ITEM 1 - Business.
Unless the context otherwise requires,
all references in this Annual Report on Form 10-K to the “Company”, “Medgenics”, “we,” “us”
and “our” refer to Medgenics, Inc., a Delaware corporation organized on January 27, 2000, and its wholly-owned subsidiary,
Medgenics Medical (Israel) Limited, a company organized under the laws of the State of Israel.
Overview
We are a medical technology and therapeutics
company developing an innovative and proprietary platform technology offering what we believe to be a novel approach for the $100+
billion protein therapeutics market. Our
Biopump
TM
Platform Technology
converts a sliver of the patient’s own dermal skin tissue into a protein-producing “Biopump”
to continuously produce and deliver therapeutic proteins, and when implanted under the patient’s skin, has the potential
to deliver several months of protein therapy from a single procedure without the need for a series of frequent injections. The
proof of concept of our Biopump Platform Technology has been demonstrated using EPODURE
TM
producing erythropoietin (EPO) for anemia, which has shown elevation and stabilization of hemoglobin levels in anemic
patients, many lasting for six or more months from a single administration in a phase I/II dose-ranging trial on chronic kidney
disease (CKD) patients, with one patient experiencing elevation and stabilization of hemoglobin levels for over 36 months.
Our Biopump is a tissue micro-organ (MO)
that acts as a biological pump created from a toothpick-size sliver of the patient’s dermal tissue to produce and secrete
a particular protein. We have developed a proprietary device called the DermaVac to facilitate reliable and straightforward removal
of MOs and implantation of Biopumps. With the DermaVac, dermis MOs are rapidly harvested under local anesthetic from just under
the skin to provide unique tissue structures with long-term viability
ex vivo
. This process allows us to process one or
more dermis MO’s outside the patient to become Biopump protein producing units in 10 – 15 days, each making
a measured daily amount of a specific therapeutic protein to treat a specific chronic disease. Based on a patient’s particular
dosage need, we can determine how many Biopumps to then insert under the patient’s skin to provide a sustained dose of protein
production and delivery for several months. We believe the dosage of protein can be reduced by simple ablation or excision of
inserted Biopumps or increased by the addition of more Biopumps to provide personalized dosing requirements for each patient as
needs change. We believe that medical personnel will only require brief training to become proficient in using our DermaVac for
harvesting and implanting, which will enable implementation of Biopump therapies by the patient’s local physician. We have
demonstrated that MOs and Biopumps can be processed in individual sealed chambers which can be viably transported by land and
air, and are developing devices to automate and scale up the cost-effective production of Biopumps in local or regional processing
centers.
We have produced more than 15,000 Biopumps
to date which have demonstrated in the laboratory the capability for sustained production of therapeutic proteins, including EPO
to treat anemia, interferon-alpha (INF-α) to treat various forms of hepatitis and Factor VIII clotting protein to treat
hemophilia. The
in vitro
stability and simplicity in handling of the Biopump is another key feature separating Biopump’s
tissue therapy approach from that of therapies based on individual cells grown in culture. Biopumps use the patient’s intact
tissue implanted subcutaneously where it heals in place. We believe that this facilitates location for ablation or removal if
it becomes necessary to reduce dose or stop therapy. A major challenge of cell-based therapies is that protein-producing cells
wander to unknown locations, making it difficult or impossible to reduce or cease therapeutic delivery. We believe that by remaining
local and potentially reversible by ablation/excision, Biopumps will avoid this problem and resolve a major hurdle of gene therapy.
We believe our Biopump Platform Technology
may be applied to produce an array of other therapeutic proteins from the patient’s own dermal tissue in order to treat
a wide range of chronic diseases or conditions. We believe our personalized approach could replace many of the existing protein
therapies, which use proteins produced in animal cells administered by frequent injections over long periods of time.
Clinical proof of concept of the Biopump
Platform Technology was reported in a phase I/II study using Biopumps that produced and delivered EPO in patients with CKD to
treat their anemia, with interim study results presented by leading nephrologists at major nephrology conferences in 2010 and
2011. We call such Biopumps EPODURE. A total of 19 patients were treated in our initial phase I/II study, with each patient receiving
a single administration of multiple Biopumps of EPODURE at a specified low, medium or high dose. The EPODURE administered was
sufficient to maintain the patient’s hemoglobin in the range of 9 to 12 g/dl without need for any injections of EPO for
more than three months in 14 of the 19 patients, of whom eight remained in range for more than six months, the longest lasting
more than three years. We and our advisors believe that the results in patients treated to date have demonstrated proof of concept
and shown safety and efficacy of our technology so far in its first application: EPODURE for treatment of renal anemia. Based
on the results of our phase I/II clinical study of the EPODURE Biopump and our other development and testing efforts for our Biopump
Platform Technology, we obtained clearance from the U.S. Food & Drug Administration (FDA) of our IND (Investigational New
Drug) application for a phase II study in the United States for EPODURE in treatment of anemia in patients on dialysis. We expect
to commence the U.S. trial in the latter part of 2013. Meanwhile, we are engaged in a similar phase IIa study of EPODURE in treatment
of anemia in patients on dialysis in Israel, where we have treated the first four patients. We presented early results from these
dialysis patients at the November 2012 annual meeting of the American Society of Nephrology.
In a further proof of principle of our Biopump
Platform Technology, in 2010 leading liver experts presented preclinical data showing months of sustained production by Biopumps
of INF-α, the therapeutic protein widely used in the treatment of various forms of hepatitis, in vitro, at a major European
liver conference. We call such Biopumps INFRADURE
TM
. Several leading
experts in the field of hepatitis have indicated their belief that INFRADURE has potential as a replacement for INF-α injections
and their side effects not only in treatment of hepatitis C, but also in hepatitis B, hepatitis D and other indications. In November
2012, we convened a meeting of 15 hepatitis experts from the United States, Europe, Israel and Australia, including several of
the key opinion leaders in hepatitis D and B, during which these experts confirmed that unmet needs in hepatitis D and B could
potentially be effectively addressed by INFRADURE Biopumps. In addition, as INF-α is used in treating other diseases such
as certain forms of cancer, we believe INFRADURE may have potential in some of these as well. We have obtained all necessary approvals
to initiate two proposed new clinical trials of INFRADURE in Israel: a phase I/II study of INFRADURE in treatment of naïve
(previously untreated) patients with hepatitis C (genotypes 2 and 3), and another phase I/II study of INFRADURE in treatment of
patients with hepatitis C (genotype 1) who have relapsed from previous treatment. We recently initiated the first of such trials
in Israel, to treat patients with hepatitis C genotypes 2 and 3. We are in the process of preparing an IND application to be submitted
to the FDA in late 2013/early 2014 for INFRADURE to treat hepatitis B. We are also preparing an IND application for INFRADURE
to treat hepatitis D, which we would plan to submit to the FDA after receiving clearance on the hepatitis B IND. Furthermore,
the FDA has granted Orphan Drug Designation for the use of INFRADURE in the treatment of patients with hepatitis D, a rare form
of hepatitis, Orphan Drug Designation carries multiple benefits, including the availability of grant money, certain tax credits
and seven years of market exclusivity, as well as the possibility of an expedited regulatory process.
EPODURE Biopumps for the treatment of anemia
have now been processed by our contract manufacturing organization (CMO) in a good manufacturing practice (GMP)-certified facility
in the United States. This marks the first Biopump processing site outside of Israel, and provides us with a significant ability
to scale-up our clinical and commercial capabilities to address global therapeutic areas such as anemia and hemophilia. In a key
“dry run” test of the production system, tissue micro-organs were obtained and loaded into individual closed processing
chambers in Israel, and then shipped to the U.S. CMO Biopump processing center in California. There, the micro-organs were processed
in their closed systems into fully functioning EPODURE Biopumps, meeting the release criteria for use in human clinical trials
in the United States. This demonstrates our capability to support the treatment of patients at remote clinical sites, transporting
their Biopumps to and from strategically located processing facilities, thereby allowing for multicenter clinical trials and practical
commercial implementation.
Based on our growing base of clinical and
pre-clinical results, we continue to seek collaboration with third parties to further develop this technology and to form strategic
alliances and licensing agreements, along the lines of such deals being reached typically with pharmaceutical companies. We engage
from time to time in discussions with a number of pharmaceutical, biotech and medical device companies to further develop our
Biopump Platform Technology. We intend to further develop and leverage our core technology in order to seek multiple licensing
agreements for many different proteins and clinical indications using the same core Biopump Platform Technology. Our current strategy
is to take various applications of our Biopump Platform Technology through proof of basic safety and efficacy in patients (phase
I/II), or further as appropriate, and then to negotiate out-licensing agreements with appropriate strategic partners. In this
manner, we anticipate receiving revenues from milestone or other development or feasibility payments from such agreements in advance
of regulatory approval and sales of our product candidates, while retaining control of our core technology. In addition to orphan
drug designation for application in hepatitis D, we are investigating additional opportunities for the treatment of rare diseases
using our Biopump Platform Technology. Rare diseases affect a small number of people worldwide. Due to the limited number of patients
afflicted with one of these rare diseases, these niche applications may also offer a more expedited route to regulatory approval
because pivotal clinical trials may require a smaller number of patients before regulatory agencies will consider product approval.
Furthermore, many rare disease applications command substantial per-patient reimbursement levels, and thus represent attractive
product opportunities even in limited target populations. In any case, we believe that initial commercialization of any of our
product candidates by us or any future strategic partners is not likely before 2017 and could easily take five years or more.
We believe that the Biopump Platform Technology
has the potential to offer a better treatment alternative and replace many current methods of protein therapy, which can often
involve many months of frequent injections and significant side effects. We believe that the Biopump Platform Technology provides
a wide range of advantages over existing therapies and will appeal and offer benefits to doctors, patients and third-party payers
(e.g., Center for Medicare and Medicaid Services (CMS) or medical insurers) including:
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potentially
lower treatment
costs;
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elimination
of frequent injections;
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increased
efficacy in chronic
disease management;
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extended
treatment to undertreated
populations; and
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better
patient compliance.
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The Biopump Platform Technology Process (Anticipated Automated
Process)
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(a)
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Harvesting Patient’s Micro-organs (MOs)
- our
proprietary device, the DermaVac, is used to extract a small piece
of tissue via a form of needle biopsy from the skin’s lower
level, the dermis of the patient. The DermaVac positions the skin
and guides a high-speed rotating hollow core needle, providing
a straightforward removal of the tissue. This procedure is intended
to be performed in a physician’s office under a local anesthetic.
It is minimally invasive to enable rapid healing with little or
no scarring.
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(b)
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Transfer to processing station
- after harvesting,
the MOs are transferred to a Biopump processing center for processing
into Biopumps.
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(c)
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Viral vector fluid
- a small amount of fluid
containing the appropriate concentration of viral vector, which
specific vector has been engineered to contain the gene necessary
for production of a selected protein and to effectively transfer
the gene to the nuclei of the cells in the MO without integrating
into the chromosomes.
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(d)
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and (e)
Processing each MO into a Biopump
- in
the Biopump processing center, MO (d) is processed using the viral
vector fluid, whereby the vector particles transfer the genes into
the cells of the MO (transduction), thereby converting the intact
tissue MO into a Biopump protein production unit (e). The MOs are
transferred at the harvest site in a sealed cassette and transported
to local or regional Biopump processing centers. While processing
is currently performed manually, we plan to develop semi-automated
processing stations.
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(e)
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Biopump producing desired protein
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(f)
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Measure daily protein production per Biopump for dosing
- protein
production levels of the Biopumps are measured to determine the
correct number of Biopumps to implant to deliver the intended aggregate
dose to the subject patient.
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(g)
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Washing and release testing
- prior to being
released for use, the Biopumps undergo a washing protocol to remove
most, if not all, of the residual unabsorbed vector and undergo
testing to verify they meet the release criteria for use, generally
between one and two weeks after harvesting.
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(h)
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Transport to the treatment center
- the Biopumps
are transported to treatment center for implantation in the patient.
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(i)
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Implantation of the required number of Biopumps
- the
calculated number of Biopumps are implanted back into the patient
where they produce and deliver the required protein to the subject
patient’s body. Additional MOs or Biopumps not implanted
in the patient can be cryostored for future use.
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(j)
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Additional MOs or Biopumps not implanted in the patient
can be cryostored for future use.
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Proof of Concept of Biopump Platform Technology
The concept of the Biopump has been demonstrated
in the clinic and in the laboratory, starting with the phase I/II clinical trial for our first product, the EPODURE Biopump, which
was conducted in Israel under approval of the Israeli Ministry of Health in consultation with the FDA (but not under an IND application
process of the FDA). This key study demonstrated that a single administration of a few EPODURE Biopumps could maintain hemoglobin
levels in the target range for months in a majority of patients without raising serum EPO levels above the normal range. This
stands in contrast to the longest intra-treatment period of an approved treatment for anemia, which is one month, and which has
recently been recalled by FDA. The safety and efficacy data from the phase I/II study formed a major part of our IND application
for a phase IIb study using EPODURE to treat anemia in dialysis patients in the United States, which was cleared by FDA in mid-2012.
We believe that the study results for our first EPODURE study in patients showed that tissue Biopumps can provide safe and sustained
protein therapy in patients, successfully demonstrating the Biopump concept for the first protein – erythropoietin (EPO).
As a result, we are now expanding our product candidate pipeline using the same Biopump Platform Technology with continued laboratory
development of Biopumps producing different proteins. We have developed in the laboratory and demonstrated in animal models our
next product candidate, the INFRADURE Biopump, which produces INF-α to treat a range of diseases including various forms
of hepatitis as well as other indications. We have commenced our first clinical study using INFRADURE under approval from the
Israel Ministry of Health: a phase I/II study in hepatitis C, initially focusing on genotypes 2 and 3. Top experts in hepatitis
have advised us that if we can demonstrate that INFRADURE provides safe and effective sustained delivery of INF-α in hepatitis
C, we will likely be able to demonstrate INFRADURE’s ability to treat hepatitis B and hepatitis D as well. Applying the
same Biopump Platform Technology to a completely different protein and clinical indication, we have also developed and demonstrated
HEMODURE
TM
Biopumps in the laboratory that make blood clotting Factor VIII for
treating hemophilia. We believe that the EPODURE clinical results, together with the laboratory results for the INFRADURE Biopump
and HEMODURE Biopump, demonstrate that our Biopump Platform Technology is capable of sustained continuous production of various
therapeutic proteins.
EPODURE Biopump for the Treatment of Anemia in CKD and Renal
Failure
Our EPODURE Biopump is designed to provide
a safer, more reliable, and cost-effective anemia therapy which we believe can better maintain hemoglobin within a defined safe
range while also reducing costs. According to a number of recent studies, there are increased risks of mortality and cardiovascular
disease in connection with present EPO therapy and the FDA has recently issued a Black Box Warning imposing new limitations on
the amounts of EPO used in current anemia therapy. Reflecting these concerns, the FDA has further reduced the maximum recommended
hemoglobin levels in these patients from 12 g/dl to 11 g/dl, which has the effect of reducing the amount of EPO needed to elevate
and maintain hemoglobin in the target range. The FDA is also concerned about the additional risks associated with the excessive
peak EPO levels which typically reach up to 100 times the normal physiological range following each bolus injection of EPO in
current anemia therapy. We believe all these concerns increase the safety advantage potentially offered by EPODURE to maintain
hemoglobin levels within a relatively narrow therapeutic range while also keeping EPO serum levels within the normal range in
the patient. We also believe EPODURE usage can improve patient compliance and quality of life, and potentially reducing the healthcare
costs of treating these patients. This supports the critical need for a more steady EPO delivery method, which the EPODURE Biopump
is designed to address. We received approval from the Israel Ministry of Health to commence a phase II study in Israel of EPODURE
in treatment of anemia in patients on dialysis and have treated four patients to date.
INFRADURE Biopump for the Treatment of Hepatitis and Other
Indications
We are developing our INFRADURE Biopump
to address the need for a patient-tolerable and cost-effective form of INF-α therapy for use in treatment of various forms
of hepatitis and other applications listed in the FDA label for INF-α products. We believe that the INFRADURE Biopump can
reduce side effects and promote patient compliance with treatment, while the steady delivery of INF- α in the physiological
range could provide a more effective and lower cost alternative to INF-α injections, whose annual per patient cost includes
approximately $35,000 for the INF-α drug and the costs of 52 weekly injections, monitoring and possible treatment of side
effects. Top experts in hepatitis have indicated that INFRADURE Biopump could fulfill an unmet need for reliable interferon therapy
for hepatitis D, a particularly aggressive form of hepatitis for which years of interferon therapy is the only effective treatment.
While a relatively rare form of hepatitis in the U.S., hepatitis D is becoming a significant cause of death in Europe, now estimated
to be killing more patients in a number of European countries than HIV AIDS.
We also believe
that INFRADURE holds much promise to effectively address the key unmet need in the treatment of hepatitis B, namely to eliminate
the hepatitis B virus (HBV), not just contain it. To date, years of expensive oral antiviral treatments have not eliminated the
HBV. Instead these oral treatments act to contain the disease as long as the patient takes them. Once a patient stops taking the
oral treatments, the disease rebounds. This requires the patient to continuously take anti-HBV drugs with mounting costs estimated
at $10-12,000 per year, and associated health risks. Our advisors note that the gold standard for clearing HBV from the patient
is to eliminate the hepatitis B surface antigen (HBsAg) by activating the immune system to fight it, known as sero-conversion
– which is attained in only a small percentage of patients using oral antiviral agents and only after long-term use. Sero-conversion
against HBV and surface antigen elimination has been reported to be improved by one-to-two years of
INF-α
therapy. However, today this requires the patient to endure regular weekly injections of pegylated INF-α with their associated
side effects, creating a significant challenge in patient compliance to achieve reliable treatment. If a weekly treatment is missed,
the effectiveness of the treatment is diminished. We believe INFRADURE has the potential to provide a much more practical and
patient-compliant way to attain sero-conversion or surface antigen loss in a large proportion of patients by having the patient’s
own tissue produce and deliver the protein instead of using injections, whether supplemental to oral treatments, or on its own.
In addition, for the treatment of hepatitis
C, we believe that INFRADURE can be part of a much lower cost alternative for treating most patients, compared to current triple
therapies (INF-α, Ribavirin, and Boceprevir or Telaprevir) costing $75-85,000 per patient annually, or the newer direct
acting antiviral agents now in development, which our advisors expect will cost at least as much. Weekly injections of the current
longer lasting formulation of INF-α, pegylated INF-α (PEG-INF-α), used together with oral antiviral drug Ribavirin,
has been shown in large clinical trials and in practical use to effectively treat most patients, particularly those with genotypes
2 or 3, but with the well-known unpleasant and often serious side effects of the injections as widely reported. We believe that
INFRADURE will demonstrate that when used instead of INF-α injections, the same or better results will be obtained, but
with better patient compliance and reduced side effect profile. We have produced many INFRADURE Biopumps which have demonstrated
sustained production of INF-α for several months in the laboratory and have been tested in mice, which results were shown
at a major European conference of hepatologists in April 2010. We recently initiated a phase I/II study in Israel of INFRADURE
in treatment-naïve patients with hepatitis C of genotypes 2 and 3.
HEMODURE Biopump for the Treatment of Hemophilia
We are in early stage development of our
HEMODURE Biopump producing Factor VIII to treat hemophilia. The HEMODURE Biopump represents a potential breakthrough in the treatment
of hemophilia because it would be prophylactic (preventing bleeding) and thus could dramatically reduce the risk posed by bleeding
in these patients. If HEMODURE Biopumps succeed in producing sufficient Factor VIII and in delivering it into these patients’
circulation, it would represent a major step towards rendering the patient’s life more normal and potentially provide significant
cost savings for treatment of hemophiliacs, where the cost of Factor VIII injections in a typical hemophilia patient typically
exceeds $100,000 per year according to the National Hemophilia Society. In October 2009, we entered into our first commercial
collaboration agreement with Baxter Healthcare (Baxter) and worked with Baxter through September 2011 when our agreement to develop
HEMODURE Biopumps expired. Our HEMODURE Biopumps produced active Factor VIII protein
in vitro
, as confirmed by testing
using a standard assay at a major hemophilia center in Israel. We have also demonstrated initial delivery of Factor VIII into
the blood circulation by implantation of HEMODURE Biopumps in SCID mice, using an approach similar to the approach we used with
EPODURE and INFRADURE Biopumps. We continue to work on improving these results, and believe it will be feasible to reach sufficient
sustained production rates of Factor VIII to warrant clinical testing with appropriate implantation site and method. Once target
levels and a modified implantation method for Factor VIII Biopump delivery are in place, we intend to seek to commence a phase
I/II clinical trial in humans.
Overall Protein Market and Current Therapeutic Treatment
Platform
The worldwide market for protein therapy
is forecast by RNCOS - Global Protein Therapeutic Market Analysis (Ed. 3, May 2010) to reach $132 billion in 2013. We
estimate that the Biopump Platform Technology could potentially be applied to many elements of this market, starting with proteins
to treat anemia (EPO) and then hepatitis (INF-α). In 2010, EPO injections to treat anemia generated revenues of $9.2 billion
and INF-α injections for treatment of patients with hepatitis C and some forms of cancer generated revenues of $2.7 billion
according to La Merie Business Intelligence, R&D Pipeline News, Top 30 Biologics 2010 (March 3, 2011). We have identified
the anemia and various hepatitis markets as first priorities for applying the Biopump Platform Technology.
Examples of other conditions that may
benefit from proteins produced and delivered by the Biopump Platform Technology are listed in the table below (although we have
not currently commenced any research/clinical programs with respect to such conditions):
Condition
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Protein therapy
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Diabetes
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Insulin, other candidates
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Obesity
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Various candidates
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Multiple sclerosis
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Interferon-beta
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Arthritis
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IL-1R
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Cancer recovery
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G-CSF
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Chronic pain
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IL-10
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Growth failure/muscular atrophy
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hGH
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Wound healing
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PDGF-BB
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The current standard platform for protein
production and delivery involves a highly complex and capital-intensive manufacturing process based on large-scale animal cell
tissue culture and delivery in the form of frequent injections (due to the short half-life of recombinant proteins as described
below). Protein manufacturing plants generally take several years and substantial capital to build, secure regulatory approvals
and bring into production. Once produced, the protein is typically distributed to, and stocked in, pharmacies and physicians’
offices and administered by injection. Injections can be painful and costly, often cause unpleasant or dangerous side effects
and require frequent visits either by home healthcare nurses or to the doctor’s office. A treatment based on the administration
of serial injections can suffer from poor patient compliance and, therefore, inadequate treatment can result.
As recombinant proteins are typically
metabolized (i.e. broken down) by the body very quickly, they have a very short therapeutic life, ranging from a few minutes to
a few hours. This means that, for many proteins, injections need to be taken at least once a week and often more frequently, to
maintain concentration in the blood within the therapeutic window, i.e., above the minimum level required to be effective. It
is widely known in the medical community that, below certain levels, the protein has no therapeutic effect. In order to keep protein
levels in the blood above the minimum therapeutic level for as long as possible in between injections, large bolus injections
are typically administered. Although this can extend the time before the protein levels in the blood drop below the minimum therapeutic
level (undershoot), it also causes initial levels to rise to many times above the maximum desired level (overshoot). Current therapies
produce extended periods of overshoot, which can cause significant side effects, followed by undershoot, which leaves the patient
under treated until the next injection. In the case of EPO for treating anemia, the overshoot can cause stimulation of the lining
of the blood vessels, raising the risks of hypertension and release of emboli which can lead to stroke. In the case of INF-α
for treatment of hepatitis C and other applications, the overshoot typically causes serious flu-like symptoms with each injection,
and can cause loss of white blood cells (neutropenia), depression, and other serious conditions.
Competition for Protein Therapy Market
Our industry is subject to rapid and intense
technological change. We face, and will continue to face, intense competition from pharmaceutical, biopharmaceutical and biotechnology
companies, as well as numerous academic and research institutions and governmental agencies engaged in activities related to the
treatment of disease based on the protein therapeutics, both in the United States and abroad. Some of these competitors are pursuing
the development of drugs and other therapies that target the same diseases and conditions that we are targeting with our product
candidates.
Many of the companies competing against
us have financial and other resources substantially greater than ours. In addition, many of our competitors have significantly
greater experience in testing pharmaceutical and other therapeutic products, obtaining FDA and other regulatory approvals of products,
and marketing and selling those products. Accordingly, our competitors may succeed more rapidly than us in obtaining FDA approval
for products and achieving widespread market acceptance. If we obtain necessary regulatory approval and commence significant commercial
sales of our product candidates, we will also be competing with respect to manufacturing efficiency and marketing capabilities,
areas in which we have limited or no commercial-scale experience.
Nearly all protein therapy currently utilizes
recombinant protein delivered via serial bolus injections; however, there are many alternative ways to make protein and to deliver
it. New ways to produce proteins are emerging, including production in plant cells, as well as generic production of off-patent
proteins using more standard recombinant protein technology. However, we believe that each of these new production methods faces
the same challenges of how to deliver the protein reliably in the intended therapeutic window over the required extended periods
of treatment. We believe that the personal production of therapeutic protein inside a patient’s body as provided by Biopump
Platform Technology has distinct advantages over the development of these new production methods.
There are also new methods for delivering
protein from implanted slow-release depots or other devices, through the skin, through inhalation or through “smart pills”
that evade the digestive track. However, these all face the common problem of who will supply the expensive protein to be delivered,
which will still be produced in cells other than the tissue of the patient. Most of the alternatives to bolus injection are aimed
at reducing the traditional patient resistance to injections; however, these alternatives to date do not adequately deal with
the challenge of peaks and troughs in between each administration and the need for high patient compliance over an extended period
to sustain therapeutic levels. Longer lasting versions of therapeutic protein have been achieved through alteration of the protein
molecule itself and may offer the potential to reduce the number of injections, but still require administration every one-to-two
weeks. These longer lasting versions of proteins remain expensive to produce and run the risk of prolonging the overdosing period
resulting from any given injection. New molecules mimicking the action of proteins have been approved, providing an inter-injection
period of up to four weeks. We believe that the risk of adverse reactions will be reduced by delivering the natural protein produced
by the patient’s own tissue as the Biopump aims to do, as compared to delivery of a new molecule attempting to mimic the
action of the natural protein.
We face competition within protein therapeutics,
directly from established competitors using alternative protein manufacturing and delivery methods for EPO and INF-α to
treat anemia and hepatitis, respectively. Additionally, many of these competitors currently manufacture, or are developing, a
wide array of proteins such as G-CSF and hGH - protein therapies that we have identified as possible targets for the
Biopump Platform Technology in the future.
We face potential competition from more
conventional forms of gene therapy, if and when any of these become approved and adopted in clinical use. Gene therapy aims to
provide some of the same advantages of Biopump therapy, delivering the desired genes to the patient’s tissue to cause the
patient to produce the desired protein in the body. Conventional direct gene therapies deliver genes directly to the circulation
with the intent that they will find their way into enough cells to produce the requisite amount of protein to treat the clinical
condition. Alternatively, ex-vivo cell based gene therapy removes cells from the patient, processes them to take up and become
transfected by the desired gene and, then grows or amplifies the population to a large number of cells before injecting them back
in the patient. Once in the patient, the cells generally tend to migrate until they find an appropriate “home” where
they become attached to the surrounding tissue, or don’t survive. In either case, whether via direct or via ex-vivo cell
gene therapy, the amount of protein produced by the cells with the genes is difficult to predict. We believe that this process
may also pose a safety risk since no reliable method has been developed to reduce or stop the production of the protein if needed.
Since the cells producing the protein are typically in unknown locations, it is very difficult to stop their production of protein,
so the treatment dosing is not downward adjustable or reversible.
The Biopump, in contrast, uses intact
tissue at all times, so that the cells in the tissue never leave their natural matrix. Upon reimplantation, the tissue heals in
place, so the cells remain in their matrix. As a result, they do not need to wander to find a place to connect, and remain in
the tissue. In this way, dosing can be reduced or stopped by ablating or removing one or more Biopumps, which are typically implanted
about a millimeter below the skin surface in a marked position. In a group of Biopumps prepared from the same patient, the daily
protein production rate is generally very similar between individual Biopumps, and is measured before implantation in the patient,
so that the total administered daily dose is known, as is the location of each Biopump. Furthermore, since no viral vector is
applied to the patient in treating with Biopumps, we believe that the patient can be treated multiple times without developing
rejection, in contrast to direct gene therapies. We believe that Biopumps address the key limitations of gene therapies, in knowing
the dose, in the ability to increase or reduce it, and most importantly, in being able to effectively stop it if needed.
Business Strategy
Our primary strategy is to complete development
of the core elements of the Biopump Platform Technology and associated key devices, and to be able to adapt them to treat different
clinical indications. While this is proceeding, we intend to seek to enter into multiple licensing agreements for many different
proteins and clinical indications using the same core Biopump Platform Technology. Our preferred approach is to develop the Biopump
technology for a particular indication through proof of basic safety and efficacy in patients (phase I/II) or further as appropriate,
and then to negotiate out-licensing agreements for the Biopump Platform Technology with appropriate strategic partners for such
indication.
We are pursuing such approach with EPODURE.
Our initial phase I/II trials demonstrated several months to over 36 months of sustained anemia treatment from a single administration
of EPODURE Biopumps in patients with CKD and showed that an appropriate administration of EPODURE Biopumps can provide sustained
anemia therapy without any EPO injections and represents an unprecedented duration from a single treatment in patients replacing
many EPO injections. In the meantime, we continue to advance our clinical testing of EPODURE. We received FDA clearance for a
phase II study of EPODURE for the treatment of anemia in dialysis patients with end-stage renal disease (ESRD) in the United States
and are preparing to commence such trial in the second half of 2013.
The approach of first demonstrating proof
of concept in patients before partnering is not our only option. We were able to successfully enter into a development and option
agreement with Baxter Healthcare, a leader in the field of hemophilia, for the development of our HEMODURE Biopump producing Factor
VIII for the treatment of hemophilia. Prior to entering into such agreement, we had not begun to develop our HEMODURE Biopump
and had no laboratory or clinical results for such indication. However the sustained clinical results of our EPODURE Biopump,
taken together with our prior production of INF-α by INFRADURE Biopumps, supported the concept of the Biopump as a platform
to potentially provide safe and sustained production and delivery of therapeutic proteins such as Factor VIII on a continuous
basis. This first deal, which succeeded in producing the first HEMODURE Biopumps, provided us with approximately $3.9 million
in research and development participation and standstill fees. While our agreement with Baxter Healthcare expired in September
2011 without having reached all the milestones, we continue to improve HEMODURE performance. We believe the HEMODURE Biopump deal
structure could provide a model for collaboration with strategic partners in completely new applications of Biopump more generally,
including a funding mechanism for proving feasibility of a new Biopump application before commencement of licensing negotiations.
We are exploring opportunities utilizing this model for further interest in new applications using the Biopump platform. We may
thus seek additional development deals with strategic partners for other clinical indications or proteins using Biopump Platform
Technology before we have reached the phase I/II clinical trial stage for such indication or protein.
We anticipate taking a somewhat different
approach with our INFRADURE Biopump to treat hepatitis. We have recently launched a phase I/II trial of the INFRADURE Biopump
for the treatment of hepatitis C in naïve patients with genotypes 2 and 3. This is a safety and escalating dose study whose
immediate objective is to demonstrate proof of concept of the INFRADURE Biopump as a safe implantable treatment to produce and
deliver INF-α in patients and that, with appropriate dose and administration, result in weeks or months of reduction in
hepatitis C virus (HCV). Assuming the objective is achieved, this study would demonstrate INFRADURE as potential treatment for
hepatitis C and provide key safety and dosing data for INFRADURE for use in preparing an IND application for FDA approval of phase
II studies using INFRADURE in treating patients with hepatitis B and D in the United States and in Europe. We are currently planning
to conduct such studies on our own. We believe we have the internal capabilities to bring INFRADURE as a treatment for hepatitis
D towards product approval and sales without requiring a partner. This approach would aim to demonstrate the complete treatment
and business model for the Biopump Platform Technology, while capturing the revenue stream from sales of a proprietary treatment
for tens of thousands of patients with hepatitis D in the United States and Europe alone, and the millions more patients estimated
worldwide.
In addition to developing new protein
applications of the Biopump, we are also working towards practical scale-up and commercial implementation of Biopump treatment
technology. In collaboration with outsourced engineering firms, we have developed a closed chamber system where each Biopump resides
in its own sealed chamber where it produces protein in a manner similar to the open system used to date. We have demonstrated
and validated that Biopumps produced in the closed chamber are comparable to those processed in the previous open system. This
key step led to the establishment of our first contract manufacturing center for the GMP production of Biopumps in the United
States, located in Sacramento, California. Prior to this, all of the Biopumps were produced in Israel, which involved manually
processing the MOs into Biopump in GMP quality clean rooms. This approach results in a higher cost of processing as compared to
the eventual commercial method anticipated, in which processing is to be performed by semi-automated bioreactors using sealed
cassettes. The limited availability of such facilities and the high levels of expertise required to manually produce Biopumps
in accordance with strict GMP standards would limit the practical ability to perform clinical trials in multiple centers. GMP
clean rooms are required to prevent accidental agent introduction and cross contamination and ensure accurate results are obtained.
This is acceptable for purposes of proving the Biopump concept in early clinical trials, and possibly for rare disease applications,
but for larger clinical trials and for commercial implementation of larger clinical indications, an automated processing system
using closed cassettes is being developed.
Accordingly, we trained the personnel
at the contract manufacturing center to use our proprietary processing chambers and associated devices to successfully implement
the Biopump processing procedure. We demonstrated that this center could process Biopumps from remote sites: skin dermis microorgans
harvested into the sealed chambers in our plant in Israel were sent to the California processing center using a small battery
powered portable incubator shipped via standard courier, and were correctly processed by the center into successful Biopumps meeting
our release criteria. We believe that the practical demonstration of remote processing from a harvest site 9,000 miles overseas
demonstrates that such centers could service many clinical sites around the United States or elsewhere. The center in California
is aimed to support manual GMP production of Biopumps for use in our proposed clinical study of EPODURE in the United States in
2013, and is capable of expansion as need grows. Additional similar centers could be established in various geographical locations
as needed. We continue to make improvements to the initial design of the chamber and plan to incorporate it into a closed single
use cassette for the Biopumps from the patient, to be processed by semi-automated processing stations which we anticipate to be
ready for use in our proposed phase II EPODURE study in the United States . The practical implementation of the Biopump system
will take advantage of the robustness and stability of the MOs and Biopumps for practical logistical transport using standard
shipping means. We anticipate that this will allow a patient’s physician to harvest MOs and administer the resulting Biopumps
to patients locally, without requiring the patient to travel to a separate specialized center. We do not currently plan to sell
Biopump devices outside of partnering agreements. It is possible that we may produce the Biopump products internally and sell
them to our future strategic partners, or we may license the technology to our future strategic partners to allow them to produce
the Biopump products themselves.
As the Biopump processing centers model
evolves, a potential role has emerged for a supply chain partner to support logistics between clinical sites and processing centers.
There may also be a role for a manufacturing partner to set up and run Biopump processing centers, which would produce Biopumps,
using scaled-up cost-effective devices and methods currently under preliminary development. A completed supply chain may facilitate
appropriate agreements with pharmaceutical or other commercial partners for harvesting MOs from, and administration of Biopumps
to, patients in local medical centers. This model can offer pharmaceutical partners the advantages of Biopump therapy in their
market applications, building on their existing infrastructure for selling injected therapeutics, while sparing them the need
to establish their own Biopump processing centers.
Regulatory Strategy
Our overall regulatory strategy is aligned
with our main business strategy of partnering with pharmaceutical, biotech, or medical companies to advance clinical development,
request regulatory approvals, and eventually commercialize approved products. To that end, our strategy is to perform laboratory
and animal feasibility studies and early clinical proof of concept (phase I/II clinical trials) to demonstrate the potential of
the Biopump application. Generally, a strategic partner is sought after sufficient phase I/II data have been gathered to show
proof of concept; however for some new indications, as with hemophilia, we may reach feasibility or partnering agreements at an
earlier stage, even before start of preclinical development. For some applications the completion of phase I/II clinical trials
would be the earliest we would seek to continue clinical development with a partner or collaborator who provides funding for the
development through the product approval stage. However, we would expect partnering deals struck at phase II stage to yield substantially
greater value to our company, and thus for some indications such as anemia and hepatitis B we plan to conduct our own phase II
clinical trial. For other indications such as hepatitis D or some rare diseases, we could take a product candidate to final the
product approval stage without a strategic partner. The general path towards regulatory approval of a Biopump product is:
|
1.
|
Select disease condition and protein therapeutic for application
for FDA approval
|
|
2.
|
Conduct pre-pre-IND (Investigative New Drug application) meeting
with FDA to clarify preclinical requirements and outline of the clinical
protocol
|
|
3.
|
Collect preclinical data, and pursue either
|
|
a.
|
Non-U.S. phase I/II: obtain approval by Israeli Ministry
of Health, or equivalent in other country
|
|
b.
|
U.S. phase I/II: present to a pre-IND meeting with
FDA, complete IND and obtain FDA clearance to conduct phase I/II
for the selected disease condition
|
|
4.
|
Conduct the phase I/II study, with some preference in Israel, where
our team can provide maximal support
|
|
5.
|
Conduct a pre-IND meeting with FDA based on the results of the phase
I/II study, to determine what further steps would be required by FDA
to approve a phase II study
|
|
6.
|
Submit IND for phase II study in the United States based on data
of the phase I/II for the selected disease condition, supportive data
from previous Biopump clinical trials, and preclinical and in vitro
data
|
|
7.
|
Obtain FDA clearance and proceed to conduct phase II in the United
States and possibly internationally
|
|
8.
|
Complete end of phase II meeting with FDA, submit protocol, obtain
FDA clearance and conduct phase III in the United States and possibly
internationally
|
|
9.
|
Submit BLA (Biologic License Application) for product sales
|
We are currently in step 7 outlined above
for our first product candidate, EPODURE, having attained clearance from the FDA for a phase II trial of EPODURE in treating dialysis
patients with ESRD in the United States. We believe that the shortest path through regulatory approval for the first Biopump application
in the United States may be for a disease condition that has an orphan drug designation granted by the FDA, particularly a life-threatening
disease. In the United States, the FDA has the authority to grant a special “orphan drug designation” to a drug or
biologic product that treats a rare disease or condition, which orphan designation provides additional rights to approved products
as well as requiring smaller clinical trials than for large indications. Diseases thought to affect less than 200,000 patients
in the United States are typically deemed to be rare. In June 2012, we successfully obtained an orphan drug designation for our
INFRADURE Biopumps in the treatment of hepatitis D. The orphan drug designation may possibly allow a quicker approval timeframe,
as well as smaller clinical trial enrollments. We plan to use the safety and dosing data from the phase I/II hepatitis C trial
in Israel to prepare an IND application for phase II studies (step 6) in hepatitis B and in hepatitis D in the United States and
elsewhere, as the INFRADURE Biopumps are the same for hepatitis C, B, or D. We will continue to evaluate and update our plans
for the regulatory and clinical pathway for the INFRADURE Biopump with a view to determine whether there would be an advantage
to seek regulatory approval of one of those product candidates in the United States, or possibly first in markets outside the
United States, in light of the fact that hepatitis D is a relatively rare disease in the United States, but is more widespread
internationally, with an estimated 15 million patients or more worldwide with the disease. In addition, we plan to identify other
rare diseases with orphan designation which affect less than 10,000 people worldwide, in which the sustained therapy potentially
offered by our Biopump Platform Technology could represent a major clinical advantage. According to the National Organization
of Rare Diseases, there are thousands of such diseases, and we are exploring these to identify those most promising for our Biopump
technology.
An initial approval of a Biopump product
candidate by the FDA will help establish the safety and effectiveness of Biopumps as treatment for chronic diseases. Future regulatory
approvals of Biopumps for other disease conditions will still need to prove their safety and effectiveness in a specific clinical
indication, but we believe the general questions on the safety and practicality of Biopumps as a treatment modality will become
less of an issue at such point.
We are currently focused on seeking FDA
approval initially as the U.S. market for therapeutic proteins is the largest. We also believe that the Biopump offers unique
advantages addressing key issues of urgent importance in the U.S. market, such as cost-effectiveness, preventive treatment, and
patient compliance. In preparation for our initial phase I/II EPODURE clinical trial in Israel, we were guided by our regulatory
advisors (which include former FDA officers), in coordination with the FDA’s preclinical department in the design of the
requisite preclinical testing for approval of the trial. The study itself was approved by Israel Ministry of Health, and was performed
in adherence with the International Conference on Harmonization (ICH) E6 Guidance for Clinical Practice. This is an international
ethical and scientific standard for designing, conducting, recording and reporting clinical trials. The guidance defines unified
standards for clinical data that will be acceptable to the European Union, Japan and the United States. We intend to conduct our
future trials in such manner as well. It is anticipated that such off shore phase I/II studies will provide support for the registration
process of EPODURE in the United States, which will involve additional clinical trials leading up to approval for sale.
Indeed, the FDA accepted the results of
our phase I/II EPODURE study in patients with CKD in our IND application, which the FDA cleared for the phase II study in the
United States in dialysis patients with ESRD disease, a more advanced renal failure than the CKD patients had in the phase I/II
study. Prior to that, we presented our proposed phase II study protocol, together the scientific and clinical background, to the
National Institutes of Health (NIH) Recombinant DNA Advisory Committee (RAC) for its review. RAC unanimously recommended proceeding
with the proposed phase II study. We intend to submit applications for other geographical markets as well.
Our understanding from the FDA is that
the Biopump Platform Technology is considered a combination product, being a combination of biological products and devices, with
the primary mode of action being a biologic. This was borne out in the pre-IND meeting we held in August 2012, where the Center
for Biologics Evaluation and Research (CBER) division of the FDA led the review of our EPODURE product candidate, with support
from the Center for Devices and Radiological Health (CDRH) for the device aspects of the Biopump product candidate. Representatives
of both CBER and CDRH subsequently reviewed the IND submission and cleared the phase II study in dialysis patients.
EPODURE Biopump Clinical Trials: Anemia in patients with
CKD
During 2003 and 2004, we undertook a phase
I clinical trial using a short acting version of the Biopump producing EPO. That short acting version utilized a first generation
adenoviral vector to process the micro-organs into Biopumps to produce and deliver EPO in ten anemic patients. The results of
that phase I clinical trial were reported in the peer reviewed publication “Blood” (the Journal of the American Society
of Hematology) in October 2005:
“
The results of this study represent
proof of principle that the implantation of an autologous genetically modified tissue into human dermis could significantly and
safely increase the level of secreted proteins in the serum of patients. Furthermore, the secreted protein induced a physiological
effect by increasing the level of the reticulocyte count. The implantation and physiologic effects were not associated with any
significant side effects associated with the experimental drug
.” (We note that a number of the authors of such report
were employees or consultants of our company and that, at that time, no regulatory authority had reviewed or approved these statements.)
The first generation adenoviral vector
used in the Biopumps tested in the phase I clinical trial contained a substantial number of viral genes in addition to the gene
for EPO. Consequently, the transduced cells were capable of producing not only EPO but also viral proteins, which the report published
in “Blood” concluded were probably responsible for drawing the immune response against those cells thereby curtailing
EPO delivery after ten to fourteen days. Having believed we proved the principle of the Biopump in the short-action phase I clinical
trial, we then developed a non-immunogenic gutless (i.e. having none of its own genes) version of the adenoviral vector to produce
the Biopumps which we believed was not likely to elicit an immune response in humans, and therefore, should be able to produce
the therapeutic proteins over a sustained period in human patients. Utilizing the gutless adenoviral vector, we produced sustained-action
Biopumps for two different applications: one producing EPO and the other producing INF-α. Each demonstrated continued protein
production in the range of thousands of nanograms per day for six months
in vitro
. We used the gutless adenoviral vector
to produce the Biopumps used in our completed phase I/II clinical trial in Israel of the EPODURE Biopump for the treatment of
chronic renal anemia.
This phase I/II clinical trial was initially
conducted at Hadassah Medical Center since September 2008 under approval of the Ethics Committee of Hadassah Medical Center and
the Israel Ministry of Health. In April 2010 we received further approval to add an additional site of Tel Aviv Sourasky Medical
Center to the clinical trial. The study was a phase I - II, open label, dose escalation study, comprising three EPODURE
sustained dosage groups of EPO (approximately 20, 40, and 60 IU/kg/day) for the treatment of anemia in CKD patients (stage III - IV),
starting with the lowest dose. These dose levels were selected to roughly correspond to the FDA recommended dosing range for injected
EPO is from 50 to 150 IU/kg given three times per week, corresponding to 150 - 450 IU/kg per week, or 20 - 60
IU/kg per day.
CKD patients diagnosed as having renal
anemia (i.e., having insufficient hemoglobin levels associated with reduced production of EPO by the failing kidneys) were candidates
for the study, whether the patient was already under treatment for the anemia by a regimen of EPO injections (EPO dependent),
or had yet to commence such a treatment (EPO naïve). Each patient was treated with a group of his or her own subcutaneously
implanted Biopumps that were measured before treatment to produce the requisite aggregate amount of EPO per day (20, 40, or 60
IU/kg) based on the patient’s weight. The treatment rationale was that by producing and delivering EPO continuously for
a sustained period, Biopumps should help stabilize the patients’ hemoglobin levels, and if the EPODURE Biopump dose was
adequate for the patient’s specific needs, the hemoglobin level will also be maintained in the target range of 10 - 12
g/dl – the range preferred by FDA at the time of the phase I/II study in 2008-12.
Under the approved protocol, ten dermis
micro-organs were harvested from each patient by simple needle biopsy performed under local anesthesia using our proprietary device,
the DermaVac, typically from the dermis of the abdomen. These tissues samples underwent a standardized, reproducible procedure
in a GMP cell processing laboratory over the course of two weeks to convert them into EPODURE Biopumps which each secrete a measured
and sustained amount of EPO per day. A group of the patient’s Biopumps which together produce the dose of EPO required by
the protocol was subsequently implanted back into the patient subcutaneously, again under local anesthesia.
The mid-dose was administered after submission
and approval of a safety report on the first six patients treated at the low dose. Likewise, we commenced high-dose administration
following review of mid-dose data and approval by the IRB of Tel Aviv Medical Center. No related serious adverse events were reported
for any of the treated patients, with the exception of minor, local subcutaneous hematoma (bleeding) seen at the harvest and implantation
sites, as can be expected for any invasive procedures dealing with the skin. The hematoma was generally seen to clear up within
several weeks for all patients treated. In addition, no immune response to the implanted Biopumps was reported. Because the protein
secreted by the implanted Biopumps is the patient’s own naturally-produced human EPO and not a foreign substance, no adverse
reaction was expected, and none has been noted. Evidence that the Biopumps were not rejected by the patients’ immune system
is seen in the sustained elevation and maintenance of hemoglobin levels in most of the patients. All of the patient procedures
were well tolerated and no complaints of discomfort were received.
For the patients who were treated with
EPO injections prior to the study, their treating physicians discontinued EPO injections at least four weeks prior to the day
of Biopump implantation, as required in the approved protocol.
In November 2012, the summary results
of the completed phase I/II dose escalation study in CKD patients and initial results of our phase I/II in ESRD patients were
presented at the annual meeting of the American Society of Nephrology. Data summarized from the completed CKD trial indicated
that five of seven patients at the low dose level of 20 IU/kg/day, and seven of seven patients at the mid-dose level of 40 IU/kg/day
and two of five patients at the high dose level of 60 IU/kg/day avoided the use of supplemental EPO for three months or longer
and three of seven, five of seven, and one of five patients, respectively, avoided the use of supplemental EPO for six months
or longer. In these treated patients, EPO levels were quickly elevated by 10-50 mU/ml above baseline with a generally larger net
rise attained in proportion to the implanted dose and resulting in an increase in the number of new red blood cells (reticulocytes).
The FDA issued a new guidance in 2011 indicating that hemoglobin should be maintained below 11 g/dl and high enough
to avoid the need for increased transfusions, but not necessarily above 10 g/dl. In view of this new guidance, we note that
the results of the completed study in 19 CKD patients showed that a single EPODURE administration elevated and maintained hemoglobin
levels above 9 g/dl for at least three months in 14 of 19 patients, and for at least six months in nine of them, without need
for any transfusions or EPO injections. The final study report of the CKD trial should be complete by end of the first quarter
of 2013. With respect to our phase I/II study in ESRD patients, the initial early data obtained in the first three patients treated
showed evidence of EPO secretion and early maintenance of hemoglobin levels.
Our proposed phase II EPODURE clinical
trial will seek to reproduce similar results to the phase I/II clinical trial in multiple centers (and in more patients), and
further seek to test:
|
·
|
reliable
preparation
of
Biopumps
processed
in
sealed
chambers;
|
|
·
|
demonstration
of maintenance
of hemoglobin within
the new specified
range of 9-11 g/dl
for at least 4
months from a single
administration
in typical patients;
|
|
·
|
avoidance
of supraphysiological
levels of serum
EPO throughout
the treatment (except
when isolated EPO
injections may
be applied to treat
a transient incident
such as an inflammation
or bleed); and
|
|
·
|
the
requirement
of
less
interventions
during
the
specified
time
interval
(currently
planning
for
four-to-six
month
duration).
|
In preparation for the anticipated phase
II study, we established and validated the GMP Biopumps processing facility in California, identified and taken steps to arrange
for CRO and obtained the interest of an experienced nephrologist will be the lead Principal Investigator for the study. More than
one major U.S. clinical site has asked to take part in the planned phase II clinical trial, with costs estimated to be in the
$5-8 million range, depending on the number of patients. We currently plan to perform the phase II clinical trial on our own.
However, if agreement is reached with an appropriate strategic partner, the phase II clinical trial could be conducted with such
partner under that agreement. In the interim we have commenced a phase IIa study of EPODURE in dialysis patients with ESRD in
Israel as our first use of EPODURE in patients with complete renal failure, and a forerunner to the U.S. phase II study. To date,
four patients have been enrolled and the preliminary results look comparable to our completed CKD study.
If the proposed phase II study produces
the anticipated results, we believe this would be followed by a phase III clinical trial for product candidate approval involving
hundreds of patients at multiple centers which we would anticipate conducting with a commercial partner, and using a version of
the automatic processor and sealed cassettes which would be similar to that intended for commercial use. Details of any phase
III clinical trial will only be determined by the FDA upon review of the results of the data from our planned phase II study.
INFRADURE Biopump Clinical Trials: In Patients with Hepatitis
C
Our first clinical
study of INFRADURE is focused on hepatitis C study which is underway in Israel and will provide us with the initial opportunity
to determine the safety and biologic activity of INFRADURE Biopumps in patients. In this study, we will be examining the ability
of INFRADURE Biopumps to deliver INF-
α
into the patient, the levels of INF-
α
that are achieved in the serum and the biologic effect of the INF-
α
on the clearance of the hepatitis C antigen and other biologic effects
.
This is a phase I/II, open label, uncontrolled,
dose escalation study. The trial is being conducted in Israel at the Tel Aviv Medical Center and other sites. This study is exploratory
in nature.
All eligible subjects will be implanted
with autologous INFRADURE Biopump tissue intended to deliver therapeutic levels of INF-α. Subjects
will be enrolled sequentially into one of three dose groups; the first dose group will include nine subjects receiving the lowest
dose. We are starting with a low dose intended to deliver weekly an amount somewhat higher than the weekly injections of pegylated
interferon used in standard of care. An interim safety review will be conducted in house after the first six subjects who receive
the lowest dose have completed four weeks of treatment. If the safety review allows, an additional three patients may be enrolled
in the low dose group.
Subsequently,
four subjects will be enrolled into each of the remaining two treatment dose groups: middle dose, roughly double the low dose,
and high dose at roughly three times the low dose. All subjects will be treated with dual therapy of implanted INFRADURE Biopumps
delivering INF-
α
together with oral Ribavirin (Copegus) for up to 24 weeks following
the Biopump implantation.
An additional 24-week follow-up period
will be conducted to ensure each subject’s safety. Outcomes to be measured will include safety, tolerability and biologic
effects on viral clearance. To date, only one patient has been enrolled in the study, but has not been implanted with any Biopumps.
If we determine that this initial exploratory
hepatitis C trial provides sufficient supportive evidence of INFRADURE Biopump safety and activity, we would then have supportable
data from the INFRADURE hepatitis C trial to draw on in applying for IND clearance of phase II studies for INFRADURE in patients
with hepatitis B and hepatitis D. Assuming the hepatitis C trial does provide the requisite data, we plan to submit to the FDA
the IND application for hepatitis B. The plans for studies in each of these indications are at a preliminary phase but a general
outline of our potential approach is described below.
INFRADURE for HEPATITIS B: Draft Clinical Development Plan
As discussed above, the current oral antiviral
nucleoside therapies as stand-alone treatment do not effectively clear the patient of the hepatitis B virus (HBV). When HBV is
truly cleared the surface antigen of HBV, HBsAg, is cleared, which is usually reached by attaining seroconversion against HBsAg.
The oral drugs have a low HBsAg seroconversion rate of 0-5%. Accordingly, we are planning to examine whether the administration
of INFRADURE in addition to nucleoside therapies can produce a higher rate of seroconversions or loss of the HBsAg from the circulation.
A second potential use of INFRADURE in treating hepatitis B is as stand-alone monotherapy.
INFRADURE as Supplement to Nucleoside Therapy (Oral Drugs)
We anticipate that the hepatitis B program
would begin with a phase II open label randomized study. We would enroll adults with chronic HBV infection and evidence of persistent
disease despite nucleoside therapy. Using this approach, subjects will be maintained on their nucleoside therapy and INFRADURE
Biopumps will be added to provide administration of
INF-
α. We would plan to test and administer
two different doses of INFRADURE for 24 weeks of therapy and compare the results to adults who only received standard of care
therapy. Current planning is to aim for a study of about 50 patients. If the phase II study provides positive information, we
could then proceed to a phase IIb/III, randomized open label trial with a control of standard of care therapy in adults with chronic
HBV infection and evidence of persistent disease despite nucleoside therapy. This study would use a longer duration of treatment.
We would plan to examine the percent of subjects with no HBsAg detectable and seroconversion, as well as the percent of subjects
with significant reduction in serum HBsAg, and the safety and tolerability of chronic INFRADURE administration. Assuming positive
data, we would likely engage in a broader phase III study.
INFRADURE Monotherapy
We anticipate that the initial phase II
would be a randomized
open label, active control study in adults (around 50 patients) with chronic HBV infection and evidence of viral replication.
INFRADURE Biopumps that would potentially be capable of secreting
INF-
α
for 24 weeks would be implanted at two dose levels and the results compared to a control group receiving standard of care
PEGASYS (peginterferon alfa-2a) 180 mcg/week injection. Assuming positive data showing a significant reduction in HBsAg, we would
anticipate a larger phase IIb/III trial of around 300 subjects studied in a randomized open label, active control design. We would
aim to enroll adults with chronic HBV infection and evidence of viral replication. Two different doses of INFRADURE would again
be compared to standard of care.
In this study, a longer duration of treatment
is contemplated and we would look to determine the percent of subjects with good suppression of the hepatitis B virus to a level
which is considered as not clinically significant (the level of HBV DNA in the patient’s serum less than 100,000 copies
of viral DNA/ml of serum), the percent of subjects with normalization in liver enzymes (as measured by the liver enzyme ALT),
the percent of subjects with clearance of serum HBeAg, the percent of subjects with clearance of HBsAg, and would also possibly
examine liver histology for reduction in inflammation and fibrosis along with safety measurements over this longer time of exposure.
Assuming positive data, a broader phase III study would be conducted. We would hope to be able to demonstrate superiority to standard
of care or non-inferiority.
INFRADURE for HEPATITIS D: Draft Clinical Development Plan
Somewhat in parallel with the Hepatitis
B program we are planning to study INFRADURE in Hepatitis D. It should be noted that patients with hepatitis D also have hepatitis
B. In this indication, the safety data base requirement might be no more than a few hundred and even as few as 100 (pending discussion
with the FDA). We plan an international multicenter approach to leverage the greater availability of patients worldwide compared
to the low number in the United States.
The initial objective would be to assess
the safety and biologic activity of INFRADURE Biopump treatment in hepatitis Delta virus (HDV) positive patients for a period
of six months. We would start with a phase II open label, randomized, dose escalation, study in adults (around 30 patients),
with chronic HDV infection and chronic inflammation on liver biopsy compatible with chronic viral hepatitis, who are either naïve
to treatment, or at least six months off interferon treatment including previously relapsed responders.
We would plan
to study the administration of
INFRADURE Biopumps for 24 weeks given in two or three dose levels and all subjects will
have HDV genotype determined at baseline. HDV RNA and HBV DNA levels and hepatic enzymes would be measured at baseline and intermittently
throughout the study until completion of therapy and follow-up. Outcome measures could include the proportion of subjects with
undetectable HDV RNA
,
and evaluation of safety. Assuming positive data, we anticipate proceeding with a phase III study
which would provide for a larger number of patients and longer treatment duration.
Patient recruitment is often a significant
challenge for many clinical trials, and we have experienced significant difficulty to date in finding and recruiting sufficient
appropriate patients for our EPODURE anemia studies in Israel. We cannot determine whether this is due to particular healthcare
economics and clinical management practice in Israel, or to other factors. We hope and believe this will improve in future trials
that we may conduct in Israel or elsewhere, including our current Israeli phase I/II study in hepatitis C and ongoing phase II
study in dialysis patients, the anticipated phase II dialysis study in the United States and the planned phase II studies in hepatitis
B and D.
Intellectual Property
Our goal is to obtain, maintain and enforce
patent and trademark protection for our products, processes, methods and other proprietary technologies of the Biopump Platform
Technology, and preserve our trade secrets both in the United States and in other countries. Our policy is to actively seek to
obtain, where appropriate, the broadest intellectual property protection possible for our Biopump Platform Technology through
a combination of contractual arrangements, trade secrets, patents and trademarks, both in the United States and elsewhere in the
world.
We also depend upon the skills, knowledge
and experience of our scientific and technical personnel, as well as that of our advisors, consultants and other contractors,
none of which is patentable. To help protect our proprietary knowledge and experience that is not patentable, and for inventions
for which patents may be difficult to enforce, we rely on trade secret protection and confidentiality agreements with our employees,
consultants, vendors, collaborators, advisors, customers and other third parties to protect our interests. To this end, we require
all employees, consultants, advisors and other contractors to enter into confidentiality agreements, which prohibit the disclosure
of confidential information and, where applicable, require disclosure and assignment to us of the ideas, developments, discoveries
and inventions important to our business.
Our ability to compete depends on our
ability to maintain and enforce our intellectual property rights and operating without infringing the intellectual property of
others and our ability to enforce our licenses. Our business could be materially harmed and we could be subject to liabilities
because of lawsuits brought by others against our licensors and licensees with whom with have a strategic alliance. We will be
able to protect our technology from unauthorized use by third parties only to the extent it is covered by valid and enforceable
patents or is effectively maintained as trade secrets. Patents and other proprietary rights are an essential and material element
of our business.
Our existing owned and licensed patent
portfolio currently contains 42 issued and 82 pending patents. Applications for patents and other intellectual property rights
capable of being registered have been, and will be, filed in certain key jurisdictions.
Our licensed and owned patent portfolio
covers the key elements of the Biopump Platform Technology, ranging from tissue engineering to device implementation and systematic
treatment. Our patent portfolio includes our proprietary dermal genetically modified micro-organ Biopump, which includes the EPODURE
Biopump, the INFRADURE Biopump, the HEMODURE Biopump and production, processing, implantation and the tools designed for use in
the Biopump procedure.
Many of the patent and patent applications
pertaining to the Biopump Platform Technology are licensed under an exclusive, worldwide license from Yissum Research Development
Company of the Hebrew University of Jerusalem (Yissum) and variants of Factor VIII are licensed from University of Michigan. The
patent portfolio at the date of this report is comprised of the following issued and pending patents:
Type
|
|
Number
|
|
Jurisdiction
|
|
Owner/Licensee status
|
Issued patent
|
|
1
|
|
US
|
|
Yissum*
|
|
|
|
|
|
|
|
Issued patent
|
|
3
|
|
US
|
|
University of Michigan*
|
|
|
|
|
|
|
|
Issued patent
|
|
6
|
|
Korea, Singapore, India, Israel and Australia
|
|
Yissum*
|
|
|
|
|
|
|
|
Issued patent
|
|
2
|
|
EP
|
|
University of Michigan*
|
|
|
|
|
|
|
|
Issued patent
|
|
4
|
|
US
|
|
Medgenics
|
|
|
|
|
|
|
|
Issued patent
|
|
26
|
|
Non-US**
|
|
Medgenics
|
|
|
|
|
|
|
|
Patent application
|
|
6
|
|
US
|
|
Yissum*
|
|
|
|
|
|
|
|
Patent application
|
|
3
|
|
Non-US**
|
|
Yissum*
|
|
|
|
|
|
|
|
Patent application
|
|
5
|
|
US
|
|
University of Michigan*
|
|
|
|
|
|
|
|
Patent application
|
|
5
|
|
Non-US**
|
|
University of Michigan*
|
|
|
|
|
|
|
|
Patent application
|
|
11
|
|
US
|
|
Medgenics
|
|
|
|
|
|
|
|
Patent application
|
|
45
|
|
Non-US**
|
|
Medgenics
|
|
*
|
licensed exclusively (within the defined scope) to us.
|
|
**
|
Variously, Patent Co-operation Treaty signatory States, European
Patent Organization member States, Peoples’ Republic of China,
Singapore, India, Australia, Canada, Japan, Israel and/or South Korea.
|
There can be no assurance that the pending
applications will result in patents ultimately being issued.
We also rely on trade secrets, technical
know-how and continuing innovation to develop and maintain our competitive position. We seek to protect our proprietary information
by requiring our employees, consultants, contractors, outside scientific collaborators and other advisors to execute non-disclosure
and confidentiality agreements and our employees to execute assignment of invention agreements to us on commencement of their
employment. Agreements with our employees also prevent them from bringing any proprietary rights of third parties to us. We also
require confidentiality or material transfer agreements from third parties that receive our confidential data or materials.
We intend to continue to take all appropriate steps to protect our intellectual property, including maintaining an active program
for patent protection for novel elements in the development of our products and technology.
Licenses
Yissum license
The licensing arrangements with Yissum
formally commenced in 2000 and have since been replaced by the current arrangements prescribed by the License Agreement, which
was entered into on November 23, 2005. The License Agreement is for a term that expires on the later of:
|
·
|
20
years from the
date of making
the first commercial
sale of any product
utilizing Yissum’s
technology under
the License Agreement;
and
|
|
·
|
the
expiration of the
last Yissum patent
licensed to us,
which is expected
to be approximately
July 2022.
|
The scope of the License Agreement includes
the exploitation of MO and MO technologies in the development and implementation of gene therapy for use in the prevention, treatment
and diagnosis (or curing) of disease and for producing recombinant proteins or nucleic acids for therapeutic applications. Under
the License Agreement, we agreed to pay Yissum the following amounts:
(a) three fixed installments
measured by reference to investment made in our company, as follows:
1
st
installment -
|
$50,000 shall be paid when the cumulative investments in our company by
any third party or parties, from May 23, 2005, amount to at least $3 million which was paid in 2007.
|
|
|
2
nd
installment -
|
Additional $150,000 shall be paid when the cumulative investments in our company by any third
party or parties, from May 23, 2005, amount to at least $12 million which was accrued as of December 31, 2009 and paid in
2010.
|
|
|
3
rd
installment -
|
Additional $200,000 shall be paid when the cumulative investments in our company by any third
party or parties, from May 23, 2005, amount to at least $18 million which was triggered by the closing of our U.S. IPO and
paid in April 2011.
|
(b) royalties at a rate of 5% of net sales of the product;
and
(c) sublicense fees at a rate of 9% of sublicense considerations.
The License Agreement provides that our
total aggregate payment of royalties and sublicense fees to Yissum shall not exceed $10,000,000.
The License Agreement requires that we
reimburse Yissum for the costs and expenses of prosecuting the pending patent applications and of maintaining all registered patents
licensed to us. If, however, for reasonable commercial considerations, we decide that we do not wish to fund the registration
or maintenance of a patent in a certain state or country and Yissum applies for, registers or maintains a patent covered by the
License Agreement in that state or country at its own cost, the patent license with respect to that state or country will revert
to Yissum and be capable of being licensed to a third party or exploited by Yissum. In addition, if the License Agreement ends
or is terminated for any reason, all rights in the Yissum patents will revert to Yissum.
BCM license
We also have licensed from Baylor College
of Medicine (BCM) the non-exclusive right to use technology developed by BCM in producing the HDAd (gutless adenoviral vector).
Under the BCM License, we agreed to pay the following amounts:
(a) a one time, non-refundable license fee of $25,000 which
was paid in 2007;
(b) an annual non-refundable maintenance fee of $20,000;
(c) a one-time milestone payment of $75,000 upon FDA clearance
or equivalent of clearance for therapeutic use; and
(d) $25,000 upon our execution of any sublicenses in respect
of the BCM technology.
The BCM license commenced on January 25,
2007 (and references collaboration agreements between us and BCM dated January 25, 2006 and April 6, 2006). The license expires
on the first date following the tenth anniversary of our first commercial sale of products incorporating the BCM licensed technology.
After the license expires, we will have a perpetual, non-exclusive, royalty free license to the licensed BCM technology. If the
BCM license is terminated, the rights to the licensed technology (except our developed technology) will revert to BCM.
University of Michigan license
We have entered into a worldwide licensing
agreement of certain patents relating to nucleic acid sequences encoding variants of Factor VIII for use in
ex vivo
introduction
of genes into cells or tissue intended to be administered to subjects for therapeutic use through a license granted by University
of Michigan. The University of Michigan license agreement contains an annual license fee, milestone payments, royalties and sublicense
fees as follows:
|
(a)
|
an initial license fee of $25,000 payable to University of Michigan;
|
|
(b)
|
An annual license fee in arrears of $10,000 rising to $50,000 following
the grant by us of a sublicense or (if sooner) from the sixth anniversary
of the license agreement;
|
|
(c)
|
Staged milestone payments of $750,000 (in aggregate), of which
$400,000 will be recoupable against royalties;
|
|
(d)
|
Royalties at an initial rate of 5% of net sales, reducing by a
percentage point at predetermined thresholds to 2% upon cumulative
net sales exceeding $50 million; and
|
|
(e)
|
Sublicense fees at an initial rate of 6% of sublicensing revenues,
reducing by a percentage point at predetermined thresholds to 4% upon
cumulative sublicensing revenues exceeding $50 million.
|
The University of Michigan license agreement
expires upon the expiration of the last patent licensed to expire, which is expected to be approximately June 30, 2026.
We are required to use commercially reasonable
efforts to bring a product utilizing one or more of the licensed patents to market to commercial use through a commercially reasonable
and diligent program and to continue active, diligent efforts during the term of the University of Michigan license agreement.
The license agreement also requires that we reimburse University of Michigan for 50% of the costs and expenses of prosecuting
the pending patent applications and of maintaining all registered patents licensed to us. If we fail to make the payments due
or otherwise breach our obligations under the University of Michigan license agreement, University of Michigan would have the
right to terminate the license agreement and our right to use the patents would end.
Trademarks
Certain names
utilized for our products and tools are the subject of trademark applications in certain jurisdictions, though the final choice
of name for products and tools has not yet been made and will be subject to marketing considerations and other
factors.
We have filed applications for BIOPUMP trademark in foreign countries. BIOPUMP is registered in Australia, China, the European
Union, South Korea, Norway and Russia in the framework of an International Trademark Registration as well as in, Hong Kong and
Mexico. BIOPUMP trademark applications are currently pending in Brazil, India, Israel, New Zealand, Canada, as well as in the
United States. There can be no assurance that a third party will not oppose any registration, that the respective Trademark Offices
will issue a registration certificate or that we will otherwise be successful in perfecting trademark rights for the marks in
the United States or in foreign countries, the results of any of which would likely have a material adverse effect on our business.
We do not currently have trademark applications in any jurisdiction for the names EPODURE, INFRADURE, HEMOD
URE
or DermaVac. We had been contacted by a third party regarding the use of that party’s Biopump trademark which we believe
is inapplicable to our use and registration of the mark BIOPUMP and communicated this to the said third party. We have now received
said party’s consent to the use and registration of our BIOPUMP trademark in Israel.
Government Regulation
General
The production, distribution, and marketing
of products employing our technology, and our development activities, are subject to extensive governmental regulation in the
United States and in other countries. In the United States, our products are regulated as biologics and medical devices and are
subject to the Federal Food, Drug, and Cosmetic Act, as amended, and the regulations of the FDA, as well as to other federal,
state, and local statutes and regulations. These laws, and similar laws outside the United States, govern the clinical and preclinical
testing, manufacture, safety, effectiveness, approval, labeling, distribution, sale, import, export, storage, record-keeping,
reporting, advertising, and promotion of our products. Product development and approval within this regulatory framework, if successful,
will take many years and involve the expenditure of substantial resources. Violations of regulatory requirements at any stage
may result in various adverse consequences, including the FDA’s and other health authorities’ delay in approving or
refusal to approve a product. Violations of regulatory requirements also may result in enforcement actions.
The following paragraphs provide further
information on certain legal and regulatory issues with a particular potential to affect our operations or future marketing of
products employing its technology.
Research, Development, and Product
Approval Process in the United States
We believe that the FDA will consider
the Biopump Platform Technology a combination product because it combines two regulated components: a medical device and a biological
product. The FDA regulatory center that has primary jurisdiction over a combination product is determined by the combination product’s
“primary mode of action,” i.e., the single mode of action that provides the most important therapeutic action. We
believe the most important therapeutic action is provided by the biological product(s), which would result in the FDA’s
Center for Biologics Evaluation and Research (CBER) leading the review of our product, with consultation from the Center for Devices
and Radiological Health (CDRH) for the device aspects of the Biopump product. We also believe combination products like the Biopump
Platform Technology are likely to be evaluated under a biological license application (BLA) if and when it is submitted for approval,
although it is possible that the FDA might require a different approach. At this time, we believe that it is likely the research,
development, and approval process for our product is likely to take a path that is usually followed for therapeutic biologicals.
The research, development, and approval
process in the United States is intensive and rigorous and generally takes many years to complete. Also, there is no guarantee
that a product approval will ultimately be obtained. The typical process required by the FDA before a therapeutic biological may
be marketed in the United States includes:
|
·
|
Preclinical
laboratory and
animal tests performed,
usually in compliance
with FDA’s
Good Laboratory
Practices (GLP)
regulations;
|
|
·
|
Submissions
to the FDA of an
IND application,
which must become
effective before
clinical trials
may commence in
the United States;
|
|
·
|
Clinical
studies to evaluate
the drug’s
safety and effectiveness
for its intended
uses under the
IND;
|
|
·
|
FDA
review of whether
the facility in
which the product
is manufactured,
processed, packed,
or held meets standards
designed to assure
the product’s
continued quality;
|
|
·
|
Submission
of a marketing
application to
the FDA; and
|
|
·
|
Approval
of the marketing
application by
the FDA.
|
During preclinical testing, laboratory
studies are performed with the product candidate. Biological testing is typically done in animal models to demonstrate the activity
of the compound against the targeted disease or condition and to assess the effects of the new product candidate on various organ
systems, as well as its relative therapeutic effectiveness and safety. These studies must generally meet GLP requirements to be
considered valid by the FDA.
An IND application must be submitted to
the FDA and become effective before studies in humans (i.e., clinical trials) in the United States may commence. The FDA will
consider, among other things, the safety of allowing studies proposed under the IND to proceed. Support for the IND can include
preclinical study results as well as relevant human experience. Some human experience might be provided from foreign clinical
trials that were not conducted under an IND. The FDA will accept as possible support for an IND a well-designed and well-conducted
foreign clinical trial if (1) it was conducted in accordance with good clinical practices (GCP), including review and approval
(or provision of a favorable opinion) by an independent ethics committee (IEC) before initiating a study, continuing review of
an ongoing study by an IEC, and compliance with informed consent principles, and (2) FDA is able to validate the data from the
study through an onsite inspection if the agency deems it necessary.
Clinical trial programs generally follow
a three-phase process. Typically, phase I studies are conducted in small numbers of healthy volunteers or, on occasion, in patients
afflicted with the target disease. phase I studies are conducted primarily to determine the metabolic and pharmacological action
of the product candidate in humans and the side effects associated with increasing doses, and, if possible, to gain early evidence
of effectiveness. In phase II, studies are generally conducted in larger groups of patients having the target disease or condition
in order to validate clinical endpoints, and to obtain preliminary data on the effectiveness of the product candidate and optimal
dosing. This phase also helps determine further the safety profile of the product candidate. In phase III, large-scale clinical
trials are generally conducted in patients having the target disease or condition to establish the effectiveness, and support
the safety, of the product candidate.
In the case of products for certain serious
or life-threatening diseases, the initial human testing is sometimes done in patients with the disease rather than in healthy
volunteers. Because these patients are already afflicted with the target disease or condition, it is possible that such studies
will also provide results traditionally obtained in phase II studies. These studies are often referred to as “phase I/II”
studies. However even if patients participate in initial human testing and a phase I/II study is conducted, the sponsor is still
responsible for obtaining all the data usually obtained in both phase I and phase II studies.
U.S. law requires that studies conducted
to support approval for product marketing be “adequate and well controlled.” Usually this means, among other things,
that either a placebo or a product already approved for the treatment of the disease or condition under study must be used as
a reference control, although other kinds of controls are sometimes used. Studies must also be conducted in compliance with GCP
requirements, including informed consent and Institutional Review Board (IRB) requirements. In addition, with certain exceptions,
sponsors of clinical trials are required to register clinical trials, and disclose clinical trial information, for posting on
the publicly-available clinicaltrials.gov website.
The clinical trial process can potentially
take several years to complete. Also, the FDA may prevent clinical trials from beginning or may place clinical trials on hold
at any point in this process if, among other reasons, it concludes that study subjects are being exposed to an unacceptable health
risk. Trials in the United States involving human subjects are also subject to advance approval and oversight IRBs, which have
the authority to request modifications to a clinical trial protocol and to suspend or terminate its approval of a protocol if
a clinical trial is not being conducted in accordance with the IRB’s requirements or where there is unexpected serious harm
to subjects. Side effects or adverse events that are reported during clinical trials can potentially delay, impede, or prevent
continued research and development.
Also, the FDA places certain restrictions
on the use of foreign clinical data that are intended to be relied on as the sole basis for approval. A marketing application
based solely on foreign clinical data meeting U.S. criteria for marketing approval may be approved only if (1) the foreign data
are applicable to the U.S. population and U.S. medical practice; (2) the studies have been performed by clinical investigators
of recognized competence; and (3) the data may be considered valid without the need for an on-site inspection by the FDA or, if
the FDA considers such an inspection to be necessary, the FDA is able to validate the data through an on-site inspection or other
appropriate means.
Following the completion of the clinical
trial program for the product, a Biologic License Application (BLA) must be submitted by the applicant, and approved by the FDA,
before commercial marketing of the product may begin in the United States. The BLA must include a substantial amount of data and
other information concerning the safety and effectiveness of the product from laboratory, animal, and clinical testing, as well
as data and information on manufacturing, product quality and stability, and proposed product labeling. Also, each domestic and
foreign manufacturing establishment, including any contract manufacturers, must be listed in the BLA and must be registered with
the FDA. The BLA must usually be accompanied by an application fee, although certain deferral, waivers, and reductions may be
available, e.g., for a small business submitting its first BLA. For fiscal year 2012, the BLA application fee is $1,841,500.
There are regulatory mechanisms which might
potentially speed up the development and approval process for certain kinds of products. These mechanisms are Fast Track, Accelerated
Approval, and Priority Review.
|
·
|
Fast Track is a process designed to facilitate the development, and expedite the review of biological
products to treat serious diseases and fill an unmet medical need by providing (1) more frequent meetings with the FDA to discuss
product development, (2) more frequent written correspondence from the FDA about such things as the design of the proposed clinical
trials, (3) eligibility for Accelerated Approval, and (4) a “ rolling review” process, which allows a company to submit
sections of its application for review by the FDA, rather than waiting until every section of the application is completed before
the entire application can be submitted for review.
|
|
·
|
Accelerated Approval allows earlier approval of biological products to treat serious diseases, and
that fill an unmet medical need based on a surrogate endpoint, which can potentially reduce the time needed to conduct trials.
Where the FDA approves a product on the basis of a surrogate marker, it requires the sponsor to perform post-approval studies as
a condition of approval, and may withdraw approval if post-approval studies do not confirm the intended clinical benefit or safety
of the product. Special rules would also apply to the submission to the FDA of advertising and promotional materials prior to use.
|
|
|
|
|
·
|
Priority Review designation is given to biological products that offer
major advances in treatment, or provide a treatment where no adequate therapy exists. A Priority Review means that the time it
takes the FDA to review an application is reduced. The goal for completing a Priority Review is six months. Priority Review status
can apply both to products that are used to treat serious diseases and to products for less serious illnesses.
|
We cannot know for sure whether the FDA
would allow us to take advantage of any of these mechanisms in developing our products.
Each BLA submitted for FDA approval is
usually reviewed for administrative completeness and reviewability within 45 to 60 days following submission of the application.
If deemed complete, the FDA will “file” the BLA, and do its substantive review of the application. The FDA can refuse
to file a BLA that it deems incomplete or not properly reviewable. An applicant can then either request that the BLA be filed over
FDA’s protest, amend the application to address the deficiencies the FDA has alleged and resubmit it, or not pursue the application.
The FDA’s current performance goals
for reviewing of BLAs are six months from submission for BLAs that the FDA designates as priority applications and 10 months from
submission for standard applications. However, the FDA is not legally required to complete its review within these periods, and
these performance goals may change over time. Moreover, the outcome of the review, even if generally favorable, can often be a
“complete response” letter that describes additional work that must be done before the application can be approved.
This work can sometimes be substantial. Also, even if the FDA approves a product, it may limit the approved therapeutic uses for
the product through indications and usage statements it allows to be approved in the product labeling, require that warning statements
be included in the product labeling, require that additional studies be conducted following approval as a condition of the approval,
impose restrictions and conditions on product distribution, prescribing, or dispensing in the form of a risk evaluation and mitigation
strategy (REMS), or otherwise limit the scope of any approval. Also, before any approval, facilities that manufacture the product
must generally pass an FDA inspection.
Overall research, development, and approval
times depend on a number of factors, including the period of review at the FDA, the number of questions posed by the FDA during
review, how long it takes to respond to the FDA’s questions, the severity or life threatening nature of the disease in question,
the availability of alternative treatments, the ability to take advantage of mechanisms that might facilitate development and FDA
review of a product, the availability of clinical investigators and eligible patients, the rate of enrollment of patients in clinical
trials, and the risks and benefits demonstrated in the clinical trials.
There are additional issues regarding our
products that might be important to its research, development, and approval. Manufacturing issues regarding biological products
can be particularly complex. Also the Biopump Platform Technology presents a somewhat different situation than those the FDA often
deals with, i.e., a situation in which a biological therapeutic is manufactured at one or a few sites. Also, because the product
will probably be considered a combination product with a device product component, there are device-related manufacturing and other
compliance issues (e.g., cGMPs and adverse event reporting) that might be implicated by the product. These issues may increase
the complexity of circumstances we will face with the FDA.
Post-Approval Requirements
Any products for which we receive FDA approvals
will be subject to continuing regulation by the FDA, including, among other things, record-keeping requirements, reporting of adverse
experiences with the product, providing the FDA with updated safety and efficacy information, product sampling and distribution
requirements, complying with certain electronic records and signature requirements and complying with FDA promotion and advertising
requirements. The FDA strictly regulates labeling, advertising, promotion and other types of information on products that are placed
on the market. Products may be promoted only for the approved indications and in accordance with the provisions of the approved
label. Furthermore, product manufacturers must continue to comply with current Good Manufacturing Practices (cGMP) requirements,
which are extensive and require considerable time, resources and ongoing investment to ensure compliance. In addition, changes
to the manufacturing process generally require prior FDA approval before being implemented and other types of changes to the approved
product, such as changes in materials or adding indications or labeling claims, are also subject to further FDA review and approval.
Manufacturers and other entities involved
in the manufacturing and distribution of an approved biological or medical device product are required to register their establishments
with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies
for compliance with cGMP and other laws. The cGMP requirements apply to all stages of the manufacturing process, including the
production, processing, sterilization, packaging, labeling, storage and shipment of the product. Manufacturers must establish validated
systems to ensure that products meet specifications and regulatory standards, and test each product batch or lot prior to its release.
The FDA has proposed, but has not yet finalized, regulations for cGMPs for combination products. The final cGMP requirements for
combination products are likely to require products comprised of a biological product and a medical device to comply with both
cGMPs for biological products and cGMPs for devices.
Manufacturers of biological products must
also report to the FDA any deviations from cGMP that may affect the safety, purity or potency of a distributed product; or any
unexpected or unforeseeable event that may affect the safety, purity or potency of a distributed product. The regulations also
require investigation and correction of any deviations from cGMP and impose documentation requirements.
We might rely on third parties for the
production of our products. FDA and state inspections may identify compliance issues at the facilities of contract manufacturers
that may disrupt production or distribution or may require substantial resources to correct.
The FDA may withdraw a product approval
if compliance with regulatory standards is not maintained or if problems occur after the product reaches the market. Later discovery
of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product
from the market. Furthermore, the failure to maintain compliance with regulatory requirements may result in administrative or judicial
actions, such as fines, warning letters, holds on clinical studies, product recalls or seizures, product detention or refusal to
permit the import or export of products, refusal to approve pending applications or supplements, restrictions on marketing or manufacturing,
injunctions or civil or criminal penalties.
In addition, from time to time, new legislation
is enacted that can significantly change the statutory provisions governing the approval, manufacturing and marketing of products
regulated by the FDA. In addition to new legislation, FDA regulations and policies are often revised or reinterpreted by the agency
in ways that may significantly affect our business and our products. It is impossible to predict whether further legislative or
FDA regulation or policy changes will be enacted or implemented and what the impact of such changes, if any, may be.
Orphan Drugs
Under the Orphan Drug Act, special incentives
exist for companies to develop products for rare diseases or conditions, which are defined to include those diseases or conditions
that affect fewer than 200,000 people in the United States. Companies may request that the FDA grant an orphan drug designation
prior to approval. Products designated as orphan drugs are eligible for special grant funding for research and development, FDA
assistance with the review of clinical trial protocols, potential tax credits for research, reduced filing fees for marketing applications,
and a special seven-year period of market exclusivity after marketing approval. Orphan Drug exclusivity prevents FDA approval of
applications by others for the same drug and the designated orphan disease or condition. The FDA may approve a subsequent application
from another entity if the FDA determines that the application is for a different drug or different use, or if the FDA determines
that the subsequent product is clinically superior, or that the holder of the initial orphan drug approval cannot assure the availability
of sufficient quantities of the drug to meet the public’s need. A grant of an orphan designation is not a guarantee that
a product will be approved. If a sponsor receives orphan drug exclusivity upon approval, there can be no assurance that the exclusivity
will prevent another entity or a similar product from receiving approval for the same or other uses.
Potential Competition with “Biosimilar”
Products
The Biologics Price Competition and Innovation
Act (BPCIA) was enacted as part of the Patient Protection and Affordable Care Act of 2010, Pub. L. No. 111-148 (2010). The BPCIA
authorizes the FDA to approve “abbreviated” BLAs for products whose sponsors demonstrate they are “biosimilar”
to reference products previously approved under BLAs. The FDA may also separately determine whether “biosimilar” products
are “interchangeable” with their reference products. However, the FDA may not approve an “abbreviated”
BLA for a biosimilar product until at least twelve (12) years after the date on which the BLA for the reference product was approved.
FDA approval could be further delayed if the reference products are subject to unexpired and otherwise valid patents.
Prior to the enactment of the BPCIA, information
in approved BLAs could not be relied upon by other manufacturers to establish the safety and efficacy of their products for which
they were seeking FDA approval. (In contrast, since at least 1984, pharmaceutical manufacturers have been able to submit Abbreviated
New Drug Applications for “generic drugs” that are materially identical to reference drugs approved under New Drug
Applications.) Accordingly, if the Biopump Platform Technology were approved under a BLA, other manufacturers potentially could
develop and seek FDA approval of “biosimilar” products at some point in the future.
U.S. Fraud and Abuse Laws
Anti-Kickback Statute and HIPAA Criminal
Laws
We are subject to various federal and state
laws pertaining to health care “fraud and abuse.” The federal Anti-Kickback Statute makes it illegal for any person,
including a pharmaceutical, biologic, or medical device company (or a party acting on its behalf), to knowingly and willfully solicit,
offer, receive or pay any remuneration, directly or indirectly, in exchange for, or to induce, the referral of business, including
the purchase, order or prescription of a particular item or service, or arranging for the purchase, ordering, or prescription of
a particular item or service for which payment may be made under federal healthcare programs such as Medicare and Medicaid. In
1996, under the Health Insurance Portability and Accountability Act (HIPAA), the Anti-Kickback Statute was expanded to be made
applicable to most federal and state-funded health care programs. The definition of “remuneration” has been broadly
interpreted to include any item or service of value, including but not limited to gifts, discounts, the furnishing of free supplies
or equipment, commercially unreasonable credit arrangements, cash payments, waivers of payments or providing anything at less than
its fair market value. Several courts have interpreted the Anti-Kickback Statute’s intent requirement to mean that if any
one purpose of an arrangement involving remuneration is to induce referrals of business reimbursable by a federal healthcare program,
the statute has been violated. The Patient Protection and Affordable Care Act of 2010, Pub. L. No. 111-148 (2010), amended the
federal Anti-Kickback Statute to clarify that “a person need not have actual knowledge of this section or specific intent
to commit a violation of this section.” Therefore, all courts are likely to use the “one purpose” test for evaluating
intent. Penalties for violations include criminal penalties, civil sanctions and administrative actions such as fines, imprisonment
and possible exclusion from Medicare, Medicaid and other federally-funded healthcare programs. In addition, some kickback allegations
have been held to violate the federal False Claims Act, which is discussed in more detail below.
The federal Anti-Kickback Statute is broad
and prohibits many arrangements and practices that may be lawful in businesses outside of the healthcare industry. Recognizing
that the Anti-Kickback Statute is broad and may technically prohibit many innocuous and beneficial arrangements, Congress created
several exceptions in the Social Security Act and has authorized the U.S. Department of Health and Human Services (HHS) to publish
regulatory “safe harbors” that exempt certain practices from enforcement action under the Anti-Kickback Statute prohibitions.
For example, there are safe harbors available for certain discounts to purchasers, personal services arrangements and various other
types of arrangements. However, safe harbor protection is only available for transactions that satisfy all of the narrowly defined
safe harbor provisions applicable to the particular remunerative relationship. We seek to comply with such safe harbors whenever
possible. Conduct and business arrangements that do not strictly comply with all the provisions of an applicable safe harbor, while
not necessarily illegal, face an increased risk of scrutiny by government enforcement authorities and an ongoing risk of prosecution.
In addition, many states have adopted laws
similar to the federal Anti-Kickback Statute. Some of these state prohibitions apply to referral of patients for healthcare services
reimbursed by any third-party payer, not only the Medicare and Medicaid programs or other governmental payers. At least one state,
California, also has adopted a law requiring pharmaceutical companies to implement compliance programs to prevent and deter conduct
that may violate fraud and abuse laws that comply with the voluntary industry guidelines and the Office of Inspector General (OIG)
compliance guidance. While we believe we have structured our business arrangements to comply with these laws, it is possible that
the government could find that such arrangements violate these laws, which could have a material adverse effect on our business,
results of operations and financial condition.
HIPAA created two new federal crimes: health
care fraud and false statements relating to health care matters. The health care fraud statute prohibits knowingly and willfully
executing a scheme to defraud any health care benefit program, including private payers. A violation of this statute is a felony
and may result in fines, imprisonment or exclusion from federal and state health care programs such as Medicare and Medicaid. The
false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any
materially false, fictitious or fraudulent statement in connection with the delivery of or payment for health care benefits, items
or services. A violation of this statute is a felony and may result in fines or imprisonment. Additionally, HIPAA granted expanded
enforcement authority to HHS and the U.S. Department of Justice (DOJ) and provided enhanced resources to support the activities
and responsibilities of the OIG and DOJ by authorizing large increases in funding for investigating fraud and abuse violations
relating to health care delivery and payment.
False Claims Laws
Pursuant to various federal and state false
claims laws, the submission of false or fraudulent claims for payment may lead to civil money penalties, criminal fines and imprisonment,
and/or exclusion from participation in Medicare, Medicaid and other federally funded health care programs. These false claims statutes
include the federal False Claims Act, which was significantly expanded in both the Fraud Enforcement and Recovery Act of 2009,
Pub. L. No. 111-21 (2009), and in the Patient Protection and Affordable Care Act of 2010, Pub. L. No. 111-148 (2010). In addition,
a number of states have enacted similar laws prohibiting the submission of false or fraudulent claims to a state government.
The federal False Claims Act allows the
federal government or private individuals to bring suit alleging that an entity or person knowingly submitted (or caused another
person or entity to submit or conspired to submit) a false or fraudulent claim for payment to the federal government or knowingly
used (or caused to be used) a false record or statement to obtain payment from the federal government. The federal False Claims
Act may also be violated if a person files a false statement in order to reduce, avoid, or conceal an obligation to pay money to
the federal government, or engages in conduct that may violate the federal Anti-Kickback Statute. The Patient Protection and Affordable
Care Act of 2010, Pub. L. No. 111-148 (2010) established conclusively that claims arising out of violations of the federal Anti-Kickback
Statute are false claims for purposes of the federal False Claims Act. Several pharmaceutical and medical device companies have
settled claims based on the federal False Claims Act for conduct involving, among other examples, providing free product to purchasers
with the expectation that federally-funded health programs would be billed for the product, or instances in which a manufacturer
has marketed its product for unapproved and non-reimbursable purposes. A person who files suit may be able to share in amounts
recovered by the government in connection with such suits. Such suits, known as
qui tam
actions, have increased significantly
in recent years and have increased the risk that a health care company will have to defend a false claims action, enter into settlements
that may include corporate integrity agreements requiring disclosures to the federal government, pay fines or be excluded from
the Medicare and/or Medicaid programs as a result of an investigation arising out of such an action. We are not aware of any false
claims actions pending against us. However, no assurance can be given that such actions may not be filed against us in the future,
or that any non-compliance with such laws would not have a material adverse effect on our business, results of operations and financial
condition.
The foregoing description of laws and regulations
affecting health care companies is not meant to be an all-inclusive discussion of aspects of federal and state fraud and abuse
laws that may affect our business, results of operations and financial condition. Health care companies operate in a complicated
regulatory environment. These or other statutory or regulatory initiatives may affect our revenues or operations. No assurance
can be given that our practices, if reviewed, would be found to be in compliance with applicable fraud and abuse laws (including
false claims laws and anti-kickback prohibitions), as such laws ultimately may be interpreted, or that any non-compliance with
such laws or government investigations of alleged non-compliance with such laws would not have a material adverse effect on our
business, results of operations and financial condition.
Other U.S. Regulatory Requirements
In the United States, the research, manufacturing,
distribution, sale, and promotion of drug and biological products are subject to regulation by various federal, state, and local
authorities in addition to the FDA, including the Centers for Medicare and Medicaid Services (formerly the Health Care Financing
Administration), other divisions of the United States Department of Health and Human Services (e.g., the Office of Inspector General),
the United States Department of Justice and individual United States Attorney offices within the Department of Justice, and state
and local governments. Pricing and rebate programs must comply with the Medicaid rebate requirements of the Omnibus Budget Reconciliation
Act of 1990 and the Veterans Health Care Act of 1992, each as amended. If products are made available to authorized users of the
Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. All of these activities
are also potentially subject to federal and state consumer protection, unfair competition, and other laws. In addition, we may
be subject to federal and state laws requiring the disclosure of financial arrangements with health care professionals.
Moreover, we may become subject to additional
federal, state, and local laws, regulations, and policies relating to safe working conditions, laboratory practices, the experimental
use of animals, and/or the use, storage, handling, transportation, and disposal of human tissue, waste, and hazardous substances,
including radioactive and toxic materials and infectious disease agents used in conjunction with our research work.
Foreign Regulatory Requirements
We may be subject to widely varying foreign
regulations, which may be quite different from those of the FDA, governing clinical trials, manufacture, product registration and
approval, and pharmaceutical sales. Whether or not FDA approval has been obtained, we must obtain a separate approval for a product
by the comparable regulatory authorities of foreign countries prior to the commencement of product marketing in these countries.
In certain countries, regulatory authorities also establish pricing and reimbursement criteria. The approval process varies from
country to country, and the time may be longer or shorter than that required for FDA approval.
Reimbursement and Pricing Controls
Third-party payers (Medicare, Medicaid,
private health insurance companies and other organizations) may affect the pricing or relative attractiveness of our product candidates
by regulating the level of reimbursement provided to the physicians and clinic utilizing our product candidates or by refusing
reimbursement. If reimbursement under these programs, or if the amount of time to secure reimbursement is too long, our ability
to market our technology and product candidates may be adversely and materially affected. In international markets, reimbursement
by private third-party medical insurance providers, including government insurers and independent providers, varies from country
to country. In certain countries, our ability to achieve significant market penetration may depend upon the availability of third-party
government reimbursement.
In many of the markets where we or our
collaborative partners would commercialize a product following regulatory approval, the prices of pharmaceutical products are subject,
by law, to direct price controls and to drug reimbursement programs with varying price control mechanisms. Public and private health
care payers control costs and influence drug pricing through a variety of mechanisms, including the setting of reimbursement amounts
for drugs and biological products covered by Medicare Part B based on their Average Sales Prices calculated by manufacturers in
accordance with the Medicare Prescription Drug, Improvement, and Modernization Act of 2010, Pub. L. No. 108-173 (2003), as amended,
through negotiating discounts with the manufacturers, and through the use of tiered formularies and other mechanisms that provide
preferential access to certain drugs over others within a therapeutic class. Drug manufacturers also may be subject to drug rebate
agreements with public or private health care payers in exchange for the manufacturers’ products being included on plan formularies.
Payers also set other criteria to govern
the uses of a drug that will be deemed medically appropriate and therefore reimbursed or otherwise covered. If a payer concludes
that a drug is experimental or investigational, in many cases it will deny coverage on that basis alone. Further, many public and
private health care payers limit reimbursement and coverage to the uses of a drug that are either approved by the FDA or that are
supported by other appropriate evidence (for example, published medical literature) and appear in a recognized drug compendium.
Drug compendia are publications that summarize the available medical evidence for particular drug products and identify which uses
of a drug are supported or not supported by the available evidence, whether or not such uses have been approved by the FDA. For
example, in the case of Medicare coverage for physician-administered oncology drugs, the Omnibus Budget Reconciliation Act of 1993,
Pub. L. No. 103-66 (1993), with certain exceptions, prohibits Medicare carriers from refusing to cover unapproved uses of an FDA-approved
drug if the unapproved use is supported by one or more citations in the American Hospital Formulary Service Drug Information the
American Medical Association Drug Evaluations, or the United States Pharmacopoeia Drug Information. Another commonly cited compendium,
for example under Medicaid, is the DRUGDEX Information System.
Employees
We currently employ 34 full-time and two
part-time employees. None of our employees is represented by a labor union and we have not experienced any strikes or work stoppages.
While none of our employees is party to any collective bargaining agreements, certain provisions of the collective bargaining agreements
between the Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations (including
the Industrialists’ Associations) are applicable to our employees in Israel by order the Israel Ministry of Labor. Such orders
are part of the employment related laws and regulations which apply to our employees in Israel and set certain mandatory terms
of employment. Such mandatory terms of employment primarily concern the length of the workday, minimum daily wages, pension plan
benefits for all employees, insurance for work-related accidents, procedures for dismissal of employees, severance pay and other
conditions of employment. We generally provide our employees with benefits and working conditions beyond the required minimums.
We believe our relations with our employees are good.
Additional Information
Our principal executive offices are located
at 555 California Street, Suite 365, San Francisco, California 94104. We conduct our research and development activities primarily
from our Israeli location in Misgav Business Park, Misgav. Our telephone number is (415) 568-2245 in the United States and
+972-4-902-8900 in Israel.
Our website address is
www.medgenics.com
.
The information on or accessible through our website is not part of this Annual Report on Form 10-K. Copies of our Annual Reports
on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to such reports are available without
charge on our website or upon request to us. In addition, our Code of Business Conduct and Ethics, Audit Committee Charter, Compensation
Committee Charter and Nomination and Corporate Governance Committee Charter are all available without charge on our website or
upon request to us. All such requests should be sent to Medgenics, Inc., Corporate Secretary, 555 California Street, Suite 365,
San Francisco, California 94104, or by email request from our website at
www.medgenics.com
. Amendments to, or waivers from,
our Code of Business Conduct and Ethics that apply to our executive officers will be posted to our website. We also post or otherwise
make available on our website from time to time other information that may be of interest to our investors.
ITEM 1A - Risk Factors.
Business-Related Risks
We are a clinical stage
medical technology company and have a history of significant and continued operating losses and a substantial accumulated earnings
deficit and we may continue to incur significant losses.
We are a clinical stage
medical technology company and since our inception have been focused on research and development and have not generated any substantial
revenues. We have incurred net losses of approximately $15.07 million and $8.10 million for the years ended December 31, 2012 and
2011, respectively, and approximately $65.01 million for the period from inception through December 31, 2012. At December 31, 2012,
we had an accumulated deficit of approximately $64.58 million. We expect to incur additional operating losses, as well as negative
cash flow from operations, for the foreseeable future, as we continue to expand our research and development and commence commercialization
of our potential product candidates. Our ability to generate revenues from sales of our potential products will depend on:
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successful completion of necessary medical trials which have not advanced beyond phase I/II stage;
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commercialization (through partnership or licensing deals or through internal development) and market
acceptance of new technologies and product candidates under development;
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medical community awareness; and
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changes in regulation or regulatory policy.
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We believe that initial
commercialization of any of our product candidates by us or any future strategic partners is not likely before 2017 and could easily
take five years or more.
We will need substantial
additional capital for the continued development of our product candidates and for our long-term operations.
As of December 31, 2012,
our cash and cash equivalents were approximately $6.43 million. We believe that the net proceeds of approximately $26.6 million
from our registered public offering of common stock and Series 2013-A warrants completed in February 2013, plus our existing cash
and cash equivalents, should be sufficient to meet our operating and capital requirements through 2014. However, changes in our
business, whether or not initiated by us, may affect the rate at which we deplete our cash and cash equivalents. Our present and
future capital requirements depend on many factors, including:
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the level of patient recruitment in the phase IIa study of EPODURE in Israel, and phase I/II study
of , INFRADURE in Israel, and the continuing results of such trials;
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the level of preparations for our anticipated phase IIb study of EPODURE in the United States;
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the level of research and development investment required to develop our first product candidates,
and maintain and improve the Biopump Platform Technology;
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changes in product development plans needed to address any difficulties that may arise in manufacturing,
preclinical activities, clinical studies or commercialization;
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our ability and willingness to enter into new agreements with strategic partners, and the terms of
these agreements;
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our success rate in preclinical and clinical efforts associated with milestones and royalties;
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the costs of recruiting and retaining qualified personnel;
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the time and costs involved in obtaining regulatory approvals; and
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the costs of filing, prosecuting, defending, and enforcing patent claims and other intellectual property
rights.
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We will require significant
amounts of additional capital in the future, and such capital may not be available when we need it on terms that we find favorable,
if at all. We may seek to raise these funds through public or private equity offerings, debt financings, credit facilities, or
partnering or other corporate collaborations and licensing arrangements. If adequate funds are not available or are not available
on acceptable terms, our ability to fund our operations, take advantage of opportunities, develop products and technologies, and
otherwise respond to competitive pressures could be significantly delayed or limited, and we may need to downsize or halt our operations.
We have significant
severance liabilities and may not be able to satisfy such obligations.
Our balance sheet as of
December 31, 2012 includes a net liability of approximately $1.21 million representing severance payments required under Israeli
law and contractual obligations in excess of severance covered by our current insurance policies that would be due if our employees
left under circumstances that triggered payment of severance. Of such amount, approximately $0.59 million represents amounts that
would be payable to our President and Chief Executive Officer if his employment with us terminated.
Our liability for severance
pay is calculated pursuant to the Israeli severance pay law based on the most recent salary for the employees multiplied by the
number of years of employment, as of the balance sheet date. Under law, employees are entitled to one month salary (based on the
average of the employee’s last three months’ salary) for each year of employment or a portion thereof. Accordingly,
our unfunded severance liability increases upon any increase in an employee’s salary. In addition, several employees are
entitled to additional severance compensation in accordance with the terms of their respective employment agreements. Our liability
for all of our employees is fully provided by an accrual and is mainly funded by monthly deposits with insurance policies. The
value of these policies is recorded as an asset in our balance sheet. Our net liability for severance payments is due to additional
months of severance provided under our agreements with certain employees and to any shortfall in our deposited amounts caused by
increases in salary.
The deposited funds may
be withdrawn only upon the fulfillment of the obligation pursuant to Israeli severance pay law or labor agreements. The value of
the deposited funds is based on the cash surrender value of these policies and includes profits or losses as appropriate.
We are still in the
process of clinical trials and do not have a commercialized product and may never be able to commercialize our product candidates.
We have completed a phase
I/II clinical trial with respect to our EPODURE Biopump in pre-dialysis patients and are conducting a phase IIa study in dialysis
patients in Israel and preparing for a phase II study in dialysis patients in the United States. We have just recently commenced
our first clinical trial for our INFRADURE Biopump, and have not received any data in connection with that trial. We have not commenced
any other clinical trial for any other Biopump application. Only a small number of research and development programs ultimately
result in commercially successful drugs and drug delivery systems. Potential products that appear to be promising at early stages
of development may not reach the market for a number of reasons, including:
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failure to obtain approvals for large-scale clinical trials;
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difficulties related to large-scale manufacturing;
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lack of familiarity of health care providers and patients;
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low market acceptance as a result of lower demonstrated clinical safety or efficacy compared to other
products or other potential disadvantages relative to alternative treatment methods;
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inability to obtain favorable coverage determinations from health plans and third-party payers;
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insufficient or unfavorable levels of reimbursement from government or third-party payers;
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infringement on proprietary rights of others for which we (or our licensees, if any) have not received
licenses;
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incompatibility with other therapeutic products;
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potential advantages of alternative treatment methods;
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ineffective marketing and distribution support;
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lack of cost-effectiveness; or
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timing of market introduction of competitive products.
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If any of these potential
problems occurs, we may never successfully commercialize our Biopump Platform Technology. If we are unable to develop commercially
viable products, our business, results of operations and financial condition will be materially and adversely affected.
Our Biopump Platform
Technology is still being developed and has not been tested on a large scale, and, therefore, we do not know all of the possible
side effects and may not be able to commercialize our technology as planned.
The Biopump Platform Technology
has not been tested on a large scale, and is still in an early stage of development. Although we and our advisors believe that
the results in patients treated to date have demonstrated proof of concept and shown safety and efficacy of our technology so far
in its first application, and although we are encouraged by the FDA clearance to proceed with a Phase IIb anemia study with EPODURE
in dialysis patients, this does not constitute confirmation or approval of the safety and efficacy of our technology, nor have
we received such from any regulatory authority. To date, although we have produced thousands of Biopumps in the laboratory, we
have administered Biopumps to only a relatively small number of patients. We are in the early stages of developing the most efficient
and effective methods to implant Biopumps so as to attain sustained performance once in the patient and thereby produce the desired
therapeutic effect for extended periods of time. While we have attained a number of positive results in our first clinical application,
there is significant variability between patients. These and other aspects of the implementation and use of the Biopump Platform
Technology are not yet fully developed or proven, and disappointing results and problems could delay or prevent their completion.
Even if the Biopump Platform Technology works well in one indication, it could have disappointing results in others. If so, the
development could be stalled or even blocked in one or more indications. Potential risks associated with the use of the Biopump
Platform Technology are the development of an immune response to the vector or the encoded protein product, local inflammatory
response to the implanted tissue or associated with the insertion of the Biopump in the surrounding tissue, autoimmunity to the
endogenous protein product or potential overdose of protein due to difficulties in managing the continuous supply in the patient
in accordance with patient need. Risk for immunogenic reaction to the vector is based on clinical studies using first general adenoviral
vectors that contain a full complement of viral proteins. We currently use a gutless adenoviral vector in all our development activities
and our current trial to eliminate the risk of immune rejection of the Biopumps prepared with viral vector particles. While these
gutless adenoviral vectors do not include genes for viral proteins, the risk for somehow re-establishing expression of viral proteins
cannot be ruled out.
The basis for the risks
described above is currently only theoretical since these effects have not been seen in the small number of patients that have
received a Biopump in our EPODURE clinical trials or in preclinical safety studies performed in mice. However, the possible side
effects and full efficacy and safety of the technology need to be tested in a substantial number of patients to verify this. Our
previous safety tests were only carried out on a small number of patients and therefore any conclusions may not be representative
of either a larger multi-centric test or the commercial version of the technology in the general population. In addition, the full
impact of the technology, and its many possible variations, on the body is, as yet, unknown. Although no side effects attributed
to the Biopump Platform Technology were found to date in our EPODURE clinical trials, other than minor bruising at the implantation
site, the possibility cannot be ruled out that serious side effects might be borne out by further trials, and if so, this could
have serious implications on the viability of the technology and our business.
Although the Biopump Platform
Technology aims to minimize the residual number of viral vector particles and their proteins introduced into a body, there is a
chance that the cumulative effect of Biopump reimplantation could result in an eventual buildup of viral proteins and an immunogenic
reaction against the Biopumps preventing further implantations, which could question the viability of the technology.
Severe side effects or
complications in trials, or post-approval, could result in financial claims and losses against us, damage our reputation, and increase
our expenses and reduce our assets. In addition, our product candidates may not gain commercial acceptance or ever be commercialized.
We are completely dependent
upon the successful development of our Biopump Platform Technology. If we fail to successfully complete its development and commercialization
or enter into licensing or partnership agreements, we will not generate operating revenues.
All of our efforts are
focused on the development of our Biopump Platform Technology. There is no guarantee that we will succeed in developing products
based on our Biopump Platform Technology. If we or any partner(s) or collaborator(s) that we may enter into a relationship with
are unable to consummate the production of Biopumps to provide the sustained protein therapy to treat various chronic diseases
in a safe, stable, commercial end-product form, we will be unable to generate any revenues. There is no certainty as to our success,
whether within a given time frame or at all. Any delays in our schedule for clinical trials, regulatory approvals or other stages
in the development of our product are likely to cause us additional expense, and may even prevent the successful finalization of
any or all of our product candidates. Delays in the timing for development of our technology may also have a material adverse effect
on our business, financial condition and results of operations due to the possible absence of financing sources for our operations
during such additional periods of time.
Clinical trials involve
lengthy and expensive processes with uncertain outcomes, and results of earlier studies and trials may not be predictive of future
trial results.
We cannot predict whether
we will encounter problems with any of our completed, ongoing or planned clinical trials, which would cause us or regulatory authorities
to delay or suspend clinical trials, or delay the analysis of data from completed or ongoing clinical trials. We estimate that
clinical trials involving various applications of our Biopump Platform Technology will continue for several years; however, such
trials may also take significantly longer to complete and may cost more money that we expect. Failure can occur at any stage of
testing, and we may experience numerous unforeseen events during, or as a result of, the clinical trial process that could delay
or prevent commercialization of the current, or a future, more advanced, version of our Biopump Platform Technology, including
but not limited to:
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delays in obtaining regulatory approvals to commence a clinical trial;
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failure or inability to recruit qualified investigators;
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slower than anticipated patient recruitment and enrollment;
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negative or inconclusive results from clinical trials;
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unforeseen safety issues;
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an inability to monitor patients adequately during or after treatment; and
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problems with investigator or patient compliance with the trial protocols.
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A number of companies
in the medical device, biotechnology, and biopharmaceutical industries, including those with greater resources and experience than
us, have suffered significant setbacks in advanced clinical trials, even after seeing promising results in earlier clinical trials.
Despite the successful results reported in early clinical trials regarding our EPODURE Biopump, we do not know whether any clinical
trials we or any future clinical partners may conduct will demonstrate adequate efficacy and safety to result in regulatory approval
to market our product candidate for the treatment of CKD or other indications. If later-stage clinical trials involving our Biopump
Platform Technology do not produce favorable results, our ability to obtain regulatory approval may be adversely impacted, which
will have a material adverse effect on our business, financial condition and results of operations.
Potential difficulty
with, and delays in, recruiting additional patients for phase I/II, phase IIa and IIb, and phase III clinical trials may adversely
affect the timing of our clinical trials and our working capital requirements.
Our research and development
is highly dependent on timely recruitment of the requisite number and type of patients for our clinical trials. We have previously
found it very difficult to recruit such patients and the increased volume and ethnic backgrounds required for future testing may
render such testing even more difficult. Such larger studies will likely be based on the use of multicenter, multinational design,
which can prove difficult to manage and could result in delays in patient recruitment. Delays in the recruitment of such patients
could delay our trials and negatively impact our working capital requirements.
Potential difficulty
with, and delays in, obtaining vectors necessary for conducting phase I/II, phase IIa and IIb, and phase III clinical trials and
additional research and development of the Biopump Platform Technology may adversely affect the timing of our clinical trials,
the further development of our technology and our working capital requirements.
We need specific vectors
in order to conduct our research and development of our Biopump Platform Technology and to create Biopumps to conduct our clinical
trials. We currently use only one source for the production and delivery of research grade versions of new vectors for developing
new products. Such source is highly dependent on the work of a particular individual. Although we have a contract with such source,
there is a possibility that the source could discontinue its business or the contract could be terminated, that the particular
individual could become unable to work on the production of vectors or that other problems could occur with the timely production
and delivery of vectors. We are in the process of seeking additional sources, including considering our internal ability to produce
the necessary vectors. Vectors intended for use in clinical trials must be produced by other vector suppliers who manufacture according
to strict requirements of Good Manufacturing Practice (GMP). We have worked with one such GMP vector manufacturer who has supplied
the GMP vectors used in our EPODURE phase I/II clinical studies and for our current INFRADURE phase I/II clinical study, and we
intend to continue to order new GMP vectors when needed from such supplier. There is a possibility that the source would discontinue
its business or that other problems could occur with the timely production and delivery of GMP vectors. If this were to occur,
we would need to establish GMP vector production at one or more alternative GMP vector manufacturers. Delays in obtaining the vectors
could delay any new trials. Without the necessary vectors, we would be unable to continue the research and development of our technology,
which would negatively impact our working capital requirements.
We may not successfully
establish and maintain relationships with third-party service providers and collaborators, which could adversely affect our ability
to develop our product candidates.
Our ability to commercialize
our technology is dependent on our ability to reach strategic licensing and other development agreements with appropriate partners,
including pharmaceutical companies, biotech firms and medical device companies. If we are unable to successfully negotiate such
agreements, we may not be able to continue to develop the Biopump Platform Technology without raising significant additional capital
for commercialization.
The successful adoption
of Biopump Platform Technology also relies on our ability to bring about practical, reliable and cost-effective production of Biopumps
on a commercial scale and its use in patients in widespread locations. This requires the design, development and commercial scale-up
of Biopump manufacturing capability, intended for implementation in regional Biopump processing centers, together with appropriate
logistical capabilities to enable local treatment of patients in their communities, in a cost effective and reliable manner. Biopump
processing is intended to be effected using semi-automated processing stations employing sealed cassettes and other single use
items for each patient. Although we have experienced initial positive results in processing MOs in individual closed processing
chambers that were shipped from Israel at our contract manufacturing organization (CMO) in a GMP-certified facility in California,
we or our CMO may not be able to replicate the results or be able to accommodate greater amounts. Treatment of patients in various
locations is dependent upon reliable acquisition of MOs and implantation or ablation of Biopumps by trained local physicians, using
appropriate proprietary and nonproprietary devices and products, and upon the transport of micro-organs and Biopumps between the
Biopump processing centers and local treatment clinics via reliable and cost effective logistical arrangements. It may also be
important that the processing center not require highly skilled operators, specialist laboratories or clean rooms. The inability
to adequately scale and rollout such technology could damage the cost-effectiveness and therefore one of the anticipated competitive
advantages of the Biopump Platform Technology.
Our core business strategy
is to enter into collaborative relationships or strategic partnerships and/or license appropriate parts or uses of our technology
in order to establish, develop and expand the distribution and international sale of our product candidates. We may not be able
to identify such collaborators and partners on a timely basis and we may not be able to enter into relationships with any future
collaborator(s) or partner(s) on terms that are commercially beneficial to us or at all. In addition, such relationships and partnerships
may not come to fruition or may not be successful. Our agreements with these third parties may also contain provisions that restrict
our ability to develop and test our product candidates or that give third parties rights to control aspects of our product development
and clinical programs.
The third-party contractors
may not assign as great of a priority to our clinical development programs or pursue them as diligently as we would if we were
undertaking such programs directly and, accordingly, may not complete activities on schedule, or may not conduct the studies or
our clinical trials in accordance with regulatory requirements or with our trial design. If these third parties do not successfully
carry out their contractual duties or meet expected deadlines, or if their performance is substandard, we may be required to replace
them.
In addition, conflicts
may arise with our collaborators, such as conflicts concerning the interpretation of clinical data, the achievement of milestones,
the interpretation of financial provisions or the ownership of intellectual property developed during the collaboration. If any
conflicts arise with our existing or future collaborators, they may act in their self-interest, which may be adverse to our best
interests. The third-party contractors may also have relationships with other commercial entities, some of whom may compete with
us. If the third-party contractors work with our competitors, our competitive position may be harmed.
In addition, although
we attempt to audit and control the quality of third-party data, we cannot guarantee the authenticity or accuracy of such data,
nor can we be certain that such data has not been fraudulently generated. The failure of third parties to carry out their obligations
towards us would materially adversely affect our ability to develop and market our Biopump Platform Technology. To date, we have
only entered into one collaboration agreement which addressed the feasibility and laboratory development of the HEMODURE Biopump.
That agreement expired in September 2011.
We have no marketing
experience, sales force or distribution capabilities. If our product candidates are approved, and we are unable to recruit key
personnel to perform these functions, we may not be able to successfully commercialize the products.
Although we do not currently
have any marketable products, our ability to produce revenues ultimately depends on our ability to sell our product candidates
if and when they are approved by the FDA and other regulatory authorities. We currently have no experience in marketing or selling
pharmaceutical products, and we do not have a marketing and sales staff or distribution capabilities. Developing a marketing and
sales force is also time-consuming and could delay the launch of new products or expansion of existing product sales. In addition,
we will compete with many companies that currently have extensive and well-funded marketing and sales operations. If we fail to
establish successful marketing and sales capabilities or fail to enter into successful marketing arrangements with third parties,
our ability to generate revenues will suffer.
Furthermore, even if we
enter into marketing and distributing arrangements with third parties, these third parties may not be successful or effective in
selling and marketing our Biopump Platform Technology. If we fail to create successful and effective marketing and distribution
channels, our ability to generate revenue and achieve our anticipated growth could be adversely affected. If these distributors
experience financial or other difficulties, sales of our products could be reduced, and our business, financial condition and results
of operations could be harmed.
We are subject to intense
government regulation and we may not be able to successfully complete the necessary clinical trials.
Approval for clinical
trials depends, among other things, on data obtained from our pre-clinical and clinical activities, including completion of preclinical
animal and in vitro studies in a timely manner. These pre-clinical and clinical activities must meet stringent quality assurance
and compliance requirements. Data obtained from such activities are susceptible to varying interpretations, which could delay,
limit or prevent regulatory approvals. Approval also depends on our obtaining certain key materials such as the GMP produced gutless
adenoviral vector, which is prepared through a contract with a GMP vector manufacturer. Being a new version of an adenoviral vector,
production of gutless adenoviral vector involves the use of certain special techniques for its preparation, which are somewhat
different from those normally used by GMP vector manufacturers of first generation adenoviral vectors and such manufacturer may
not be able to meet our requirements on a timely basis, or at all. Delays in obtaining a GMP vector needed for a specific clinical
trial could delay the start of the trial. In addition, we cannot guarantee approval of our clinical trial protocols under the human
subject protection laws and regulations of the countries where such trials are planned.
We currently have limited
experience in and resources for conducting the large-scale clinical trials which may hamper our ability to obtain or comply with
regulatory approval. The failure to comply with applicable regulatory requirements may result in criminal prosecution, civil penalties,
product recalls, withdrawal of product approval, mandatory restrictions and other actions, which could impair our ability to conduct
business.
The FDA and other health
authorities will regulate our product candidates and we may never receive regulatory approval to market and sell our product candidates.
Our product candidates
will require regulatory approvals prior to sale. In particular, our product candidates are subject to stringent approval processes,
prior to commercial marketing, by the FDA and by comparable agencies in all countries where we operate and desire to introduce
our product candidates, whether sold via a strategic partner or directly by us. These requirements range from vector and Biopump
efficacy and safety assessment in phase III clinical trials to long-term follow-up assessments on treated patients in clinical
trials for product approval for sale. The process of obtaining FDA and corresponding foreign approvals is costly and time-consuming,
and we cannot assure that such approvals will be granted. Also, the regulations we are subject to change frequently and such changes
could cause delays in the development of our product candidates.
It typically takes a company
several years or longer to satisfy the substantial requirements imposed by the FDA and comparable agencies in other countries for
the introduction of therapeutic pharmaceutical and biological products. Pharmaceutical or biological products must be registered
in accordance with applicable law before they can be manufactured, marketed and distributed. This registration must include medical
data proving the product’s safety, efficacy and clinical testing. Also included in product registration should be references
to medical publications and information about the production methods and quality control.
To obtain regulatory approvals
in the United States, we or a collaborator must ultimately demonstrate to the satisfaction of the FDA that our product candidates
are sufficiently safe and effective for their proposed administration to humans. Many factors, known and unknown, can adversely
impact clinical trials and the ability to evaluate a product candidate’s safety and efficacy, including:
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the FDA or other health regulatory authorities, or instructional review boards (IRB), do not approve
a clinical trial protocol or place a clinical trial on hold;
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suitable patients do not enroll in a clinical trial in sufficient numbers or at the expected rate,
for reasons such as the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for
the trial, the perceptions of investigators and patients regarding safety, and the availability of other treatment options;
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clinical trial data are adversely affected by trial conduct or patient withdrawal prior to completion
of the trial;
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there is competition with ongoing clinical trials and scheduling conflicts with participating clinicians;
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patients experience serious adverse events, including adverse side effects of our drug candidates,
for a variety of reasons that may or may not be related to our product candidates, including the advanced stage of their disease
and other medical problems;
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patients in the placebo or untreated control group exhibit greater than expected improvements or fewer
than expected adverse events;
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third-party clinical investigators do not perform the clinical trials on the anticipated schedule
or consistent with the clinical trial protocol and good clinical practices, or other third-party organizations do not perform data
collection and analysis in a timely or accurate manner;
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service providers, collaborators or co-sponsors do not adequately perform their obligations in relation
to the clinical trial or cause the trial to be delayed or terminated;
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we are unable to obtain a sufficient supply of manufactured clinical trial materials;
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regulatory inspections of manufacturing facilities require us or a co-sponsor to undertake corrective
action or suspend the clinical trials;
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the interim results of the clinical trial are inconclusive or negative;
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the clinical trial, although approved and completed, generates data that are not considered by the
FDA or others to be sufficient to demonstrate safety and efficacy; and
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changes in governmental regulations or administrative actions affect the conduct of the clinical trial
or the interpretation of its results.
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There can be no assurance
that our clinical trials will in fact demonstrate, to the satisfaction of the FDA and others, that our product candidates are sufficiently
safe or effective. The FDA or we may also restrict or suspend our clinical trials at any time if either believes that we are exposing
the subjects participating in the trials to unacceptable health risks.
Delays in obtaining such
clearances and/or changes in existing requirements could have a material adverse effect on our company by making it difficult to
advance product candidates or by reducing or eliminating their potential or perceived value and, therefore, our ability to conduct
our business as currently planned could materially suffer. Failure to obtain required regulatory approvals could require us to
delay, curtail or cease our operations. Even if we invest the necessary time, money and resources required to advance through the
FDA approval process, there is no guarantee that we will receive FDA approval of our product candidates.
Our failure to comply
with applicable regulatory requirements could result in enforcement action by the FDA or state agencies, which may include any
of the following sanctions:
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warning letters, fines, injunctions, consent decrees and civil penalties;
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repair, replacement, refunds, recall or seizure of our products;
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operating restrictions or partial suspension or total shutdown of production;
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refusing our requests for regulatory clearance or premarket approval of new products, new intended
uses, or modifications to existing products;
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withdrawing regulatory clearance or premarket approvals that have already been granted; and
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If any of these events
were to occur, it could adversely affect our business, financial condition and results of operations.
Even if we obtain regulatory
approvals, our products will be subject to ongoing regulatory review and if we fail to comply with continuing regulations, we could
lose those approvals and our business, financial condition and results of operations would be seriously harmed.
Even if our Biopump Technology
Platform receives initial regulatory approval or clearance for specific therapeutic applications, we will still be subject to ongoing
reporting obligations, and such product and the related manufacturing operations will be subject to continuing regulatory review,
including FDA inspections. This ongoing review may result in the withdrawal of our product from the market, the interruption of
manufacturing operations and/or the imposition of labeling and/or marketing limitations related to specific applications of our
product. Since many more patients will be exposed to our Biopump Technology Platform following its marketing approval, serious
but infrequent adverse reactions that were not observed in clinical trials may be observed during the commercial marketing of such
product. In addition, the manufacturer(s) and the manufacturing facilities that we will use to produce our Biopumps will be subject
to periodic review and inspection by the FDA and other similar foreign regulators. Late discovery of previously unknown problems
with any product, manufacturer or manufacturing process, or failure to comply with regulatory requirements, may result in actions,
such as:
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restrictions on such product, manufacturer or manufacturing process;
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warning letters from the FDA or other regulatory authorities;
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the withdrawal of the product from the market;
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the suspension or withdrawal of regulatory approvals;
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a refusal by such regulator to approve pending applications or supplements to approved applications
that we or our licensees (if any) submit;
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a voluntary or mandatory recall;
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a refusal to permit the import or export of our product;
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product seizures or detentions;
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injunctions or the imposition of civil or criminal penalties; and
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In addition, from time
to time, legislation is drafted and introduced in the United States that could significantly change the statutory provisions governing
any regulatory clearance or approval that we receive from the U.S. regulatory authorities. FDA regulations and guidance are often
revised or reinterpreted by the FDA in ways that may significantly affect our business and our product. We cannot predict what
these changes will be, how or when they will occur or what effect they will have on the regulation of our product. If we, or our
licensees, suppliers, collaborative research partners or clinical investigators are slow to adapt, or are unable to adapt, to changes
in existing regulatory requirements or the adoption of new regulatory requirements or policies, we may lose marketing approval
for any of the therapeutic applications of our product (to the extent that such applications are initially approved), resulting
in decreased or lost revenue from milestones, product rental or usage fees, or royalties.
Even if approved by
the necessary regulatory authorities, our product candidates may not gain market acceptance.
The development of a market
for new technology is affected by numerous factors, many of which are beyond our control. There can be no assurance the Biopump
Platform Technology will gain acceptance within the markets at which it is targeted. Further, the internal structure for medical
service provision varies considerably from territory to territory throughout the world and may be, in some cases, subject to public
sector procurement processes, which could delay penetration of this market by our product candidates. If the market does not accept
our product candidates, when and if we are able to commercialize them, then we may never become profitable. Factors that could
delay, inhibit or prevent market acceptance of our product candidates may include:
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the timing and receipt of marketing approvals;
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the safety and efficacy of the products;
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the emergence of equivalent or superior products;
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the cost-effectiveness of the products;
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findings by health plans or third-party payers that the product candidates are not reasonable and
necessary, or are subject to additional prerequisites for coverage;
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decisions by health plans not to cover the Biopump Platform Technology if they conclude that it is
experimental or investigational; and
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Our success is first and
foremost reliant upon there being a demand for our technology by potential strategic partners. Together with such partners, we
intend to establish and manage reliable and cost effective Biopump production capabilities on a large scale. There is risk that
such facilities may not be successfully established, may not meet their performance requirements or cost targets, or in other ways
fail to deliver the requisite level of reliable and cost-effective Biopumps for clinical use. In addition, sales will rely upon
demand for Biopump products, which in turn is dependent upon patient and doctor and other medical practitioner perceptions as to
safety, reliability and efficacy of our product candidates. Although our product candidates will be subject to extensive testing,
there can be no assurance that consumers will ultimately accept them relating to safety.
Our efforts to comply
with federal and state fraud and abuse laws could be costly, and, if we are unable to fully comply with such laws, we could face
substantial penalties.
We are subject to extensive
federal and state healthcare fraud and abuse laws and regulations, including, but not limited to, the following:
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the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and
willfully soliciting, offering, receiving or providing 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, any good or service, for which payment may
be made under federal healthcare programs, such as Medicare and Medicaid;
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the federal False Claims Act, which prohibits, among other things, individuals or entities from knowingly
presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a
false statement to avoid, decrease or conceal an obligation to pay money to the federal government;
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the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA), which creates federal
criminal laws that prohibit executing a scheme to defraud any healthcare benefit program and which also imposes certain obligations
on entities with respect to the privacy, security and transmission of individually identifiable health information;
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the federal False Statements Statute, which prohibits knowingly and willfully falsifying, concealing
or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare
benefits, items or services;
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the federal Foreign Corrupt Practices Act (FCPA), which prohibits, among other things, making payments
to foreign officials of any country outside of the United States for the purpose of obtaining or retaining business; and
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state laws that are analogous to each of the above federal laws, such as state anti-kickback and false
claims laws (some of which may apply to healthcare items or services reimbursed by any third-party payer, including commercial
insurers), as well as certain state laws that require pharmaceutical and medical device companies to comply with industry voluntary
compliance guidelines and the relevant compliance guidance promulgated by the federal government.
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If our past or present
operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may
be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion from third-party payer programs
such as Medicare and Medicaid and/or the curtailment or restructuring of our operations. If any of the physicians or other providers
or entities with whom we may do business are found to be non-compliant with applicable laws, they may be subject to criminal, civil
or administrative sanctions including exclusions from government-funded health care programs, which could also negatively impact
our operations. Our ongoing efforts to comply with these laws may be costly, and our failure to comply with these laws could have
a material adverse effect on our business, financial condition and results of operations. The risk of our being found in violation
of these laws is increased by the fact that many of them have not been definitively interpreted by the regulatory authorities or
the courts, and their provisions are open to a variety of subjective interpretations. In addition, these laws and their interpretations
are subject to change. Any action against us for violation of these laws, even if we successfully defend against it, could cause
us to incur significant legal expenses, divert our management's attention from the operation of our business and damage our reputation.
If any of our key employees
discontinue his or her services with us, our efforts to develop our business may be delayed.
Our success will depend
on the retention of our Directors, Strategic Advisory Board and other current and future members of our management and technical
team, including Dr. Andrew Pearlman, our founder, President and Chief Executive Officer, Clarence “Butch” Dellio, our
Chief Operating Officer, and Dr. Marvin Garovoy, our Chief Medical Officer, and on our ability to continue to attract and retain
highly skilled and qualified personnel. There can be no assurance that we will retain the services of any of our Directors, Strategic
Advisory Board members, officers or employees, or attract or retain additional senior managers or skilled employees. Furthermore,
we do not carry key man insurance with respect to any of such individuals.
The Biopump Platform Technology
is still in development and is dependent on further development and testing to reach commercial production. We currently employ
a small number of key personnel including top managers, scientists, engineers and clinical experts who are important to developing
the Biopump Platform Technology and have a high level of accumulated knowledge which would be lost if they left our company. If
these employees leave our company or otherwise are unable to provide services, there could be significant implications on the timing
and cost of future development of the technology. Because competition for qualified personnel in our industry is intense, we may
be unable to timely find suitable replacements with the necessary scientific expertise. We cannot assure you that our efforts to
attract or retain such personnel will be successful.
If we are not able
to obtain and maintain adequate patent protection for our product candidates, we may be unable to prevent our competitors from
using our technology.
Our ability to commercialize
the Biopump Platform Technology, or our product candidates, will depend, in part, on our ability, both in the United States and
in other countries, to obtain patents, enforce those patents, preserve trade secrets and operate without infringing the proprietary
rights of third parties. Our owned and licensed patent portfolio directed to the Biopump Platform Technology contains 42 issued
patents and 82 pending U.S. and international patent applications. We may not successfully obtain patents in the other countries
in which patent applications have been or will be filed, and we may not develop other patentable products or processes. In addition,
any future patents may not prevent other persons or companies from developing similar or medically equivalent products and other
persons or companies may be issued patents that may prevent the sale of our products or that will require us to license or pay
significant fees or royalties. Furthermore, issued patents may not be valid or enforceable, or be able to provide our company with
meaningful protection. Patent litigation is costly and time-consuming and there can be no assurance that we will have, or will
be able to devote, sufficient resources to pursue such litigation. In addition, potentially unfavorable outcomes in such proceedings
could limit our intellectual property rights and activities.
The
patent positions of the products being developed by us and our collaborators involve complex legal and factual uncertainties.
As a result, we cannot assure that any patent applications filed by us, or by others under which we have rights, will result
in patents being issued in the United States or foreign countries. In addition, there can be no assurance that the scope of
any patent protection will be sufficient to provide us with competitive advantages, that any patents obtained by us or our
collaborators will be held valid if subsequently challenged or that others will not claim rights in or ownership of the
patents and other proprietary rights we or our collaborators may hold.
Our
competitors may argue such patents are invalid or unenforceable, lack of utility, lack sufficient written description or
enablement, or that the claims of the issued patents should be limited or narrowly construed. Patents also will not protect
our product candidates if competitors devise ways of making or using these product candidates or similar products without
legally infringing our patents.
There can be no assurance
that our patents will not
be challenged by third parties or that we will be successful in any defense we undertake. Failure to successfully defend
a patent challenge could materially and adversely affect our business.
Unauthorized parties may
try to copy aspects of our product candidates and technologies or obtain and use information we consider proprietary. Policing
the unauthorized use of our proprietary rights is difficult. We cannot guarantee that no harm or threat will be made to our or
our collaborators’ intellectual property. In addition, changes in, or different interpretations of, patent laws in the United
States and other countries may also adversely affect the scope of our patent protection and our competitive situation.
There
is certain subject matter that is patentable in the United States but not generally patentable outside of the United States. Differences
in what constitutes patentable subject matter in various countries may limit the protection we can obtain outside of the United
States. For example, methods of treating humans are not patentable in many countries outside of the United States. These and other
issues may prevent us from obtaining patent protection outside of the United States, which would have a material adverse effect
on our business, financial condition and results of operations.
Furthermore,
different countries have different procedures for obtaining patents, and patents issued in different countries provide different
degrees of protection against the use of a patented invention by others. Therefore, if the issuance to us or our licensors, in
a given country, of a patent covering an invention is not followed by the issuance, in other countries, of patents covering the
same invention, or if any judicial interpretation of the validity, enforceability, or scope of the claims in, or the written description
or enablement in, a patent issued in one country is not similar to the interpretation given to the corresponding patent issued
in another country, our ability to protect our intellectual property in those countries may be limited.
As we develop the Biopump
Platform Technology, we may need to obtain licenses to use certain patents depending on the specific gene products, proteins, vectors
and promoters used in conjunction with the Biopump Platform Technology. These licenses include, for example, one or more specific
proteins and promoters used in conjunction with certain genes to control their expression. There is no assurance that we will obtain
licenses for such technology or would be able to obtain licenses to any third party intellectual property on commercially reasonable
terms.
Additionally, there can
be no assurance that we can successfully develop non-infringing alternatives on a timely basis, or license non-infringing alternatives,
if any exist, on commercially reasonable terms. A significant intellectual property impediment to our ability to develop and commercialize
our product candidates could adversely affect our business prospects.
There can be no assurance that third parties cannot and will not design around our patents and develop similar products or that
we will be successful in enforcing our patents on such design around products. Additionally, the biosimilars
pathway created under the Biologics Price Competition and Innovation Act (BPCIA) may allow for another manufacturer to
develop a non-patent infringing product using data from our own clinical trials. Prior to the enactment of BPCIA, information
in approved Biologic License Applications (BLAs) could not be relied upon by other manufacturers to establish the safety
and efficacy of their products for which they were seeking FDA approval. Accordingly, if the Biopump Platform Technology
were approved under a BLA, other manufacturers potentially could develop and seek FDA approval of
“biosimilar” products at some point in the future.
In addition, changes in
either patent laws or in interpretations of patent laws in the United States and other countries may materially diminish the value
of our intellectual property or narrow the scope of our patent protection. For example, on September 16, 2011, the Leahy-Smith
America Invents Act was signed into law. The Leahy-Smith America Invents Act includes a number of significant changes to U.S. patent
law. These include provisions that affect the way patent applications will be prosecuted and may also affect patent enforcement
and defense. It is too early to determine what the effect or impact the Leahy-Smith America Invents Act will have on the
operation of our business and the protection and enforcement of our intellectual property. However, the Leahy-Smith America Invents
Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and
the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial
condition.
We are heavily reliant
on licenses from third parties and any loss of these rights would adversely affect our business.
We do not own some of
the patents upon which the Biopump Platform Technology is based. We license such patents exclusively from Yissum Research Development
Company of the Hebrew University of Jerusalem (Yissum), subject to certain specific reservations and restrictions. We have certain
monetary and operational obligations under the license agreement with Yissum. If we fail to perform any of our obligations under
the Yissum license agreement, Yissum may have the right to declare a breach of the Yissum license agreement. Upon such a breach,
the Yissum license agreement could be terminated and the intellectual property could revert to Yissum and we may be unable to use
or further develop the Biopump Platform Technology in those circumstances.
We have also obtained
a non-exclusive license to technology from Baylor College of Medicine (BCM), Houston, Texas. The license is subject to certain
specific reservations and restrictions including BCM’s required approval for the sale, market, transfer, sublicense, use
and filing of patent applications for the BCM technology. BCM’s technology is also subject to U.S. governmental rights to
call for a license to exploit the technology. If we fail to get such approvals or rights, our ability to use and/or profit from
products that incorporate the BCM technology may be inhibited or prevented. If we fail to perform any of our obligations under
the BCM license agreement, the BCM license agreement may be terminated. If the BCM license agreement is terminated, the licensed
technology could revert to BCM, which may impair our ability to use or further develop our products candidates.
We have obtained a worldwide
license to patents for variants of Factor VIII from the Regents of the University of Michigan (University of Michigan). We intend
to use such variants to further our research and development with respect to our HEMODURE Biopump. If we breach our payment or
development obligations under such license agreement, University of Michigan would have the right to terminate the license and
we would be unable to use such licensed patents. As a result, development of our HEMODURE Biopump may be adversely impacted or
delayed.
Our business is dependent
on proprietary rights that may be difficult to protect and such dependence could affect our ability to effectively compete.
In addition to
our patents, we also rely on trade secrets, know-how, continuing technological innovations and licensing opportunities to develop
and maintain our competitive position
especially where we do not believe that
patent protection is appropriate or obtainable
. However, others, including our competitors, may independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose our technology. We
take precautionary measures to protect our proprietary rights and information, including the use of confidentiality agreements
with employees and consultants, and those with whom we have academic and commercial relationships. However, we may not have such
agreements in place with all such parties and, in spite of the measures, there can still be no guarantee that agreements will not
be violated or that there will be an adequate remedy available for a violation of an agreement. Any of these events could prevent
us from developing or commercializing our product candidates.
Trade secrets
are difficult to protect. Our employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally
or willfully disclose our confidential information to competitors, and confidentiality agreements may not provide an adequate remedy
in the event of unauthorized disclosure of confidential information. Enforcing a claim that a third party illegally obtained and
is using our trade secrets is expensive and time-consuming, and the outcome is unpredictable. Moreover, our competitors may independently
develop equivalent knowledge, methods and know-how. Failure to obtain or maintain trade secret protection could adversely affect
our competitive business position.
In addition, we have no
trademark or applications pending; and third parties may have trademarks or have pending applications on our contemplated marks
or similar marks or in similar fields of use that are confusingly similar; or may be using our contemplated marks or similar marks.
We may have to change our use of certain marks currently in use or contemplated which could have an adverse impact on our business
and may require us to spend additional funds to develop new marks. We anticipate that we will spend both time and management resources
to develop and file trademark applications in the future.
We are subject to intense
competition in the therapeutic protein market from companies with greater resources and more mature products, which may result
in our competitors developing or commercializing products before or more successfully than us.
While we believe our Biopump
Platform Technology has significant advantages, there are a number of well-established and substantial companies engaged in the
development, production, marketing, sale and distribution of products that are potentially competitive with our product candidates
or the Biopump Platform Technology in general. Many of these companies are more experienced than our company is and represent significant
competition. It is also possible that other parties have in development products substantially similar to or with properties that
are more efficacious, less invasive and more cost effectively delivered than our product candidates or the Biopump Platform Technology
in general. The success of our competitors in developing, bringing to market, distributing and selling their products could negatively
affect our result of operations and/or general acceptance of our product candidates.
We face risks related
to the current economic conditions that may adversely affect our business.
In general, our operating
results can be significantly and adversely affected by negative economic conditions, high labor, material and commodity costs and
unforeseen changes in demand for our products and services. These conditions have resulted and could continue to result in slower
adoption of new technologies and cost containment efforts by governments and other payers for healthcare research and development,
products and services. The current economic conditions could also have a potentially significant negative impact on our ability
to generate sufficient internal cash flows or access credit at reasonable rates to meet future operating expenses, service debt
and fund capital expenditure. The continued weakness in world economies makes the strength and timing of any economic recovery
uncertain, and there can be no assurance that global economic conditions will not deteriorate further.
The grants we received
from the Israeli Office of the Chief Scientist place certain restrictions on us.
Through our wholly owned
Israeli subsidiary, we have received $6,846,000, of grants from the Israeli Office of the Chief Scientist (OCS) and anticipate
receiving an additional $203,000 of OCS grants for research and development activities conducted in 2013. The grant agreements
require repayment of the grants provided to us through the payment of royalties out of income received from commercializing the
developed technology. Pursuant to the Israeli Encouragement of Industrial Research and Development Law, certain limitations will
apply to the change of control of the grant recipient and the financing, mortgaging, production, exportation, licensing and transfer
or sale of its technology and intellectual property to third parties, which will require the Chief Scientist’s prior consent
and, in case such a third party is outside of Israel, extended royalties and/or other fees. This could have a material adverse
effect on and significant cash flow consequences to our company if, and when, any technologies, intellectual property or manufacturing
rights are exported, transferred or licensed to third parties outside Israel. If the OCS does not wish to give its consent in any
required situation or transaction, we would need to negotiate a resolution with the OCS. In any event, such a transaction, assuming
the OCS approved it, would involve monetary payments, such as royalties or fees, of not less than the applicable funding received
from the OCS plus interest, not to exceed, in aggregate, six times the applicable funding received from the OCS.
Health care policy
changes, including U.S. health care reform legislation signed in 2010, may have a material adverse effect on us.
Health care reform is
often a subject of attention in governments that are trying to control health care expenditures. Health care reform proposals have
been the subject of much debate in the U.S. Congress and some state legislatures, as well as in other countries. There is no assurance
that legislation resulting in adverse effects on our company or our product candidates will not be adopted in a country in which
we intend to operate and/or upon the distribution of our product candidates in the United States.
In March 2010, President
Obama signed into law the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010.
The legislation imposes significant new taxes on medical device makers in the form of a 2.3% excise tax on all U.S. medical device
sales that began January 1, 2013. Under the law, the total cost to the medical device industry from the tax is expected to be approximately
$29 billion over ten years. This significant increase in the tax burden on our industry could have a material, negative impact
on our results of operations and our cash flows, especially if the Biopump was determined to be a medical device. Other elements
of this legislation, such as comparative effectiveness research, an independent payment advisory board, payment system reforms,
including shared savings pilots, and other provisions, could meaningfully change the way health care is developed and delivered,
and may materially impact numerous aspects of our business.
Reimbursement policies
of third-party payers may negatively affect the acceptance of our product candidates by subjecting the product candidates to sales
and pharmaceutical pricing controls.
Third-party payers (Medicare,
Medicaid, private health insurance companies and other organizations) may affect the pricing or relative attractiveness of our
product candidates by regulating the level of reimbursement provided to the physicians and clinics utilizing our product candidates
or by refusing reimbursement. If reimbursement under these programs, or if the amount of time to secure reimbursement is too long,
our ability to market our technology and product candidates may be adversely and materially affected. In international markets,
reimbursement by private third-party medical insurance providers, including government insurers and independent providers, varies
from country to country. In certain countries, our ability to achieve significant market penetration may depend upon the availability
of third-party government reimbursement. Pharmaceutical pricing is also subject to regulation in Israel as well as other countries
within which we may wish to distribute our product candidates.
The Patient Protection
and Affordable Care Act enacted in March 2010 reduces Medicare and Medicaid payments to hospitals, clinical laboratories and pharmaceutical
companies, and could otherwise reduce the volume of medical procedures. Further, the Budget Control Act enacted in August 2011
committed the U.S. federal government to significantly reduce the federal deficit over ten years. In addition to placing caps on
discretionary spending through 2021, the Budget Control Act also established a budget sequestration that calls for automatic spending
cuts over a nine-year period. Across-the-board spending cuts went into effect on March 1, 2013, and Medicare spending cuts that
will reduce Part A and Part B payments by 2% are expected to go into effect on April 1, 2013. Although we cannot predict the full
effect on our business of the implementation of existing legislation such as the Patient Protection and Affordable Care Act and
the Budget Control Act, or the enactment of additional legislation, we believe that legislation or regulation that reduces reimbursement
for our products could adversely affect how much or under what circumstances health care providers will prescribe or administer
our products. This could materially and adversely impact our business by reducing our ability to generate revenue, raise capital,
obtain additional collaborators and market our products. In addition, we believe the increasing emphasis on managed care in the
United States has and will continue to put pressure on the price and usage of pharmaceutical products, which may adversely impact
product sales.
We may experience product
liability claims, which could adversely affect our business and financial condition.
We may become subject
to product liability claims. We have not experienced any product liability claims to date; however, the production at commercial
scale, distribution, sale and support of our product candidates may entail the risk of such claims, which is likely to be substantial
in light of the use of our product candidates in the treatment of medical conditions. We currently carry product liability insurance
coverage in connection with our clinical trials conducted in Israel. Our insurance provides $5 million in coverage, subject to
a $5,000 deductible. Our insurance must be renewed annually at a current cost of $17,000 per year to cover current and
planned trials in Israel. If we are unable to obtain a renewal or if we suffer a successful product liability claim in excess of
our insurance coverage, such claim could result in significant monetary liability and could have a material adverse impact on our
business, operations, financial position and/or reputation.
Failure to maintain
effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our
business and operating results. In addition, current and potential shareholders could lose confidence in our financial reporting,
which could have a material adverse effect on the price of our common stock.
Effective internal controls
are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial
reports or prevent fraud, our results of operation could be harmed.
Section 404 of the Sarbanes-Oxley
Act of 2002 requires annual management assessments of the effectiveness of our internal controls over financial reporting and a
report by our independent registered public accounting firm addressing these assessments. We continuously monitor our existing
internal controls over financial reporting systems to confirm that they are compliant with Section 404, and we may identify deficiencies
that we may not be able to remediate in time to meet the deadlines imposed by the Sarbanes-Oxley Act. This process may divert internal
resources and will take a significant amount of time and effort to complete.
If, at any time, it is
determined that we are not in compliance with Section 404, we may be required to implement new internal control procedures and
reevaluate our financial reporting. We may experience higher than anticipated operating expenses as well as increased independent
auditor fees during the implementation of these changes and thereafter. Further, we may need to hire
additional qualified personnel. If we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented
or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal controls over
financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act, which could result in our being unable to obtain
an unqualified report on internal controls from our independent auditors. Failure to maintain an effective internal control environment
could also cause investors to lose confidence in our reported financial information, which could have a material adverse effect
on the price of our common stock.
Compliance with changing
regulation of corporate governance and public disclosure may result in additional expenses, divert management’s attention
from operating our business which could have a material adverse effect on our business.
There have been changing
laws, regulations and standards relating to corporate governance and public disclosure, as well as new regulations promulgated
by the SEC and rules promulgated by the national securities exchanges, including the NYSE MKT. These new or changed laws, regulations
and standards are subject to varying interpretations in many cases due to their lack of specificity, and as a result, their application
in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing
uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.
As a result, our efforts to comply with evolving laws, regulations and standards are likely to continue to result in increased
general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance
activities. Our board members, principal executive officer and principal financial officer could face an increased risk of personal
liability in connection with the performance of their duties. As a result, we may have difficulty attracting and retaining qualified
board members and executive officers, which could have a material adverse effect on our business. If our efforts to comply with
new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies, we may incur
additional expenses to comply with standards set by regulatory authorities or governing bodies which would have a material adverse
effect on our business, financial condition and results of operations.
Risk Related to our Securities
Our securities are
thinly traded, resulting in relative illiquidity and price volatility, and there may not ever be an active market for our securities
in the United States.
Although our common stock
has been admitted for trading on the AIM Market since December 2007 and our common stock and a class of our warrants have been
traded on the NYSE MKT (formerly the NYSE Amex) since April 2011, the volumes and trading in our securities have been extremely
sporadic. As a result, the ability of holders to purchase or sell our securities is limited, with low-volume trading creating wide
shifts in price. For our securities to continue to be listed on the NYSE MKT, we must meet the current listing requirements of
that exchange. If we were unable to meet these requirements, our securities could be delisted from the NYSE MKT. Any such delisting
of our securities could have an adverse effect on the market price of, and the efficiency of the trading market for, our securities,
not only in terms of the number of shares that can be bought and sold at a given price, but also through delays in the timing of
transactions and less coverage of us by securities analysts, if any. Also, if in the future we were to determine that we need to
seek additional equity capital, it could have an adverse effect on our ability to raise capital in the public or private equity
markets.
Further, the share prices
of public companies, particularly those operating in high growth sectors, are often subject to significant fluctuations. The market
price of our common stock on the NYSE MKT has been volatile, ranging from $4.25 per share to $16.43 per share during the 52-week
trading period ending March 11, 2013. We expect that the market price of our common stock will continue to fluctuate significantly
due to factors including, but not limited to, the following:
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actual or anticipated variations in our operating results;
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announcements of developments by us or our competitors;
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announcements by us or our competitors of significant acquisitions, strategic partnerships, joint
ventures or capital commitments;
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adoption of new accounting standards affecting our industry;
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additions or departures of key personnel;
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introduction of new products by us or our competitors;
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changes in market valuations of companies in our industry;
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general market conditions;
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future issuances of our common stock or other securities; and
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other events or factors, many of which are beyond our control.
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Our common stock is
traded on more than one market and this may result in price variations.
Our common stock is traded
on both the NYSE MKT and the AIM Market. Trading in our shares on these markets takes place in different currencies (U.S. dollars
on the NYSE MKT and British Pounds sterling on the AIM Market) and at different times (resulting from different time zones, different
trading days and different public holidays in the United States and the United Kingdom). The trading prices of our shares of common
stock on these two markets may differ due to these and other factors. Any decrease in the price of our shares of common stock on
one of these markets could cause a decrease in the trading price of our shares on the other market. We cannot predict what the
effect of trading of our common stock on the AIM Market will be on the trading of our common stock on the NYSE MKT, and vice versa.
Securities analysts
may not initiate coverage or continue to cover our common stock, and this may have a negative impact on its market price.
The trading market for
our securities could depend in part on the research and reports that securities analysts publish about our business and us. We
do not have any control over these analysts. There is no guarantee that securities analysts will cover our securities. If securities
analysts do not cover our securities, the lack of research coverage may adversely affect their market prices. If we are covered
by securities analysts, and our securities are the subject of an unfavorable report, the prices for our securities would likely
decline. If one or more of these analysts ceases to cover us or fails to publish regular reports on us, we could lose visibility
in the financial markets, which could cause our stock price and/or trading volume to decline.
The exercise of options
and warrants and other issuances of shares of common stock or securities convertible into or exercisable for shares of common stock
will dilute the ownership interests of our current stockholders and may adversely affect the future market price of our common
stock.
Sales of our common stock
in the public market, either by us or by our current stockholders, or the perception that these sales could occur, could cause
a decline in the market price of our securities. Nearly all of the shares of our common stock held by those of our current stockholders
who are not affiliates may be immediately eligible for resale in the open market either in compliance with an exemption under Rule
144 promulgated under the Securities Act of 1933, as amended, or the Securities Act, or pursuant to an effective resale registration
statement that we have previously filed with the SEC. Such sales, along with any other market transactions, could adversely affect
the market price of our common stock.
In addition, as of December
31, 2012, there were outstanding options to purchase an aggregate of 1,959,543 shares of our common stock at exercise prices ranging
from $2.49 per share to $14.50 per share, of which options to purchase 788,878 shares were exercisable as of such date. As of December
31, 2012, there were warrants outstanding to purchase 5,969,891 shares of our common stock, at exercise prices ranging from $0.0002
per share to $11.16 per share, with a weighted average exercise price of $5.98 per share, all of which were exercisable as of December
31, 2012. The exercise of options and warrants at prices below the market price of our common stock could adversely affect the
price of shares of our common stock. In addition, some of the warrants have anti-dilution protection which will require us to lower
the exercise price in the event we sell securities in the future at a price lower than the exercise price then in effect. Additional
dilution may result from the issuance of shares of our common stock in connection with collaborations or manufacturing arrangements
or in connection with other financing efforts.
Any issuance of our common
stock that is not made solely to then-existing stockholders proportionate to their interests, such as in the case of a stock dividend
or stock split, will result in dilution to each stockholder by reducing his, her or its percentage ownership of the total outstanding
shares. Moreover, if we issue options or warrants to purchase our common stock in the future and those options or warrants are
exercised, stockholders may experience further dilution. Holders of shares of our common stock have no preemptive rights that entitle
them to purchase their pro rata share of any offering of shares of any class or series.
Our principal stockholders
have significant voting power and may take actions that may not be in the best interests of our other stockholders.
As of December 31, 2012,
our officers and directors together controlled approximately 23.0% of our outstanding common stock on a fully diluted basis. In
addition, as of December 31, 2012, our four largest stockholders other than management and the directors controlled approximately
10.3% of our outstanding common stock on a fully diluted basis. This concentration of ownership may have the effect of delaying
or preventing a change in control and might adversely affect the market price of our common stock, and therefore may not be in
the best interest of our other stockholders.
We have never declared
or paid dividends on our capital stock and we do not anticipate paying any cash dividends in the foreseeable future.
We have never declared
or paid dividends on our capital stock and we do not anticipate paying any cash dividends in the foreseeable future. We currently
intend to retain future earnings, if any, to fund the development and growth of our business. Any future determination to pay dividends
will be at the discretion of our board of directors and will be dependent upon our financial condition, operating results, capital
requirements, applicable contractual restrictions and other such factors as our board of directors may deem relevant.
Provisions of Delaware
law may delay or prevent efforts to acquire a controlling interest in us, even if such acquisition were in the best interests of
our stockholders.
We are subject to the
anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which regulates corporate acquisitions. These
provisions could discourage potential acquisition proposals and could delay or prevent a change in control transaction. They could
also have the effect of discouraging others from making tender offers for our common stock. These provisions may also prevent changes
in our management.
There may be future
sales or other dilution of our equity, which may adversely affect the market price of our common stock.
We are not restricted
from issuing additional shares of our common stock, including any securities that are convertible into or exchangeable for, or
that represent the right to receive, our common stock. The market price of our common stock could decline as a result of sales
of shares of our common stock or sales of such other securities or the perception that such sales could occur.
Israel-Related Risks
Our business occurs
primarily in Israel, and our company and our business could be adversely affected by the economic, political and military conditions
in that region.
Our principal activities
are based in Israel, which may be adversely affected by acts of terrorism, major hostilities, adverse legislation or litigation.
If major hostilities should occur in the Middle East, including as a result of acts of terrorism in the United States or elsewhere,
any such effects may not be covered by insurance. Our commercial insurance does not cover losses that may occur as a result of
events associated with the security situation in the Middle East, such as damages to our facilities and the resulting disruption
to our ability to continue our product development. Although the Israeli government currently covers the reinstatement value of
direct damages that are caused by terrorist attacks or acts of war, we cannot be certain that this government coverage will be
maintained or will be adequate in the event we submit a claim. Any losses or damages incurred by us could have a material adverse
effect on our business, financial condition and results of operations.
Israel withdrew unilaterally
from the Gaza Strip and certain areas in northern Samaria in 2005. Thereafter Hamas, an Islamist terrorist group responsible for
many attacks, including missile strikes against Israeli civilian targets, won the majority of the seats in the Parliament of the
Palestinian Authority in January 2006 and took control of the entire Gaza Strip, by force, in June 2007. Since then, Hamas and
other Palestinian movements have launched thousands of missiles from the Gaza strip into civilian targets in southern Israel. In
late 2008, a sharp increase in rocket fire from Gaza on Israel’s western Negev region, extending as far as 25 miles into
Israeli territory and disrupting most day-to-day civilian activity in the proximity of the border with the Gaza Strip, prompted
the Israeli government to launch military operations against Hamas that lasted approximately three weeks. Israel declared a unilateral
ceasefire in January 2009, which substantially diminished the frequency of, but did not eliminate, Hamas rocket attacks against
Israeli cities. In November 2012, following an increase in rocket attacks and hostile activity originating from the Gaza Strip,
the Israeli government launched an air attack on Hamas. Rockets were fired into Israel extending as far as Tel Aviv and Jerusalem.
After seven days, a ceasefire was agreed to by Israel and Hamas. Since then, rocket attacks have been significantly reduced, but
not totally stopped. There can be no assurance that this period of relative calm will continue, especially in light of continuing
rhetoric between Iran and Israel.
We are directly affected
by economic, political and military conditions in that country. Our Israeli production facilities are located in Misgav which is
located approximately 150 miles from the nearest point of the border with the Gaza Strip. There can be no assurance that Hamas
will not obtain and use longer-range missiles capable of reaching our facilities, which could result in a significant disruption
of the Israel-based portion of our business. Any armed conflicts, terrorist activities or political instability in the region could
adversely affect business conditions and could harm our business, financial condition and results of operations and may make it
more difficult for us to raise necessary capital. Since the establishment of the State of Israel in 1948, a number of armed conflicts
have taken place between Israel and its Arab neighbors and a state of hostility, varying in degree and intensity, has led to security
and economic problems for Israel. For example, any major escalation in hostilities in the region could result in a portion of our
employees, including executive officers, directors, and key personnel and consultants, being called up to perform military duty
for an extended period of time. In addition, the political and security situation in Israel may result in parties with whom we
have agreements involving performance in Israel claiming that they are not obligated to perform their commitments under those agreements
pursuant to force majeure provisions in the agreements.
In addition to the foregoing,
since the end of 2010, numerous acts of protest and civil unrest have taken place in several countries in the Middle East and North
Africa, many of which involved significant violence. The civil unrest in Egypt, which borders Israel, resulted in significant changes
to the country’s government. In Syria, also bordering Israel, large and violent protests against the government are taking
place. The ultimate effect of these developments on the political and security situation in the Middle East and on Israel’s
position within the region is not clear at this time.
Our operations may
be disrupted by the obligations of our personnel to perform military service which could have a material adverse effect of our
business.
Many of our male employees
in Israel are obligated to perform up to one month (in some cases more) of annual military reserve duty until they reach the age
of 45 and, in the event of a military conflict, could be called to active duty. Our operations could be disrupted by the absence
of a significant number of our employees related to military service or the absence for extended periods of military service of
one or more of our key employees. A disruption could have a material adverse effect on our business.
Under current U.S.
and Israeli law, we may not be able to enforce employees’ covenants not to compete and therefore may be unable to prevent
our competitors from benefiting from the expertise of some of our former employees.
We have entered in non-competition
agreements with our key employees. These agreements prohibit our key employees, if they cease working for us, from competing directly
with us or working for our competitors for a limited period. Under applicable U.S. and Israeli law, we may be unable to enforce
these agreements. If we cannot enforce our non-competition agreements with our employees, then we may be unable to prevent our
competitors from benefiting from the expertise of our former employees, which could materially adversely affect our business, results
of operations and ability to capitalize on our proprietary information.
Service of process
and enforcement of civil liabilities on our company and our officers may be difficult.
We are organized under
the laws of the State of Delaware and are subject to service of process in the United States. However, certain of our assets are
located outside the United States. In addition, certain of our executive officers are residents of Israel and the bulk of the assets
of such executive officers may be located outside the United States.
There is doubt as to the
enforceability of civil liabilities under the Securities Act and the Securities Exchange Act of 1934, as amended, or the Exchange
Act, in original actions instituted in Israel. As a result, it may not be possible for investors to enforce or effect service of
process upon these executive officers or to judgments of U.S. courts predicated upon the civil liability provisions of U.S. laws
against our assets, as well as the assets of these executive officers. In addition, awards of punitive damages in actions brought
in the United States or elsewhere may be unenforceable in Israel.
We may experience foreign
currency exchange risks, which may increase the dollar costs of our operations in Israel.
A substantial portion
of our expenses, including those related to our clinical trial, our research and development, personnel and facilities-related
expenses is incurred in New Israeli Shekels (NIS). Inflation in Israel will have the effect of increasing the dollar cost of our
operations in Israel, unless it is offset on a timely basis by a devaluation of the NIS relative to the U.S. dollar. This may give
rise to an exchange rate risk against NIS. We do not currently engage in hedging or use any other financial instruments or arrangements
to manage this risk.