ITEM 4. Information on the Company.

Historical Background and Corporate Structure

Our Company, Galmed Pharmaceuticals Ltd., was incorporated in Israel on July 31, 2013 as a privately held company. However, our business has been operating since 2000 under a different group of companies established in the same year, or the Group. Originally, we operated under the parent company, GHI. GHI held all of the equity rights in and to GTTI. GTTI held all of the equity rights in and to GIL (other than one share held by GRD). GIL held all of the equity rights in and to GMR. Our intellectual property was held by GIL. The research and development was conducted by GMR as a service to GIL on a cost plus basis. GIL was responsible for all product development.

On February 2, 2014, we underwent the Reorganization, pursuant to which all of our current business (including our intellectual property) was transferred to us. The Group was reorganized by share transfers and asset transfers, resulting in the Company as the parent company and 100% equity-owner of the following companies: (1) GRD, which holds all the Group’s intellectual property, including the Company’s patent portfolio; (2) GIL, which may provide research and development services to GRD on a cost plus basis; and (3) GTTI, which is an inactive company that we expect to liquidate at or following the end of 2015. GIL holds GMR, which became an inactive company in 2014. The Reorganization was conducted in order to simplify our capital structure, reduce our operating cost and to improve our ability to raise funds. Immediately prior to the Reorganization, all our shareholders collectively held 9,739 ordinary shares of GHI. In connection with the Reorganization, and in accordance with the Tax Pre-Ruling, we issued to all such shareholders ordinary shares of the Company, such that upon the Reorganization all our shareholders collectively held 7,099,731 ordinary shares of the Company, in the same proportion among all shareholders, which reflected a ratio of 729 ordinary shares of the Company for each ordinary share of GHI.

In connection with the Reorganization, we obtained the Tax Pre-Ruling, which includes certain restrictions and limitations, including with respect to the transfer of our intellectual property and our ordinary shares and options during a two year period following the completion of our initial public offering, as more fully described in “Item 10. Additional Information—E. Taxation—Certain Israeli Tax Considerations” below. Among other things, the Tax Pre-Ruling required that as of immediately prior to the completion of the Reorganization, the shareholders, option holders and other rights holders of GHI and the Company had to be identical, and that their respective holdings in each of GHI and the Company also had to be identical. 

The following is a diagram of our corporate structure following the liquidation of GTTI:

During May 2014, we completed our initial public offering in the United States. In connection with our initial public offering, we listed our ordinary shares on the Nasdaq Capital Market and issued 3,363,010 of our ordinary shares in consideration of approximately $39.7 million, after deducting underwriting discounts, commissions and other estimated offering expenses.

Our principal executive offices and registered office in Israel are located at 8 Shaul Hamelech Blvd., Amot Mishpat Bldg., Tel Aviv, Israel, 6473307 and our telephone number is +972 3-6938448. Our website address is http://www.galmedpharma.com. The information contained on, or that can be accessed through, our website is neither a part of nor incorporated into this report. We have included our website address in this annual report solely as an inactive textual reference. Puglisi & Associates serves as our authorized representative in the United States. Its address is 850 Library Avenue, Newark, Delaware 19711.

Other than as described in “Item 5. Operating and Financial Review and Prospects—Contractual Obligations”, we currently do not have and did not have any material commitments for capital expenditures, including any anticipated material acquisition of plant and equipment or interests in other companies, as of December 31, 2014.

Business Overview

We are a clinical-stage biopharmaceutical company focused on the development and commercialization of a novel, once-daily, oral therapy for the treatment of liver diseases and cholesterol gallstones utilizing our proprietary first-in-class synthetic fatty-acid/bile-acid conjugate, or FABAC, called aramchol. We believe that aramchol has the potential to be a disease modifying treatment for fatty liver disorders, including NASH, which is a chronic disease that we believe constitutes a large unmet medical need. 

NASH is a severe form of NAFLD in which patients suffer from inflammation and fat accumulation in the liver. NAFLD, which is the first stage of liver disease, is characterized by an accumulation of more than 6% of fat in the liver of people who drink little or no alcohol, and it is mostly associated with obesity or genetic predisposition, as well as in people with a combination of a high fat, fructose-rich diet and a sedentary lifestyle. Recent studies suggest that whereas NAFLD can be a benign condition, NASH may lead to progressive fibrosis that dramatically increases the risk of late-stage severe liver diseases, such as cirrhosis, carcinoma and end-stage liver disease, each potentially requiring liver transplantation. NASH is also associated with increased risk for metabolic and cardiovascular diseases. Both the medical community’s and the public’s awareness of NASH and its complications, as well as its economic burden, have increased in recent years. There is currently no approved drug for the treatment of NASH. According to a joint workshop held on September 5 - 6, 2013, sponsored by the FDA and the AASLD to develop guidance on diagnostic and therapeutic modalities for NASH, the FDA is currently working on guidelines for the development of therapies for the treatment of NASH. A recently published manuscript that summarizes the discussion at this joint workshop entitled “CHALLENGES AND OPPORTUNITIES IN DRUG AND BIOMARKER DEVELOPMENT FOR NONALCOHOLIC TEATOHEPATITIS: FINDINGS AND RECOMMENDATIONS FROM AN AMERICAN ASSOCIATION FOR THE STUDY OF LIVER DISEASES (AASLD) - FOOD AND DRUG ADMINISTRATION (FDA) JOINT WORKSHOP” clarified, among other things, that the reversal of steatohepatitis with no evidence of progression to advanced fibrosis (stage 3 or 4), may be an acceptable surrogate endpoint suitable both for Phase IIb and Phase III trials that enroll patients with NASH and evidence of early fibrosis.

According to an article in the Journal of Gastroenterology and Hepatology in 2013, NAFLD is believed to affect up to 30% of the population in developed countries and up to 75% of Western populations with diabetes and obesity. Also according to an article in the Journal of Gastroenterology and Hepatology in 2013, approximately 12% of the general population in the United States and in the five most-populated countries in the EU, the United Kingdom, France, Spain, Germany and Italy, has NASH. According to an article in the Journal of Hepatology in 2008, and as summarized in an article in the Journal of Hepatology in 2010, the risk that persons with NASH will suffer a liver disease-related death is ten-times higher than that of the general population, and according to these sources, as well as an article in the Journal of Gastroenterology in 2005, NASH increases overall mortality by between 35% and 85%. NASH patients are also twice as likely to die from cardiovascular disease as the global general population. Publications over the last five years that addressed the connection between NASH and its cardiovascular complications include data from 18 studies with a total of 263,000 patients, with a follow up between 4.6 - 24 years. These studies reveal that the presence of NASH and NAFLD increases the risk of cardiovascular events by between 50% in females and up to 600% in males. An article in the European Scientific Journal in 2013 indicates that the presence of NASH increases the cardiovascular risk by a multiple of 2.4 in addition to the other metabolic risk factors, such as type 2 diabetes, and stresses the importance of treating NASH to prevent cardiovascular disease in addition to the known hepatic complications.

The estimated size of the NASH patient population in the United States and in the five most-populated EU countries is presented in the diagram below.

We are initially developing aramchol for the treatment of NASH in patients who also suffer from obesity and insulin resistance. These patients are at the highest risk of developing both the cardiovascular and hepatic complications associated with NASH. Aramchol is a synthetic conjugate of cholic acid, or a type of bile acid, and arachidic acid, or a type of saturated fatty acid, both of which, in their non-synthetic forms, are naturally occurring. The conjugated molecule acts upon important metabolic pathways, reducing fat accumulation in the liver and regulating the transport of cholesterol, which is essential for maintaining cholesterol balance in the body. The ability of aramchol to decrease liver fat content may also reduce the risk of cardiovascular complications associated with NASH. Independent third-party epidemiologic studies suggest that certain levels of fat reduction may reduce, and ultimately eliminate, liver inflammation in patients who have undergone bariatric surgery or other weight loss programs. We believe that aramchol’s ability to reduce liver fat without observable adverse side effects in our studies to date will enable it to be an effective treatment for NASH and prevent the hepatic and cardiovascular complications associated therewith.

On February 1, 2015, we began our ARREST Study, a multi-center, randomized, double-blind, placebo-controlled, dose-ranging Phase IIb clinical trial of aramchol, which we intend to conduct in 240 biopsy-diagnosed NASH patients who also suffer from obesity and insulin resistance. We have initially initiated this study in Israel, and depending on the timing of the respective National Regulatory Authorities’ approval, we may also initiate the study in Europe and Latin America. Furthermore, we have also submitted to the FDA an update of our existing IND filing, including the results of chronic toxicology and human PK studies, in order to initiate the study in the United States. Our ARREST Study for aramchol in NASH patients is in accordance with the study design recommended by the Medicines and Healthcare Products Regulatory Agency, or MHRA, and has been deemed acceptable by Bundesinstitut für Arzneimittel und Medizinprodukte, a German medical agency, or BfArM, and deemed satisfactory by Agence nationale de sécurité du médicament, a French medical agency, or ANSM. The study design has been confirmed by the FDA in a written pre-IND advice as acceptable for a Phase IIb study. The BfArM and ANSM also confirmed, in minutes of each of their respective scientific advisory meetings, that if successful, this Phase IIb trial may serve as a basis for Phase III pivotal trials of aramchol. The FDA and MHRA invited us to discuss the next steps in the development of aramchol after we analyze the results of the ARREST Study. If the Phase III trials are successful, we intend to submit an NDA to the FDA and an MAA to the EMA for the approval of aramchol for the treatment of NASH in patients who also suffer from obesity and insulin resistance in the United States and Europe. We currently expect complete results from our ARREST Study to be available at the end of 2016. Once 120 patients in our ARREST Study complete six months of treatment, we intend to conduct an interim analysis for safety and futility of aramchol based on MRS analysis. The interim analysis will provide safety data according to which an independent safety board will decide whether to continue studying both doses or move all patients to one dose, if one is found safer than the other. The MRS, will provide data for a futility decision, namely the decision to stop the study if no trend of reduction in liver fat content is found. We do not anticipate the interim results to lead to the stoppage of the ARREST Study, but no assurance can be given. This highlights the importance of the main secondary endpoint of the resolution of NASH in biopsies, which can be assessed only at the completion of the study and by repeated liver biopsies. We currently expect results from the interim analysis to be available in the first half of 2016. Depending on a number of factors, including, but not limited to, having sufficient resources and the completion of a pre-clinical study in juvenile animals, we may conduct in the future, but give no assurance that we will conduct or when we will conduct, an open-label Phase I clinical trial of aramchol in children.

We are also exploring other indications for the use of aramchol, including the treatment of cholesterol gallstones. On November 13, 2014, we announced the first administration of aramchol in a proof-of-concept Phase IIa clinical trial for the treatment of newly formed cholesterol gallstones following bariatric surgery. The Phase IIa trial is a multi-center, randomized, double blind, placebo controlled study, designed to evaluate the efficacy and safety of a once-daily dose of aramchol for three months in 36 adult patients and is being conducted in four medical centers in Israel. The primary endpoint of the trial is the complete dissolution of newly formed cholesterol gallstones following bariatric surgery. Secondary endpoints include a decrease of more than 50% in the number of newly formed gallstones, prevention of the formation of additional gallstones during the trial period and dissolution of biliary sludge. We currently anticipate reporting top line results in the second half of 2015. Approximately 5% of the general population in most countries develops cholesterol gallstones and the current standard of care is surgery, either laparoscopic or open cholecystectomy.

On April 28, 2014, we commenced PK and food effect studies of aramchol. In written correspondence from December 2013 regarding a requested pre- IND application meeting, the FDA recommended that we conduct such studies prior to commencing our Phase IIb ARREST Study of aramchol for the treatment of NASH. We conducted the PK study at the Sourasky Medical Center in Tel Aviv, Israel. We enrolled 66 healthy male volunteers who received three doses of aramchol: 200mg, 400mg and 600mg. The two higher doses will be used in our ARREST Study. In December 2014, we completed the statistical analysis of the PK study of the three doses of aramchol and observed no serious adverse events. Such PK study provides additional safety data to further support existing safety data from our pre-clinical studies and our Phase I and Phase IIa clinical trials of aramchol.

To date, we have successfully completed four clinical trials of aramchol. The first was a single dose, double-blind, placebo- controlled, Phase Ia study with ascending doses of aramchol in healthy volunteers in one center in Israel. All doses proved to be well-tolerated and no serious adverse side effects were observed. An additional Phase Ib repeated dose trial completed on healthy volunteers in one center in Israel also showed that aramchol has no observable adverse side effects and confirmed the suitability of a once-daily dose of aramchol. A multi-center, randomized, double-blind, placebo-controlled Phase IIa trial of aramchol in 60 NAFLD and NASH patients in 12 centers in Israel, whose study design was deemed acceptable by the FDA in 2007 at a pre-IND scientific advisory meeting, suggested that aramchol reduced liver fat in a dose dependent manner, as evidenced by a statistically significant reduction of liver fat over a three month treatment period of once-daily 300 mg doses of aramchol, and induced positive trends of changes in several metabolic parameters. The fourth was a single-site, randomized, partially double-blind, placebo-controlled PK and food effect study conducted in three parts. The first two parts of the study assessed PK, safety and tolerability of aramchol tablets administered in single doses of 200 mg, 400 mg and 600 mg either following a ten-hour overnight fast or a high-fat, high-calorie meal. The third part of the study assessed PK, safety and tolerability of aramchol tablets administered in the same three doses as the first two parts of the study for ten consecutive days, in each case within one hour after a light breakfast. We did not observe any serious adverse side effects in the PK and food effect study.

Based on our Phase IIa proof-of-concept results, we established a development plan that we believe may confirm that aramchol (i) is safe, (ii) can be administered as a once-daily oral therapy, (iii) targets NASH, (iv) can effectively treat inflammation and thus prevent the progression of NASH and (v) can treat the underlying condition of NASH, metabolic syndrome, by improving insulin resistance and other parameters of metabolic syndrome, such as HOMA levels, or homeostatic model assessment levels, which is a method used to quantify insulin resistance and beta-cell function, which are each biological markers of metabolic syndrome, and adiponectin levels.

Our Development Pipeline

Based on the potential metabolic effects of aramchol, we are considering additional indications with meaningful potential market opportunities, with the view of expanding aramchol’s therapeutic applications to cholesterol gallstones and other cholestatic diseases and lipodystrophy, a medical condition characterized by abnormal or degenerative conditions of adipose tissue, or body fat, including the loss of body fat from various regions of the body and its redistribution and accumulation in other areas. The pipeline chart below shows the current stage of development of aramchol for each of these indications and the next planned clinical trial in respect of each such indication, as applicable, as well as the preclinical programs for aramchol.

Our Competitive Strengths

The pharmaceutical industry is characterized by rapidly evolving technology, intense competition and a highly risky, costly and lengthy research and development process. Adequate protection of intellectual property, successful product development, adequate funding and retention of skilled, experienced and professional personnel are among the many factors critical to success in the pharmaceutical industry. We believe we are strategically positioned to address the unmet medical needs of NASH patients who also suffer from obesity and insulin resistance. Our competitive strengths include:

Our Strategy

Our strategy is to build a specialized biopharmaceutical company that discovers, develops and commercializes novel FABAC drugs and potentially other molecules for the treatment of liver diseases and cholesterol gallstones, beginning with the treatment of fatty liver disorders, primarily NASH, and cholesterol gallstones. We focus on drugs and drug conjugates for liver diseases and cholesterol gallstones with global market potential and we seek to create global partnerships with academic institutions and biotechnology or pharmaceutical companies to effectively assist us in developing our portfolio and marketing our products. Using this approach, we have successfully advanced aramchol into various stages of clinical development. Key elements of our strategy include:

We believe that our strategy will increase the likelihood of advancing clinical development and potential commercialization of aramchol, as well as increase awareness of liver disease and cholesterol gallstones, our brand and our potential market share.

Overview of NAFLD and NASH

NAFLD . NAFLD is a spectrum of conditions characterized by the accumulation of fat in the liver, encompassing fatty liver, a relatively benign increase in liver fat content, NASH, or fat infiltration and inflammation of the liver, and liver cirrhosis, or scarring of the liver tissue. Although some fat in the liver is normal, if fat comprises more than 6% of the liver, it may lead to inflammation and subsequent liver disease. In some cases, over time, liver cells may be replaced by scar tissue, which causes cirrhosis. When this happens, the liver is unable to function properly, necessitating a liver transplant or leading to liver cancer, and potentially liver-related death. The following diagram demonstrates the progression of liver disease.

According to the Journal of Gastroenterology and Hepatology in 2013, NAFLD is believed to affect up to 30% of the population in developed countries, and up to 75% of Western populations with diabetes and obesity. According to the World Gastroenterology Organization, in 2012, 30%, 25%, 25% and 15%, respectively, of the general population in each of the United States, Europe, the Middle East and Asia, respectively, had NASH.

Associated with the Western diet, which is rich in processed foods with high fat and sugar content, and a sedentary lifestyle, NAFLD’s prevalence is rapidly growing in parallel with metabolic syndrome, obesity and diabetes, each of which are on the rise in Western countries. Metabolic syndrome is a serious health condition caused by obesity, physical inactivity and genetic factors that results in a higher risk of cardiovascular disease, diabetes, stroke and NAFLD. According to the Journal of Gastroenterology and Hepatology in 2013, NAFLD is associated with insulin resistance and its physical and biochemical manifestations, such as obesity, visceral adiposity, type 2 diabetes, hypertriglyceridemia and arterial hypertension. Recently, the medical community has widely come to consider NAFLD as the liver disease of metabolic syndrome, which is the cause of atherosclerosis and its associated complications. Concordant studies over the last five years in Europe and Japan have indicated that over a follow-up period of five to six years, individuals with NAFLD also develop major cardiovascular complications, such as myocardial infarction, more frequently than those without NAFLD. Further, an article in the Journal of Gastroenterology and Hepatology in 2013 acknowledges a causal relationship between the progression of metabolic syndrome and the occurrence of NAFLD. The 2013 handbook, Non-Alcoholic Fatty Liver Disease: A Practical Guide, notes that the amount of liver fat influences the severity of insulin resistance, such that patients with fat accumulation in the liver have substantially more insulin resistance than those without such accumulation. Moreover, according to an article in the Journal of Hepatology in 2014 , patients with NAFLD develop atherosclerosis earlier than those without NAFLD. It is therefore considered by the medical community that NAFLD is not only a manifestation of metabolic syndrome, but may also be involved in its development and severity. The current management of NAFLD demands lifestyle changes such as weight reduction and physical activity, which are hard to achieve and long-term compliance is difficult.

NASH . NASH is a severe form of NAFLD characterized by inflammation in the liver in addition to the presence of excess fat. A subset of approximately 30% to 50% of individuals with NAFLD in all age groups, including children, develop NASH, although this more often occurs in obese individuals. Independent third-party studies suggest that whereas simple fatty liver can be a benign condition, in NASH patients, for reasons that are still not completely understood, the fat build-up in the liver induces chronic inflammation which leads to progressive fibrosis that can lead to cirrhosis with a high risk of carcinoma and to end-stage liver disease. According to an article in the Journal of Gastroenterology, NASH is currently the third leading indication for liver transplantation in the United States, and according to articles in the Journal of Digestive Diseases in 2011 and the Journal of Hepatology in 2010, NASH will become the leading cause for liver transplantation in the United States by 2020.

Based on research and discussions, we believe that the size of the NASH market is somewhere between $10 billion and $40 billion, although there can be no assurance of the market size.

NASH is often discovered incidentally, frequently by observation of elevated liver enzyme levels in blood tests. NASH patients may be asymptomatic or suffer from fatigue, with other symptoms occurring as the liver disease advances. Diagnosis of NASH is based on the exclusion of other reasons for liver disease, such as the use of medications, viral hepatitis or excessive use of alcohol; followed by non-invasive imaging tests, such as ultrasound, Computed Tomography scan, or CT scan, and magnetic resonance imaging, or MRI. Liver biopsy is currently the standard procedure for the diagnosis of NASH.

The underlying pathophysiology, or the explanation of the physiological processes or mechanisms whereby abnormal or undesired conditions develop and progress, of NASH is not well understood. The disease is multifactorial, involving both genetic and environmental factors that regulate lipid metabolism and the transportation of fat to, within and from the liver cells. Insulin resistance and subsequent hyperinsulinemia, or increased blood insulin levels as compared to blood glucose levels, lead to alterations in the hepatic metabolism of free fatty acids and ultimately to an accumulation of lipids in the liver cells. As the disease progresses, persistent fatty infiltration and inflammation cause liver damage marked by fibrosis and gradual loss of normal liver cells, which in turn could lead to cirrhosis with a high risk of carcinoma and end-stage liver disease.

Beside its hepatic complications, NASH is also associated with increased risk for the cardiovascular complications associated with metabolic syndrome. A position statement on NAFLD and NASH from the European Association for the Study of the Liver’s, or the EASL, 2009 Special Conference found extra-hepatic complications of NAFLD and NASH. The EASL position statement noted that “[b]eyond damage to the liver, steatosis can also worsen and/or induce insulin resistance, worsen glycemic control in patients with type 2 diabetes, and predict subsequent development of metabolic syndrome; it is also associated with increased cardiovascular risk and events and with essential arterial hypertension.” The American Journal of Gastroenterology noted in 2012 that “[t]he long-term outcomes of patients with NASH have been reported in several studies… [whose] findings can be summarized as follows: (a) patients with NAFLD have increased overall mortality compared to matched control populations; (b) the most common cause of death in patients with NASH is cardiovascular disease; and (c) patients with NASH (but not NAFL) have an increased liver-related mortality rate.

Currently Available Treatment Options for NASH

Modification of risk factors, such as obesity and hyperlipidemia, and proper diabetic control is generally recommended for the treatment of NASH, and the standard of care includes lifestyle changes to promote weight loss, including low-calorie, low-fat diets and physical activity. Although weight loss can be potentially significant in delaying the progression of NASH, we believe that for most individuals, it is generally very difficult to maintain over the long-term, even following bariatric surgery.

There are currently no drugs approved by regulatory authorities for the treatment of NASH. Even though certain drugs, such as insulin sensitizers and antihyperlipidemic agents, are prescribed for some NASH patients, they are not approved for the treatment of NASH and their efficacy has not been proven in well-designed clinical studies. Such prescription or use of unapproved drugs is typically known as “off-label” prescription or use. According to press releases issued in mid-2011 by the FDA and EMA, the use of other drugs that have historically also been used off-label to treat NASH has been restricted due to their severe side effects, including adverse cardiovascular effects and liver toxicity, or suspected carcinogenicity. Bariatric surgery can be performed in obese patients with NASH, but is not an established procedure to treat NASH. Lastly, vitamin E was found to be beneficial for non- diabetic patients with biopsy proven NASH, but not for diabetics with NASH, NAFLD or liver cirrhosis. As such, the use of vitamin E is fairly limited.

Based on the foregoing, we believe that there is a significant unmet need for a NASH-specific therapy. We believe that aramchol has the potential to provide significant benefits in the treatment of this liver disease due to its ability to reduce liver fat in a dose dependent manner, lack of observable adverse side effects in our studies to date and ease of use through once-daily oral administration. Moreover, based in part on the Journal of Gastroenterology and Hepatology, we believe the increasing rates of diabetes and obesity worldwide likely means that a significant number of patients will be eligible for, and will be interested in, receiving a new therapy for the treatment of NASH if it becomes available on the market. We believe that aramchol’s observed positive metabolic effects, if confirmed in future studies, will position it as a valuable tool in the treatment of NASH in early stages of the disease, for helping to prevent both hepatic and cardiovascular complications.

Aramchol for NASH

Overview

Our product candidate, aramchol, is a first-in-class synthetic FABAC which we are initially developing for the once-daily oral treatment of NASH in patients who also suffer from obesity and insulin resistance.

Early in its development, aramchol’s ability to modulate hepatic lipid metabolism was observed and validated in numerous preclinical trials with different animal species. Mice fed a high fat diet and treated with aramchol did not develop fatty liver, as opposed to the control mice that were fed a high fat diet, but were not treated with aramchol, in which fatty liver was observed. In such early studies, we also observed that the mechanism of this effect was not a result of malabsorption of fat in the intestines because the FABAC-treated mice gained weight throughout the test periods to a similar degree as the control mice. This led us to conclude that FABAC therapy triggers a beneficial modulation of intra-hepatic lipid metabolism and thus reduces liver fat content. The images below show the reduction of liver fat content in rodents after treatment with aramchol.

In in-vitro studies, aramchol partially inhibited the Stearoyl-Coenzyme A Desaturase1, or the SCD1 enzyme, an enzyme recognized as playing an important role in the metabolism of fatty acids. The SCD1 enzyme is essentially the gateway that regulates the use and storage of fat in the body by converting saturated fatty acids to monounsaturated fatty acids. Experimental animal studies showed that inhibition of the SCD1 enzyme protects against diet-induced obesity, hepatic steatosis, or fatty liver, and insulin resistance by instructing the body to use, rather than store, all fatty acids. However, various animal studies have indicated that complete SCD1 enzyme inhibition has dangerous side effects, such as inflammation, atherosclerosis and pancreatic beta cell dysfunction. As observed by us in our studies and subsequently published in the European Journal of Gastroenterology and Hepatology and Archives of Medical Research in 2008 and 2010 respectively, one of aramchol’s unique characteristics is that it triggers a partial SCD1 enzyme inhibition without any significant adverse events.

Aramchol also has the ability to up-regulate ABCA1, an enzyme that induces “reverse cholesterol transport.” Each cell in the body has a specific receptor for cholesterol entry, the LDL receptor, and a transporter, the ABCA1 transporter that pumps cholesterol out of the cell towards the high-density lipoprotein, or HDL, which transports it towards the liver to be excreted into the intestine. This pathway from the cell to the liver is called the “reverse cholesterol transport” and is essential for maintaining cholesterol balance in the body. Excess levels of “bad” cholesterol are deposited mainly in vascular walls, causing atherosclerosis, or a vascular disease in which an artery wall thickens as a result of the accumulation of calcium and fatty materials, such as cholesterol. Activation of the reverse cholesterol transport reduces the bad cholesterol deposited in vascular walls and is therefore beneficial. As published in the Biochemical Journal, the Archives of Medical Research and the Current Opinion in Lipidology in 2006, 2010 and 2014, respectively, in several experimental models in animals, aramchol has been shown in independent studies to increase ABCA1 activity by between 300% and 400%, thereby stimulating reverse cholesterol transport, reducing cholesterol levels and preventing atherosclerosis. An article in the April 2014 issue of Biochimie further supports the importance of the regulation of ABCA1-induced reverse cholesterol transport on the pathogenesis of NASH.

The Company expects aramchol to reduce and eventually eliminate liver inflammation by the mechanism of action described above, while also mitigating cardiovascular comorbidities.

We commenced our Phase IIb ARREST Study on February 1, 2015, to evaluate the efficacy and determine the safest and most efficient dose of aramchol as a novel treatment for NASH patients with obesity and insulin resistance. We filed an IND application with the FDA in order to use the results of our previously conducted, and to be conducted clinical studies in Europe, Latin America and Israel, as a basis for the FDA’s future approval to conduct our ARREST Study and the pivotal Phase III clinical trials for NASH and other clinical trials in the United States. On July 22, 2014, the FDA cleared this IND application, permitting us to conduct clinical trials of aramchol in the United States for the treatment of fatty liver disorders, and in September 2014, the FDA granted Fast Track designation status to aramchol for the treatment of NASH. Fast Track designation may accelerate the development process and may expedite the review of INDs that show promise in treating serious, life-threatening medical conditions for which no other drug either exists or is as effective. In March 2015 we submitted to the FDA an updated IND request, which, if cleared, will allow us to conduct the Phase IIb ARREST Study in the United States.

Summary of Aramchol Clinical Trials

Our Phase IIb ARREST Study for Aramchol

We are currently conducting our Phase IIb ARREST Study to determine the safest and most effective dose of aramchol for the treatment of NASH. In order to be eligible to participate in our ARREST Study, patients must be affected by NASH, as diagnosed by a biopsy, and also suffer from overweight or obesity, measured by a Body Mass Index between 26 and 29 and 30 or greater, respectively and insulin resistance, measured by fasting plasma glucose levels of 100 mg/dl or greater. We target this specific population as it is at the greatest risk of developing the complications that are associated with NASH. Although we do not expect aramchol to reduce the fibrosis levels of such patients, we include both fibrotic and non-fibrotic patients in the trial. Patients are randomized into one of three trial groups taking either one of two different once-daily oral doses of aramchol or a placebo. The treatment part of the trial is designed to be 12 months in duration and patients completing this phase will be observed for a three month follow-up period. This trial is designed to enroll 240 patients (89 patients in the 400 mg aramchol group, 89 patients in the 600 mg aramchol group and 62 patients in the placebo group) across approximately 60 clinical sites in the United States, Israel, Europe and Latin America, and we currently expect results from the trial to be available at the end of 2016.

The primary endpoint of the 12-month double-blind portion of the trial is a statistically significant reduction in liver fat concentration, which according to the trial design, would be a reduction in liver fat of 10% more than the placebo group, as measured by MRS, which is a surrogate endpoint that is generally accepted by the FDA with respect to Phase I and Phase II NASH studies.

Secondary endpoints of the trial are changes in diagnosis as measured by a biopsy, such as the resolution of NASH, and/or a two point reduction in the NAFLD activity score, or NAS (a measurement of the disease severity that measures the parameters of fat, ballooning and inflammation), which reduction is caused by more than one parameter, with no worsening of fibrosis. Other secondary endpoints are improved liver and metabolic biomarker levels and exploratory endpoints, such as FibroMax, which is a non-invasive comprehensive biomarker for the diagnosis of the most common liver diseases, including NASH, and metabolomics. The Company believes that finding a non-invasive test which correlates well with biopsy findings would significantly increase the likelihood of the future use of aramchol in an outpatient setting, where biopsies, which are expensive and painful, are not the standard diagnostic procedures.

During the trial, we plan to conduct an interim analysis for safety and futility with respect to 120 participants who have completed six months of treatment. An independent expert committee, the DSMB, will review the interim safety data to determine whether emergent safety issues are present, and if so, whether they are dose-related. Depending on its severity, any emergent safety issues may warrant a suspension of the higher dose used in the trial or of the entire trial itself. Our pre-specified interim criterion for futility is a trend of reduction in liver fat content measured by MRS in treated patients compared to placebo-treated patients. If this interim criterion is met, the trial will continue for the full period and number of patients, as planned. If this result is not reached, however, the trial will be suspended.

With respect to conducting trials in the United States, on December 13, 2013, in connection with a pre-IND meeting that we requested with the FDA for aramchol for the treatment of NASH in obese patients with insulin resistance, the FDA provided a written response, or the FDA Response, regarding our planned ARREST Study design, including its primary and secondary endpoints and inclusion and exclusion criteria. The FDA Response and prior correspondence confirmed that we may conduct our planned ARREST Study in the United States, but recommended that we perform a PK and a food effect study prior to doing so. We have since completed the PK study and the statistical analysis showed no observable serious adverse events. The FDA also indicated that it will require data from nine-month toxicology studies in animals prior to the initiation of any year-long clinical trial conducted within the United States; the EU, Israel and Latin America only require six-month toxicology data. In September 2014, we successfully completed two six-month chronic toxicology studies of aramchol with no observed significant adverse events and continued these studies into December 2014 to satisfy the above initial requirement of the FDA to complete nine-month pre-clinical toxicology studies of aramchol prior to conducting clinical trials in the United States. In February 2015, we successfully completed the nine-month pre-clinical toxicology studies of aramchol with no observed significant adverse events. As such, we intend to include U.S.-based sites in our ARREST Study of aramchol.

The FDA also recommended that future clinical studies should be discussed at an end-of-Phase II meeting with the FDA to take place within three months from the date we complete the analysis of the results of our ARREST Study, where the data captured in such trial will be taken into consideration. The FDA Response further noted that we must discuss with the FDA a methodology for our drug development processes as our development of aramchol progresses to determine which surrogate endpoints, if any, the FDA will allow us to use to predict the clinical benefit of aramchol. In light of the publication of the FDA and AASLD joint workshop minutes, we speculate that the discussion will focus on the appropriateness of the resolution of NASH, as measured by biopsies.

Potential Phase III Program for Aramchol

The development work we have completed to date with regard to aramchol was deemed appropriate for the initiation of a phase IIb study by the FDA, MHRA, BfArM and ANSM, and our ARREST Study design is in accordance with the study design recommended by the MHRA, deemed acceptable by BfArM and deemed satisfactory by ANSM. In, addition, the FDA recently confirmed in a written pre-IND advisory letter that such study design was acceptable for our ARREST Study. BfArM and ANSM also confirmed, in minutes of each of their respective scientific advisory meetings, that, if our ARREST Study is successful in reaching its primary endpoint, we may proceed to pivotal randomized, double-blind, placebo-controlled, Phase III trials. We expect the primary end-points of such trials to be the resolution of inflammation in the liver. The FDA, in the FDA Response, and the MHRA invited us to discuss the next steps in the development of aramchol after we complete the analysis of the results of our ARREST Study, where the data captured in such trial will be taken into consideration. In July 2014, the FDA granted Fast Track designation to aramchol, which designation may accelerate the development process and may expedite the review of INDs that show promise in treating serious, life-threatening medical conditions for which no other drug either exists or is as effective.

Phase IIa Trial: Aramchol Treatment in NAFLD or NASH Patients

In January 2012, we completed a 60 patient multi-center, randomized, double-blind, placebo-controlled Phase IIa clinical trial of aramchol in patients with NAFLD or NASH between the ages of 18 and 75 in 12 centers in Israel. The Phase IIa study results were published in July 2014 in the peer-reviewed medical journal, Clinical Gastroenterology and Hepatology Journal. In accordance with the AASLD’s guidelines for Phase IIa studies in NAFLD or NASH, the trial was performed in patients with either NAFLD or NASH, rather than only in NASH patients. The trial’s primary efficacy endpoint was a reduction in liver fat content, and did not consider inflammation or fibrosis, which can only be diagnosed by liver biopsy. We believe that the short study duration of three months of treatment followed by a one-month follow-up period did not warrant repeated biopsies. The trial evaluated the effects on liver fat content of 100 mg and 300 mg once-daily doses of aramchol compared to a placebo. At the end of the three month treatment period, statistically significant reductions in liver fat concentration as measured by MRS, a noninvasive and sensitive method for quantification of the amount of fat in the liver, were observed in the 300 mg patient group. Specifically, a 12.57% mean liver fat content reduction was observed in the 300 mg group, as compared to a mean reduction of 2.89% in the 100 mg group and a mean increase of 6.39% in the placebo-treated patients, indicating that the effects of aramchol are dose-dependent, as demonstrated in the graph below, which presents the results with respect to the 57 patients who completed the entire treatment period and experienced no protocol violations.

Relative Change in MRS from Baseline After Three Months of Treatment

The difference between baseline and liver fat concentration at the end-of-treatment, as measured by MRS, for patients diagnosed with NASH and with NAFLD is presented in the following table, which also presents the results with respect to the 57 patients who completed the entire treatment period and experienced no protocol violations.

Relative Change in Liver Fat Concentrations in the NASH and NAFLD Groups

N = number of patients

SD = standard deviation

The graph and table above show that the primary endpoint of the study was attained. The study demonstrated a statistically significant, dose dependent reduction in fat content in the livers of patients treated with aramchol, with a 19% difference between the 300 mg dose group and the placebo group, while the difference between the 100 mg dose group and the placebo group was not statistically significant.

No statistically significant changes in body weight were observed between the three groups, suggesting that weight-loss did not influence the observed reduction in liver fat content experienced in the aramchol treated groups.

In addition, both treated patients and the placebo group showed a trend of reduction in alanine aminotransferase, or ALT, levels, which is a marker of hepatocellular injury and an indicator of liver disease. We believe that the reason the treated and placebo groups showed such a trend may be a result of the fact that the individuals in the placebo may have changed their lifestyle based on the guidance they received from the Company on adopting a healthy lifestyle. The aramchol treated groups’ ALT values relapsed 30 days post-treatment, indicating that after the cessation of aramchol treatment, the patients experienced recurring liver inflammation. The placebo group did not demonstrate a relapse in ALT levels. This supports the supposition that aramchol has a real biological effect.

Total cholesterol and LDL cholesterol levels were determined as safety parameters in our Phase IIa study. Differences between low-dose aramchol (100 mg/d), high-dose aramchol (300 mg/d) and the placebo were also analyzed for secondary efficiency endpoints. The graphs below show no statistically significant differences among the three treatment groups for cholesterol and LDL.

Adiponectin is a protein that modulates metabolic processes, including the regulation of glucose levels and fatty acid breakdown in the body. Adiponectin has an anti-inflammatory and antifibrotic effect on the liver. Adiponectin deficiency, or low amounts of adiponectin, results in insulin resistance, glucose intolerance, abnormal levels of fat in the blood and vascular injury, all of which are characteristic of metabolic syndrome. The graph below shows the change in serum adiponectin levels from baseline during treatment. At the end of the three month treatment period, increased serum adiponectin levels were observed in the aramchol treated patient groups, indicating that aramchol increases serum adiponectin levels in a dose dependent manner, suggesting that aramchol may act as a protective factor for the prevention of metabolic syndrome, as increased serum adiponectin is itself such an independent protective factor.

Change in Serum Adiponectin Levels from Baseline During Three Months of Treatment

The arterial endothelium is a target for the atherosclerotic process. Atherosclerosis is associated with endothelial dysfunction in the very early stages of the disease process. Several studies have shown that metabolic syndrome is associated with endothelial dysfunction as an early pathogenic event. Thus, assessing endothelial function serves as an early marker for both metabolic syndrome and atherosclerosis. In the present study, endothelial function was assessed using flow-mediated dilation, a noninvasive ultrasound-based method that measures the ability of a large conduit artery to dilate in response to a shear stress stimulus, or an external force acting on the blood vessel. At the end of the three month treatment period, improved endothelial function was observed in the 300 mg aramchol treated patient group. The table and graph below present the change in endothelial function, as measured by flow mediated dilation observed between baseline and the end-of-treatment for the 48 patients who performed two flow mediated dilation examinations.

Change in Endothelial Function between Baseline and the End-of-Treatment

N = number of patients

SD = standard deviation

The improvement in endothelial function suggests a positive effect on metabolic syndrome, specifically on vascular function.

Furthermore, treatment with aramchol was well-tolerated. There were no notable changes in biochemical, hematological, cardiovascular or other safety parameters, and there were no serious drug related adverse events during the three month treatment period or the subsequent recovery period. Aramchol’s adverse event profile was comparable to that of the placebo, as portrayed in the chart below.

The results of our Phase IIa clinical trial of aramchol in the peer-reviewed Clinical Gastroenterology and Hepatology Journal were published in December 2014. The trial manuscript, entitled “The Fatty Acid-Bile Acid Conjudgate Aramchol Reduced Liver Fat Content in Patients with Nonalcoholic Fatty Liver Disease,” provides the full report of the Phase IIa trial, which was completed in January 2012 and presented at the 47 ^th Annual Meeting of the European Association for the Study of the Liver in 2012.

Phase I Trials

Aramchol was evaluated in two Phase I clinical trials to study its safety, tolerability and PK profile in healthy volunteers, in both single and multiple dose administrations. The first Phase I clinical trial was an escalating single-dose trial conducted in 16 subjects testing single aramchol doses in the range of 30 mg to 900 mg. The subsequent Phase I clinical trial was a repeated-dose trial conducted over four days in 25 subjects testing repeated daily doses of aramchol of 30 mg and 300 mg. The profiles for the groups were similar and the maximal plasma concentration of aramchol increased with the higher doses. The PK profile demonstrated that aramchol is suitable at each dose for once-daily administration and there were neither significant adverse events observed in either Phase I trial nor any notable changes in biochemical, hematologic, cardiovascular or other safety parameters.

Additional Preclinical and Clinical Studies Required for Regulatory Submissions

The tolerability of aramchol has been demonstrated in toxicity studies performed in rats (up to six months) and dogs (up to nine months), as well as reproductive studies in rats and rabbits. More recently, we conducted a food effect and PK study in 66 healthy volunteers to evaluate the PK of aramchol following single and multiple escalating doses (200mg, 400mg and 600mg), as well as to evaluate the effect of a high-fat, high-calorie meal on the PK of aramchol following a single dose (600mg) in healthy volunteers. The safety and tolerability of aramchol was assessed during the study period.

The results showed dose-related, but less than dose-proportional, increases in the mean aramchol plasma concentrations, or Cmax, area under the curve, or AUC (0-t), and AUC (inf) of 200 mg, 400 mg and 600 mg doses administered under fasting conditions or following a light meal, both at single and repeated dose administration. Cmax and AUC are metrics used to indicate the significance of a drug’s exposure. Steady-state was achieved by 144 hours (day seven). Administration of aramchol after a high-fat, high-calorie meal afforded a 2.6 fold increase in exposure, as measured by Cmax, AUC(0-t), and AUC(inf) compared to the fasting group.

The clinical exposure level observed after daily repeat dosing at 600 mg for ten days was used to determine a safety margin of greater than 50 times when compared to the maximum exposure levels detected in the nine month dog toxicology study (after allometric scaling).

The safety assessment demonstrated that all doses of aramchol administered during the study were safe and well-tolerated. No serious adverse events or deaths occurred during the study and only one patient withdrew due to an adverse event, which was categorized as unrelated to aramchol. Of the 27 adverse events reported in the study, 24 were considered to be unrelated to aramchol and three were considered to be possibly related (all three of which were mild). No clinically significant abnormalities related to any aramchol dose were noted in ECGs, laboratory results, vital signs or physical examinations.

Chronic Toxicology studies

Since the completion of the Phase IIa study, additional non-clinical chronic toxicology studies have been conducted in pharmacologically-relevant species to support the initiation of our ARREST Study and Phase III clinical studies. These studies were performed in compliance with the EMA’s ICH M3 (R2) guidelines by WIL Research, a global contract research organization, at its facility in Holland. The studies are required in advance of the commencement of human clinical trials and marketing authorization for pharmaceuticals in Europe and the United States. The toxicity program for aramchol included repeat dose studies of up to six months in rats and up to nine months in dogs by oral administration, the intended clinical dose route. These studies demonstrated that aramchol was well-tolerated at the dose levels investigated with no-observed-adverse-effect-level, values of 1000 mg/kg/day in rats and 1500 mg/kg/day in dogs, the maximum feasible dose in both species. There were no observations noted in the rat study. The findings in the dog study were limited to changes in plasma lipids, including decreases in total blood cholesterol levels, LDL, HDL and phospholipids, and a slight increase in the size of the adrenal glands, which were  considered to be an extension of the primary pharmacology of aramchol and non-toxic effects, and skin scales from week 13 onwards in all aramchol-treated groups, with a dose-related incidence. The decrease in total blood cholesterol levels in the dog study further supports our understanding of the positive effect of aramchol on lipids as we previously observed in our preclinical studies in other animals. After six months this was not accompanied by any microscopic alteration of the skin and therefore considered not toxicologically relevant. Preliminary results from the study show that after nine months the presence of scales in all aramchol-treated groups was accompanied by minor test item-related microscopic findings in the skin: Hyperkeratosis of the epidermis, correlating to the scales, and keratin plugs in the hair follicles (in males at 750/500 and 1500 mg/kg). After a 12-week treatment-free recovery period, fewer scales were noted and microscopically there was partial recovery. As these findings were minor and no clinical symptoms like scratching were noted, these findings were considered not adverse.

Aramchol was non-mutagenic in vitro in the Ames test and chromosomal aberrations test, each of which is a test to determine whether the subject chemical can cause mutations in the DNA of an organism. In addition, aramchol was not clastogenic, or a mutagenic agent giving rise to or inducing disruption or breakages of chromosomes, nor aneugenic, or a chemical agent that promotes the number of chromosomes in the nucleus of a cell to not be an exact multiple of the monoploid number of a particular species, in bone marrow micronucleus test in male rats at a 2000 mg/kg oral dose (the maximum recommended dose in accordance with ICH S2 (R1)).

Embryo-fetal development toxicity was assessed in rats and rabbits. No maternal or fetal development toxicity was observed in either species. The NOAEL for maternal and development toxicity was at least 1000 mg/kg in rats and 750 mg/kg in rabbits (the maximum feasible dose in both species).

No maximum tolerated doses were reached in the studies. A 50 fold safety margin exposure multiple was achieved in dogs but not in rats. However, for rats, at least three of the four ICH M3(R2) safety margin criteria were met, and for dogs all four criteria were met. Blood tests revealed a decrease in total blood cholesterol levels, including LDL, HDL and phospholipids, and there was a slight increase in the size of the adrenal glands of the dogs, which WIL Research assessed as a physiologic compensatory response to the decrease in blood cholesterol levels. WIL Research did not consider the decrease in blood cholesterol levels or the physiologic response of the adrenal glands as a toxic effect, but rather as a pharmacodynamic effect, which is a biochemical and physiological effect of the drug on the body. Based on the above, WIL Research concluded that the overall safety data for aramchol is sufficient to support the proposed Phase IIb clinical trial.

Aramchol Formulation Development

There has been a progression of the formulations of aramchol used so far in the preclinical and clinical studies. In the Phase IIa study, we administered a simple compressed tablet form that was developed directly from the suspension used in the Phase Ia and Ib studies and the preclinical studies in animals. Upon completion of our Phase IIa study, drug product formulation options were reviewed comprehensively, leading to the development of an immediate release tablet formulation for aramchol. Based on this formulation, aramchol tablets with matching placebos at 400 mg and 200 mg strengths have been developed to enable the convenient administration of 400 mg and 600 mg doses (for a 600 mg dose, patients will administer one 400 mg tablet and one 200 mg tablet). At the end of our Phase IIb study, we expect to determine the efficacious dose (400 mg or 600 mg). In case we select 600 mg, there may be an additional development of a single dose tablet of 600 mg. 

Notwithstanding the foregoing, the optimized conventional tablet for the aramchol free acid form may be suitable for Phase III clinical trial and commercial use, subject to minor alterations for dosage strength after confirmation of the efficacious dose. If we decide to develop the formulations of aramchol salts due to the improvement in solubility and bioavailability and longer patent protection, we may conduct an appropriate bioequivalence studiy, or studies of the biological equivalence of two proprietary preparations of a drug, prior to administering an aramchol salt formulation to patients in our clinical studies.

Potential Use of Aramchol to Treat Cholesterol Gallstones

Cholesterol gallbladder stones, or cholesterol gallstones, are mostly composed of cholesterol, for which bile is the only significant pathway for excretion from the body. Given that phospholipids have been recognized as the major natural cholesterol solubilizers in bile, and which also possess anti-crystallizing activity, we hypothesize that aramchol, which increases the proportion of phospholipids in bile, will be able to prevent or reduce the precipitation of cholesterol gallstones and also clear existing stones. Preliminary in-vivo and in-vitro studies conducted by the Company have shown that aramchol prevents the formation of cholesterol crystals in the gallbladders of hamsters and mice and is able to dissolve existing cholesterol crystals. The chart below shows that the levels of cholesterol crystallization in human bile is lower after the addition of FABACs to the bile, including aramchol (C-20).

Cholesterol gallstones is a common disorder in the Western world, largely due to dietary and life style factors. According to Schiff’s Diseases of the Liver in 2006, gallstones are present in about 10% of the general population, and cholesterol gallstones comprise approximately 80% of such gallstones. In addition, patients who undergo bariatric surgery commonly develop gallstones as a result of such surgery. Almost a quarter of all cholesterol gallstone carriers develop pain as a result of their cholesterol gallstones, as well as complications, and up to half of these carriers eventually undergo surgery to have their cholesterol gallstones removed. Currently, laparoscopic cholecystectomy is the main treatment option for cholesterol gallstones. Surgery is, however, expensive and may cause morbidity and even mortality in high-risk populations, such as the elderly and those with co-morbidities. We expect that the dissolution of cholesterol gallstones using aramchol will only cost a fraction of the price of surgery and will eliminate the mortality and morbidity associated with laparoscopic and open surgery. We also expect aramchol to become an alternative treatment for patients for whom surgery carries a high risk, such as the elderly population, patients with suspected abdominal adhesions and patients with heart, lung or renal problems. Further studies are required to determine whether intermittent maintenance therapy will be required following dissolution of the cholesterol gallstones.

On November 13, 2014, we commenced an open-label Phase IIa proof-of-concept clinical trial of aramchol for the treatment of cholesterol gallstones. The Phase IIa trial is being conducted at the Assuta Medical Center in Tel Aviv, Israel and is a single center, randomized, double blind, placebo controlled study, designed to evaluate the efficacy and safety of a once-daily dose of aramchol for three months in 36 adult patients. The primary endpoint of the trial is a complete dissolution of newly formed cholesterol gallstones following bariatric surgery. Secondary endpoints include a decrease of more than 50% in the number of newly formed gallstones, prevention of the formation of additional gallstones during the trial period and dissolution of biliary sludge. We anticipate reporting top line results in the second half of 2015.

We are party to an agreement with Aventis Pharma Deutschland GmbH, or Aventis, which merged with Sanofi S.A. and the company is now called Sanofi S.A., pursuant to which we are obligated to pay Aventis a 10% royalty on sales of aramchol that are indicated for the treatment and prevention of cholesterol gallstones. See “Item 4.B. Information on the Company—Business Overview—Strategic Collaborations, Research Arrangements and other Material Agreements—Aventis Pharma Deutschland GmbH.”

Potential Use of Aramchol to Treat Lipodystrophy

Lipodystrophy is a medical condition characterized by abnormal or degenerative conditions of adipose tissue, or body fat, including the loss of body fat from various regions of the body and its redistribution and accumulation in other areas. Lipodystrophy may be hereditary, but is commonly associated with HIV and AIDS patients who develop lipodystrophy from treatment with highly active antiretroviral therapies, or HAARTs, or other protease inhibitors. There is currently no approved medical treatment for lipodystrophy or its associated conditions. According to AIDS Reviews, 2005, approximately 40% of HIV patients treated for over one year with a protease inhibitor will develop induced lipodystrophy. Patients with HAART-induced lipodystrophy may also develop NAFLD with some of such patients progressing to cirrhosis, hypertriglyceridemia, or high triglyceride blood levels, or diabetes. In our Phase IIa clinical trial of aramchol in 60 NAFLD patients, we observed a significant reduction in liver fat and improvement of certain metabolic parameters. In February 2015, we entered into an Investigator Initiated Trial Agreement with the University of California, San Diego to conduct a proof-of-concept phase IIa study in 50 HIV-positive patients with lipodystrophy and nonalcoholic fatty liver disease, or the LD Study. The LD Study principal investigator is Dr. Rohit Loomba, a member of our scientific advisory board. The LD Study will be a single center, randomized, double blinded, placebo-controlled study. The LD Study is designed to evaluate the efficacy of a 600 mg oral, daily dosing of aramchol in HIV-positive patients with lipodystrophy and nonalcoholic fatty liver disease over 16 weeks of treatment. The primary endpoint of the trial is the improvement in hepatic steatosis assessed by MRS. The secondary endpoint includes the improvement of total body fat content and serum alanine aminotransferase, an enzyme found mainly in the liver that is present in higher than normal levels in the blood when the liver is damaged or diseased, and aspartate aminotransferase, an additional enzyme found in red blood cells and liver tissue, among other places, that is present in higher than normal levels in the blood when the liver is diseased or damaged .

On June 9, 2014, we filed a provisional patent application in the United States for the use of aramchol for the treatment of lipodystrophy.

Other Indications

After conducting market research, at this point in time we have decided not to pursue the indications of feline fatty liver or chemotherapy-associated steatohepatitis for aramchol due to what we believe is limited commercial potential for aramchol for such indications.

Potential Future Biomarkers for Non-Invasive Diagnosis of NAFLD and NASH

Currently, the initial diagnosis of NAFLD and/or NASH is based on elevated levels of liver enzymes, such as serum ALT levels, in blood tests. Once further evaluation excludes other reasons for liver disease, such as medications, viral hepatitis or excessive alcohol use, non-invasive imaging tests such as ultrasound, CT scans and MRS are good indicators of the presence of NAFLD and/or NASH. However, such tests are not reliable in assessing the degree of inflammation and fibrosis which would distinguish between the diseases. Moreover, some of these tests suffer from high rates of false negatives; up to 20% in ultrasound and CT scans. Necro inflammation, or premature cell death coupled with inflammation, hepatocellular ballooning, or a form of liver cell death, and the degree of fibrosis strongly predict the risk of disease progression, all are based on histology. Therefore, the liver biopsy is the standard approach for the diagnosis of inflammation and fibrosis associated with NASH and NAFLD, and the differentiation between them. However, the procedure-related morbidity, pain, sample errors and costs limit its use.

The current lack of specific, non-invasive diagnostic tools for patient monitoring and clinical drug development for NAFLD and NASH presents a major challenge to the scientific and medical communities. Initiation of treatment depends on an accurate diagnosis of NASH, which for now can only be arrived at by biopsy, thus limiting patient care and prognosis. We believe that a non-invasive, reliable diagnostic tool is also needed for the assessment of the efficacy of treatment in a particular patient with NAFLD or NASH, once treatment is initiated.

In light of this unmet need, new non-invasive methods for the diagnosis of NASH have been developed or are currently under development. Among those, MRS is a validated, commonly used and non-invasive technique for in-vivo fat quantification. According to an article in the Journal of Hepatology in 2004, MRS is routinely used for measuring triglycerides and potentially other liver fat components and is increasingly being used as an endpoint in clinical trials and observational studies, as is the case in our ARREST Study of aramchol. If we are successful in our clinical trials in correlating fat reduction in the liver as measured by MRS with aramchol’s effect on inflammation in the liver, MRS may become a non-invasive biomarker with the ability to measure the effect of aramchol in patients following treatment with the drug.

However, MRS does not measure inflammation, and thus the need for additional markers must still be addressed. As such, there is currently a growing interest in clinical prediction algorithms and biomarkers, such as the NAFLD fibrosis score, Enhanced Liver Fibrosis panel score and circulating biomarkers, such as CK-18, which is a marker of inflammation.

Recognizing this unmet need, we are collaborating with OWL, which developed the proprietary OWL LIVERTest®, a test seeking to stratify patients according to their metabolites profile. By correlating the findings of OWL LIVERTest® with liver biopsies in the patients enrolled in our studies, we are working towards finding a specific non-invasive test which would predict individual responses to aramchol, which we believe could increase the likelihood of success of our Phase III trials and facilitate the market adoption of aramchol, although there is no assurance. On February 6, 2015, we entered into a term sheet with OWL with respect to the foregoing. See “Item 4.B. Information on the Company—Business Overview—Strategic Collaborations, Research Arrangements and other Material Agreements—OWL.”

We hope that our efforts will lead to the identification of specific biomarkers, which will differentiate NASH from NAFLD patients without the need for liver biopsy, and serve as a tool for the prediction and assessment of aramchol’s efficacy. The identification of such specific biomarkers would greatly improve aramchol’s chances of qualifying for reimbursement from third-party payors, by providing an indication of the patients who are most likely to benefit from treatment with aramchol. We do not expect to generate any revenue directly from such biomarkers.

Strategic Collaborations, Research Arrangements and other Material Agreements

OWL

On February 6, 2015, we entered into a non-binding term sheet with OWL, or the OWL Term Sheet, with respect to developing a companion diagnostic tool that would predict individual responses to aramchol, which we believe could increase the likelihood of success of our Phase III trials and facilitate the market adoption of aramchol. Pursuant to the OWL Term Sheet, we or GRD have an option, which is exercisable at any time until December 31, 2016, to obtain a worldwide, exclusive license for all indications for a companion diagnostic based on OWL liver technologies, or OWLiverGAL. OWLiverGAL is intended to be a set of biomarkers detectable in the plasma or serum of patients suffering from NAFLD/NASH that will allow physicians and other authorities to treat and follow-up with the patients without the need for a liver biopsy. The OWL Term Sheet provides that we and OWL will use our best efforts to enter into definitive agreements within four months following a two month due diligence period. We may terminate the OWL Term Sheet upon thirty days’ prior written notice to OWL.

Upon execution of the OWL Term Sheet, we advanced to OWL €50,000, which is to be applied by OWL to research and development as set forth in the work plan included in the OWL Term Sheet. If we enter into a definitive agreement with OWL, then at such time we will fund the first year of the work plan, less a credit for the €50,000 that we already advanced to OWL. Additionally, we will fund the second year of the work plan on a quarterly basis in advance of each applicable quarter. We have also agreed to make certain milestone payments to OWL in the amounts of €75,000 and €100,000 upon obtaining successful interim results of the ARREST Study and the successful completion of the ARREST Study, respectively, and in return for such milestone payments, OWL will issue us a corresponding number of OWL’s shares of common stock. Furthermore, we will have the option to purchase additional shares of OWL’s common stock during any of OWL’s subsequent financing rounds on the same terms and conditions as the most senior class of shareholders participating in such financing round. If aramchol becomes commercially available, we will pay OWL 10% of the cash payments we receive for the sale of the OWLiverGAL kit. We will own any new intellectual property associated with the companion diagnostic for aramchol that results from our collaboration with OWL.

Itamar Medical Ltd.

On September 29, 2014, we purchased 60 EndoPAT™ devices and accessories from, and entered into a collaboration with, Itamar to include an assessment of endothelial, or arterial, function in our ARREST Study of aramchol in NASH patients suffering from obesity and insulin resistance. The purchase price for the EndoPAT™ devices and accessories was approximately $750,000.

Aventis Pharma Deutschland GmbH

In September 2002, we entered into an agreement, which we refer to as the Aventis Agreement, with Aventis, which merged with Sanofi S.A. and the company is now called Sanofi S.A., in connection with the settlement of court proceedings regarding an invention covered by Israeli patent application 123998 and PCT/IL99/00173. The invention relates to certain FABACs, pharmaceutical compositions containing FABACs and the use of FABACs for dissolving cholesterol gallstones in bile and preventing the formation thereof, as well as for the prevention and reduction of atherosclerosis, or the hardening of the arteries. Such court proceedings resulted from a claim filed by us and Prof. Tuvia Gilat, our founder, in the Tel- Aviv District Court seeking a declaratory judgment that Prof. Gilat was the sole inventor of the invention and the owner of all rights in and to the invention and the patent application with respect thereto, and that neither Aventis nor anyone on its behalf has any rights in or to the invention or such patent application. We filed the claim with Prof. Gilat based on assertions by Aventis that it had certain rights to the invention as a result of the participation of one of its employees in the discovery of the same. Under the Aventis Agreement, Aventis agreed that we had the exclusive worldwide right to commercialize the invention and we agreed to pay Aventis a royalty of 10% in respect of all income that we or our affiliates may receive from the commercialization of such invention for the prevention and treatment of cholesterol gallstones (less certain standard deductions, including taxes, credits, allowances, rebates, freight and insurance costs), for as long as there is a valid patent or pending patent application covering such invention. Once all valid patents covering the invention expire, which will occur in 2018, and provided that one of Aventis’ other patents that covers an aspect of the invention is still valid and has received marketing approval prior to the expiration of all the patents covering the invention, the royalty will be reduced to 5%.

The Aventis Agreement does not contain any diligence obligations that require us to exert any special efforts to develop a product for the prevention and treatment of cholesterol gallstones, nor are we contractually required to meet any milestones in respect of the development or commercialization of the invention. We have not yet paid, nor do we currently owe, any amounts to Aventis under the Aventis Agreement.

Perrigo API Ltd.

On January 28, 2015, the Company entered into a Manufacturing Services Agreement, or the Perrigo Agreement, with Perrigo API Ltd., or Perrigo, a subsidiary of Perrigo Company plc, for, among other things, the large-scale production of aramchol’s API and the scale-up and manufacturing process optimization for large-scale production of the aramchol API. As such, the Company is currently in the process of transferring the development and scale-up process of the manufacturing process from Cambridge Major Laboratories to Perrigo. Pursuant to the Perrigo Agreement, Perrigo will provide manufacturing process optimization services for large-scale production of the aramchol API, manufacture the aramchol API pursuant to current good manufacturing practices, or cGMP, and perform additional development services regarding scale-up and manufacturing optimization for the aramchol API. In consideration for the services to be provided by Perrigo, the Company agreed to pay in accordance with the Perrigo Agreement a maximum aggregate amount of approximately $3.6 million U.S. dollars to Perrigo. The Perrigo Agreement also provides Perrigo, under certain circumstances, with the option to manufacture commercial supplies of the aramchol API in the future.

University of California, San Diego

On February 2015, we entered into an Investigator Initiated Trial Agreement with the University of California, San Diego to conduct the LD Study. The LD Study principle investigator is Dr. Rohit Loomba, a member of our scientific advisory board. The LD Study will be a single center, randomized, double blinded, placebo-controlled study. The LD Study is designed to evaluate the efficacy of a 600 mg oral, daily dosing of aramchol in HIV-positive patients with lipodystrophy and nonalcoholic fatty liver disease over 16 weeks of treatment. The primary endpoint of the trial is the improvement of hepatic steatosis assessed by MRS. The secondary endpoint includes the improvement of total body fat content and serum alanine aminotransferase and aspartate aminotransferase.

Competition

The pharmaceutical industry is characterized by rapidly evolving technology, intense competition and a highly risky, costly and lengthy research and development process. Adequate protection of intellectual property, successful product development, adequate funding and retention of skilled, experienced and professional personnel are among the many factors critical to success in the pharmaceutical industry.

We believe that aramchol offers key potential advantages over other drugs in development that could enable aramchol, if approved for these indications, to capture meaningful market share. We believe that aramchol’s ability, as observed in our studies to date, to reduce liver fat content without adverse side effects, which we believe may prove to have an anti-inflammatory effect, and convenient once-daily oral administration make aramchol a potentially valuable drug for the treatment of liver disease.

Other companies, including Intercept Pharmaceuticals, Inc., Genfit S.A. and Gilead Sciences, Inc. have agonists and antibodies in Phase II or earlier stages of clinical development for the treatment of NASH and the fibrosis associated therewith. Antibodies cannot be delivered orally. Some of these companies are focusing their trials on NASH patients with advanced fibrosis, whereas our studies relate to NASH, or the onset of fat accumulation in and inflammation of the liver, in which we expect that aramchol will reduce and eventually eliminate liver inflammation by reducing the fat content of the liver.

We believe that the characteristics of aramchol, as exhibited in our clinical studies to date, including its convenient once-daily oral administration and lack of observable adverse side effects, position it well against the potential competition in the NASH market. Currently used treatments are not approved by applicable regulatory authorities for the indication they are prescribed or used for as they have not proven efficacious in well-designed clinical studies. In addition, drugs in development for the treatment of NASH may, according to published data, be injectable or require intravenous delivery and may cause side effects, such as dyslipidemia, or an abnormal amount of lipids in the blood, severe itching, which can be highly inconvenient for patients with chronic diseases, such as NASH, and which may result in low patient compliance.

Aside from laparoscopic cholecystectomy surgery, the only therapeutic product available for the treatment of cholesterol gallstones and for the prevention of cholesterol gallstones in selected cases, is the bile acid known as ursodeoxycholic acid, both of which have been shown in clinical studies to have low efficacy, slow action and are characterized by cholesterol gallstone recurrence. We are not aware of any other company that has a new product candidate in development for the treatment of cholesterol gallstones. Our preclinical studies demonstrated that aramchol prevents and treats cholesterol gallstones without adverse effects, and we currently have an ongoing proof-of-concept Phase IIa clinical trial for the treatment of patients with cholesterol gallstones.

Notwithstanding the foregoing, see “Item 3. Key Information—Risk Factors—Risks Related to Our Business, Industry and Regulatory Requirements—Our market is subject to intense competition. If we are unable to compete effectively, aramchol or any other product candidate that we develop may be rendered noncompetitive or obsolete.”

Intellectual Property and Patent Strategy

The proprietary nature of, and protection for, our product candidates and our discovery programs, processes and know-how are important to our business. We own patent rights to aramchol in various jurisdictions worldwide, including within and outside of Israel. We have sought patent protection in the United States and internationally for aramchol and our discovery programs, and any other inventions to which we have rights, where available and when appropriate. We expect that patent protection covering the use of aramchol for the treatment of fatty liver will not expire until 2022 (2021 in Israel), subject to any applicable extensions then-available. Within Israel, we agreed to negotiate the grant of an exclusive license to Unipharm Ltd., or Unipharm, with respect to the use of patents within our first patent family covering the composition of matter of aramchol on to-be-agreed upon terms and conditions. We are not in negotiations with Unipharm and no definitive agreement has been executed as of the date hereof. Should we decide to commercialize aramchol for the treatment and prevention of cholesterol gallstones in any country of the world, we will be obligated to pay Aventis a 10% royalty on related sales. See “Item 4. Information on the Company—Business Overview—Potential Use of Aramchol to Treat Cholesterol Gallstones”, “Item 4.B. Information on the Company—Business Overview—Strategic Collaborations, Research Arrangements and other Material Agreements.” and “Item 10. Additional Information—Material Contracts.”

Our policy is to pursue, maintain and defend patent rights, whether developed internally or licensed from third parties, and to protect the technology, inventions and improvements that are commercially important to the development of our business. We also rely on trade secrets that may be important to the development of our business.

Patent Portfolio for Aramchol (First-in-Class Synthetic FABAC)

The patent portfolio for aramchol contains patents and pending patent applications directed to composition of matter, manufacturing methods and methods of use. As of February 5, 2015, we own five U.S. patents, one pending U.S. patent application and corresponding foreign patents and pending patent applications, as detailed below. We have also recently filed a PCT patent application for second generation FABAC compounds.

The first patent family discloses and claims FABACs, including aramchol, as well as methods for preventing or dissolving cholesterol gallstones in bile and reducing or preventing arteriosclerosis using FABACs. This patent family includes three issued U.S. patents and an issued European patent that was validated in Austria, Belgium, Cyprus, Denmark, Finland, France, Germany Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Monaco, Netherlands, Portugal, Romania, Slovenia, Spain, Sweden, Switzerland and the United Kingdom. Corresponding patents have been granted in Australia, Brazil, Canada, China, Czech Republic, Eurasia, Hungary, Indonesia, Israel, Japan, Korea, Mexico, New Zealand, Norway, Poland, Turkey and the Ukraine. Foreign patent applications are pending in the Czech Republic and Norway, and patent applications in Brazil and Hungary have been allowed. If the appropriate maintenance, renewal, annuity or other governmental fees are paid, the non-extended patent term for this patent family is due to expire on March 25, 2019, with the exception of the Israeli patent, which is due to expire on April 8, 2018.

The second patent family discloses and claims additional FABACs with different conjugation moieties, as well as the use of these and the compounds disclosed in the first patent family above, including aramchol, in the treatment of fatty liver, reduction of serum cholesterol and treatment of hyperglycemia and diabetes. This patent family includes a U.S. patent directed to the treatment of fatty liver and a U.S. patent directed to reduction of serum cholesterol by administering additional forms of FABACs. A Continuation-in-Part application is directed to the treatment of a disease or disorder associated with an altered glucose metabolism or insulin action, such as hyperglycemia, diabetes, insulin resistance and obesity. The application has been allowed with claims directed to the treatment of hyperglycemia and diabetes. This patent family also includes two European patents that were validated in Austria, Belgium, Cyprus, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Monaco, Netherlands, Portugal, Spain, Sweden, Switzerland, Turkey and the United Kingdom, as well as patents in Australia, Canada, China, Czech Republic, Eurasia, Indonesia, Japan, Korea, Israel, Mexico, New Zealand, Norway, Poland and the Ukraine. Foreign patent applications are pending in Hungary and the Czech Republic. If the appropriate maintenance, renewal, annuity or other governmental fees are paid, the non-extended patent term for this patent family is due to expire on April 15, 2022, with the exception of the Israeli patent, which is due to expire on April 17, 2021. The terms of the U.S. patents in this family have been extended due to patent term adjustments of 567 days for U.S. Patent 7,501,403, which is directed to the treatment of fatty liver, and 24 days for U.S. Patent 8,110,564, which is directed to reduction of serum cholesterol.

A third patent family that is due to expire on February 1, 2030, discloses the use of FABACs in the treatment, prevention and inhibition of progression of Alzheimer’s Disease, cerebral amyloid angiopathy and other brain diseases characterized by amyloid plaque deposits. This patent family includes pending patent applications in the United States, Europe (decision to grant issued) and Israel.

A fourth patent family, including one PCT patent application, discloses and claims second generation FABAC compounds.

A fifth patent family, including one provisional patent application, covers the use of aramchol for the treatment of lipodystophy.

It is possible that the term of the patents issued in the United States within our first patent family, which includes the composition of matter patents, may be extended up to five additional years under the provisions of the Drug Price Competition and Patent Term Restoration Act of 1984, or the Hatch-Waxman Act. Patent term extension or supplementary protection certificates may be available in certain foreign countries upon regulatory approval. Independent of patent term extensions, five years of data exclusivity may be provided for this patent in the United States automatically from the day of receiving FDA approval of an NCE in the United States. If the Company pursues commercialization of aramchol in other jurisdictions, longer periods of data exclusivity may pertain.

Our commercial success will depend in part on obtaining and maintaining patent protection and trade secret protection of our current and future product candidates and the methods used to develop and manufacture them, as well as successfully defending these patents against third-party challenges. Our ability to stop third parties from making, using, selling, offering to sell or importing our products depends on the extent to which we have rights under valid and enforceable patents or trade secrets that cover these activities. We believe that our patents provide broad and comprehensive coverage for the use of aramchol for the treatment of certain liver diseases. However, the patent positions of biopharmaceutical companies, such as ourselves, are generally uncertain and involve complex legal and factual questions. Our ability to maintain and solidify our proprietary position for the technology will depend on our success in obtaining effective claims and enforcing those claims once granted. There is no certainty that any of the Company’s pending patent applications will result in the issuance of any patents. The issued patents and those that may be issued in the future, may be challenged, narrowed, circumvented or found to be invalid or unenforceable, which could limit our ability to stop competitors from marketing related products or the length of term of patent protection that we may have for our products. In addition, our competitors may independently develop similar technologies or duplicate any technology developed by us, and the rights granted under any issued or future patents may not provide us with any meaningful competitive advantages against these competitors. Furthermore, because of the extensive time required for development, testing and regulatory review of a potential product, 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 advantage of such patent. For more risks associated with the protection of our licensed intellectual property, see “Item 3. Key Information—Risk Factors—Risks Related to Our Intellectual Property.”

Trade Secrets

In addition to patents, we rely on trade secrets and know-how to develop and maintain our competitive position. Trade secrets and know-how can be difficult to protect. We seek to protect our proprietary processes, in part, by confidentiality agreements and invention assignment agreements with our employees, consultants, scientific advisors, contractors and commercial partners. These agreements are designed to protect our proprietary information. We also seek to preserve the integrity and confidentiality of our data, trade secrets and know-how by maintaining physical security of our premises and physical and electronic security of our information technology systems. While we have confidence in these individuals, organizations and systems, such agreements or security measures may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors or others.

Seasonality

Our business and operations are generally not affected by seasonal fluctuations or factors.

Raw Materials and Suppliers

We believe that the raw materials that we require to manufacture aramchol are readily available commodities commonly used in the pharmaceutical industry. Demand for certain of the required raw materials, such as cholic acid, has recently increased, resulting in a price increase. Although there is no assurance, we anticipate that the price levels of cholic acid will revert back to prior levels and will not experience continued volatility as a result of the entrance of additional manufacturers into the cholic acid market.

Manufacturing

We do not own or operate manufacturing facilities for the production of our product candidates, nor do we have plans to develop our own manufacturing operations in the foreseeable future. We currently rely on third-party contract manufacturers for all of our required raw materials, API and finished product for our preclinical research and clinical trials, including our ARREST Study for aramchol for the treatment of NASH. We do not have long -term agreements with any of these third parties. We also do not have any current contractual relationships for the manufacture of commercial supplies of our product candidate if it is approved; however, the Perrigo Agreement (as described below) provides Perrigo with the option to negotiate an exclusive commercial contract for the manufacture of commercial supplies of the aramchol API in the future for a minimum term of five years. If our product candidate or future product candidates are approved by any regulatory agency, we intend to enter into agreements with a third-party contract manufacturer and one or more back-up manufacturers for the commercial production of those products. Development and commercial quantities of any products that we develop will need to be manufactured in facilities, and by processes, that comply with the requirements of the FDA and the regulatory agencies of other jurisdictions in which we are seeking approval. We currently employ internal resources to manage our manufacturing contractors. The relevant manufacturers of our drug products for our current preclinical and clinical trials have advised us that they are compliant with both cGMP and current Good Laboratory Practices, or cGLP.

There can be no assurance that our product candidate, if approved, can be manufactured in sufficient commercial quantities, in compliance with regulatory requirements and at an acceptable cost. We and our contract manufacturers are, and will be, subject to extensive governmental regulation in connection with the manufacture of any pharmaceutical products or medical devices. We and our contract manufacturers must ensure that all of the processes, methods and equipment are compliant with cGMP and cGLP for drugs on an ongoing basis, as mandated by the FDA and other regulatory authorities, and conduct extensive audits of vendors, contract laboratories and suppliers.

We currently use Cambridge Major Laboratories, a leading provider of chemistry services to the global pharmaceutical industry, to develop and manufacture aramchol clinical API. However, on January 28, 2015, we entered into the Perrigo Agreement with Perrigo, a subsidiary of Perrigo Company plc, for, among other things, the large-scale production of aramchol’s API and the scale-up and manufacturing process optimization for large-scale production of the aramchol API. As such, the Company is currently in the process of transferring the development and scale-up of the manufacturing process from Cambridge Major Laboratories to Perrigo. See “Item 4.B. Information on the Company—Business Overview—Strategic Collaborations, Research Arrangements and other Material Agreements—Perrigo API Ltd.” for a more information regarding the Perrigo Agreement.

Contract Research Organizations

We outsource certain clinical trial activities to CROs. Our clinical CROs comply with guidelines from the International Conference on Harmonisation of Technical Requirements for Registration of Pharmaceuticals for Human Use, which attempt to harmonize the FDA, the EMA, and the Pharmaceuticals and Medical Devices Agency of Japan regulations and guidelines. We create and implement the drug development plans and manage the CROs according to the specific requirements of the drug candidate under development. To the extent clinical research is overseen by the CROs (or us in the future), compliance with certain federal regulations, including but not limited to 21 C.F.R. parts 50, 54, 56, 58 and 312, which pertain to, among other things, IRBs, informed consent, financial conflicts of interest by investigators, correct administration of treatment, follow up of adverse events, good laboratory practices and submitting IND applications, may be required.

Marketing, Sales and Commercialization

Given our stage of development, we do not have any internal sales, marketing or distribution infrastructure or capabilities. In the event we receive regulatory approval for aramchol, we intend, where appropriate, to pursue commercialization relationships, including strategic alliances and licensing, with pharmaceutical companies and other strategic partners, which are equipped to market and/or sell our products, if any, through their well-developed sales, marketing and distribution organizations in order to gain access to global markets. In addition, we may out-license some or all of our worldwide patent rights to more than one party to achieve the fullest development, marketing and distribution of any products we develop. Over the longer term, we may consider ultimately building an internal marketing, sales and commercial infrastructure.

Environmental Matters

We, our agents and our service providers, including our manufacturers, may be subject to various environmental, health and safety laws and regulations, including those governing air emissions, water and wastewater discharges, noise emissions, the use, management and disposal of hazardous, radioactive and biological materials and wastes and the cleanup of contaminated sites. We believe that our business, operations and facilities, including, to our knowledge, those of our agents and service providers, are being operated in compliance in all material respects with applicable environmental and health and safety laws and regulations. All information with respect to any chemical substance is filed and stored as a Material Safety Data Sheet, as required by applicable environmental regulations. Based on information currently available to us, we do not expect environmental costs and contingencies to have a material adverse effect on us. However, significant expenditures could be required in the future if we, our agents or our service providers are required to comply with new or more stringent environmental or health and safety laws, regulations or requirements.

Government Regulation and Product Approval

Governmental 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, labeling, packaging, promotion, storage, advertising, distribution, marketing and export and import of products such as those we are developing. Our product candidates must be approved by the FDA through the NDA process before they may be legally marketed in the United States and by the Committee on Human Medicinal Products, or CHMP, via the EMA and European Commission through the MAA process before they may be legally marketed in Europe. Our product candidate and future product candidates will be subject to similar requirements in other countries prior to marketing in those countries. The process of obtaining regulatory approvals and the subsequent compliance with applicable federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources.

We are conducting a global development program for aramchol for the treatment of NASH in patients who also suffer from obesity and insulin resistance, and we may make our submissions for regulatory approval in parallel; initially in Europe and in the United States. Typically, approval time in the United States with the FDA for an NDA is faster than that within Europe with the EMA and the European Commission for an MMA, especially when the novelty of the submission is considered. First in class, high medical need and rare disease drugs can experience faster review. Nevertheless, marketing and pricing approval presents a further delay in many countries that should be considered in addition to the regulatory approvals noted above.

United States Government Regulation

NDA Approval Processes

In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or the FDCA, and implementing regulations. Failure to comply with the applicable U.S. requirements at any time during the product development process or approval process, or after approval, may subject an applicant to administrative or judicial sanctions, any of which could have a material adverse effect on us. These sanctions could include refusal to approve pending applications, withdrawal of an approval, imposition of a clinical hold, warning letters, product seizures, total or partial suspension of production or distribution, or injunctions, fines, disgorgement, and civil or criminal penalties.

The process required by the FDA before a drug may be marketed in the United States generally involves the following:

The testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that any approvals for our product candidates will be granted on a timely basis, if at all.

Once a product candidate is identified for development, it enters the preclinical or nonclinical testing stage. Preclinical tests include laboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies. An IND sponsor must submit the results of the preclinical tests, together with manufacturing information and analytical data, to the FDA as part of the IND. Some preclinical testing may continue after the IND is submitted. In addition to including the results of the nonclinical studies, the IND will also include a clinical trial protocol detailing, among other things, the objectives of the clinical trial, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated if the first phase lends itself to an efficacy determination. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, places the IND on clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can begin. A clinical hold may occur at any time during the life of an IND, due to safety concerns or non-compliance, and may affect one or more specific studies or all studies conducted under the IND.

All clinical trials must be conducted under the supervision of one or more qualified investigators in accordance with GCPs and relevant FDA regulations. These regulations include the requirement that all research subjects provide informed consent. Further, an IRB must review and approve the plan for any clinical trial before it commences at any institution. An IRB considers, among other things, whether the risks to individuals participating in the trials are minimized and are reasonable in relation to anticipated benefits. The IRB also approves the information regarding the trial and the consent form that must be provided to each trial subject or his or her legal representative and must monitor the study until completed. All clinical trials must be conducted under protocols detailing the objectives of the trial, dosing procedures, research subject inclusion and exclusion criteria and the safety and effectiveness criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND, and progress reports detailing the status of the clinical trials must be submitted to the FDA annually. Sponsors must also report within set timeframes to FDA serious and unexpected adverse reactions, any clinically important increase in the rate of a serious suspected adverse reaction over that listed in the protocol or investigation brochure, or any findings from other studies or animal or in-vitro testing that suggest a significant risk in humans exposed to the drug.

Human clinical trials are typically conducted in three sequential phases that may overlap or be combined:

Human clinical trials are inherently uncertain and Phase I, Phase II and Phase III testing may not be successfully completed. The FDA or the sponsor may suspend a clinical trial at any time for a variety of reasons, including a finding that the research subjects or patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the drug has been associated with unexpected serious harm to patients.

During the development of a new drug, sponsors are given opportunities to meet with the FDA at certain points. These points may be prior to the submission of an IND, at the end of Phase II and before an NDA is submitted. Meetings at other times may be requested. These meetings can provide an opportunity for the sponsor to share information about the data gathered to date and for the FDA to provide advice on the next phase of development. Sponsors typically use the meeting at the end of Phase II to discuss their Phase II clinical results and present their plans for the pivotal Phase III clinical trial that they believe will support the approval of the NDA. If a Phase II clinical trial is the subject of discussion at the end of Phase II meeting with the FDA, a sponsor may be able to request a Special Protocol Assessment, or SPA, the purpose of which is to reach agreement with the FDA on the Phase III clinical trial protocol design and analysis that will form the primary basis of an efficacy claim.

According to published guidance on the SPA process, a sponsor which meets the prerequisites may make a specific request for an SPA and provide information regarding the design and size of the proposed clinical trial. The FDA is supposed to evaluate the protocol within 45 days of the request to assess whether the proposed trial is adequate, and that evaluation may result in discussions and a request for additional information. An SPA request must be made before the proposed trial begins, and all open issues must be resolved before the trial begins. If a written agreement is reached, it will be documented and made part of the record. The agreement will be binding on the FDA and may not be changed by the sponsor or the FDA after the trial begins except with the written agreement of the sponsor and the FDA or if the FDA determines that a substantial scientific issue essential to determining the safety or efficacy of the drug was identified after the testing began. There is no indication that we will be able to meet the requirements necessary for an SPA.

Concurrent with clinical trials, sponsors usually complete any remaining animal safety studies and also develop additional information about the chemistry and physical characteristics of the drug and finalize a process for manufacturing commercial quantities of the product in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the drug and the manufacturer must develop methods for testing the quality, purity and potency of the drug. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the drug candidate does not undergo unacceptable deterioration over its proposed shelf-life.

The results of product development, preclinical studies and clinical trials, along with descriptions of the manufacturing process, analytical tests and other control mechanisms, proposed labeling and other relevant information are submitted to the FDA as part of an NDA requesting approval to market the product. The submission of an NDA is subject to the payment of user fees, but a waiver of such fees may be obtained under specified circumstances. We will seek a waiver of these fees as a small company submitting its first marketing application. If the waiver is granted it would not extend to establishment or product fees. The FDA reviews all NDAs submitted to ensure that they are sufficiently complete for substantive review before it accepts them for filing. It may request additional information rather than accept an NDA for filing. In this event, the NDA must be resubmitted with the additional information. The resubmitted application also is subject to review before the FDA accepts it for filing.

In addition, under the Pediatric Research Equity Act, or PREA, an NDA or supplement to an NDA must contain data to assess the safety and effectiveness of the drug for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the drug is safe and effective. The FDA may grant deferrals for submission of data or full or partial waivers. Submission of a pediatric assessment is not required for an application to market a product for an orphan-designated indication, and waivers are not needed at this time. However, if only one indication for a product has orphan designation, a pediatric assessment may still be required for any applications to market that same product for the non- orphan indication(s).

Once the submission is accepted for filing, the FDA begins an in-depth review. NDAs receive either standard or priority review. A drug representing a significant improvement in treatment, prevention or diagnosis of disease may receive priority review. The FDA may refuse to approve an NDA if the applicable regulatory criteria are not satisfied or may require additional clinical or other data. Even if such data are submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. The FDA reviews an NDA to determine, among other things, whether a product is safe and effective for its intended use and whether its manufacturing is cGMP-compliant. The FDA may refer the NDA to an advisory committee for review and recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations. Before approving an NDA, the FDA will inspect the facility or facilities where the product is manufactured and tested. The FDA will also inspect selected clinical sites that participated in the clinical studies and may inspect the testing facilities that performed the GLP toxicology studies cited in the NDA.

Expedited Review and Approval

NDAs receive either standard or priority review. A drug representing a significant improvement in treatment, prevention or diagnosis of disease may receive priority review. The FDA has various specific programs, including Fast Track, Breakthrough Therapy, Accelerated Approval and Priority Review, which are each intended to expedite the process for reviewing drugs, and in certain cases involving Accelerated Review, permit approval of a drug on the basis of a surrogate endpoint. Even if a drug qualifies for one or more of these programs, the FDA may later decide that the drug no longer meets the conditions for qualification or that the time period for FDA review or approval will be shortened. Generally, drugs that are eligible for these programs are those for serious or life-threatening conditions, those with the potential to address unmet medical needs and those that offer meaningful benefits over existing treatments. For example, Fast Track is a process designed to facilitate the development and expedite the review of drugs to treat serious or life-threatening diseases or conditions and fill unmet medical needs, and Breakthrough Therapy designation is designed to expedite the development and review of drugs that are intended to treat a serious condition and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over available therapy on a clinically significant endpoint(s). Priority review is designed to give drugs that offer major advances in treatment or provide a treatment where no adequate therapy exists an initial review within six months as compared to a standard review time of ten months. Although Fast Track, Breakthrough Therapy designation and priority review do not affect the standards for approval, the FDA will attempt to facilitate early and frequent meetings with a sponsor of a Fast Track or Breakthrough Therapy designated drug and expedite review of the application for a drug designated for priority review. The FDA will also provide Breakthrough Therapy designated drugs intensive guidance on an efficient drug development program and provide these drug developers with an organizational commitment from the FDA involving senior managers. Since sponsors can design clinical trials in a number of ways, in providing its guidance for drugs designated as breakthrough therapies, the FDA will seek to ensure that the sponsor of the product designated as a breakthrough therapy receives timely advice and interactive communications in order to help the sponsor design and conduct a development program as efficiently as possible. During these interactions, the FDA may suggest, or a sponsor can propose, alternative clinical trial designs (e.g., adaptive designs, an enrichment strategy, use of historical controls) that may result in smaller trials or more efficient trials that require less time to complete. Such trial designs could also help minimize the number of patients exposed to a potentially less efficacious treatment (i.e., the control group treated with available therapy). Accelerated Approval, which is described in 21 C.F.R. § 314.500 et seq ., provides for an earlier approval for a new drug that is intended to treat a serious or life-threatening disease or condition and that fills an unmet medical need based on a surrogate endpoint. A surrogate endpoint is a laboratory measurement or physical sign used as an indirect or substitute measurement representing a clinically meaningful outcome. As a condition of approval, the FDA may require that a sponsor of a drug receiving accelerated approval perform adequate and well-controlled post- marketing clinical trials. Priority Review and Accelerated Approval do not change the standards for approval, but may expedite the approval process.

If a product receives regulatory approval, the approval may be significantly limited to specific diseases, subpopulations, and dosages or the indications for use may otherwise be limited, which could restrict the commercial value of the product. In addition, the FDA may require us to conduct Phase IV testing, which involves clinical trials designed to further assess a drug’s safety and effectiveness after NDA approval, and may require testing and surveillance programs to monitor the safety of approved products which have been commercialized.

Food and Drug Administration (FDA) Regulatory Pathways

The FDA has two main pathways for drug development. The first pathway is the “regular” or “traditional” pathway for drug approval, in which a drug is approved based on either a clinical benefit endpoint or a surrogate endpoint that is known to predict clinical benefit on irreversible morbidity or mortality. A clinical endpoint is one that affects how a patient feels, functions or survives.

The second option is the Accelerated Approval Pathway (21 CFR 314.510 and 601.41, Subpart H and E). Accelerated approval applies to drugs and biologics that are intended to treat serious and life threatening illness AND that provide meaningful therapeutic benefit over existing treatments.

Accelerated approval is based on effects of a surrogate endpoint that is “reasonably likely, based on epidemiologic, therapeutic, pathophysiologic, or other evidence to predict benefit” on irreversible morbidity or mortality. The Agency may grant accelerated approval to a product for a serious or life-threatening condition upon a determination that the product 1) has an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit or, 2) an effect on a clinical endpoint that can be measured earlier than an effect on irreversible morbidity or mortality and is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity, or prevalence of the condition and the availability or lack of alternative treatments. The term “reasonable likely” implies that some uncertainty remains about the relationship of the surrogate to the clinical benefit to the patient. Therefore, accelerated approval is usually contingent on a sponsor’s agreement to conduct additional post-approval studies to verify and describe the drug’s clinical benefit. This regulatory pathway requires that when marketing approval is granted based on the surrogate, or a clinical endpoint other than survival or irreversible morbidity, clinical trials must be carried out after marketing approval to verify and describe the drug’s clinical benefit. The preamble to the Accelerated Approval Rule, (Federal Register/Vol.57, No.239/Friday. December 11, 1992/Rules and Regulations), acknowledged that surrogate endpoints can be used for regular or traditional approval when these surrogates are validated by definitive studies. It states that “Ordinarily, products used to treat serious or life-threatening illness, for which approval is based on a surrogate endpoint that is recognized as validated by definitive studies, will be considered for approval under the traditional process rather that under accelerated approval.” The Agency’s draft Guidance for Industry - Expedited Programs for Serious Conditions––Drugs and Biologics (http://www.fda.gov/downloads/Drugs/GuidanceComplianceRegulatoryInformation/Guidances/UCM35 8301.pdf) states: “For purposes of accelerated approval, a surrogate endpoint is a marker, such as a laboratory measurement, radiographic image, physical sign, or other measure that is thought to predict clinical benefit, but is not itself a measure of clinical benefit. Depending on the strength of the evidence supporting the ability of a marker to predict clinical benefit, the marker may be a surrogate endpoint that is known to predict clinical benefit (a validated surrogate endpoint, which could be used for traditional approval), a surrogate endpoint that is reasonably likely to predict a drug’s intended clinical benefit (which could be used for accelerated approval), or a marker for which there is insufficient evidence to support reliance on the marker as either kind of surrogate endpoint (and thus cannot be used to support traditional or accelerated approval of a marketing application). Change in the rate of decline in renal function as measured by creatinine clearance, and changes in blood pressure and Hg A1C have been accepted as validated surrogates to support traditional drug approvals. However, the preamble does not specifically define the criteria for “validated by definitive studies” that allows a surrogate to be used for traditional approval. Therefore the level of evidence necessary to determine if a surrogate is validated (i.e., acceptable for traditional or regular approval pathways), or if a surrogate is reasonably likely to predict clinical benefit is made on a case-by-case basis by the Agency. Whether an endpoint is reasonably likely to predict clinical benefit is a function of the biological plausibility of the relationship between the disease, endpoint, and the desired effect, and the empirical evidence to support that relationship. The empirical evidence may include “epidemiological, pathophysiological, therapeutic, pharmacologic, or other evidence developed using biomarkers, for example, or other scientific methods or tools.” Clinical data should be provided to support the assertion that a relationship of the surrogate or intermediate clinical endpoint to the outcome is reasonably likely, and should be relevant to the relationship between the specific endpoint to be used and the specific intended clinical benefit of the drug. What is clear is that there are pitfalls with using surrogates, i.e., examples of where a plausible surrogate that showed improvement with treatment resulted in an overall poor outcome for the patient. Some of these unexpected outcomes may be from off-target effects of a drug. Several things should be taken into consideration when evaluating a surrogate for use in the regular approval pathway. A surrogate that directly measures tissue loss or organ function e.g. liver failure is particularly plausible for use as an endpoint. Also helpful are the results of controlled trials that show the relationship of the effect on outcomes in trials of other drugs, especially trials involving drugs with different mechanisms, as is the case for example with antihypertensives. See Guidance “Expedited Programs for Serious Conditions––Drugs and Biologics”: http://www.fda.gov/downloads/Drugs/GuidanceComplianceRegulatoryInformation/Guidances/UCM358301.pdf for further details. As noted above, surrogate endpoints can be used as part of the regular approval pathway if these endpoints have been validated by definitive trials to predict outcomes on clinically meaningful endpoints. Surrogates may be used to support accelerated approval when there is not an established link of the surrogate to the clinical outcome. The long duration over which NASH evolves before patients develop clinical outcomes, and the inability to identify the population that will progress, creates a major challenge in designing and conducting clinical trials for those with early stage NASH. This challenge, however, does not diminish the need to develop therapeutics in these patients, and identify who is at risk of progression, given the growing contribution of progressive NASH to the burden of chronic liver disease. It is also important to identify endpoints that can be achieved within a reasonable time interval and that are reliable surrogates for meaningful outcomes. Moreover, these endpoints should both reflect changes in the disease process and be ‘biologically plausible’, in other words, linked mechanistically to the disease’s pathogenesis.

Liver histology currently offers the best short-term method for tracking the progression of NASH. Certain features on histopathology provide some prognostic information regarding risk for progression. Steatohepatitis, not isolated fatty liver, is associated with a substantial increase in the long-term risk of developing cirrhosis and liver-related outcomes (15, 35). This is believed to be related to the underlying inflammation and activation of pro-fibrogenic pathways in NASH. Based on this current understanding of the pathogenesis of NASH, one would expect that reversal of steatohepatitis would reduce the risk of developing cirrhosis. However, steatosis and inflammation can decrease as fibrosis advances (37). Therefore, the reversal of steatohepatitis with no evidence of progression to advanced fibrosis (stage 3 or 4), may be an acceptable surrogate endpoint suitable both for phase 2b and 3 trials that enroll patients with NASH and evidence of early fibrosis.

On September 23, 2014, the FDA granted Fast Track designation status to aramchol for the treatment of NASH.

Patent Term Restoration and Marketing Exclusivity

Depending upon the timing, duration and specifics of FDA approval of the use of our product candidates, U.S. patents may be eligible for limited patent term extension under the Hatch-Waxman Act. The Hatch-Waxman Act permits a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However, patent term restoration cannot extend the remaining term of a patent beyond a total of 14 years from the product’s approval date. The patent term restoration period is generally one-half the time between the effective date of an IND, and the submission date of an NDA, plus the time between the submission date of an NDA and the approval of that application. Only one patent applicable to an approved drug is eligible for the extension and the application for extension must be made prior to expiration of the patent. The USPTO, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration. In the future, we intend to apply for restorations of patent term for some of our currently owned patents to add patent life beyond their current expiration date, depending on the expected length of clinical trials and other factors involved in the submission of the relevant NDA.

Market exclusivity provisions under the FDCA also can delay the submission or the approval of certain applications. The FDCA provides a five year period of non-patent marketing exclusivity within the United States to the first applicant to gain approval of an NDA for a new chemical entity. A drug is a new chemical entity if the FDA has not previously approved any other new drug containing the same active moiety, which is the molecule or ion responsible for the action of the drug substance. During the exclusivity period, the FDA may not accept for review an abbreviated new drug application, or ANDA, or a 505(b)(2) NDA submitted by another company for another version of such drug where the applicant does not own or have a legal right of reference to all the data required for approval. However, an application may be submitted after four years if it contains a certification of patent invalidity or non-infringement. The FDCA also provides three years of marketing exclusivity for an NDA, 505(b)(2) NDA or supplement to an approved NDA if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the application, for example, for new indications, dosages or strengths of an existing drug. This three year exclusivity covers only the conditions associated with the new clinical investigations and does not prohibit the FDA from approving ANDAs for drugs containing the original active agent. Five year and three year exclusivity will not delay the submission or approval of a full NDA; however, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the preclinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness.

Post-approval Requirements

Once an approval is granted, the FDA, European authorities and other regulatory authorities may withdraw the approval if compliance with regulatory requirements 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. After approval, some types of changes to the approved product, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further regulatory authority review and approval. Some of these modifications, especially adding indications, would likely require additional clinical studies. In addition, the FDA may require testing and surveillance programs to monitor the effect of approved products that have been commercialized, and the FDA has the power to prevent or limit further marketing of a product based on the results of these post-marketing programs.

Any drug product manufactured or distributed by us pursuant to FDA approvals are subject to continuing regulation by the FDA, including, among other things record-keeping requirements; reporting of adverse experiences with the drug; providing the FDA with updated safety and efficacy information; drug sampling and distribution requirements; notifying the FDA and gaining its approval of specified manufacturing or labeling changes; and complying with FDA promotion and advertising requirements.

Drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and some state agencies for compliance with cGMP and other laws.

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

From time to time, legislation is drafted, introduced and passed in Congress that could significantly change the statutory provisions governing the approval, manufacturing and marketing of products regulated by the FDA. In addition, FDA regulations and guidance 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 legislative changes will be enacted, or FDA regulations, guidance or interpretations changed or what the impact of such changes, if any, may be.

Reimbursement

Sales of our products will depend, in part, on the extent to which the costs of our products will be covered by third-party payors, such as government health programs, commercial insurance and managed healthcare organizations. These third-party payors are increasingly challenging the prices charged for medical products and services. Additionally, the containment of healthcare costs has become a priority of federal and state governments and the prices of drugs have been a focus in this effort. The U.S. government, state legislatures and foreign governments have shown significant interest in implementing cost-containment programs, including price controls, restrictions on reimbursement and requirements for substitution of generic products. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could further limit our net revenue and results. If these third-party payors do not consider our products to be cost-effective compared to other therapies, they may not cover our products after approved as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our products on a profitable basis.

The Modernization Act imposed new requirements for the distribution and pricing of prescription drugs for Medicare beneficiaries under Part B. Under Part D, Medicare beneficiaries may enroll in prescription drug plans offered by private entities which will provide coverage of outpatient prescription drugs. Part D plans include both stand-alone prescription drug benefit plans and prescription drug coverage as a supplement to Medicare Advantage plans. Unlike Medicare Parts A and B, Part D reimbursement is not set by the government, but rather by private insurers. Moreover, Part D prescription drug plan sponsors are not required to pay for all covered Part D drugs, and each drug plan can develop its own drug formulary that identifies which drugs it will cover and at what tier or level. However, Part D prescription drug formularies must include drugs within each therapeutic category and class of covered Part D drugs, though not necessarily all the drugs in each category or class. Recently, the Centers for Medicare & Medicaid Services proposed a rule that would enable Part D plans to offer fewer drugs than would otherwise be the case. The impact of this proposed rule on a product such as ours cannot be predicted at this time, but it could have a material adverse impact on our product were it being marketed at this time. Any formulary used by a Part D prescription drug plan must be developed and reviewed by a pharmacy and therapeutic committee. Government payment for some of the costs of prescription drugs may increase demand for our products for which we receive marketing approval. However, any negotiated prices for our products covered by a Part D prescription drug plan will likely be lower than the prices we might otherwise obtain. Moreover, while the Modernization Act applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own payment rates. Any reduction in payment that results from the Modernization Act may result in a similar reduction in payments from non-governmental payors.

The American Recovery and Reinvestment Act of 2009 provides funding for the federal government to compare the effectiveness of different treatments for the same illness. A plan for the research will be developed by the Department of Health and Human Services, the Agency for Healthcare Research and Quality and the National Institutes for Health, and periodic reports on the status of the research and related expenditures will be made to Congress. Although the results of the comparative effectiveness studies are not intended to mandate coverage policies for public or private payors, it is not clear what effect, if any, the research will have on the sales of any product, if any such product or the condition that it is intended to treat is the subject of a study. It is also possible that comparative effectiveness research demonstrating benefits in a competitor’s product could adversely affect the sales of our product candidates. If third-party payors do not consider our products to be cost-effective compared to other available therapies, they may not cover our products as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our products on a profitable basis.

The Affordable Care Act, enacted in March 2010, is expected to have a significant impact on the health care industry. The Affordable Care Act is expected to expand coverage for the uninsured while at the same time containing overall healthcare costs. With regard to pharmaceutical products, among other things, the Affordable Care Act is expected to expand and increase industry rebates for drugs covered under Medicaid programs and make changes to the coverage requirements under the Medicare Part D program. We cannot predict the impact of the Affordable Care Act on pharmaceutical companies. See “Item 3. Key Information—Risk Factors—Risks Related to Our Business, Industry and Regulatory Requirements—We expect the healthcare industry to face increased limitations on reimbursement, rebates and other payments as a result of healthcare reform, which could adversely affect third-party coverage of our products and how much or under what circumstances healthcare providers will prescribe or administer our products.”

In addition, in some non-U.S. jurisdictions, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing vary widely from country to country. For example, the EU provides options for its member states to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. A member state may approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our products. Historically, products launched in the EU do not follow price structures of the United States and generally tend to be significantly lower.

Anti-Kickback and False Claims Laws

In the United States, the research, manufacturing, distribution, sale and promotion of drug products and medical devices are potentially subject to regulation by various federal, state and local authorities in addition to the FDA, including the Centers for Medicare & Medicaid Services, other divisions of the U.S. Department of Health and Human Services (e.g., the Office of Inspector General), the U.S. Department of Justice, state Attorneys General, and other state and local government agencies. For example, sales, marketing and scientific/educational grant programs must comply with the Medicare-Medicaid Anti-Fraud and Abuse Act, as amended (the “Anti-Kickback Statute”), the False Claims Act, as amended, the privacy regulations promulgated under the Health Insurance Portability and Accountability Act, or HIPAA, and similar state laws. Pricing and rebate programs must comply with the Medicaid Drug Rebate Program requirements of the Omnibus Budget Reconciliation Act of 1990, as amended, and the Veterans Health Care Act of 1992, 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 and unfair competition laws.

In the United States, we are subject to complex laws and regulations pertaining to healthcare “fraud and abuse,” including, but not limited to, the Anti-Kickback Statute, the federal False Claims Act, and other state and federal laws and regulations. The Anti- Kickback Statute makes it illegal for any person, including a prescription drug manufacturer (or a party acting on its behalf) to knowingly and willfully solicit, receive, offer, or pay any remuneration that is intended to induce the referral of business, including the purchase, order, or prescription of a particular drug, for which payment may be made under a federal healthcare program, such as Medicare or Medicaid.

The federal False Claims Act prohibits anyone from knowingly presenting, or causing to be presented, for payment to federal programs (including Medicare and Medicaid) claims for items or services, including drugs, that are false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services.

There are also an increasing number of state laws that require manufacturers to make reports to states on pricing and marketing information. Many of these laws contain ambiguities as to what is required to comply with the laws. In addition, a similar federal requirement requires manufacturers to track and report to the federal government certain payments made to physicians and teaching hospitals made in the previous calendar year. These laws may affect our sales, marketing, and other promotional activities by imposing administrative and compliance burdens on us. In addition, given the lack of clarity with respect to these laws and their implementation, our reporting actions could be subject to the penalty provisions of the pertinent state and federal authorities.

European Economic Area

In addition to approval in the United States, we currently intend to seek regulatory approval of aramchol in the EU. As such, a summary of the EU regulatory processes follows below.

A medicinal product may only be placed on the market in the European Economic Area, or EEA, composed of the 28 EU member states, plus Norway, Iceland and Lichtenstein, when a marketing authorization has been issued by the competent authority of a member state pursuant to Directive 2001/83/EC (as recently amended by Directive 2004/27/EC), or an authorization has been granted under the centralized procedure in accordance with Regulation (EC) No. 726/2004 or its predecessor, Regulation 2309/93. There are essentially three community procedures created under prevailing European pharmaceutical legislation that, if successfully completed, allow an applicant to place a medicinal product on the market in the EEA.

Centralized Procedure

Regulation 726/2004/EC now governs the centralized procedure when a marketing authorization is granted by the European Commission, acting in its capacity as the European Licensing Authority on the advice of the EMA. That authorization is valid throughout the entire community and directly or (as to Norway, Iceland and Liechtenstein) indirectly allows the applicant to place the product on the market in all member states of the EEA. The EMA is the administrative body responsible for coordinating the existing scientific resources available in the member states for evaluation, supervision and pharmacovigilance of medicinal products. Certain medicinal products, as described in the Annex to Regulation 726/2004, must be authorized centrally. These are products that are developed by means of a biotechnological process in accordance with Paragraph 1 to the Annex to the Regulation. Medicinal products for human use containing a new active substance for which the therapeutic indication is the treatment of acquired immune deficiency syndrome, or AIDS, cancer, neurodegenerative disorder or diabetes must also be authorized centrally. Starting on May 20, 2008, the mandatory centralized procedure was extended to autoimmune diseases and other immune dysfunctions and viral diseases. Finally, all medicinal products that are designated as orphan medicinal products pursuant to Regulation 141/2000 must be authorized under the centralized procedure. An applicant may also opt for assessment through the centralized procedure if it can show that the medicinal product constitutes a significant therapeutic, scientific or technical innovation or that the granting of authorization centrally is in the interests of patients at the community level. For each application submitted to the EMA for scientific assessment, the EMA is required to ensure that the opinion of the Committee for Medicinal Products for Human Use, or CHMP, is given within 210 days after receipt of a valid application. This 210 days period does not include the time that the applicant to answer any questions raised during the application procedure, the so-called ‘clock stop’ period. If the opinion is positive, the EMA is required to send the opinion to the European Commission, which is responsible for preparing the draft decision granting a marketing authorization. This draft decision may differ from the CHMP opinion, stating reasons for diverging for the CHMP opinion. The draft decision is sent to the applicant and the member states, after which the European Commission takes a final decision. If the initial opinion of the CHMP is negative, the applicant is afforded an opportunity to seek a re-examination of the opinion. The CHMP is required to re-examine its opinion within 60 days following receipt of the request by the applicant. All CHMP refusals and the reasons for refusal are made public on the EMA website. Without a centralized marketing authorization it is prohibited to place a medicinal product that must be authorized centrally on the market in the EU.

Mutual Recognition and Decentralized Procedures

With the exception of products that are authorized centrally, the competent authorities of the member states are responsible for granting marketing authorizations for medicinal products placed on their national markets. If the applicant for a marketing authorization intends to market the same medicinal product in more than one member state, the applicant may seek an authorization progressively in the community under the mutual recognition or decentralized procedure. Mutual recognition is used if the medicinal product has already been authorized in a member state. In this case, the holder of this marketing authorization requests the member state where the authorization has been granted to act as reference member state by preparing an updated assessment report that is then used to facilitate mutual recognition of the existing authorization in the other member states in which approval is sought (the so-called concerned member state(s)). The reference member state must prepare an updated assessment report within 90 days of receipt of a valid application. This report together with the approved Summary of Product Characteristics, or SmPC (which sets out the conditions of use of the product), and a labeling and package leaflet are sent to the concerned member states for their consideration. The concerned member states are required to approve the assessment report, the SmPC and the labeling and package leaflet within 90 days of receipt of these documents. The total procedural time is 180 days.

The decentralized procedure is used in cases where the medicinal product has not received a marketing authorization in the EU at the time of application. The applicant requests a member state of its choice to act as reference member state to prepare an assessment report that is then used to facilitate agreement with the concerned member states and the grant of a national marketing authorization in all of these member states. In this procedure, the reference member state must prepare, for consideration by the concerned member states, the draft assessment report, a draft SmPC and a draft of the labeling and package leaflet within 120 days after receipt of a valid application. As in the case of mutual recognition, the concerned member states are required to approve these documents within 90 days of their receipt.

For both mutual recognition and decentralized procedures, if a concerned member state objects to the grant of a marketing authorization on the grounds of a potential serious risk to public health, it may raise a reasoned objection with the reference member state. The points of disagreement are in the first instance referred to the Co-ordination Group on Mutual Recognition and Decentralized Procedures, or CMD, to reach an agreement within 60 days of the communication of the points of disagreement. If member states fail to reach an agreement, then the matter is referred to the EMA and CHMP for arbitration. The CHMP is required to deliver a reasoned opinion within 60 days of the date on which the matter is referred. The scientific opinion adopted by the CHMP forms the basis for a binding European Commission decision.

Irrespective of whether the medicinal product is assessed centrally, de-centrally or through a process of mutual recognition, the medicinal product must be manufactured in accordance with the principles of good manufacturing practice as set out in Directive

2003/94/EC and Volume 4 of the rules governing medicinal products in the European community. Moreover, community law requires the clinical results in support of clinical safety and efficacy based upon clinical trials conducted in the European community to be in compliance with the requirements of Directive 2001/20/EC, which implements good clinical practice in the conduct of clinical trials on medicinal products for human use. Clinical trials conducted outside the European community and used to support applications for marketing within the EU must have been conducted in a way consistent with the principles set out in Directive 2001/20/EC. The conduct of a clinical trial in the EU requires, pursuant to Directive 2001/20/EC, authorization by the relevant national competent authority where a trial takes place, and an ethics committee to have issued a favorable opinion in relation to the arrangements for the trial. It also requires that the sponsor of the trial, or a person authorized to act on his behalf in relation to the trial, be established in the community.

National Procedure

This procedure is available for medicinal products that do not fall within the scope of mandatory centralized authorization. Specific procedures and timelines differ between member states, but the duration of the procedure is generally 210 days and based on a risk/efficacy assessment by the competent authority of the member state concerned, followed by determination of SmPC, package leaflet and label text/layout and subsequently grant of the marketing authorization. Marketing authorizations granted on this basis are not mutually recognized by other member states.

There are various types of applications for marketing authorizations:

Cross-referral to Innovator’s Data

Articles 10(1) and 10(2)(b) of Directive 2001/83/EC provide the legal basis for an applicant to seek a marketing authorization on the basis that its product is a generic medicinal product (a copy) of a reference medicinal product that has already been authorized, in accordance with community provisions. A reference product is, in principle, an original product granted an authorization on the basis of a full dossier of particulars and information. This is the main exemption used by generic manufacturers for obtaining a marketing authorization for a copy product. The generic applicant is not required to provide the results of preclinical studies and of clinical trials if its product meets the definition of a generic medicinal product and the applicable regulatory results protection period for the results submitted by the innovator has expired. A generic medicinal product is defined as a medicinal product:

Applications in respect of a generic medicinal product cannot be made before the expiry of the protection period. Where the reference product was granted a national marketing authorization pursuant to an application made before October 30, 2005, the protection period is either six years or 10 years, depending upon the election of the particular member state concerned. Where the reference product was granted a marketing authorization centrally, pursuant to an application made before November 20, 2005, the protection period is 10 years. For applications made after these dates, Regulation 726/2004 and amendments to Directive 2001/83/EC provide for a harmonized protection period regardless of the approval route utilized. The harmonized protection period is in total 10 years, including eight years of research data protection and two years of marketing protection. The effect is that the originator’s results can be the subject of a cross-referral application after eight years, but any resulting authorization cannot be exploited for a further two years. The rationale of this procedure is not that the competent authority does not have before it relevant tests and trials upon which to assess the efficacy and safety of the generic product, but that the relevant particulars can, if the research data protection period has expired, be found on the originator’s file and used for assessment of the generic medicinal product. The 10 year protection period can be extended to 11 years where, in the first eight years post-authorization, the holder of the authorization obtains approval for a new indication assessed as offering a significant clinical benefit in comparison with existing products.

If the copy product does not meet the definition of a generic medicinal product or if certain types of changes occur in the active substance(s) or in the therapeutic indications, strength, pharmaceutical form or route of administration in relation to the reference medicinal product, Article 10(3) of Directive 2001/83/EC provides that the results of the appropriate preclinical studies or clinical trials must be provided by the applicant.

Well-established Medicinal Use

Under Article 10a of Directive 2001/83/EC, an applicant may, in substitution for the results of its own preclinical and clinical research, present detailed references to published literature demonstrating that the active substance(s) of a product have a well- established medicinal use within the community with recognized efficacy and an acceptable level of safety. The applicant is entitled to refer to a variety of different types of literature, including reports of clinical trials with the same active substance(s) and epidemiological studies that indicate that the constituent or constituents of the product have an acceptable safety/efficacy profile for a particular indication. However, use of the published literature exemption is restricted by stating that in no circumstances will constituents be treated as having a well- established use if they have been used for less than 10 years from the first systematic and documented use of the substance as a medicinal product in the EU. Even after 10 years’ systematic use, the threshold for well-established medicinal use might not be met. European pharmaceutical law requires the competent authorities to consider among other factors the period over which a substance has been used, the amount of patient use of the substance, the degree of scientific interest in the use of the substance (as reflected in the scientific literature) and the coherence (consistency) of all the scientific assessments made in the literature. For this reason, different substances may reach the threshold for well-established use after different periods, but the minimum period is 10 years. If the applicant seeks approval of an entirely new therapeutic use compared with that to which the published literature refers, additional preclinical and/or clinical results would have to be provided.

Informed Consent

Under Article 10c of Directive 2001/83/EC, following the grant of a marketing authorization the holder of such authorization may consent to a competent authority utilizing the pharmaceutical, preclinical and clinical documentation that it submitted to obtain approval for a medicinal product to assess a subsequent application relating to a medicinal product possessing the same qualitative and quantitative composition with respect to the active substances and the same pharmaceutical form.

Law Relating to Pediatric Research

Regulation (EC) 1901/2006 (as amended by Regulation (EC) 1902/2006) was adopted on December 12, 2006. This Regulation governs the development of medicinal products for human use in order to meet the specific therapeutic needs of the pediatric population. It requires any application for marketing authorization made after July 26, 2008 in respect of a product not authorized in the European Community on January 26, 2007 (the time the Regulation entered into force), to include the results of all studies performed and details of all information collected in compliance with a pediatric investigation plan agreed by the Pediatric Committee of the EMA, unless the product is subject to an agreed waiver or deferral or unless the product is excluded from the scope of Regulation 1902/2006 (generics, hybrid medicinal products, biosimilars, homeopathic and traditional (herbal) medicinal products and medicinal products containing one or more active substances of well-established medicinal use). Waivers can be granted in certain circumstances where pediatric studies are not required or desirable. Deferrals can be granted in certain circumstances where the initiation or completion of pediatric studies should be deferred until appropriate studies in adults have been performed. The EMA does not evaluate an application for market authorization if there is no agreed PIP, deferral or waiver. Moreover, this regulation imposes the same obligation from January 26, 2009 on an applicant seeking approval of a new indication, pharmaceutical form or route of administration for a product already authorized and still protected by a supplementary protection certificate granted under Regulation EC 469/2009 and its precursor (EEC) 1768/92 or by a patent that qualifies for the granting of such a supplementary protection certificate. The pediatric Regulation 1901/2006 also provides, subject to certain conditions, a reward for performing such pediatric studies, regardless of whether the pediatric results provided resulted in the grant of a pediatric indication. This reward comes in the form of an extension of six months to the supplementary protection certificate granted in respect of the product, unless the product is subject to orphan drug designation, in which case the 10 year market exclusivity period for such orphan products is extended to 12 years. If any of the non-centralized procedures for marketing authorization have been used, the six month extension of the supplementary protection certificate is only granted if the medicinal product is authorized in all member states.

Post-authorization Obligations

In the pre-authorization phase the applicant must provide a detailed pharmacovigilance plan that it intends to implement post- authorization. An authorization to market a medicinal product in the EU carries with it an obligation to comply with many post- authorization organizational and behavioral regulations relating to the marketing and other activities of authorization holders. These include requirements relating to post-authorization efficacy studies, post-authorization safety studies, adverse event reporting and other pharmacovigilance requirements, advertising, packaging and labeling, patient package leaflets, distribution and wholesale dealing. The regulations frequently operate within a criminal law framework and failure to comply with the requirements may not only affect the authorization, but also can lead to financial and other sanctions levied on the company in question and responsible officers. As a result of the currently on-going overhaul of EU pharmacovigilance legislation the financial and organizational burden on market authorization holders will increase significantly, such as the obligation to maintain a pharmacovigilance system master file that applies to all holders of marketing authorizations granted in accordance with Directive 2001/83/EC or Regulation (EC) No 726/2004. Marketing authorization holders must furthermore collect data on adverse events associated with use of the authorized product outside the scope of the authorization. Pharmacovigilance for biological products and medicines with a new active substance will be strengthened by subjecting their authorization to additional monitoring activities. The EU is currently in the process of issuing implementing regulations for the new pharmacovigilance framework.

Any authorization granted by member state authorities, which within three years of its granting is not followed by the actual placing on the market of the authorized product in the authorizing member state ceases to be valid. When an authorized product previously placed on the market in the authorizing member state is no longer actually present on the market for a period of three consecutive years, the authorization for that product shall cease to be valid. The same two three year periods apply to authorizations granted by the European Commission based on the centralized procedure.

Israel

Clinical Testing in Israel

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. In addition, these regulations also require authorization from the Israeli Ministry of Health, in the case of genetic trials, certain fertility trials and in such other matters as set forth by the Ministry of Health, which also include our ARREST Study for aramchol. 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. Because we intend to perform a portion of the clinical studies on certain of our therapeutic candidates in Israel, we obtained 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.

Israeli Ministry of Health

Israel’s Ministry of Health, which regulates medical testing, has adopted guidelines that correspond, generally, to those of the FDA and the EMA, making it comparatively straightforward for studies conducted in Israel to satisfy FDA and the EMA requirements, thereby enabling medical technologies subjected to clinical trials in Israel to reach U.S. and EU commercial markets in an expedited fashion. Many members of Israel’s medical community have earned international prestige in their chosen fields of expertise and routinely collaborate, teach and lecture at leading medical centers throughout the world.

Other Countries

In addition to regulations in the United States, the EU and Israel, we are subject to a variety of other regulations governing clinical trials and commercial sales and distribution of drugs in other countries. Whether or not our product candidate or future product candidates receive approval from the FDA, approval of such product candidates must be obtained by the comparable regulatory authorities of countries other than the United States before we can commence clinical trials or marketing of the product in those countries. The approval process varies from jurisdiction to jurisdiction, and the time may be longer or shorter than that required for FDA approval. The requirements governing the conduct of clinical trials and product licensing vary greatly from country to country.

The requirements that we and our collaborators must satisfy to obtain regulatory approval by government agencies in other countries prior to commercialization of our products in such countries can be rigorous, costly and uncertain. In the European countries, Canada and Australia, regulatory requirements and approval processes are similar in principle to those in the United States. Additionally, depending on the type of drug for which approval is sought, there are currently two potential tracks for marketing approval in the European countries: Mutual recognition and the centralized procedure. These review mechanisms may ultimately lead to approval in all EU countries, but each method grants all participating countries some decision-making authority in product approval. Foreign governments also have stringent post-approval requirements including those relating to manufacture, labeling, reporting, record keeping and marketing. Failure to substantially comply with these on-going requirements could lead to government action against the product, us and/or our representatives.

Related Matters

From time to time, legislation is drafted, introduced and passed in governmental bodies that could significantly change the statutory provisions governing the approval, manufacturing and marketing of products regulated by the FDA or EMA and other applicable regulatory bodies to which we are subject. The estimated size of the NASH patient population in the United States and in the five most-populated EU countries is presented in the diagram below. In addition, regulations and guidance are often revised or reinterpreted by the national agency in ways that may significantly affect our business and our therapeutic candidates. It is impossible to predict whether such legislative changes will be enacted, whether FDA or EMA regulations, guidance or interpretations will change, or what the impact of such changes, if any, may be. We may need to adapt our business and therapeutic candidates and products to changes that occur in the future. For information regarding the Company’s corporate structure and its subsidiaries, see also “Item 4. Information on the Company—Historical Background and Corporate Structure” below.

Description of Property and Facilities

Our corporate headquarters are located at 8 Shaul Hamelech Blvd., Amot Mishpat Bldg., Tel Aviv, Israel, 6473307, where we lease and occupy approximately 78 square meters of space. The lease for our office expires in April 2016. The aggregate monthly rental payment, together with the maintenance fees, is approximately $2,542. Our headquarters do not include laboratory or product manufacturing facilities. Due to an increase in the number of employees, we have entered into a sublease agreement with GEMS Investment Research Ltd., for approximately 250 square meters of additional space in the same building, which expires on March 31, 2015. The aggregate monthly rental payment for the additional space is approximately $4,615, including maintenance fees and taxes. On March 22, 2015, we entered into a lease agreement with Mintz K. Construction Company Ltd., for approximately 356 square meters of space, which we refer to as the New Lease. The initial term of the New Lease expires on March 21, 2019, but we have an option to extend the term of the New Lease for two additional years after the expiration of the initial term. The aggregate monthly rental payment under the New Lease for the initial term, together with adjustments and the maintenance fees, is approximately $8,159.

In addition, in April 2014, we entered into a sublease agreement with Radix Organization Inc. for one office, which expires in May 2015. The aggregate monthly rental payment is approximately $1,980.