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statement for the same offering. o

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

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

Calculation of Registration Fee

Title of each class of securities to be registered		Proposed maximum aggregate offering price (1) (2)				Amount of registration fee
Ordinary shares, par value NIS 1.00 each		$	69,000,000			$	9,411.60

(1)

Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.

(2)

Includes ordinary shares that may be purchased by the underwriters pursuant to an over-allotment option.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission acting pursuant to said Section 8(a) may determine.

 

 

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

PROSPECTUS (Subject to Completion)
Issued April 11, 2013

         SHARES

ORDINARY SHARES

Kamada Ltd. is offering      ordinary shares. This is our initial public offering in the United States. Our ordinary shares are listed on the Tel Aviv Stock Exchange (the “TASE”) under the symbol “KMDA.” On            , 2013, the last reported sale price of our ordinary shares on the TASE was NIS     , or $    , per share (based on the exchange rate reported by the Bank of Israel on such date, which was NIS      per U.S. $1.00). We anticipate that the initial public offering price will be between $     and $     per share.

We will apply to list our ordinary shares on the Nasdaq Global Market under the symbol “KMDA.”

We are an “emerging growth company” under the federal securities laws. Investing in our ordinary shares involves risks. See “Risk Factors” beginning on page 14 .

PRICE $     A SHARE

Price to Public

Underwriting Discounts and Commissions

Proceeds to Company (1)

Per Share

$

$

$

Total

$

$

$

(1)

Expenses related to the review and qualification of the offering of the ordinary shares by the Financial Regulatory Authority, Inc. (“FINRA”) will be paid by us.

Kamada Ltd. has granted the underwriters the right to purchase up to an additional      ordinary shares to cover over-allotments.

The Securities and Exchange Commission, the Israeli Securities Authority and state regulators have not approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the ordinary shares to purchasers on            , 2013.

MORGAN STANLEY		JEFFERIES

           , 2013

 

 

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Prospectus Summary			1
Risk Factors			14
Special Note Regarding Forward-Looking Statements			44
Price Range of our Ordinary Shares			45
Use of Proceeds			46
Dividend Policy			47
Capitalization			48
Dilution			49
Selected Consolidated Financial Data			50
Management’s Discussion and Analysis of Financial Condition and Results of Operations			54
Business			74
Management			102
Principal Shareholders			122
Certain Relationships and Related Party Transactions			125
Description of Share Capital			127
Shares Eligible for Future Sale			132
Taxation and Government Programs			133
Underwriters			141
Expenses Relating to this Offering			145
Legal Matters			146
Experts			146
Enforceability of Civil Liabilities			147
Where You Can Find Additional Information			149
Index to Consolidated Financial Statements			F-1

 

Neither we nor the underwriters have authorized anyone to provide you with information different from that contained in this prospectus, any amendment or supplement to this prospectus or any free writing prospectus prepared by us or on our behalf. Neither we nor the underwriters take any responsibility for, or can provide any assurance as to the reliability of, any information other than the information in this prospectus, any amendment or supplement to this prospectus or any free writing prospectus prepared by us or on our behalf. We are offering to sell ordinary shares and seeking offers to buy ordinary shares only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of the ordinary shares.

We have not taken any action to permit a public offering of the ordinary shares outside the United States or to permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to the offering of the ordinary shares and the distribution of this prospectus outside of the United States.

The audited consolidated financial statements as of December 31, 2012 and 2011 and for the years ended December 31, 2012, 2011 and 2010 in this prospectus have been prepared in accordance with the international financial reporting standards (“IFRS”) as issued by the international accounting standards board (“IASB”). None of the financial information in this prospectus has been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).

Unless otherwise noted, NIS amounts presented in this prospectus are translated at the rate of $1.00 = NIS 3.73, the exchange rate published by the Bank of Israel as of December 31, 2012.

 

 

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PROSPECTUS SUMMARY

This summary highlights information contained in greater detail elsewhere in this prospectus. You should read the entire prospectus carefully before making an investment in our ordinary shares. You should carefully consider, among other things, our consolidated financial statements and the related notes and the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Unless the context indicates otherwise, references in this prospectus to “NIS” are to the legal currency of Israel, “U.S. dollars,” “$” or “dollars” are to United States dollars, and the terms “we,” “us,” “our company,” “our,” and “Kamada” refer to Kamada Ltd., along with its consolidated subsidiaries.

KAMADA LTD.

We are an orphan drug focused, plasma-derived protein therapeutics company with an existing marketed product portfolio and a robust late-stage product pipeline. We develop and produce specialty plasma-derived protein therapeutics and currently market these products through strategic partners in the United States and directly, through local distributors, in several emerging markets. We use our proprietary platform technology and know-how for the extraction and purification of proteins from human plasma to produce Alpha-1 Antitrypsin (“AAT”) in a high purity, liquid form, as well as other plasma-derived proteins. AAT is a protein derived from human plasma with known and newly discovered therapeutic roles given its immuno-modulatory, anti-inflammatory, tissue protective and antimicrobial properties. Our flagship product, Glassia, is the first and only liquid, ready-to-use, intravenous plasma-derived AAT product approved by the United States Food and Drug Administration (the “FDA”). We market Glassia through a strategic partnership with Baxter International Inc. in the United States. Additionally, we have a product line consisting of nine other injectable pharmaceutical products which are marketed, in addition to Glassia, in more than 15 countries, including Israel, Russia, Brazil, India and other countries in Latin America, Eastern Europe and Asia. We currently have five plasma-derived protein products in our development pipeline, including an inhaled formulation of AAT for treatment of AAT deficiency (“Inhaled AAT for AATD”) that is in pivotal Phase II/III clinical trials in Europe and entering into Phase II clinical trials in the United States. In addition, we leverage our expertise and presence in the plasma-derived protein therapeutics market by distributing ten complementary products in Israel that are manufactured by third parties. We have generated an operating profit of $4.2 million for the year ended December 31, 2012. Our total revenues have grown from approximately $14.4 million in the year ended December 31, 2009 to $72.7 million in the year ended December 31, 2012, representing a 71% compound annual growth rate.

Glassia is an intravenous AAT product that is indicated for chronic augmentation and maintenance therapy in adults with emphysema due to congenital AAT deficiency (“AATD”). AAT is a naturally occurring protein found in a derivative of plasma known as fraction IV which regulates the activity of certain white blood cells known as neutrophils and reduces cell inflammation. Patients with genetic AATD suffer from a chronic inflammatory state, lung tissue damage and a decrease in lung function. We believe that our second generation AAT product, Inhaled AAT for AATD, is currently the only aerosolized AATD treatment in advanced stages of clinical development. We believe that Inhaled AAT for AATD will increase patient convenience and reduce the need for patients to use intravenous infusions of AAT products, thereby further reducing the risk of infection, decreasing the need for clinic visits or nurse home visits and reducing medical costs. In addition, because Inhaled AAT for AATD would be delivered directly to the affected tissue through a nebulizer using a lower dosage, we believe that this product, if approved, will enable us to treat significantly more patients from the same amount of plasma and production capacity and therefore increase our profitability. Additionally, we have successfully completed Phase II clinical studies in Israel for additional novel indications for our AAT products, including for newly diagnosed Type-1 diabetes, cystic fibrosis and bronchiectasis, and we are advancing these new indications in further clinical development.

Our products are produced using our advanced proprietary technologies and know-how for the separation and purification of proteins derived from human plasma. We produce our plasma-derived protein therapeutics in our state-of-the-art, current Good Manufacturing Practice standards (“cGMP”) compliant, FDA-approved, large scale production facility located in Beit Kama, Israel.

 

 

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We operate in two segments: the Proprietary Products segment, in which we develop and manufacture plasma-derived therapeutics and market them in more than 15 countries, and the Distribution segment, in which we distribute drugs manufactured by third-parties for critical use in Israel, most of which are produced from plasma or its derivative products.

Our Competitive Strengths

We believe our position in the market is attributable to the following strengths:

•

Focus on growing orphan market opportunities .  We believe that the fundamental economic drivers of the orphan diseases market in which we operate are strong. In the United States and Europe, we believe that AATD is currently significantly under-identified and under-treated, as we estimate that only approximately 5% and 2% of all potential cases of AATD are treated in the United States and Europe, respectively, with an aggregate of up to an estimated 200,000 patients suffering from AATD, of which less than 10% have been diagnosed. We expect that our market opportunity for our AAT products, including Glassia and Inhaled AAT for AATD (if approved), will continue to grow as awareness of AATD expands due to factors such as marketing activities, inexpensive and effective diagnosis tools, and improved training. Additionally, the potential treatment of additional indications by our AAT products, such as cystic fibrosis and newly-diagnosed cases of Type-1 diabetes presents a significant orphan drug market opportunity beyond the AATD market.

•

Ability to develop and produce differentiated AAT products .  We have used our proprietary plasma-derived protein extraction and purification platform to create approved and pipeline AAT products that we believe have advantages over the products of our competitors. For example, Glassia is the only AAT product in the world that is approved for use in a high purity liquid state which is ready for infusion and does not require reconstitution and mixing before injection, as is required from competing products. Glassia has a number of advantages over other intravenous AAT products, including the reduction of the risk of contamination or infection during the preparation for infusion, reduced potential for allergic reactions due to the absence of stabilizing agents, simple and easy use by the patient or nurse, and the possible reduction of the nurse’s time during home visits, in the clinic or in the hospital. Additionally, we have leveraged our ability to manufacture high purity liquid AAT to develop the next generation of our AAT product, Inhaled AAT for AATD, which is in pivotal Phase II/III clinical trials in Europe and is entering Phase II clinical trials in the United States. If approved, Inhaled AAT for AATD will be the first AAT product that is not required to be delivered intravenously and, instead, is administered through an easy to use nebulizer in two short daily sessions. We believe that the non-invasive Inhaled AAT for AATD will increase patient convenience and reduce the need for patients to use intravenous infusions of AAT products, thereby further reducing the risk of infection, decreasing the need for clinic visits or nurse home visits and reducing medical costs. Although we do not expect Inhaled AAT for AATD to be priced at a premium to existing intravenous AAT products, because of the high purity and lower amount of AAT used in Inhaled AAT for AATD relative to intravenous infusion, we believe that this product, if approved, will enable us to treat significantly more patients from the same amount of plasma and production capacity and therefore increase our profitability.

•

Portfolio of marketed products in attractive geographies .  In our Proprietary Products segment, we have a product line consisting of ten products that are marketed in the United States and over 15 other countries, including Israel, Russia, Brazil, India and other countries in Latin America, Eastern Europe and Asia. We have derived approximately 43% and 41% of our total revenues in the years ended December 31, 2012 and 2011, respectively, from sales in the United States, approximately 5% and 1% of our total revenues in the years ended December 31, 2012 and 2011, respectively, from sales in Europe, approximately 5% of our total revenues in both the years ended December 31, 2012 and 2011 in Asia (excluding Israel) and 6% and 5% of our total revenues in the years ended December 31, 2012 and 2011, respectively, from Latin America. We believe that sales in Latin America and Asia will continue to grow as socioeconomic conditions improve in these emerging markets, resulting in more informed patients who demand better quality medical care. In addition, in our Distribution segment, we leverage our expertise and presence in the plasma-derived

 

 

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protein therapeutics market by distributing in Israel ten complementary plasma-derived, critical-care products manufactured by third-parties.

•

Strategic partnerships with proven, industry-leading partners .  We have entered into strategic partnerships with industry-leading companies to leverage their expertise, technology and familiarity with local markets, to achieve broad penetration into local markets and to control our operating costs.

•

In the United States, we established a strategic relationship with Baxter in 2010 regarding our Glassia product and technology. The Baxter strategic relationship provides us with a strong marketing partner and a supplier of fraction IV paste, which we use to produce Glassia to be sold in the United States. Eventually, this relationship will also lead to additional production capacity as Baxter transitions to producing Glassia in its own facilities while paying us royalties, which will free up our facility to produce inhaled formulations of AAT and Glassia for other geographies and indications or other plasma-derived products.

•

Our strategic relationship with Chiesi Farmaceutici S.p.A. for Inhaled AAT for AATD, which we established in 2012, provides us with a partner that is knowledgeable and experienced in developing respiratory products and obtaining regulatory and reimbursement approval for such products in Europe, and has established and proven marketing capabilities to pulmonologists and other respiratory specialists in Europe.

•

Our strategic relationship with PARI Pharma GmbH was established in 2006 and is related to an “eFlow” nebulizer that we jointly developed to administer inhaled formulations of AAT.

•

Our strategic relationship with Kedrion S.p.A., which we established in 2011, will provide us with a strong marketing partner for KamRAB, our rabies immunoglobulin, in the United States (if approved) and will also provide us with plasma supply for the production of KamRAB.

•

Integrated scalable, fully-invested, proprietary platform technology and know-how .  Our platform enables us to efficiently produce multiple products and develop new products. Our platform includes our proprietary technology and know-how, which is based on chromatography, a method for the separation of materials based on their chemical and physical characteristics such as electrical charge or molecular size. Our proprietary method and know-how for the separation of proteins from raw materials, such as plasma fractions and hyper-immune plasma, allows us to produce a majority of the proteins that are contained in sufficient concentration in blood plasma. We believe that our production process is highly efficient, in that it produces a higher proportion of final product from a given quantity of plasma or its derivative products and at a higher level of purity than other production processes employed by our competitors. In addition, our production process allows us to produce protein therapeutics from different sources of plasma and plasma derivatives from multiple suppliers. This platform provides us with control over the development and production processes and contributes to lower production costs.

•

Strong financial profile with increasing operating profitability .  Our total revenues have grown from approximately $14.4 million in the year ended December 31, 2009 to $72.7 million in the year ended December 31, 2012, representing a 71% compound annual growth rate. During this time, our focus on improving our operating efficiency and our increased contribution from our own proprietary products in comparison to the distribution of third-party products increased our operating margin from (4)% to 6%, resulting in operating profit of $4.2 million for the year ended December 31, 2012. We believe that as Glassia sales continue to grow and we continue to develop our proprietary product pipeline, our operating profitability will continue to improve.

 

 

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Our Strategy

We intend to grow our company by pursuing the following strategies:

•

Focus on growing AAT in new indications .  We believe that there is significant growth potential for our AAT products in a variety of new indications. We intend to capitalize on these growth opportunities by pursuing approvals for new indications for our AAT products. We completed a Phase II trial in Israel for the use of our intravenous AAT product for the treatment of newly diagnosed Type-1 diabetes. Additionally, we completed a Phase II clinical trial in Israel for the use of an inhaled formulation of AAT for the treatment of cystic fibrosis and bronchiectasis. We intend to continue further clinical trials either by ourselves or with a strategic partner for these new indications. For example, we intend to initiate Phase II trials in the United States for use of our inhaled formulation of AAT for the treatment of cystic fibrosis and AATD, and to continue development of AAT for the treatment of newly diagnosed Type-1 diabetes. Additionally, in pre-clinical studies, our AAT products have demonstrated promising evidence to support development in additional indications, such as chronic obstructive pulmonary disease, graft-versus-host disease and transplantations and others. We anticipate that we can effectively penetrate markets for specialty, niche products for orphan disease indications, as competition is relatively limited and our proprietary production process can give us an advantage in product quality and yield. By increasing the number of products we offer and expanding the indications in which our AAT products are used, we expect to generate higher revenues and further diversify our revenue base.

•

Expand our presence in emerging markets .  Our products are currently marketed in more than 15 countries worldwide, primarily in the United States, Israel, Russia, Brazil, India and other countries in Latin America, Eastern Europe and Asia. We continue to focus on further expansion in these markets, as certain emerging markets such as Russia, Brazil and India are expected to continue to experience significant growth in plasma-derived product demand. We believe that this demand will continue to be driven by enhanced socioeconomic conditions and more informed patients who are demanding better quality medical care, as well as increasing government healthcare spending on plasma-derived products in some of these markets. In Latin America, Asia and Russia, we are expanding our presence by establishing and strengthening relationships with distributors as well as obtaining additional marketing authorization for our products. We believe that we are well positioned to take advantage of potential growth in these geographic markets because we have the ability to leverage our existing presence in these local markets. For example, Glassia is already approved by regulators in Russia and Brazil, and we currently have relationships with local distributors in both of those countries. Additionally, we have relationships with local distributors in India and Thailand related to several of our other products.

•

Pursue further strategic partnerships .  We continue to examine our options for strategic partnerships for our marketed products and our product pipeline, including pursuing a strategic partner in the United States for our Inhaled AAT for AATD product and for our inhaled formulations of AAT for the treatment of cystic fibrosis and bronchiectasis. Historically, we have sought strategic partners in our target markets with industry leaders where we can benefit from their expertise, brand recognition, technology and familiarity with and penetration into local markets, and to control our operating cost. Our current strategic partnerships include Baxter for Glassia in the United States, Chiesi for Inhaled AAT for AATD in Europe, Kedrion for KamRAB in the United States, and PARI for the “eFlow” nebulizer which we use to administer inhaled formulations of AAT.

•

Invest in additional pipeline products .  We are continuing to pursue further growth by diversifying our product pipeline through the discovery and development of additional plasma-derived protein products for high-value indications. For example, we are currently studying whether additional products can be developed from fraction IV paste and are investigating the development of a recombinant AAT product. We believe that we can leverage our knowledge of AAT, our strength in clinical development and our proprietary platform technology and know-how to produce additional products that could complement our existing, core plasma-derived protein therapeutics products.

 

 

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Our Existing Products

Our existing products include plasma-derived protein therapeutics that are administered intravenously, intramuscularly or by inhalation and either produced in our Proprietary Products segment or marketed and sold in our Distribution segment. The following chart sets forth our primary products in our Proprietary Products segment, as well as the countries in which the products are currently approved or marketed as indicated:

Product		Indication		Active Ingredient		Geography
Respiratory
Glassia (or Respira/RespiKam/Ventia in certain countries)		Intravenous AATD		Alpha-1 Antitrypsin (human)		United States, Israel, Russia*, Slovenia, Brazil, Croatia and Argentina*
Immunoglobulins
KamRAB		Prophylaxis of rabies disease		Anti-rabies immunoglobulin (human)		Israel, India, Thailand, El Salvador, Russia*, and Mexico* and Korea
KamRho (D) IM		Prophylaxis of hemolytic disease of newborns		Rho(D) immunoglobulin (human)		Israel, Brazil, India, Argentina, Chile*, El Salvador, Sri Lanka, Russia, Kenya, Nigeria, Sri Lanka* and the Palestinian Authority
KamRho (D) IV		Treatment of immune thermobocytopunic purpura		Rho(D) immunoglobulin (human)		Israel, India and Argentina*
Snake bite antiserum		Treatment of snake bites by the Vipera palaestinae		Anti snake venom		Israel
Other Products
Heparin Lock Flush		To maintain patency of indwelling IV catheter designed for intermittent injection therapy or blood sampling		Heparin sodium		Israel
Kamacaine 0.5%		Local or regional anesthesia or analgesia during surgery, diagnostic and therapeutic procedures and obstetrical procedures. Spinal anesthesia for surgery		Bupivacaine HCl		Israel
Human transferrin (diagnostical grade)		Not for human use		Transferrin		United States, Israel, Germany, Slovakia and France

*

We have regulatory approval, but have not marketed the product in this country in 2012.

 

 

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The following chart sets forth our primary products in our Distribution segment:

Product		Indication		Active Ingredient
Respiratory
Bramitob		Management of chronic pulmonary infection due to pseudomonas aeruginosa in patients six years and older with cystic fibrosis		Tobramycin
Immunoglobulins
IVIG 5%		Treatment of various immunodeficiency-related conditions		Gamma globulins (IgG) (human)
Varitect		Preventive treatment after exposure to the virus which causes chicken pox and zoster herpes		Varicella zoster immunoglobulin (human)
Hepatect CP		Prevent contraction of Hepatitis B by adults and children older than two years		Hepatitis B immunoglobulin (human)
Megalotect		Contains antibodies which neutralize cytomegalovirus viruses and prevent their spread in immunologically impaired patients		CMV immunoglobulin (human)
Critical Care
Heparin sodium injection		Treatment of thrombo-embolic disorders such as deep vein thrombosis, acute arterial embolism or thrombosis, thrombophlebitis, pulmonary embolism, fat embolism. Prophylaxis of deep vein thrombosis and thromboembolic events		Heparin sodium
Albumin		Maintains a proper level in the patient’s blood plasma		Human serum Albumin
Coagulation Factors
Factor VIII		Treatment of Hemophilia Type A diseases		Coagulation Factor VIII (human)
Factor IX		Treatment of Hemophilia Type B disease		Coagulation Factor IX (human)

 

 

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Our Product Pipeline

We are in various stages of clinical development of new products for our Proprietary Products segment that constitute the next generation of products. The following table sets forth our primary product pipeline in our Proprietary Products segment, each such product’s stage of clinical trials, markets in which the product has been approved and our strategic marketing partners, where applicable, for such product or product candidate:

(1)

“IV” represents intravenous administration of the product. “IH” represents inhaled administration of the product. “IM” represents intramuscular administration of the product.

(2)

Phase I and II are complete in Israel. Phase II/III are in process in Europe. Phase II scheduled to begin in 2013 in the United States.

(3)

Phase I and II are complete in Israel. Received approval of investigational new drug (“IND”) application in the United States.

(4)

Currently reviewing regulatory pathway for Phase II/III trial in Europe or Israel for newly diagnosed cases of Type-1 diabetes.

(5)

Phase II/III clinical trials are scheduled to begin in the United States in the first half of 2013.

(6)

Orphan drug designation in the United States.

(7)

Orphan drug designation in the European Union.

Risks Associated with Our Business

Our business is subject to a number of risks you should be aware of before making an investment decision, as our failure to adequately manage these risks may significantly harm our business. These risks are discussed more fully under the caption “Risk Factors,” and include, but are not limited to, the following:

•

Our business is highly concentrated on our flagship product, Glassia, and our largest geographic region, the United States.

•

We will need to successfully introduce new products and indications, and keep pace with advances in technology.

•

We may not be able to commercialize our product candidates in development.

 

 

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•

We may not obtain orphan drug designation for our products, or we may lose orphan drug designations.

•

The commercial success of any of our products that we may develop will depend upon the degree of market acceptance.

Emerging Growth Company Status

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). Thus, we may take advantage of certain exemptions from various reporting requirements that are applicable to public companies generally. For example, we may elect not to have our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting, as would otherwise be required by Section 404(b) of the Sarbanes-Oxley Act (“S-OX”).

We will cease to be an “emerging growth company” upon the earliest of:

•

the last day of the fiscal year in which the fifth anniversary of this offering occurs;

•

the last day of the fiscal year in which our annual gross revenues are $1 billion or more;

•

the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt securities; or

•

the last day of any fiscal year in which the market value of our ordinary shares held by non-affiliates exceeded $700 million as of the end of the second quarter of that fiscal year.

The JOBS Act also provides that an “emerging growth company” can utilize the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards. However, we are choosing to “opt out” of such extended transition period, and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for companies that are not “emerging growth companies.” Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

Corporate Information

We were founded in Israel in 1990. In August 2005, we successfully completed an initial public offering on the TASE. The address of our principal executive office is 7 Sapir St., Kiryat Weizmann Science Park, P.O. Box 4081, Ness Ziona 74140, Israel, and our telephone number is +972 8 9406472. Our website address is www.kamada.com. The reference to our website is intended to be an inactive textual reference and the information on, or accessible through, our website is not intended to be part of this prospectus.

Our trademarks indicated in this prospectus include Glassia, Kamada, KamRAB, Kamada-Respira, RespiKam, Respira, Rebinolin and Ventia. All other trademarks or service marks appearing in this prospectus are the property of their respective holders.

 

 

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THE OFFERING

Ordinary shares offered by us

ordinary shares.

Ordinary shares to be outstanding after this offering

ordinary shares.

Over-allotment option of ordinary shares offered by us

ordinary shares.

Use of proceeds

We estimate that our net proceeds from the sale of ordinary shares that we are offering will be approximately $     million, assuming an initial public offering price of $     per share, which is the midpoint of the price range on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use the net proceeds from this offering for:

1. clinical trials;

2. research and development for additional AAT indications;

3. expanding our distribution capabilities to additional territories;

4. expanding manufacturing infrastructure; and

5. general corporate purposes.

The expected use of the net proceeds from this offering represents our intentions based upon our current plans and business conditions, which could change in the future as our plans and business conditions evolve. The amounts and timing of our actual expenditures for each enumerated purpose above depend on numerous factors, including the ongoing status of and results from our clinical trials, the progress of our research and development efforts and any unforeseen cash needs. As a result, our management will have broad discretion in applying the net proceeds of this offering.

In addition, we may use a portion of the proceeds from this offering to tender for up to approximately $26.8 million aggregate principal amount of our convertible debentures. See “Use of Proceeds.”

Dividend policy

We have not recently paid and do not intend to pay dividends on our ordinary shares. We plan to retain any earnings for use in the operation of our business and to fund future growth.

Proposed Nasdaq symbol

“KMDA.”

Risk factors

See “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our ordinary shares.

 

 

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The number of ordinary shares to be outstanding after our initial public offering is based on 28,665,121 ordinary shares outstanding as of December 31, 2012, and excludes:

•

1,554,781 ordinary shares (not including 150,000 options granted to David Tsur, our Chief Executive Officer, which were approved in December 2012 and amended in April 2013 by our compensation committee and board of directors but are subject to shareholder approval at our general shareholders meeting) issuable upon the exercise of options issued as incentive compensation outstanding as of December 31, 2012, at a weighted average exercise price of NIS 19.76 (or approximately $5.30), per share;

•

22,576 ordinary shares issuable upon the exercise of warrants outstanding as of December 31, 2012, at weighted average exercise price of NIS 29.89 (or approximately $8.01), per share;

•

2,693,965 ordinary shares issuable upon the conversion of NIS 100 million ($26.8 million) aggregate principal amount of convertible debentures outstanding as of December 31, 2012, at a conversion price of NIS 37.12 (or approximately $9.95) per share; and

•

1,200,000 ordinary shares reserved for issuance under our 2005 Israeli Share Option Plan (the “2005 Plan”) and our 2011 Israeli Share Option Plan (the “2011 Plan” and, together with the 2005 Plan, the “Option Plans”).

Unless expressly indicated or the context requires otherwise, all information in this prospectus assumes:

•

an initial public offering price of $     per share, which is the midpoint of the estimated offering price range on the cover page of this prospectus; and

•

that the underwriters do not exercise their over-allotment option.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following table summarizes our consolidated financial data. We have derived the summary consolidated statements of operations data for the years ended December 31, 2012, 2011 and 2010 and the consolidated balance sheets data as of December 31, 2012 and 2011 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the summary consolidated balance sheet data as of December 31, 2010 from our audited consolidated financial statements not included in this prospectus.

We have included, in our opinion, all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the financial information set forth in those statements. Our historical results are not necessarily indicative of the results that should be expected in the future, and our interim results are not necessarily indicative of the results that should be expected for the full year.

The summary of our consolidated financial data set forth below should be read together with our consolidated financial statements and the related notes, as well as the section entitled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this prospectus.

 

 

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		Year Ended December 31,
		2012				2011				2010
		(in thousands, except per share data)
Consolidated Statements of Operations Data:
Revenues from Proprietary Products		$	46,445			$	35,308			$	22,980
Revenues from Distribution			26,230				24,175				11,497
Total revenues			72,675				59,483				34,477
Cost of revenues from Proprietary Products			26,911				22,188				18,878
Cost of revenues from Distribution			23,071				20,574				9,827
Total cost of revenues			49,982				42,762				28,705
Gross profit			22,693				16,721				5,772
Research and development expenses			11,821				11,729				9,279
Selling and marketing expenses			1,853				2,331				2,152
General and administrative expenses			4,781				5,126				4,543
Operating income (loss)			4,238				(2,465	)			(10,202	)
Financial income			578				870				560
Income (expense) in respect of currency exchange and translation differences and derivatives instruments, net			(100	)			937				(1,052	)
Income (expense) in respect of revaluation of warrants to fair value			(576	)			540				(640	)
Financial expense			(3,357	)			(3,597	)			(3,088	)
Loss before taxes on income			783				(3,715	)			(14,421	)
Taxes on income			523				—				—
Net income (loss)		$	260			$	(3,715	)		$	(14,421	)
Income (loss) attributable to equity holders		$	260			$	(3,715	)		$	(14,421	)
Income (loss) per share attributable to equity holders:
Basic		$	0.01			$	(0.13	)		$	(0.54	)
Diluted		$	0.01			$	(0.15	)		$	(0.54	)
Weighted-average number of ordinary shares used to compute income (loss) per share attributable to equity holders:
Basic			28,078,996				27,550,643				26,674,717
Diluted			28,686,636				27,703,331				26,674,717
Pro forma earnings per share attributable to equity holders (1) :
Basic		$				$
Diluted		$				$
Consolidated Statements of Cash Flows:
Cash flows from operating activities		$	(8,262	)		$	994			$	10,037
Cash flows from investing activities			(2,432	)			(1,136	)			(22,183	)
Cash flows from financing activities			2,966				(403	)			7,430
Other Data:
Adjusted net income (loss) (2) (3)		$	2,103			$	(3,377	)		$	(12,161	)
Adjusted EBITDA (2) (4)			8,549				1,453				(5,941	)

 

 

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		As of December 31,
		2012								2011				2010
		As Adjusted (5)				Actual
		(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents, restricted cash and short-term investments		$				$	33,795			$	42,686			$	46,071
Trade receivables							13,861				7,131				12,827
Working capital (6)							40,651				44,185				51,545
Total assets							89,114				85,114				91,496
Total liabilities							60,580				62,529				65,016
Total shareholders’ equity							28,534				22,585				26,480

(1)

Pro forma basic and diluted earnings per share have been computed to give effect to the sale by us of      ordinary shares in this offering.

(2)

We present adjusted net income (loss) and adjusted EBITDA because we use these non-IFRS financial measures to assess our operational performance, for financial and operational decision-making, and as a means to evaluate period-to-period comparisons on a consistent basis. Management believes these non-IFRS financial measures are useful to investors because: (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making; and (2) they exclude the impact of non-cash items that are not directly attributable to our core operating performance and that may obscure trends in the core operating performance of the business.

Non-IFRS financial measures have limitations as an analytical tool and should not be considered in isolation from, or as a substitute for, our IFRS results. We expect to continue reporting non-IFRS financial measures, adjusting for the items described below, and we expect to continue to incur expenses similar to the non-cash, non-IFRS adjustments described below. Accordingly, unless otherwise stated, the exclusion of these and other similar items in the presentation of non-IFRS financial measures should not be construed as an inference that these items are unusual, infrequent or non-recurring. Adjusted net income (loss) and adjusted EBITDA are not recognized terms under IFRS and do not purport to be an alternative to IFRS net income (loss) as an indicator of operating performance or any other IFRS measure. Moreover, because not all companies use identical measures and calculations, the presentation of adjusted net income (loss) or adjusted EBITDA may not be comparable to other similarly titled measures of other companies. A reconciliation of our net income (loss) under IFRS to adjusted net income (loss) and to adjusted EBITDA is set forth below in “Selected Consolidated Financial Data.”

(3)

Adjusted net income (loss) is defined as net income (loss), plus share-based compensation charges and plus or minus expense or income in respect of revaluation of our warrants to fair value. Our management believes that excluding non-cash charges related to share-based compensation provides useful information to investors because of its non-cash nature, varying available valuation methodologies among companies and the subjectivity of the assumptions and the variety of award types that a company can use under the relevant accounting guidance, which may obscure trends in our core operating performance. Similarly, our management believes that excluding the non-cash income (expense) in respect of revaluation of our warrants to fair value is useful to investors because the valuation of our warrants is based on a number of subjective assumptions, the amount of the loss or gain is derived from market forces outside management’s control, and it enables investors to compare our performance with other companies that have different capital structures. Additionally, the revaluation of the fair value of our warrants is not expected to recur in future periods after the first quarter of 2013, as the warrants were exercised in the first quarter of 2013.

(4)

Adjusted EBITDA is defined as net income (loss), plus income tax expense, plus financial expense, net, plus depreciation and amortization expense, plus share-based compensation charges, plus or minus income or expense in respect of exchange and translation differences and derivatives instruments not designated as hedging and plus or minus income or expense in respect of revaluation of our warrants to fair value. Management believes that adjusted EBITDA provides useful information to investors for the same reasons discussed above for adjusted net income (loss).

(5)

Adjusted amounts give effect to our sale of ordinary shares at an assumed initial public offering price of $     per share, which is the midpoint of the estimated offering price range on the cover page of this prospectus, and after deducting the underwriting discounts and commissions, and estimated offering expenses payable by us, as set forth under “Use of Proceeds.”

(6)

Working capital is defined as total current assets minus total current liabilities.

 

 

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RISK FACTORS

Investing in our ordinary shares involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including the consolidated financial statements and the related notes included elsewhere in this prospectus, before deciding whether to invest in our ordinary shares. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks actually occurs, our business, financial condition, results of operations, and future prospects could be materially and adversely affected. In that event, the market price of our ordinary shares could decline, and you could lose part or all of your investment.

Risks Related to Our Business and Industry

Our business is currently highly concentrated on our flagship product, Glassia, and our largest geographic region, the United States. Any adverse market event with respect to such product or the United States would have a material adverse effect on our business.

We rely heavily upon the sales of our AAT intravenous product, Glassia. Revenue from our AATD products comprised approximately 47%, 44% and 34% of our total revenues for the years ended December 31, 2012, 2011 and 2010, respectively. If Glassia were to lose significant sales, or was substantially or completely displaced in the market, we would lose a significant and material source of our total revenues. Similarly, if Glassia were to become the subject of litigation and/or an adverse governmental ruling requiring us to cease sales of Glassia, our business would be adversely affected.

We rely heavily upon sales from the United States, which comprised approximately 43%, 41% and 22% of our total revenues for the years ended December 31, 2012, 2011 and 2010, respectively. If our U.S. sales were significantly impacted by either material changes to government or private payor reimbursement, by other regulatory developments, by competition or other factors, then our business would be adversely affected.

If we are unable to successfully introduce new products and indications or fail to keep pace with advances in technology, our business, financial condition and results of operations could be adversely affected.

We operate in highly innovative businesses. We currently rely on sales of Glassia for a significant portion of our total revenues. However, our continued growth depends in large part on our ability to develop and obtain approval of new products and new indications for our products and product candidates. In particular, obtaining approval of the Inhaled AAT for AATD product from the European Medicines Agency (the “EMA”) initially and the FDA thereafter is critical to our business plan. Failure to obtain regulatory approval of the Inhaled AAT for AATD product or of any of our other product candidates or additional indications would materially adversely impact our business prospects.

The development of innovative products and technologies that improve efficacy, safety, patients’ and clinicians’ ease of use and cost-effectiveness involve significant technical and business risks. The success of new product offerings will depend on many factors, including our ability to properly anticipate and satisfy customer needs, adapt to new technologies, obtain regulatory approvals on a timely basis, demonstrate satisfactory clinical results, manufacture products in an economic and timely manner, and differentiate our products from those of our competitors. If we cannot successfully introduce new products, adapt to changing technologies or anticipate changes in our current and potential customers’ requirements, our products may become obsolete and our business could suffer.

We may not be able to commercialize our product candidates in development for numerous reasons.

Before obtaining regulatory approval for the sale of our product candidates, including Inhaled AAT for AATD, or for the marketing of existing products for new indications, we must conduct, at our own expense, extensive preclinical tests to demonstrate the safety of our product candidates in animals and clinical trials to demonstrate the safety and efficacy of our product candidates in humans. We cannot predict how long the approval processes of the FDA, the EMA, the regulatory authorities in Israel or any other applicable regulatory authority or agency for any of our product candidates will take or whether any such approvals

 

 

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ultimately will be granted. The FDA, the EMA, the regulatory authorities in Israel and other regulatory agencies have substantial discretion in the drug approval process, and positive results in preclinical testing or early phases of clinical studies offer no assurance of success in later phases of the approval process. The approval process varies from country to country and the requirements governing the conduct of clinical trials, product manufacturing, product licensing, pricing and reimbursement vary greatly from country to country.

Preclinical and clinical testing is expensive, is difficult to design and implement, can take many years to complete and is uncertain as to outcome. A failure of one or more of our clinical trials can occur at any stage of testing. We may experience numerous unforeseen events during, or as a result of, preclinical testing and the clinical trial process that could delay or prevent our ability to receive regulatory approval or commercialize our product candidates, including:

•

regulators may not authorize us to commence or conduct a clinical trial within a country or at a prospective trial site;

•

the regulatory requirements for product approval may not be explicit, may evolve over time and may diverge among jurisdictions;

•

delays may occur in obtaining our clinical materials;

•

our preclinical tests or clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional preclinical testing or clinical trials or to abandon strategic projects;

•

the number of patients required for our clinical trials may be larger than we anticipate, enrollment in our clinical trials may be slower or more difficult than we anticipate or participants may withdraw from our clinical trials at higher rates than we anticipate, any of which would result in significant delays in our clinical testing process;

•

delays may occur in reaching agreement on acceptable clinical trial agreement terms with prospective sites or obtaining institutional review board approval;

•

our third-party contractors, such as a contract research organization, may fail to comply with regulatory requirements or meet their contractual obligations to us;

•

we may be forced to suspend or terminate our clinical trials if the participants are being exposed to unacceptable health risks or if any participant experiences an unexpected serious adverse event;

•

regulators or institutional review boards may require that we hold, suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements;

•

undetected or concealed fraudulent activity by a clinical researcher, if discovered, could preclude the submission of clinical data prepared by that researcher, lead to the suspension or substantive scientific review of one or more of our marketing applications by regulatory agencies, and result in the recall of any approved product distributed pursuant to data determined to be fraudulent;

•

the cost of our clinical trials may be greater than we anticipate;

•

an audit of preclinical or clinical studies by the FDA, the EMA, the regulatory authorities in Israel or other regulatory authorities may reveal noncompliance with applicable regulations, which could lead to disqualification of the results and the need to perform additional studies; and

•

our product candidates may not achieve the desired clinical benefits or may cause undesirable side effects, or the product candidates may have other unexpected characteristics.

If we are required to conduct additional clinical trials or other testing of our product candidates beyond those that we contemplate, if we are unable to successfully complete our clinical trials or other testing, if the results of these trials or tests are not positive or are only modestly positive or if safety concerns arise, we may:

•

be delayed in obtaining marketing approval for our product candidates;

 

 

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•

be unable to obtain regulatory and marketing approval;

•

be unable to obtain reimbursement for our products in some countries;

•

obtain approval for indications that are not as broad as we intended;

•

have the product removed from the market after obtaining marketing approval from the FDA, the EMA, the regulatory authorities in Israel or other regulatory authorities; or

•

be delayed in, or prevented from, receiving the receipt of clinical milestone payments from our strategic partners.

Our product development costs will also increase if we experience delays in testing or approvals. We do not know whether any preclinical tests or clinical trials will begin as planned, will need to be restructured or will be completed on schedule, if at all. Significant preclinical or clinical trial delays also could shorten the patent protection period during which we may have the exclusive right to commercialize our product candidates or could allow our competitors to bring products to market before we do, impairing our ability to commercialize our products or product candidates. For example, in the past, we have experienced delays in the commencement of clinical trials, such as a delay in patient enrollment for our clinical trials in Europe for Inhaled AAT for AATD and a delay in receiving approval for the commencement of Phase II trials in the United States for Inhaled AAT for AATD until further preclinical testing results were submitted.

Even if preclinical trials are successful, we still may be unable to commercialize a product because of difficulties in obtaining regulatory approval for its engineering process or problems in scaling that process to commercial production.

Pre-clinical studies, including studies of our product candidates in animal models of disease, may not accurately predict the result of human clinical trials of those product candidates. In particular, new indications for our AAT products that are entering into Phase I and II clinical trials may be found not to be safe and/or efficacious when studied further in Phase III trials. To satisfy FDA or foreign regulatory approval standards for the commercial sale of our product candidates, we must demonstrate in adequate and controlled clinical trials that our product candidates are safe and effective. Success in early clinical trials, including Phase II trials, does not ensure that later clinical trials will be successful. Initial results from Phase I and II clinical trials also may not be confirmed by later analysis or subsequent larger clinical trials. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after obtaining promising results in earlier clinical trials.

We cannot provide assurance that any products we may seek to develop or are currently developing, such as Inhaled AAT for AATD, will ever be successfully commercialized, and to the extent they are not successfully commercialized, such products could be a significant expense with no reward.

We may not obtain orphan drug status for our products, or we may lose orphan drug designations, which would have a material adverse effect on our business.

Many of our products and product candidates, including Inhaled AAT for AATD, have been granted the designation of an orphan drug. One of the incentives provided by an orphan drug designation is market exclusivity for seven years in the United States and ten years in the European Union for the first product in a class approved for the treatment of a rare disease. While the marketing exclusivity of an orphan drug would prevent other sponsors from obtaining approval of the same drug compound for the same indication unless the subsequent sponsors could demonstrate clinical superiority or a market shortage occurs, it would not prevent other sponsors from obtaining approval of the same compound for other indications or the use of other types of drugs for the same use as the orphan drug. We may not be the first product licensed for the treatment of a rare disease. In such a situation, we would not be able to take advantage of market exclusivity and instead the other sponsor would receive such exclusivity. In the event we are unable to fill demand for any orphan drug, it is possible that the FDA or the EMA may view such unmet demand as a market shortage which could impact the market exclusivity. The FDA or the EMA may also, in the future, revisit any orphan drug designation it has conferred upon a drug and retains the ability to withdraw the designation at any time. Additionally, the U.S. Congress has considered, and may consider in the future, legislation that would restrict

 

 

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the duration or scope of the market exclusivity of an orphan drug and, thus, we cannot be sure that the benefits to us of the existing statute will remain in effect.

The commercial success of any products that we may develop, if any, will depend upon the degree of market acceptance by physicians, patients, healthcare payors, opinion leaders, patients’ organizations and others in the medical community.

Any products that we bring to the market may not gain market acceptance by physicians, patients, healthcare payors, opinion leaders, patients’ organizations and others in the medical community. If these products do not achieve an adequate level of acceptance, we may not generate material product revenue and we may not sustain profitability. The degree of market acceptance of our product candidates, if approved for commercial sale, will depend on a number of factors, some of which are beyond our control, including:

•

the prevalence and severity of any side effects;

•

the efficacy, potential advantages and timing of introduction to the market of alternative treatments;

•

the ability to offer our product candidates for sale at competitive prices;

•

relative convenience and ease of administration;

•

the willingness of physicians to prescribe our products;

•

the willingness of patients to use our products;

•

the strength of marketing and distribution support; and

•

third-party coverage or reimbursement.

If we are not successful in achieving market acceptance for any new products that we have developed and have been approved for commercial sale, we may be unable to recover the large investment we have made and plan to make in research and development efforts and our growth strategy will be adversely affected.

Our products involve biological intermediates that are susceptible to contamination, which could adversely affect our operating results.

Plasma and its derivatives, such as fraction IV, are raw materials that are susceptible to damage and contamination and may contain microorganisms that cause diseases in humans, commonly known as human pathogens, any of which would render such materials unsuitable as raw material for further manufacturing. Almost immediately after collection from a donor, plasma and plasma derivatives must be stored and transported at temperatures that are at least -20 degrees Celsius (-4 degrees Fahrenheit). Improper storage or transportation of plasma or plasma derivatives by us or third-party suppliers may require us to destroy some of our raw material. In addition, plasma and plasma derivatives are also suitable for use only for certain periods of time once removed from storage. If unsuitable plasma or plasma derivatives are not identified and discarded prior to release to our manufacturing processes, it may be necessary to discard intermediate or finished products made from that plasma or plasma derivatives, or to recall any finished product released to the market, resulting in a charge to cost of goods sold and harm to our brand and reputation. Furthermore, if we distribute plasma-derived protein therapeutics that are produced from unsuitable plasma because we have not detected any contaminants or impurities, we could be subject to product liability claims and our reputation would be adversely affected.

Additionally, despite overlapping safeguards, including the screening of donors and other steps to remove or inactivate viruses and other infectious disease-causing agents, the risk of transmissible disease through plasma-derived protein therapeutics cannot be entirely eliminated. If a new infectious disease was to emerge in the human population, the regulatory and public health authorities could impose precautions to limit the transmission of the disease that would impair our ability to manufacture our products. Such precautionary measures could be taken before there is conclusive medical or scientific evidence that a disease poses a risk for plasma-derived protein therapeutics. In recent years, new testing and viral inactivation methods have been developed that more effectively detect and inactivate infectious viruses in collected plasma. There can be no assurance, however, that such new testing and inactivation methods will adequately screen for, and inactivate,

 

 

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infectious agents in the plasma or plasma derivatives used in the production of our plasma-derived protein therapeutics. Additionally, this could trigger the need for changes in our existing inactivation and production methods, including the administration of new detection tests, which could result in delays in production until the new methods are in place, as well as increased costs that may not be readily passed on to our customers.

Plasma and plasma derivatives can also become contaminated through the manufacturing process itself, such as through our failure to identify and purify the contaminant through our manufacturing process or failure to maintain a high level of sterility within our manufacturing facilities.

Once we have manufactured our plasma-derived protein therapeutics, they must be handled carefully and kept at appropriate temperatures. Our failure, or the failure of third parties that supply, ship or distribute our products, to properly care for our plasma-derived products may result in the requirement that such products be destroyed.

While we expect to write off small amounts of work-in-process inventories in the ordinary course of business because of the complex nature of plasma and plasma derivatives, our processes and our plasma-derived protein therapeutics, unanticipated events may lead to write-offs and other costs materially in excess of our expectations. We had in the past situations that have caused us to write off the value of our product. For example, in the past year, we have had to discard an immaterial amount of inventory that did not pass our inspections due to deviations in the production process that had created a higher risk of contamination. Such write-offs and other costs could cause material fluctuations in our operating results. Furthermore, contamination of our plasma-derived protein therapeutics could cause consumers or other third parties with whom we conduct business to lose confidence in the reliability of our manufacturing procedures, which could adversely affect sales and operating results.

Our ability to continue manufacturing and distributing our plasma-derived protein therapeutics depends on our continued adherence to cGMP regulations.

The manufacturing processes for our products are governed by detailed written procedures and regulations that set forth cGMP requirements for blood products, including plasma and plasma derivative products. Failure by our quality operations unit to adhere to established procedures or regulations, or to meet a specification set forth in cGMP requirements, could require that a product or material be rejected and destroyed. There are relatively few opportunities for us to rework, reprocess or salvage nonconforming materials or products. Our manufacturing process and facilities are not currently approved by the EMA, and we will need to obtain such approval prior to beginning manufacture of products (including Inhaled AAT for AATD) to be marketed and sold in Europe.

Our adherence to cGMP regulations and the effectiveness of our quality control systems are periodically assessed through inspections of our manufacturing facility in Beit Kama, Israel by the FDA and regulatory authorities of other countries. Such inspections could result in deficiency citations, which would require us to take action to correct those deficiencies to the satisfaction of the applicable regulatory authorities. If serious deficiencies are noted or if we are unable to prevent recurrences, we may have to recall products or suspend operations until appropriate measures can be implemented. We are required to report certain deviations from procedures to the FDA. Even if we determine that the deviations were not material, the FDA could require us to take certain measures to address the deviations. Since cGMP reflects ever-evolving standards, we regularly need to update our manufacturing processes and procedures to comply with cGMP. These changes may cause us to incur additional costs and may adversely impact our profitability. For example, more sensitive testing assays (if and when they become available) may be required or existing procedures or processes may require revalidation, all of which may be costly and time-consuming and could delay or prevent the manufacturing of a product or launch of a new product.

The biologic properties of plasma and plasma derivatives are variable, which may adversely impact our levels of product yield from our plasma or plasma derivative supply.

Due to the nature of plasma, there will be variations in the biologic properties of the plasma or plasma derivatives we purchase that may result in fluctuations in the obtainable yield of desired fractions, even if cGMP is followed. Lower yields may limit production of our plasma-derived protein therapeutics because of capacity constraints. If these batches of plasma with lower yields impact production for extended periods, we

 

 

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may not be able to fulfill orders on a timely basis and the total capacity of product that we are able to market could decline and our cost of goods sold could increase, thus reducing our profitability.

Usage of our products may lead to serious and unexpected side effects, which could materially adversely affect our business and may, among other factors, lead to our products being recalled and our reputation being harmed, resulting in an adverse effect on our operating results.

As with many pharmaceutical products, the use of our plasma-derived protein therapeutics may produce undesirable side effects or adverse reactions or events. For the most part, these side effects are known, are expected to occur at some frequency and are described in the products’ labeling. Known side effects of a number of our plasma-derived protein therapeutics include headache, nausea and additional common protein infusion related events such as flu-like symptoms, dizziness and hypertension. The occurrence of known side effects on a large scale could adversely affect our reputation and public image, and hence also our operating results.

In addition, the use of our plasma-derived protein therapeutics may be associated with serious and unexpected side effects, or with less serious reactions at a greater than expected frequency. This may be especially true when our products are used in critically ill patient populations. When these unexpected events are reported to us, we typically make a thorough investigation to determine causality and implications for product safety. These events must also be specifically reported to the applicable regulatory authorities. If our evaluation concludes, or regulatory authorities perceive, that there is an unreasonable risk associated with one of our products, we would be obligated to withdraw the impacted lot or lots of that product or, in certain cases, to withdraw the product entirely. Furthermore, it is possible that an unexpected side effect caused by a product could be recognized only after extensive use of the product, which could expose us to product liability risks, enforcement action by regulatory authorities and damage to our reputation.

We are subject to a number of existing laws and regulations in multiple jurisdictions, non-compliance with which could adversely affect our business, financial condition and results of operations, and we are susceptible to a changing regulatory environment which could increase our compliance costs or reduce profit margins.

Any new product must undergo lengthy and rigorous testing and other extensive, costly and time-consuming procedures mandated by the FDA and similar authorities in other jurisdictions, including the EMA and the regulatory authorities in Israel. Our facilities must be approved and licensed prior to production and remain subject to inspection from time to time thereafter. Failure to comply with the requirements of the FDA or similar authorities in other jurisdictions, including a failed inspection or a failure in our reporting system for adverse effects of our products experienced by the users of our products, could result in warning letters, product recalls or seizures, monetary sanctions, injunctions to halt the manufacture and distribution of products, civil or criminal sanctions, refusal of a regulatory authority to grant approvals or licenses, restrictions on operations or withdrawal of existing approvals and licenses. In addition, we rely to a large extent on Baxter for purposes of most of our regulatory compliance for Glassia and product development and approvals in the United States relating to Glassia. Any failure by Baxter to properly advise us regarding, or properly perform tasks related to, regulatory compliance requirements could adversely affect us. If our relationship with Baxter terminated for any reason, we may be unable to maintain regulatory compliance on a cost-effective basis, if at all. Any of these actions could cause direct liabilities, a loss in our ability to market Glassia, or a loss of customer confidence in us or Glassia, which could adversely affect our sales, reputation, and results of operations.

Any changes in our production processes for our products must be approved by the FDA and similar authorities in other jurisdictions. Failure to comply with any requirements as to production process changes dictated by the FDA or similar authorities in other jurisdictions could also result in warning letters, product recalls or seizures, monetary sanctions, injunctions to halt the manufacture and distribution of products, civil or criminal sanctions, refusal of a regulatory authority to grant approvals or licenses, restrictions on operations or withdrawal of existing approvals and licenses. Recently, as part of our on-going effort to increase efficiency and profitability, we submitted a supplement with the FDA to make changes to the production processes for Glassia, which are intended to scale-up the output of our manufacturing facility and began to produce Glassia using the improved processes. In March 2013, we received a request from the FDA to submit additional data and explanations prior to its approval of our new production processes. We expect to provide the additional

 

 

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information required by the FDA during the second quarter of 2013. While such FDA review is pending, we are continuing to produce Glassia according to FDA-approved application and production processes. We cannot provide assurances that we will obtain approval for the improved processes on a timely basis or at all. Failure to obtain such approval, or obtaining approval only on a prospective basis, could cause us to write off the value of the inventory produced using the new methods. In addition, we would not obtain the margin benefits we are anticipating from such new operating processes.

In addition, changes in the regulation of our activities, such as increased regulation affecting safety requirements or new regulations such as limitations on the prices charged to customers in the European Union, the United States, Israel or other jurisdictions in which we operate, could materially adversely affect our business. In addition, the requirements of different jurisdictions in which we operate may become less uniform, creating a greater administrative burden and generating additional compliance costs, which would have a material adverse effect on our profit margins.

We would become supply-constrained and our financial performance would suffer if we were unable to obtain adequate quantities of source plasma or plasma derivatives or specialty ancillary products approved by the FDA, the EMA or the regulatory authorities in Israel, or if our suppliers were to fail to modify their operations to meet regulatory requirements.

Our products that generate the majority of our revenues depend on our access to U.S. or European source plasma or its derivative, fraction IV. Our plasma and fraction IV are purchased from third-party licensed suppliers which are also responsible for the fractionation process, pursuant to multiple purchase agreements. We have entered into a number of supply agreements with various third parties in the United States and Europe, some of which are also strategic partners in the distribution of our proprietary products. These agreements contain various termination provisions, including upon a material breach of either party, force majeure and, with respect to supply agreements with strategic partners, the failure or delay on the part of either party to obtain the applicable regulatory approvals or the termination of the principal strategic relationship. If we are unable to obtain adequate quantities of source plasma or fraction IV approved by the FDA, the EMA or the regulatory authorities in Israel from these providers, we may be unable to find an alternative cost-effective source.

In order for plasma and fraction IV to be used in the manufacturing of our plasma-derived protein therapeutics, the individual centers at which the plasma is collected must be licensed and approved by the relevant regulatory authorities, such as the FDA or the EMA. When a new plasma collection center is opened, and on an ongoing basis after its licensure, it must be inspected by the FDA and the EMA and the regulatory authorities in Israel for compliance with cGMP and other regulatory requirements. An unsatisfactory inspection could prevent a new center from being licensed or lead to the suspension or revocation of an existing license. If we or relevant regulatory authorities determine a plasma collection center did not comply with cGMP in collecting plasma, we may be unable to use and may ultimately destroy plasma collected from that center, which may impact on our ability to timely meet our manufacturing and supply obligations. Additionally, if noncompliance in the plasma collection process is identified after the impacted plasma has been pooled with compliant plasma from other sources, entire plasma pools, in-process intermediate materials and final products could be impacted. Consequently, we could experience significant inventory impairment provisions and write-offs which could adversely affect our business and financial results.

In addition, the plasma supplier’s fractionation process must also meet standards of the FDA, the EMA and the regulatory authorities in Israel. If a plasma supplier is unable to meet such standards, we will not be able to use the plasma derivatives provided by such supplier, which may impact on our ability to timely meet our manufacturing and supply obligations.

If we were unable to obtain adequate quantities of source plasma or plasma derivatives approved by the FDA, the EMA or the regulatory authorities in Israel, we would be limited in our ability to maintain or increase current manufacturing levels of our plasma derivative products, as well as our ability to conduct the research required to maintain a robust product pipeline. As a result, we could experience a substantial decrease in total revenues or profit margins, a potential breach of distribution agreements, a loss of customers, a negative effect on our reputation as a reliable supplier of plasma derivative products or a substantial delay in our production and strategic growth plans.

 

 

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The ability to increase plasma collections may be limited, our supply of plasma and plasma derivatives could be disrupted or the cost of plasma and plasma derivatives could increase substantially, as a result of numerous factors, including a reduction in the donor pool, increased regulatory requirements, decreased number of plasma supply sources due to consolidation and new indications for plasma-derived protein therapeutics, which could increase demand for plasma and plasma derivatives and lead to shortages.

We are also dependent on a number of suppliers who supply specialty ancillary products used in the production process, such as specific gels and filters. Each of these specialty ancillary products is provided by a single, exclusive supplier. If these suppliers were unable to provide us with these specialty ancillary products or if our relationships with these suppliers deteriorate, the production of our products would be materially adversely affected, which would adversely affect our sales and results of operations.

In addition, regulatory requirements, including cGMP regulations, continually evolve. Failure of our plasma suppliers to adjust their operations to conform to new standards as established and interpreted by applicable regulatory authorities would create a compliance risk that could impair our ability to sustain normal operations.

We have been required to conduct post-approval clinical trials of Glassia as a condition to marketing the product in the United States, and we may be required to conduct post-approval clinical trials as a condition to licensing or distributing other products.

When a new product is approved, the FDA or other regulatory authorities may require post-approval clinical trials, sometimes called Phase IV clinical trials. For example, the FDA has required that we conduct Phase IV clinical trials of Glassia. The trials are aimed at collecting additional safety data, such as the immune response in the body of a human or animal, commonly referred to as immunogenicity, viral transmission, levels of the protein in the lung, or epithelial lining fluid, and certain efficacy endpoints requested by the FDA. If the results of such trials are unfavorable and demonstrate a previously undetected risk or provide new information that puts the patients at risk, this could result in the loss of the approval to market the product in the United States and other countries, with a resulting loss of sales. Other products we develop may face similar requirements, which would require additional resources and which may not be successful.

The nature of producing plasma-derived protein therapeutics may prevent us from responding in a timely manner to market forces and effectively managing our production capacity.

The production of plasma-derived protein therapeutics is a lengthy and complex process. Our ability to match our production of plasma-derived protein therapeutics to market demand is imprecise and may result in a failure to meet the market demand for our plasma-derived protein therapeutics or potentially in an oversupply of inventory. Failure to meet market demand for our plasma-derived protein therapeutics may result in customers transitioning to available competitive products, resulting in a loss of segment share or customer confidence. In the event of an oversupply in the market, we may be forced to lower the prices we charge for some of our plasma-derived protein therapeutics, record asset impairment charges or take other action which may adversely affect our business, financial condition and results of operations.

In our Proprietary Products segment, we currently rely on one of our strategic partners that accounts for a significant portion of our total sales and our distribution plan for our principal product candidate relies on another strategic partner, and any disruption to our relationships with these distributors would have an adverse effect on our results of operations and profitability.

We have a partnership arrangement with Baxter, pursuant to which Baxter is the sole distributor of Glassia in the United States, Canada, Australia and New Zealand. Sales to Baxter accounted for approximately 42%, 41% and 30% of our total revenues in the years ended December 31, 2012, 2011 and 2010, respectively. Additionally, we depend upon Baxter for the supply of fraction IV plasma for our production of Glassia to be sold in the United States. See “Risk Factors — We would become supply-constrained and our financial performance would suffer if we were unable to obtain adequate quantities of source plasma or plasma derivatives or specialty ancillary products approved by the FDA, the EMA or the regulatory authorities in Israel, or if our suppliers were to fail to modify their operations to meet regulatory requirements.”

 

 

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Currently, revenue derived from our relationship with Baxter consists solely of sales of Glassia, which we incur cost of revenues to produce. However, Baxter is expected to begin producing Glassia itself in 2015 and pay us royalties. While we would generate higher margins from royalties, as we would not incur cost of revenues, we will receive lower revenues per unit sold. We plan to replace that revenue by producing other AAT products, including for sales in Europe, and increases in the volume of units sold. If we could not obtain approval and make such sales in Europe or were unable to increase sales of our products, our revenues would be impacted and our operating results would be impacted as we would continue to incur the fixed costs relating to our manufacturing facility.

In addition, for Inhaled AAT for AATD, we intend to rely on our relationship with Chiesi for the distribution of Inhaled AAT for AATD in Europe and to obtain reimbursement for our Inhaled AAT for AATD product in Europe. Chiesi’s failure to adequately distribute or to obtain reimbursement will have a material adverse effect on our expected profitability from sales of Inhaled AAT for AATD in Europe.

If our relationship with Baxter were to deteriorate, our sales through this channel and our supply of fraction IV could be adversely affected. If we fail to maintain our relationship with Baxter or Chiesi, we could face significant costs in finding a replacement distributor for the markets Baxter and Chiesi serve for Glassia and Inhaled AAT for AATD, respectively, and a replacement supplier of fraction IV for Glassia. Delays in establishing a relationship with a new distributor and supplier could lead to a decrease in our sales and a deterioration in our market share compared to one or more of our competitors. Any of the foregoing developments could have an adverse effect upon our sales, margins and profitability.

Each inhaled formulation of AAT, including Inhaled AAT for AATD, is being developed with a specific nebulizer produced by PARI, and the occurrence of an adverse market event or PARI’s non-compliance with its obligations would have a material adverse effect on the commercialization of any inhaled formulation of AAT.

We are dependent upon PARI for the commercialization of any inhaled formulation of AAT, including our second generation AATD product, Inhaled AAT for AATD. We have an agreement with PARI, pursuant to which it is required to obtain the appropriate clearance to market PARI’s eFlow device, which is a device required for the administration of inhaled formulation of AAT, from the EMA and FDA for use with Inhaled AAT for AATD. See “Business — Strategic Partnerships — PARI.” Failure of PARI to achieve these authorizations will have a material adverse effect on the commercialization of any inhaled formulation of AAT, including Inhaled AAT for AATD, which would harm our growth strategy.

Additionally, pursuant to the agreement, PARI is obligated to manufacture and supply all of the market demand for the eFlow device for use in conjunction with any inhaled formulation of AAT and, we are required to purchase all of our volume requirements from PARI. Any event which permanently, or for an extended period, prevents PARI from supplying the required quantity of devices would have an adverse effect on the commercialization of any inhaled formulation of AAT, including Inhaled AAT for AATD.

Our Distribution segment is dependent on a few suppliers, and any disruption to our relationship with these suppliers, or their inability to supply us with the products we sell, in a timely manner, in adequate quantities and/or at a reasonable cost, would have a material adverse effect on our business, financial condition and results of operations.

Sales of products supplied by Bioproducts Laboratories Ltd. and Biotest A.G., which are sold in our Distribution segment, together represented 35% and 39% of our total revenues for the years ended December 31, 2012 and 2011, respectively. While we have distribution agreements with each of these suppliers, these agreements do not obligate these suppliers to provide us with minimum amounts of our Distribution segment products. Purchases of our Distribution segment products from our suppliers are typically on a purchase order basis. We work closely with our suppliers to develop annual forecasts, but these forecasts are not obligations or commitments. However, if we fail to submit purchase orders that meet our annual forecasts, we could lose exclusivity or the agreement could be terminated. These suppliers may experience capacity constraints that result in their being unable to supply us with products in a timely manner, in adequate quantities and/or at a reasonable cost. Contributing factors to supplier capacity constraints include, among other things, industry or customer demands in excess of machine capacity, labor shortages and changes

 

 

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in raw material flows. These suppliers may also choose not to supply us with products at their discretion or raise prices to a level that would render our products non competitive. Any significant interruption in the supply of these products could result in us being unable to meet the demands of our customers, which would have a material adverse effect on our business, financial condition and results of operations.

Additionally, if our relationship with either were to deteriorate, our distribution sales could be adversely affected. If we fail to maintain our existing relationships with these suppliers, we could face significant costs in finding a replacement supplier, and delays in establishing a relationship with a new supplier could lead to a decrease in our sales and a deterioration in our market share compared to one or more of our competitors.

Our business requires substantial capital, including potential investments in large capital projects, to operate and grow and to achieve our strategy of realizing increased operating leverage.

In order to obtain FDA, EMA and other regulatory approval for product candidates and new indications for existing products, we are required to enhance the facilities in which and processes by which we manufacture existing products, to develop new product delivery mechanisms for existing products and to develop innovative product additions and conduct clinical trials. We face a number of obstacles that we will need to overcome in order to achieve these goals, including but not limited to the successful development of an experimental product for use in clinical trials, the design of clinical study protocols acceptable to the FDA, the EMA and other regulatory authorities, the successful outcome of clinical trials, scaling our manufacturing processes to produce commercial quantities or successfully transition technology, obtaining FDA, EMA and other regulatory approvals of our products or processes and successfully marketing an approved product or new product with our new process. To finance these various activities, we may need to incur future debt or issue additional equity, and we may not be able to structure our debt obligations on favorable economic terms. A failure to fund these activities may harm our growth strategy, competitive position, quality compliance and financial condition.

In addition, any enhancements to our manufacturing facilities necessary to obtain FDA or EMA approval for product candidates or new indications for existing products could require large capital projects. We may also undertake such capital projects in order to maintain compliance with cGMP or expand capacity. Capital projects of this magnitude involve technology and project management risks. Technologies that have worked well in a laboratory or in a pilot plant may cost more or not perform as well, or at all, in full scale operations. Projects may run over budget or be delayed. We cannot be certain that these projects will be completed in a timely manner or that we will maintain our compliance with cGMP, and we may need to spend additional amounts to achieve compliance. Additionally, by the time these multi-year projects are completed, market conditions may differ significantly from our assumptions regarding competitors, customer demand, alternative therapies, reimbursement and public policy, and as a result capital returns may not be realized. A failure to invest in large capital projects may harm our competitive position and financial condition. In addition, to fund large capital projects, we may need to incur future debt or issue additional equity, and we may not be able to structure our debt obligations on favorable economic terms. A failure to fund these activities may harm our growth strategy, competitive position, quality compliance and financial condition.

Our Proprietary Products segment operates in a highly competitive market.

We compete with well-established drug companies, including two to four large competitors for each of our products in the Proprietary Products segment. These large competitors include CSL Behring Ltd., Baxter, Cangene Corporation and Grifols S.A., which recently acquired a previous competitor, Talecris Biotherapeutics, Inc. We compete against these companies for, among other things, licenses, expertise, clinical trial patients and investigators, consultants and third-party strategic partners. We also compete with these companies for market share for certain products in the Proprietary Products segment. Our large competitors have advantages in the market because of their size, financial resources, markets and the duration of their activities and experience in the relevant market, especially in the United States and countries of the European Union. As a result, they may be able to devote more funds to research and development and new production technologies, as well as to the promotion of their products and business. These competitors may also be able to sustain for longer periods a deliberate substantial reduction in the price of their products or services. Some of them also have an additional advantage regarding the availability of raw materials, as they manufacture

 

 

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plasma and its products, and own companies that collect or produce raw materials such as plasma. Other than our AAT products, our products generally do not benefit from patent protection and compete against similar products produced by other providers.

Additionally, the development by a competitor of a similar or superior product or increased pricing competition may result in a reduction in our net sales or a decrease in our profit margins.

For example, we believe that there are two main competitors in the AAT market: Grifols and CSL. We estimate that Grifols’s AAT by infusion product for the treatment of AATD, Prolastin A1PI, accounts for more than 70% of sales in the worldwide market for the treatment of AATD, and is the only product that is allowed to be sold in both Europe and the United States. Due to its limited availability, CSL’s product is mainly sold in the United States. Apart from its sales through Talecris, Grifols is also a local producer of the product in the Spanish market and operates in Brazil. There is another, smaller local producer in the French market, LFB S.A.

Similarly, if a new AAT formulation with a significantly improved rate of administration is adopted (including, for example, aerosol inhalation or one that can demonstrate statistically significant efficacy), the market share of our current AAT product, Glassia, could be negatively impacted. While we are in the process of developing Inhaled AAT for AATD, our competitors may also be attempting to develop similar products or products which could be substitutions for AAT products, such as gene therapy. For example, in October 2012, Grifols announced that it commenced a limited clinical trial for the development of an inhaled formulation of AAT for the indication of cystic fibrosis. While we believe that these products are in the early stages of development, they may eventually be successfully developed and launched. Furthermore, even if we are able to commercialize Inhaled AAT for AATD prior to the development of comparable products by our competitors, sales of Inhaled AAT for AATD could adversely impact our revenue and growth of sales of Glassia, our current AATD product.

In addition, our plasma-derived protein therapeutics face competition from existing non-plasma products and other courses of treatments. For example, we believe our main competitor for KamRho(D) (IM and IV) is Kedrion, which recently acquired the Anti-Rh product line of Ortho-Clinical Diagnostics, Inc., formerly our main competitor for KamRho(D) (IM or IV). Kedrion sells a product that we estimate accounts for approximately 50% of sales in the U.S. anti-Rh market. We believe there are three additional competitors in this market: Cangene, Grifols and CSL. Additionally, in 2008, GlaxoSmithKline plc and Amgen Inc. launched thrombopoietin inhibitors targeting immune thermobocytopunic purpura patients, which may reduce the demand for intravenous immunoglobulins (“IVIG”) to treat immune thermobocytopunic purpura. New treatments, such as small molecules, monoclonal or recombinant products, may also be developed for indications for which our products are now used. We do not currently sell any recombinant products. We have begun developing recombinant versions of AAT, but we cannot be certain that such products will ever be approved or commercialized. The main advantage of recombinant AAT is its potentially higher availability at lower price per raw material. As a result, our product offerings may remain plasma-derived, even if our competitors offer competing recombinant or other non-plasma products or treatments.

Sales in our Distribution segment rely primarily on our ability to win tender bids based on the price and availability of our products in annual public tender processes.

We primarily sell our Distribution segment products through offers to participate in public tenders, which occur on an annual basis. The public tender process involves health maintenance organizations and hospitals soliciting bids from several potential suppliers, including us, and selecting the winning bid based on several attributes, primarily price and availability. The annual public tender process is also used by our existing customers to determine their suppliers. As a result, our existing relationships with customers in our Distribution segment do not guarantee additional orders from such customers year to year.

In 2010 through 2012, we benefitted from the temporary suspension of two of our competitors from selling their IVIG products in Israel. This suspension has been lifted and both competitors are now able to distribute plasma-derived protein therapeutics in the Israeli market. As these competing IVIG products returned to the market by the end of 2012, we expect to see increased competition for our Distribution segment products, which could lead to decreased revenues from our Distribution segment. For example, we recently participated in a public tender in Israel with these competitors. During this public tender process,

 

 

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some of our customers in prior years chose to purchase their supply requirements from our competitors. As a result, we expect that revenues from our Distribution segment will decrease in 2013.

Our existing and new competitors may also have significantly greater financial resources than us, which they could use to promote their products and business. Greater financial resources would also enable our competitors to substantially reduce the price of their products or services. If our competitors are able to offer prices lower than us, our ability to win tender bids during the annual tender process will be materially affected, and could reduce our total revenues or decrease our profit margins.

Certain of our products have historically been, and may in the future be, subject to supply-driven price fluctuations.

Certain of our products in both segments have historically been subject to price fluctuations as a result of changes in the production capacity available in the industry, the availability and pricing of plasma, development of competing products and the availability of alternative therapies. Higher prices for plasma-derived protein therapeutics have traditionally spurred increases in plasma production and collection capacity, resulting over time in increased product supply and lower prices. As demand continues to grow, if plasma supply and manufacturing capacity do not commensurately expand, prices tend to increase. Additionally, consolidation in plasma companies has led to a decrease in the number of plasma suppliers in the world, as either manufacturers of plasma-based pharmaceuticals purchase plasma suppliers or plasma suppliers are shut down in response to the number of manufacturers of plasma-based pharmaceuticals decreasing, which may lead to increased prices. We may not be able to pass along these increased plasma and plasma-derivative prices to our customers, which would reduce our profit margins.

Sales of our Distribution segment products are made through public tenders of Israeli hospitals and health maintenance organizations on an annual basis. The prices we can offer, as well as the availability of products, are key factors in the tender process. If our suppliers in the Distribution segment cannot sell us products at a competitive price or cannot guarantee sufficient quantities of products, we may lose the tenders.

Product liability claims or product recalls involving our products or products we distribute could have a material adverse effect on our business.

Our business exposes us to the risk of product liability claims that are inherent in the manufacturing, distribution and sale of plasma-derived therapeutic protein products and other drug products. We face an inherent risk of product liability exposure related to the testing of our product candidates in human clinical trials and an even greater risk when we commercially sell any products including those manufactured by others that we distribute in Israel. If we cannot successfully defend ourselves against claims that our product candidates or products caused injuries, or any indemnities we have negotiated do not cover any losses, we could incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

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decreased demand for our plasma-derived protein therapeutics and any product candidates that we may develop;

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injury to our reputation;

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difficulties in recruitment of new participants to our future clinical trials and withdrawal of current clinical trials’ participants;

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costs to defend the related litigation;

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substantial monetary awards to trial participants or patients;

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difficulties in finding distributors to our products;

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difficulties in entering strategic partnerships with third parties;

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diversion of management’s attention;

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loss of revenue;

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the inability to commercialize any products that we may develop; and

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higher insurance premiums.

 

 

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Plasma is biological matter that is capable of transmitting viruses and pathogens, whether known or unknown. Therefore, plasma derivative products, if not properly tested, inactivated, processed, manufactured, stored and transported, could cause serious disease and possibly death to the patient. Further, even when such steps are properly effected, viral and other infections may escape detection using current testing methods and may not be susceptible to inactivation methods. Any transmission of disease through the use of one of our products or third-party products sold by us could result in claims against us by persons allegedly infected by such products.

In addition, we sell and distribute third-party products in Israel, and the laws of Israel could also expose us to product liability claims for those products. Furthermore, the presence of a defect in a product could require us to carry out a recall of such product. A product liability claim or a product recall could result in substantial financial losses, negative reputational repercussions and an inability to retain customers. Although we maintain insurance for certain types of losses, claims made against our insurance policies could exceed our limits of coverage or be outside our scope of coverage. Additionally, as product liability insurance is expensive and can be difficult to obtain, a product liability claim could increase our required premiums or otherwise decrease our access to product liability insurance on acceptable terms. In turn, we may not be able to maintain insurance coverage at a reasonable cost and may not be able to obtain insurance coverage that will be adequate to satisfy liabilities that may arise.

Regulatory approval for our products is limited by the FDA and similar authorities in other jurisdictions to those specific indications and conditions for which clinical safety and efficacy have been demonstrated, and the prescription or promotion of off-label uses could adversely affect our business.

Any regulatory approval of our products is limited to those specific diseases and indications for which our products have been deemed safe and effective by the FDA or similar authorities in other jurisdictions. In addition to the regulatory approval required for new formulations, any new indication for an approved product also requires regulatory approval. Once we produce a plasma-derived protein therapeutic, we rely on physicians to prescribe and administer it as we have directed and for the indications described on the labeling. It is not, however, unusual for physicians to prescribe medication for unapproved, or “off-label,” uses or in a manner that is inconsistent with the manufacturer’s directions. To the extent such off-label uses and departures from our administration directions become pervasive and produce results such as reduced efficacy or other adverse effects, the reputation of our products in the marketplace may suffer. In addition, off-label uses may cause a decline in our revenues or potential revenues, to the extent that there is a difference between the prices of our product for different indications.

Furthermore, while physicians may choose to prescribe drugs for uses that are not described in the product’s labeling and for uses that differ from those approved by regulatory authorities, our ability to promote the products is limited to those indications that are specifically approved by the FDA or other regulators. Although regulatory authorities generally do not regulate the behavior of physicians, they do restrict communications by companies on the subject of off-label use. If our promotional activities fail to comply with these regulations or guidelines, we may be subject to warnings from, or enforcement action by, these authorities. In addition, failure to follow FDA rules and guidelines relating to promotion and advertising can result in the FDA’s refusal to approve a product, the suspension or withdrawal of an approved product from the market, product recalls, fines, disgorgement of money, operating restrictions, injunctions or criminal prosecution.

The loss of one or more of our key employees could harm our business.

We depend on the continued service and performance of our key employees, including David Tsur, our Chief Executive Officer, and our other senior management. We have entered into employment agreements with all of our senior management, including Mr. Tsur, and other key employees. Either party, however, can terminate these agreements for any reason. The loss of key members of our executive management team could disrupt our operations or product development and have an adverse effect on our ability to grow our business.

Our ability to attract, recruit, retain and develop qualified employees is critical to our success and growth.

We compete in a market that involves rapidly changing technological and regulatory developments that require a wide ranging set of expertise and intellectual capital. In order for us to successfully compete and

 

 

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grow, we must attract, recruit, retain and develop the necessary personnel who can provide the needed expertise across the entire spectrum of our intellectual capital needs. While we have a number of our key personnel who have substantial experience with our operations, we must also develop our personnel to provide succession plans capable of maintaining continuity in the midst of the inevitable unpredictability of human capital. However, the market for qualified personnel is competitive, and we may not succeed in recruiting additional personnel, retaining current personnel or effectively replacing current personnel who depart with qualified or effective successors. Many of the companies with which we compete for experienced personnel have greater resources than us.

Our effort to retain and develop personnel may also result in significant additional expenses, which could adversely affect our profitability. We cannot assure that qualified employees will continue to be employed or that we will be able to attract and retain qualified personnel in the future. Failure to retain or attract key personnel could have a material adverse effect on our business, financial condition and results of operations.

We are subject to risks associated with doing business globally.

Our operations are subject to risks inherent in conducting business globally and under the laws, regulations and customs of various jurisdictions and geographies. These risks include fluctuations in currency exchange rates, changes in exchange controls, loss of business in government and public tenders that are held annually in many cases, nationalization, expropriation and other governmental actions, availability of raw materials, changes in taxation, importation limitations, export control restrictions, changes in or violations of applicable laws, including the U.S. Foreign Corrupt Practices Act (“FCPA”), the U.K. Bribery Act of 2010, pricing restrictions, economic and political instability, disputes between countries, diminished or insufficient protection of intellectual property, and disruption or destruction of operations in a significant geographic region regardless of cause, including war, terrorism, riot, civil insurrection or social unrest. Failure to comply with, or material changes to, the laws and regulations that affect our global operations could have an adverse effect on our business, financial condition or results of operations.

We are subject to foreign currency exchange risk.

We receive payment for our sales and make payments for resources in a number of different currencies. While our sales and expenses are primarily denominated in U.S. dollars, our financial results may be adversely affected by fluctuations in currency exchange rates as a portion of our sales and expenses are denominated in other currencies, including the NIS and the Euro. Market volatility and currency fluctuations may limit our ability to cost-effectively hedge against our foreign currency exposure and, in addition, our ability to hedge our exposure to currency fluctuations in certain emerging markets may be limited. Hedging strategies may not eliminate our exposure to foreign exchange rate fluctuations and may involve costs and risks of their own, such as devotion of management time, external costs to implement the strategies and potential accounting implications. Foreign currency fluctuations, independent of the performance of our underlying business, could lead to materially adverse results or could lead to positive results that are not repeated in future periods.

Events in global credit markets may impact our ability to obtain financing or increase the cost of future financing or refinancing of our existing debt, including interest rate fluctuations based on macroeconomic conditions that are beyond our control.

As of December 31, 2012, we had total debt of approximately $24.1 million, which primarily consists of convertible debentures with a total face value of approximately $26.8 million. During periods of volatility and disruption in the U.S., European, or global credit markets, obtaining additional or replacement financing may be more difficult and the cost of issuing new debt or replacing our existing convertible debentures could be higher than the costs we incur under our current debentures. The higher cost of new debt may limit our ability to have cash on hand for working capital, capital expenditures and acquisitions on terms that are acceptable to us. Additionally, our convertible debentures have a variable interest rate. By its nature, a variable interest rate will move up or down based on changes in the economy and other factors, all of which are beyond our control. If interest rates increase, our interest expense could increase, affecting earnings and reducing cash flows available for working capital, capital expenditures and acquisitions.

 

 

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Developments in the economy may adversely impact our business.

Our operating and financial performance may be adversely affected by a variety of factors that influence the general economy in the United States, Europe and worldwide, including the current global economic slowdown and the ongoing challenges faced by European banks and the markets for the sovereign debt of certain European countries. Throughout many of our largest markets, including the United States and Europe, there have been dramatic declines in the housing market, high levels of unemployment and underemployment, and reduced earnings, or, in some cases, losses, for businesses across many industries, with reduced investments in growth.

A recessionary economic environment may adversely affect demand for our plasma-derived protein therapeutics. As a result of their job losses, patients in the U.S. may lose medical insurance and be unable to purchase needed medical products or may be unable to pay their share of deductibles or co-payments. Hospitals adversely affected by the economy may steer patients to less costly therapies, resulting in a reduction in demand, or demand may shift to public health hospitals, which purchase our products at a lower government price. A recessionary economic environment may also lead to price pressure for reimbursement of new drugs, which may adversely affect the demand for our future plasma-derived protein therapeutics.

If our manufacturing facility in Beit Kama, Israel were to suffer a serious accident, or if a force majeure event materially affected our ability to operate and produce saleable plasma-derived protein therapeutics, all of our manufacturing capacity could be shut down for an extended period.

We rely on a single manufacturing facility in Beit Kama, which is located in southern Israel approximately 20 miles from the Gaza Strip. All of our revenues in our Proprietary Products segment are derived from products manufactured at this facility. If this facility were to suffer an accident or a force majeure event such as war, terrorist attack, earthquake, major fire or explosion, major equipment failure or power failure lasting beyond the capabilities of our backup generators or similar event, our revenues would be materially adversely affected. In this situation, our manufacturing capacity could be shut down for an extended period, we could experience a loss of raw materials, work in process or finished goods inventory and our ability to operate our business would be harmed. In addition, in any such event, the reconstruction of our manufacturing facility and storage facilities, and the regulatory approval of the new facilities could be time-consuming. During this period, we would be unable to manufacture our plasma-derived protein therapeutics.

Our insurance against property damage and business interruption insurance may be insufficient to mitigate the losses from any such accident or force majeure event. We may also be unable to recover the value of the lost plasma or work-in-process inventories, as well as the sales opportunities from the products we would be unable to produce, or the loss of customers during such period.

If we experience equipment difficulties or if the suppliers of our equipment or disposable goods fail to deliver key product components or supplies in a timely manner, our manufacturing ability would be impaired and our product sales could suffer.

For certain equipment and supplies, we depend on a limited number of companies that supply and maintain our equipment and provide supplies such as chromatography resins, filter media, glass bottles and stoppers used in the manufacture of our plasma-derived protein therapeutics. If our equipment were to malfunction, or if our suppliers stop manufacturing or supplying such machinery, equipment or any key component parts, the repair or replacement of the machinery may require substantial time and cost, and could disrupt our production and other operations. Alternative sources for key component parts or disposable goods may not be immediately available. In addition, any new equipment or change in supplied materials may require revalidation by us or review and approval by the FDA, the EMA, the regulatory authorities in Israel or other regulatory authorities, which may be time-consuming and require additional capital and other resources. We may not be able to find an adequate alternative supplier in a reasonable time period, or on commercially acceptable terms, if at all. As a result, shipments of affected products may be limited or delayed. Our inability to obtain our key source supplies for the manufacture of products may require us to delay shipments of products, harm customer relationships and force us to curtail operations.

 

 

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If our shipping or distribution channels were to become inaccessible due to an accident, an act of terrorism, a strike or any other force majeure event, our supply, production and distribution processes could be disrupted.

Our raw materials must be transported at a temperature of -20 degrees Celsius (-4 degrees Fahrenheit) to ensure the preservation of their proteins. Not all shipping or distribution channels are equipped to transport plasma at these temperatures. If any of our shipping or distribution channels become inaccessible because of a serious accident, an act of terrorism, a strike or any other force majeure event, we may experience disruptions in our continued supply of plasma and other raw materials, delays in our production process or a reduction in our ability to distribute our plasma-derived protein therapeutics to our customers.

Our success depends in part on our ability to obtain and maintain protection in the United States and other countries for the intellectual property relating to or incorporated into our technology and products, including the patents protecting our manufacturing process.

Our success depends in large part on our ability to obtain and maintain protection in the United States and other countries for the intellectual property covering or incorporated into our technology and products, especially intellectual property related to our manufacturing processes. At present, we consider our two patents relating to our manufacturing process to be material to the operation of our business as a whole.

However, the patent landscape in the biotechnology and pharmaceutical fields is highly uncertain and involves complex legal, factual and scientific questions, and changes in either patent laws or in the interpretation of patent laws in the United States and other countries may diminish the value and strength of our intellectual property or narrow the scope of our patent protection. In addition, we may fail to apply for or be unable to obtain patents necessary to protect our technology or products or enforce our patents due to lack of information about the exact use of our process by third parties. Even if patents are issued to us or to our licensors, they may be challenged, narrowed, invalidated, held to be unenforceable or circumvented, which could limit our ability to prevent competitors from using similar technology or marketing similar products, or limit the length of time our technologies and products have patent protection. Additionally, many of our patents relate to the processes we use to produce our products, not to the products themselves. In many cases, the plasma-derived products we produce or develop in the future will not, in and of themselves, be patentable. Since many of our patents relate to processes, if a competitor is able to utilize a process that does not rely on our protected intellectual property, that competitor could sell a plasma-derived product similar to one we developed or sell it without infringing these patents. In addition, we are a party to certain license agreements which may impose various obligations upon us as a licensee, including the obligation to make milestone and royalty payments. If we fail to comply with these obligations, the licensor may terminate the license, in which event we might not be able to market any product that is covered by the licensed intellectual property.

Our patents also may not afford us protection against competitors with similar technology. Because patent applications in the United States and many other jurisdictions are typically not published until 18 months after their filing, if at all, and because publications of discoveries in scientific literature often lag behind actual discoveries, neither we nor our licensors can be certain that we or they were the first to make the inventions claimed in our or their issued patents or pending patent applications, or that we or they were the first to file for protection of the inventions set forth in such patent applications. As a result, the patents we own and license may be invalidated in the future, and the patent applications we own and license may not be granted. For example, if a third party has also filed a patent application covering an invention similar to one covered in one of our patent applications, we may be required to participate in an adversarial proceeding, known as an “interference proceeding,” declared by the U.S. Patent and Trademark Office or its foreign counterparts to determine priority of invention. The costs of these proceedings could be substantial and our efforts in them could be unsuccessful, resulting in a loss of our anticipated patent position. In addition, if a third party prevails in such a proceeding and obtains an issued patent, we may be prevented from practicing technology or marketing products covered by that patent. Additionally, patents and patent applications owned by third parties may prevent us from pursuing certain opportunities such as entering into specific markets or developing certain products. Finally, we may choose to enter into markets where certain competitors have patents or patent protection over technology that may impede our ability to compete effectively.

 

 

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Our patents expire at various dates between 2018 and 2027. However, because of the extensive time required for development, testing and regulatory review of a potential product, it is possible that, before any of our products can be commercialized, any related patent may expire or remain in force for only a short period following commercialization, thereby reducing any advantages of the patent. Our pending and future patent applications may not lead to the issuance of patents or, if issued, the patents may not be issued in a form that will provide us with any competitive advantage. We also cannot guarantee that: any of our present or future patents or patent claims or other intellectual property rights will not lapse or be invalidated, circumvented, challenged or abandoned; our intellectual property rights will provide competitive advantages or prevent competitors from making or selling competing products; our ability to assert our intellectual property rights against potential competitors or to settle current or future disputes will not be limited by our agreements with third parties; any of our pending or future patent applications will be issued or have the coverage originally sought; our intellectual property rights will be enforced in jurisdictions where competition may be intense or where legal protection may be weak; or we will not lose the ability to assert our intellectual property rights against, or to license our technology to, others and collect royalties or other payments. In addition, our competitors or others may design around our patents or protected technologies. Effective protection of our intellectual property rights may also be unavailable, limited or not applied in some countries, and even if available, we may fail to pursue or obtain necessary intellectual property protection in such countries. In addition, the legal systems of certain countries do not favor the aggressive enforcement of patents and other intellectual property rights, and the laws of foreign countries may not protect our rights to the same extent as the laws of the United States. As a result, our intellectual property may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours. In order to preserve and enforce our patent and other intellectual property rights, we may need to make claims or file lawsuits against third parties. Such lawsuits could entail significant costs to us and divert our management’s attention from developing and commercializing our products. Lawsuits may ultimately be unsuccessful, and may also subject us to counterclaims and cause our intellectual property rights to be challenged, narrowed, invalidated or held to be unenforceable.

Additionally, unauthorized use of our intellectual property may have occurred or may occur in the future, including, for example, in the production of counterfeit versions of our products. Counterfeit products may use different and possibly contaminated sources of plasma and other raw materials, and the purification process involved in the manufacture of counterfeit products may raise additional safety concerns, over which we have no control. Although we have taken steps to minimize the risk of unauthorized uses of our intellectual property, including for the production of counterfeit products, any failure to identify unauthorized use of, and otherwise adequately protect, our intellectual property could adversely affect our business, including reducing the demand for our products. Additionally, any reported adverse events involving counterfeit products that purport to be our products could harm our reputation and the sale of our products in particular and consumer willingness to use plasma-derived therapeutics in general. Moreover, if we are required to commence litigation related to unauthorized use, whether as a plaintiff or defendant, such litigation would be time-consuming, force us to incur significant costs and divert our attention and the efforts of our management and other employees, which could, in turn, result in lower revenue and higher expenses.

In addition to patented technology, we rely on our unpatented proprietary technology, trade secrets, processes and know-how.

We rely on proprietary information (such as trade secrets, know-how and confidential information) to protect intellectual property that may not be patentable, or that we believe is best protected by means that do not require public disclosure. We generally seek to protect this proprietary information by entering into confidentiality agreements, or consulting, services or employment agreements that contain non-disclosure and non-use provisions with our employees, consultants, contractors, scientific advisors and third parties. However, we may fail to enter into the necessary agreements, and even if entered into, these agreements may be breached or otherwise fail to prevent disclosure, third-party infringement or misappropriation of our proprietary information, may be limited as to their term and may not provide an adequate remedy in the event of unauthorized disclosure or use of proprietary information. We have limited control over the protection of trade secrets used by our third-party manufacturers and suppliers and could lose future trade secret protection if any unauthorized disclosure of such information occurs. In addition, our proprietary information may otherwise become known or be independently developed by our competitors or other third parties. To the

 

 

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extent that our employees, consultants, contractors, scientific advisors and other third parties use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain protection for our proprietary information could adversely affect our competitive business position. Furthermore, laws regarding trade secret rights in certain markets where we operate may afford little or no protection to our trade secrets.

We also rely on physical and electronic security measures to protect our proprietary information, but we cannot provide assurance that these security measures will not be breached or provide adequate protection for our property. There is a risk that third parties may obtain and improperly utilize our proprietary information to our competitive disadvantage. We may not be able to detect or prevent the unauthorized use of such information or take appropriate and timely steps to enforce our intellectual property rights.

If we are unable to protect our trademarks from infringement, our business prospects may be harmed.

We own trademarks that identify certain of our products and have registered these trademarks in certain key markets. Although we take steps to monitor the possible infringement or misuse of our trademarks, it is possible that third parties may infringe, dilute or otherwise violate our trademark rights. Any unauthorized use of our trademarks could harm our reputation or commercial interests. In addition, our enforcement against third-party infringers or violators may be unduly expensive and time-consuming, and the outcome may be an inadequate remedy.

We may be subject to claims that we infringe, misappropriate or otherwise violate the intellectual property rights of third parties.

The conduct of our business, our products or product candidates may infringe or be accused of infringing one or more claims of an issued patent or may fall within the scope of one or more claims in a published patent application that may be subsequently issued and to which we do not hold a license or other rights. For example, certain of our competitors own patents and patent applications in areas relating to critical aspects of our business and technology, including the separation and purification of proteins, and these competitors may in the future allege that we are infringing on their patent rights. We may also be subject to claims that we are infringing, misappropriating or otherwise violating other intellectual property rights, such as trademarks, copyrights or trade secrets. Third parties could therefore bring claims against us or our strategic partners that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages. Further, if such a claim were brought against us or our strategic partners, we or they could be forced to permanently or temporarily stop or delay manufacturing or sales of the product or product candidate that is the subject of the suit.

If we are found to be infringing, misappropriating or otherwise violating the patent or other intellectual property rights of a third party, or in order to avoid or settle claims, we or our strategic partners may choose or be required to seek a license from a third party and be required to pay license fees or royalties or both, which could be substantial. These licenses may not be available on acceptable terms, or at all. Even if we or our strategic partners were able to obtain a license, the rights may be nonexclusive, which could result in our competitors gaining access to the same intellectual property. Ultimately, we could be prevented from commercializing a product, or be forced to cease some aspect of our business operations, if, as a result of actual or threatened claims, we or our strategic partners are unable to enter into licenses on acceptable terms.

There have been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical and biotechnology industries. In addition, to the extent that we gain greater visibility and market exposure as a public company in the United States, we face a greater risk of being involved in such litigation. In addition to infringement claims against us, we may become a party to other patent litigation and other proceedings, including interference, opposition, re-examination and similar proceedings before the U.S. Patent and Trademark Office and its foreign counterparts, regarding intellectual property rights with respect to our products. The cost to us of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings

 

 

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could have a material adverse effect on our ability to compete in the marketplace, and patent litigation and other proceedings may also absorb significant management time.

Some of our employees were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. While we take steps to prevent our employees from using the proprietary information or know-how of others in their work for us, we may be subject to claims that we or these employees have inadvertently or otherwise used or disclosed intellectual property, trade secrets or other proprietary information of any such employee’s former employer. Litigation may be necessary to defend against these claims and, even if we are successful in defending ourselves, could result in substantial costs to us or be distracting to our management. If we fail to defend any such claims successfully, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel.

A breakdown in our information technology systems could result in a significant disruption to our business.

Our operations are highly dependent on our information technology systems. If we were to suffer a breakdown in our systems, storage, distribution or tracing, we could experience significant disruptions affecting all our areas of activity, including our manufacturing, research, accounting and billing processes and potentially cause disruptions to our manufacturing process for products currently in production. We may also suffer from partial loss of information and data due to such disruption.

The implementation of the 2010 healthcare reform law in the United States may adversely affect our business.

Our industry is highly regulated and changes in law may adversely impact our business, operations or financial results. The Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively, the “healthcare reform law”), is a sweeping measure intended to expand healthcare coverage within the United States, primarily through the imposition of health insurance mandates on employers and individuals and expansion of the Medicaid program. Several provisions of the new law, which have varying effective dates, may affect us and will likely increase certain of our costs. For example, an increase in the Medicaid rebate rate from 15.1% to 23.1% became effective as of January 1, 2010, and the volume of rebated drugs was expanded to include beneficiaries in Medicaid managed care organizations, effective as of March 23, 2010. In addition, the new law establishes an abbreviated licensure pathway for products that are drugs made by a living organism or derived from a living organism, commonly referred to as biosimilars, to become FDA-approved biological products, with provisions covering exclusivity periods and a specific reimbursement methodology for biosimilars. President Obama’s 2014 budget proposal includes a proposed reduction of the exclusivity period for biosimilars from twelve years to seven years.

The reforms imposed by the new law will significantly impact the pharmaceutical industry; however, the full effects of the healthcare reform law cannot be known until these provisions are implemented and the Centers for Medicare and Medicaid Services and other federal and state agencies issue applicable regulations or guidance. Moreover, in the coming years, additional changes could be made to governmental healthcare programs that could significantly impact the success of our products. We will continue to evaluate the healthcare reform law, as amended, the implementation of regulations or guidance related to various provisions of the healthcare reform law by federal agencies, as well as trends and changes that may be encouraged by the legislation and that may potentially impact on our business over time.

In addition, Federal, state and foreign governmental authorities are likely to continue efforts to control the price of drugs and reduce overall healthcare costs. These efforts could have an adverse impact on our ability to market products and generate revenues in the United States and foreign countries.

Certain of our business practices could become subject to scrutiny by regulatory authorities, as well as to lawsuits brought by private citizens under federal and state laws. Failure to comply with applicable law or an adverse decision in lawsuits may result in adverse consequences to us.

The laws governing our conduct in the United States are enforceable by criminal, civil and administrative penalties. Violations of laws such as the Federal Food, Drug and Cosmetic Act (the “FDCA”), the Federal False Claims Act (the “FCA”), the Public Health Service (the “PHS Act”) or a provision of the U.S. Social Security Act known as the “Anti-Kickback Law,” or any regulations promulgated under their authority, may

 

 

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result in jail sentences, fines or exclusion from federal and state programs, as may be determined by Medicare, Medicaid, the Department of Defense, other regulatory authorities and the courts. There can be no assurance that our activities will not come under the scrutiny of regulators and other government authorities or that our practices will not be found to violate applicable laws, rules and regulations or prompt lawsuits by private citizen “relators” under federal or state false claims laws.

For example, under the Anti-Kickback Law, and similar state laws and regulations, even common business arrangements, such as discounted terms and volume incentives for customers in a position to recommend or choose drugs and devices for patients, such as physicians and hospitals, can result in substantial legal penalties, including, among others, exclusion from Medicare and Medicaid programs, and arrangements with referral sources must be structured with care to comply with applicable requirements. Also, certain business practices, such as payment of consulting fees to healthcare providers, sponsorship of educational or research grants, charitable donations, interactions with healthcare providers that prescribe products for uses not approved by the FDA and financial support for continuing medical education programs, must be conducted within narrowly prescribed and controlled limits to avoid any possibility of wrongfully influencing healthcare providers to prescribe or purchase particular products or as a reward for past prescribing. Significant enforcement activity has been the result of actions brought by relators, who file complaints in the name of the United States (and if applicable, particular states) under federal and state False Claims Act statutes and can be entitled to receive up to 30% of total recoveries. Also, violations of the False Claims Act can result in treble damages, and each false claim submitted can be subject to a penalty of up to $11,000 per claim. The healthcare reform law imposes new reporting and disclosure requirements for pharmaceutical and medical device manufacturers with regard to payments or other transfers of value made to certain U.S. healthcare practitioners, such as physicians and academic medical centers. Data collection obligations under this rule are to commence on August 1, 2013, and reporting requirements are to be implemented in 2014. On February 5, 2013, the Centers for Medicare and Medicaid Services (“CMS”) issued final regulations to implement these provisions. A number of states have similar laws in place. Additional and stricter prohibitions could be implemented by federal and state authorities. Where practices have been found to involve improper incentives to use products, government investigations and assessments of penalties against manufacturers have resulted in substantial damages and fines. Many manufacturers have been required to enter into consent decrees or orders that prescribe allowable corporate conduct. Failure to satisfy requirements under the FDCA can also result in penalties, as well as requirements to enter into consent decrees or orders that prescribe allowable corporate conduct.

To market and sell our products outside the United States and Israel, we must obtain and maintain regulatory approvals and comply with regulatory requirements in such jurisdictions. The approval procedures vary among countries in complexity and timing. We may not obtain approvals from regulatory authorities outside the United States on a timely basis, if at all, and in such case, we would be precluded from commercializing products in those markets. In addition, some countries, particularly the countries of the European Union, regulate the pricing of prescription pharmaceuticals. In these countries, pricing discussions with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies. Such trials may be time-consuming and expensive and may not show an advantage in cost-efficacy for our products. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, in either the United States or the European Union, we could be adversely affected. Also, under the FCPA, the United States has increasingly focused on regulating the conduct by U.S. businesses occurring outside of the United States, generally prohibiting remuneration to foreign officials for the purpose of obtaining or retaining business.

To enhance compliance with applicable health care laws, and mitigate potential liability in the event of noncompliance, regulatory authorities, such as HHS’s Office of Inspector General (“OIG”), have recommended the adoption and implementation of a comprehensive health care compliance program that generally contains the elements of an effective compliance and ethics program described in Section 8B2.1 of the U.S. Sentencing Commission Guidelines Manual. Increasing numbers of U.S.-based pharmaceutical companies have such programs. We have not adopted U.S. healthcare compliance and ethics programs that

 

 

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generally incorporate the HHS OIG’s recommendations, but even if we do, having such a program can be no assurance that we will avoid any compliance issues.

We could be adversely affected if other government or private third-party payors decrease or otherwise limit the amount, price, scope or other eligibility requirements for reimbursement for the purchasers of our products.

Prices in many of our principal markets are subject to local regulation and certain pharmaceutical products, such as plasma-derived protein therapeutics, are subject to price controls. In the United States, where pricing levels for our products are substantially established by third-party payors, a reduction in the payors’ amount of reimbursement for a product may cause groups or individuals dispensing the product to discontinue administration of the product, to administer lower doses, to substitute lower cost products or to seek additional price-related concessions. These actions could have a negative effect on our financial results, particularly in cases where our products command a premium price in the marketplace or where changes in reimbursement rates induce a shift in the site of treatment. The existence of direct and indirect price controls and pressures over our products has affected, and may continue to materially adversely affect, our ability to maintain or increase gross margins.

Also, the intended use of a drug product by a physician can affect pricing. Physicians frequently prescribe legally available therapies for uses that are not described in the product’s labeling and that differ from those tested in clinical studies and approved by the FDA or similar regulatory authorities in other countries. These off-label uses are common across medical specialties, and physicians may believe such off-label uses constitute the preferred treatment or treatment of last resort for many patients in varied circumstances. If reimbursement for off-label uses of products is reduced or eliminated by Medicare or other third-party payors, including those in the United States or the European Union, we could be adversely affected. For example, the CMS could initiate an administrative procedure known as a National Coverage Determination (“NCD”), by which the agency determines which uses of a therapeutic product would be reimbursable under Medicare and which uses would not. This determination process can be lengthy, thereby creating a long period during which the future reimbursement for a particular product may be uncertain.

We are subject to extensive environmental, health and safety, and other laws and regulations.

Our business involves the controlled use of hazardous materials, various biological compounds and chemicals. The risk of accidental contamination or injury from these materials cannot be eliminated. If an accident, spill or release of any regulated chemicals or substances occurs, we could be held liable for resulting damages, including for investigation, remediation and monitoring of the contamination, including natural resource damages, the costs of which could be substantial. We are also subject to numerous environmental, health and workplace safety laws and regulations, including those governing laboratory procedures, exposure to blood-borne pathogens and the handling of biohazardous materials and chemicals. Although we maintain workers’ compensation insurance to cover the costs and expenses that may be incurred because of injuries to our employees resulting from the use of these materials, this insurance may not provide adequate coverage against potential liabilities. Additional or more stringent federal, state, local or foreign laws and regulations affecting our operations may be adopted in the future. We may incur substantial capital costs and operating expenses and may be required to obtain consents to comply with any of these or certain other laws or regulations and the terms and conditions of any permits required pursuant to such laws and regulations, including costs to install new or updated pollution control equipment, modify our operations or perform other corrective actions at our respective facilities. In addition, fines and penalties may be imposed for noncompliance with environmental, health and safety and other laws and regulations or for the failure to have, or comply with the terms and conditions of, required environmental or other permits or consents. In 2009 and 2010, we were subjected to audits by the Environmental Health Department of the Regional Health Bureau of the Ministry of Health of Israel and the Ministry of Environmental Protection of Israel regarding wastewater and brine treatment at our production plant. As a result of these audits, the production plant must comply with specific guidelines during 2013. We do not expect the costs of complying with these guidelines to be material to our business. See “Business — Environmental.”

Under the Israeli Restrictive Trade Practices Law, 5758-1988 (the “Restrictive Trade Practices Law”), a company that supplies or acquires more than 50% of any product or service in Israel is deemed to be a monopoly.

 

 

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The monopolist is prohibited from participating in certain business practices, including unreasonably refusing to sell products or provide services over which a monopoly exists, charging unfair prices for such products or services, and abusing its position in the market in a manner which might reduce business competition or harm the public. In addition, the General Director of the Israeli Antitrust Authority may determine that a company is a monopoly and has the right to order such company to change its conduct in matters that may adversely affect business competition or the public, including by imposing restrictions on its conduct. Depending on the analysis and the definition of the relevant product markets in which we operate, we may be deemed to be a “monopoly” under the Israeli Antitrust Law with respect to certain of our products.

A significant portion of our workforce has recently joined the Histadrut (General Federation of Labor in Israel) and established an employees' committee, and we could incur additional labor costs or experience work stoppages as a result of our negotiations with the Histadrut and employees' committee.

In February 2013, we were notified by the Histadrut (General Federation of Labor in Israel) that more than one-third of our employees at our Beit Kama facility had decided to join the Histadrut and that they have established an employees' committee. We intend to hold negotiations with the committee and the Histadrut and, depending on the course of these negotiations, we could incur additional labor costs and/or experience work stoppages, which could adversely affect our business operations, including through a loss of revenue and strained relationships with customers.

The requirements of being a public company in the United States, as well as in Israel, may strain our resources and distract our management, which could make it difficult to manage our business, particularly after we are no longer an “emerging growth company.”

Following the completion of this offering, we will be required to comply with various regulatory and reporting requirements, including those required by the SEC. Complying with these reporting and regulatory requirements will be time consuming, result in increased costs to us and could have a negative effect on our business, results of operations and financial condition.

As a public company in the United States, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the requirements of S-OX. These requirements may place a strain on our systems and resources. The Exchange Act requires that we file annual and current reports with respect to our business and financial condition. S-OX requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting. To maintain and improve the effectiveness of our disclosure controls and procedures, we may need to commit significant resources, hire additional staff and provide additional management oversight. We will be implementing additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies in the United States. These activities may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations.

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

Risks Related to Our Ordinary Shares and the Offering

Our share price may be volatile, and you may lose all or part of your investment or be unable to sell your shares at or above the offering price.

The initial public offering price will be based, in part, on the price of our ordinary shares on the TASE and determined by negotiation between us and the representatives of the underwriters, and the price may not be indicative of prices that will prevail in the trading market. The market price of our ordinary shares following this offering is therefore likely to be highly volatile and could be subject to wide fluctuations in price as a result of various factors, some of which are beyond our control. These factors include:

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actual or anticipated fluctuations in our financial condition and operating results;

 

 

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overall conditions in the specialty pharmaceuticals market;

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loss of significant customers or changes to agreements with our strategic partners;

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changes in laws or regulations applicable to our products;

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actual or anticipated changes in our growth rate relative to our competitors’;

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announcements of clinical trial results, technological innovations, significant acquisitions, strategic alliances, joint ventures or capital commitments by us or our competitors;

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changes in key personnel;

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fluctuations in the valuation of companies perceived by investors to be comparable to us;

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the issuance of new or updated research reports by securities analysts;

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disputes or other developments related to proprietary rights, including patents, litigation matters and our ability to obtain intellectual property protection for our technologies;

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announcement of, or expectation of, additional financing efforts;

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sales of our ordinary shares by us or our shareholders;

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share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;

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the expiration of contractual lock-up agreements with our executive officers and directors; and

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general economic and market conditions.

Furthermore, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market price of equity securities of many companies. Broad market and industry fluctuations, as well as general economic, political and market conditions, may negatively impact the market price of our ordinary shares. If the market price of our ordinary shares after this offering does not exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment.

In the past, companies that have experienced volatility in the market price of their shares have been subject to securities class action litigation. We may also be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

There has been no prior public market in the United States for our ordinary shares, and an active trading market in the United States may not develop.

Prior to this offering, there has been no public market in the United States for our ordinary shares. An active trading market in the United States may not develop following completion of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital by selling shares of capital stock and may impair our ability to acquire other companies by using our shares as consideration.

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

The trading market for our ordinary shares will rely in part on the research and reports that equity research analysts publish about us and our business. The price of our ordinary shares could decline if one or more securities analysts downgrade our ordinary shares or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.

Future sales of our ordinary shares in the public market could cause our share price to fall.

Sales by us or our shareholders of a substantial number of our ordinary shares in the public market, either on the TASE or Nasdaq, after this offering, or the perception that these sales might occur, could depress

 

 

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the market price of our ordinary shares and could impair our ability to raise capital through the sale of additional equity securities. Upon completion of this offering, we will have      ordinary shares outstanding, assuming no exercise of our outstanding options, warrants or conversion of our convertible debt as of December 31, 2012.

Except for the 9,009,006 ordinary shares that are the subject of lock-up agreements described below and shares held by our affiliates as contemplated by Rule 144 and the Securities Act, all of the ordinary shares sold in this offering and the 28,665,121 ordinary shares that are outstanding as of December 31, 2012, as well as the 4,271,322 ordinary shares issuable upon exercise of outstanding options, warrants or our convertible debentures, will be freely tradable in the United States without restrictions or further registration under the Securities Act. Following the completion of this offering, approximately      % of our outstanding ordinary shares (or      % if the underwriters fully exercise their over-allotment option) will be beneficially owned by affiliates. These entities could resell the shares into the public markets in the United States in the future in accordance with the requirements of Rule 144, which include certain limitations on volume. See “Shares Eligible for Future Sale.”

We and our executive officers, directors and certain shareholders, who collectively hold 31.54% of our outstanding ordinary shares prior to this offering, have agreed with the underwriters that, subject to limited exceptions, for a period of 180 days after the date of this prospectus, we and they will not directly or indirectly offer, pledge, sell, contract to sell, sell any option or contract to purchase or otherwise dispose of any ordinary shares or any securities convertible into or exercisable or exchangeable for ordinary shares, or in any manner transfer all or a portion of the economic consequences associated with the ownership of ordinary shares, or cause a registration statement covering any ordinary shares to be filed, without the prior written consent of Morgan Stanley & Co. LLC and Jefferies LLC, which may, in their sole discretion and at any time without notice, release all or any portion of the shares subject to these lock-up agreements. After these lock-up agreements have expired and holding periods have elapsed, additional shares will be eligible for sale in the public market.

We may file a registration statement on Form S-8 under the Securities Act to register approximately      million shares for issuance under the Option Plans. Once we register these shares, they can be freely sold in the public market upon issuance and vesting.

The significant share ownership positions of the estate of Ralf Hahn, the former Chairman of our board of directors, and Leon Recanati, a member of our board of directors, may limit your ability to influence corporate matters.

After giving effect to this offering, the estate of Ralf Hahn, the former Chairman of our board of directors, and Leon Recanati, the Chairman of our board of directors, will own or control, directly and indirectly, approximately      % and      % of our outstanding ordinary shares, respectively. Accordingly, if the estate of Ralf Hahn and Leon Recanati vote the shares that they own or control together, they will be able to significantly influence the outcome of matters required to be submitted to our shareholders for approval, including decisions relating to the election of our board of directors and the outcome of any proposed merger or consolidation of our company. Their interests may not be consistent with those of our other shareholders. In addition, these parties’ significant interest in us may discourage third parties from seeking to acquire control of us, which may adversely affect the market price of our shares. On March 6, 2013, a shareholders agreement was entered into, effective March 4, 2013, pursuant to which Mr. Recanati and any company controlled by him (collectively, the “Recanati Group”), who collectively own 11.92% of our outstanding ordinary shares on the one hand, and Damar Chemicals Inc., a company registered in Panama (“Damar”), TUTEUR S.A.C.I.F.I.A (“Tuteur”) (companies formerly controlled by Mr. Ralf Hahn) and their affiliates (collectively, the “Damar Group”), who collectively own 16.72% of our outstanding ordinary shares, on the other hand, have each agreed to vote the ordinary shares beneficially owned by them in favor of the election of director nominees designated by the other group as follows: (i) three director nominees, so long as the other group beneficially owns at least 7.5% of our outstanding share capital, (ii) two director nominees, so long as the other group beneficially owns at least 5.0% (but less than 7.5%) of our outstanding share capital, and (iii) one director nominee, so long as the other group beneficially owns at least 2.5% (but less than 5.0%) of our outstanding share capital. In addition, to the extent that after the designation of the foregoing director nominees there are additional director vacancies, each of the Recanati Group and Damar Group have agreed

 

 

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to vote the ordinary shares beneficially owned by them in favor of such additional director nominees designated by the party who beneficially owns the larger voting rights in our company. We are not party to such agreement or bound by its terms.

Our ordinary shares will be traded on more than one market and this may result in price variations.

Our ordinary shares have been traded on the TASE since August 2005, and we will apply to list our ordinary shares on Nasdaq. Trading in our ordinary shares on these markets will take place in different currencies (U.S. dollars on Nasdaq and NIS on the TASE), and at different times (resulting from different time zones, trading days and public holidays in the United States and Israel). The trading prices of our ordinary shares on these two markets may differ due to these and other factors. Any decrease in the price of our ordinary shares on the TASE could cause a decrease in the trading price of our ordinary shares on Nasdaq.

Our U.S. shareholders may suffer adverse tax consequences if we are characterized as a passive foreign investment company.

Generally, if, for any taxable year, at least 75% of our gross income is passive income, or at least 50% of the value of our assets is attributable to assets that produce passive income or are held for the production of passive income, we would be characterized as a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes. Our status as a PFIC may also depend, in part, on how quickly we utilize the cash proceeds from this offering in our business. We do not expect to be a PFIC for our current taxable year. However, since PFIC status depends on the composition of our income and assets and the value of our assets (which may be determined in large part by reference to the market value of our ordinary shares, which may be volatile) from time to time, there can be no assurance that we will not be considered a PFIC for any taxable year. If we are characterized as a PFIC, our U.S. shareholders may suffer adverse tax consequences, including having gains realized on the sale of our ordinary shares treated as ordinary income, rather than capital gain, the loss of the preferential rate applicable to dividends received on our ordinary shares by individuals who are U.S. Holders (as defined in “Taxation and Government Programs — United States Federal Income Taxation”), and having interest charges apply to distributions by us and the proceeds of share sales. See “Taxation and Government Programs — United States Federal Income Taxation.”

We are a “foreign private issuer” and have disclosure obligations that are different from those of U.S. domestic reporting companies.

We are a foreign private issuer and are not subject to the same requirements that are imposed upon U.S. domestic issuers by the SEC. Under the Exchange Act, we will be subject to reporting obligations that, in certain respects, are less detailed and less frequent than those of U.S. domestic reporting companies. For example, we will not be required to issue quarterly reports, proxy statements that comply with the requirements applicable to U.S. domestic reporting companies, or individual executive compensation information that is as detailed as that required of U.S. domestic reporting companies. We will also have four months after the end of each fiscal year to file our annual reports with the SEC and will not be required to file current reports as frequently or promptly as U.S. domestic reporting companies. Furthermore, our officers, directors and principal shareholders will be exempt from the requirements to report short-swing profit recovery contained in Section 16 of the Exchange Act.

As we are a “foreign private issuer” and intend to follow certain home country corporate governance practices, our shareholders may not have the same protections afforded to shareholders of companies that are subject to all Nasdaq corporate governance requirements.

As a foreign private issuer, we have the option to follow certain Israeli corporate governance practices rather than those of Nasdaq, except to the extent that such laws would be contrary to U.S. securities laws, and provided that we disclose the requirements we are not following and describe the home country practices we follow instead. We intend to rely on this “foreign private issuer exemption” with respect to the Nasdaq requirements to have a majority of independent directors on our board of directors, shareholder approval requirements in respect of equity issuances and equity-based compensation plans, the requirement to have independent oversight on our director nominations process and the quorum requirement for meetings of our shareholders. We may in the future elect to follow home country practices in Israel with regard to other

 

 

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matters. As a result, our shareholders may not have the same protections afforded to shareholders of companies that are subject to all Nasdaq corporate governance requirements. See “Management — Corporate Governance Practices.”

We do not intend to pay dividends.

We have not recently declared or paid any cash dividends on our ordinary shares and do not intend to pay any cash dividends. Any future agreements may contain terms prohibiting or limiting the amount of dividends that may be declared or paid on our ordinary shares. In addition, Israeli law limits our ability to declare and pay dividends, and may subject our dividends to Israeli withholding taxes. We anticipate that we will retain all of our future earnings for use in the development of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors. Accordingly, investors must rely on sales of their ordinary shares after price appreciation, which may never occur, as the only way to realize any future gains on their investments.

You will experience immediate and substantial dilution in the net tangible book value of ordinary shares purchased.

The initial public offering price per ordinary share will be substantially higher than the net tangible book value per ordinary share prior to the offering. Consequently, when you purchase ordinary shares in the offering, you will incur an immediate dilution of $     per ordinary share (assuming the underwriters do not exercise their over-allotment option), representing the difference between our net tangible book value per ordinary share as of December 31, 2012, after giving effect to this offering, and the initial public offering price of $      per ordinary share (which is the mid-point of the estimated offering price range on the cover page of this prospectus).

Our management will have broad discretion over how to use the proceeds from this offering.

We intend to use the net proceeds from this offering for general corporate purposes, which may include the funding of future clinical trials for our existing product pipeline, expanding our distribution capabilities to additional territories, expanding manufacturing capacity and infrastructure, research and development for additional AAT indications, and acquisitions or in-licensing of new products. However, depending on future developments and circumstances, we may use some of the proceeds for other purposes. Our management will have significant flexibility and discretion in applying the net proceeds we receive from this offering. The net proceeds could be applied in ways that do not improve our operating results or in ways with which you may not agree. The actual amounts and timing of these expenditures will vary significantly depending on a number of factors, including the amount of cash used in or generated by our operations and the market response to the introduction of any new product offerings.

We have not yet determined whether our existing internal controls over financial reporting are compliant with Section 404 of S-OX, and we cannot assure you that there are no material weaknesses or significant deficiencies in our existing internal controls.

Section 404(a) of S-OX and the related rules adopted by the SEC and the Public Company Accounting Oversight Board will require our management to report on the effectiveness of our internal control over financial reporting beginning with the second annual report that we file with the SEC after the completion of this offering. Beginning with that same report, Section 404(b) of S-OX will require our independent registered public accounting firm to attest to the effectiveness of our internal control over financial reporting, although as an “emerging growth company” under the JOBS Act, we will have the option to defer compliance with the requirements of Section 404(b) until we no longer qualify as an “emerging growth company,” as described below.

We have not yet begun the process of determining whether our existing internal controls over financial reporting are compliant with Section 404 and whether there are any material weaknesses or significant deficiencies in our existing internal controls. This process will require the investment of substantial time and resources, including by our Chief Financial Officer and other members of our senior management. It could, therefore, divert internal resources and take a significant amount of time, effort and expense to complete.

 

 

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In addition, we cannot predict whether we will determine that we have effective controls over financial reporting or whether we will need to implement remedial actions in order to implement effective controls. This determination and any required remedial actions could result in our incurring additional, unexpected costs. As a result, we may experience higher than anticipated operating expenses, as well as higher independent auditor fees during and after the implementation of these changes. Further, any failure of our internal controls could result in an adverse opinion from our auditors or have a material adverse effect on our stated results of operations, either of which could harm our reputation and cause investors to lose confidence in the reliability of our financial reporting, thereby adversely affecting the value of our ordinary shares.

We are an “emerging growth company” with reduced reporting requirements that may make our ordinary shares less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and may take advantage of certain exemptions from various reporting requirements that are applicable to public companies generally. As discussed above, for so long as we remain an emerging growth company, we may elect not to have our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting, as would otherwise be required by Section 404(b) of S-OX. This may increase the risk that we fail to detect and remedy any weaknesses or deficiencies in our internal control over financial reporting.

In general, these reduced reporting requirements may allow us to refrain from disclosing information that you may find important. It is also possible that investors may generally find our ordinary shares less attractive because of our status as an emerging growth company and our more limited disclosure. Any of the foregoing could adversely affect the price and liquidity of our ordinary shares.

We may take advantage of these disclosure exemptions until we are no longer an “emerging growth company.” We will cease to be an “emerging growth company” upon the earliest of:

•

the last day of the fiscal year in which the fifth anniversary of this offering occurs;

•

the last day of the fiscal year in which our annual gross revenues are $1 billion or more;

•

the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt securities; or

•

the last day of any fiscal year in which the market value of our ordinary shares held by non-affiliates exceeded $700 million as of the end of the second quarter of that fiscal year.

Risks Relating to Our Incorporation and Location in Israel

Conditions in Israel could adversely affect our business.

We are incorporated under Israeli law and our principal offices and manufacturing facilities are located in Israel. Accordingly, political, economic and military conditions in Israel directly affect our business. Since the State of Israel was established in 1948, a number of armed conflicts have occurred between Israel and its Arab neighbors. Although Israel has entered into various agreements with Egypt, Jordan and the Palestinian Authority, there has been an increase in unrest and terrorist activity, which began in September 2000 and has continued with varying levels of severity through 2012. Starting in December 2008, for approximately three weeks, Israel engaged in an armed conflict with Hamas in the Gaza Strip, which involved missile strikes against civilian targets in various parts of Israel and negatively affected business conditions in Israel. In November 2012, for approximately one week, Israel experienced a similar armed conflict, resulting in hundreds of rockets being fired from the Gaza Strip and disrupting most day-to-day civilian activity in southern Israel, the location of our manufacturing facility. In the event that our facilities are damaged as a result of hostile action or hostilities otherwise disrupt the ongoing operation of our facilities or the airports and seaports on which we depend to import and export our supplies and products, our ability to manufacture and deliver products to customers could be materially adversely affected.

Several countries, principally in the Middle East, still restrict doing business with Israel and Israeli companies, and additional countries may impose restrictions on doing business with Israel and Israeli companies if hostilities in Israel or political instability in the region continues or increases. These restrictions

 

 

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may limit materially our ability to obtain raw materials from these countries or sell our products to companies in these countries. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners, or significant downturn in the economic or financial condition of Israel, could adversely affect our operations and product development, cause our sales to decrease and adversely affect the share price of publicly traded companies having operations in Israel, such as us.

Our operations may be disrupted by the obligations of personnel to perform military service.

As of December 31, 2012, we had 299 employees, all of whom were based in Israel. Our employees may be called upon to perform up to 36 days (and in some cases more) of annual military reserve duty until they reach the age of 40 (and in some cases, up to 45 or older) and, in emergency circumstances, could be called to active duty. In response to increased tension and hostilities, there have been since September 2000 occasional call-ups of military reservists, including in connection with the mid-2006 war in Lebanon, and the December 2008 and November 2012 conflicts with Hamas, and it is possible that there will be additional call-ups in the future. 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 one or more of our key employees for military service. Such disruption could materially adversely affect our business and results of operations. Additionally, the absence of a significant number of the employees of our Israeli suppliers and contractors related to military service or the absence for extended periods of one or more of their key employees for military service may disrupt their operations, in which event our ability to deliver products to customers may be materially adversely affected.

The tax benefits that are available to us require us to continue to meet various conditions and may be terminated or reduced in the future, which could increase our costs and taxes.

One of our Israeli facilities has “Approved Enterprise” status granted by the Investment Center of the Ministry of Industry, Trade and Labor of the State of Israel (the “Investment Center”), under the Israeli Law for the Encouragement of Capital Investments, 1959 (the “Investment Law”), which made us eligible for a grant and certain tax benefits under that law for a certain investment program. The investment program provided us with a grant in the amount of 24% of our approved investments, in addition to certain tax benefits, which will apply to the turnover resulting from the operation of such investment program, for a period of up to ten consecutive years from the first year in which we generated taxable income. The tax benefits under the Approved Enterprise status will expire at the end of 2017.

Additionally, we have obtained a tax ruling from the Israeli Tax Authority according to which, among other things, our activity has been qualified as an “industrial activity,” as defined in the Investment Law, and is also eligible for tax benefits as a “Privileged Enterprise,” which will apply to the turnover attributed to such enterprise, for a period of up to ten years from the first year in which we generated taxable income. The tax benefits under the Privileged Enterprise status are scheduled to expire at the end of 2021.

In order to remain eligible for the tax benefits of an Approved/Privileged Enterprise, we must continue to meet certain conditions stipulated in the Investment Law and its regulations, as amended. In addition, in order to remain eligible for the tax benefits available to the Approved Enterprise, we must also comply with the criteria set forth in the applicable certificate of approval, and in the case of the Privileged Enterprise, we must also comply with the conditions set forth in the tax ruling. These conditions include, among other things, that the production, directly or through subcontractors, of all our products should be performed within certain regions of Israel. If we do not meet these requirements, the tax benefits would be reduced or canceled and we could be required to refund any tax benefits that we received in the past, in whole or in part, linked to the Israeli consumer price index, together with interest. Further, these tax benefits may be reduced or discontinued in the future. For example, while we do not expect that the transfer of manufacturing of Glassia to Baxter would result in the reduction or loss of these tax benefits, the Israeli Tax Authority may determine otherwise. If these tax benefits are canceled, our Israeli taxable income would be subject to regular Israeli corporate tax rates. The standard corporate tax rate for Israeli companies is currently 25%. For more information about applicable Israeli tax regulations, see “Taxation and Government Programs — Israeli Tax Considerations and Government Programs.”

In the future, we may not be eligible to receive additional tax benefits under the Investment Law if we increase certain of our activities outside of Israel. Additionally, in the event of a distribution of a dividend

 

 

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from the abovementioned tax exempt income, in addition to withholding tax at a rate of 15% (or a reduced rate under an applicable double tax treaty), we will be subject to tax on the otherwise exempt income (grossed-up to reflect the pre-tax income that we would have had to earn in order to distribute the dividend) at the corporate tax rate applicable to our Approved/Privileged Enterprise’s income which would have been applied had we not enjoyed the exemption. Similarly, in the event of our liquidation or a share buyback, we will be subject to tax on the grossed up amount distributed or paid at the corporate tax rate which would have been applied to our Privileged Enterprise’s income had we not enjoyed the exemption. For more information about applicable Israeli tax regulations, see “Taxation and Government Programs — Israeli Tax Considerations and Government Programs.”

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

We are incorporated in Israel. None of our directors and executive officers are residents of the United States and the Israeli experts named in this prospectus are located in Israel. The majority of our assets and the assets of these persons are located outside the United States. Therefore, it may be difficult for an investor, or any other person or entity, to enforce a U.S. court judgment based upon the civil liability provisions of the U.S. federal securities laws against us or any of these persons in a U.S. or Israeli court, or to effect service of process upon these persons in the United States. Additionally, it may be difficult for an investor, or any other person or entity, to assert U.S. securities law claims in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on an alleged violation of U.S. securities laws on the grounds that Israel is not the most appropriate forum in which to bring such a claim. Even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel addressing the matters described above. See “Enforceability of Civil Liabilities.”

Your rights and responsibilities as our shareholder will be governed by Israeli law, which may differ in some respects from the rights and responsibilities of shareholders of U.S. corporations.

Since we are incorporated under Israeli law, the rights and responsibilities of our shareholders are governed by our articles of association and Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders of U.S.-based corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith and in a customary manner in exercising its rights and performing its obligations towards the company and other shareholders and to refrain from abusing its power in the company, including, among other things, in voting at the general meeting of shareholders on certain matters, such as an amendment to the company’s articles of association, an increase of the company’s authorized share capital, a merger of the company and approval of related party transactions that require shareholder approval. A shareholder also has a general duty to refrain from discriminating against other shareholders. In addition, a controlling shareholder or a shareholder who knows that it possesses the power to determine the outcome of a shareholders vote or to appoint or prevent the appointment of an office holder in the company has a duty to act in fairness towards the company. However, Israeli law does not define the substance of this duty of fairness. See “Management — Fiduciary Duties and Approval of Specified Related Party Transactions under Israeli Law — Duties of Shareholders.” Since Israeli corporate law underwent extensive revisions approximately 12 years ago, the parameters and implications of the provisions that govern shareholder behavior have not been clearly determined. These provisions may be interpreted to impose additional obligations and liabilities on our shareholders that are not typically imposed on shareholders of U.S. corporations.

Provisions of Israeli law and our articles of association may delay, prevent or make undesirable an acquisition of all or a significant portion of our shares or assets.

Certain provisions of Israeli law and our articles of association could have the effect of delaying or preventing a change in control and may make it more difficult for a third party to acquire us or for our shareholders to elect different individuals to our board of directors, even if doing so would be beneficial to

 

 

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our shareholders, and may limit the price that investors may be willing to pay in the future for our ordinary shares. For example, Israeli corporate law regulates mergers and requires that a tender offer be effected when more than a specified percentage of shares in a company are purchased. In addition, pursuant to the Israeli Companies Law, 5759-1999 (the “Companies Law”), our articles of association require that a merger receive a 75% special majority approval from our shareholders. We have proposed that our shareholders amend our articles of association prior to the completion of this offering to include a provision under which a merger shall require the approval of 66% of the voting rights represented at the meeting and voting on the matter, in person or by proxy, and that any amendment to such provision shall require the approval of 60% of the voting rights represented at the meeting and voting on the matter, in person or by proxy. Further, Israeli tax considerations may make potential transactions undesirable to us or to some of our shareholders whose country of residence does not have a tax treaty with Israel granting tax relief to such shareholders from Israeli tax. With respect to certain mergers, Israeli tax law may impose certain restrictions on future transactions, including with respect to dispositions of shares received as consideration, for a period of two years from the date of the merger. See “Description of Share Capital — Acquisitions Under Israeli Law.”

 

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that relate to future events or our future financial performance, which express the current beliefs and expectations of our management. Such statements involve a number of known and unknown risks, uncertainties and other factors that could cause our actual future results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements include all statements that are not historical facts and can be identified by words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “likely,” “will,” “would,” “could,” and similar expressions or phrases. We have based these forward-looking statements largely on our management’s current expectations and future events and financial trends that we believe may affect our financial condition, results of operation, business strategy and financial needs. Forward-looking statements include, but are not limited to, statements about:

•

our belief that our relationships with our strategic partners will continue without disruption;

•

our ability to procure adequate quantities of plasma and fraction IV which are acceptable for use in our manufacturing processes from our suppliers;

•

our ability to maintain compliance with government regulations and licenses;

•

our ability to identify growth opportunities for existing products and our ability to identify and develop new product candidates;

•

our belief that the market opportunity for AAT products will grow;

•

the timing of, and our ability to, obtain and/or maintain regulatory approvals for our products and new product candidates, the rate and degree of market acceptance, and the clinical utility of our products;

•

the expected timeline of our development program for our product candidates, including statements about clinical trials and regulatory milestone dates;

•

our anticipation that we will generate higher revenues as we diversify our revenue base by increasing the number of products we offer;

•

legislation or regulation in countries where we sell our products that affect product pricing, reimbursement, access or distribution channels;

•

the impact of geographic and product mix on our total revenues and gross profit; and

•

the impact of our research and development expenses as we continue developing product candidates.

All forward-looking statements involve risks, assumptions and uncertainties. You should not rely upon forward-looking statements as predictors of future events. The occurrence of the events described, and the achievement of the expected results, depend on many events, some or all of which are not predictable or within our control. Actual results may differ materially from expected results. See the sections “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this prospectus for a more complete discussion of these risks, assumptions and uncertainties and for other risks and uncertainties. These risks, assumptions and uncertainties are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results. All of the forward-looking statements we have included in this prospectus are based on information available to us on the date of this prospectus. We undertake no obligation, and specifically decline any obligation, to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this prospectus might not occur.

 

 

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PRICE RANGE OF OUR ORDINARY SHARES

Our ordinary shares have been trading on the TASE under the symbol “KMDA” since August 2005. No trading market currently exists for our ordinary shares in the United States. We will apply to list our ordinary shares on Nasdaq under the symbol “KMDA.”

The following table sets forth, for the periods indicated, the reported high and low closing sale prices of our ordinary shares on the TASE in NIS and U.S. dollars at a rate of $1.00 = NIS 3.73, the exchange rate published by the Bank of Israel as of December 31, 2012.

		NIS								$
		Price Per Ordinary Share								Price Per Ordinary Share
		High				Low				High				Low
Annual:
2012			35.95				19.02				9.64				5.10
2011			33.00				17.65				8.85				4.73
2010			28.13				18.18				7.54				4.87
2009			34.48				4.83				9.24				1.29
2008			40.00				4.55				10.72				1.22
Quarterly:
First Quarter 2013			39.70				33.80				10.64				9.06
Fourth Quarter 2012			37.16				30.50				9.96				8.18
Third Quarter 2012			29.90				25.50				8.02				6.84
Second Quarter 2012			30.51				22.35				8.18				5.99
First Quarter 2012			22.47				19.02				6.02				5.10
Fourth Quarter 2011			24.45				19.66				6.55				5.27
Third Quarter 2011			28.19				17.65				7.56				4.73
Second Quarter 2011			31.85				24.31				8.54				6.52
First Quarter 2011			33.00				25.84				8.85				6.93
Most Recent Six Months:
March 2013			39.70				35.44				10.64				9.50
February 2013			37.01				35.11				9.92				9.41
January 2013			36.90				33.93				9.89				9.10
December 2012			37.16				31.95				9.96				8.57
November 2012			32.64				32.15				8.75				8.62
October 2012			31.55				30.50				8.46				8.18

On April 8, 2013, the last reported sale price of our ordinary shares on the TASE was NIS 38.79 per share, or $10.72 per share (based on the exchange rate reported by the Bank of Israel on such date, which was NIS 3.618 = $1.00).

As of December 31, 2012, there were three shareholders of record of our ordinary shares. The number of record holders is not representative of the number of beneficial holders of our ordinary shares, as 98% of our issued and outstanding shares as of such date were recorded in the name of our nominee company to the TASE, Mizrahi Tefahot Registration Company Ltd.

 

 

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USE OF PROCEEDS

We estimate that our net proceeds from the sale of ordinary shares that we are offering will be approximately $     million, assuming an initial public offering price of $     per share, which is the midpoint of the price range on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed public offering price would increase (decrease) the net proceeds we receive from this offering by $     million.

We intend to use the net proceeds from this offering for:

1.

clinical trials;

2.

research and development for additional AAT indications;

3.

expanding our distribution capabilities to additional territories;

4.

expanding manufacturing infrastructure; and

5.

general corporate purposes.

The expected use of the net proceeds from this offering represents our intentions based upon our current plans and business conditions, which could change in the future as our plans and business conditions evolve. The amounts and timing of our actual expenditures for each enumerated purpose above depend on numerous factors, including the ongoing status of and results from our clinical trials, the progress of our research and development efforts and any unforeseen cash needs. As a result, our management will have broad discretion in applying the net proceeds of this offering.

In addition, we may use a portion of the proceeds from this offering to tender for up to approximately $26.8 million aggregate principal amount of our convertible debentures. The interest rate on our convertible debentures is variable, and is indexed to the rate borne by the Israeli Government Bonds — Series 817, plus a margin of 6.10%. As of December 31, 2012, the interest rate on our convertible debentures was 8.10%. The interest rate on the Series 817 bonds resets every quarter. Our convertible debentures are scheduled to mature commencing on December 1, 2015, with payments of 20%, 40% and 40% of the principal on December 1, 2013, 2014 and 2015, respectively.

 

 

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DIVIDEND POLICY

Since we conducted our initial public offering on the TASE, we have not declared or paid any cash dividends on our ordinary shares. We intend to retain any earnings for use in our business and do not currently intend to pay cash dividends on our ordinary shares. Dividends, if any, on our outstanding ordinary shares will be declared by and subject to the discretion of our board of directors. Even if our board of directors decides to distribute dividends, the form, frequency and amount of such dividends will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors our board of directors may deem relevant.

In addition, the distribution of dividends is limited by Israeli law, which permits the distribution of dividends only out of distributable profits. See “Description of Share Capital — Dividend and Liquidation Rights.” In addition, if we pay a dividend out of income attributed to our Approved/Privileged Enterprise during the tax exemption period, we may be subject to tax on the grossed-up amount of such income at the corporate tax rate which would have been applied to such Approved/Privileged Enterprise’s income had we not enjoyed the exemption. See “Taxation and Government Programs — Israeli Tax Considerations and Government Programs.”

 

 

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CAPITALIZATION

The following table sets forth our capitalization as of December 31, 2012:

•

on an actual basis; and

•

on an as adjusted basis to reflect our sale of      ordinary shares in this offering at an initial public offering price of $     per share, which is the midpoint of the estimated offering price range on the cover page of this prospectus.

You should read this table together with our consolidated financial statements and the related notes, which we include elsewhere in this prospectus, and with the information under “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

		As of December 31, 2012
		Actual				As Adjusted
Cash, cash equivalents and short-term investments		$	33,795			$
Debt:
Convertible Debentures (1)		$	24,105			$
Shareholder’s Equity:
Ordinary shares, NIS 1.00 par value; 60,000,000 shares authorized, 28,665,121 shares issued and outstanding, actual;      shares authorized,      shares issued and outstanding, as adjusted			7,204
Warrants
Additional paid in capital			96,874
Conversion option in convertible debentures			3,794
Other capital reserves			4,614
Capital reserve due to translation to presentation currency			(3,490	)
Cash flow hedge reserve			229
Accumulated deficit			(80,691	)
Total shareholder’s equity			28,534
Total capitalization		$	52,639

(1)

Convertible debentures represents NIS 100 million ($26.8 million) aggregate principal amount of our convertible debentures, which are convertible into our ordinary shares at a price of NIS 37.12 (or approximately $9.95 per share)

The number of our ordinary shares outstanding as of December 31, 2012 excludes:

•

1,554,781 ordinary shares (not including 150,000 options granted to David Tsur, our Chief Executive Officer, which were approved in December 2012 and amended in April 2013 by our compensation committee and board of directors but are subject to shareholder approval at our general shareholders meeting) issuable upon the exercise of options issued as incentive compensation outstanding as of December 31, 2012, at a weighted average exercise price of NIS 19.76 (or approximately $5.30), per share;

•

22,576 ordinary shares issuable upon the exercise of warrants outstanding as of December 31, 2012, at weighted average exercise price of NIS 29.89 (or approximately $8.01), per share; and

•

2,693,965 ordinary shares issuable upon the conversion of NIS 100 million ($26.8 million) aggregate principal amount of convertible debentures outstanding as of December 31, 2012, at a conversion price of NIS 37.12 (or approximately $9.95) per share.

 

 

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DILUTION

If you invest in our ordinary shares in this offering, your interest will be diluted to the extent of the difference between the public offering price per ordinary share and the net tangible book value per ordinary share after this offering. We determine our net tangible book value per ordinary share as of any date by taking the amount of our total tangible assets, subtracting the amount of our total liabilities, and dividing the difference by the total number of our ordinary shares outstanding as of the given date.

As of December 31, 2012, our net tangible book value was $28.3 million, or $0.99 per ordinary share. After giving effect to our sale in this offering of      ordinary shares at an assumed initial public offering price of $      per share, which is the midpoint of the estimated offering price range on the cover page of this prospectus, and after deducting the underwriting discount and the estimated offering expenses payable by us, our net tangible book value as of December 31, 2012 would have been $      million, or $      per ordinary share. This represents an immediate increase of net tangible book value of $      million to our existing shareholders and an immediate dilution of $      per ordinary share to investors purchasing shares in this offering. The following table illustrates this dilution.

Initial public offering price per ordinary share						$
Net tangible book value per ordinary share as of December 31, 2012, before giving effect to this offering		$
Increase in net tangible book value per ordinary share attributable to investors purchasing shares in this offering
Net tangible book value per ordinary share after giving effect to this offering
Dilution per ordinary share to investors purchasing shares in this offering						$

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

If the underwriters fully exercise their overallotment option, the net tangible book value per ordinary share after giving effect to this offering would be $     per ordinary share, and the dilution in pro forma net tangible book value per ordinary share to investors in this offering would be $     per ordinary share.

The following table presents the differences between the total consideration paid to us and the average price per ordinary share paid by directors or senior management and their respective affiliates and by new investors purchasing ordinary shares in this offering, before deducting underwriting discounts and commissions and the estimated offering expenses payable by us.

Ordinary Shares Purchased

Total Consideration

Average Price Per Ordinary Share

Number

Percent

Amount

Percent

Directors and senior management and their respective affiliates

$

$

$

New investors

Total

$

$

 

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following table summarizes our consolidated financial data. We have derived the summary consolidated statements of operations data for the years ended December 31, 2012, 2011 and 2010 and the consolidated balance sheets data as of December 31, 2012 and 2011 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the summary consolidated balance sheet data as of December 31, 2010 from our audited consolidated financial statements not included in this prospectus.

We have included, in our opinion, all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the financial information set forth in those statements. Our historical results are not necessarily indicative of the results that should be expected in the future, and our interim results are not necessarily indicative of the results that should be expected for the full year.

The summary of our consolidated financial data set forth below should be read together with our consolidated financial statements and the related notes, as well as the section entitled “Summary Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this prospectus.

 

 

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		Year Ended December 31,
		2012				2011				2010
		(in thousands, except per share data)
Consolidated Statements of Operations Data:
Revenues from Proprietary Products		$	46,445			$	35,308			$	22,980
Revenues from Distribution			26,230				24,175				11,497
Total revenues			72,675				59,483				34,477
Cost of revenues from Proprietary Products			26,911				22,188				18,878
Cost of revenues from Distribution			23,071				20,574				9,827
Total cost of revenues			49,982				42,762				28,705
Gross profit			22,693				16,721				5,772
Research and development expenses			11,821				11,729				9,279
Selling and marketing expenses			1,853				2,331				2,152
General and administrative expenses			4,781				5,126				4,543
Operating income (loss)			4,238				(2,465	)			(10,202	)
Financial income			578				870				560
Income (expense) in respect of currency exchange and translation differences and derivatives instruments, net			(100	)			937				(1,052	)
Income (expense) in respect of revaluation of warrants to fair value			(576	)			540				(640	)
Financial expense			(3,357	)			(3,597	)			(3,088	)
Income (loss) before taxes on income			783				(3,715	)			(14,421	)
Taxes on income			523				—				—
Net income (loss)		$	260			$	(3,715	)		$	(14,421	)
Income (loss) attributable to equity holders		$	260			$	(3,715	)		$	(14,421	)
Income (loss) per share attributable to equity holders:
Basic		$	0.01			$	(0.13	)		$	(0.54	)
Diluted		$	0.01			$	(0.15	)		$	(0.54	)
Weighted-average number of ordinary shares used to compute income (loss) per share attributable to equity holders:
Basic			28,078,996				27,550,643				26,674,717
Diluted			28,686,636				27,703,331				26,674,717
Pro forma earnings per share attributable to equity holders (1) :
Basic		$				$
Diluted		$				$
Consolidated Statements of Cash Flows:
Cash flows from operating activities		$	(8,262	)		$	994			$	10,037
Cash flows from investing activities			(2,432	)			(1,136	)			(22,183	)
Cash flows from financing activities			2,966				(403	)			7,430
Other Data:
Adjusted net income (loss) (2) (3)		$	2,103			$	(3,377	)		$	(12,161	)
Adjusted EBITDA (2) (4)			8,549				1,453				(5,941	)

 

 

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		As of December 31,
		2012								2011				2010
		As Adjusted (5)				Actual
		(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents, restricted cash and short-term investments		$				$	33,795			$	42,686			$	46,071
Trade receivables							13,861				7,131				12,827
Working capital (6)							40,651				44,185				51,545
Total assets							89,114				85,114				91,496
Total liabilities							60,580				62,529				65,016
Total shareholders’ equity							28,534				22,585				26,480

(1)

Pro forma basic and diluted earnings per share have been computed to give effect to the sale by us of ordinary shares in this offering.

(2)

We present adjusted net income (loss) and adjusted EBITDA because we use these non-IFRS financial measures to assess our operational performance, for financial and operational decision-making, and as a means to evaluate period-to-period comparisons on a consistent basis. Management believes these non-IFRS financial measures are useful to investors because: (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision making; and (2) they exclude the impact of non-cash items that are not directly attributable to our core operating performance and that may obscure trends in the core operating performance of the business.

Non-IFRS financial measures have limitations as an analytical tool and should not be considered in isolation from, or as a substitute for, our IFRS results. We expect to continue reporting non-IFRS financial measures, adjusting for the items described below, and we expect to continue to incur expenses similar to the non-cash, non-IFRS adjustments described below. Accordingly, unless otherwise stated, the exclusion of these and other similar items in the presentation of non-IFRS financial measures should not be construed as an inference that these items are unusual, infrequent or non-recurring. Adjusted net income (loss) and adjusted EBITDA are not recognized terms under IFRS and do not purport to be an alternative to IFRS net income (loss) as an indicator of operating performance or any other IFRS measure. Moreover, because not all companies use identical measures and calculations, the presentation of adjusted net income (loss) or adjusted EBITDA may not be comparable to other similarly titled measures of other companies.

(3)

Adjusted net income (loss) is defined as net income (loss), plus share-based compensation charges and plus or minus expense or income in respect of revaluation of our warrants to fair value. Our management believes that excluding non-cash charges related to share-based compensation provides useful information to investors because of its non-cash nature, varying available valuation methodologies among companies and the subjectivity of the assumptions and the variety of award types that a company can use under the relevant accounting guidance, which may obscure trends in our core operating performance. Similarly, our management believes that excluding the non-cash income (expense) in respect of revaluation of our warrants to fair value is useful to investors because the valuation of our warrants is based on a number of subjective assumptions, the amount of the loss or gain is derived from market forces outside management’s control, and it enables investors to compare our performance with other companies that have different capital structures. Additionally, the revaluation of the fair value of our warrants is not expected to recur in future periods after the first quarter of 2013, as the warrants were exercised in the first quarter of 2013.

 

 

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The table below shows adjusted net income (loss) and also reconciles these figures to the IFRS measure net income (loss):

		Year Ended December 31,
		2012				2011				2010
		(in thousands of dollars)
Net income (loss)		$	260			$	(3,715	)		$	(14,421	)
Share-based compensation charges			1,267				878				1,620
Expense (income) in respect of revaluation of warrants to fair value			576				(540	)			640
Adjusted net income (loss)		$	2,103			$	(3,377	)		$	(12,161	)

(4)

Adjusted EBITDA is defined as net income (loss), plus income tax expense, plus financial expense, net, plus depreciation and amortization expense, plus share-based compensation charges, plus or minus income or expense in respect of translation differences and derivatives instruments not designated as hedging and plus or minus income or expense in respect of revaluation of our warrants to fair value. Management believes that adjusted EBITDA provides useful information to investors for the same reasons discussed above for adjusted net income (loss)

The table below shows adjusted EBITDA and also reconciles these figures to the IFRS measure net income (loss):

		Year Ended December 31,
		2012				2011				2010
		(in thousands of dollars)
Net income (loss)		$	260			$	(3,715	)		$	(14,421	)
Income tax expense			523				—				—
Financial expense, net			2,779				2,727				2,528
Depreciation and amortization expense			3,044				3,040				2,640
Share-based compensation charges			1,267				878				1,620
Income (expense) in respect of translation differences and derivatives instruments, net			100				(937	)			1,052
Expense (income) in respect of revaluation of warrants fair value			576				(540	)			640
Adjusted EBITDA		$	8,549			$	1,453			$	(5,941	)

(5)

Adjusted amounts give effect to our sale of      ordinary shares at an assumed initial public offering price of $     per share, which is the midpoint of the estimated offering price range on the cover page of this prospectus, and after deducting the underwriting discounts and commissions, and estimated offering expenses payable by us, as set forth under “Use of Proceeds.”

(6)

Working capital is defined as total current assets minus total current liabilities.

 

 

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

The following discussion of our financial condition and results of operations should be read in conjunction with “Selected Consolidated Financial Data”, “Summary Consolidated Financial Data” and our consolidated financial statements and the related notes to those statements included elsewhere in this prospectus. In addition to historical consolidated financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Risk Factors” and elsewhere in this prospectus.

The audited consolidated financial statements as of December 31, 2012 and 2011 and for the years ended December 31, 2012, 2011 and 2010 in this prospectus have been prepared in accordance with IFRS as issued by the IASB. None of the financial information in this prospectus has been prepared in accordance with U.S. GAAP.

Overview

We are an orphan drug focused, plasma-derived protein therapeutics company with an existing marketed product portfolio and a robust late-stage product pipeline. We develop and produce specialty plasma-derived protein therapeutics and currently market these products through strategic partners in the United States and directly, through local distributors, in several emerging markets. We use our proprietary platform technology and know-how for the extraction and purification of proteins from human plasma to produce AAT in a high purity, liquid form, as well as other plasma-derived proteins. AAT is a protein derived from human plasma with known and newly discovered therapeutic roles given its immuno-modulatory, anti-inflammatory, tissue protective and antimicrobial properties. Our flagship product, Glassia, is the first and only liquid, ready-to-use, intravenous plasma-derived AAT product approved by the FDA. We market Glassia through a strategic partnership with Baxter International Inc. in the United States. Additionally, we have a product line consisting of nine other injectable pharmaceutical products which are marketed, in addition to Glassia, in more than 15 countries, including Israel, Russia, Brazil, India and other countries in Latin America, Eastern Europe and Asia. We currently have five plasma-derived protein products in our development pipeline, including Inhaled AAT for AATD that is in pivotal Phase II/III clinical trials in Europe and entering into Phase II clinical trials in the United States. In addition, we leverage our expertise and presence in the plasma-derived protein therapeutics market by distributing ten complementary products in Israel that are manufactured by third parties. We have generated an operating profit of $4.2 million for the year ended December 31, 2012. Our total revenues have grown from approximately $14.4 million in the year ended December 31, 2009 to $72.7 million in the year ended December 31, 2012, representing a 71% compound annual growth rate.

Our Segments

We operate in two segments: the Proprietary Products segment, in which we develop and manufacture plasma-derived therapeutics and market them in more than 15 countries, and the Distribution segment, in which we distribute drugs for critical use in Israel, which are manufactured by third-parties, most of which are produced from plasma or its derivative products.

Segment performance is evaluated based on revenues and gross profit (loss). Items that are not allocated to our segments consist mainly of research and development costs, sales and marketing expenses, general and administrative costs and financial expenses, net, each of which are managed on a group basis. For the year ended December 31, 2012, we derived $46.4 million of revenues from our Proprietary Products segment, or 64% of total revenues, and $26.2 million of revenues from our Distribution segment, or 36% of total revenues. For the year ended December 31, 2011, we derived $35.3 million of revenues from our Proprietary Products segment, or 59% of total revenues, and $24.2 million of revenues from our Distribution segment, or 41% of total revenues.

Factors Affecting Our Results of Operations

Strategic Partnerships

In July 2010, we received FDA approval for the marketing of Glassia in the United States. Following this approval, we entered into a strategic arrangement with Baxter for the marketing and distribution of Glassia in

 

 

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the United States, Canada, Australia and New Zealand and for the licensing of our technology, granting Baxter rights to manufacture Glassia for sales in these territories. We began recognizing revenues from sales of Glassia in the United States under this strategic arrangement with Baxter in September 2010. From the inception of the strategic arrangement through December 31, 2012, we have received $30.0 million from Baxter for distribution rights, a portion of which has been accrued as deferred revenue, and for achieving milestones set forth in the distribution and licensing agreements. We have recognized cumulative revenues until December 31, 2012 from Baxter in the amount of $65.6 million. We currently generate revenues from sales of Glassia to Baxter, and incur cost of revenues to produce it. Baxter has the right to begin producing Glassia itself, which is expected to occur in 2015, and pay us royalties. As Baxter transitions to producing Glassia in its own facilities, our capacity will become available to produce inhaled formulations of AAT, AAT products for sale in other geographies and indications, or other plasma-derived products. We would generate higher margins from royalties from Baxter under this arrangement, as we would not incur cost of revenues, but we may receive lower revenues. We expect to replace those lower revenues by producing and selling other products, including inhaled formulations of AAT and Glassia (if approved) in Europe.

In August 2012, we also entered into a strategic agreement with Chiesi, pursuant to which Chiesi will be an exclusive distributor of Inhaled AAT for AATD in Europe. Chiesi will be responsible for, among other things, product marketing, patient screening and obtaining reimbursement approvals for the Inhaled AAT for AATD product. As part of the agreement, we are entitled to receive payments of up to $60.0 million, contingent on meeting regulatory and sales milestones. In addition, Chiesi has committed to purchase Inhaled AAT for AATD in minimum quantities following the second anniversary of obtaining certain regulatory and reimbursement approvals.

In addition, in July 2011, we signed a strategic agreement with Kedrion to cooperate in the clinical development and exclusive marketing and sales in the United States of KamRAB, our vaccine against rabies in humans. Kedrion markets its products in Europe, the United States and in approximately 40 other countries worldwide. We have not yet started to generate revenues under this agreement as Kedrion is in the process of commencing the Phase III clinical trials in the United States.

Product Development Costs

Since the founding of our company, we have focused on developing a broad portfolio of plasma-derived protein therapeutics for a variety of indications. The development of plasma-derived protein therapeutics is characterized by significant up-front product development costs, including, for example, costs for conducting clinical trials to obtain regulatory approvals, costs for materials for development, external consulting fees and opportunity costs for reallocating our production facility to produce clinical trial materials. In order to reduce costs related to the development and regulatory approval of new protein therapeutics, we seek to share development costs with strategic partners, such as Baxter for the clinical trials for Glassia in the United States and Kedrion for the clinical trials for KamRAB in the United States. See “Business — Strategic Partnerships — Baxter (Glassia)” and “Business — Strategic Partnerships — Kedrion (KamRAB).”

Product development costs may fluctuate from period to period, as our product candidates pass through various stages of development. For example, for the years ended December 31, 2012 and 2011, we incurred significant research and development expenses related to two ongoing clinical trials related to Inhaled AAT for AATD in Europe and the use of AAT for the treatment of newly diagnosed Type-1 diabetes. We expect to continue to incur research and development expenses related to clinical trials, as well as other ongoing, planned or future clinical trials with regards to our product pipeline. See “Business — Our Product Pipeline and Development Program.

Product Competition

The worldwide market for pharmaceuticals in general and biopharmaceutical and plasma products in particular has in recent years undergone a process of mergers and acquisitions among companies active in such markets. This trend has led to a reduction in the number of competitors in the market, and the strengthening of the remaining competitors, mainly for specific immunoglobulin products.

While there are additional producers of AAT products in Europe and the United States, including Baxter, we have not seen significant changes in these producers’ activities in the market. Additionally, our strategic

 

 

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alliance with Baxter has strengthened our competitive positioning in the market and we believe this will contribute to increased revenues in the future.

In our Distribution segment, in recent periods, we have benefitted from the temporary suspension in sales in Israel of two of our competitors’ IVIG products. These competing IVIG products have returned to the market in 2013. As such, we expect to see increased competition for our Distribution segment products. Based on the results of the recent tenders for 2013, we expect that revenues from our Distribution segment will decrease in 2013 due to such renewed competition.

Costs of Raw Materials

In our Proprietary Products segment, a significant portion of our manufacturing costs are for raw materials consisting of plasma or fraction IV. The consolidation among plasma companies has led to a decrease in the number of plasma suppliers in the world, as either manufacturers of plasma-based pharmaceuticals purchase plasma suppliers or plasma suppliers are shut down in response to the number of manufacturers of plasma-based pharmaceuticals decreasing. In addition, in recent years, we have seen an increase in the development efforts for new plasma-derived products.

Historically, we have not been subject to significant pricing fluctuations for plasma or fraction IV due to the consolidation of plasma suppliers or increased development efforts. Additionally, in order to attempt to prevent future price fluctuations and ensure the availability of plasma and fraction IV, we have secured supply of plasma and fraction IV from multiple suppliers at fixed prices (subject to adjustments for inflation) for predetermined quantities.

In our Distribution segment, our costs are for the purchase of products for sale from our distributors. Our annual purchases are forecasted each year with each distributor, but individual product purchases during the year are made on a purchase order basis. We do not have minimum purchase obligations, and as such, are able to respond accordingly to pricing fluctuations that occur year to year. Historically, we have not seen significant price fluctuations from our two largest suppliers. Absent material changes in the market, such as a significant increase in the price of plasma or plasma-derivatives, we do not expect a significant increase in the cost of purchasing products.

Growing Demand

Over the past few years, we have seen an increase in demand for products in our Proprietary Products segment. Technological improvements and increased awareness permit innovations in the diagnosis of the illnesses and symptoms that our products are designed to treat. For example, demand in certain emerging markets such as Russia, Brazil and India for plasma-derived products have grown and are expected to continue to grow. This demand is driven by enhanced socioeconomic conditions and more informed patients who are demanding better quality medical care, as well as increasing government healthcare spending on plasma derivative products in some of these markets. More informed patients are demanding the use of drugs based on human antibodies obtained from human plasma rather than antibodies obtained from animal blood, which generally have a lower standard of quality and safety.

Additionally, in the United States and Europe, we believe that AATD is currently significantly under-identified and under-treated, as we estimate that only approximately 5% and 2% of all potential cases of AATD are treated in the United States and Europe, respectively, with an aggregate of up to an estimated 200,000 patients suffering from AATD, of which lesss than 10% have been disgnosed. We expect that our market opportunity for our AAT products, including Glassia and Inhaled AAT for AATD (if approved), will continue to grow as awareness of AATD expands due to factors such as marketing activities, inexpensive and effective diagnosis tools, and improved training. In addition, various awareness and patient identification programs initiated by companies producing AATD treatments are expected to increase demand for Glassia and, once approved, Inhaled AAT for AATD. In addition, our product pipeline is focused on products for indications that will address markets in which we believe have a significant market opportunity, such as indications for the treatment of cystic fibrosis and newly diagnosed Type-1 diabetes.

 

 

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Key Components of Our Results of Operations

Revenues

In our Proprietary Products segment, we generate revenues from the sale of products and the licensing of our technology to strategic partners. Historically, we have derived most of our revenues from the sale of products and to a lesser extent from payments by the Israeli government related to our snake bite antiserum product. In the years ended December 31, 2012, 2011 and 2010, we derived a significant portion of our total revenues from sales of Glassia to Baxter. Sales to Baxter accounted for approximately 42%, 41% and 30% of our total revenues in the years ended December 31, 2012, 2011 and 2010, respectively. We expect sales of Glassia to Baxter will be stable in the next year or two and grow after that, until Baxter begins production of Glassia, at which time our sales to Baxter will be reduced as they are replaced by royalties from Baxter. As a result of the timing of Baxter’s orders for Glassia and our expected timetable for receiving FDA approval for our production processes changes, which is expected during the second half of 2013 (see “Business — Manufacturing and Supply”), revenue in 2013 from sales to Baxter will mainly be recognized during the second half of the year.

In our Distribution segment, we generate revenues from the sale in Israel of products produced by third parties, which, in the years ended December 31, 2012 and 2011, has increased significantly due to a temporary reduction in sales of our competitors’ IVIG products in the Israeli market. Sales of IVIG accounted for approximately 26%, 29% and 18% of our total revenues for the years ended December 31, 2012, 2011 and 2010, respectively.

In the future, as we further commercialize our products, we expect to derive a greater percentage of our revenues from our Proprietary Products segment, mainly as a result of continued growth in sales of our existing products, the launch of new AAT products currently in different development phases and reduced revenues from our Distribution segment due to the factors described above.

Cost of Revenues and Gross Profit

Cost of revenues in our Proprietary Products segment includes expenses for the manufacturing of products such as raw materials, payroll, utilities, laboratory costs and depreciation. Cost of revenues also includes provisions for write-downs of inventories and inventory write offs. Costs of revenues in our Distribution segment consists of costs of products acquired, packaging and labeling for sales by us in Israel.

In addition to the successful strategic partnership with Baxter and successful penetration of the U.S. market, we have focused during the years ended December 31, 2012 and 2011 on increasing our production outputs and improving profitability. In addition, implementing significant technology improvements and streamlining our manufacturing process resulted in significantly increased manufacturing capacity at our facility. The increase in production capacity led to a further increase in profitability and, following the strategic partnership with Baxter, enabled us to achieve economies of scale and lower our per unit costs. We have been implementing production improvements for Glassia that we expect will lead to improved margins and higher productivity in anticipation of additional applications for AAT. FDA approval for such processes is pending and required before we can distribute products produced by the improved processes and realize any expected margin benefits.

Gross profit is the difference between total revenues and the cost of revenues. Gross profit is mainly affected by volume of sales and launching new products, cost of raw materials and plant maintenance and overhead. We have seen an increase in gross profitability in recent years as a result of the increase in our sales and the corresponding reduction in per unit costs attributable to greater production output.

Our gross margins are generally higher in our Proprietary Products segment (42.1% for the year ended December 31, 2012), reflecting higher margins on our proprietary products than in our Distribution segment (12.0% for the year ended December 31, 2012). We expect that our overall gross margins will increase to the extent that our sales from Proprietary Products segment increase as a percentage of our total sales (which we expect to occur in 2013), and we expect our gross margins in the Proprietary Products segment to increase further to the extent that our sales of Glassia (or other AAT products) increase as these products have higher gross margins than our immunoglobulin proprietary products.

 

 

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Research and Development Expenses

Research and development expenses are incurred for the development of new products and processes and include conducting clinical trials, development materials, payroll, including scientists and professionals for product registration and approval, external advisors and the allotted cost of our manufacturing facility for research and development purposes. While research and development expenses are unallocated on a segment basis, the activities generally relate to our Proprietary Products segment.

We expect our research and development expenses to increase annually over the next couple of years to reflect our plan to fund certain additional clinical trials for AAT for certain indications. However, actual spending could differ as our plans change and we invest in other drugs or potentially reduce our anticipated funding on research for existing products.

Selling and Marketing Expenses

Selling and marketing expenses principally consist of expenditures incurred for advertising, marketing or promotional activities, shipping and handling costs, product liability insurance and business development activities, as well as marketing authorization fees to regulatory agencies. Due to our strategic partnerships in our Proprietary Products segment, we expect these costs to remain at a similar level. However, we may incur higher expenses in the future, as we have not entered into strategic partnerships for all of our pipeline products, which we may decide to sell using our own direct sales force. We market our products in our Distribution segment to health maintenance organizations and hospitals in Israel.

General and Administrative Expenses

General and administrative expenses consist of compensation for employees in executive and administrative functions (including payroll, bonus, equity compensation and other benefits), office expenses, professional consulting services, legal and audit fees as well as team development. We expect general and administrative expenses to remain stable; however, they may increase due to expenses related to being a public company in the United States.

Financial Income

Financial income is comprised of interest income on amounts invested, in bank deposits and short-term investments and changes in fair value of financial instruments at fair value through profit or loss.

Income (expense) in respect of currency exchange and translation differences and derivatives instruments

Income (expense) in respect of currency exchange and translation differences and derivatives instruments are comprised of changes on balances in currencies other than our functional currency. As a result of changing our functional currency in 2012 from NIS to U.S dollar, the income (expense) in respect of translation differences are generated (incurred) due to differences on balances in other currencies versus the U.S dollar, while before 2012, it was generated due to other currencies versus the NIS. Changes in the fair value of derivatives instruments not designated as hedging instruments are reported to profit or loss.

Income (expense) in respect of revaluation of warrants to fair value

Income (expense) in respect of revaluation of warrants to fair value comprised of a change in the fair value of warrants as a result of change in shares prices and expected life of warrants, which impact the fair value of the liability at the end of each reporting period. We do not expect to record any further income (expense) in respect of the revaluation of warrants to fair value starting in the second quarter of 2013 because the remaining outstanding warrants as of December 31, 2012 were exercised during the first quarter of 2013.

Financial Expenses

Financial expenses are comprised of changes in the time value of provisions, changes in the fair value of financial assets at fair value through profit and interest and amortization of discount on convertible debentures.

Taxes on Income

We have not been required to pay income taxes since 1997 other than tax withheld in a foreign jurisdiction in 2012.

 

 

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One of our Israeli facilities has Approved Enterprise status granted by the Investment Center under the Investment Law, which made us eligible for a grant and certain tax benefits under that law for a certain investment program. The investment program provided us with a grant in the amount of 24% of our approved investments, in addition to certain tax benefits, which will apply to the turnover resulting from the operation of such investment program, for a period of up to ten consecutive years from the first year in which we generated taxable income. The tax benefits under the Approved Enterprise status will expire at the end of 2017. Additionally, we have obtained a tax ruling from the Israeli Tax Authority according to which, among other things, our activity has been qualified as an “industrial activity,” as defined in the Investment Law, and is also eligible for tax benefits as a Privileged Enterprise, which will apply to the turnover attributed to such enterprise, for a period of up to ten years from the first year in which we generated taxable income. The tax benefits under the Privileged Enterprise status are scheduled to expire at the end of 2021. As of the date of this prospectus, we have not utilized any tax benefits under the Investment Law, other than the receipt of grants attributable to our Approved Enterprise status.

We may be subject to withholding taxes for payments we receive from foreign countries. If certain conditions are met, these taxes may be credited against future tax liabilities under tax treaties and Israeli tax laws. However, due to our net operating loss carryforwards, it is uncertain whether we will be able to receive such credit and therefore, we may incur tax expenses.

We anticipate that as we further expand our sales into other countries, we could become subject to taxation based on such country’s statutory rates and our effective tax rate could fluctuate accordingly.

As of December 31, 2012, we have net operating loss carryfowards of approximately $73.0 million. The net operating loss carryforwards have no expiration date. Following the full utilization of our net operating loss carryforwards, we expect that our effective income tax rate in Israel will reflect the benefits discussed above.

Results of Operations

The following table sets forth certain statement of operations data:

		Year Ended December 31,
		2012				2011				2010
		(in thousands, except per share data)
Revenues from Proprietary Products		$	46,445			$	35,308			$	22,980
Revenues from Distribution			26,230				24,175				11,497
Total revenues			72,675				59,483				34,477
Cost of revenues from Proprietary Products			26,911				22,188				18,878
Cost of revenues from Distribution			23,071				20,574				9,827
Total cost of revenues			49,982				42,762				28,705
Gross profit			22,693				16,721				5,772
Research and development expenses			11,821				11,729				9,279
Selling and marketing expenses			1,853				2,331				2,152
General and administrative expenses			4,781				5,126				4,543
Operating income (loss)			4,238				(2,465	)			(10,202	)
Financial income			578				870				560
Income (expense) in respect of currency exchange and translation differences and derivatives instruments			(100	)			937				(1,052	)
Income (expense) in respect of revaluation of warrants to fair value			(576	)			540				(640	)
Financial expense			(3,357	)			(3,597	)			(3,088	)
Income (loss) before taxes on income			783				(3,715	)			(14,421	)
Taxes on income			523				—				—
Net income (loss)		$	260			$	(3,715	)		$	(14,421	)

 

 

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Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Segment Results

		Year Ended December 31,								Change 2012 vs. 2011
		2012				2011				Amount				Percent
		(in thousands)
Revenues:
Proprietary Products		$	46,445			$	35,308			$	11,137				31.5	%
Distribution			26,230				24,175				2,055				8.5	%
Total		$	72,675			$	59,483			$	13,192				22.2	%
Cost of Revenues:
Proprietary Products		$	26,911			$	22,188			$	4,723				21.3	%
Distribution			23,071				20,574				2,497				12.1	%
Total		$	49,982			$	42,762			$	7,220				16.9	%
Gross Profit:
Proprietary Products		$	19,534			$	13,120			$	6,414				48.9	%
Distribution			3,159				3,601				(442	)			(12.3	%)
Total		$	22,693			$	16,721			$	5,972				35.7	%

Revenues

In the year ended December 31, 2012, we generated $72.7 million of total revenues, compared to $59.5 million in the year ended December 31, 2011, an increase of $13.2 million, or approximately 22.2%. This increase was primarily due to a $11.1 million increase in our Proprietary Products segment revenues, mainly attributable to an increase in sales volume of Glassia to Baxter mainly due to an increase in the number of patients treated with Glassia, offset by a decrease in milestone payments as we received a $5.0 million milestone payment from Baxter for the achievement of a development-based milestone related to the transfer of technology to Baxter in 2011 that we did not receive in 2012, and a $2.1 million increase in Distribution segment revenues, mainly attributable to an increase in IVIG product sales volume, that grew since 2010 when one of our competitors halted sales of its IVIG product and we were able to fill the additional demand in the market. In our Distribution segment, we generated $19.2 million of revenues from IVIG products and $7.0 million of revenues from other products in the year ended December 31, 2012, compared to $17.5 million of revenues from IVIG products and $6.7 million of revenues from other products in the year ended December 31, 2011.

Cost of Revenues

In the year ended December 31, 2012, we incurred $50.0 million of cost of revenues, compared to $42.8 million in the year ended December 31, 2011, an increase of $7.2 million, or approximately 16.9%. The cost of revenues in our Proprietary Products segment increased by $4.7 million, which was primarily due to the increase in sales volume of Glassia. The cost of revenues in our Distribution segment increased by $2.5 million, which was primarily due to an increase in volume of products sold.

Gross profit in our Proprietary Products segment increased by $6.4 million, primarily due to an increase in production output during the period and improvement in our production processes which yielded higher outputs and resulted in increased profitability due to economies of scale, offset by a decrease in milestone payments as we received a $5.0 million milestone payment from Baxter for the achievement of a development-based milestone related to the transfer of technology to Baxter in 2011 that we did not receive in 2012. Gross profit in our Distribution segment decreased by $0.4 million, which was primarily due to change in the mix of products sold to products with lower margins. As a percentage of total revenues, gross margin was 31.2% and 28.1% for the years ended December 31, 2012 and 2011, respectively. Gross margin for the Proprietary Products segment, as a percentage of revenues from that segment, was 42.1% and 37.2% for the years ended December 31, 2012 and 2011, respectively. Gross margin for the Distribution segment, as a percentage of revenues from that segment, was 12.0% and 14.9% for the years ended December 31, 2012 and 2011, respectively. The increase in gross profit as a percentage of total revenues was primarily driven by our

 

 

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growth in the Proprietary Products segment attributed to growth in revenues from Glassia, which has better margins over our other products in this segment and the revenues recognized from our agreement with Chiesi since August 2012, offset by the decrease in milestone payments from Baxter that were recognized in 2011 but not 2012 and a decrease in the profitability in our Distribution segment. Distribution segment gross profit declined due to a change in the product mix in our Distribution segment that resulted from an increase in sales in 2012 of IVIG products that had lower margins compared to 2011, and from a decline in the gross profit of our non-IVIG products due to a decrease in gross margins for certain products.

Research and Development Expenses

In the year ended December 31, 2012, we incurred $11.8 million of research and development expenses, compared to $11.7 million in the year ended December 31, 2011, an increase of $0.1 million. This increase was primarily due to increases in expenses for Inhaled AAT for AATD trials, as described more fully below, offset by a $0.5 million decrease in manufacturing expenses allocated for research and development and a $0.1 million decrease in salary expenses. Research and development expenses accounted for approximately 16.3% and 19.7% of total revenues for the years ended December 31, 2012 and 2011, respectively.

Set forth below are the research and development expenses associated with our major development programs in the years ended December 31, 2012 and 2011:

		Year ended December 31,								Total Expenses to Date through December 31, 2012
		2012				2011
		(in thousands)
Inhaled AAT		$	6,239			$	5,411			$	27,788
AAT for newly diagnosed Type-1 Diabetes			209				286				495
Unallocated salary			3,493				3,618
Unallocated facility cost allocated to research and development			1,066				1,545
Unallocated other expenses			814				869
Total research and development expenses		$	11,821			$	11,729

Research and development expenses for Inhaled AAT increased by $0.8 million due to an increase in expenses for clinical trials in Europe. Research and development expenses for Type-1 Diabetes trials decreased by $0.1 million due to expenses for a clinical trial that were incurred in 2011 but not 2012. Unallocated expenses are expenses that are not managed by projects and are allocated between various tasks that are not always related to a major project. In the years ended December 31, 2012 and 2011, we incurred $3.5 million and $3.6 million, respectively, of unallocated salary expenses, a decrease of $0.1 million due to a decrease in number of employees, $1.1 million and $1.5 million, respectively, of unallocated facility costs, a decrease of $0.4 million due to decrease in process conformance expenses, and $0.8 million and $0.9 million, respectively, of unallocated other expenses.

Our current intentions as to the short-term development timeline for our major development programs are described in “Business — Our Product Pipeline and Development Program,” and we have long-term development goals. However, we cannot determine with full certainty the duration and completion costs of the current or future clinical trials of our major development programs or if, when, or to what extent we will generate revenues from the commercialization and sale of any product candidates. We or our strategic partners may never succeed in achieving marketing approval for any product candidates. The duration, costs and timing of clinical trials and our major development programs will depend on a variety of factors, including the uncertainties of future clinical and preclinical studies, uncertainties in clinical trial enrollment rates and significant and changing government regulation and whether our current or future strategic partners are committed to and make progress in programs licensed to them, if any. In addition, the probability of success for each product candidate will depend on numerous factors, including competition, manufacturing capability and commercial viability. See “Risk Factors — Risks Related to Our Business and Industry — We may not be able to commercialize our product candidates in development for numerous reasons.”

 

 

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We will determine which programs to pursue and how much to fund each program in response to the scientific and clinical success of each product candidate, as well as an assessment of each product candidate's commercial potential. We cannot forecast with any degree of certainty which of our product candidates, if any, will be subject to future collaborations or how such arrangements would affect our development plans or capital requirements.

Selling and Marketing Expenses

In the year ended December 31, 2012, we incurred $1.9 million of selling and marketing expenses, compared to $2.3 million in the year ended December 31, 2011, a decrease of $0.5 million, or approximately (20.5%). This decrease was primarily due to a $0.4 million decrease in marketing activities related to promotions and trade show attendance. Selling and marketing expenses accounted for approximately 2.5% and 3.9% of total revenues for the years ended December 31, 2012 and 2011, respectively.

General and Administrative Expenses

In the year ended December 31, 2012, we incurred $4.8 million of general and administrative expenses, compared to $5.1 million in the year ended December 31, 2011, a decrease of $0.3 million, or approximately 6.7%. This decrease was primarily due to a decrease of salary expenses. General and administrative expenses accounted for approximately 6.6% and 8.6% of total revenues for the years ended December 31, 2012 and 2011, respectively.

Financial Income

In the year ended December 31, 2012, we generated $0.6 million of financial income, compared to $0.9 million in the year ended December 31, 2011, a decrease of $0.3 million, or approximately 33.6%. This decrease was due to a decrease in interest received from bank deposits and other short term investments.

Income (expense) in respect of exchange and translation differences and derivatives instruments

On January 1, 2012 we changed our functional currency from NIS to U.S. dollars. See also Note 2d in our consolidated financial statements included in this prospectus.

In the year ended December 31, 2012, we incurred $0.1 million of expenses in respect of currency exchange differences on balances in other currencies versus the U.S. dollar compared to $0.9 million of income in respect of translation and currency exchange differences and derivatives in the year ended December 31, 2011.

Income (expense) in respect of revaluation of warrants to fair value

In the year ended December 31, 2012, we incurred $0.6 million of expenses in respect of revaluation of warrants to fair value, compared to $0.5 million of income in the year ended December 31, 2011, in respect of revaluation of warrants to fair value due to change in share prices and expected life of the warrants. In the year ended December 31, 2012, because our ordinary share price increased, the warrant liability increased with a corresponding expense in respect of revaluation of our warrants to fair value.

Financial Expenses

In the year ended December 31, 2012, we incurred $3.4 million of financial expenses, compared to $3.6 million in the year ended December 31, 2011, a decrease of $0.2 million, or approximately 6.7%. This decrease was primarily due to a decrease in interest on our convertible debentures as a result of a decrease in its variable interest rate.

Taxes on Income

In the year ended December 31, 2012, we incurred $0.5 million of taxes on income, compared to no taxes on income incurred in the year ended December 31, 2011. We incurred $0.6 million tax expense for tax withheld in a foreign jurisdiction, which we may not be able to offset against future taxes and generated $0.1 million of income taxes from deferred tax assets.

 

 

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Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Segment Results

		Year Ended December 31,								Change 2011 vs. 2010
		2011				2010				Amount				Percent
		(in thousands)
Revenues:
Proprietary Products		$	35,308			$	22,980			$	12,328				53.6	%
Distribution			24,175				11,497				12,678				110.3	%
Total		$	59,483			$	34,477			$	25,006				72.5	%
Cost of Revenues:
Proprietary Products		$	22,188			$	18,878			$	3,310				17.5	%
Distribution			20,574				9,827				10,747				109.4	%
Total		$	42,762			$	28,705			$	14,057				49.0	%
Gross Profit:
Proprietary Products		$	13,120			$	4,102			$	9,018				219.8	%
Distribution			3,601				1,670				1,931				115.6	%
Total		$	16,721			$	5,771			$	10,950				189.7	%

Revenues

In the year ended December 31, 2011, we generated $59.5 million of total revenues, compared to $34.5 million in the year ended December 31, 2010, an increase of $25.0 million, or approximately 73%. This increase was primarily due to a $12.3 million increase in our Proprietary Products segment revenues, mainly attributable to an increase in sales of Glassia as sales of Glassia to Baxter commenced in the second quarter of 2011, offset by a decrease of $1.3 million of revenues due to the decrease in payments from the Israeli government related to the development of our snake bite antiserum product in 2011, and a $12.7 million increase in Distribution segment revenues, mainly attributable to an increase in sales of IVIG products, which has grown since 2010 when one of our competitors in the market halted sales of its IVIG product and we were able to fill the additional demand in the market. In our Distribution segment, we generated $17.5 million of revenues from IVIG products and $6.7 million of revenues from other products in the year ended December 31, 2011, compared to $6.3 million of revenues from IVIG products and $5.2 million of revenues from other products in the year ended December 31, 2010.

Cost of Revenues

In the year ended December 31, 2011, we incurred $42.8 million of cost of revenues, compared to $28.7 million in the year ended December 31, 2010, an increase of $14.1 million, or approximately 49%. The cost of revenues in our Proprietary Products segment increased by $3.3 million, which was primarily due to the increase in sales volume of Glassia. The cost of revenues in our Distribution segment increased by $10.7 million, which was primarily due to an increase in volume of products sold.

Gross profit in our Proprietary Products segment increased by $9.0 million, primarily due to an increase in production output during the period and improvement in our production processes, which yielded higher outputs and resulted in increased profitability due to economies of scale. Gross profit in our Distribution segment increased by $1.9 million, which was primarily due to increased sales of IVIG, offset by higher cost of revenues. As a percentage of total revenues, gross margin was 28% and 17% for the years ended December 31, 2011 and 2010, respectively. Gross margin for the Proprietary Products segment, as a percentage of revenues from that segment, was 37% and 18% for the years ended December 31, 2011 and 2010, respectively. Gross margin for the Distribution segment, as a percentage of revenues from that segment, was 15% for both of the years ended December 31, 2011 and 2010, respectively. The increase in gross profit as a percentage of total revenues was primarily driven by our growth in the Proprietary Products segment attributed to growth in revenues from our AATD product.

 

 

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Research and Development Expenses

In the year ended December 31, 2011, we incurred $11.7 million of research and development expenses, compared to $9.3 million in the year ended December 31, 2010, an increase of $2.5 million, or approximately 26%. This increase was primarily due to an increase in expenses for Inhaled AAT for AATD, offset by a $1.0 million decrease in professional services expenses associated with the BLA submission to the FDA in 2010 for Glassia. Research and development expenses accounted for approximately 20% and 27% of total revenues for the years ended December 31, 2011 and 2010, respectively.

Set forth below are the research and development expenses associated with our major development programs in the years ended December 31, 2011 and 2010:

		Year ended December 31,
		2011				2010
		(in thousands)
Inhaled AAT		$	5.411			$	5,144
AAT for newly diagnosed Type-1 Diabetes			286				—
Unallocated salary			3,618				3,389
Unallocated facility cost allocated to research and development			1,545				267
Unallocated other expenses			869				479
Total research and development expenses		$	11,729			$	9,279

Research and development expenses for Inhaled AAT increased by $0.3 million due to an increase in expenses for clinical trials in Europe. Other research and development expenses are not managed by projects and are allocated between various tasks that are not always related to a major project. In the year ended December 31, 2011 and 2010, we incurred $3.6 million and $3.4 million, respectively, of unallocated salary expenses, an increase of $0.2 million due to a decrease in employee salaries in 2010, $1.5 million and $0.3 million, respectively, of unallocated facility costs, an increase of $1.2 million due to process conformance expenses, and $0.9 million and $0.5 million, respectively, of unallocated other expenses, an increase of $0.4 million due to various unallocated development tasks.

Selling and Marketing Expenses

In the year ended December 31, 2011, we incurred $2.3 million of selling and marketing expenses, compared to $2.2 million in the year ended December 31, 2010, an increase of $0.2 million, or approximately 8%. This increase was primarily due to FDA marketing authorization fees following approval of Glassia, product liability insurance expenses and professional advisor expenses, offset by a decrease in payroll and commission to distributors. Selling and marketing expenses accounted for approximately 4% and 6% of total revenues for the years ended December 31, 2011 and 2010, respectively.

General and Administrative Expenses

In the year ended December 31, 2011, we incurred $5.1 million of general and administrative expenses, compared to $4.5 million in the year ended December 31, 2010, an increase of $0.6 million, or approximately 13%. This increase was primarily due to an increase of $0.2 million in team development expenses and related corporate events, an increase of $0.2 million due to a decrease in the allocation of general and administrative expenses to the cost of establishing the facility to produce our snake bite antiserum product in 2011 compared to 2010 and an increase of $0.2 million in general, office-related expenses. General and administrative expenses accounted for approximately 9% and 13% of total revenues for the years ended December 31, 2011 and 2010, respectively.

Financial Income

In the year ended December 31, 2011, we generated $0.9 million of financial income, compared to $0.6 million in the year ended December 31, 2010, an increase of $0.3 million, or approximately 55%. This increase was primarily due to an increase of $0.4 million in income with respect to bank deposits and our short-term investments due to the increase in our cash on hand.

 

 

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Income (expense) in respect of exchange and translation differences and derivatives instruments

In the year ended December 31, 2011, we generated $0.9 million of income in respect of translation and exchange differences and derivatives compared to $1.1 million of expense in the year ended December 31, 2010, primarily due to the volatility of the U.S. dollar to NIS exchange rate. During the year ending December 31, 2011 and 2010, we had excess assets over liabilities denominated in U.S. dollars. In 2011, the U.S. dollar devaluated against the NIS and we recognized financial income. In 2010, when the U.S. dollar appreciated against the NIS, we recognized financial expenses with respect to exchange rate differences.

Income (expense) in respect of revaluation of warrants to fair value

In the year ended December 31, 2011, we generated $0.5 million of income in respect of revaluation of warrants to fair value, compared to $0.6 million of expense in the year ended December 31, 2010, in respect of revaluation of warrants to fair value. This decrease of $1.2 million was primarily due to the change in share prices and the expected life of warrants. In 2011, because our ordinary share price decreased, the warrant liability decreased with a corresponding income in respect of revaluation of our warrants to fair value.

Financial Expenses

In the year ended December 31, 2011, we incurred $3.6 million of financial expenses, compared to $3.1 million in the year ended December 31, 2010, an increase of $0.5 million, or approximately 17%. This increase was primarily due to a $0.2 million increase in the amortization of our convertible debt discount and an increase in $0.4 million of interest expenses with respect to our convertible debentures as a result of an increase in the variable interest rate of the debentures.

Taxes on Income

We did not incur any income tax expenses in the years ended December 31, 2011 and 2010.

 

 

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Quarterly Results of Operations

The following tables set forth unaudited quarterly consolidated statements of operations data for the four quarters of fiscal year 2012 and 2011. We have prepared the statement of operations data for each of these quarters on the same basis as the audited consolidated financial statements included elsewhere in this prospectus and, in the opinion of management, each statement of operations includes all adjustments, consisting solely of normal recurring adjustments, necessary for the fair statement of the results of operations for these periods. This information should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this prospectus. These quarterly operating results are not necessarily indicative of our operating results for any future period.

		Three Months Ended
		December 31, 2012				September 30, 2012				June 30, 2012				March 31, 2012				December 31, 2011				September 30, 2011				June 30, 2011				March 31, 2011
		(in thousands)
Revenues from Proprietary Products		$	15,913			$	11,030			$	7,024			$	12,478			$	13,420			$	7,282			$	7,106			$	7,500
Revenues from Distribution			5,730				6,648				6,728				7,124				7,737				6,028				5,249				5,161
Total revenues			21,643				17,678				13,752				19,602				21,157				13,310				12,355				12,661
Cost of revenues from Proprietary Products			8,382				6,278				4,679				7,572				8,429				5,461				5,374				2,924
Cost of revenues from Distribution			4,971				5,788				5,928				6,384				6,476				5,264				4,389				4,445
Total cost of revenues			13,353				12,066				10,607				13,956				14,905				10,725				9,763				7,369
Gross profit			8,290				5,612				3,145				5,646				6,252				2,585				2,592				5,292
Research and development expenses			2,842				2,769				2,744				3,466				3,350				2,688				2,595				3,096
Selling and marketing expenses			449				438				494				472				504				619				776				432
General and administrative expenses			1,216				1,132				1,085				1,348				1,579				1,217				1,219				1,111
Operating income (loss)			3,783				1,273				(1,178	)			360				819				(1,939	)			(1,998	)			653
Financial income			123				119				153				183				150				251				256				213
Income (expense) in respect of translation differences and derivatives			(85	)			34				15				(64	)			302				1,021				(216	)			170	)
Income (expense) in respect of revaluation of warrants fair value			(22	)			19				(518	)			(55	)			10				448				501				(419	)
Financial expense			(812	)			(836	)			(836	)			(873	)			(826	)			(926	)			(952	)			(893	)
Income (loss) before taxes on income			2,987				609				(2,364	)			(449	)			455				(1,145	)			(2,409	)			(616	)
Taxes on income			(77	)			600				—				—				—				—				—				—
Net income (loss)			3,064				9				(2,364	)			(449	)			455				(1,145	)			(2,409	)			(616	)

Liquidity and Capital Resources

Our primary uses of cash are to fund working capital requirements, research and development expenses and capital expenditures. Historically, we have funded our operations primarily through cash flow from operations, payments received in connection with strategic partnerships and the issuance of convertible debentures, warrants to purchase our ordinary shares and other equity securities. The balance of cash and cash equivalents, restricted cash and short-term investments as of December 31, 2012, 2011 and 2010 totaled $33.8 million, $42.7 million and $46.1 million, respectively.

 

 

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We have certain strategic partnership and distribution agreements under which we receive payments for the achievement of certain milestones. As of December 31, 2012, we received an aggregate of $36 million in payments under these agreements, and there were $69 million in payments under these agreements that we could potentially receive if we receive the milestones set forth in such agreements. See “Business — Strategic Partnerships — Chiesi (Inhaled AAT for AATD product)” and “Business — Strategic Partnerships — Baxter (Glassia).”

On October 15, 2009, we issued NIS 100 million (or approximately $26.8 million) in aggregate principal amount of convertible debentures on the TASE. The convertible debentures mature on December 1, 2015, with three annual payments starting on December 1, 2013, with 20% of principal due on December 1, 2013 and 40% on each of December 1, 2014 and 2015. The interest rate on the convertible debentures is variable, and is indexed to the rate borne by the Israeli Government Bonds — Series 817, plus a margin of 6.10%. As of December 31, 2012, the interest rate on the convertible debentures was 8.10%. The interest rate on the Series 817 bonds resets every quarter. The convertible debentures convert into our ordinary shares at a rate of NIS 37.12 par value of debentures per ordinary share, subject to customary anti-dilution adjustments. Holders of the convertible debentures have the right to convert to our ordinary shares on each business day until November 15, 2015, except for between November 16 and December 1 of each of 2013 and 2014.

Our capital expenditures for the years ended December 31, 2012, 2011 and 2010 were $4.6 million, $2.0 million and $3.6 million, respectively. Our capital expenditures currently relate primarily to infrastructure facilities. We expect our capital expenditures to be stable in the near term and decline in the long term.

We believe our current cash and cash equivalents and short-term investments, along with the proceeds from this offering, will be sufficient to satisfy our liquidity requirements for the next 12 months.

Cash Flows from Operating Activities

Net cash used in operating activities was $8.3 million for the year ended December 31, 2012. This net cash used primarily reflects net income of $0.3 million and non-cash expenses of $6.1 million, offset by an increase in trade receivables of $6.7 million due to sales made at the end of 2012 for which payment was collected in 2013, as opposed to sales made at the end of 2011 for which a portion of payment was collected during 2011, an increase in inventory of $4.9 million due to higher production at the end of 2012 in anticipation of sales in 2013 and a decrease in deferred revenues of $3.4 million reflecting revenues that were collected in advance of 2012. Non-cash expenses of $6.1 million consisted primarily of depreciation expenses of $3.0 million, financing expenses of $1.3 million and stock based compensation of $1.3 million.

Net cash provided by operating activities was $1.0 million for the year ended December 31, 2011. This net cash provided by operating activities primarily reflected an operating loss of $2.5 million net of non-cash expenses of $3.9 million totaling to $1.6 million net cash provided. In addition, in 2011, we collected an additional $5.8 million of income generated in 2010, and increased trade payable by $1.1 million, both offset by an increase in inventory of $6.5 million.

Net cash provided by operating activities was $10.0 million for the year ended December 31, 2010. This net cash provided by operating activities primarily reflected an operating loss of $10.2 million, non-cash expenses of $4.3 million and the upfront payment with respect to the agreement with Baxter of $25.0 million and increases in trade payables of $5.9 million, offset by an increase in inventory of $1.8 million and an increase in trade receivables of $8.2 million.

Cash Flows from Investing Activities

Net cash used in investing activities was $2.4 million for the year ended December 31, 2012. This net use of cash primarily reflected investment in property, plant and equipment of $4.6 million and the retransfer of $1.5 million of restricted cash that was unrestricted and $0.7 million of net cash invested in short term investments.

Net cash used in investing activities was $1.1 million for the year ended December 31, 2011. This net use of cash primarily reflected an investment in property, plant and equipment of $2.0 million and the transfer of $1.5 million of cash to restricted cash to collateralize a bank guarantee to a customer, offset by the net proceeds from sale of short-term investments of $2.4 million.

 

 

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Net cash used in investing activities was $22.2 million for the year ended December 31, 2010. This net use of cash was primarily due to a cash investment in short-term investments of $18.8 million and the purchase of property and equipment in the amount of $3.6 million.

Cash Flows from Financing Activities

Net cash provided by financing activities was $3.0 million for the year ended December 31, 2012. This net cash provided by financing activities was primarily due to the exercise of warrants.

Net cash used in financing activities was $0.4 million for the year ended December 31, 2011. This net use of cash was primarily due to the repayment of a research and development grant of $1.1 million, offset by the exercise of warrants in the amount of $0.7 million.

Net cash provided by financing activities was $7.4 million for the year ended December 31, 2010. This net cash provided by financing activities was primarily due to the exercise of warrants in the amount of $7.5 million.

Contractual Obligations and Commitments

The following is a summary of our contractual obligations and commitments as of December 31, 2012 (in thousands):

		Total				Less than 1 Year				1 – 3 Years				3 – 5 Years				More than 5 Years
Purchase commitments		$	23,792			$	23,355				437				—				—
Long-term debt obligations (1)			31,584				7,529				24,055				—				—
Operating lease obligations			456				294				162				—				—
Total		$	55,832			$	31,178			$	24,654			$	—				—

(1)

Includes interest payments on our convertible debentures at an assumed interest rate of 8.10%. Interest payments are subject to a variable interest rate of 610 basis points in excess of the interest rate borne by Israeli Government Bonds — Series 817. Of the amounts in the table, $2.2 million are interest payments in the first year and $3.1 million are for interest payments in the second and third years combined. A 10% change in interest rates on our convertible debentures would cause an increase or decrease in interest expense of approximately $0.3 million on an annual basis.

Purchase commitments are obligations under purchase agreement or purchase orders that are non-cancelable. Long-term debt obligations consist of contractual obligations from convertible debentures. Operating leases consist of contractual obligations from offices and vehicles leases agreements.

We are also obligated to make certain severance or pension payments to our Israeli employees upon their retirement under Israeli law. Due to the uncertainty of the timing of future cash flows associated with these payments (see Note 2q and Note 18 in our consolidated financial statements included in this prospectus), we are unable to make reasonably reliable estimates for the period of cash settlement, if any, with respect to such obligations.

Seasonality

We have experienced in the past, and expect to continue to experience, certain fluctuations in our quarterly revenues. Historically, our revenues have been strongest in our first and fourth quarters and weaker in our second and third quarters.

Off-Balance Sheet Arrangements

As of December 31, 2012, we have not been involved in any material off-balance sheet arrangements not described herein.

Critical Accounting Policies and Estimates

This discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with IFRS as issued by the IASB. The preparation of these financial statements requires management to make estimates that affect the reported amounts of our

 

 

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assets, liabilities, revenues and expenses. Significant accounting policies employed by us, including the use of estimates, are presented in the notes to the consolidated financial statements included elsewhere in this prospectus. We periodically evaluate our estimates, which are based on historical experience and on various other assumptions that management believes to be reasonable under the circumstances. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management’s subjective or complex judgments, resulting in the need for management to make estimates about the effect of matters that are inherently uncertain. If actual performance should differ from historical experience or if the underlying assumptions were to change, our financial condition and results of operations may be materially impacted. In addition, some accounting policies require significant judgment to apply complex principles of accounting to certain transactions, such as acquisitions, in determining the most appropriate accounting treatment.

While our significant accounting policies are more fully described in note 2 to our consolidated financial statements appearing elsewhere in this prospectus, we believe that the following accounting policies are the most critical for fully understanding and evaluating our financial condition and results of operations.

Revenue Recognition

Revenues are recognized in profit or loss when the revenues can be measured reliably, it is probable that the economic benefits associated with the transaction will flow to us and the costs incurred or to be incurred in respect of the transaction can be measured reliably. Revenues are measured at the fair value of the consideration received less any trade discounts, volume rebates and returns.

Revenues from the sale of goods are recognized when all the significant risks and rewards of ownership of the goods have passed to the buyer and the seller no longer retains continuing managerial involvement. The delivery date is usually the date on which ownership passes.

We estimate provisions for returns in arrangements allowing the customers to return expired inventory, or inventory that is close to its end of shelf life, based on historical experience of product returns and specific return exposure.

Milestone revenues are recognized when we meet the milestones.

Contracts that are multiple element arrangements

We entered into strategic alliance agreements under which we grant to our strategic alliance partner an exclusive license to intellectual property rights for the development and commercialization of our proprietary products. The agreements contain multiple elements, including license fees, payments based on achievement of specified milestones, funding for research and development services and royalties on sales of our products.

Based on the type of element, revenues from these agreements are allocated to the various accounting units and recognized for each accounting unit separately. An element constitutes a separate accounting unit if and only if it has a separate value to the customer. Significant judgment is required to allocate elements to each accounting unit. Depending upon how such judgment is exercised, the timing and amount of revenue recognized could differ significantly. Revenue in the various accounting units containing elements is recognized when the criteria for revenue recognition regarding the elements of that accounting unit have been met according to their type and only to the extent of the consideration that is not contingent upon completion or performance of the remaining elements in the contract.

Recognizing revenue on a gross or net basis

We recognize revenues from the distribution of drugs in Israel manufactured by third-parties for clinical uses. If we were to operate or act as an agent or broker without being exposed to the risks and rewards associated with the transaction, our revenues would be presented on a net basis. However, we operate as a principal supplier and not as an agent or broker, and therefore, are exposed to the risks and rewards associated with the transaction. As such, our revenues are presented on a gross basis.

Clinical Trial Accruals and Related Expenses

We accrue and expense costs for clinical trial activities performed by third parties (or CROs), based upon estimates made as of the reporting date of the work completed over the life of the individual study in accordance with agreements established with the CRO. We determine the estimates of clinical activities

 

 

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incurred at the end of each reporting period through discussion with internal personnel and outside service providers as to the progress or stage of completion of trials or services, as of the end of each reporting period, pursuant to contracts with numerous clinical trial centers and CROs and the agreed upon fee to be paid for such services.

To date, we have not experienced significant changes in our estimates of clinical trial accruals after a reporting period. However, due to the nature of estimates, we cannot assure you that we will not make changes to our estimates in the future as we become aware of additional information about the status or conduct of our clinical trials.

Warrants

Some of our outstanding warrants are deemed to be derivative instruments that require liability classification and mark-to-market accounting.

The fair value of warrants presented as a financial liability classified to Level 3 in the fair value disclosure hierarchy as per IFRS 7 is determined using assessment methods, through the use of an acceptable option pricing model. The assumptions used in the model can include the share price, exercise price, expected volatility, expected life, expected dividend and risk-free interest rate.

Inventories

Inventories are measured at the lower of cost and net realizable value. The cost of inventories is comprised of costs of purchase and shipping and handling. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated selling costs.

We periodically evaluate the condition and age of inventories and make provisions for slow-moving inventories accordingly. Unfavorable changes in market conditions may result in a need for additional inventory reserves that could adversely impact our gross margins. Conversely, favorable changes in demand could result in higher gross margins when we sell products.

Inventory that is produced following a change in manufacturing process prior to final approval of regulatory authorities is subject to our estimates as to the probability of receipt of such approval. We periodically reassess the probability of such approval and the remaining shelf life of such inventory to determine whether the net realizable value is lower than cost.

Impairment of Non-financial Assets

We evaluate the need to record an impairment of the carrying amount of non-financial assets whenever events or changes in circumstances indicate that the carrying amount is not recoverable. If the carrying amount of non-financial assets exceeds their recoverable amount, the assets are reduced to their recoverable amount. The recoverable amount is the higher of fair value less costs of sale and value in use. In measuring value in use, the expected future cash flows are discounted using a pre-tax discount rate that reflects the risks specific to the asset. The recoverable amount of an asset that does not generate independent cash flows is determined for the cash-generating unit to which the asset belongs. Impairment losses are recognized in profit or loss.

An impairment loss of an asset, other than goodwill, is reversed only if there have been changes in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized. Reversal of an impairment loss, as above, will not be increased above the lower of the carrying amount that would have been determined (net of depreciation or amortization) had no impairment loss been recognized for the asset in prior years and its recoverable amount. The reversal of impairment loss of an asset presented at cost is recognized in profit or loss.

We did not recognize any impairment of non-financial assets for any of the periods presented.

Share-based Payment Transactions

Our employees and other service providers are entitled to remuneration in the form of equity-settled share-based payment transactions.

The cost of equity-settled transactions with employees is measured at the fair value of the equity instruments granted at grant date. We use the binomial model when estimating the grant date fair value of equity settled share

 

 

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options. We selected the binomial option pricing model as the most appropriate method for determining the estimated fair value of our share-based awards without market conditions. For options granted to service providers, the fair value is remeasured as the services are received.

The determination of the grant date fair value of options using an option pricing model is affected by estimates and assumptions regarding a number of complex and subjective variables. These variables include the expected volatility of our share price over the expected term of the options, share option exercise and cancellation behaviors, risk-free interest rates, expected dividends and the price of our ordinary shares on the TASE, which are estimated as follows:

•

Expected Life .  The expected life of the share options is based on historical data, and is not necessarily indicative of the exercise patterns of share options that may occur in the future.

•

Volatility .  The expected volatility of the share prices reflects the assumption that the historical volatility of the share prices on the TASE is reasonably indicative of expected future trends.

•

Risk-free interest rate .  The risk-free interest rate is based on the yields of non-index-linked Bank of Israel treasury bonds with maturities similar to the expected term of the options for each option group.

•

Expected forfeiture rate .  The post-vesting forfeiture rate is based on the weighted average historical forfeiture rate.

•

Dividend yield and expected dividends .  We have not recently declared or paid any cash dividends on our ordinary shares and do not intend to pay any cash dividends. We have therefore assumed a dividend yield and expected dividends of zero.

•

Share price on the TASE .  The price of our ordinary shares on the TASE used in determining the grant date fair value of options is based on the price on the grant date.

If any of the assumptions used in the binomial model change significantly, share-based compensation for future awards may differ materially compared with the awards granted previously.

As for other service providers, the cost of the transactions is measured at the fair value of the goods or services received as consideration for equity instruments. In cases where the fair value of the goods or services received as consideration of equity instruments cannot be measured, they are measured by reference to the fair value of the equity instruments granted.

The cost of equity-settled transactions is recognized in profit or loss, together with a corresponding increase in equity, during the period which the performance and/or service conditions are to be satisfied, ending on the date on which the relevant employees become fully entitled to the award. The cumulative expense recognized for equity-settled transactions at the end of each reporting period until the vesting date reflects the extent to which the vesting period has expired and our best estimate of the number of equity instruments that will ultimately vest. The expense or income recognized in profit or loss represents the change between the cumulative expense recognized at the end of the reporting period and the cumulative expense recognized at the end of the previous reporting period.

No expense is recognized for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether the market condition is satisfied, provided that all other vesting conditions (service and/or performance) are satisfied.

If we modify the conditions on which equity-instruments were granted, an additional expense is recognized for any modification that increases the total fair value of the share-based payment arrangement or is otherwise beneficial to the employee/other service provider at the modification date.

If a grant of an equity instrument is cancelled, it is accounted for as if it had vested on the cancellation date, and any expense not yet recognized for the grant is recognized immediately. However, if a new grant replaces the cancelled grant and is identified as a replacement grant on the grant date, the cancelled and new grants are accounted for as a modification of the original grant, as described above.

 

 

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Post-employment Benefits Liabilities

Our post-retirement benefit plans are normally financed by contributions to insurance companies and classified as defined contribution plans or as defined benefit plans.

We operate a defined benefit plan in respect of severance pay pursuant to the Severance Pay Law. See Note 2q and Note 18 in our consolidated financial statements included in this prospectus for more details.

The present value of our severance pay depends on a number of factors that are determined on an actuarial basis using a number of assumptions. The assumptions used in determining the net cost or income for severance pay and plan assets include a discount rate. Any changes in these assumptions will impact the carrying amount of severance pay and plan assets.

Other key assumptions inherent to the valuation include employee turnover, inflation, expected long term returns on plan assets and future payroll increases. The expected return on plan assets is determined by considering the expected returns available on assets underlying the current investments policy. These assumptions are given a weighted average and are based on independent actuarial advice and are updated on an annual basis. Actual circumstances may vary from these assumptions, giving rise to a different severance pay liability.

Accounting for Income Taxes

At the end of each reporting period, we are required to estimate our income taxes. There are transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business, determined according to complex tax laws and regulations. Where the effect of these laws and regulations is unclear, we use estimates in determining the liability for the tax to be paid on our past profits, which we recognize in our financial statements. We believe the estimates, assumptions and judgments are reasonable, but this can involve complex issues which may take a number of years to resolve. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred income tax provisions in the period in which such determination is made.

Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

We are exposed to changes in interest arising from our convertible debentures, which bear variable interest rates. To reduce this exposure, we invest our cash balance in interest-bearing deposits. Liabilities with respect to debentures, net of deposits bearing variable interest expose us to interest rate risk with respect to changes in interest rates of short-term government debentures, which will be reflected in interest expenses. In addition, we have exposure to investments in deposits or securities bearing fixed interest, which expose us to interest rate risk with respect to fair value.

A 10% change in interest rates on our convertible debentures would cause an increase or decrease in interest expense of approximately $0.3 million on an annual basis.

Foreign Currency Risk

Fluctuations in exchange rates, especially the NIS against the U.S. dollar, may affect our results, as part of our assets is linked to NIS, as are part of our liabilities. Changes in exchange rates may also affect the prices of products purchased by us and designated for marketing in Israel in cases where these product prices are not linked to the U.S. dollar and during the period after these products are sold to our customers in NIS. In addition, the fluctuation in the NIS exchange rate against the U.S. dollar may impact our results, as a portion of our manufacturing cost is NIS denominated.

In 2009, we signed an agreement with a contract research organization for the management of clinical trials in Europe. Total payments to the contract research organization under the agreement are denominated in U.S. dollars. In addition, payments to trial sites will go through the contract research organization, linked to the Euro to U.S. dollar exchange rate. As such, a weakening of the Euro against the U.S. dollar would lower trial costs in U.S. dollars, and vice versa. Our purchases in other currencies are not material, and therefore the impact of fluctuations in exchange rates for these currencies are not material for our results.

 

 

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For the years ended December 31, 2012, 2011 and 2010, we have witnessed high volatility in the U.S. dollar exchange rate. This fact impacts our revenues from the Distribution segment, where prices are denominated in or linked to the NIS upon delivery of product while our expenses for the purchase of raw materials and imported goods in the Distribution segment are in U.S. dollars and part of our development and marketing expenses are paid in NIS.

We attempt to mitigate our currency exposure by matching assets denominated in NIS currency with liabilities denominated in NIS. In the Distribution segment, we attempt to mitigate foreign currency exposure by matching Euro denominated expenses with Euro denominated revenues. Additionally, we used, and from time to time, will continue to use, currency hedging transactions using financial derivatives, collars and forward currency contracts. We attempt to enter into forward currency contracts with critical terms that match those of the underlying exposure. As of December 31, 2012, we had open transactions in derivatives in the amount of approximately $6.7 million. We regularly monitor and review the need for currency hedging transactions in accordance with trend analysis.

The following table presents information about the changes in the exchange rates of the NIS against the U.S. dollar:

Period		Change in Average Exchange Rate of the NIS against the U.S. Dollar (%)
Year ended December 31, 2011			(4.3	)
Year ended December 31, 2012			7.8

As of December 31, 2012, we had excess liabilities over assets denominated in NIS in the amount of $1.4 million. When the U.S. dollar appreciates against the NIS, we recognize financial expenses with respect to exchange rate differences. When the U.S. dollar devalues against the NIS, we recognize financial revenues.

As of December 31, 2012, we had foreign currency exposures to currencies other than U.S. dollars amounting to $1.9 million in excess liabilities over assets. Most of this exposure is to the Euro.

A 10% increase (decrease) in the value of the NIS against the U.S. dollar would have decreased (increased) our financial assets by $0.1 million, $0.4 million and $1.4 million as of December 31, 2012, 2011 and 2010, respectively.

 

 

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BUSINESS

Overview

We are an orphan drug focused, plasma-derived protein therapeutics company with an existing marketed product portfolio and a robust late-stage product pipeline. We develop and produce specialty plasma-derived protein therapeutics and currently market these products through strategic partners in the United States and directly, through local distributors, in several emerging markets. We use our proprietary platform technology and know-how for the extraction and purification of proteins from human plasma to produce AAT in a high purity, liquid form, as well as other plasma-derived proteins. AAT is a protein derived from human plasma with known and newly discovered therapeutic roles given its immuno-modulatory, anti-inflammatory, tissue protective and antimicrobial properties. Our flagship product, Glassia, is the first and only liquid, ready-to-use, intravenous plasma-derived AAT product approved by the FDA. We market Glassia through a strategic partnership with Baxter International Inc. in the United States. Additionally, we have a product line consisting of nine other injectable pharmaceutical products which are marketed, in addition to Glassia, in more than 15 countries, including Israel, Russia, Brazil, India and other countries in Latin America, Eastern Europe and Asia. We currently have five plasma-derived protein products in our development pipeline, including Inhaled AAT for AATD that is in pivotal Phase II/III clinical trials in Europe and entering into Phase II clinical trials in the United States. In addition, we leverage our expertise and presence in the plasma-derived protein therapeutics market by distributing ten complementary products in Israel that are manufactured by third parties. We have generated an operating profit of $4.2 million for the year ended December 31, 2012. Our total revenues have grown from approximately $14.4 million in the year ended December 31, 2009 to $72.7 million in the year ended December 31, 2012, representing a 71% compound annual growth rate.

Glassia is an intravenous AAT product that is indicated for chronic augmentation and maintenance therapy in adults with emphysema due to AATD. AAT is a naturally occurring protein found in a derivative of plasma known as fraction IV which regulates the activity of certain white blood cells known as neutrophils and reduces cell inflammation. Patients with genetic AATD suffer from a chronic inflammatory state, lung tissue damage and a decrease in lung function. We believe that our second generation AAT product, Inhaled AAT for AATD, is currently the only aerosolized AATD treatment in advanced stages of clinical development. We believe that Inhaled AAT for AATD will increase patient convenience and reduce the need for patients to use intravenous infusions of AAT products, thereby further reducing the risk of infection, decreasing the need for clinic visits or nurse home visits and reducing medical costs. In addition, because Inhaled AAT for AATD would be delivered directly to the affected tissue through a nebulizer using a lower dosage, we believe that this product, if approved, will enable us to treat significantly more patients from the same amount of plasma and production capacity and therefore increase our profitability. Additionally, we have successfully completed Phase II clinical studies in Israel for additional novel indications for our AAT products, including for newly diagnosed Type-1 diabetes, cystic fibrosis and bronchiectasis, and we are advancing these new indications in further clinical development.

Our products are produced using our advanced proprietary technologies and know-how for the separation and purification of proteins derived from human plasma. We produce our plasma-derived protein therapeutics in our state-of-the-art, cGMP compliant, FDA-approved, large scale production facility located in Beit Kama, Israel.

We operate in two segments: the Proprietary Products segment, in which we develop and manufacture plasma-derived therapeutics and market them in more than 15 countries, and the Distribution segment, in which we distribute drugs manufactured by third-parties for critical use in Israel, most of which are produced from plasma or its derivative products.

 

 

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Our Competitive Strengths

We believe our position in the market is attributable to the following strengths:

•

Focus on growing orphan market opportunities .  We believe that the fundamental economic drivers of the orphan diseases market in which we operate are strong. In the United States and Europe, we believe that AATD is currently significantly under-identified and under-treated, as we estimate that only approximately 5% and 2% of all potential cases of AATD are treated in the United States and Europe, respectively, with an aggregate of up to an estimated 200,000 patients suffering from AATD, of which less than 10% have been diagnosed. We expect that our market opportunity for our AAT products, including Glassia and Inhaled AAT for AATD (if approved), will continue to grow as awareness of AATD expands due to factors such as marketing activities, inexpensive and effective diagnosis tools, and improved training. Additionally, the potential treatment of additional indications by our AAT products, such as cystic fibrosis and newly-diagnosed cases of Type-1 diabetes presents a significant orphan drug market opportunity beyond the AATD market.

•

Ability to develop and produce differentiated AAT products .  We have used our proprietary plasma-derived protein extraction and purification platform to create approved and pipeline AAT products that we believe have advantages over the products of our competitors. For example, Glassia is the only AAT product in the world that is approved for use in a high purity liquid state which is ready for infusion and does not require reconstitution and mixing before injection, as is required from competing products. Glassia has a number of advantages over other intravenous AAT products, including the reduction of the risk of contamination or infection during the preparation for infusion, reduced potential for allergic reactions due to the absence of stabilizing agents, simple and easy use by the patient or nurse, and the possible reduction of the nurse’s time during home visits, in the clinic or in the hospital. Additionally, we have leveraged our ability to manufacture high purity liquid AAT to develop the next generation of our AAT product, Inhaled AAT for AATD, which is in pivotal Phase II/III clinical trials in Europe and is entering Phase II clinical trials in the United States. If approved, Inhaled AAT for AATD will be the first AAT product that is not required to be delivered intravenously and, instead, is administered through an easy to use nebulizer in two short daily sessions. We believe that the non-invasive Inhaled AAT for AATD will increase patient convenience and reduce the need for patients to use intravenous infusions of AAT products, thereby further reducing the risk of infection, decreasing the need for clinic visits or nurse home visits and reducing medical costs. Although we do not expect Inhaled AAT for AATD to be priced at a premium to existing intravenous AAT products, because of the high purity and lower amount of AAT used in Inhaled AAT for AATD relative to intravenous infusion, we believe that this product, if approved, will enable us to treat significantly more patients from the same amount of plasma and production capacity and therefore increase our profitability.

•

Portfolio of marketed products in attractive geographies .  In our Proprietary Products segment, we have a product line consisting of ten products that are marketed in the United States and over 15 other countries, including Israel, Russia, Brazil, India and other countries in Latin America, Eastern Europe and Asia. We have derived approximately 43% and 41% of our total revenues in the years ended December 31, 2012 and 2011, respectively, from sales in the United States, approximately 5% and 1% of our total revenues in the years ended December 31, 2012 and 2011, respectively, from sales in Europe, approximately 5% of our total revenues in both the years ended December 31, 2012 and 2011 in Asia (excluding Israel) and 6% and 5% of our total revenues in the years ended December 31, 2012 and 2011, respectively, from Latin America. We believe that sales in Latin America and Asia will continue to grow as socioeconomic conditions improve in these emerging markets, resulting in more informed patients who demand better quality medical care. In addition, in our Distribution segment, we leverage our expertise and presence in the plasma-derived protein therapeutics market by distributing in Israel ten complementary plasma-derived, critical-care products manufactured by third-parties.

 

 

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•

Strategic partnerships with proven, industry-leading partners .  We have entered into strategic partnerships with industry-leading companies to leverage their expertise, technology and familiarity with local markets, to achieve broad penetration into local markets and to control our operating costs.

•

In the United States, we established a strategic relationship with Baxter in 2010 regarding our Glassia product and technology. The Baxter strategic relationship provides us with a strong marketing partner and a supplier of fraction IV paste, which we use to produce Glassia to be sold in the United States. Eventually, this relationship will also lead to additional production capacity as Baxter transitions to producing Glassia in its own facilities while paying us royalties, which will free up our facility to produce inhaled formulations of AAT and Glassia for other geographies and indications or other plasma-derived products.

•

Our strategic relationship with Chiesi Farmaceutici S.p.A. for Inhaled AAT for AATD, which we established in 2012, provides us with a partner that is knowledgeable and experienced in developing respiratory products and obtaining regulatory and reimbursement approval for such products in Europe, and has established and proven marketing capabilities to pulmonologists and other respiratory specialists in Europe.

•

Our strategic relationship with PARI Pharma GmbH was established in 2006 and is related to an “eFlow” nebulizer that we jointly developed to administer inhaled formulations of AAT.

•

Our strategic relationship with Kedrion S.p.A., which we established in 2011, will provide us with a strong marketing partner for KamRAB, our rabies immunoglobulin, in the United States (if approved) and will also provide us with plasma supply for the production of KamRAB.

•

Integrated scalable, fully-invested, proprietary platform technology and know-how .  Our platform enables us to efficiently produce multiple products and develop new products. Our platform includes our proprietary technology and know-how, which is based on chromatography, a method for the separation of materials based on their chemical and physical characteristics such as electrical charge or molecular size. Our proprietary method and know-how for the separation of proteins from raw materials, such as plasma fractions and hyper-immune plasma, allows us to produce a majority of the proteins that are contained in sufficient concentration in blood plasma. We believe that our production process is highly efficient, in that it produces a higher proportion of final product from a given quantity of plasma or its derivative products and at a higher level of purity than other production processes employed by our competitors. In addition, our production process allows us to produce protein therapeutics from different sources of plasma and plasma derivatives from multiple suppliers. This platform provides us with control over the development and production processes and contributes to lower production costs.

•

Strong financial profile with increasing operating profitability .  Our total revenues have grown from approximately $14.4 million in the year ended December 31, 2009 to $72.7 million in the year ended December 31, 2012, representing a 71% compound annual growth rate. During this time, our focus on improving our operating efficiency and our increased contribution from our own proprietary products in comparison to the distribution of third-party products increased our operating margin from (4)% to 6%, resulting in operating profit of $4.2 million for the year ended December 31, 2012. We believe that as Glassia sales continue to grow and we continue to develop our proprietary product pipeline, our operating profitability will continue to improve.

Our Strategy

We intend to grow our company by pursuing the following strategies:

•

Focus on growing AAT in new indications .  We believe that there is significant growth potential for our AAT products in a variety of new indications. We intend to capitalize on these growth opportunities by pursuing approvals for new indications for our AAT products. We completed a Phase II trial in Israel for the use of our intravenous AAT product for the treatment of newly diagnosed Type-1 diabetes. Additionally, we completed a Phase II clinical trial in Israel for the use of an inhaled formulation of AAT for the treatment of cystic fibrosis and bronchiectasis. We intend

 

 

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to continue further clinical trials either by ourselves or with a strategic partner for these new indications. For example, we intend to initiate Phase II trials in the United States for use of our inhaled formulation of AAT for the treatment of cystic fibrosis and AATD, and to continue development of AAT for the treatment of newly diagnosed Type-1 diabetes. Additionally, in pre-clinical studies, our AAT products have demonstrated promising evidence to support development in additional indications, such as chronic obstructive pulmonary disease, graft-versus-host disease and transplantations and others. We anticipate that we can effectively penetrate markets for specialty, niche products for orphan disease indications, as competition is relatively limited and our proprietary production process can give us an advantage in product quality and yield. By increasing the number of products we offer and expanding the indications in which our AAT products are used, we expect to generate higher revenues and further diversify our revenue base.

•

Expand our presence in emerging markets .  Our products are currently marketed in more than 15 countries worldwide, primarily in the United States, Israel, Russia, Brazil, India and other countries in Latin America, Eastern Europe and Asia. We continue to focus on further expansion in these markets, as certain emerging markets such as Russia, Brazil and India are expected to continue to experience significant growth in plasma-derived product demand. We believe that this demand will continue to be driven by enhanced socioeconomic conditions and more informed patients who are demanding better quality medical care, as well as increasing government healthcare spending on plasma-derived products in some of these markets. In Latin America, Asia and Russia, we are expanding our presence by establishing and strengthening relationships with distributors as well as obtaining additional marketing authorization for our products. We believe that we are well positioned to take advantage of potential growth in these geographic markets because we have the ability to leverage our existing presence in these local markets. For example, Glassia is already approved by regulators in Russia and Brazil, and we currently have relationships with local distributors in both of those countries. Additionally, we have relationships with local distributors in India and Thailand related to several of our other products.

•

Pursue further strategic partnerships .  We continue to examine our options for strategic partnerships for our marketed products and our product pipeline, including pursuing a strategic partner in the United States for our Inhaled AAT for AATD product and for our inhaled formulations of AAT for the treatment of cystic fibrosis and bronchiectasis. Historically, we have sought strategic partners in our target markets with industry leaders where we can benefit from their expertise, brand recognition, technology and familiarity with and penetration into local markets, and to control our operating cost. Our current strategic partnerships include Baxter for Glassia in the United States, Chiesi for Inhaled AAT for AATD in Europe, Kedrion for KamRAB in the United States, and PARI for the “eFlow” nebulizer which we use to administer inhaled formulations of AAT.

•

Invest in additional pipeline products .  We are continuing to pursue further growth by diversifying our product pipeline through the discovery and development of additional plasma-derived protein products for high-value indications. For example, we are currently studying whether additional products can be developed from fraction IV paste and are investigating the development of a recombinant AAT product. We believe that we can leverage our knowledge of AAT, our strength in clinical development and our proprietary platform technology and know-how to produce additional products that could complement our existing, core plasma-derived protein therapeutics products.

Our Product Portfolio

Our products include plasma-derived protein therapeutics that are either produced in our Proprietary Products segment or marketed and sold in our Distribution segment.

Proprietary Products Segment

Our products in the Proprietary Products segment consist of plasma-derived protein therapeutics that are administered by injection or infusion. We also manufacture certain products from synthetic raw materials or from raw materials derived from animal sources.

 

 

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We currently have products that target four product categories: respiratory, immunoglobulins, critical care and other. Our flagship product in the Proprietary Products segment is Glassia, sales of which, for the year ended December 31, 2012, comprised approximately 73% of our total revenues in the Proprietary Products segment. Sales of KamRAB and KamRho (D) for the year ended December 31, 2012 accounted for the substantial balance of total revenues in the Proprietary Products segment. The following table sets forth our primary products for each treatment category in our Proprietary Products segment.

Product		Indication		Active Ingredient		Geography
Respiratory
Glassia (or Respira/RespiKam/Ventia in certain countries)		Intravenous AATD		Alpha-1 Antitrypsin (human)		United States, Israel, Russia*, Slovenia, Brazil, Croatia and Argentina*
Immunoglobulins
KamRAB		Prophylaxis of rabies disease		Anti-rabies immunoglobulin (human)		Israel, India, Thailand, El Salvador, Russia*, and Mexico* and Korea
KamRho (D) IM		Prophylaxis of hemolytic disease of newborns		Rho(D) immunoglobulin (human)		Israel, Brazil, India, Argentina, Chile*, El Salvador, Sri Lanka, Russia, Kenya, Nigeria, Sri Lanka* and the Palestinian Authority
KamRho (D) IV		Treatment of immune thermobocytopunic purpura		Rho(D) immunoglobulin (human)		Israel, India and Argentina*
Snake bite antiserum		Treatment of snake bites by the Vipera palaestinae		Anti snake venom		Israel
Other Products
Heparin Lock Flush		To maintain patency of indwelling IV catheter designed for intermittent injection therapy or blood sampling		Heparin sodium		Israel
Kamacaine 0.5%		Local or regional anesthesia or analgesia during surgery, diagnostic and therapeutic procedures and obstetrical procedures. Spinal anesthesia for surgery		Bupivacaine HCl		Israel
Human transferrin (diagnostical grade)		Not for human use		Transferrin		United States, Israel, Germany, Slovakia and France

*

We have regulatory approval, but have not marketed the product in this country in 2012.

Respiratory — Glassia

Glassia is an intravenous AAT product produced from fraction IV that is indicated by the FDA for chronic augmentation and maintenance therapy in adults with emphysema due to congenital AATD. While Glassia does not cure AATD, it supplements the patient’s insufficient physiological levels of AAT and is

 

 

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administered as a chronic treatment. As such, the patient must take Glassia indefinitely over the course of his or her life in order to maintain the benefits provided by it.

In the United States and Europe, we believe that AATD is currently significantly under-identified and under-treated, as we estimate that only approximately 5% and 2% of all potential cases of AATD are treated in the United States and Europe, respectively, with an aggregate of up to an estimated 200,000 patients suffering from AATD, of which less than 10% have been diagnosed. According to a 2011 report of the Marketing Research Bureau, the annual cost to the patient of AATD treatment is between $80,000 and $100,000 per patient. In the United States, in some of the European countries and in Israel, we believe that the majority of the cost of treatment is covered by medical insurance programs.

We estimate that the potential world market for AAT products is significantly larger than current consumption indicates. We believe that the primary reasons for this are the non-availability of AAT products in many countries, underdiagnosis of patients suffering from AATD, expensive and protracted registration processes required to commence sales of AAT products in new markets and the absence of insurance reimbursement in various countries.

Glassia is the only AAT product in the world that is approved for use in a high purity liquid state which is ready for infusion and does not require reconstitution and mixing before injection, as is required from competing products. Glassia has a number of advantages over other intravenous AAT products, including the reduction of the risk of contamination during the preparation and infection during the infusion, reduced potential for allergic reactions due to the absence of stabilizing agents, simple and easy use by the patient or nurse, and the possible reduction of the nurse’s time during home visits, in the clinic or in the hospital.

Currently, Glassia has been approved in five countries. It is sold in three of those countries and also is sold in two additional countries, where it has not been approved, on a compassionate use basis. The majority of sales of Glassia are in the United States, where Glassia was approved by the FDA in July 2010 and sales began in September 2010. As part of the approval, the FDA requested that we conduct Phase IV clinical trials, as is common in the pharmaceutical industry, aimed at collecting additional safety and efficacy data for Glassia. In 2010, we submitted our proposed Phase IV clinical trials to the FDA, which we have not yet begun. Pursuant to our agreement with Baxter described below, we expect that the Phase IV clinical trials will be substantially financed by Baxter.

We market Glassia in the United States through our partnership with Baxter and by ourselves, and through our distributors in four countries. We plan to submit Glassia for marketing approval in additional countries. Revenues from our AATD products have grown from approximately $0.6 million in 2009 to $30.8 million in 2012, representing a 270% compound annual growth rate.

Immunoglobulins

KamRAB

KamRAB is a prophylactic treatment against rabies infection that is administered to patients after exposure to an animal suspected of being infected with rabies. KamRAB is a protein therapeutic derived from hyper-immune plasma, which is plasma that contains high levels of antibodies from donors that have been previously exposed to rabies. KamRAB is administered by a one-time injection, and the precise dosage is a function of the patient’s weight.

According to the World Health Organization, about 10 million people throughout the world require medical treatment against rabies every year after being bitten by animals suspected of being infected. We believe that there are market opportunities for KamRAB in developing countries and in the United States. In many developing countries, patients do not receive treatment for suspected rabies due to the lack of availability of healthcare resources. In the United States, there is currently only one significant provider of anti-rabies immunoglobulin and we believe that healthcare providers may seek to diversify their source of supply if a competing high-quality product were approved for sale.

We began selling KamRAB in certain countries in Asia and Latin America in 2003, where sales of the product have steadily increased. We sell KamRAB in seven countries and are pursuing market approval in the United States. In April 2007, we received approval from the FDA to commence Phase II/III clinical trials of KamRAB and in January 2010, the FDA approved significantly shorter clinical trials, which are scheduled to

 

 

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begin in the first quarter of 2013. We hope to complete these trials by the end of 2013 and launch KamRAB in the United States in 2014 or 2015. In July 2011, we signed a strategic agreement with Kedrion S.p.A for the clinical development and marketing in the United States of KamRAB, pursuant to which Kedrion agreed to bear all the costs required for the Phase II/III clinical trials. See “— Strategic Partnerships — Kedrion.”

KamRho (D)

KamRho (D) is indicated for (i) the prevention of hemolytic disease of the newborn (“HDN”), which is a blood disease that occurs where the blood type of the mother is incompatible with the blood type of the fetus; and (ii) the treatment of immune thrombocytopenic purpura (“ITP”), which is thought to be an autoimmune blood disease in which the immune system destroys the blood’s platelets, which are necessary for normal blood clotting. KamRho (D) is produced from hyper-immune plasma and is administered through intra-muscular injection (KamRho (D) IM) or through intravenous infusion (KamRho (D) IV).

According to academic research, approximately 15% of Caucasian women are Rh-negative and, if left untreated, HDN would affect one percent of all newborns and would be responsible for the death of one baby out of every 2,200 births. In addition, academic research estimates that ITP affects approximately five out of every 100,000 children per year, and two of every 100,000 adults per year worldwide, although some will recover without treatment. We have completed the registration process for Kam Rho (D), and are selling it in Israel and in another six countries in Latin America, Asia, Africa and Eastern Europe.

Snake Bite Antiserum

Our snake bite antiserum product is used for the treatment of humans that have been bitten by the most common Israeli viper ( Vipera palaestinae). The venom of the Israeli viper is poisonous and causes, among other symptoms, severe immediate pain with rapid swelling. These snake bites can lead to death if left untreated. Our snake bite antiserum is produced from hyper-immune serum that has been derived from horses that were immunized against Israeli viper venom. This product is the only treatment on the market for Israeli viper snake bites.

We developed the snake bite antiserum pursuant to an agreement with the Israeli Ministry of Health entered into in March 2009. We completed construction of production facilities and laboratories for the product, and successfully passed the Israeli Ministry of Health inspections. We began production in August 2011 and commenced sales to the Israeli Ministry of Health in 2012. The agreement with the Israeli Ministry of Health is renewable for up to ten additional one-year periods.

Other Products

We also sell additional critical care products including Heparin, an anticoagulant, and Kamacaine, an anesthetic for surgery or obstetric procedures and Transferrin, which is used as a cultural medium for diagnostic assays and cell cultures.

Distribution Segment

Our primary products in the Distribution segment include pharmaceuticals for critical use delivered by injection, infusion or inhalation. We leverage our expertise and presence in the plasma-derived protein therapeutics market to distribute products in Israel that we believe complement our products in the Proprietary Products segment. Most of the products in our Distribution segment are produced from plasma or plasma-derivatives, and are manufactured by European companies. We distribute these products in Israel on an exclusive basis. IVIG is our primary product in the Distribution segment, comprising approximately 26% of total revenues in the Distribution segment for the year ended December 31, 2012.

 

 

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The following table sets forth our primary products in our Distribution segment.

Product		Indication		Active Ingredient
Respiratory
Bramitob		Management of chronic pulmonary infection due to pseudomonas aeruginosa in patients six years and older with cystic fibrosis		Tobramycin
Immunoglobulins
IVIG 5%		Treatment of various immunodeficiency-related conditions		Gamma globulins (IgG) (human)
Varitect		Preventive treatment after exposure to the virus which causes chicken pox and zoster herpes		Varicella zoster immunoglobulin (human)
Hepatect CP		Prevent contraction of Hepatitis B by adults and children older than two years		Hepatitis B immunoglobulin (human)
Megalotect		Contains antibodies which neutralize cytomegalovirus viruses and prevent their spread in immunologically impaired patients		CMV immunoglobulin (human)
Critical Care
Heparin sodium injection		Treatment of thrombo-embolic disorders such as deep vein thrombosis, acute arterial embolism or thrombosis, thrombophlebitis, pulmonary embolism, fat embolism. Prophylaxis of deep vein thrombosis and thromboembolic events		Heparin sodium
Albumin		Maintains a proper level in the patient’s blood plasma		Human serum Albumin
Coagulation Factors
Factor VIII		Treatment of Hemophilia Type A diseases		Coagulation Factor VIII (human)
Factor IX		Treatment of Hemophilia Type B disease		Coagulation Factor IX (human)

 

 

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Our Product Pipeline and Development Program

We are in various stages of clinical development of new product candidates for our Proprietary Products segment. The following table sets forth our primary product pipeline in our Proprietary Products segment and each such product’s stage of clinical trials:

(1)

“IV” represents intravenous administration of the product. “IH” represents inhaled administration of the product. “IM” represents intramuscular administration of the product.

(2)

Phase I and II are complete in Israel. Phase II/III are in process in Europe. Phase II scheduled to begin in 2013 in the United States.

(3)

Phase I and II are complete in Israel. Received approval of IND application the United States.

(4)

Currently reviewing regulatory pathway for Phase II/III trial in Europe or Israel for newly diagnosed cases of Type-1 diabetes.

(5)

Phase II/III clinical trials are scheduled to begin in the United States in the first half of 2013.

(6)

Orphan drug designation in the United States.

(7)

Orphan drug designation in the European Union.

Inhaled Formulations of AAT

We are in various stages of development of inhaled formulations of AAT administered through the use of a custom-designed nebulizer co-developed with PARI for several indications in the respiratory field, including the treatment of AATD, cystic fibrosis and bronchiectasis.

AATD

We have been able to leverage our expertise gained from the production of Glassia to develop Inhaled AAT for AATD, an inhaled AAT product candidate for the treatment of AATD. Existing treatments for congenital AATD require weekly intravenous infusions of AAT therapeutics. We believe that Inhaled AAT for AATD will significantly improve the quality of life of the patients. If approved, Inhaled AAT for AATD will be the first AAT product that is not required to be delivered intravenously but, instead is administered by an easy-to-use nebulizer in two short daily sessions. We believe that Inhaled AAT for AATD will increase patient convenience and reduce the need for patients to use intravenous infusions of AAT products, thereby further reducing the risk of infection, decreasing the need for clinic visits or nurse home visits and reducing medical costs. Because of the purity and amount of AAT product used in Inhaled AAT for AATD, we believe that this

 

 

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product, if approved, will enable us to treat significantly more patients from the same amount of plasma and production capacity and therefore increase our profitability.

The current standard care for AATD in the United States and in certain European countries is intravenous infusion of an AAT therapeutic. We estimate that only 2% of the AAT dose reaches the lung when administered intravenously. We have conducted a study demonstrating that administration of inhaled formulations of AAT through inhalation results in greater dispersion of AAT to the target lung tissue. Accordingly, we believe that an inhaled formulation of AAT would require a significantly lower therapeutic dose and would be more effective in reducing inflammation of the lung tissue. In addition, treatment by inhalation will enable the treatment of up to four to five times more patients with the same amount of AAT currently used by one patient for intravenous infusion. In addition, self-administration by inhalation is more convenient than intravenous infusion and would also reduce the burden on healthcare providers to administer treatments.

We are currently undergoing or preparing for clinical trials for Inhaled AAT for AATD, which has been designated as an orphan drug for the treatment of AATD in the United States and Europe. A Phase II/III pivotal trial under EMA guidance is currently being performed in six countries in Europe and in Canada. The trial, which is designed as a double blind placebo controlled and randomized trial, started in January 2010 and is currently ongoing. Subjects in this trial administer a daily dose of Inhaled AAT for AATD or equivalent dose of placebo for 50 consecutive weeks. An open label extension of an additional 50 weeks on active drug is offered to some study participants once they complete the initial 50 week period. Additionally, we completed a third blinded interim safety analysis. The interim safety analysis reports of these trials did not raise any safety concerns.

During the second half of 2012, in the United States, we gained FDA approval for investigational new drug (“IND”) Phase II trials for Inhaled AAT for AATD. We are currently planning the Phase II trials in the United States, to begin in 2013, which may serve as a supplementary trial to the European Phase II/III trial which were designed to incorporate parameters required by the FDA. We intend to complete the European trial in 2013 and the United States trials in 2014 and file a marketing authorization application afterwards in 2014 in Europe. We hope to launch Inhaled AAT for AATD in 2015 in Europe and 2016 in the United States.

An inhaled formulation of AAT was investigated in two separate Phase I trials (Phase Ia and Phase Ib). These trials were performed in accordance with the scientific advice provided by the EMA under the product’s orphan designation status. In both trials, the inhaled formulation of AAT and the control product, a placebo, were administered using the “eFlow” nebulizer. Phase Ia was a single-blind, randomized, single-dose escalation, placebo-controlled study in 24 subjects. Phase Ib was a single-blind, randomized, repeated-dose, dose ranging, placebo-controlled study in 15 subjects. Both trials were targeted to explore safety and tolerability and were completed successfully.

We conducted a Phase II lung deposition trial in three different patient populations: patients with cystic fibrosis, patients with emphysema and healthy subjects. The results of the Phase II trial indicated efficient deposition of AAT, including to most periphery regions. No safety issues were noted.

Cystic Fibrosis

We are currently developing an inhaled formulation of AAT for the treatment of cystic fibrosis, which has been designated as an orphan drug in Europe and the United States. Cystic fibrosis is a congenital disease that causes mucus to build up in the lungs, digestive tract and other areas of the body. The Cystic Fibrosis Foundation estimates that approximately 70,000 people suffer from cystic fibrosis throughout the world. The rate of diagnosis of new patients in the United States is approximately 1,000 per year. Treatment of cystic fibrosis continues throughout the patient’s life, and standard treatments are currently limited to inhaled antibiotics and, in severe cases, lung transplantation.

As discussed above in “— Our Product Pipeline and Development Program — Inhaled Formulations of AAT — AATD,” during the second half of 2012, we received FDA approval for IND Phase II trials for the inhaled formulation of AAT for the treatment of AATD and cystic fibrosis, which we are currently in the process of developing.

 

 

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Previously, in August 2008, we completed a Phase II trial in 21 cystic fibrosis patients. The trial was a double-blind, randomized, placebo-controlled, Phase II trial that sought to explore the safety and efficacy of an inhaled formulation of AAT in cystic fibrosis patients, and consisted of treatment periods of 1 day, 7 days and 28 days. No serious adverse events were reported in any of the patients and the safety listings did not indicate any safety concerns. The trial concluded that the product was safe and well tolerated when inhaled daily for 28 days. A reduction of neutrophils and neutrophil elastase in sputum was observed in the group receiving the inhaled formulation of AAT while no such reduction was observed in the placebo group. The results, while not statistically significant due to small sample size, suggested an anti-inflammatory effect through the usage of the inhaled formulation of AAT in cystic fibrosis patients.

Bronchiectasis

We are also in the process of developing an inhaled formulation of AAT for the treatment of bronchiectasis, which has been designated as an orphan drug in the United States. Bronchiectasis is an illness causing blockage and infection of the lungs. According to research conducted by the Cystic Fibrosis Foundation, in the United States alone, there are 100,000 persons suffering from bronchiectasis. Throughout the world, it is estimated that there are about 600,000 persons suffering from bronchiectasis. Treatment of bronchiectasis continues throughout the patient’s life.

While we have not yet sought approval for clinical trials in the United States, we presented the findings to the FDA of a Phase II trial we conducted in Israel, which was a double-blind, randomized, placebo-controlled trial in 21 bronchiectasis patients and aimed to explore the safety and efficacy of an inhaled formulation of AAT in bronchiectasis patients for 12 weeks. The safety profile demonstrated was high and the product was determined as safe and tolerable for a period of 12 weeks in bronchiectasis patients. Efficacy results were not statistically significant due to the small number of patients in the study and to variability of the patients’ disease severity, but suggested a positive effect of AAT on decreasing inflammation of the lungs.

AAT by Infusion for Treatment of Newly Diagnosed Type-1 Diabetes

We have commenced the development of an additional indication for Glassia for its usage in the treatment of newly diagnosed cases of Type-1 Diabetes. Diabetes is an autoimmune disease in which the pancreas cells responsible for secretion of insulin are attacked and destroyed by the immune system. According to estimates by the U.S. Centers for Disease Control, more than 10 million persons throughout the world suffer from Type-1 Diabetes with 100,000 new patients diagnosed annually. According to estimates by the American Association for Type-1 Diabetes, approximately three million people in the United States suffer from Type-1 Diabetes, with 30,000 new patients diagnosed annually.

Studies have demonstrated that even though the level of AAT protein in Type-1 Diabetes patients may be normal, the activity of the AAT protein in these patients is significantly lower than in healthy people. Because AAT has proven anti-inflammatory responses, we believe that treatment by AAT protein in the initial stages after diagnosis of Type-1 Diabetes may prevent or may delay the inflammation that is caused by the autoimmune destruction of the pancreatic cells. As a result, we believe that AAT therapeutics may slow the progression of the development of newly diagnosed Type-1 Diabetes and improve prognosis. A number of studies conducted recently, including those conducted using Glassia, as discussed below, have suggested that use of AAT protein may delay the inflammatory process in the pancreatic cells and maintain or prolong cell function, which is increased by the secretion of insulin and glycemic control. We believe that the use of Glassia for the treatment of newly diagnosed Type-1 Diabetes, unlike the current standard of care insulin treatment, may prevent or slow the progression of the development of the disease. If demonstrated in further clinical studies, we believe that this product can slow progression and delay the complications of diabetes, such as retinopathy, nephropathy and heart disease.

In December 2012, we completed Phase I/II clinical trials in Israel of Glassia for usage in the treatment of Type-1 Diabetes, which suggested that AAT may slow disease progression, allow continued functionality of beta cells and improve glycemic control. The objective of the trials was to examine the safety and efficacy of Glassia for treatment of newly diagnosed Type-1 Diabetes. The participants in the trials included 24 patients suffering from Type-1 Diabetes, between ages 9 and 17, who have been diagnosed as suffering from Type-1 Diabetes within the most recent six months. We intend to begin Phase II or Phase II/III trials in Israel and/or

 

 

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Europe during 2013 and hope to launch by 2017. We are currently planning to approach the FDA, the EMA and the Israeli Ministry of Health to discuss next steps for the registration process in the United States, Europe and Israel, respectively.

Other Indications

In addition, we believe that a number of additional potential indications may exist for this product candidate, including chronic obstructive pulmonary disease, graft-versus-host disease and transplantations.

Strategic Partnerships

We currently have strategic partnerships with a number of different companies regarding the development and/or distribution of our products in both the Proprietary Products and Distribution segments. Certain of the strategic partnerships relating to our Proprietary Products segment are discussed below.

Baxter (Glassia)

On August 23, 2010, we entered into a strategic partnership with Baxter Healthcare Corporation, an affiliate of Baxter. The arrangement includes three main agreements: (1) a distribution agreement, pursuant to which Baxter is the sole distributor of Glassia in the United States, Canada, Australia and New Zealand; (2) a licensing agreement, which grants Baxter licenses to use our knowledge and patents to produce, develop and sell Glassia and other products administered by transfusion; and (3) an agreement for Baxter to supply us with fraction IV, a plasma derivative, produced by Baxter, as discussed under “— Manufacturing and Supply — Raw Materials — Fraction IV for Glassia.” As between us and Baxter, we retain all rights, including distribution rights, to any inhaled formulation of AAT in development, including Inhaled AAT for AATD.

Sales to Baxter accounted for 42%, 41% and 30% of our total revenues in the years ended December 31, 2012, 2011 and 2010, respectively.

Distribution Agreement

Pursuant to the distribution agreement, we received an upfront payment of $20 million related to distribution rights. Additionally, Baxter is obligated to purchase a minimum amount of Glassia per year until the end of 2015, subject to Baxter’s option, which must be exercised by June 30, 2013, to replace the purchase requirement for 2015 with the minimum amount of royalty payments set forth in the technology license agreement described below. Pursuant to Baxter’s minimum purchase obligations, from the date of this prospectus until the end of 2015, we are entitled to receive a minimum of $13.2 million per year from Baxter. After 2015, Baxter has no obligation to purchase a minimum amount of Glassia; however, Baxter’s failure to purchase a specified minimum amount of Glassia over a period of 24 consecutive months beginning in 2016 until the expiration of the agreement provides us with the right to terminate the agreement. Baxter is also obligated to fund required Phase IV clinical trials related to Glassia up to a specified amount. If the costs of such clinical trials are in excess of this amount, we have agreed to fund a portion of the costs. We do not expect that the cost of the trials will exceed the specified amount.

The distribution agreement expires in 2040. In addition to customary termination provisions, either party may terminate the agreement, subject to certain exceptions, in whole or solely with respect to one or more countries covered by the distribution agreement, if regulatory approval in one or more countries covered by the distribution agreement is withdrawn or rejected and not reversed. Baxter has the right to terminate the agreement, upon prior written notice and after a period of time, in the event that Glassia is determined to materially infringe upon a third party’s intellectual property rights. In addition to the minimum purchase termination right discussed above, we have the right to terminate the agreement upon prior written notice if Baxter infringes upon our intellectual property.

Following termination of the agreement, Baxter is obligated to cease marketing, promoting or otherwise using Glassia and, at our election, sell all remaining inventory of Glassia in the market or back to us at the relevant purchase price.

Technology License Agreement

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additional development of Glassia for use in Baxter’s production and sale of Glassia in the United States, Canada, Australia and New Zealand. Baxter agreed to pay us royalties at the rates specified in the agreement, which are in the low double digits during the first 15 years and decreasing to less than 10% for the remainder of the period, once it begins its own production of Glassia, which we expect to begin in 2015. The technology license agreement sets forth a minimum amount of royalty payments of $5.0 million required to be made by Baxter per year beginning on the earlier of the first year of commercial sales of Glassia produced by Baxter or 2015, if Baxter exercises its option to replace the minimum purchase requirements for 2015 under the distribution agreement, as described above.

Pursuant to the technology license agreement, we are entitled to receive payments for the achievement of certain milestones for an aggregate of up to $25.0 million, of which we have already received $10.0 million. Of the milestone payments, $15.0 million are development-based milestones related to the transfer of technology to Baxter and $10.0 million are sales-based milestones.

The intellectual property rights for any improvements on the manufacturing process or formulations that we disclose to Baxter belong to the party that develops the improvements, with each party agreeing to cross-license the developed improvements to the other party. We retain an option to license any intellectual property developed by Baxter under the agreement that is not considered an improvement on the licensed technology. Additionally, Baxter owns any intellectual property it develops using the licensed technology for new indications for the intravenous AAT product, for which we retain an option to license at rates to be negotiated. Any technology related to new indications for the intravenous AAT product developed by us during the royalty payments period will be part of the licensed technology covered by the technology license agreement.

The technology license agreement expires in 2040. Either party may terminate the agreement, in whole or solely with respect to one or more countries covered by the distribution agreement, pursuant to customary termination provisions. Baxter also has the right to terminate the agreement, upon prior written notice, in the event that: (i) our manufacturing process technology for Glassia is determined to materially infringe upon a third party’s intellectual property rights, and we have not obtained a license to such third party’s intellectual property or provided an alternative non-infringing manufacturing process; (ii) there are certain decreases in Glassia sales in the United States unless such decreases are due to transfers to Inhaled AAT for AATD; or (iii) the regulatory approval process in the United States has been withdrawn or rejected as a result of our inaction or lack of diligent effort, provided such withdrawal or rejection was not primarily caused by the breach by Baxter of its obligations. We have the right to terminate the agreement, upon prior written notice: (i) if Baxter contests or infringes upon our intellectual property; (ii) if regulatory approval in one or more countries covered by the technology license agreement is withdrawn or rejected and not reversed, provided it was not primarily caused by the breach by us of our obligations; (iii) in the event that Glassia produced by Baxter, other than as a result of our manufacturing process technology, is determined to materially infringe upon a third party’s intellectual property rights, provided that the termination right is limited only to the country in which such judgment is binding; or (iv) if the first sale of Glassia produced by Baxter has not occurred by June 15, 2017, and Baxter has not used commercially reasonable efforts to sell by that date. Following any termination, other than expiration of the agreement, all licensed rights will revert to us. Upon expiration of the agreement, we are obligated to grant to Baxter a non-exclusive, perpetual, royalty free license.

Chiesi (Inhaled AAT for AATD product)

On August 2, 2012, we entered into an exclusive distribution agreement with Chiesi, a fully integrated European-based pharmaceutical company focused on respiratory disease and special care products. Chiesi distributes its products in more than 60 countries and has 24 affiliates worldwide. It has a direct commercial presence in Europe, the United States and in many important emerging markets.

We granted Chiesi the exclusive right to commercialize Inhaled AAT for AATD in the European Union and Turkey, as well as certain other European and Asian countries, including certain ex-Soviet Union countries. We retain all rights, including distribution rights, for additional indications for inhaled formulations of AAT, including indications for the treatment of cystic fibrosis and bronchiectasis. We also retain ownership of intellectual property rights for Inhaled AAT for AATD. Chiesi will be responsible for, among other things,

 

 

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product sales and marketing, patient recruitment and screening and obtaining reimbursement approvals for the product. Beginning in the second year after the receipt of certain required regulatory and reimbursement approvals, Chiesi is required to purchase a minimum amount of the Inhaled AAT for AATD product per year based on the number of countries in which regulatory and reimbursement approvals have been received, for a minimum amount of approximately $120 million for the first four years, subject to adjustments based on actual product price after regulatory approval.

We are entitled to receive payments upon the achievement of certain regulatory and sales target milestones for an aggregate of up to $60.0 million, including $20.0 million, consisting of an upfront payment we have already received and regulatory-based milestones, and $40.0 million of sales-based milestones.

The agreement expires on August 2, 2024. Either party may terminate the agreement (i) upon an uncured material breach by the other party, (ii) upon certain bankruptcy events of the other party or (iii) with prior notice if any regulatory approval in one or more countries covered by the distribution agreement is withdrawn or the application has been rejected, and the decision has not been reversed for a certain period thereafter, provided that the withdrawal or rejection was not primarily caused by the breach of the terminating party of its obligations. We have the right to terminate the agreement with prior notice if Chiesi does not meet its minimum purchase obligations, or if Chiesi infringes upon our intellectual property.

PARI

On November 16, 2006, we entered into a license agreement with PARI (the “Original PARI Agreement”) regarding the clinical development of an inhaled formulation of AAT, including Inhaled AAT for AATD, using PARI’s “eFlow” nebulizer. Under the Original PARI Agreement, we received an exclusive worldwide license, subject to certain preexisting rights, including the right to grant sub-licenses, to use the “eFlow” nebulizer, including the associated technology and intellectual property, for the clinical development, registration and commercialization of inhaled formulations of AAT to treat AATD and respiratory deterioration, and to commercialize the device for use with such inhaled formulations. The agreement also provided for PARI’s cooperation with us during the pre-clinical phase and Phase I clinical trials of inhaled formulations of AAT, where each of us was responsible for developing and adapting our own product and bore the costs involved.

Pursuant to the Original PARI Agreement, we agreed to pay PARI royalties from sales of inhaled formulations of AAT, after certain deductions, at the rates specified in the agreement. We have agreed to pay PARI tiered royalties ranging from the low single digits up to the high single digits based on the annual net sales of inhaled formulations of AAT for the applicable indications. The royalties will be paid for each country separately, until the later of (1) the expiration of the last of certain specified patents covering the “eFlow” nebulizer, or (2) 15 years following the first commercial sale of an inhaled formulation of AAT in that country (the “PARI royalties period”). During the PARI royalties period, PARI is obligated to pay us specified percentages of its annual sales of the “eFlow” nebulizer for use with inhaled formulations of AAT above a certain threshold defined in the agreement and after certain deductions. On February 21, 2008, we entered into an addendum to the Original PARI Agreement (together with the Original PARI Agreement, the “PARI Agreement”), which extended the exclusive global license granted to us to use the “eFlow” nebulizer, including the associated technology and intellectual property, for the clinical development, registration and commercialization of inhaled formulations of AAT for two additional indications of lung disease, namely cystic fibrosis and bronchiectasis. Pursuant to the addendum, each party will be responsible for developing and adapting its own product for the additional indications and will bear the costs involved. Additionally, we and PARI will supply, each at our own expense, inhaled formulations of AAT and the “eFlow” nebulizers, respectively, and in the quantities required for all phases of clinical studies worldwide. In addition, PARI will provide to us, at its expense, technical and regulatory support regarding the “eFlow” nebulizer. Sales of the inhaled formulation of AAT for the additional indications will be added to sales of the first two indications covered by the original agreement as the basis for calculating the royalties to be paid by us to PARI.

The PARI Agreement expires when the PARI royalties period ends. Either party can terminate the PARI Agreement upon customary termination provisions. Additionally, upon the occurrence of any one of the following events, PARI has the right to negotiate with us in good faith about whether to continue our collaboration: (i) PARI’s costs of the required clinical trials exceed a certain amount, unless we or a third

 

 

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party incurs such expenses on behalf of PARI; (ii) an inhaled formulation of AAT is not successfully registered with any regulatory authorities by 2016; (iii) there are no commercial sales of inhaled formulations of AAT within a certain period after successful registration with any regulatory authority; or (iv) we cease development of inhaled formulations of AAT for a certain period of time. If, within 180 days of PARI’s request to negotiate, we do not agree to continue the collaboration, PARI has the option either to render the license they grant to us non-exclusive or to terminate the agreement. We have the right to terminate the agreement, upon prior written notice, (i) in the event that the “eFlow” nebulizer is determined to infringe upon a third party’s intellectual property rights, (ii) an injunction barring the use of the “eFlow” nebulizer has been in place for a certain period of time, (iii) a clinical trial for inhaled formulations of AAT fails as a result of, after a cure period, the “eFlow” nebulizer not conforming to specifications or PARI’s inability to supply the “eFlow” nebulizer; or (iv) failure by PARI to register the “eFlow” nebulizer within a certain period of time after receiving Phase III results for Inhaled AAT for AATD.

Following any termination, all licensed rights will revert to PARI, unless we terminate the agreement as a result of PARI’s bankruptcy, payment failure or material breach, in which case we retain the license rights to the “eFlow” nebulizer as long as we continue making royalty payments.

In addition, on February 21, 2008, we signed a commercialization and supply agreement with PARI that provides for the supply of the “eFlow” nebulizer and its spare parts to patients who are treated with the inhaled formulation of AAT, either through its own distributors, our distributors or independent distributors in countries where PARI does not have a distributor. The commercialization and supply agreement expires upon the earlier of (1) the end of four years from (x) the end of the last PARI royalties period, or (y) the termination of the PARI Agreement by one party due to the other party declaring bankruptcy, failing to make a payment after a 30-day cure period or breach of a material provision after a 30-day cure period, or (2) the termination of the PARI Agreement pursuant to its terms, other than for reasons as previously described, in which case the commercialization and supply agreement terminates simultaneously with the PARI Agreement provided that PARI ensures availability of the “eFlow” nebulizer and its associated spare parts and service to anyone being treated with the inhaled formulation of AAT at the time of such termination, for the warranty period of the device or for a longer period, if required by the applicable law or the relevant regulatory authority.

Kedrion (KamRAB)

On July 18, 2011, we signed an agreement with Kedrion, an international pharmaceutical company engaged in the manufacture of life saving drugs based on human plasma which complement our products, and which are marketed in Europe, the United States and approximately 40 other countries worldwide. The agreement provides for exclusive cooperation on completing the clinical development, and marketing and distribution of our anti-rabies pharmaceutical, KamRAB, in the United States.

Pursuant to the agreement, Kedrion will bear all the costs of the Phase III clinical trials in the United States of our product for rabies. Costs related to any Phase IV clinic trials, if required, and the FDA Prescription Drug User fee that is required for all FDA new drug approvals will be divided equally between us and Kedrion. It was also agreed that the hyper-immune plasma required to produce the product would be supplied by KedPlasma LLC, a subsidiary of Kedrion.

The agreement provides exclusive rights to Kedrion to market and sell KamRAB in the United States. We retain intellectual property rights to KamRAB. Beginning shortly after receipt of FDA approval for KamRAB, Kedrion will be obligated to purchase a minimum amount of KamRAB per year during the term of the agreement.

The term of the agreement is for six years following the receipt of FDA approval, subject to Kedrion’s option to extend the agreement by two years. In addition to customary termination provisions, either party can terminate the agreement for any reason prior to the commencement of clinical trials for FDA approval. Kedrion also has the right to terminate the agreement, upon prior written notice, (i) for any reason after receipt of FDA approval, (ii) in the event that the FDA biologics license is suspended or revoked and cannot be reinstated within a certain period of time, or (iii) a major regulatory change occurs that materially and adversely increases the clinical trial costs. We have the right to terminate the agreement in the event that (i) a major regulatory change occurs that materially and adversely increases the manufacturing costs of KamRAB,

 

 

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(ii) a major regulatory change occurs that poses considerable difficulties on submission of an application for FDA approval or (iii) clinical trials are not initiated within a certain time after either receipt by Kedrion of enough product or FDA approval to begin clinical trials.

Manufacturing and Supply

We have a production plant located in Beit Kama, Israel, which is fully cGMP compliant. We operate the main production facility on schedules so that at any time the facility is assigned to produce one product only. The division of facility time among the various products is determined based on orders received, sales forecasts and development needs. We are planning to increase the logistics capacity of the plant through 2013 and to enhance the existing infrastructure.

Our production plant passed inspection by the FDA in 2010, and our plant and laboratories also successfully passed a quality assurance audit by the Russian Ministry of Health and similar authorities in Brazil and Mexico. In July 2011, a cGMP audit was conducted by the Israeli Ministry of Health, following which the plant’s main production facility was reapproved, as well as the new facility to produce our snake bite antiserum product, which was planned and constructed between the years 2009 and 2011 with Ministry of Health funding and began operating in August 2011.

Any changes in our production processes for our products must be approved by the FDA and similar authorities in other jurisdictions. Recently, as part of our on-going effort to increase efficiency and profitability, we submitted a supplement with the FDA to make changes to the production processes for Glassia, which are intended to scale-up the output of our manufacturing facility and began to produce Glassia using the improved processes. We believe that these adjustments will significantly increase our manufacturing capacity for Glassia. In March 2013, we received a request from the FDA to submit additional data and explanations prior to its approval of our new production processes. We expect to provide the additional information required by the FDA during the second quarter of 2013. While such FDA review is pending, we are continuing to produce Glassia according to FDA-approved application and production processes. We cannot provide assurance that we will obtain such approval on a timely basis or at all. Failure to obtain such approval could cause us to write off the value of the inventory produced using the new methods. In addition, if we do not obtain such approval, we would not obtain the margin benefits we are anticipating from such improved processes. See “Risk Factors — Risks Related to Our Business and Industry — We are subject to a number of existing laws and regulations in multiple jurisdictions, non-compliance with which could adversely affect our business, financial condition and results of operations, and we are susceptible to a changing regulatory environment which could increase our compliance costs or reduce profit margins.”

Raw Materials

The main raw materials in our Proprietary Products segment are plasma and fraction IV. We also use other raw materials, including both natural and synthetic materials. We purchase raw materials from suppliers who are regulated by the FDA, EMA and other regulatory authorities. Our suppliers are approved in their countries of origin and by the Ministry of Health in Israel. The raw materials must comply with strict regulatory requirements. We require our raw materials suppliers to comply with the cGMP rules, and we audit our suppliers from time to time. We are dependent on the regular supply and availability of raw materials in our Proprietary Products segment.

Other than Baxter, in the years ended December 31, 2012, 2011 and 2010, there were no other suppliers who accounted for 10% or more of the total purchases of raw materials in our Proprietary Products Segment. We maintain relationships with several suppliers in order to ensure availability and reduce reliance on specific suppliers. We are dependent, however, on a number of suppliers who supply specialty ancillary products prepared for the production process, such as specific gels and filters. See “Risk Factors — We would become supply-constrained and our financial performance would suffer if we were unable to obtain adequate quantities of source plasma or plasma derivatives or specialty ancillary products approved by the FDA, the EMA or the regulatory authorities in Israel, or if our suppliers were to fail to modify their operations to meet regulatory requirements.”

In the years ended December 31, 2012 and 2011, we incurred $15.3 million and $9.1 million of expenses for the purchase of raw materials, respectively.

 

 

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Fraction IV for Glassia

On August 23, 2010, in conjunction with the cooperation arrangement with Baxter, we signed an agreement with Baxter for the supply of fraction IV for use in the production of Glassia to be sold in the United States. Under this agreement, Baxter also supplies us with fraction IV to continue the development and trials of Glassia and for the production, sale and distribution of Glassia in jurisdictions other than the United States or for the production, sale and distribution of other products in any territory. Baxter receives no payment for the supply of fraction IV to be used by us for the manufacture of Glassia to be sold to Baxter. If we require fraction IV for other purposes, we are entitled to purchase it from Baxter at a predetermined price. While we are dependent on Baxter for the supply of fraction IV, Baxter is currently dependent on us to produce Glassia for sale in the United States, as it does not have its own production capacity for Glassia. The supply agreement terminates on August 23, 2040, subject to an option for earlier termination in the event of a material breach.

In December 2012, we signed an additional agreement with Baxter to supply additional fraction IV manufactured in its Vienna plant to be used as the raw material in the production of our AAT product. Baxter is obligated to make available to us yearly minimum quantity of fraction IV. The agreement remains in effect until December 31, 2021, subject to earlier termination in the case of a breach, and may be renewed for two consecutive two year periods upon mutual agreement of both parties. Either party may terminate the agreement for any reason with twelve months prior written notice to the other party, provided that as a condition to such termination by Baxter, Baxter is obligated to provide us, upon our request, with fraction IV in the amount equivalent to the previous year’s total amount of fraction IV sold to us in addition to the fraction IV to be sold during the last year of the agreement.

We have relationships with suppliers in addition to Baxter, and we are currently in negotiations with two additional FDA- and EMA-approved fraction IV suppliers to reduce our dependence on Baxter.

Hyper-immune Plasma

We have a number of suppliers in the United States and Europe for hyper-immune plasma with which we have long-term supply agreements. Hyper-immune plasma is used for the production of KamRAB and KamRho(D). In addition to long-term supply agreements, we work to secure availability of hyper-immune plasma on an annual basis by providing forecasts to our suppliers based on our customers’ actual and forecasted orders. We continue to seek to enter into additional long-term supply agreements for hyper-immune plasma.

Research and Development

Our research and development activity in the Proprietary Products segment is focused on developing new orphan plasma-derived therapeutic products, registering new products, including conducting clinical trials, improving existing products and processes and engaging in development work at the request of regulatory authorities and strategic partners. We are continuing to pursue further growth by diversifying our product pipeline through the discovery and development of additional plasma-derived protein therapeutic products for high-value indications. We incurred approximately $11.8 million, $11.7 million and $9.3 million in research and development expenses in the years ended December 31, 2012, 2011 and 2010, respectively.

Marketing and Distribution

In the Proprietary Products segment, we receive orders for plasma-derived protein therapeutics and, other than for Glassia, requests for participation in tenders for the supply of plasma-derived protein therapeutics from potential distributors and from existing distributors. We sell Glassia to Baxter and to other distributors.

For our other products, we market, in most cases, by means of agreements with local distributors in each country through a tender process. The tender process is conducted on a regular basis with distributors, sometimes on an annual basis. For existing customers, our existing relationship does not guarantee additional orders from the same customers in these tenders. The decisive parameter is generally the price proposed in the tender. The distributor purchases plasma-derived protein therapeutics from us and sells them to its customers (either directly or by means of sub-distributors). In most cases, we do not sign agreements with the end users, and as such, we do not fix the price to the end user or its terms of payment and are not exposed to credit

 

 

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risks of the end users. In the vast majority of cases, our agreements with the local distributors award the various distributors exclusivity in the distribution of our plasma-derived protein therapeutics in the relevant country. The distribution agreements are, in most cases, made for a specific initial period and are subsequently renewed for one-year periods, where the parties have the right to cancel or renew the agreements with prior notice of a number of months. In these markets, we do not actively participate in the marketing to the end users, except for supplying marketing assistance where the cost is negligible or participation in marketing costs as a part of incentives for distributors. In Israel, we market our plasma-derived protein therapeutics independently to the end user, healthcare providers and medical centers or through a partner company that specializes in the supply of equipment and pharmaceuticals to healthcare providers.

Most of our sales outside of Israel are made against open credit and some in documentary credit or cash in advance. Most of our sales inside Israel are made against open credit or cash. The credit given to some of our customers abroad (except for sales in documentary credit or cash) is mostly secured by means of a credit insurance policy.

In the Distribution segment, we market our products in Israel to health maintenance organizations and hospitals on our own. While we occasionally receive direct orders for our Distribution segment products, we primarily sell our Distribution segment products through offers to participate in public tenders, which occur on an annual basis. The public tender process involves health maintenance organizations and hospitals soliciting bids from several potential suppliers, including us, and selecting the winning bid based on several attributes, primarily price and availability. The annual public tender process is also used by our existing customers to determine their suppliers. As a result, our existing relationships with customers in our Distribution segment do not guarantee additional orders from such customers year to year.

We have distribution agreements with each of our two largest suppliers in our Distribution segment to be their exclusive distributor in Israel for a number of their manufactured products; however, we purchase our Distribution segment products from our suppliers on a purchase order basis. We work closely with our suppliers to develop annual forecasts, but these forecasts do not obligate our suppliers to provide us with their products. Additionally, one of our suppliers has the right to convert the agreement into a non-exclusive agreement or terminate the agreement if we do not meet our annual forecasts.

Customers

For the year ended December 31, 2012, sales to Baxter and Kupat Holim Clalit, an Israeli healthcare provider, accounted for 42% and 21%, respectively, of our total revenues. No other sole customer accounted for greater than 10% of our total revenues in the nine months ended September 30, 2012.

Baxter is our major customer in the Proprietary Products segment. Our other customers in the Proprietary Products segment are our distributors in Brazil, Thailand and India, as well as healthcare providers and medical centers in Israel. In other geographies, most of the sales of our products are conducted through local distributors. These arrangements are further described above under “— Marketing and Distribution.”

Our primary customers in the Distribution segment are health maintenance organizations and hospitals in Israel, including Kupat Holim Clalit.

Competition

The worldwide market for pharmaceuticals in general, and biopharmaceutical and plasma products in particular, has in recent years undergone a process of mergers and acquisitions among companies active in such markets. This trend has led to a reduction in the number of competitors in the market, but the strengthening of the remaining competitors, mainly for specific immunoglobulin products.

Proprietary Products Segment

We believe that there are two to four large competitors for each of our products in the Proprietary Products segment. These large competitors include CSL Behring Ltd., Baxter, Cangene Corporation and Grifols S.A., which recently acquired a previous competitor, Talecris Biotherapeutics, Inc. While these competitors also produce AAT products in Europe and the United States, we have not seen significant changes in their activities. Additionally, our strategic alliance with Baxter has strengthened our competitive positioning in the market.

 

 

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Our large competitors have advantages in the market because of their size, financial resources, markets and the duration of their activities and experience in the relevant market, especially in the United States and countries of the European Union. Some of them have an additional advantage regarding the availability of raw materials, as they manufacture plasma and its products, and own companies that collect or produce raw materials such as plasma.

The following describes details known to us about our most significant competitors for each of our main Proprietary Products segment products.

Glassia .  We believe that Glassia has two main competitors: Grifols and CSL. We estimate that Grifols’ AAT by infusion product for the treatment of AATD, Prolastin, accounts for more than 70% of sales worldwide, and is the only such product that is approved for sale in both Europe and the United States. CSL’s product, Zemaira, is mainly sold in the United States. Apart from its sales of the past Talecris product, Grifols is also a local producer of a separate AAT product, Trypsone, which is marketed in Spain and in some Latin American countries, including Brazil. While Baxter is our strategic partner for sales of Glassia, it also markets its own product, Aralast, which competes with Glassia. In addition, we are aware of a smaller local producer of AAT in the French market, Laboratoire Français du Fractionnement et des Biotechnologies, S.A. We do not believe any new suppliers are expected to enter the United States market for AAT by infusion in the near future. As part of the approval of our competitors’ intravenous AAT products for the treatment of AATD, they (like us) were required by the FDA to conduct Phase IV clinical trials aimed to collect efficacy data. One of our competitors has recently released results from its Phase IV trial. While the results appear to be positive, we are currently evaluating the data. To the best of our knowledge, to date, our other competitors have not completed their trials or their results have not been published.

KamRAB .  We believe that there are two main competitors for this anti-rabies product worldwide: Grifols, whose product we estimate comprises approximately 90% of the anti-rabies market in the United States, and CSL, which sells its anti-rabies product in Europe and elsewhere. Sanofi Pasteur, the vaccines division of Sanofi S.A., has a product registered for the United States market, but the product is primarily sold in Europe and not currently sold in commercial quantities in the United States. There are a number of local producers in other countries that make similar anti-rabies products. Most of these products are based on horse serum, which we believe results in inferior products, as compared to products made from human plasma.

KamRho(D) .  While Kedrion is one of our strategic partners for KamRAB, it is also one of our main competitors for this product following its acquisition of the Anti-Rh product line of Ortho-Clinical Diagnostics, Inc., which was formerly our main competitor for this product. We estimate that Kedrion’s product accounts for approximately 50% of sales in the United States. Kedrion also markets a competing product in Italy and has recently begun to expand into other markets. We believe there are three additional suppliers of competitive products in this market: Cangene, Grifols and CSL. There are also local producers in other countries that make similar products mostly intended for local markets.

Distribution Segment

We believe that there are a number of companies active in the Israeli market distributing the products of seven manufacturers whose comparable products compete with our products in the Distribution segment. These manufacturers include Grifols, Baxter, CSL, Octapharma AG, Omrix Biopharmaceuticals Ltd. (a Johnson & Johnson company) and Cangene. In particular, we compete against Omrix and Octapharma for IVIG. These competing manufacturers have advantages of size, financial resources, market share, broad product selection and extensive experience in the market, although we believe that we have greater expertise in the Israeli market. Each of these competitors sells its products through local representatives in Israel.

Government Regulation

Government authorities in the United States, at the federal, state and local level, and in other countries extensively regulate, among other things, the research, development, testing, manufacture, quality control, approval, labeling, packaging, storage, record-keeping, promotion, advertising, distribution, post-approval monitoring and reporting, marketing and export and import of products such as those we sell and are developing. Any pharmaceutical candidate that we develop must be approved by the FDA before it may be legally marketed in the United States and by the appropriate foreign regulatory agency before it may be legally marketed in foreign countries.

 

 

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U.S. Drug Development Process

In the United States, pharmaceutical products are regulated by the FDA under the Federal Food, Drug, and Cosmetic Act and other laws, including, in the case of biologics, the Public Health Service Act. All of our products for human use and product candidates in the United States, including Glassia, are regulated by the FDA as a biologic. Biologics require the submission of a Biologics License Application (“BLA”) and approval by the FDA prior to being marketed in the United States. Manufacturers of biologics may also be subject to state regulation. Failure to comply with FDA requirements, both before and after product approval, may subject us and/or our partners, contract manufacturers and suppliers to administrative or judicial sanctions, including FDA refusal to approve applications, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, fines and/or criminal prosecution.

The steps required before a biologic may be approved for marketing for an indication in the United States generally include:

1.

preclinical laboratory tests and animal tests;

2.

submission to the FDA of an IND for human clinical testing, which must become effective before human clinical trials may commence;

3.

adequate and well-controlled human clinical trials to establish the safety and efficacy of the product;

4.

submission to the FDA of a BLA or supplemental BLA;

5.

FDA pre-approval inspection of product manufacturers; and

6.

FDA review and approval of the BLA or supplemental BLA.

Preclinical studies include laboratory evaluation, as well as animal studies to assess the potential safety and efficacy of the product candidate. Preclinical safety tests must be conducted in compliance with FDA regulations regarding good laboratory practices. The results of the preclinical tests, together with manufacturing information and analytical data, are submitted to the FDA as part of an IND which must become effective before human clinical trials may be commenced. The IND will automatically become effective 30 days after receipt by the FDA, unless the FDA before that time raises concerns about the drug candidate or the conduct of the trials as outlined in the IND. The IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can proceed. We cannot assure you that submission of an IND will result in FDA authorization to commence clinical trials or that, once commenced, other concerns will not arise that could lead to a delay or a hold on the clinical trials.

Clinical trials involve the administration of the investigational product to healthy volunteers or to patients, under the supervision of qualified principal investigators. Each clinical study at each clinical site must be reviewed and approved by an independent institutional review board, prior to the recruitment of subjects.

Clinical trials are typically conducted in three sequential phases, but the phases may overlap and different trials may be initiated with the same drug candidate within the same phase of development in similar or differing patient populations.

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Phase I studies may be conducted in a limited number of patients, but are usually conducted in healthy volunteer subjects. The drug is usually tested for safety and, as appropriate, for absorption, metabolism, distribution, excretion, pharmaco-dynamics and pharmaco-kinetics.

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Phase II usually involves studies in a larger, but still limited, patient population to evaluate preliminarily the efficacy of the drug candidate for specific, targeted indications; to determine dosage tolerance and optimal dosage; and to identify possible short-term adverse effects and safety risks.

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Phase III trials are undertaken to further evaluate clinical efficacy of a specific endpoint and to test further for safety within an expanded patient population at geographically dispersed clinical study sites.

Phase I, Phase II or Phase III testing may not be completed successfully within any specific time period, if at all, with respect to any of our product candidates. Results from one trial are not necessarily predictive of