate-to-severe papulopustular rosacea in adults. The facial aesthetic market in general, and the market for acne treatments in particular, is highly competitive and dynamic, and is characterized by rapid and substantial
technological development and product innovations. AMZEEQ faces significant competition from other acne products, including oral drugs such as Seysara, Solodyn, Doryx, Dynacin, Acticlate and Minocin, and topical anti-acne drugs such as Aklief,
Acanya, Ziana, Epiduo, Benzaclin, Aczone and Differin. FMX103, if approved, may face significant competition from other rosacea products, including oral drugs such as Oracea®, and topical anti-rosacea drugs such as Metrogel, Soolantra and Finacea,
all of which have been approved for marketing and are currently available to consumers. AMZEEQ and, if approved, FMX103 may also compete with non-prescription anti-acne and rosacea products and unapproved and off-label treatments.
There are also several potential competing products currently under development. One of such potential competing products is a topical gel suspension containing minocycline
non-hydrochloride for the treatment of inflammatory skin disease, including acne and rosacea, developed by Hovione, a manufacturer of active pharmaceutical ingredients and drug product intermediates, which product candidate has recently completed
Phase II clinical trials for the treatment of moderate-to-severe papulopustular rosacea and has obtained FDA input for the design of a planned Phase III clinical trial. Another such potential competing product is a topical hydrophilic gel
containing minocycline hydrochloride for the treatment of acne, known as BPX-01, developed by BioPharmX Corporation, for which BioPharmX has completed Phase IIa and Phase IIb clinical trials and has obtained FDA input for the design of a planned
Phase III clinical trial. BioPharmX has also announced positive results for its Phase IIb study for a topical minocycline gel named BPX-04 for the treatment of rosacea. If ultimately approved and launched in the United States, these products would
become direct competitors to AMZEEQ and FMX103.
To compete successfully in the acne and rosacea treatment markets, we will have to continue to demonstrate that AMZEEQ is safe and effective for the treatment of
moderate-to-severe acne and to demonstrate that FMX103 is safe and effective for the treatment of moderate-to-severe rosacea, and that they do not infringe the intellectual property rights of any third parties. Competing in the acne and rosacea
markets could result in price-cutting, reduced profit margins and loss of market share, any of which would harm our business, financial condition and results of operations.
Due to less stringent regulatory requirements, there are many more acne products and procedures available for use in international markets than are approved for use in the
United States. There are also fewer limitations on the claims that our competitors in international markets can make about the effectiveness of their products and the manner in which they can market them. As a result, if we partner with other
companies in these markets and launch our products, we may face more competition in these markets than in the United States.
In addition, we may not be able to price AMZEEQ or, if approved, FMX103, competitively with current standard of care products or their price may drop considerably due to
factors outside our control. If this happens or the price of materials and manufacture increases dramatically, our ability to continue to operate our business would be materially harmed and we may be unable to commercialize AMZEEQ or FMX103
successfully. Potential competitors may challenge, narrow, invalidate or seek to design around our granted patents or our patent applications, and such patents and patent applications may fail to provide adequate protection for our product
candidates. Furthermore, such potential competitors may enter the market before us, and their products may be designed to circumvent our granted patents and pending patent applications.
Healthcare reforms by governmental authorities and related reductions in pharmaceutical pricing, reimbursement and coverage by third party payors may
adversely affect our business.
We expect the healthcare industry to face increased limitations on reimbursement, rebates and other payments as a result of healthcare reform, which could adversely affect
third party coverage of our products and how much or under what circumstances healthcare providers will prescribe or administer our products, if approved.
In both the United States and other countries, sales of our products, if approved for marketing, will depend in part upon the coverage and adequate reimbursement from third
party payors, which include governmental authorities, managed care organizations and other 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 reducing reimbursement for prescription products
and reducing the levels at which consumers and healthcare providers are reimbursed for purchases of pharmaceutical products.
Cost reduction initiatives and changes in coverage implemented through legislation or regulation could decrease utilization of and reimbursement for any approved products,
which in turn would affect the price we can receive for those products. Any reduction in reimbursement that results from federal legislation or regulation may also result in a similar reduction in payments from private payors, as private payors
often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates.
Significant developments that may adversely affect pricing in the United States include the enactment of federal healthcare reform laws and regulations, including the
Affordable Care Act, or the ACA, and the Medicare Prescription Drug Improvement and Modernization Act of 2003. Changes in the healthcare system enacted as part of healthcare reform in the United States, as well as the increased purchasing power of
entities that negotiate on behalf of Medicare, Medicaid, and private sector beneficiaries, may result in increased pricing pressure by influencing, for instance, the reimbursement policies of third party payors. While healthcare reform legislation
may have increased the number of patients who are expected to have insurance coverage for our product candidates, provisions such as the assessment of a branded pharmaceutical manufacturer fee and an increase in the amount of rebates that
manufacturers pay for coverage of their drugs by Medicaid programs may have an adverse effect on us. It is uncertain how current and future reforms in these areas will influence the future of our business operations and financial condition.
Since its enactment, there have been judicial, Congressional and political challenges to certain aspects of the ACA. For example, President Trump signed two Executive Orders
and other directives designed to delay the implementation of certain provisions of the ACA or otherwise circumvent some of the requirements for health insurance mandated by the ACA. Concurrently, Congress has considered legislation that would
repeal or repeal and replace all or part of the ACA. While Congress has not passed comprehensive repeal legislation, two bills affecting the implementation of certain taxes under the ACA have been signed into law. In July 2018, CMS published a
final rule permitting further collections and payments to and from certain ACA qualified health plans and health insurance issuers under the ACA risk adjustment program in response to the outcome of federal district court litigation regarding the
method CMS uses to determine this risk adjustment. On December 14, 2018, a U.S. District Court Judge in the Northern District of Texas ruled that the individual mandate is a critical and inseverable feature of the ACA, and because it was repealed
as part of the Tax Act, the remaining provisions of the ACA are invalid as well. While neither the Texas District Court Judge, Trump administration nor CMS have stated that the ruling will have an immediate effect, it is unclear how this decision,
subsequent appeals, and other efforts to repeal and replace the ACA will impact the ACA. Although we cannot predict the form of any such replacement of the ACA may take, or the full effect on our business of the enactment of additional legislation
pursuant to healthcare and other legislative reform, we believe that legislation or regulations that would reduce reimbursement for, or restrict coverage of, our products could adversely affect how much or under what circumstances healthcare
providers will prescribe or administer our products. This could materially and adversely affect our business by reducing our ability to generate revenues, raise capital, obtain additional licensees 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.
Recently there has been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products, which has resulted in several U.S.
Congressional inquiries and proposed federal legislation designed to, among other things, bring more transparency to product pricing, reduce the cost of certain products under Medicare, review the relationship between pricing and manufacturer
patient programs, and reform government program reimbursement methodologies. At the state level, individual states in the United States are also increasingly passing legislation and implementing regulations designed to control product pricing,
including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures.
It is likely that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments
will pay for healthcare products and services, which could result in reduced demand for a pharmaceutical manufacturer’s products or additional pricing pressure.
It will be difficult for us to profitably sell AMZEEQ, FMX103 or our other product candidates if reimbursement for these products is limited by government
authorities and third party payor policies.
In addition to any healthcare reform measures which may affect reimbursement, market acceptance and sales of AMZEEQ, FMX103 and our other product candidates, if approved, will
depend on the reimbursement policies of government authorities and third party payors. Government authorities and third party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for,
and establish reimbursement levels.
A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and these third party payors have attempted to control costs by
limiting coverage and the amount of reimbursement for particular medications. We cannot be sure that reimbursement will be available for AMZEEQ or FMX103, or, if reimbursement is available, the level of reimbursement.
Reimbursement may impact the demand for, or the price of, any product for which we obtain marketing approval. In addition, third party payors are likely to impose strict
requirements for reimbursement in order to limit off-label use of a higher priced drug. Reimbursement by a third party payor may depend upon a number of factors including the third party payor’s determination that use of a product is:
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a covered benefit under its health plan;
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safe, effective and medically necessary;
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appropriate for the specific patient;
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neither experimental nor investigational.
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Obtaining coverage and reimbursement approval for a product from a government or other third party payor is a time-consuming and costly process that could require us to provide
supporting scientific, clinical and cost effectiveness data for the use of our products to the payor. We may not be able to provide data sufficient to gain acceptance with respect to coverage and reimbursement. We cannot be sure that coverage or
adequate reimbursement will be available for our product candidates, if approved. Also, we cannot be sure that reimbursement amounts will not reduce the demand for, or the price of, our future products. If reimbursement is not available, or is
available only to limited levels, we may not be able to commercialize our product candidates, profitably or at all, even if approved.
Legislative or regulatory healthcare reforms in the United States may make it more difficult and costly for us to obtain regulatory clearance or approval of
our product candidates and to produce, market, and distribute our products after clearance or approval is obtained.
From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulatory clearance or approval,
manufacture, and marketing of regulated products or the reimbursement thereof. In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. Any new
regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of FMX103 or any of our other product candidates. We cannot determine what effect changes in regulations, statutes, legal
interpretation or policies, when and if promulgated, enacted or adopted may have on our business in the future. Such changes could, inter alia, require:
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changes to manufacturing methods;
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recall, replacement, or discontinuance of one or more of our products; and
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additional recordkeeping.
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Each of these would likely entail substantial time and cost and could adversely affect our business and our financial results.
We will require substantial additional financing to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at
all, could force us to delay, limit, reduce or terminate our product development, other operations or commercialization efforts.
We anticipate that we will continue to expend substantial resources for the foreseeable future for the commercialization of AMZEEQ and for pre-commercialization efforts related
to FMX103. We also wish to continue the development of other indications and product candidates. However, we may not have sufficient funds to carry out and complete all of these plans and may need to raise additional funds for such purposes.
These expenditures will include costs associated with research and development, conducting preclinical studies and clinical trials, and manufacturing and supply, as well as
marketing and selling any products approved for sale. In addition, other unanticipated costs may arise. Because of the numerous risks and uncertainties associated with product development and commercialization, we are unable to precisely estimate
the actual amounts necessary to successfully complete the development and commercialization of any of our product candidates.
Based on our current plans, we believe our existing cash and investments will be sufficient to fund our operating expenses and capital requirements into the fourth quarter of
2020. However, our operating plan may change as a result of many factors currently unknown to us. We may therefore need to seek additional capital sooner than planned, through public or private equity or debt financings or other sources, such as
strategic collaborations or additional license arrangements. Such financings may result in dilution to shareholders, imposition of debt covenants and repayment obligations or other restrictions that may affect our business. In addition, we may seek
additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans.
Our future capital requirements depend on many factors, including:
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the cost of commercialization activities for AMZEEQ, FMX103 or any of our other product candidates approved for sale, including marketing, sales and distribution costs;
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the degree and rate of market acceptance of AMZEEQ and any future approved products;
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the emergence, approval, availability, perceived advantages, relative cost, relative safety and relative efficacy of alternative and competing products or treatments;
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the results of the clinical trials of our product candidates;
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the timing of, and the costs involved in, obtaining regulatory approvals for our product candidates;
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the number and characteristics of any additional product candidates we develop or acquire;
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the scope, progress, results and costs of researching and developing our product candidates, and conducting preclinical and clinical trials;
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the cost of manufacturing our product candidates and any products we successfully commercialize, and maintaining our related facilities;
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our ability to establish and maintain strategic collaborations, licensing or other arrangements and the terms of and timing of such arrangements;
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any product liability or other lawsuits related to our products;
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the expenses needed to attract and retain skilled personnel;
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the costs associated with being a public company;
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the costs associated with evaluation of AMZEEQ or our product candidates;
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the costs associated with evaluation of third party intellectual property;
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the costs associated with obtaining and maintaining licenses;
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the costs associated with creating, obtaining, protecting defending and enforcing intellectual property, such as costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, litigation costs,
including for patent infringement arising out of ANDA submissions by generic companies to manufacture and sell generic products, and the outcome of such litigation; and
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the timing, receipt and amount of sales of, or royalties on, approved products.
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Additional capital may not be available when we need it, on terms that are acceptable to us or at all. If adequate funds are not available to us on a timely basis, we may be
required to:
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delay, limit, reduce or terminate our establishment of manufacturing, sales and marketing or distribution capabilities or other activities that may be necessary to commercialize AMZEEQ, FMX103 or any of our other product candidates;
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delay, limit, reduce or terminate our research and development activities; or
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delay, limit, reduce or terminate preclinical studies, clinical trials or other development activities for our product candidates.
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If we raise additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may
have to relinquish certain valuable rights to our product candidates, technologies, future revenue streams or research programs or grant licenses on terms that may not be favorable to us. If we raise additional capital through public or private
equity offerings, the ownership interest of our existing shareholders will be diluted and the terms of any new equity securities may have a preference over our ordinary shares. If we raise additional capital through debt financing, we may be
subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt or making capital expenditures or specified financial ratios, any of which could restrict our ability to commercialize our product
candidates or operate as a business.
We have incurred significant losses since our inception and we anticipate that we will continue to incur losses in the near future.
We continue to incur significant research and development and other expenses related to our ongoing clinical trials and operations. We have recorded a net loss of $74.2
million, $65.7 million and $29.3 million for the years ended December 31, 2018, 2017 and 2016, respectively. As of December 31, 2018, we had an accumulated deficit of $215.4 million and had a working capital surplus of $90.7 million. We expect to
continue to incur losses, and we anticipate these losses may continue as we advance our commercialization efforts for AMZEEQ and as we continue our development of, and seek regulatory approvals for, FMX103 and our other product candidates.
We expect to rely on third parties to conduct some or all aspects of our drug product manufacturing, production research and preclinical and clinical testing,
and these third parties may not perform satisfactorily.
We do not expect to independently conduct all aspects of our drug product manufacturing, production research and preclinical and clinical testing. We currently rely, and expect
to continue to rely, on third parties with respect to these items, including manufacturing in the commercial context.
We have arrangements in place with two suppliers for the supply of the API of AMZEEQ and FMX103, and an exclusive supply agreement with ASM, for the manufacturing and supply of
our finished product of AMZEEQ. Pursuant to the agreement, ASM has agreed to manufacture and supply all of our commercial needs for the products on an exclusive basis for a period of four years, subject to certain exceptions.
Our reliance on these third parties for manufacturing, research and development activities will reduce our control over these activities but will not relieve us of our
responsibility to ensure compliance with all required regulations and study protocols. For example, for products that we develop and commercialize on our own, we will remain responsible for ensuring that each of our IND-enabling studies and
clinical studies are conducted in accordance with the study plan and protocols, and that our products are manufactured in accordance with cGMP as applied in the relevant jurisdictions.
If these third parties do not successfully carry out their contractual duties, meet expected deadlines, conduct our studies in accordance with regulatory requirements or our
stated study plans and protocols, or manufacture our drug products in accordance with cGMP, we will not be able to complete, or may be delayed in completing, the preclinical and clinical studies and manufacturing process validation activities
required to support future IND submissions and approval of our product candidates, or to support commercialization of AMZEEQ and, if approved, FMX103 and our other product candidates. Many of our agreements with these third parties contain
termination provisions that allow these third parties to terminate their relationships with us upon notice. If we need to enter into alternative arrangements, our product development and commercialization activities could be delayed.
Reliance on third party subcontractors and suppliers entails a number of risks, including reliance on the third party for regulatory compliance and quality assurance, the
possible breach of the manufacturing or supply agreement by the third party, the possibility that the supply is inadequate or delayed, the risk that the third party may enter the field and seek to compete and may no longer be willing to continue
supplying, and the possible termination or nonrenewal of the agreement by the third party at a time that is costly or inconvenient for us. In addition, third party subcontractors and suppliers may not be able to comply with cGMP or quality system
regulation or similar regulatory requirements outside the United States. If any of these risks transpire, we may be unable to timely retain alternate subcontractors or suppliers on acceptable terms and with sufficient quality standards and
production capacity, which may disrupt and delay the manufacture and commercial sale of AMZEEQ or our product candidates, if approved, and may disrupt and delay our clinical trials.
We may be forced to manufacture our product ourselves, for which we may not have the capabilities or resources, or enter into an agreement with a different manufacturer, which
we may not be able to do on reasonable terms, if at all. In some cases, the technical skills required to manufacture our product candidates may be unique or proprietary to the original manufacturer, and we may have difficulty or there may be
contractual restrictions prohibiting us from, transferring such skills to a back-up or alternate supplier, or we may be unable to transfer such skills at all. Any of these events could lead to clinical study delays or failure to obtain marketing
approval, or impact our ability to successfully commercialize our product or any future products. Some of these events could be the basis for FDA action, including injunction, recall, seizure or total or partial suspension of production.
We and our contract manufacturers are subject to significant regulation with respect to manufacturing our product and product candidates. The manufacturing
facilities on which we rely may not continue to meet regulatory requirements and have limited capacity.
We and the contract manufacturers for our product and product candidates are subject to extensive regulation. Some components of a finished drug product approved for commercial
sale or used in late-stage clinical studies must be manufactured in accordance with cGMP. These regulations govern manufacturing processes and procedures (including record keeping) and the implementation and operation of quality systems to control
and assure the quality of investigational products and products approved for sale. Poor control of production processes can lead to the introduction of adventitious agents or other contaminants, or to inadvertent changes in the properties or
stability of our product and product candidates that may not be detectable in final product testing. We or our contract manufacturers must supply all necessary documentation in support of regulatory applications on a timely basis and where
required, must adhere to the FDA’s or other regulator’s good laboratory practices and cGMP regulations enforced by the FDA or other regulator through facilities inspection programs. Our facilities and quality systems and the facilities and quality
systems of some or all of our third-party contractors must pass a pre-approval inspection for compliance with the applicable regulations as a condition of marketing approval of our product and potential products. In addition, the regulatory
authorities may, at any time, audit or inspect a manufacturing facility involved with the preparation of our products or the associated quality systems for compliance with the regulations applicable to the activities being conducted. If these
facilities do not pass a pre-approval plant inspection, FDA or other marketing approval of the products may not be granted.
The regulatory authorities also may, at any time following approval of a product for sale, audit the manufacturing facilities of our third-party contractors. If any such
inspection or audit identifies a failure to comply with applicable regulations or if a violation of our product specifications or applicable regulations occurs independent of such an inspection or audit, we or the relevant regulatory authority may
require remedial measures that may be costly and/or time-consuming for us or a third party to implement and that may include the temporary or permanent suspension of a clinical study or commercial sales or the temporary or permanent closure of a
facility. Any such remedial measures imposed upon us or third parties with whom we contract could materially harm our business.
If we or any of our third-party manufacturers fail to maintain regulatory compliance, the FDA or other regulators can impose regulatory sanctions including, among other things,
refusal to approve a pending application for a product, or revocation of a pre-existing approval. As a result, our business, financial condition and results of operations may be materially harmed.
Additionally, if supply from one approved manufacturer is interrupted, there could be a significant disruption in commercial supply. The number of manufacturers with the
necessary manufacturing capabilities is limited. The regulatory agencies may also require additional studies if a new manufacturer is relied upon for commercial production. Switching manufacturers may involve substantial costs and is likely to
result in a delay in our desired clinical and commercial timelines.
These factors could cause the delay of clinical studies, regulatory submissions, required approvals or commercialization of our product and any future products, cause us to
incur higher costs and prevent us from commercializing our products successfully. Furthermore, if our suppliers fail to meet contractual requirements, and we are unable to secure, validate and obtain approval of one or more replacement suppliers
capable of production at a substantially equivalent cost, our clinical studies may be delayed or we could lose potential revenues.
We expect to rely on third parties to conduct, supervise and monitor our clinical studies, and if these third parties perform in an unsatisfactory manner, it
may harm our business.
We also rely on medical institutions, clinical investigators, contract laboratories, collaborative partners and other third parties, such as CROs, to assist us in conducting
our clinical trials for our other product candidates. While we will have agreements governing their activities, we will have limited influence over their actual performance. We will control only certain aspects of our CROs’ activities.
Nevertheless, we will be responsible for ensuring that each of our clinical studies is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards, and our reliance on the CROs does not relieve us of our
regulatory responsibilities.
We and our CROs are required to comply with the FDA’s and other regulatory authorities’ good clinical practices, or GCPs, for conducting, recording and reporting the results of
clinical studies to assure that the data and reported results are credible and accurate and that the rights, integrity and confidentiality of clinical study participants are protected. If we or our CROs fail to comply with applicable GCPs, the
clinical data generated in our future clinical studies may be deemed unreliable and the FDA and other regulatory authorities may require us to perform additional clinical studies before approving any marketing applications.
If the third parties or consultants that assist us in conducting our clinical trials do not perform their contractual duties or obligations, experience work stoppages, do not
meet expected deadlines, terminate their agreements with us or need to be replaced, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical trial protocols or GCPs, or for any other
reason, we may need to conduct additional clinical trials or enter into new arrangements with alternative third parties, which could be difficult, costly or impossible, and our clinical trials may be extended, delayed or terminated or may need to
be repeated. If any of the foregoing were to occur, we may not be able to obtain, or may be delayed in obtaining, regulatory approval for the product candidates being tested in such trials, and will not be able to, or may be delayed in our efforts
to, successfully commercialize these product candidates.
Supply interruptions may disrupt our inventory levels and the availability of our products and product candidates and cause delays in obtaining regulatory
approval for our product candidates or harm our business by reducing our revenues.
We depend on a limited number of manufacturing facilities to manufacture our finished products and product candidates. Numerous factors could cause interruptions in the supply
or manufacture of our products and product candidates, including:
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timing, scheduling and prioritization of production by our contract manufacturers or a breach of our agreements by our contract manufacturers;
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changes in our sources for manufacturing;
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the timing and delivery of shipments;
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our failure to locate and obtain replacement suppliers and manufacturers as needed on a timely basis; and
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conditions affecting the cost and availability of raw materials.
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If one of our suppliers or manufacturers fails or refuses to supply us with necessary raw materials or finished products or product candidates on a timely basis or at all, it
would take a significant amount of time and expense to qualify a new supplier or manufacturer. We may not be able to obtain active ingredients or finished products from new suppliers or manufacturers on acceptable terms and at reasonable prices, or
at all.
Any interruption in the supply of finished products could hinder our ability to distribute finished products to meet commercial demand and adversely affect our financial
results and financial condition.
With respect to our product candidates, production of product is necessary to perform clinical trials and successful registration batches are necessary to file for approval to
commercially market and sell product candidates. Delays in obtaining clinical material or registration batches could adversely impact our clinical trials and delay regulatory approval for our product candidates.
We currently develop our clinical drug product candidates in our research and development facility located in Rehovot, Israel and through partnerships with
external contract manufacturing organizations. If these facilities or any future facilities or our equipment were to be damaged or destroyed, or if we experience a significant disruption in our operations for any other reason, our ability to
continue to operate our business could be materially harmed.
We currently research and develop our product candidates primarily in our laboratory located in Rehovot, Israel and through partnership with external contract manufacturing
organizations. If these or any future facilities were to be damaged, destroyed or otherwise unable to operate, whether due to war, acts of hostility, earthquakes, fire, floods, hurricanes, storms, tornadoes, other natural disasters, employee
malfeasance, terrorist acts, power outages or otherwise, or if performance of our research and development facility is disrupted for any other reason, such an event could delay our clinical trials. If we experience delays in achieving our
development objectives, or if we are unable to manufacture an approved product within a timeframe that meets our prospective customers’ expectations, our business, prospects, financial results and reputation could be materially harmed.
Currently, we maintain insurance covering damage to our property and equipment and workers compensation coverage, subject to deductibles and other limitations. If we have
underestimated our insurance needs with respect to an interruption, or if an interruption is not subject to coverage under our insurance policies, we may not be able to cover our losses.
If product liability lawsuits are brought against us, we may incur substantial liabilities that may not be fully covered by our insurance policies and we may
be required to limit commercialization of any of our other products we develop.
We face an inherent risk of product liability as a result of the clinical testing of our product candidates and will face an even greater risk as we commercialize AMZEEQ and
any other product candidates that receive marketing approval. For example, we may be sued if any product we develop allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such
product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability and a breach of warranties. Claims could also be asserted under
state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our products. Even a successful defense would require
significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:
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decreased demand for AMZEEQ, FMX103 or any of our other product candidates or products we develop;
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injury to our reputation and significant negative media attention;
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withdrawal of clinical trial participants or cancellation of clinical trials;
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costs to defend the related litigation, which may be only partially recoverable even in the event of successful defense;
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a diversion of management’s time and our resources;
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substantial monetary awards to trial participants or patients;
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regulatory investigations, product recalls, withdrawals or labeling, marketing or promotional restrictions;
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the inability to commercialize any products we develop.
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Although we maintain product liability insurance, any claim that may be brought against us could result in a court judgment or settlement in an amount that is not covered, in
whole or in part, by our insurance or that is in excess of the limits of our insurance coverage. Our insurance policies also have various exclusions and deductibles, and we may be subject to a product liability claim for which we have no coverage.
We will have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts.
Moreover, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses.
Our Credit Agreement subjects us to various financial and other restrictive covenants. These restrictions may limit our operational or financial flexibility
and could subject us to potential defaults under our Credit Agreement.
On July 29, 2019, we entered into a Credit Agreement and Guaranty, or the Credit Agreement, with Foamix Pharmaceuticals Inc., lenders from time to time party thereto, the
subsidiary guarantors from time to time party thereto, or the Subsidiary Guarantors, and Perceptive Credit Holdings II, LP, as administrative agent, that provides a senior secured (including on our intellectual property) delayed draw term loan
facility in an aggregate principal amount of up to $50.0 million. The Credit Agreement contains financial and other restrictive covenants that limit the ability of us, Foamix Pharmaceuticals Inc. and the Subsidiary Guarantors, among other things,
to incur new indebtedness; create liens on assets; engage in certain fundamental corporate changes, such as mergers or acquisitions, or changes to business activities; make certain investments or payments; or pay dividends. The Credit Agreement
also contains certain financial covenants, including that we, Foamix Pharmaceuticals Inc. and the Subsidiary Guarantors must (1) maintain a minimum aggregate cash balance of $2.5 million; and (2) as of the last day of each fiscal quarter commencing
on the fiscal quarter ending September 30, 2020, receive revenue for the trailing 12-month period in amounts set forth in the Credit Agreement, which range from $10.5 million for the fiscal quarter ending September 30, 2020 to $109.5 million for
the fiscal quarter ending June 30, 2024.
The restrictive covenants in the Credit Agreement may limit our ability to plan for or react to market conditions, meet capital needs or otherwise restrict our activities or
business plans and adversely affect our ability to finance our operations, enter into acquisitions or to engage in other business activities that could be in our interest. Our ability to comply with these financial covenants can be affected by
events beyond our control and we may not be able to do so. If we are unable to remain in compliance with the restrictive covenants of the Credit Agreement, then amounts outstanding thereunder may be accelerated and become due immediately. Any such
acceleration could have a material adverse effect on our financial condition and results of operations.
Our debt obligations and any future debt obligations expose us to risks that could adversely affect our business, operating results, overall financial
condition and may result in further dilution to our stockholders.
The Credit Agreement has a borrowing capacity of up to $50.0 million, of which $15.0 million of borrowings were outstanding as of November 4, 2019. In addition, as described in
“Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Key Developments,” we may incur additional debt under the Credit Agreement if we meet certain regulatory and commercial milestones. Our current and any
future indebtedness, including under the Credit Agreement, could have an adverse impact on our business or operations. For example, it could:
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limit our flexibility in planning for the commercialization of AMZEEQ and the approval and marketing FMX103, as well as the development of our other pipeline product candidates;
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increase our vulnerability to both general and industry-specific adverse economic conditions; and
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limit our ability to obtain additional funds for working capital, capital expenditures, acquisitions, general corporate and other purposes.
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Any current or future indebtedness that we incur, including under the Credit Agreement, will require us to make certain interest and principal payments. Our ability to make
payments on this indebtedness depends on our ability to generate cash in the future. We expect to experience negative cash flow for the foreseeable future as we fund our operations and capital expenditures. There can be no assurance we will be in a
position to repay this indebtedness when due or obtain extensions to the maturity date. In order to repay these obligations when due, we may be required to sell assets, to refinance all or a portion of such indebtedness or to obtain additional
financing, including on terms that are not acceptable to us. If that additional financing involves the sale of equity securities or convertible securities, it would result in the issuance of additional shares of our capital stock, which would
result in dilution to our shareholders.
If we fail to attract and keep senior management and key scientific personnel, we may be unable to successfully develop FMX103 or any of our other product
candidates, conduct our clinical trials and commercialize AMZEEQ, FMX103 or any of our other products we develop.
Our success depends in part on our continued ability to attract, retain and motivate highly qualified management, clinical and scientific personnel. We believe that our future
success is highly dependent upon the contributions of our senior management, particularly our Chief Executive Officer, as well as our senior technologists and scientists. The loss of services of any of these individuals could delay or prevent the
successful development of our product pipeline or completion of our planned commercialization of AMZEEQ, FMX103 or any of the clinical development of our other product candidates.
Although we have not historically experienced unique difficulties in attracting and retaining qualified employees, we could experience such problems in the future. For example,
competition for qualified personnel in the pharmaceutical field is intense due to the limited number of individuals who possess the skills and experience required by our industry. We will need to hire additional personnel as we expand our clinical
development and commercial activities. We may not be able to attract and retain quality personnel on acceptable terms, or at all. In addition, to the extent we hire personnel from competitors, we may be subject to allegations that they have been
improperly solicited or that they have divulged proprietary or other confidential information, or that their former employers own their research output.
We have incurred, and will continue to incur significant increased costs as a result of operating as a public company in the United States, and our management
will be required to devote substantial time to new compliance initiatives.
As a public company in the United States, we are subject to an extensive regulatory regime, requiring us to maintain various internal controls and to prepare and file periodic
and current reports and statements, including reports on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404.
Our independent registered public accounting firm has not previously performed an audit of our internal control over financial reporting, and as long as we remain an “emerging
growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, we are exempt from the requirement to have an independent registered public accounting firm perform such audit. As of the end of our fiscal year ending
December 31, 2019, the last day of our fiscal year following the fifth anniversary of the closing of our initial public offering, we will cease to qualify as an emerging growth company. As a result, we will be required to have our auditors formally
attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 in connection with our annual report for the year ending December 31, 2019.
Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management efforts. We will continue to dedicate internal
resources, engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that
controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting and to compile the system and process documentation necessary to perform the evaluation needed to
comply with Section 404. However, we cannot assure you that our independent registered public accounting firm will be able to attest to the effectiveness of our internal control over financial reporting. We may not be able to remediate any material
weaknesses that may be identified, or to complete our evaluation, testing and any required remediation in a timely fashion and our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied
with the level at which our controls are documented, designed or operating.
Any failure to maintain adequate internal controls over financial reporting could severely inhibit our ability to accurately report our financial condition or results of
operations. If we are unable to assert that our internal control over financial reporting is effective, or if our auditors are unable to express an opinion on the effectiveness of our internal controls when they are required to issue such opinion,
investors could lose confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, and we could be subject to sanctions or investigations by the Nasdaq, the SEC or other regulatory
authorities. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital
markets.
Our business involves the use of hazardous materials and we and our third party manufacturers and suppliers must comply with environmental laws and
regulations, which can be expensive and restrict how we do business.
Our research and development activities and our third party subcontractors’ and suppliers’ activities involve the controlled storage, use and disposal of hazardous materials
owned by us, including minocycline and doxycycline, key components of our product candidates, and other hazardous compounds. We and our manufacturers and suppliers are subject to laws and regulations governing the use, manufacture, storage,
handling and disposal of these hazardous materials. We are licensed by the Israeli Ministry of Health to manufacture small batches of product in topical dose form for our Phase I, II and III clinical trials. In some cases, these hazardous materials
are stored at our and our subcontractors’ facilities pending their use and disposal.
Despite our efforts, we cannot eliminate the risk of contamination. This could cause an interruption of our commercialization efforts and business operations, environmental
damage resulting in costly clean-up and liabilities under applicable laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. Although we believe that the safety procedures utilized by
us and our subcontractors and suppliers for handling and disposing of these materials generally comply with the standards prescribed by these laws and regulations, we cannot guarantee that this is the case or eliminate the risk of accidental
contamination or injury from these materials. In such an event, we may be held liable for any resulting damages and such liability could exceed our resources and state or federal or other applicable authorities may curtail our use of certain
materials and interrupt our business operations.
Furthermore, environmental laws and regulations are complex, change frequently and have tended to become more stringent. We cannot predict the impact of such changes and cannot
be certain of our future compliance.
We are subject to various U.S. federal, state, local and foreign health care fraud and abuse laws, including anti-kickback, self-referral, false claims and
fraud laws, health information privacy and security, and transparency laws and any violations by us of such laws could result in substantial penalties. Additionally, any challenge to or investigation into our practices under these laws could cause
adverse publicity and be costly to respond to, and thus could harm our business.
There are numerous U.S. federal, state, local and foreign health care fraud and abuse laws pertaining to our business, including anti-kickback, false claims and physician
transparency laws. Our business practices and relationships with providers, patients and third-party payors are subject to scrutiny under these laws. We may also be subject to patient information privacy and security regulation by both the federal
government, states and foreign jurisdictions in which we conduct our business. The healthcare laws and regulations that may affect our ability to operate include:
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The U.S. federal Anti-Kickback Statute, which prohibits knowingly and willfully offering, soliciting, receiving, or paying remuneration directly or indirectly, in cash or in kind to induce or reward either the referral of an
individual for, or the purchase, order or recommendation of goods or services for which payment may be made in whole or part by Medicare, Medicaid or other federal health care programs. Remuneration has been broadly defined to include
anything of value, including cash, improper discounts, and free or reduced price items and services. The intent standard under the federal Anti-Kickback Statute was amended by the ACA to a stricter standard such that a person or entity
no longer needs to have actual knowledge of the statute or specific intent to violate it, in order to have committed a violation. In addition, the ACA provides that a claim including items or services resulting from a violation of the
federal AKS constitutes a false or fraudulent claim for purposes of the False Claims Act. Additionally, many states have similar laws that apply to their state health care programs as well as private payors. Violations of the federal
and state anti-kickback laws can result in exclusion from federal and state health care programs and substantial civil and criminal penalties.
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The federal civil and criminal false claims laws and civil monetary penalties laws, including the False Claims Act, or FCA, prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented,
false, fictitious or fraudulent claims for payment from Medicare, Medicaid or other federal healthcare programs, and knowingly making, using or causing to be made or used a false record or statement material to a false or fraudulent
claim to avoid, decrease or conceal an obligation to pay money to the federal government. As a result of a modification made by the Fraud Enforcement and Recovery Act of 2009, a claim includes "any request or demand" for money or
property presented to the federal government. Even where pharmaceutical companies do not submit claims directly to payors, they can be held liable under these laws if they are deemed to "cause" the submission of false or fraudulent
claims by, for example, providing inaccurate billing or coding information to customers, promoting a product off-label, marketing products of sub-standard quality, or, as noted above, paying a kickback that results in a claim for items
or services. In addition, activities relating to the reporting of wholesaler or estimated retail prices for pharmaceutical products, the reporting of prices used to calculate Medicaid rebate information and other information affecting
federal, state and third-party reimbursement for such products, and the sale and marketing of such products, are subject to scrutiny under this law. For example, several pharmaceutical and other healthcare companies have faced
enforcement actions under these laws for allegedly inflating drug prices they report to pricing services, which in turn were used by the government to set Medicare and Medicaid reimbursement rates, and for allegedly providing free
product to customers with the expectation that the customers would bill federal programs for the product. Private individuals or “whistleblowers” can bring FCA “qui tam” actions on behalf of the government and may share in recovered
amounts. The FCA has been used to prosecute persons submitting claims for payment that are inaccurate or fraudulent, that are for services not provided as claimed, or for services that are not medically necessary. Proof of intent to
deceive is not required to establish liability under the civil False Claims Act.
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The federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which imposes criminal and civil liability for, among other things, executing or attempting to execute a scheme to defraud any healthcare benefit
program, including any third party payors, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare offense, and knowingly and willfully falsifying,
concealing or covering up a material fact or making any materially false, fictitious or fraudulent statements or representations, or making false statements relating to healthcare benefits, items or services. Similar to the federal
Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation.
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HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and their respective implementing regulations, including the Final Omnibus Rule published on January 25, 2013, which
impose, among other things, obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information held by certain healthcare providers,
health plans and healthcare clearinghouses, known as “covered entities,” and “business associates.” Among other things, HITECH made certain aspects of HIPAA's rules (notably the Security Rule) directly applicable to business associates
- independent contractors or agents of covered entities that receive or obtain individually identifiable health information in connection with providing a service on behalf of a covered entity. HITECH also created four new tiers of
civil monetary penalties, amended HIPAA to make civil and criminal penalties directly applicable to business associates, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal court to
enforce the federal HIPAA laws and seek attorney's fees and costs associated with pursuing federal civil actions. The Department of Health and Human Services Office for Civil Rights, or the OCR, has increased its focus on compliance and
continues to train state attorneys general for enforcement purposes. The OCR has recently increased both its efforts to audit HIPAA compliance and its level of enforcement, with one recent penalty exceeding $5 million. In addition,
according to the United States Federal Trade Commission, or the FTC, failing to take appropriate steps to keep consumers' personal information secure constitutes unfair acts or practices in or affecting commerce in violation of Section
5(a) of the Federal Trade Commission Act, or the FTCA, 15 USC § 45(a). The FTC expects a company's data security measures to be reasonable and appropriate in light of the sensitivity and volume of consumer information it holds, the size
and complexity of its business, and the cost of available tools to improve security and reduce vulnerabilities. Medical data is considered sensitive data that merits stronger safeguards. The FTC's guidance for appropriately securing
consumers' personal information is similar to what is required by the HIPAA Security Rule.; and
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The federal Physician Payments Sunshine Act and its implementing regulations, which require certain manufacturers of prescription drugs, devices and medical supplies for which payment is available under Medicare, Medicaid or the
Children’s Health Insurance Program to annually report to CMS information related to payments and other transfers of value to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching
hospitals, or to entities or individuals at the request of, or designated on behalf of, the physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members. On
October 25, 2018, President Trump signed into law the “Substance Use-Disorder Prevention that Promoted Opioid Recovery and Treatment for Patients and Communities Act.” This law, in part (under a provision entitled “Fighting the Opioid
Epidemic with Sunshine”), will extend the Sunshine Act to payments and transfers of value to physician assistants, nurse practitioners, and other mid-level healthcare providers (with reporting requirements going into effect in 2022 for
payments made in 2021). In addition, Section 6004 of the ACA requires annual reporting of information about drug samples that manufacturers and authorized distributors provide to physicians.
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Analogous state, local and foreign laws and regulations, such as state anti-kickback and false claims laws, and other states’ laws addressing the pharmaceutical and healthcare industries, may apply to sales or marketing arrangements
and claims involving healthcare items or services reimbursed by non-governmental third party payors, including private insurers, and in some cases that may apply regardless of payor, i.e., even if reimbursement is not available; state
laws that require drug companies to comply with the industry’s voluntary compliance guidelines (the PhRMA Code) and the applicable compliance program guidance promulgated by the federal government (HHS-OIG) or otherwise prohibit or
restrict gifts or payments that may be made to healthcare providers and other potential referral sources; state and local laws that require the licensure of sales representatives; state laws that require drug manufacturers to report
information related to drug pricing or payments and other transfers of value to healthcare providers or marketing expenditures and pricing information; and state laws related to insurance fraud in the case of claims involving private
insurers.
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Data privacy and security laws and regulations in foreign jurisdictions that may be more stringent than those in the United States, such as the European Union, which adopted the General Data Protection Regulation (GDPR), which became
effective in May 2018. The GDPR, which is wide-ranging in scope, imposes several requirements relating to the consent of the individuals to whom the personal data relates, the information provided to the individuals, the security and
confidentiality of the personal data, data breach notification and the use of third party processors in connection with the processing of personal data. The GDPR also imposes strict rules on the transfer of personal data out of the
European Union to the United States, provides an enforcement authority and imposes large penalties for noncompliance, including the potential for fines of up to €20 million or 4% of the annual global revenues of the noncompliant
company, whichever is greater. The recent implementation of the GDPR has increased our responsibility and liability in relation to personal data that we process, including in clinical trials, and we may in the future be required to put
in place additional mechanisms to ensure compliance with the GDPR, which could divert management's attention and increase our cost of doing business.
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State laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, and may apply more broadly than HIPAA, thus
complicating compliance efforts – for example, the California Consumer Privacy Act, or CCPA, which goes into effect January 1, 2020. The CCPA, among other things, creates new data privacy obligations for covered companies and provides
new privacy rights to California residents, including the right to opt out of certain disclosures of their information. The CCPA also creates a private right of action with statutory damages for certain data breaches, thereby
potentially increasing risks associated with a data breach. Legislators have stated that they intend to propose amendments to the CCPA before it goes into effect, and the California Attorney General will issue clarifying regulations.
Although the law includes limited exceptions, including for certain information collected as part of clinical trials as specified in the law, it may regulate or impact our processing of personal information depending on the context. It
remains unclear what, if any, modifications will be made to this legislation or how it will be interpreted.
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State and federal authorities have aggressively targeted pharmaceutical companies for alleged violations of these fraud and abuse laws based on improper research or consulting
contracts with doctors, certain marketing arrangements that rely on volume-based pricing, off-label marketing schemes, and other improper promotional practices. If our operations are found to be in violation of any of the health regulatory laws
described above or any other laws that apply to us, we may be subject to penalties, including, but not limited to, criminal, civil and administrative penalties, damages, fines, disgorgement, individual imprisonment, possible exclusion from
participation in government healthcare programs, injunctions, private qui tam actions brought by individual whistleblowers in the name of the government. Companies targeted in such prosecutions have paid substantial fines in the hundreds of
millions of dollars or more, have been forced to implement extensive corrective action plans, and have often become subject to consent decrees or corporate integrity agreements that severely restrict the manner in which they conduct their business,
including the requirement of additional reporting and oversight obligations. Due to the breadth of these laws, the narrowness of statutory exceptions and regulatory safe harbors available, and the range of interpretations to which they are
subject, it is possible that some of our current or future practices might be challenged under one or more of these laws. Responding to investigations can be time-and resource-consuming and can divert management’s attention from the business. Any
such investigation or settlement could increase our costs or otherwise have an adverse effect on our business and reputation. Even an unsuccessful challenge or investigation into our practices could cause adverse publicity and be costly to respond
to.
If our operations are found to be in violation of any of the healthcare laws or regulations described above or any other healthcare regulations that apply to us, we may be
subject to penalties, including administrative, civil and criminal penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs, such as Medicare and Medicaid, imprisonment, additional reporting
obligations and oversight if we becomes subject to a corporate integrity agreement or consent decree, reputational harm, diminished profits and future earnings, and the curtailment or restructuring of our operations, any of which could adversely
affect our ability to operate our business and pursue our strategy.
We are subject to various U.S. and foreign anti-bribery and anti-corruption laws, and any violations by us of such laws could result in substantial penalties.
The U.S. Foreign Corrupt Practices Act, or FCPA, and similar worldwide anti-bribery and anti-corruption laws generally prohibit companies and their intermediaries from
offering, making or authorizing improper payments to government officials for the purpose of obtaining or retaining business. The FCPA also obligates companies whose securities are listed in the United States to comply with accounting provisions
requiring the company to maintain books and records that accurately and fairly reflect all transactions of the corporation, including international subsidiaries, and to devise and maintain an adequate system of internal accounting controls for
international operations. Our internal control policies and procedures may not protect us from reckless or negligent acts committed by our employees, future distributors, licensees or agents. Violations of these laws, or allegations of such
violations, could result in fines, penalties or prosecution and have a negative impact on our business, results of operations and reputation.
Unfavorable global economic conditions could adversely affect our business, financial condition or results of operations.
Although we believe the market for acne and rosacea therapies is less vulnerable to unfavorable economic conditions due to the significant discomfort and distress that these
conditions inflict, our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets. We currently have very limited visibility regarding the prospects of AMZEEQ, FMX103 or our
other product candidates becoming eligible for reimbursement by any government or third party payor and the possible scope of such reimbursement, and we must assume that demand for these product candidates may be tied to discretionary spending
levels of our targeted patient population.
A severe or prolonged economic downturn could result in a variety of risks to our business, including weakened demand for AMZEEQ, or if approved, FMX103 or any of our other
product candidates, and our ability to raise additional capital when needed on acceptable terms, if at all. A weak or declining economy could also strain our suppliers, possibly resulting in supply disruption, or cause our customers to delay making
payments for our services.
Any of the foregoing could harm our business and we cannot anticipate all of the ways in which the current economic climate and financial market conditions could adversely
impact our business.
Exchange rate fluctuations between the U.S. dollar and the New Israeli Shekel may negatively affect our earnings.
The dollar is our functional and reporting currency. However, a significant portion of our operating expenses are incurred in NIS. As a result, we are exposed to the risks that
the NIS may appreciate relative to the dollar, or, if the NIS instead devalues relative to the dollar, that the inflation rate in Israel may exceed such rate of devaluation of the NIS, or that the timing of such devaluation may lag behind inflation
in Israel. In any such event, the dollar cost of our operations in Israel would increase and our dollar-denominated results of operations would be adversely affected. We cannot predict any future trends in the rate of inflation or deflation in
Israel or the rate of devaluation or appreciation of the NIS against the dollar. For example, the NIS depreciated against the dollar by 8.1% in 2018, which depreciation was partly offset by inflation at the rate of 0.8% that year, while in 2017 the
NIS appreciated 11.6% against the dollar, which appreciation was further amplified by inflation in Israel of 0.4% that year. If the dollar cost of our operations in Israel increases, our dollar-measured results of operations will be adversely
affected. Our operations also could be adversely affected if we are unable to effectively hedge against currency fluctuations in the future.
Risks Related to Our Intellectual Property
If our efforts to obtain, protect or enforce our patents and other intellectual property rights related to AMZEEQ, FMX103 or any of our
other product candidates are not adequate, we may not be able to compete effectively and we otherwise may be harmed.
Our commercial success depends in part on our ability to obtain and maintain patent protection and other intellectual property rights and to utilize trade secret protection for
our intellectual property and proprietary technologies, our products and their uses, as well as our ability to operate without infringing upon the proprietary rights of others. We rely upon a combination of patents, trade secret protection and
confidentiality agreements, assignment of invention agreements and other contractual arrangements to protect the intellectual property related to AMZEEQ, FMX103 and our other development programs. Limitations on the scope of our intellectual
property rights may limit our ability to prevent third parties from designing around such rights and competing against us. For example, our patents do not claim a new compound. Rather, the active pharmaceutical ingredients of our products are
existing compounds and our granted patents and pending patent applications are directed to, among other things, novel formulations of these existing compounds that are dispensed as a foam. Accordingly, other parties may compete with us, for
example, by independently developing or obtaining competing topical formulations that design around our patent claims, or by using formulations from expired patents but which may contain the same active ingredients, or by seeking to invalidate our
patents. Moreover, any disclosure to or misappropriation by third parties of our confidential proprietary information, unless we have sufficient patent and/or trade secret protection and we are able to enforce such rights successfully, could enable
competitors to quickly duplicate or surpass our technological achievements, eroding our competitive position in our market.
We currently have various granted patents related to AMZEEQ and FMX103 in the United States, which are expected to remain in effect until 2030. We also have a recently issued
patent in the United States related to AMZEEQ that expires in September 2037. These patents relate to a composition of matter comprising a claim to a formulation of a tetracycline antibiotic which can include minocycline or doxycycline, and
therefore may be less protective than patents that claim a new drug. We also have patents granted claiming compositions of matter relating to AMZEEQ and FMX103 in each of the following international markets Australia, Canada, Great Britain,
Israel, and Mexico and we have patent applications claiming compositions of matter relating to AMZEEQ and FMX103 pending in Canada, the European Union, India and Mexico.
As of September 30, 2019, we had over 200 granted patents and over 40 patent applications pending worldwide covering our various foam-based platforms and other technology.
However, the patent applications that we own or license may fail to result in granted patents in the United States or foreign jurisdictions, or if granted the patent claims may fail to prevent a potential infringer from marketing its product or be
deemed invalid or held unenforceable by a court. Competitors and others in the field of topically-administered therapies comprising an active ingredient in foam presentation have created a substantial amount of scientific publications, patents and
patent applications and other materials relating to their technologies. Our ability to obtain and maintain valid and enforceable patents depends on various factors, including interpretation of our technology and the prior art and whether the
differences between them allow our technology to be patentable. Patent applications and patents granted from them are complex, lengthy and highly technical documents that are often prepared under very limited time constraints and may not be free
from errors or words that make their interpretation uncertain. The existence of errors in a patent may have a materially adverse effect on the patent, its scope and its enforceability. Our pending patent applications may not issue, or the scope of
the claims of patent applications that do issue may be too narrow or inadequate to protect our competitive advantage. Pending applications may be challenged during prosecution by the submission of third-party observations. Such observations may
result in the scope of claims being narrowed or rejected. Also, our granted patents may be subject to challenges or construed in a way that may not provide adequate protection.
Even if these patents do successfully issue, third parties may challenge the validity, enforceability or scope of such granted patents or any other granted patents we own or
license, which may result in such patents being narrowed, invalidated or held unenforceable. For example, patents granted by the European Patent Office may be opposed by any person within 9 months from the publication of their grant. Also, patents
granted by the U.S. Patent and Trademark Office, or USPTO, may be subject to review, reexamination and other challenges. Changes to the U.S. patent laws in 2012 provide additional procedures for third parties to challenge the validity of patents
issuing from patent applications including post-grant review, which generally applies to patents first filed after March 15, 2013. A post-grant review petition must be filed on or prior to the date which is 9 months after the patent is granted. The
procedures also expand and reform the proceedings for challenging issued patents on grounds of prior art and publications, also known as inter partes review, or IPR. For patents filed after March 15, 2013,
a petition for IPR may be filed the later of 9 months after grant of the patent or after a post-grant review proceeding on the patent has terminated. For patents filed prior to March 15, 2013, the rules regarding IPR filing remain unchanged and an
IPR petition may be filed any time following issuance of the patent.
Furthermore, efforts to enforce our patents could give rise to challenges to their validity or unenforceability in court proceedings. If the patents and patent applications we
hold or pursue with respect to AMZEEQ, FMX103 or any of our other product candidates are challenged, it could put one or more patents at risk of being invalidated, or interpreted narrowly and threaten our competitive advantage for AMZEEQ, FMX103 or
any of our other product candidates. Furthermore, even if they are not challenged, our patents and patent applications may not adequately protect our intellectual property or prevent others from designing around our claims. To meet such challenges,
which are part of the risks and uncertainties of developing and marketing product candidates, we may need to evaluate third party intellectual property rights and, if appropriate, to seek licenses for such third party intellectual property or to
challenge such third party intellectual property, which may be costly and time consuming and may or may not be successful, which could also have a material adverse effect on the commercial potential for AMZEEQ, FMX103 and any of our other product
candidates.
Further, if we encounter delays in our clinical trials or in seeking marketing approval of our products, the period of time during which we could market AMZEEQ, FMX103 or any
of our other product candidates under patent protection could be reduced.
Since patent applications in the United States and most other countries are confidential for a period of time after filing, we cannot be certain that we were
the first to (i) file any patent application related to AMZEEQ, FMX103 or any of our other product candidates or (ii) conceive and invent any of the inventions claimed in our patents or patent applications.
Furthermore, for applications filed before March 16, 2013, or patents issuing from such applications, an interference proceeding can be invoked by a third party, or instituted
by the USPTO, to determine who was the first to invent any of the subject matter covered by the patent claims of our applications and patents. As of March 16, 2013, the United States transitioned to a “first-to-file” system for deciding which party
should be granted a patent when two or more patent applications are filed by different parties claiming the same invention. A third party that files a patent application in the USPTO under the new first-to-file system before we did, could therefore
be awarded a patent covering an invention of ours even if we had made the invention before it was made by the third party.
The change to “first-to-file” from “first-to-invent” is one of the changes to the patent laws of the United States resulting from the Leahy-Smith America Invents Act, or AIA,
signed into law on September 16, 2011. Among some of the other changes to the patent laws are changes that limit where a patentee may file a patent infringement suit and providing opportunities for third parties to challenge any issued patent in
the USPTO. Until recently, a lower evidentiary standard was applied in certain USPTO proceedings compared to the evidentiary standard in U.S. federal court necessary to invalidate a patent claim. Under the new final rule, effective for petitions
filed on or after November 13, 2018, the USPTO Patent Trial and Appeal Board (PTAB) is to apply the same claim construction standard applied by civil courts under 35 USC §282(b) in IPR, post-grant review, and the transitional program for covered
business method patents proceedings. The impact this may have in practice on the use and outcome of USPTO proceedings is uncertain. Because of lower costs and the fact that USPTO statistics indicate that a high rate of challenged claims are being
invalidated in these USPTO procedures, they may continue to be a popular and effective means of challenging patents.
Even where patent, trade secret and other intellectual property laws provide protection, costly and time-consuming litigation could be necessary to enforce and determine the
scope of our proprietary rights, and the outcome of such litigation would be uncertain. Moreover, any actions we may bring to enforce our intellectual property against our competitors could provoke them to bring counterclaims against us, and our
competitors have intellectual property of their own, some of which include substantial patent portfolios. An unfavorable outcome could have a material adverse effect on our business and could result in the challenged patent or one or more of its
claims being interpreted narrowly or invalidated, or held not to be infringed, or one or more of our patent applications may not be granted.
We also rely on trade secret protection and confidentiality agreements to protect our know-how, data and information prior to filing patent applications and during the period
before they are published. We additionally rely on trade secret protection and confidentiality agreements to protect proprietary know-how that we consider may be preferably maintained as a trade secret rather than the subject of a patent
application. We further rely on trade secret protection and confidentiality agreements to protect proprietary know-how that may not be patentable, processes for which patents may be difficult to obtain or enforce and other elements of our product
development processes that involve proprietary know-how, information or technology that is not covered by patents.
In an effort to protect our trade secrets and other confidential information, we incorporate confidentiality provisions in all our employees’ agreements and require our
consultants, contractors and licensees to which we disclose such information to execute confidentiality agreements upon the commencement of their relationships with us. These agreements require that confidential information, as defined in the
agreement and disclosed to the individual by us during the course of the individual’s relationship with us, be kept confidential and not disclosed to third parties for an agreed term. These agreements, however, may not provide us with adequate
protection against accidental or improper use or disclosure of confidential information, and these agreements may be breached. Adequate remedies may not exist in the event of unauthorized use or disclosure of our confidential information. A breach
of confidentiality could significantly affect our competitive position and we could lose our trade secrets or they could become otherwise known or be independently discovered by our competitors. Also, to the extent that our employees, consultants
or contractors use any intellectual property owned by others in their work for us, disputes may arise as to the rights in any related or resulting know-how and inventions. Additionally, others may independently develop the same or substantially
equivalent proprietary information and techniques or otherwise gain access to our trade secrets and other confidential information. Any of the foregoing could deteriorate our competitive advantages, undermine the trade secret and contractual
protections afforded to our confidential information and have material adverse effects on our business.
Cybersecurity disruptions may impact our business operations if it becomes a target for such activities.
We may be subject to attempted cybersecurity disruptions from a variety of threat actors. If our systems for protecting against cybersecurity disruptions prove to be
insufficient, our employees or third parties could be adversely affected. Such cybersecurity disruptions could cause damage or destroy assets, compromise business systems, result in proprietary information and trade secrets being altered, lost or
stolen; result in employee or third-party information being compromised, or otherwise disrupt business operations. Significant costs to remedy the effects of such a cybersecurity disruption may be incurred by us, as well as in connection with
resulting regulatory actions and litigation, and such disruption may harm relationships with third parties and impact our business reputation.
Changes in U.S. or foreign patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.
As is the case with other companies in the markets in which we participate, our success is heavily dependent on intellectual property, particularly patents. The strength of
patents in the pharmaceutical field involves complex legal and scientific questions and in the United States and many foreign jurisdictions patent policy and case law also continues to evolve and change and the issuance, scope, validity,
enforceability and commercial value of our patent rights are highly uncertain. This uncertainty includes changes to the patent laws through one or more of legislative action to change statutory patent law, rule changes and practice directions
issued by National Patent Offices, or court action that may reinterpret or expand on existing law in ways affecting the scope or validity of granted patents. Particularly in recent years in the United States, there have been several major
legislative developments and court decisions that have affected patent laws in significant ways and there may be more developments in the future that may weaken or undermine our ability to obtain patents or to enforce our existing and future
patents.
We have agreed to share ownership in certain patents that may result from our development and license agreements with certain major pharmaceutical companies,
which may detract from our rights to such patents.
We have agreed with several of the pharmaceutical companies with whom we are developing certain topical products, based on our foam technology and the licensees’ active
ingredients, to jointly own and have an undivided interest in patents that arise from the relevant projects, where the licensee made its own material contributions to the invention. In certain agreements, we have further agreed that inventions
achieved exclusively or primarily by the licensees in the course of the development without significant contribution by us will be owned solely by them, and they will be allowed to file patent applications covering such inventions without our
participation.
We have granted certain licensees the right to provide input during the prosecution of licensed patent applications. We have further granted certain licensees the primary right
to enforce several of our existing patents, which we have licensed to these licensees to allow them to commercialize or continue to commercialize our jointly-developed product, in the event that any infringement of the licensed patents adversely
affects the licensees’ ability to utilize the licenses for the purpose they were granted. Such rights may detract from our rights and title to such patents and we may as a result have little or no control or say in any proceedings concerning them.
In addition, any proceedings against our technology could impact any or all of our licensees, and we may be considered or found to be contractually responsible for the payment of certain claims and losses as a result of such impact.
If we infringe or are alleged to infringe or otherwise violate intellectual property rights of third parties, our business could be harmed.
Our research, development and commercialization activities may infringe or otherwise violate or be claimed to infringe or otherwise violate patents owned or controlled by other
parties. Competitors in the field of topical and oral drugs for the treatment of acne or rosacea and other indications have developed large portfolios of patents and patent applications relating to our business. In particular, there are patents and
pending patent applications held by third parties that relate to formulations with minocycline-based and doxycycline-based products and to methods of treatment with minocycline-based and doxycycline-based products for indications we are pursuing
with AMZEEQ, FMX103 and our other product candidates. There may be granted patents that could be asserted against us in relation to such products or product candidates. There may also be granted patents held by third parties that may be infringed
or otherwise violated by our other product candidates and activities, and we do not know whether or to what extent we may be infringing or otherwise violating third party patents. There may also be third party patent applications that if approved
and granted as patents may be asserted against us in relation to AMZEEQ, FMX103 or any of our other product candidates or activities. We may fail to identify new applications and granted patents that may be asserted against us in relation to
AMZEEQ, FMX103 or any of our other product candidates or activities. Searches and analyses undertaken may not uncover all potential and future threats. These third parties could bring claims against us that would cause us to incur substantial
expenses and, if successful against us, could cause us to pay substantial damages and legal fees. Further, if a patent infringement suit were brought against us, we could be temporarily or permanently enjoined or otherwise forced to stop or delay
research, development, manufacturing or sales of the product candidate that is the subject of the suit.
As a result of patent infringement claims, or to avoid potential claims, we may choose or be required to seek licenses from third parties. These licenses may not be available
on acceptable terms, or at all. Even if we are able to obtain a license, the license would likely obligate us to pay license fees or royalties or both, and the rights granted to us might be nonexclusive, which could result in our competitors
gaining access to the same intellectual property, or such rights might be restrictive and limit our present and future activities. Ultimately, we or a licensee could be prevented from commercializing a product or be forced to cease some aspect of
our business operations, if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses on acceptable terms.
There has been and there currently is substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical industry. In
addition to possible infringement claims against us, we may become a party to other patent litigation and other proceedings, including interference, derivation, review, re-examination or other post-grant proceedings declared or granted by the USPTO
and similar proceedings in foreign countries, regarding intellectual property rights with respect to our current or any future products. The cost and burden to us of any patent litigation or other proceeding, even if resolved in our favor, could be
substantial. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. Patent litigation and other proceedings may also absorb
significant management time. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings and their outcome could impair our ability to compete in the marketplace and impose a substantial financial burden
on us. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition or results of operations.
Furthermore, several of our employees were previously employed at universities or other pharmaceutical companies, including potential competitors. While we take steps to
prevent our employees from using the proprietary information or know-how of others that is not in the public domain or that has not already been independently developed by us earlier, we may be subject to claims that we or these employees have
inadvertently or otherwise used or disclosed, confidential information, intellectual property, trade secrets or other proprietary information of any such employee’s former employer. Litigation may be necessary to defend against these claims and,
even if we are successful in defending ourselves, could result in substantial costs to us or be distracting to our management. If we do not succeed with respect to any such claims, in addition to paying monetary damages and possible ongoing
royalties, we may lose valuable intellectual property rights or personnel.
If we are unable to protect our trademarks from infringement, our business prospects may be harmed.
We own trademarks that identify “Foamix” and have registered these trademarks in the United States and Israel. We own the trademarks “AMZEEQ” and “MST” that identify our
recently FDA approved topical product for acne vulgaris and its delivery technology and we have filed applications for these trademarks in the United States and in Israel. We also own and have filed applications for trademarks in the United States
that represent the proposed commercial name(s) of our other drug product candidates. Although we take steps to monitor the possible infringement or misuse of our trademarks, it is possible that third parties may infringe, dilute or otherwise
violate our trademark rights. Any unauthorized use of our trademarks could harm our reputation or commercial interests. In addition, our enforcement against third party infringers or violators may be unduly expensive and time-consuming, and the
outcome may be an inadequate remedy.
We may become involved in lawsuits to protect or enforce our patents or other intellectual property or the patents of our licensors, which could be expensive
and time-consuming.
Competitors may infringe our intellectual property, including our patents or the patents of our licensors. As a result, we may be required to file infringement claims to stop
third party infringement or unauthorized use. This can be expensive and burdensome, particularly for a company of our size, as well as time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid
or is unenforceable, or may refuse to stop the other party from using the technology or method at issue on the grounds that our patent claims do not cover its technology or method or that the factors necessary to grant an injunction against an
infringer are not satisfied.
We have received notice letters of ANDAs submitted for drug products that are generic versions of Finacea foam and we are involved in lawsuits to protect and
enforce our patents, which are expensive, time consuming and may be unsuccessful.
Competitors may infringe our patents. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time consuming.
The infringing party may deny any infringement or challenge the patents as invalid or unenforceable. Litigation proceedings may also fail, and even if successful, they may result in substantial costs and distraction of our management and other
employees.
For example, Paragraph IV Certification Notice Letters from Taro Pharmaceutical Industries, Ltd. dated December 20, 2018 and January 18, 2019, were received in connection with
Finacea. A Paragraph IV Certification Notice Letter notifies the FDA that one or more patents listed in the FDA’s Orange Book is allegedly invalid, unenforceable or will not be infringed by an ANDA product. In the case at hand, the letters were
directed against several of our U.S. patents and stated that Taro had submitted to the FDA an ANDA for an azelaic acid foam composition which is a generic version of Finacea.
Complaints were filed against Taro with the U.S. District Court for the District of Delaware, asserting, among other things, that Taro had infringed our patents, as listed in
its Paragraph IV Notice Letters, by seeking FDA approval to manufacture and sell a generic version of Finacea prior to expiration of these patents. Since the complaint was filed within the 45-day period required under the Hatch-Waxman Act, a
30-month stay will preclude Taro from receiving final FDA approval of a generic version of Finacea prior to June 2021, unless a court enters judgment that the patents are invalid or not infringed.
Pursuant to our licensing agreement with LEO, this litigation is in the sole control of LEO and we are currently unable to
predict its outcome. The substitution of Finacea in favor of generic versions has the potential to have a negative impact on future commercialization of Finacea and to result in a loss of license revenue. Furthermore, in any infringement
proceeding, including the foregoing, a court may decide that a patent of ours, or one or more claims of such patent, is not valid or is unenforceable, or may refuse to stop the other party from using the supposedly infringing technology on the
grounds that our patents, or one or more claims of such patents, do not cover such technology. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and
could also put one or more of our pending patent applications at risk of not issuing. There can be no assurance that our product candidates will not be subject to the same risks.
We have also entered into license agreements with other commercial partners for the development and commercialization of products with active ingredients other than azelaic
acid that license one or more of the patents listed in the FDA’s Orange Book for Finacea. Whilst these license agreements are not considered material to our main business, an adverse result may put at risk the development and commercialization of
any of these licensed products.
An adverse determination of any litigation or other proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and
could put our patent applications at risk of not issuing.
Interference, derivation review, or other proceedings brought at the USPTO may be necessary to determine the priority or patentability of inventions with respect to our patent
applications or those of our licensors or licensees. Litigation or USPTO proceedings brought by us may fail or may be invoked against us by third parties. Even if we are successful, domestic or foreign, litigation or USPTO or foreign patent office
proceedings, may result in substantial costs and distraction to our management. Moreover, proceedings may be appealed and obtaining a final resolution can take a long time and substantial resources. We may not be able, alone or with our licensors
or licensees, to prevent misappropriation of our proprietary rights, particularly in countries where the laws may not protect such rights as fully as in the U.S.
Furthermore, because of the substantial amount and extent of discovery required in connection with intellectual property litigation or other proceedings, there is a risk that
some of our confidential information could be compromised by disclosure during this type of litigation or proceedings. In addition, during the course of this kind of litigation or proceedings, there could be public announcements of the results of
hearings, motions or other interim proceedings or developments or public access to related documents. If investors perceive these results to be negative, the market price for our ordinary shares could be significantly harmed.
We may not obtain intellectual property rights or otherwise be able to protect our intellectual property rights throughout the world.
Filing, prosecuting and defending patents on product candidates in all or most countries throughout the world would be prohibitively expensive. We primarily file patent
applications in the United States and may file in some other selected jurisdictions on a case-by-case basis. As a result, our intellectual property rights in countries outside the United States are generally significantly less extensive than those
in the United States. In addition, the laws of some foreign countries and jurisdictions, particularly of certain developing countries and jurisdictions, do not protect intellectual property rights to the same extent as federal and state laws in the
United States, and these countries and jurisdictions may limit the scope of what can be claimed, and in some cases may even force us to grant a compulsory license to competitors or other third parties. Consequently, we may not be able to prevent
third parties from practicing our inventions outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions
where we have not sought or obtained patent protection to develop their own products and further, may export otherwise infringing products to territories where we have patent protection, but protection and enforcement is not as strong as that in
the United States. These products may compete with our products and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing. Moreover, competitors or others may raise legal challenges to
our intellectual property rights or may infringe upon our intellectual property rights, including through means that may be difficult to prevent or detect.
Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries,
particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relating to pharmaceuticals, which could make it difficult for us to stop the infringement of our
patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects
of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we
initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful. Further, third parties may prevail in their claims against us, which could potentially result in the award of injunctions or substantial damages
against us. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.
In addition, our ability to protect and enforce our intellectual property rights may be adversely affected by unforeseen changes in domestic and foreign intellectual property
laws and practice.
Under applicable employment laws, we may not be able to enforce covenants not to compete.
We generally enter into non-competition agreements as part of our employment agreements with our employees. These agreements generally prohibit our employees, if they cease
working for us, from competing directly with us or working for our competitors or clients for a limited period. We may be unable to enforce these agreements under the laws of the jurisdictions in which our employees work and it may be difficult for
us to restrict our competitors from benefitting from the expertise our former employees or consultants developed while working for us.
For example, Israeli labor courts place emphasis on freedom of employment and have required employers seeking to enforce non-compete undertakings of a former employee to
demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of the employer which have been recognized by the courts, such as the protection of a company’s trade secrets or other
intellectual property.
Risks Related to Our Ordinary Shares
We do not know whether a market for our ordinary shares will be sustained and as a result it may be difficult for holders of our ordinary shares to sell their
shares.
Although our ordinary shares are quoted on the Nasdaq, an active trading market for our shares may not be sustained. The lack of an active market may impair the ability of
holders of our ordinary shares to sell their shares at the time they wish to sell them or at a price that they consider reasonable. The lack of an active market may also reduce the fair market value of our shares, and may cause the trading price of
our ordinary shares to be more volatile. An inactive market may also impair our ability to raise capital by selling shares and may impair our ability to acquire other companies by using our shares as consideration.
The market price of our ordinary shares may be subject to fluctuation and holders of our ordinary shares could lose all or part of their investment.
The stock market in general and the market price of our ordinary shares in particular has been, and will likely continue to be, subject to fluctuation, whether due to, or
irrespective of, our operating results and financial condition. For example, the price of our shares fell by more than 40% following the announcement of top-line results from our first two Phase III clinical trials for AMZEEQ and then increased by
more than 40% on September 11, 2018, following the announcement of successful results from our third Phase III clinical for AMZEEQ. The market price of our ordinary shares on the Nasdaq may fluctuate as a result of a number of factors, some of
which are beyond our control, including, but not limited to:
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our ability to successfully launch and commercialize AMZEEQ in the United States;
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the status and cost of our marketing commitments for AMZEEQ;
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actual or anticipated variations in our and our competitors’ results of operations and financial condition;
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market acceptance of our products;
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the mix of products that we sell and related services that we provide;
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the success or failure of our licensees to develop, obtain approval for and commercialize our licensed products, for which we are entitled to contingent payments and royalties;
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changes in earnings estimates or recommendations by securities analysts, if our ordinary shares are covered by analysts;
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development of technological innovations or new competitive products by others;
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announcements of technological innovations or new products by us;
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publication of the results of preclinical or clinical trials for our product candidates;
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failure by us to achieve a publicly announced milestone;
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delays between our expenditures to develop and market new or enhanced products and the generation of sales from those products;
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the filing of ANDAs by generic companies seeking approval to market generic versions of our products and of our licensee’s products;
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developments concerning intellectual property rights, including our involvement in litigation brought by or against us, including patent infringement proceedings before national and state courts, and patent opposition and review
proceedings before national patent offices;
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regulatory developments and the decisions of regulatory authorities as to the approval or rejection of new or modified products;
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changes in the amounts that we raise in financings or collaboration transactions and spend to develop, acquire or license new products, technologies or businesses;
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changes in our expenditures to promote our products;
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our sale or proposed sale, or the sale by our significant shareholders, of our ordinary shares or other securities in the future;
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changes in key personnel;
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success or failure of our research and development projects or those of our competitors;
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the trading volume of our ordinary shares; and
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general economic and market conditions and other factors, including factors unrelated to our operating performance.
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These factors and any corresponding price fluctuations may materially and adversely affect the market price of our ordinary shares and result in substantial losses being
incurred by our investors. In the past, following periods of market volatility, public company shareholders have often instituted securities class action litigation. If we were involved in securities litigation, it could impose a substantial cost
upon us and divert the resources and attention of our management from our business.
If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our ordinary shares,
the price of our ordinary shares could decline.
The trading market for our ordinary shares relies in part on the research and reports that equity research analysts publish about us and our business, if at all. We do not have
control over these analysts and we do not have commitments from them to write research reports about us. The price of our ordinary shares could decline if no research reports are published about us or our business, or if one or more equity research
analysts downgrades our ordinary shares or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.
Future sales of our ordinary shares could reduce the market price of our ordinary shares.
If our shareholders, particularly our directors and their affiliates or our executive officers, sell a substantial number of our ordinary shares in the public market, the
market price of our ordinary shares could decrease significantly. The perception in the public market that our shareholders might sell our ordinary shares could also depress the market price of our ordinary shares and could impair our future
ability to obtain capital, especially through an offering of equity securities. In addition, the perception in the public market that we will need to issue new shares to raise capital and our sale of additional ordinary shares or similar securities
in order to raise capital might have a similar negative impact on the share price of our ordinary shares. A decline in the price of our ordinary shares might impede our ability to raise capital through the issuance of additional ordinary shares or
other equity securities, and may cause holders of our ordinary shares to lose part or all of their investment.
We have never paid cash dividends on our share capital, and we do not anticipate paying any cash dividends in the foreseeable future.
We have never declared or paid cash dividends on our share capital, nor do we anticipate paying any cash dividends on our share capital in the foreseeable future. We currently
intend to retain all available funds and any future earnings to fund the development and growth of our business. As a result, capital appreciation, if any, of our ordinary shares will be investors’ sole source of gain for the foreseeable future. In
addition, Israeli law limits our ability to declare and pay dividends, and may subject our dividends to Israeli withholding taxes.
We are an “emerging growth company” and a “smaller reporting company” and the reduced disclosure requirements applicable to emerging growth companies and
smaller reporting companies may make our ordinary shares less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various requirements that are applicable to other public companies that are
not “emerging growth companies.” Most of such requirements relate to disclosures that we would otherwise be required to make. For example, as an emerging growth company, we will not be required to comply with the auditor attestation requirements
of Section 404 of the Sarbanes-Oxley Act for up to five fiscal years after the date of our initial public offering. We will remain an emerging growth company until December 31, 2019, the last day
of our fiscal year following the fifth anniversary of the closing of our initial public offering.
We are also currently a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act. In the event that we are still considered a smaller reporting company when we
cease being an emerging growth company, the disclosure we will be required to provide in our SEC filings will still be less than it would be if we were not considered either an emerging growth company or a smaller reporting company. For example,
“smaller reporting companies” are able to provide simplified executive compensation disclosures in their filings and have certain other decreased disclosure obligations in their SEC filings, including, among other things, being required to provide
only two years of audited financial statements in annual reports.
When we are no longer deemed to be an emerging growth company or a smaller reporting company, we will not be entitled to the exemptions discussed above. Decreased disclosures
in our SEC filings due to our status as an emerging growth company or a smaller reporting company may make it harder for investors to analyze our results of operations and financial prospects. We cannot predict if investors will find our ordinary
shares less attractive as a result of our reliance on these exemptions. If some investors find our ordinary shares less attractive as a result, there may be a less active trading market for our ordinary shares and our share price may be more
volatile.
Our U.S. shareholders may suffer adverse tax consequences if we are characterized as a passive foreign investment company.
Generally, if, for any taxable year, 75% or more of our gross income is passive income, or at least 50% of the average quarterly value of our assets (which may be determined in
part by the market value of our ordinary shares, which is subject to change) are held for the production of, or produce, passive income, we would be characterized as a passive foreign investment company, or PFIC, for U.S. federal income tax
purposes.
Based on certain estimates of our gross income and gross assets, our use of proceeds of our initial public offering, and the nature of our business, we believe that we were not
classified as a PFIC for the taxable year ended December 31, 2018, and do not anticipate being classified as a PFIC for the taxable year ending December 31, 2019. Because we currently hold, and expect to continue to hold, a substantial amount of
cash and cash equivalents and other passive assets used in our business, and because the value of our gross assets is likely to be determined in large part by reference to our market capitalization, a decline in the value of our ordinary shares may
result in our becoming a PFIC. Accordingly, we may be considered a PFIC for any taxable year.
If we are characterized as a PFIC, our U.S. shareholders may suffer adverse tax consequences, including having gains realized on the sale of our ordinary shares treated as
ordinary income, rather than as capital gain, the loss of the preferential rate applicable to dividends received on our ordinary shares by individuals who are U.S. Holders (as defined in the section titled “U.S. Federal Income Tax Considerations”
in our prospectus supplement filed pursuant to Rule 424(b)(2) on September 14, 2018 under our shelf registration statement on Form S-3 (registration statement no. 333-224084, declared effective April 12, 2018)), and having interest charges apply to
distributions by us and the proceeds of share sales. Certain elections exist that may alleviate some of the adverse consequences of PFIC status and would result in an alternative treatment (such as mark-to-market treatment) of our ordinary shares;
however, we do not intend to provide the information necessary for U.S. holders to make qualified electing fund elections if we are classified as a PFIC.
If a United States person is treated as owning at least 10% of our common shares, such holder may be subject to adverse U.S. federal income tax consequences.
If a U.S. Holder (as defined in the section titled “U.S. Federal Income Tax Considerations” in our prospectus supplement filed pursuant to Rule 424(b)(2) on September 14, 2018
under our shelf registration statement on Form S-3 (registration statement no. 333-224084, declared effective April 12, 2018)) is treated as owning (directly, indirectly or constructively) at least 10% of the value or voting power of our common
shares, such U.S. Holder may be treated as a “United States shareholder” with respect to each “controlled foreign corporation” in our group. Because our group includes at least one U.S. subsidiary, if we were to form or acquire any non-U.S.
subsidiaries in the future, they may be treated as controlled foreign corporations. A United States shareholder of a controlled foreign corporation may be required to annually report and include in its U.S. taxable income its pro rata share of
“Subpart F income,” “global intangible low-taxed income” and investments in U.S. property by that controlled foreign corporation, regardless of whether that controlled foreign corporation, or we, make any distributions. An individual that is a
United States shareholder with respect to a controlled foreign corporation generally would not be allowed certain tax deductions or foreign tax credits that would be allowed to a United States shareholder that is a U.S. corporation. We cannot
provide any assurances that we will assist investors in determining whether any non-U.S. subsidiaries that we may form or acquire in the future will be treated as controlled foreign corporations or whether any such investor would be treated as a
United States shareholder with respect to any of such controlled foreign corporations. Further, we cannot provide any assurances that we will furnish to any investor information that may be necessary to comply with the reporting and tax paying
obligations discussed above. Failure to comply with these reporting obligations may subject a U.S. Holder to significant monetary penalties and may extend the statute of limitations with respect to its U.S. federal income tax return for the year
for which reporting was due. U.S. Holders should consult their tax advisors regarding the potential application of these rules to their investment in our common shares.
Future changes to tax laws could materially adversely affect our company and reduce net returns to our shareholders.
Our tax treatment is subject to the enactment of, or changes in, tax laws, regulations and treaties, or the interpretation thereof, tax policy initiatives and reforms under
consideration and the practices of tax authorities in jurisdictions in which we operate. Such changes may include (but are not limited to) the taxation of operating income, investment income, dividends received or (in the specific context of
withholding tax) dividends paid. We are unable to predict what tax reform may be proposed or enacted in the future or what effect such changes would have on our business, but such changes, to the extent they are brought into tax legislation,
regulations, policies or practices, could affect our financial position and overall or effective tax rates in the future in countries where we have operations, reduce post-tax returns to our shareholders, and increase the complexity, burden and
cost of tax compliance.
In addition, on December 22, 2017, U.S. federal tax legislation popularly known as the Tax Cuts and Jobs Act (the “Tax Cuts and Jobs Act”) was signed into law, which
significantly revised the Internal Revenue Code of 1986, as amended. The overall impact of the Tax Cuts and Jobs Act continues to be uncertain and our business and financial condition could be adversely affected by it or as a result of
interpretations thereof. It is uncertain if and to what extent various states will conform to the Tax Cuts and Jobs Act. The impact of this tax reform on holders of our common shares is also uncertain and could be adverse.
Tax authorities may disagree with our positions and conclusions regarding certain tax positions, resulting in unanticipated costs, taxes or non-realization of
expected benefits.
A tax authority may disagree with tax positions that we have taken, which could result in increased tax liabilities. For example, the U.S. Internal Revenue Service or another
tax authority could challenge our allocation of income by tax jurisdiction and the amounts paid between our affiliated companies pursuant to our intercompany arrangements and transfer pricing policies. Similarly, a tax authority could assert that
we are subject to tax in a jurisdiction where we believe we have not established a taxable connection, often referred to as a “permanent establishment” under international tax treaties, and such an assertion, if successful, could increase our
expected tax liability in one or more jurisdictions. A tax authority may take the position that material income tax liabilities, interest and penalties are payable by us, in which case we expect that we might contest such assessment. Contesting
such an assessment may be lengthy and costly and, if we were unsuccessful in disputing the assessment, the result could increase our anticipated effective tax rate.
Risks Related to Our Operations in Israel
Our headquarters, research and development and other significant operations are located in Israel and, therefore, our results may be adversely affected by
political, economic and military instability in Israel.
Our headquarters and research and development facilities are located in Rehovot, Israel. In addition, some of our key employees, officers and directors are residents of Israel.
Accordingly, political, economic and military conditions in Israel may directly affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel, its neighboring countries and
other organizations. Any hostilities involving Israel or the interruption or curtailment of trade or transport between Israel and its trading partners could adversely affect our operations and results of operations. Further, certain countries, as
well as certain companies and organizations, continue to participate in a boycott of Israeli businesses and businesses with large Israeli operations. Such boycott or other restrictive laws, policies or practices may have a material adverse effect
on our business and financial condition in the future. Further, certain countries, as well as certain companies and organizations, continue to participate in a boycott of Israeli businesses and businesses with large Israeli operations. Such boycott
or other restrictive laws, policies or practices may have a material adverse effect on our business and financial condition in the future. In addition, our operations could be disrupted by the obligations of personnel to perform military reserve
service.
Provisions of Israeli law and our amended and restated articles of association may delay, prevent or otherwise impede a merger with, or an acquisition of, us,
even when the terms of such a transaction are favorable to us and our shareholders.
Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving
directors, officers or significant shareholders and regulates other matters that may be relevant to such types of transactions. For example, a tender offer for all of a company’s issued and outstanding shares can only be completed if the acquirer
receives positive responses from the holders of at least 95% of the issued share capital. Completion of the tender offer also requires approval of a majority of the offerees that do not have a personal interest in the tender offer unless, following
consummation of the tender offer, the acquirer would hold at least 98% of the company’s outstanding shares. Furthermore, the shareholders, including those who indicated their acceptance of the tender offer, may, at any time within six months
following the completion of the tender offer, petition an Israeli court to alter the consideration for the acquisition, unless the acquirer stipulated in its tender offer that a shareholder that accepts the offer may not seek such appraisal rights.
Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to our shareholders whose country of residence does not have a tax treaty with
Israel exempting such shareholders from Israeli tax. For example, Israeli tax law does not recognize tax-free share exchanges to the same extent as U.S. tax law. With respect to mergers, Israeli tax law allows for tax deferral in certain
circumstances but makes the deferral contingent on the fulfillment of a number of conditions, including, in some cases, a holding period of two years from the date of the transaction during which sales and dispositions of shares of the
participating companies are subject to certain restrictions. Moreover, with respect to certain share swap transactions, the tax deferral is limited in time, and when such time expires, the tax becomes payable even if no disposition of the shares
has occurred.
It may be difficult to enforce a judgment of a United States court against us, our officers and directors in Israel or the United States, to assert United
States securities laws claims in Israel or to serve process on our officers and directors.
We are incorporated in Israel. A significant number of our current executive officers and directors reside outside of the United States, and most of our assets and most of the
assets of these persons are located outside of the United States. Therefore, a judgment obtained against us, or any of these persons, including a judgment based on the civil liability provisions of the United States federal securities laws, may not
be collectible in the United States and may not be enforced by an Israeli court. It also may be difficult for you to effect service of process on these persons in the United States or to assert United States securities law claims in original
actions instituted in Israel. Israeli courts may refuse to hear a claim based on an alleged violation of United States securities laws reasoning that Israel is not the most appropriate forum in which to bring such a claim. In addition, even if an
Israeli court agrees to hear a claim, it may determine that Israeli law and not United States law is applicable to the claim. If United States law is found to be applicable, the content of applicable United States law must be proven as a fact by
expert witnesses, which can be a time consuming and costly process. Certain matters of procedure will also be governed by Israeli law.
There is little binding case law in Israel that addresses the matters described above. As a result of the difficulty associated with enforcing a judgment against us in Israel,
holders of our ordinary shares may not be able to collect any damages awarded by either a United States or foreign court.
The rights and responsibilities of our shareholders are governed by Israeli law, which differs in some material respects from the rights and responsibilities
of shareholders of United States companies.
The rights and responsibilities of the holders of our ordinary shares are governed by our amended articles of association and by Israeli law. These rights and responsibilities
differ in some material respects from the rights and responsibilities of shareholders in U.S.-based companies. In particular, a shareholder of an Israeli company has a duty to act in good faith and in a customary manner in exercising its rights and
performing its obligations towards the company and other shareholders, and to refrain from abusing its power in the company, including, among other things, in voting at a general meeting of shareholders on matters such as amendments to a company’s
articles of association, increases in a company’s authorized share capital, mergers and acquisitions and related party transactions requiring shareholder approval. In addition, a shareholder who is aware that it possesses the power to determine the
outcome of a vote at a meeting of the shareholders or to appoint or prevent the appointment of a director or executive officer in the company has a duty of fairness toward the company with regard to such vote or appointment. There is limited case
law available to assist us in understanding the nature of this duty or the implications of these provisions. These provisions may be interpreted to impose additional obligations and liabilities on holders of our ordinary shares that are not
typically imposed on shareholders of U.S. companies.
Sanctions and other trade control laws create the potential for significant liabilities, penalties and reputational harm.
As a company gearing toward the launch of commercial operations in the United States and overseas, we may be subject to national laws as well as international treaties and
conventions controlling imports, exports, re-export and diversion of goods, services and technology. These include import and customs laws, export controls, trade embargoes and economic sanctions, denied party watch lists and anti-boycott measures
(collectively “Customs and Trade Controls”). Applicable Customs and Trade Controls are administered by Israel’s Ministry of Finance, the U.S. Treasury’s Office of Foreign Assets Control (OFAC), other U.S. agencies and other agencies of other
jurisdictions where we do business. Customs and Trade Controls relate to a number of aspects of our business, including most notably the sales of finished goods and API as well as the licensing of our intellectual property, as provided above.
Compliance with Customs and Trade Controls has been the subject of increasing focus and activity by regulatory authorities, both in the United States and elsewhere, in recent years. Although we have policies and procedures designed to address
compliance with Customs and Trade Controls, actions by our employees, by third-party intermediaries (such as distributors and wholesalers) or others acting on our behalf in violation of relevant laws and regulations may expose us to liability and
penalties for violations of Customs and Trade Controls and accordingly may have a material adverse effect on our reputation and our business, financial condition and results of operations.