ITEM 1 - Business.

We are a clinical stage rare and orphan disease company developing an innovative and proprietary ex vivo gene therapy platform, offering what we believe to be a novel therapeutic approach for use in the $50 billion orphan and rare disease therapeutics markets. Our TARGT ^TM (Transduced Autologous Restorative Gene Therapy) platform (previously called BioPump) is designed to provide sustained protein and peptide therapies to treat a range of chronic diseases and conditions. We are currently studying our lead product, MDGN-201, which we refer to as TARGT _EPO ^TM (previously called EPODURE ^TM ), in a Phase 1/2 clinical trial in patients with End Stage Renal Disease (ESRD), and we plan on studying TARGT _EPO in identified orphan populations of unmet need including subpopulations of Chronic Kidney Disease (CKD) or ESRD patients who may benefit from treatment with TARGT _EPO. These patients may include those who are hypo-responsive to recombinant humanized erythropoietin, or rHuEPO, patients eligible for peritoneal dialysis, anemic patients on the transplant list, patients with Myelodysplastic Syndrome (MDS), and Beta Thalassemia Intermedia patients. We have initiated in vivo proof of concept pre-clinical studies with several other orphan/rare disease candidates, and we anticipate initiating discussions with regulatory agencies for some of those programs in 2015.

In June 2014, the first patient was enrolled in our Phase 1/2 clinical trial of MDGN-201 (TARGT _EPO ). The aim of the ongoing trial is to validate the potential of our TARGT platform using a second-generation expression cassette of the HDAd viral vector that was developed to enhance durability of the proposed therapeutic effect. The ongoing study is evaluating the potential of the updated platform to offer sustained production and delivery of endogenous erythropoietin, or eEPO, to treat anemia in dialysis patients with ESRD. This open-label trial is expected to enroll up to 18 patients with ESRD who require rHuEPO treatment for anemia. We expect that each patient will receive one or more TARGT _EPO microorgans and will be followed for at least one year. The trial endpoints include plasma eEPO levels, blood counts and safety assessment.

In February 2015, we announced ongoing interim clinical data on the six patients in the low-dose cohort of the Phase 1/2 trial. The patients follow up at that time ranged from 2 to 8 months post implantation of TARGT _EPO microorgans and patients have shown positive response to therapy at up to 100x lower Cmax and 10X lower total exposure compared with rHuEPO (e.g., EPREX). The first patient implanted with TARGT _EPO has maintained hemoglobin (Hb) levels due to red blood cell production stimulated by eEPO at 8 months following implantation. Of the remaining 5 patients, one maintained his target Hb levels without receiving an injection of rHuEPO for five months, another patient, who had a complicated course and surgery unrelated to the TARGT _EPO treatment leading to a loss of blood, required additional rHuEPO at two months following the implantation of the TARGT _EPO microorgan and has since been withdrawn from the study. The other patients, who were implanted from 2 to 4 months ago remain stable, are maintaining acceptable hemoglobin levels and have not required any rHuEPO or blood transfusions following their TARGT _EPO implantations. The low-dose TARGT _EPO was well tolerated and there were no treatment related serious adverse events (SAEs). Enrollment has now begun in the mid-dose cohort of the Phase 1/2 trial with first results expected in the second quarter of 2015. In addition, in October 2014, we announced pre-clinical in-vivo data that showed a novel TARGT construct, TARGT _GLP-2 , demonstrated pre-clinical proof of concept by producing GATTEX (teduglutide), a GLP-2 analogue for the treatment of short bowel syndrome, in severe combined immunodeficiency mice (SCID) implanted with TARGT _GLP-2 .

In November 2014, we entered into a licensing and research collaboration with the Children’s Hospital of Philadelphia, or CHOP (the “Research Agreement” and the “License Agreement”). Under this Research Agreement, we agreed to sponsor research at CHOP with respect to the recruitment and genetic analysis of patents with rare Mendelian diseases to accelerate discovery of diagnostic and therapeutic targets. As consideration for the research program, we are obligated to pay CHOP $4,475,765 on a specified timeline during the initial year of the Research Agreement. In exchange for our sponsorship of the research program, CHOP has granted us options over certain intellectual property created in the course of the research. The initial term of the Research Agreement is one year. We have the unilateral right to extend the term of the Research Agreement for an additional two-year term beyond the initial term and to provide additional funding for such an extension. The terms of the License Agreement are described below under “Licenses.”

Overview of TARGT Platform

Our TARGT technology is based upon a transduced tissue microorgan (MO) that acts as an autologous protein or peptide “bioreactor” created from a small (1/2 the size of a toothpick) piece of the patient’s dermal tissue explanted and reimplanted in a simple procedure under local anesthetic. We have developed a proprietary device called the DermaVac ^TM to facilitate reliable and straightforward removal of MOs (pre-transduction) and ImplantVac ^TM device for the implantation of TARGT microorgans (post-transduction). With the DermaVac, dermal MOs are rapidly harvested under local anesthetic from just under the skin to provide unique intact tissue structures with long-term viability ex-vivo . This procedure allows us to process, in not more than nine days, one or more dermis MO(s) outside the patient to become TARGTs, a protein producing units. Each TARGT produces a specific therapeutic protein or peptide to be utilized in the treatment of a specific chronic disease or the alleviation of a symptom in a patient with chronic disease. Based on the patient’s particular dosage needs, we determine how many TARGT microorgans to then insert under the patient’s skin in order to provide a sustained therapeutic dose of protein or peptide production and delivery for several months. We believe the dosage of proteins and peptides can be reduced by simple ablation or excision of inserted TARGT microorgans, or increased by the addition of more TARGT microorgans to provide personalized dosing requirements according to each patient’s individual needs.

We believe our TARGT platform may be best applied to produce an array of other therapeutic proteins and peptides from the patient’s own dermal tissue in order to treat a wide range of rare and orphan diseases. We believe our personalized approach could replace many existing protein and peptide therapies, which currently use proteins or peptides produced in animal or human cells administered by frequent injections over long periods of time. We are currently in pre-clinical testing with the TARGT in several rare and orphan diseases, and will identify the targets once the proper Intellectual Property coverage is obtained.

Based on our growing base of clinical- and pre-clinical results, we continue to seek collaboration with third parties in order to fully develop the TARGT _EPO product candidate in broader therapeutic markets (e.g., ESRD), while focusing on developing and leveraging our core technology in multiple rare and orphan disease areas both with TARGT _EPO and other protein and peptide targets. Limited development and commercialization costs, high reimbursement rates, and mandated governmental exclusivity make rare and orphan diseases attractive areas for a small biotech company. Initial approval and commercialization of our first product is not anticipated before 2018.

We believe that the TARGT platform has great potential to offer a better treatment alternative to current methods of protein and peptide therapy for rare and orphan diseases (which as stated can often involve years of frequent injections and significant side effects, including anaphylaxis and antibodies against the exogenous protein or peptide injections). We believe that the TARGT platform will provide a wide range of advantages over existing therapies, and appeal/offer many potential benefits to doctors, patients and third-party payers (e.g., Center for Medicare and Medicaid Services (CMS), medical insurers, etc.), including:

The TARGT Platform (Anticipated Automated Process)

Proof of Concept of TARGT Platform

Proof of concept of the TARGT has been demonstrated in both the clinic and the laboratory, beginning with the Phase 1/2 clinical trial for our first generation MDGN-101 product – TARGT _EPO – which was conducted in Israel under the regulatory jurisdiction of the Israeli Ministry of Health. The MDGN-101 study demonstrated transient erythropoietin (EPO) production and generated safety information demonstrating that the product was well tolerated. The safety and efficacy data from the Phase 1/2 study formed a major part of our IND application for a study using TARGT _EPO to treat anemia in dialysis patients in the United States, which was cleared by FDA in mid-2012. The study results from our first TARGT _EPO study in patients showed that tissue TARGT microorgans can provide safe and sustained protein therapy in patients, and successfully demonstrated the TARGT concept for the first protein – EPO. The aforementioned data, coupled with new in-vivo SCID mouse data with an improved viral vector expression cassette showing clinically meaningful protein production for more than six months, led to resuming the TARGT _EPO human trial with the new vector and implantation techniques (MDGN-201). Given that TARGT SCID mouse data has historically translated into human efficacy, a replication of the SCID mouse data in the human clinical trial would provide significant POC for the TARGT platform’s commercial viability (e.g. protein or peptide production for more than six months).

Based on the positive data to date in TARGT _EPO , we have initiated several pre-clinical TARGT programs in rare and orphan diseases that we believe will benefit from our unique platform thereby allowing us to rapidly address areas of high unmet need and value to patient and payers with regulatory exclusivity in commercially attractive markets. These diseases were identified in markets where the TARGT’s therapeutic and autologous characteristics and sustained protein and peptide production, would be particularly advantageous. Identified markets would include those where the injected therapeutic protein or peptide has a short half-life, or where the injected protein or peptide elicits a significant immune response, leading to side effects or decreased efficacy. We will identify these new markets for the TARGT after appropriate intellectual property (IP) is obtained.

TARGT _EPO for the Treatment of Anemia in CKD and Renal Failure

Our TARGT _EPO microorgan is designed to provide a safer, and more reliable anemia therapy, which we believe can better maintain hemoglobin within a defined safe range while also significantly reducing costs. According to a number of recent studies, there are increased risks of mortality and cardiovascular disease in connection with present EPO therapy, and the FDA has recently issued a Black Box Warning imposing new limitations on the amounts of EPO used in current anemia therapy. Reflecting these concerns, the FDA has further reduced the maximum recommended hemoglobin levels in these patients from 12 g/dl to 11 g/dl, effectively reducing the amount of EPO needed to elevate and maintain hemoglobin in the target range. The FDA is also concerned about the additional risks associated with the excessive peak EPO levels which typically reach up to 100 times the normal physiological range following each bolus injection of EPO in current anemia therapy. We believe all these concerns increase the safety advantage potentially offered by TARGT _EPO to maintain hemoglobin levels within a relatively narrow therapeutic range while also keeping EPO serum levels within the normal range in the patient. We also believe TARGT _EPO usage can improve patient compliance and quality of life, in addition to potentially reducing the healthcare costs of treating these same patients. This supports the critical need for a steadier EPO delivery method, which the TARGT _EPO microorgan is designed to address. With these advantages in mind, we have focused the TARGT _EPO development program on several sub-populations of high unmet need both in ESRD (e.g., Peritoneal Dialysis patients, anemic transplant patients) and hematological disorders (e.g., Myelodysplastic Syndrome (MDS) and Beta Thalassemia Intermedia that may qualify for orphan drug designation.

Overall Orphan Disease Market and Current Therapeutic Treatment Platform

The worldwide orphan disease market was $52 billion in 2012 and is expected to grow to $82 billion by 2018 (EvaluatePharma). The orphan disease market is fragmented, with 240 products comprising the $52 billion in 2012 sales. Over the past five years, big pharma companies have targeted the orphan disease space via licensing and acquisition. Several aspects of the orphan disease market that underlie its attractiveness include: 1) High price and reimbursement of orphan drugs ($200,000-$500,000) per year with seven years of U.S. government-mandated exclusivity) and ten years of exclusivity in the European Union; 2) Low development costs and expedited regulatory review (often less than 100 patients treated for regulatory approval and expedited regulatory pathway versus conventional drugs); and 3) Attractive commercial model (small sales force (e.g., 60 reps) to drive significant sales and high profit margins due to low operating costs and high price per dose).

The current standard platform for protein and peptide production and delivery involves a highly complex and capital-intensive manufacturing process based on large-scale cell tissue culture and delivery in the form of frequent injections (due to the short half-life of recombinant proteins as described below). Protein manufacturing plants generally take several years and substantial capital to build, secure regulatory approvals, and bring into production. Once produced, the protein is typically distributed to – and stocked in – pharmacies and physicians’ offices and administered by injection. Injections can be painful and costly, often cause unpleasant and/or dangerous side effects, and require frequent home healthcare nurse or doctor’s office visits. As a result, treatments based on the administration of serial injections can suffer from poor patient compliance and therefore not always work as intended.

Our platform is designed to overcome many limitations of certain biological therapies that have precluded successful development owing to the need for maintain a sustained critical blood concentration to maintain efficacy and avoid toxicity, the inability to produce usable formulations owing to metabolic instability and short half-life and immunogenicity of synthetic compounds and analogs. Likewise the TARGT platform can offer several advantages as compared with other gene therapy modalities because it exposes the patient to less vital antigen, is dosable and interruptible. We may also realize certain capital efficiencies given to the inherent efficiencies of viral vector production compared with many other biologics such as monoclonal antibodies, and the much lower amount of vector needed to treat patients with TARGT compared with systemic gene therapy.

Competition for Protein Therapy Market

Our industry is subject to rapid and intense technological change. We face, and will continue to face, intense competition from pharmaceutical, biopharmaceutical and biotechnology companies, as well as numerous academic and research institutions and governmental agencies engaged in activities related to the treatment of disease based on protein therapeutics, both in the United States and abroad. Some of these competitors may be pursuing the development of drugs and other therapies that target the same diseases and conditions that we are targeting.

Many of our competitors have financial and other resources substantially greater than ours. In addition, many of these competitors have significantly greater experience in testing pharmaceutical and other therapeutic products, obtaining FDA and other regulatory approvals of products, and marketing and selling those products. Accordingly, our competitors may succeed more rapidly than us in obtaining FDA approval for products and achieving widespread market acceptance. If we obtain necessary regulatory approval and commence significant commercial sales of our product candidates, we will also be competing with respect to manufacturing efficiency and marketing capabilities, areas in which we have limited or no commercial-scale experience.

Many existing protein and peptide replacement therapies require frequent dosing of relatively large amounts of protein. Immune responses reduce the effectiveness of therapy and in some cases result in allergic reactions, some severe and even life-threatening. The TARGT approach may provide an effective alternative by providing continuous secretion of authentic human protein or peptide glycosylated by the patient’s own cells and thus more like the patient’s own native protein or peptide. Such proteins and peptides are expected to be less likely to provoke an immune response in patients – at least in those patients who express non-functional or inadequate concentrations of the molecule of interest. Introduction of a protein that is foreign to the patient may still provoke an immune response.

There are also new methods for delivering protein from implanted slow-release depots or other devices, through the skin, through inhalation or through “smart pills” that evade the digestive track. However, these all face the common problem of who will supply the expensive protein to be delivered, which will still be produced in cells other than the tissue of the patient. Most of the alternatives to bolus injection are aimed at reducing the traditional patient resistance to injections; however, these alternatives to date do not adequately deal with the challenge of peaks and troughs in between each administration and the need for high patient compliance over an extended period to sustain therapeutic levels. Longer-lasting versions of therapeutic proteins and peptides have been achieved through alteration of the protein and peptide molecule itself and may offer the potential to reduce the number of injections, but still require administration every one to two weeks. These longer-lasting versions of proteins remain expensive to produce and run the risk of prolonging the overdosing period resulting from any given injection. New molecules mimicking the action of proteins have been approved, providing an inter-injection period of up to four weeks. We believe that the risk of adverse reactions will be reduced by delivering the natural protein produced by the patient’s own tissue as the TARGT microorgan aims to do as compared to delivery of a new molecule attempting to mimic the action of the natural protein.

We face competition within protein and peptide therapeutics, directly from established competitors using alternative protein manufacturing and delivery methods for EPO and in many orphan and rare disease areas respectively. We also face potential competition from more conventional forms of gene therapy if and when any of these become approved and adopted in clinical use. Gene therapy aims to provide or augment inadequate, nonfunctional or absent proteins that are associated with disease. In vivo gene therapy requires injection of viral vector into the body. Alternatively, stem cells may be transduced outside the body and the cells reintroduced after partial bone marrow ablations. These techniques seek to cure the patient with a single treatment. Repeat dosing, in the event that a patient does not initially receive an adequate response, is considered dangerous at present. Moreover, it is currently impossible to remove or inactivate the gene in the event of an adverse reaction. Novel technologies using drug regulation of gene expression are being studied, but have not yet been demonstrated, and are expected to be more complex than existing approaches.

The TARGT microorgan, in contrast, uses intact tissue at all times, so that the cells in the tissue would not leave their natural matrix. Upon re-implantation, the tissue heals in place, so the cells remain in their matrix. As a result, they do not need to wander to find a place to connect, and remain within the tissue. In this way, dosing can be reduced or stopped by ablating or removing one or more TARGT microorgans, which are typically implanted about 2-5 millimeters below the skin’s surface in a marked position. In a group of TARGT microorgans prepared from the same patient, the daily protein production rate is measured before implantation in the patient so that the total administered daily dose is known, as is the location of each TARGT microorgan. Furthermore, because the TARGT system does not seem to trigger an immune response or transduce surrounding tissue, we believe that the patient can be treated multiple times without the risk of developing immune response unlike direct gene therapies. TARGT microorgans therefore may address the key limitations of gene therapies in knowing the dose administered, in the ability to increase or reduce that dose, and most importantly, in being able to effectively stop the process if needed.

Business Strategy

Our primary strategy is two-fold: 1) Validate the TARGT platform with the second generation expression cassette HDAd vector and implantation techniques through the current human TARGT _EPO trial and; 2) Develop and expand the TARGT platform, including TARGT _EPO , to attractive orphan and rare disease markets which we believe we could then independently develop and commercialize.

We are currently studying our lead product MDGN-201, which we refer to as TARGT _EPO (previously called EPODURE), in a Phase 1/2 clinical trial in patients with End Stage Renal Disease (ESRD), and we plan on studying TARGT _EPO in identified sub-populations of unmet need including ESRD patients who are hypo-responsive to recombinant humanized erythropoietin, or rHuEPO, patients eligible for peritoneal dialysis, anemic patients on the transplant list, patients with Myelodysplastic Syndrome (MDS),, and Beta Thalassemia Intermedia patients, that may qualify for orphan drug designation. We have initiated in vivo proof of concept pre-clinical studies with several other orphan or rare disease candidates, and we anticipate initiating discussions with regulatory agencies for some of those programs in 2015. We will also be initiating discussions with the FDA in 2015 to open a new IND for MDGN-201 and plan on initiating Phase 1/2 trials in the United States with MDGN-201 for the treatment of anemia in ESRD patients undergoing peritoneal dialysis.

The TARGT platform offers significant advantages in obtaining POC data in orphan disease markets. Our technology platform allows us to rapidly prototype new transgenes in vitro using readily available human skin and in vivo using a SCID mouse host for transduced human tissue. We are currently developing immunocompetent animal models to allow additional experimentation in disease models and to obtain toxicology data where needed. We have the needed expertise in house or in our established collaboration network to complete this work rapidly and efficiently. Our collaboration with CHOP should allow us to rapidly identify new disease targets suitable for our platform.

Additionally, there are several aspects of the orphan disease market which underlie its attractiveness and would potentially allow us to independently develop and commercialize in specific orphan markets including: 1) High price and reimbursement of orphan drugs ($200,000-$500,000 per year with seven years of U.S. government-mandated exclusivity and ten year of exclusivity in the EU); 2) Low development cost and expedited regulatory review (generally less than 100 patients treated for regulatory approval and expedited regulatory pathway versus conventional drugs); 3) Attractive commercial model (small sales force (e.g., 60 reps) to drive significant sales and high profit margins due to low operating costs and high price per dose). 

In addition to developing new protein applications of the TARGT platform, we are also working towards practical scale-up and commercial implementation of TARGT treatment technology. We have developed a container system where each TARGT microorgan resides in its own sealed container within which it produces protein in a manner similar to the system used to date. We have demonstrated and validated that TARGT microorgans produced in the new container are comparable to those processed in the previous system. This key step led to the establishment of our first contract manufacturing center for the GMP production of TARGT microorgans in the United States (located in Sacramento, California). Prior to this, all the TARGT microorgans were produced in Israel.

Accordingly, we trained the personnel at the contract manufacturing center to use our proprietary processing containers and associated devices to successfully implement the TARGT processing procedure. We demonstrated that this center could process TARGT microorgans from remote sites: skin dermis microorgans harvested into the sealed containers in our plant in Israel were sent to the California processing center using a small battery powered portable incubator shipped via standard courier, and were correctly processed by the center into successful TARGT microorgans meeting our release criteria. We believe that the practical demonstration of remote processing from a harvest site 9,000 miles overseas effectively demonstrates that such centers could service many clinical sites around the United States or elsewhere. The center in California is aimed to support manual GMP production of TARGT microorgans for use in future U.S. TARGT clinical studies. Additional similar centers could be established in various geographical locations as needed. We continue to make improvements to the initial design of the container with potential future automation.

Regulatory Strategy

Our overall regulatory strategy is aligned with our main business strategy of partnering the TARGT _EPO program after successful human clinical trials with the new expression cassette HDAd viral vector and implantation techniques, and independently developing the TARGT platform for orphan and rare disease indications. The general path towards U.S. regulatory approval of a TARGT microorgan is:

We are currently in step 3 for our first product candidate (TARGT _EPO ), having attained clearance from the Ministry of Health in Israel and expect to file an IND with FDA for a Phase 2 in the first quarter of 2015 for a trial in treating peritoneal dialysis patients with ESRD in the United States. We believe that the shortest path through regulatory approval for the first TARGT microorgan application in the United States may be for a disease condition that has an orphan drug designation granted by the FDA, particularly a life-threatening disease. In the United States, the FDA has the authority to grant a special “orphan drug designation” to a drug or biologic product that treats a rare disease or condition, which orphan designation provides additional rights to approved products as well as requiring smaller clinical trials than for large indications. Diseases thought to affect less than 200,000 patients in the United States are typically deemed to be rare. As discussed earlier, we are currently involved in several pre-clinical studies with the TARGT technology in orphan diseases in which sustained, autologous protein and peptide production would offer an advantage.

An initial approval of a TARGT product candidate by the FDA will help establish the safety and efficacy of the TARGT technology as treatment for chronic diseases. TARGT microorgans for other disease conditions will still need to prove their safety and effectiveness in a specific clinical indication in order to obtain future regulatory approval, but we believe the general questions on the safety and practicality of the TARGT technology as a treatment modality will become less of an issue at such point.

We are currently focused on seeking FDA approval initially as the U.S. market for therapeutic proteins is the largest. In preparation for our initial Phase 1/2 TARGT _EPO clinical trial in Israel, we were guided by our regulatory advisors (which include former FDA officers), in coordination with the FDA’s preclinical department in the design of the requisite preclinical testing for approval of the trial. The study itself was approved by Israel Ministry of Health, and was performed in adherence with the International Conference on Harmonization (ICH) E6 Guidance for Clinical Practice. This is an international ethical and scientific standard for designing, conducting, recording and reporting clinical trials. The guidance defines unified standards for clinical data that will be acceptable to the European Union, Japan and the United States. We intend to conduct our future trials in such manner as well. It is anticipated that such offshore Phase 1/2 studies will provide support for the registration process of TARGT _EPO in the United States, which will also involve additional clinical trials leading up to approval for sale.

 Our understanding from the FDA is that the TARGT platform is considered a combination product (being a combination of biological products and devices), with the primary mode of action being a biologic. We expect that a BLA filing will be required, and that the FDA review would be submitted to the Center for Biologics Evaluation and Research (CBER) division of the FDA, with support from the Center for Devices and Radiological Health (CDRH) for the device aspects of the TARGT product candidate.

TARGT _EPO Clinical Trials: Anemia in patients with ESRD

In June 2014, the first patient was enrolled in our Phase 1/2 clinical trial of MDGN-201 (TARGT _EPO ). The aim of the ongoing trial is to validate the potential of our TARGT platform using a second-generation expression cassette of the HDAd viral vector, which was developed to enhance durability of the proposed therapeutic effect. The ongoing study is evaluating the potential of the updated platform to offer sustained production and delivery of endogenous erythropoietin, or eEPO, to treat anemia in dialysis patients with ESRD. This open-label trial is expected to enroll up to 18 patients with ESRD who require rHuEPO treatment for anemia. We expect that each patient will receive one or more TARGT _EPO microorgans and will be followed for at least one year. The trial endpoints include plasma eEPO levels, blood counts and safety assessment.

In February 2015, we announced ongoing interim clinical data on the six patients in the low-dose cohort of the Phase 1/2 trial. The patients follow up at that time ranged from 2 to 8 months post implantation of TARGT _EPO microorgans and patients have shown positive response to therapy at up to 100x lower Cmax and 10X lower total exposure compared with rHuEPO (e.g., EPREX). The first patient implanted with TARGT _EPO has maintained hemoglobin levels due to red blood cell production stimulated by eEPO at 8 months following implantation. Of the remaining 5 patients, one maintained his target Hb levels without receiving an injection of rHuEPO for five months, another patient, who had a complicated course and surgery unrelated to the TARGT _EPO treatment leading to a loss of blood, required additional rHuEPO at two months following the implantation of her TARGT _EPO microorgan and has since been withdrawn from the study. The other patients, who were implanted from 2 to 4 months ago remain stable, are maintaining acceptable hemoglobin levels and have not required any rHuEPO or blood transfusions following their TARGT _EPO implantations. The low dose TARGT _EPO was well tolerated and there were no treatment related serious adverse events (SAEs). Enrollment has now begun in the mid-dose cohort of the Phase 1/2 trial with first results expected in the second quarter of 2015.

Other Clinical Trials and Pre-Clinical Studies

We previously developed INFRADURE as a potential treatment for chronic viral hepatitis. Although preliminary data suggested that therapeutic levels were attainable with a first generation platform, the project has been stopped for strategic reasons.

During 2010-2011, we performed pre-clinical studies of our HEMODURE product candidate to produce Factor VIII for the treatment of patients with hemophilia, in collaboration with Baxter Healthcare, a market leader in the field of hemophilia. We formally terminated the HEMODURE program in 2014.

Intellectual Property

Our goals are to obtain, maintain, and enforce patent and trademark protection for our products, processes, methods, and other proprietary technologies of the TARGT platform, and to preserve our trade secrets both in the United States and elsewhere in the world. Our policy is to actively seek to obtain, where appropriate, the broadest intellectual property protection possible for our TARGT platform through a combination of contractual arrangements, trade secrets, patents, and trademarks both in the United States and abroad.

Our ability to compete depends on our ability to maintain and enforce our intellectual property rights and operating without infringing the intellectual property of others and our ability to enforce our licenses. Our business could be materially harmed, and we could be subject to liabilities, because of lawsuits brought by others against our licensors and licensees with whom we have a strategic alliance. We will be able to protect our technology from unauthorized use by third parties only to the extent it is covered by valid and enforceable patents or is effectively maintained as trade secrets. Patents and other proprietary rights are an essential and material element of our business. 

Our existing owned patent and patent application portfolio directed to TARGT platform, including TARGT _EPO , currently contains 55 issued patents, and 43 pending and allowed patent applications. Applications for patents and other intellectual property rights capable of being registered have been, and will be, filed in certain key jurisdictions. As we identify additional orphan and rare disease targets, we will seek protection for the related intellectual property rights in the United States and other relevant jurisdictions.

Our licensed and owned patent portfolio has issued or pending claims covering the key elements of the TARGT platform, including, but not limited to, genetically modified dermal microorgans and methods of making same, methods for using genetically modified dermal microorgans, devices and methods for harvesting and implanting genetically modified dermal microorgans, and methods and uses for using these microorgans in the treatment of diseases and disorders or in the alleviation of symptoms of a disease or disorder.

There can be no assurance that the pending applications will result in patents ultimately being issued.

We also depend upon the skills, knowledge and experience of our scientific and technical personnel, as well as that of our advisors, consultants and other contractors, none of which is patentable. To help protect our proprietary knowledge and experience that is not patentable, and for inventions for which patents may be difficult to enforce, we rely on trade secret protection and confidentiality agreements with our employees, consultants, vendors, collaborators, advisors, customers and other third parties to protect our interests. To this end, we require all employees, consultants, advisors and other contractors to enter into confidentiality agreements that prohibit the disclosure of confidential information and, where applicable, require disclosure and assignment to us of the ideas, developments, discoveries and inventions important to our business. We also require confidentiality or material transfer agreements from third parties that receive our confidential data or materials. We intend to continue to take all appropriate steps to protect our intellectual property, including maintaining an active program for patent protection for novel elements in the development of our products and technology. 

Licenses

CHOP license

In November 2014, we entered into a licensing and research collaboration agreement (the “Research Agreement” and the “License Agreement”) with the Children’s Hospital of Philadelphia (“CHOP”). Under the terms of the License and Research Agreement, CHOP granted us (i) an exclusive, sublicensable license to use certain patent rights covering potential diagnostic and therapeutic targets, (ii) an exclusive, non-sublicensable license to use certain biospecimen and phenotypic data collected from patients with rare and orphan diseases and their family members, (iii) a non-exclusive, sublicensable license to use certain know-how related to such patent rights, biospecimen and phenotypic data, (iv) a non-exclusive and non-sublicensable license to use certain biospecimen and phenotypic data collected from patients with non-rare and orphan diseases, and (v) an exclusive option to negotiate licenses to commercialize certain inventions that may be created in the future that target rare and orphan diseases. In consideration of the licenses and option granted under the Licensing and Research Agreement, we agreed to pay to CHOP a license issuance fee of $500,000, certain maintenance fees, certain milestone payments, low single-digit royalties on net sales of all licensed products and a percentage of amounts received from sublicensing activities.

The License Agreement terminates upon the expiration date of the last-to-expire royalty term under the License Agreement, however (i) CHOP may terminate the License Agreement upon an uncured default by us of the License Agreement or the failure by us to meet certain development and/or commercialization milestones under the License Agreement or if we become insolvent or enter into bankruptcy proceedings, and (ii) we may terminate the License Agreement at any time with six months’ prior written notice to CHOP.

Stanford University license

In May 2014, we entered into a non-exclusive agreement with the Board of Trustees of the Leland Stanford Junior University (Stanford) protect our right to make and use certain embodiments of our TARGT platform, including TARGT _EPO . According to the agreement, Stanford granted us a non-exclusive license to a) a patent application and any patents that grant therefrom; and b) the right to use a biological material, in a specific field of use, for commercial development, production and marketing of certain products. In consideration, we agreed to pay Stanford the following amounts:

(a) an issue royalty of $25,000 upon signing the agreement;

(b) license maintenance fees of: (i) $10,000 in May 2015 and May 2016, (ii) $20,000 in May 2017 and May 2018, and (iii) $50,000 in May 2019 and each year thereafter;

(c) royalties at a rate of 1.5% of net sales (although certain credits may apply for license maintenance fees); and

(d) milestone payments of: (i) $50,000 upon dosing of the first patient with a licensed product, (ii)$150,000 upon the first approval in the United States of a licensed product, and (iii) $150,000 upon the first approval in Europe or Japan of a licensed product, even if there are no patent rights in that country.

The Stanford license began on May 30, 2014 and will end upon the expiration date of the licensed patent.

Yissum License

On November 23, 2005, we entered into an agreement with Yissum Research Development Company of the Hebrew University of Jerusalem (Yissum) to exclusively license certain patent and patent applications (“Yissum Agreement”). On May 25, 2014, we notified Yissum of our decision to discontinue, effective as of May 25, 2014, the reimbursement to Yissum of the costs associated with filing, prosecuting, and maintaining the licensed patents and patent applications. Under the terms of the Yissum Agreement, upon our non-payment, rights to the licensed patents and patent applications will revert to Yissum . Our decision to discontinue this license was based upon our belief that we would not be infringing these patents in the course of making, selling, or using the TARGT platform.

Trademarks

Certain names utilized for our products and tools are trademarked, and certain names utilized for our products and tools are the subject of trademark registrations and applications in certain jurisdictions. The final choice of names for products and tools has not yet been made and will be subject to marketing considerations and other factors.

We have filed applications in the United States for registering TARGT ^TM and TARGT _EPO ^TM .

We have filed applications for registering BIOPUMP in the United States and abroad, and BIOPUMP is registered in Australia, China, Israel, New Zealand, the European Union, South Korea, Norway and Russia in the framework of an International Trademark Registration as well as in Hong Kong and Mexico.

We have not filed applications for registering, and do not have issued registrations, for INFRADURE ^TM , HEMODURE ^TM ,DermaVac ^TM or ImplantVac ^TM .

There can be no assurance that a third party will not oppose any registration, that the respective Trademark Offices will issue a registration certificate or that we will otherwise be successful in perfecting trademark rights for the marks in the United States or in foreign countries, the results of any of which would likely have a material adverse effect on our company.

Government Regulation

General

The production, distribution, and marketing of products employing our technology, and our development activities, are subject to extensive governmental regulation in the United States and in other countries. In the United States, our products are regulated as biologics and medical devices and are subject to the Federal Food, Drug, and Cosmetic Act, as amended, and the regulations of the FDA, as well as to other federal, state, and local statutes and regulations. These laws, and similar laws outside the United States, govern the clinical and preclinical testing, manufacture, safety, effectiveness, approval, labeling, distribution, sale, import, export, storage, record-keeping, reporting, advertising, and promotion of our products. Product development and approval within this regulatory framework, if successful, will take many years and involve the expenditure of substantial resources. Violations of regulatory requirements at any stage may result in various adverse consequences, including the FDA’s and other health authorities’ delay in approving or refusal to approve a product. Violations of regulatory requirements also may result in enforcement actions.

The following paragraphs provide further information on certain legal and regulatory issues with a particular potential to affect our operations or future marketing of products employing our technology.

Research, Development, and Product Approval Process in the United States

We believe that the FDA will consider the TARGT platform a combination product because it combines two regulated components: a medical device and a biological product. The FDA regulatory center that has primary jurisdiction over a combination product is determined by the combination product’s “primary mode of action,” i.e., the single mode of action that provides the most important therapeutic action. We believe the most important therapeutic action is provided by the biological product(s), which would result in the FDA’s Center for Biologics Evaluation and Research (CBER) leading the review of our product, with consultation from the Center for Devices and Radiological Health (CDRH) for the device aspects of the TARGT product. We also believe combination products like the TARGT platform are likely to be evaluated under a biological license application (BLA) if and when it is submitted for approval, although it is possible that the FDA might require a different approach. At this time, we believe that it is likely the research, development, and approval process for our product is likely to take a path that is usually followed for therapeutic biologics.

The research, development, and approval process in the United States is intensive and rigorous and generally takes many years to complete. Also, there is no guarantee that a product approval will ultimately be obtained. The typical process required by the FDA before a therapeutic biological may be marketed in the United States includes:

During preclinical testing, laboratory studies are performed with the product candidate. Biological testing is typically done in animal models to demonstrate the activity of the compound against the targeted disease or condition and to assess the effects of the new product candidate on various organ systems, as well as its relative therapeutic effectiveness and safety. These studies must generally meet GLP requirements to be considered valid by the FDA.

An IND application must be submitted to the FDA and become effective before studies in humans (i.e., clinical trials) in the United States may commence. The FDA will consider, among other things, the safety of allowing studies proposed under the IND to proceed. Support for the IND can include preclinical study results as well as relevant human experience. Some human experience might be provided from foreign clinical trials that were not conducted under an IND. The FDA will accept as possible support for an IND a well-designed and well-conducted foreign clinical trial if (1) it was conducted in accordance with good clinical practices (GCP), including review and approval (or provision of a favorable opinion) by an independent ethics committee (IEC) before initiating a study, continuing review of an ongoing study by an IEC, and compliance with informed consent principles, and (2) FDA is able to validate the data from the study through an onsite inspection if the agency deems it necessary. In some cases, we may apply for orphan drug status from the FDA and/or European Medicines Agency (EMA) in order to secure additional exclusivity and tax benefits.

In the case of products for certain serious or life-threatening diseases, the initial human testing is sometimes done in patients with the disease rather than in healthy volunteers. Because these patients are already afflicted with the target disease or condition, it is possible that such studies will also provide results traditionally obtained in Phase 2 studies. These studies are often referred to as “Phase 1/2” studies. However even if patients participate in initial human testing and a Phase 1/2 study is conducted, the sponsor is still responsible for obtaining all the data usually obtained in both Phase 1 and Phase 2 studies.

U.S. law requires that studies conducted to support approval for product marketing be “adequate and well controlled.” Usually this means, among other things, that either a placebo or a product already approved for the treatment of the disease or condition under study must be used as a reference control, although other kinds of controls are sometimes used. Studies must also be conducted in compliance with GCP requirements, including informed consent and Institutional Review Board (IRB) requirements. In addition, with certain exceptions, sponsors of clinical trials are required to register clinical trials, and disclose clinical trial information, for posting on the publicly-available clinicaltrials.gov website.

The clinical trial process can potentially take several years to complete. Also, the FDA may prevent clinical trials from beginning or may place clinical trials on hold at any point in this process if, among other reasons, it concludes that study subjects are being exposed to an unacceptable health risk. Trials in the United States involving human subjects are also subject to advance approval and oversight IRBs, which have the authority to request modifications to a clinical trial protocol and to suspend or terminate its approval of a protocol if a clinical trial is not being conducted in accordance with the IRB’s requirements or where there is unexpected serious harm to subjects. Side effects or adverse events that are reported during clinical trials can potentially delay, impede, or prevent continued research and development.

Also, the FDA places certain restrictions on the use of foreign clinical data that are intended to be relied on as the sole basis for approval. A marketing application based solely on foreign clinical data meeting U.S. criteria for marketing approval may be approved only if (1) the foreign data are applicable to the U.S. population and U.S. medical practice; (2) the studies have been performed by clinical investigators of recognized competence; and (3) the data may be considered valid without the need for an on-site inspection by the FDA or, if the FDA considers such an inspection to be necessary, the FDA is able to validate the data through an on-site inspection or other appropriate means.

Following the completion of the clinical trial program for the product, a Biologic License Application (BLA) must be submitted by the applicant, and approved by the FDA, before commercial marketing of the product may begin in the United States. The BLA must include a substantial amount of data and other information concerning the safety and effectiveness of the product from laboratory, animal, and clinical testing, as well as data and information on manufacturing, product quality and stability, and proposed product labeling. Also, each domestic and foreign manufacturing establishment, including any contract manufacturers, must be listed in the BLA and must be registered with the FDA. The BLA must usually be accompanied by an application fee, although certain deferral, waivers, and reductions may be available, e.g., for a small business submitting its first BLA. For fiscal year 2014, the BLA application fee is $2,335,200.

There are regulatory mechanisms that might potentially speed up the development and approval process for certain kinds of products. These mechanisms are Fast Track, Accelerated Approval, Priority Review, and Breakthrough status.

We cannot know for sure whether the FDA would allow us to take advantage of any of these mechanisms in developing our products.

Each BLA submitted for FDA approval is usually reviewed for administrative completeness and reviewability within 45 to 60 days following submission of the application. If deemed complete, the FDA will “file” the BLA, and perform its substantive review of the application. The FDA can refuse to file a BLA that it deems incomplete or not properly reviewable. An applicant can then either request that the BLA be filed over FDA’s protest, amend the application to address the deficiencies the FDA has alleged and resubmit it, or not pursue the application.

The FDA’s current performance goals for reviewing of BLAs are six months from submission for BLAs that the FDA designates as priority applications and 10 months from submission for standard applications. However, the FDA is not legally required to complete its review within these periods, and these performance goals may change over time. Moreover, the outcome of the review, even if generally favorable, can often be a “complete response” letter that describes additional work that must be done before the application can be approved. This work can sometimes be substantial. Also, even if the FDA approves a product, it may limit the approved therapeutic uses for the product through indications and usage statements it allows to be approved in the product labeling, require that warning statements be included in the product labeling, require that additional studies be conducted following approval as a condition of the approval, impose restrictions and conditions on product distribution, prescribing, or dispensing in the form of a risk evaluation and mitigation strategy (REMS), or otherwise limit the scope of any approval. Also, before any approval, facilities that manufacture the product must generally pass an FDA inspection.

Overall research, development, and approval times depend on a number of factors, including the period of review at the FDA, the number of questions posed by the FDA during review, how long it takes to respond to the FDA’s questions, the severity or life threatening nature of the disease in question, the availability of alternative treatments, the ability to take advantage of mechanisms that might facilitate development and FDA review of a product, the availability of clinical investigators and eligible patients, the rate of enrollment of patients in clinical trials, and the risks and benefits demonstrated in the clinical trials.

There are additional issues regarding our products that might be important to its research, development, and approval. Manufacturing issues regarding biological products can be particularly complex. Also the TARGT platform presents a somewhat different situation than those the FDA often deals with (i.e. a situation in which a biological therapeutic is manufactured at one or a few sites). Also, because the product will probably be considered a combination product with a device product component, there are device-related manufacturing and other compliance issues (e.g. cGMPs and adverse event reporting) that might be implicated by the product. These issues may increase the complexity of circumstances we will face with the FDA.

Post-Approval Requirements

Any products for which we receive FDA approvals will be subject to continuing regulation by the FDA, including, among other things, record-keeping requirements, reporting of adverse experiences with the product, providing the FDA with updated safety and efficacy information, product sampling and distribution requirements, complying with certain electronic records and signature requirements, and complying with FDA promotion and advertising requirements. The FDA strictly regulates labeling, advertising, promotion, and other types of information on products that are placed on the market. Products may be promoted only for the approved indications and in accordance with the provisions of the approved label. Furthermore, product manufacturers must continue to comply with current Good Manufacturing Practices (cGMP) requirements, which are extensive and require considerable time, resources, and ongoing investment to ensure compliance. In addition, changes to the manufacturing process generally require prior FDA approval before being implemented, and other types of changes to the approved product – such as changes in materials or adding indications or labeling claims – are also subject to further FDA review and approval.

Manufacturers and other entities involved in the manufacturing and distribution of an approved biological or medical device product are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMP and other laws. The cGMP requirements apply to all stages of the manufacturing process, including the production, processing, sterilization, packaging, labeling, storage, and shipment of the product. Manufacturers must establish validated systems to ensure that products meet specifications and regulatory standards, and test each product batch or lot prior to its release. On January 22, 2013, the FDA published final regulations for cGMPs for combination products. The final cGMP requirements for combination products are based upon the premise that constituent parts of a combination product retain their regulatory status after they are combined. In other words, combination products comprised of a biological product and a medical device are required to comply with both cGMPs for biological products and cGMPs for devices.

Manufacturers of biological products must also report to the FDA any deviations from cGMP that may affect the safety, purity, or potency of a distributed product, or any unexpected or unforeseeable event that may affect the safety, purity, or potency of a distributed product. The regulations also require investigation and correction of any deviations from cGMP and impose documentation requirements.

We might rely on third parties for the production of our products. FDA and state inspections may identify compliance issues at the facilities of contract manufacturers that may disrupt production or distribution or may require substantial resources to correct.

The FDA may withdraw a product approval if compliance with regulatory standards is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market. Furthermore, the failure to maintain compliance with regulatory requirements may result in administrative or judicial actions, such as fines, warning letters, holds on clinical studies, product recalls or seizures, product detention or refusal to permit the import or export of products, refusal to approve pending applications or supplements, restrictions on marketing or manufacturing, injunctions or civil or criminal penalties.

In addition, from time to time, new legislation is enacted that can significantly change the statutory provisions governing the approval, manufacturing and marketing of products regulated by the FDA. In addition to new legislation, FDA regulations and policies are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether further legislative or FDA regulation or policy changes will be enacted or implemented and what the impact of such changes, if any, may be.

Orphan Drugs

Under the Orphan Drug Act, Pub. L. No. 97-414 (1983), special incentives exist for companies to develop products for rare diseases or conditions, which are defined to include those diseases or conditions that affect fewer than 200,000 people in the United States. Companies may request that the FDA grant an orphan drug designation prior to approval. Products designated as orphan drugs are eligible for special grant funding for research and development, FDA assistance with the review of clinical trial protocols, potential tax credits for research, reduced filing fees for marketing applications, and a special seven-year period of market exclusivity after marketing approval. Orphan Drug exclusivity prevents FDA approval of applications by others for the same drug and the designated orphan disease or condition. The FDA may approve a subsequent application from another entity if the FDA determines that the application is for a different drug or different use, or if the FDA determines that the subsequent product is clinically superior, or that the holder of the initial orphan drug approval cannot assure the availability of sufficient quantities of the drug to meet the public’s need. A grant of an orphan designation is not a guarantee that a product will be approved. If a sponsor receives orphan drug exclusivity upon approval, there can be no assurance that the exclusivity will prevent another entity or a similar product from receiving approval for the same or other uses.

To qualify for orphan designation in the European Union, a medicine must meet a number of criteria:

Applications for orphan designation are examined by the EMA's Committee for Orphan Medicinal Products (COMP), using the network of experts that the Committee has built up. The evaluation process takes a maximum of 90 days from validation. A drug that is approved as an orphan drug in by the EMA receives a special ten-year period of market exclusivity after marketing approval. If a sponsor receives orphan drug exclusivity upon approval, there can be no assurance that the exclusivity will prevent another entity or a similar product from receiving approval for the same or other uses.

Potential Competition with “Biosimilar” Products

The Biologics Price Competition and Innovation Act (BPCIA) was enacted as part of the Patient Protection and Affordable Care Act of 2010 (ACA), Pub. L. No. 111-148 (2010). The BPCIA authorizes the FDA to approve “abbreviated” BLAs for products whose sponsors demonstrate they are “biosimilar” to reference products previously approved under BLAs. The FDA may also separately determine whether “biosimilar” products are “interchangeable” with their reference products. However, the FDA may not approve an “abbreviated” BLA for a biosimilar product until at least twelve years after the date on which the BLA for the reference product was approved. FDA approval could be further delayed if the reference products are subject to unexpired and otherwise valid patents.

Prior to the enactment of the BPCIA, information in approved BLAs could not be relied upon by other manufacturers to establish the safety and efficacy of their products for which they were seeking FDA approval. (In contrast, since at least 1984, pharmaceutical manufacturers have been able to submit Abbreviated New Drug Applications for “generic drugs” that are materially identical to reference drugs approved under New Drug Applications.) Accordingly, if the TARGT platform were approved under a BLA, other manufacturers potentially could develop and seek FDA approval of “biosimilar” products at some point in the future.

U.S. Fraud and Abuse Laws

Anti-Kickback Statute and HIPAA Criminal Laws

We are subject to various federal and state laws pertaining to health care “fraud and abuse.” The federal Anti-Kickback Statute makes it illegal for any person, including a pharmaceutical, biologic, or medical device company (or a party acting on its behalf), to knowingly and willfully solicit, offer, receive or pay any remuneration, directly or indirectly, in exchange for, or to induce, the referral of business, including the purchase, order or prescription of a particular item or service, or arranging for the purchase, ordering, or prescription of a particular item or service for which payment may be made under federal healthcare programs such as Medicare and Medicaid. In 1996, under the Health Insurance Portability and Accountability Act (HIPAA), Pub. L. No. 104-191 (1996), the Anti-Kickback Statute was expanded to be made applicable to most federal and state-funded health care programs. The definition of “remuneration” has been broadly interpreted to include any item or service of value, including but not limited to gifts, discounts, the furnishing of free supplies or equipment, commercially unreasonable credit arrangements, cash payments, waivers of payments or providing anything at less than its fair market value. Several courts have interpreted the Anti-Kickback Statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of business reimbursable by a federal healthcare program, the statute has been violated. The ACA further amended the federal Anti-Kickback Statute to clarify that “a person need not have actual knowledge of this section or specific intent to commit a violation of this section.” Therefore, all courts are likely to use the “one purpose” test for evaluating intent. Penalties for violations include criminal penalties, civil sanctions and administrative actions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federally-funded healthcare programs. In addition, some kickback allegations have been held to violate the federal False Claims Act, which is discussed in more detail below.

The federal Anti-Kickback Statute is broad and prohibits many arrangements and practices that may be lawful in businesses outside of the healthcare industry. Recognizing that the Anti-Kickback Statute is broad and may technically prohibit many innocuous and beneficial arrangements, Congress created several exceptions in the Social Security Act and has authorized the U.S. Department of Health and Human Services (HHS) to publish regulatory “safe harbors” that exempt certain practices from enforcement action under the Anti-Kickback Statute prohibitions. For example, there are safe harbors available for certain discounts to purchasers, personal services arrangements and various other types of arrangements. However, safe harbor protection is only available for transactions that satisfy all of the narrowly defined safe harbor provisions applicable to the particular remunerative relationship. We seek to comply with such safe harbors whenever possible. Conduct and business arrangements that do not strictly comply with all the provisions of an applicable safe harbor, while not necessarily illegal, face an increased risk of scrutiny by government enforcement authorities and an ongoing risk of prosecution.

In addition, many states have adopted laws similar to the federal Anti-Kickback Statute. Some of these state prohibitions apply to referral of patients for healthcare services reimbursed by any third-party payer, not only the Medicare and Medicaid programs or other governmental payers. At least one state, California, also has adopted a law requiring pharmaceutical companies to implement compliance programs to prevent and deter conduct that may violate fraud and abuse laws that comply with the voluntary industry guidelines and the HHS Office of Inspector General (OIG) compliance guidance. While we believe we have structured our business arrangements to comply with these laws, it is possible that the government could find that such arrangements violate these laws, which could have a material adverse effect on our business, results of operations and financial condition.

HIPAA created two new federal crimes: health care fraud and false statements relating to health care matters. The health care fraud statute prohibits knowingly and willfully executing a scheme to defraud any health care benefit program, including private payers. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from federal and state health care programs such as Medicare and Medicaid. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for health care benefits, items or services. A violation of this statute is a felony and may result in fines or imprisonment. Additionally, HIPAA granted expanded enforcement authority to HHS and the U.S. Department of Justice (DOJ) and provided enhanced resources to support the activities and responsibilities of the OIG and DOJ by authorizing large increases in funding for investigating fraud and abuse violations relating to health care delivery and payment.

False Claims Laws

Pursuant to various federal and state false claims laws, the submission of false or fraudulent claims for payment may lead to civil money penalties, criminal fines and imprisonment, and/or exclusion from participation in Medicare, Medicaid and other federally funded health care programs. These false claims statutes include the federal False Claims Act, 12 Stat. 696 (1863), which was significantly expanded in both the Fraud Enforcement and Recovery Act of 2009, Pub. L. No. 111-21 (2009), and in the ACA. In addition, a number of states have enacted similar laws prohibiting the submission of false or fraudulent claims to a state government.

The federal False Claims Act allows the federal government or private individuals to bring suit alleging that an entity or person knowingly submitted (or caused another person or entity to submit or conspired to submit) a false or fraudulent claim for payment to the federal government or knowingly used (or caused to be used) a false record or statement to obtain payment from the federal government. The federal False Claims Act may also be violated if a person files a false statement in order to reduce, avoid, or conceal an obligation to pay money to the federal government, or engages in conduct that may violate the federal Anti-Kickback Statute. The ACA expressly states that claims arising out of violations of the federal Anti-Kickback Statute are false claims for purposes of the federal False Claims Act. Several pharmaceutical and medical device companies have settled claims based on the federal False Claims Act for conduct involving, among other examples, providing free product to purchasers with the expectation that federally-funded health programs would be billed for the product, or instances in which a manufacturer has marketed its product for unapproved and non-reimbursable purposes or encouraged providers to bill government health care programs for unapproved uses of the product. In addition to False Claims Act cases brought directly by the federal government, individuals who file a lawsuit in the name of the federal government may be able to share in amounts recovered by the government in connection with such suits. Such suits, known as qui tam actions, have increased significantly in recent years and have increased the risk that a health care company will have to defend a false claims action, enter into settlements that may include corporate integrity agreements requiring disclosures to the federal government, pay fines or be excluded from the Medicare and/or Medicaid programs as a result of an investigation arising out of such an action. We are not aware of any false claims actions pending against us. However, no assurance can be given that such actions may not be filed against us in the future, or that any non-compliance with such laws would not have a material adverse effect on our business, results of operations and financial condition.

The foregoing description of laws and regulations affecting health care companies is not meant to be an all-inclusive discussion of aspects of federal and state fraud and abuse laws that may affect our business, results of operations and financial condition. Health care companies operate in a complicated regulatory environment. These or other statutory or regulatory initiatives may affect our revenues or operations. No assurance can be given that our practices, if reviewed, would be found to be in compliance with applicable fraud and abuse laws (including false claims laws and anti-kickback prohibitions), as such laws ultimately may be interpreted, or that any non-compliance with such laws or government investigations of alleged non-compliance with such laws would not have a material adverse effect on our business, results of operations and financial condition.

Other U.S. Regulatory Requirements

In the United States, the research, manufacturing, distribution, sale, and promotion of drug and biological products are subject to regulation by various federal, state, and local authorities in addition to the FDA, including the CMS (formerly the Health Care Financing Administration), other divisions of HHS (e.g., OIG), DOJ and individual United States Attorney offices within DOJ, and state and local governments. Pricing and rebate programs must comply with the Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990, Pub. L. No. 101–508 (1990), and the Veterans Health Care Act of 1992, Pub. L. No. 102-585 (1992), each as amended. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. All of these activities are also potentially subject to federal and state consumer protection, unfair competition, and other laws. In addition, we may be subject to federal and state laws requiring the disclosure of financial arrangements with health care professionals.

Moreover, we may become subject to additional federal, state, and local laws, regulations, and policies relating to safe working conditions, laboratory practices, the experimental use of animals, and/or the use, storage, handling, transportation, and disposal of human tissue, waste, and hazardous substances, including radioactive and toxic materials and infectious disease agents used in conjunction with our research work.

Foreign Regulatory Requirements

We may be subject to widely varying foreign regulations, which may be quite different from those of the FDA, governing clinical trials, manufacture, product registration and approval, and pharmaceutical sales.

Whether or not FDA approval has been obtained, we must obtain a separate approval for a product by the comparable regulatory authorities of foreign countries prior to the commencement of product marketing in these countries. In certain countries, regulatory authorities also establish pricing and reimbursement criteria. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval.

In order to conduct clinical testing on humans in Israel, special authorization must first be obtained from the ethics committee and general manager of the institution in which the clinical studies are scheduled to be conducted, as required under the Guidelines for Clinical Trials in Human Subjects implemented pursuant to the Israeli Public Health Regulations (Clinical Trials in Human Subjects), as amended from time to time, and other applicable legislation. The institutional ethics committee must, among other things, evaluate the anticipated benefits that are likely to be derived from the project to determine if it justifies the risks and inconvenience to be inflicted on the human subjects, and the committee must ensure that adequate protection exists for the rights and safety of the participants as well as the accuracy of the information gathered in the course of the clinical testing. Since we intend to perform a portion of the clinical studies on certain of our therapeutic candidates in Israel, we will be required to obtain authorization from the ethics committee and general manager of each institution in which we intend to conduct our clinical trials, and from the Israeli Ministry of Health.

In addition, pharmaceutical products may not be imported into, or manufactured or marketed in, the State of Israel absent drug registration or the appropriate license/approval to import/manufacture for clinical trials use.

Reimbursement and Pricing Controls

Third-party payers (Medicare, Medicaid, private health insurance companies and other organizations) may affect the pricing or relative attractiveness of our product candidates by regulating the level of reimbursement provided to the physicians and clinic utilizing our product candidates or by refusing reimbursement. If reimbursement under these programs, or if the amount of time to secure reimbursement is too long, our ability to market our technology and product candidates may be adversely and materially affected. In international markets, reimbursement by private third-party medical insurance providers, including government insurers and independent providers, varies from country to country. In certain countries, our ability to achieve significant market penetration may depend upon the availability of third-party government reimbursement.

In many of the markets where we or our collaborative partners would commercialize a product following regulatory approval, the prices of pharmaceutical products are subject, by law, to direct price controls and to drug reimbursement programs with varying price control mechanisms. Public and private health care payers control costs and influence drug pricing through a variety of mechanisms, including the setting of reimbursement amounts for drugs and biological products covered by Medicare Part B based on their Average Sales Prices calculated by manufacturers in accordance with the Medicare Prescription Drug, Improvement, and Modernization Act of 2010, Pub. L. No. 108-173 (2003), as amended, through negotiating discounts with the manufacturers, and through the use of tiered formularies and other mechanisms that provide preferential access to certain drugs over others within a therapeutic class. Drug manufacturers also may be subject to drug rebate agreements with public or private health care payers in exchange for the manufacturers’ products being included on plan formularies.

Payers also set other criteria to govern the uses of a drug that will be deemed medically appropriate and therefore reimbursed or otherwise covered. If a payer concludes that a drug is experimental or investigational, in many cases it will deny coverage on that basis alone. Further, many public and private health care payers limit reimbursement and coverage to the uses of a drug that are either approved by the FDA or that are supported by other appropriate evidence (for example, published medical literature) and appear in a recognized drug compendium. Drug compendia are publications that summarize the available medical evidence for particular drug products and identify which uses of a drug are supported or not supported by the available evidence, whether or not such uses have been approved by the FDA. For example, in the case of Medicare coverage for physician-administered oncology drugs, the Omnibus Budget Reconciliation Act of 1993, Pub. L. No. 103-66 (1993), with certain exceptions, prohibits Medicare carriers from refusing to cover unapproved uses of an FDA-approved drug if the unapproved use is supported by one or more citations in the American Hospital Formulary Service Drug Information the American Medical Association Drug Evaluations, or the United States Pharmacopoeia Drug Information. Another commonly cited compendium, for example under Medicaid, is the DRUGDEX Information System.

Employees

We currently employ 40 full-time and five part-time employees. None of our employees is represented by a labor union and we have not experienced any strikes or work stoppages. While none of our employees is party to any collective bargaining agreements, certain provisions of the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations (including the Industrialists’ Associations) are applicable to our employees in Israel by order the Israel Ministry of Labor. Such orders are part of the employment related laws and regulations which apply to our employees in Israel and set certain mandatory terms of employment. Such mandatory terms of employment primarily concern the length of the workday, minimum daily wages, pension plan benefits for all employees, insurance for work-related accidents, procedures for dismissal of employees, severance pay and other conditions of employment. We generally provide our employees with benefits and working conditions beyond the required minimums. We believe our relations with our employees are good.

Additional Information

Our principal executive offices are located at 435 Devon Park Drive, Building 700, Wayne, Pennsylvania 19087. We conduct our research and development activities primarily from our Israeli location in Misgav Business Park, Misgav. Our telephone numbers are (610) 254-4201 in the United States and +972-4-902-8900 in Israel.

Our website address is www.medgenics.com . The information on or accessible through our website is not part of this Annual Report on Form 10-K. Copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to such reports are available without charge on our website or upon request to us. In addition, our Code of Business Conduct and Ethics, Audit Committee Charter, Compensation Committee Charter and Nominating and Corporate Governance Committee Charter are all available without charge on our website or upon request to us. All such requests should be sent to Medgenics, Inc., Corporate Secretary, 435 Devon Park Drive, Building 700, Wayne, Pennsylvania 19087, or by email request from our website at www.medgenics.com . Amendments to, or waivers from, our Code of Business Conduct and Ethics that apply to our executive officers will be posted to our website. We also post or otherwise make available on our website from time to time other information that may be of interest to our investors.