MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our accompanying consolidated financial statements and notes thereto that appear elsewhere in this prospectus. In addition to our consolidated financial statements, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs.  Our actual results could differ materially from those discussed in the forward-looking statements.  Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in the sections entitled “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements.”

 

Overview of Operations

 

We are a pharmaceutical company currently engaged in the research and development of innovative pharmaceutical solutions, including an orally ingestible insulin capsule to be used for the treatment of individuals with diabetes, and the use of orally ingestible capsules or pills for delivery of other polypeptides.

 

Short Term Business Strategy

 

 

Long Term Business Strategy

 

If our oral insulin capsule or other drug delivery solutions show significant promise in clinical trials, we plan to ultimately seek a strategic commercial partner, or partners, with extensive experience in the development, commercialization, and marketing of insulin applications and/or other orally digestible drugs. We anticipate such partner or partners would be responsible for, or substantially support, late stage clinical trials (Phase 3) to increase the likelihood of obtaining regulatory approvals and registrations in the appropriate markets in a timely manner. We further anticipate that such partner, or partners, would also be responsible for sales and marketing of our oral insulin capsule in these markets. Such planned strategic partnership, or partnerships, may provide a marketing and sales infrastructure for our products as well as financial and operational support for global clinical trials, post marketing studies, label expansions and other regulatory requirements concerning future clinical development in the United States and elsewhere. Any future strategic partner, or partners, may also provide capital and expertise that would enable the partnership to develop new oral dosage form for other polypeptides. While our strategy is to partner with an appropriate party, no assurance can be given that any third party would be interested in partnering with us. Under certain circumstances, we may determine to develop one or more of our oral dosage form on our own, either world-wide or in select territories.

 

Other Planned Strategic Activities

 

In addition to developing our own oral dosage form drug portfolio, we are, on an on-going basis, considering in-licensing and other means of obtaining additional technologies to complement and/or expand our current product portfolio. Our goal is to create a well-balanced product portfolio that will enhance and complement our existing drug portfolio.

 

 

Results of Operations

 

Critical accounting policies

 

Our significant accounting policies are more fully described in the notes to our accompanying consolidated financial statements. We believe that the accounting policies below are critical for one to fully understand and evaluate our financial condition and results of operations.

 

The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which we prepared in accordance with U.S. generally accepted accounting principles. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate such estimates and judgments. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

Marketable securities : Consist mainly of ordinary shares and a warrant to purchase ordinary shares of D.N.A, which are classified as available-for-sale and are recorded at fair value.  As of October 1, 2011, the ordinary shares are not restricted and the fair value of the ordinary shares is measured based on the quoted prices of the ordinary shares on an active market. Changes in fair value, net of taxes, are reflected in other comprehensive income (loss).    The ordinary shares that will be received upon exercising the warrant will be restricted for a period of six months from the exercise date.  The fair value of the restricted ordinary shares receivable upon exercise of the warrant was measured based on the quoted prices of the otherwise identical unrestricted securities, adjusted for the effect of the restriction by applying a proper discount. The discount was determined with reference to other similar restricted instruments. Similar securities, with no restriction on tradability, are quoted on an active market.

 

Factors considered in determining whether a loss is temporary include the extent to which fair value has been less than the cost basis, and the financial condition and near-term prospects of the investee based on our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. The loss is recorded as a charge to earnings.

 

Valuation of options and warrants : We grant options to purchase shares of our common stock to employees and consultants and issue warrants in connection with some of our financings and to certain other consultants.

 

 We account for share-based payments in accordance with the guidance that requires awards classified as equity awards be accounted for using the grant-date fair value method. The fair value of share-based payment transactions is recognized as an expense over the requisite service period, net of estimated­ forfeitures. We estimate forfeitures based on historical experience and anticipated future conditions.

 

We elected to recognize compensation cost for an award with only service conditions that has a graded vesting schedule using the accelerated method based on the multiple-option award approach.

 

When stock options are granted as consideration for services provided by consultants and other non-employees, the transaction is accounted for based on the fair value of the consideration received or the fair value of the stock options issued, whichever is more reliably measurable, pursuant to the guidance. The fair value of the options granted is measured on each reporting date, and the gains (losses) are recorded to earnings over the related service period using the straight-line method.

 

Valuation of warrants issued as part of capital raisings that are classified as a liability : Warrants that entitle the holder to down-round protection (through ratchet and anti-dilution provisions) are classified as liabilities in the statement of financial position. The liability is measured both initially and in subsequent periods in fair value, with changes in fair value are charged to finance expenses, net.

 

The fair value of the warrants was determined by using Monte Carlo type model based on the risk neutral approach.  The model takes as an input the estimated future dates when new capital will be raised, and builds a multi-step dynamic model.  The first step is to model the risk neutral distribution of the share value on the new issue dates, then for each path to use the Black-Scholes model to estimate the value of the warrants on the last issue date including all the changes in exercise price and quantity along this path. The significant unobservable input used in the fair value measurement is the future expected issue dates. Significant delay in this input would result in a higher fair value measurement.

 

 

Taxes on income : Deferred taxes are determined utilizing the asset and liability method based on the estimated future tax effects of differences between the financial accounting and tax bases of assets and liabilities under the applicable tax laws. Deferred tax balances are computed using the tax rates expected to be in effect when those differences reverse. A valuation allowance in respect of deferred tax assets is provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. We have provided a full valuation allowance with respect to our deferred tax assets.

 

Regarding our subsidiary, Oramed Ltd., relevant accounting guidance prohibits the recognition of deferred tax liabilities or assets that arise from differences between the financial reporting and tax bases of assets and liabilities that are measured from the local currency into U.S. Dollars using historical exchange rates, and that result from changes in exchange rates or indexing for tax purposes. Consequently, the above-mentioned differences were not reflected in the computation of deferred tax assets and liabilities.

 

 

The following table summarizes certain statements of operations data for us for the twelve months periods ended August 31, 2012 and 2011:

 

 

 

            Research and development expenses

 

Research and development expenses include costs directly attributable to the conduct of research and development programs, including the cost of salaries, payroll taxes, employee benefits, costs of registered patents materials, supplies, the cost of services provided by outside contractors, including services related to our clinical trials, clinical trial expenses, the full cost of manufacturing drug for use in research, preclinical development. All costs associated with research and development are expensed as incurred.

 

Clinical trial costs are a significant component of research and development expenses and include costs associated with third-party contractors. We outsource a substantial portion of our clinical trial activities, utilizing external entities such as CROs, independent clinical investigators, and other third-party service providers to assist us with the execution of our clinical studies.

 

Clinical activities which relate principally to clinical sites and other administrative functions to manage our clinical trials are performed primarily by CROs. CROs typically perform most of the start-up activities for our trials, including document preparation, site identification, screening and preparation, pre-study visits, training, and program management.

 

Clinical trial and pre-clinical trial expenses include regulatory and scientific consultants’ compensation and fees, research expenses, purchase of materials, cost of manufacturing of the oral insulin capsules, payments for patient recruitment and treatment, costs related to the maintenance of our registered patents, costs related to the filings of patent applications, as well as salaries and related expenses of research and development staff.

 

In August 2009, Oramed Ltd. was awarded a government grant amounting to a total net amount of NIS 3.1 million (approximately $813,000), from the Office of the Chief Scientist of the Ministry of Industry, Trade and Labor of Israel, or OCS. This grant was used for research and development expenses for the period of February 2009 to June 2010. The funds were used by us to support further research and development and clinical study of our oral insulin capsule and oral GLP-1-analog. In December 2010, Oramed Ltd. was awarded a second grant, or the Second Grant,  amounting to a total net amount of NIS 2.9 million (approximately $720,000) from the OCS, which was designated for research and development expenses for the period of July 2010 to November 2011. As a result of a delay in the research and development plan, as of November 30, 2011, Oramed Ltd. had used only NIS 1,473,000 (approximately $365,000) of the Second Grant.  In May 2012, Oramed Ltd. was awarded an extension of nine months to use the funds of the Second Grant until August 2012.  In addition, in May 2012, Oramed Ltd. was granted a third grant amounting to a total net amount of NIS 595,000 (approximately $148,000) from the OCS, which was designated for research and development expenses for the period of September 2012 to December 2012.  We used the funds to support further research and development and clinical studies of our oral insulin capsule and oral GLP-1 analog. The three grants are subject to repayment according to the terms determined by the OCS and applicable law.  See “—Government grants” below.

 

Government grants

 

The Government of Israel encourages research and development projects through the OCS, pursuant to the Law for the Encouragement of Industrial Research and Development, 1984, as amended, or the R&D Law.  Under the R&D Law, a research and development plan that meets specified criteria is eligible for a grant of up to 50% of certain approved research and development expenditures. Each plan must be approved by the OCS.

 

In May 2012, Oramed Ltd. was granted a third grant amounting to a total net amount of NIS 595,000 (approximately $148,000) from the OCS, which was designated for research and development expenses for the period of September 2012 to December 2012.  We used the funds to support further research and development and clinical studies of our oral insulin capsule and oral GLP-1 analog.

 

 

In the three months ended November 30, 2012, we recognized research and development grants in an amount of $10,058 from the OCS, and in the three months ended November 30, 2011, we recognized research and development grants in an amount of $41,257 from OCS.  As of November 30, 2012, we had no contingent liabilities to the OCS.

 

In the years ended August 31, 2012 and 2011, we recognized research and development grants in an amount of $372,959 and $354,906, respectively.  As of August 31, 2012, we did not incur any royalty liability to the OCS.

 

The R&D Law generally requires that a product developed under a program be manufactured in Israel. However, upon notification to the OCS  (and provided that the OCS does not object within 30 days), up to 10% of a company’s approved Israeli manufacturing volume, measured on an aggregate basis, may be transferred outside of Israel. In addition, upon the approval of the OCS, a greater portion of the manufacturing volume may be performed outside of Israel, provided that the grant recipient pays royalties at an increased rate, which may be substantial, and the aggregate repayment amount is increased up to 300% of the grant, depending on the portion of the total manufacturing volume that is performed outside of Israel. The R&D Law further permits the OCS, among other things, to approve the transfer of manufacturing rights outside of Israel in exchange for an import of different manufacturing into Israel as a substitute, in lieu of the increased royalties. The R&D Law also allows for the approval of grants in cases in which the applicant declares that part of the manufacturing will be performed outside of Israel or by non-Israeli residents and an OCS research committee is convinced that doing so is essential for the execution of the program.  This declaration will be a significant factor in the determination of the OCS as to whether to approve a program and the amount and other terms of benefits to be granted.  For example, an increased royalty rate and repayment amount might be required in such cases.

 

The R&D Law imposes reporting requirements with respect to certain changes in the ownership of a grant recipient.  The R&D Law requires the grant recipient and its controlling shareholders and foreign interested parties to notify the OCS of any change in control of the recipient or a change in the holdings of the means of control of the recipient that results in a non-Israeli becoming an interested party in the recipient, and requires the new interested party to undertake to the OCS to comply with the R&D Law.  In addition, the rules of the OCS may require additional information or representations in respect of certain such events. For this purpose, “control” is defined as the ability to direct the activities of a company other than any ability arising solely from serving as an officer or director of the company.  A person is presumed to have control if such person holds 50% or more of the means of control of a company.  “Means of control” refers to voting rights or the right to appoint directors or the chief executive officer.  An “interested party” of a company includes a holder of 5% or more of its outstanding share capital or voting rights, its chief executive officer and directors, someone who has the right to appoint its chief executive officer or at least one director, and a company with respect to which any of the foregoing interested parties owns 25% or more of the outstanding share capital or voting rights or has the right to appoint 25% or more of the directors.  Accordingly, any non-Israeli who acquires 5% or more of our common stock will be required to notify the OCS that it has become an interested party and to sign an undertaking to comply with the R&D Law.

 

 

Failure to meet the R&D Law’s requirements may subject us to mandatory repayment of grants received by us (together with interest and penalties), as well as expose us to criminal proceedings.  In addition, the Israeli government may from time to time audit sales of products which it claims incorporate technology funded through OCS programs which may lead to additional royalties being payable on additional products.

 

Grants from the Bio-Jerusalem fund

 

The Bio-Jerusalem fund was founded by the Jerusalem Development Authority in order to support the biomed industry in Jerusalem. We are committed to pay royalties to the Bio-Jerusalem fund on proceeds from future sales at a rate of 4% and up to 100% of the amount of the grants received by the Company (Israeli CPI linked) in the total amount of $65,053 as of November 30, 2012.  For the three month periods ended November 30, 2012 and 2011, we received $12,320 and $0, respectively, from the Bio-Jerusalem fund.  For the year ended August 31, 2012 there were no grants received from the Bio-Jerusalem fund, and in the year ended August 31, 2011, we received $20,950 from said fund.  As of November 30, 2012, we had not yet realized any revenues since inception and thus did not incur any royalty liability to the Bio-Jerusalem fund.

 

General and administrative expenses

 

General and administrative expenses include the salaries and related expenses of our management, consulting costs, legal and professional fees, traveling, business development costs, insurance expenses and other general costs.

 

For the three months ended November 30, 2012, general and administrative expenses totaled $339,213 compared to $281,901 for the three months ended November 30, 2011. The increase in costs incurred related to general and administrative activities during the three months ended November 30, 2012, reflect an increase in stock options granted to employees and consultants of $113,079. The increase in general and administrative expenses was partially offset by a decrease in investor relations costs, most of which were paid in the three months ended November 30, 2011 with our common stock and warrants to purchase common stock. During the three months ended November 30, 2012, as part of our general and administrative expenses, we incurred $139,770 related to stock options granted to employees and consultants, as compared to $26,691 during the three months ended November 30, 2011.

 

For the year ended August 31, 2012, general and administrative expenses totaled $1,203,164 compared to $1,275,960 for the year ended August 31, 2011. The decrease in costs incurred related to general and administrative activities during the year ended August 31, 2012 was mainly due to a decrease in consulting fees, which was partially offset by an increase in investor relations costs. During the year ended August 31, 2012, as part of our general and administrative expenses, we incurred $172,470 related to stock options granted to employees and consultants, as compared to $263,999 during the year ended August 31, 2011.

 

Financial income/expense, net

 

Financial expenses for the three months ended November 30, 2012 includes an expense of $296,982 resulting mainly from the removal of the anti-dilution protections from warrant liabilities and the grant of new warrants.

 

In the three months ended November 30, 2012, we incurred revenues from exchange rate differences as well as interest income on available cash and cash equivalents that were partially offset by bank charges.  In the three months ended November 30, 2011, we received a higher amount of interest income on available cash and cash equivalents which was offset by bank charges.

 

Financial expenses for the year ended August 31, 2012 include an expense of $142,704 for changes in fair value of warrant liabilities, which was mainly derived from an amendment to certain warrants that reduced the exercise prices and increased the number of shares issuable pursuant thereto, as discussed below under “—Liquidity and Capital Resources.”   During the year ended August 31, 2012, we incurred increased losses, as compared to the year ended August 31, 2011, as a result of exchange rate differences and bank charges that were partially offset by interest income on available cash and cash equivalents. The decrease in the interest income for the year ended August 31, 2012 was also attributable to the use of funds raised by share issuances described below in the year ended August 31, 2011.

 

As of August 31, 2011, the warrants that were granted to Regals during the year ended August 31, 2011 were presented within stockholders’ equity.  After further review, we have determined that these instruments should have been classified as liabilities.  Changes in the fair value of these warrants require adjustments to the amount of the liabilities recorded on our balance sheet, and the corresponding gain or loss is required to be recorded in our statement of operations.  We assessed the materiality of the correction and concluded that it was immaterial to previously reported annual and interim amounts and that the correction of the error in 2012 is not material to the current year end results of operations. Accordingly, we corrected this error during the year ended August 31, 2012, as reflected in the financial expenses for the year ended August 31, 2012, and did not restate our consolidated financial statements for the prior years or interim periods impacted.

 

 

Gain on sale of investment and impairment of available for sale securities

 

In March 2011, we consummated a transaction with D.N.A whereby we sold to D.N.A 47% of Entera Bio Ltd.’s, or Entera’s, outstanding share capital on an undiluted basis, as discussed below under “Our Business—Out-Licensed Technology.”   As a result of the transaction, we recognized a gain on sale of investment of $1,033,004 for the year ended August 31, 2011.  Also as a result of the transaction, we received 8,404,667 ordinary shares of D.N.A, having an aggregate market value of approximately $581,977 as of March 31, 2011, the closing date of the Entera sale. The D.N.A shares were recorded at fair value as discussed above under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Marketable securities.”   As of November 30, 2012 and August 31, 2012, these ordinary shares of D.N.A had an aggregate market value of approximately $317,657 and $200,311, respectively.  Pursuant to the Israel Securities Law, the ordinary shares of D.N.A that we own are subject to certain restrictions on sale.  In addition, even if such restrictions are no longer applicable, the market price for D.N.A’s ordinary shares may decline, which could result in a loss to us if we sell such shares at a price below the value on the date we acquired such shares.  The ordinary shares of D.N.A have historically experienced low trading volume; as a result there is no guarantee that we will be able to resell the ordinary shares of D.N.A at the prevailing market prices.  Changes in fair value, net of taxes, are discussed in Note 3 to our accompanying consolidated financial statements for the three months ended November 30, 2012 and 2011 and for the years ended August 31, 2012 and 2011.

 

Liquidity and capital resources

 

From inception through November 30, 2012, we incurred losses in an aggregate amount of $18,850,530. We have financed our operations through the private placements of equity financing, raising a total of $16,603,071, net of transaction costs. We will seek to obtain additional financing through similar sources in the future as needed.  As of November 30, 2012, we had $5,531,075 of available cash. We anticipate that we will require approximately $4.9 million to finance our activities during the 12 months following November 30, 2012.

 

·      In January 2011, we issued a total of 8,334 shares of our common stock, valued at $30,000, in the aggregate, to a third party as remuneration for services rendered.

 

·      In February 2011, we granted options to purchase up to 20,834 shares of our common stock, at an exercise price of $6.00 per share, to a consultant for services rendered. The options vest in five annual installments commencing in February 2012 and expiring in February 2021.  The initial fair value of the options on the date of grant was $62,185, calculated using the Black-Scholes option-pricing model, and was based on the following assumptions: dividend yield of 0% for all years; expected volatility of 78.65%; risk-free interest rates of 3.42%; and the remaining contractual life of 10 years. The fair value of the options granted is measured on a final basis at the end of the related service period and is recognized over the related service period using the straight-line method.

 

·      In March 2011, we completed a private placement pursuant to which we sold to the investors an aggregate of 873,961 “units” at a purchase price of $3.84 per unit for total consideration of $3,356,000.  Each unit consisted of one share of our common stock and a five-year warrant to purchase 0.35 of a share of our common stock at an exercise price of $6.00 per share. We also issued 16,397 shares of our common stock and warrants to purchase 5,906 shares of our common stock as finders’ fees in connection with the private placement. These amounts include the $250,000 investment by D.N.A in connection with our technology transaction on March 31, 2011.

 

 

·      In April 2011, we granted 3,584 options to a third-party as remuneration for services rendered at an exercise price of $6.00 per share (higher than the traded market price on the date of grant). The options vested immediately on the date of grant and will expire in April 2016. The fair value of these options on the date of grant was $10,000, calculated using the Black-Scholes option-pricing model, and was based on the following assumptions: dividend yield of 0% for all years; expected volatility of 79.24%; risk-free interest rates of 2.06%; and the remaining contractual life of five years.

 

·      In April 2011, we completed a private placement pursuant to which we sold to the investors an aggregate of 93,701 “units” at a purchase price of $3.84 per unit for total consideration of $359,800.  Each unit consisted of one share of our common stock and a five-year warrant to purchase 0.35 of a share of our common stock at an exercise price of $6.00 per share. We also issued five year warrants to purchase 5,622 shares of our common stock at an exercise price of $6.00 per share and paid $21,588 as finders’ fees in connection with the private placement.

 

·      In May 2011, we issued 14,744 shares of our common stock, valued at $47,769, in the aggregate, to a third party as remuneration for services rendered.

 

·      In May 2011, we issued 16,667 shares of our common stock, valued at $60,000, in the aggregate, to a third party as remuneration for services to be rendered.

 

·      In July 2011, we issued warrants to purchase 2,667 shares of our common stock at an exercise price of $6.00 per share to a third-party as remuneration for services rendered during the 12 month period commencing in May 2011. The warrants vest in twelve equal annual installments commencing in October 2011 and will expire in July 2016. The fair value of these warrants on the date of grant was $5,057, calculated using the Black-Scholes option-pricing model, and was based on the following assumptions: dividend yield of 0% for all years; expected volatility of 77.39%; risk-free interest rates of 1.55%; and the remaining contractual life of five years.

 

·      In December 2011, we issued 6,917 shares of our common stock, valued at $24,900, in the aggregate, to an advisor as remuneration for services rendered.

 

·      In March 2012, we issued 11,084 shares in the aggregate of our common stock, valued at $38,570, to two advisory companies as remuneration for services rendered.

 

·      In May 2012, we issued 6,917 shares of our common stock, valued at $24,900, in the aggregate, to an advisor as remuneration for services rendered.

 

·      In July 2012, we issued 4,167 shares of our common stock, valued at $16,000, in the aggregate, to an advisor as remuneration for services rendered.

 

 

·      In October 2012, we entered into a Securities Purchase Agreement with D.N.A, according to which, we issued to D.N.A 199,172 shares of our common stock in consideration for the D.N.A Warrant.  D.N.A has filed an application for the approval of the TASE to list the ordinary shares of D.N.A issuable upon exercise of the D.N.A Warrant.  Mr. Zeev Bronfeld, a controlling shareholder of D.N.A, beneficially owned 7.1% of our outstanding common stock prior to the transaction. As a result of the holdings of Mr. Bronfeld, the Israeli Securities Authority, or the ISA, informed D.N.A that in its opinion the procedure of approving the transaction by D.N.A was not in accordance with applicable law.  We, based on a legal opinion we received from counsel, are of the opinion that the procedure was in order, based on precedents and counsel’s experience with similar cases. Should we exercise the D.N.A Warrant, we will hold approximately 14.5% of D.N.A’s outstanding ordinary shares, which includes 8,404,667 ordinary D.N.A shares that were previously issued in March 2011 as further discussed in “Our Business—Out-Licensed Technology.” Pursuant to the Israel Securities Law, the ordinary shares of D.N.A that we own are subject to certain restrictions on sale.  In addition, even if such restrictions are no longer applicable, the market price for D.N.A’s ordinary shares may decline, which could result in a loss to us if we sell such shares at a price below the value on the date we acquired such shares.  The ordinary shares of D.N.A have historically experienced low trading volume; as a result there is no guarantee that we will be able to resell the ordinary shares of D.N.A at the prevailing market prices. 

 

·      In November 2012, we entered into the Agreement with Regals in connection with the Warrants.  Pursuant to the Agreement, we and Regals agreed to amend the Warrants to provide that the anti-dilution protection of the Warrants shall be deleted in its entirety. In addition, as to the warrants issued in August and November 2012, the parties agreed to reduce the exercise price to $3.7656 per share, the current exercise price per share of the warrants originally issued in January 2011. At such time, we also issued to Regals the New Warrant.  All such warrant shares issued to Regals are included in this prospectus for resale.  See “Selling Stockholders.”

 

·      In connection with the New Warrant, Nadav Kidron, our President, Chief Executive Officer and a director, in his personal capacity as one of our stockholders, agreed that following the execution and delivery of the Agreement, in the event that an adjustment pursuant to the anti-dilution protection of the Warrants (had they not been amended by the Agreement) would have been triggered and the number of shares of our common stock that Regals would have been able to purchase under the Warrants would have increased by an aggregate number in excess of 137,311 common shares, then Regals shall have the right to purchase from Mr. Kidron such number of shares of our common stock owned by Mr. Kidron, up to a maximum of 112,690 shares of our common stock. This right shall survive until the termination of the Warrants.

 

Off-Balance Sheet Arrangements

 

As of August 31, 2012 and November 30, 2012, we had no off balance sheet arrangements that have had or that we expect would be reasonably likely to have a future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

 

As indicated above, in December 2012 we filed an IND application with the FDA for our orally ingested insulin and we are conducting, or planning to conduct, further clinical studies with our exenatide capsule and the combination therapy, respectively, and others.  We expect to have a significant increase in research and development expenses during the term of the FDA approved Phase 2 study that will be conducted during fiscal year 2013.  Our ability to complete these activities is dependent on several major factors including the ability to attract sufficient financing on terms acceptable to us and receiving additional grants from the OCS.

 

 

OUR BUSINESS

 

General

 

We are a pharmaceutical company currently engaged in the research and development of innovative pharmaceutical solutions, including an orally ingestible insulin capsule to be used for the treatment of individuals with diabetes, and the use of orally ingestible capsules or pills for delivery of other polypeptides.

 

GLP-1 Analog: Our second pipeline product is orally ingestible exenatide (GLP-1 analog) capsule, which aids in the balance of blood-sugar levels and decreases appetite. Results of a trial on healthy volunteers and type 2 diabetic patients are expected in the first quarter of calendar year 2013.

 

Combination of Oral Insulin and GLP-1 Analog: Our third pipeline product is a combination of our two primary products, oral insulin and oral exenatide. Preliminary results of this trial were announced in June 2012. The results showed that our two main products have greater positive effects when given together, as a combination therapy, above the administration of each product alone.  A human clinical trial on healthy volunteers is expected to commence in the first quarter of calendar year 2013.

 

Diabetes:   Diabetes is a disease in which the body does not produce or properly use insulin. Insulin is a hormone that causes sugar to be absorbed into cells, where the sugar is converted into energy needed for daily life. The cause of diabetes is attributed both to genetics (type 1 diabetes) and, most often, to environmental factors such as obesity and lack of exercise (type 2 diabetes). According to the International Diabetes Federation, an estimated 371 million people worldwide suffered from diabetes in 2012. In 2012, an estimated 4.8 million people died from consequences of high blood sugar. According to the American Diabetes Association, or ADA, in the United States there were approximately 25.8 million people with diabetes, or 8.3% of the U.S. population in 2010.  Diabetes is a leading cause of blindness, kidney failure, heart attack, stroke and amputation.

 

Intellectual Property: We own a portfolio of patents and patent applications covering our technologies and we are aggressively protecting these technology developments on a worldwide basis.

 

Management: We are led by a highly-experienced management team knowledgeable in the treatment of diabetes. Our Chief Medical and Technology Officer, Miriam Kidron, PhD, is a world-recognized pharmacologist and a biochemist and the innovator primarily responsible for our oral insulin technology development and know-how.

 

Scientific Advisory Board: Our management team has access to our internationally recognized Scientific Advisory Board whose members are thought-leaders in their respective areas. The Scientific Advisory Board is comprised of Dr. Nir Barzilai, Professor Ele Ferrannini, Professor Avram Hershko, Dr. Derek LeRoith, Dr. John Amatruda and Dr. Michael Berelowitz acting as Chairman.

 

Strategy

 

Short Term Business Strategy

 

 

Long Term Business Strategy

 

If our oral insulin capsule or other drug delivery solutions show significant promise in clinical trials, we plan to ultimately seek a strategic commercial partner, or partners, with extensive experience in the development, commercialization, and marketing of insulin applications and/or other orally digestible drugs. We anticipate such partner or partners would be responsible for, or substantially support, late stage clinical trials (Phase 3) to increase the likelihood of obtaining regulatory approvals and registrations in the appropriate markets in a timely manner. We further anticipate that such partner, or partners, would also be responsible for sales and marketing of our oral insulin capsule in these markets. Such planned strategic partnership, or partnerships, may provide a marketing and sales infrastructure for our products as well as financial and operational support for global clinical trials, post marketing studies, label expansions and other regulatory requirements concerning future clinical development in the United States and elsewhere. Any future strategic partner, or partners, may also provide capital and expertise that would enable the partnership to develop new oral dosage form for other polypeptides. While our strategy is to partner with an appropriate party, no assurance can be given that any third party would be interested in partnering with us. Under certain circumstances, we may determine to develop one or more of our oral dosage form on our own, either world-wide or in select territories.

 

Other Planned Strategic Activities

 

In addition to developing our own oral dosage form drug portfolio, we are, on an on-going basis, considering in-licensing and other means of obtaining additional technologies to complement and/or expand our current product portfolio. Our goal is to create a well-balanced product portfolio that will enhance and complement our existing drug portfolio.

 

Product Development

 

Orally Ingestible Insulin

 

During fiscal year 2007 we conducted several clinical studies of our orally ingestible insulin. The studies were intended to assess both the safety/tolerability and absorption properties of our proprietary oral insulin. Based on the pharmacokinetic and pharmacologic outcomes of these trials, we decided to continue the development of our oral insulin product.

 

In November 2007, we successfully completed animal studies in preparation for the Phase 1B clinical trial of our oral insulin capsule (ORMD0801).  In January 2008, we commenced the non-FDA approved Phase 1B clinical trials with our oral insulin capsule, in healthy human volunteers with the intent of dose optimization.  In March 2008, we successfully completed our Phase 1B clinical trials.

 

In April 2008, we commenced a non-FDA approved Phase 2A study to evaluate the safety and efficacy of our oral insulin capsule in type 2 diabetic volunteers at Hadassah Medical Center in Jerusalem. In August 2008, we announced the successful results of this trial.

 

In July 2008 we were granted approval by the Institutional Review Board Committee of Hadassah Medical Center in Jerusalem, or IRB, to conduct a non-FDA approved Phase 2A study to evaluate the safety and efficacy of our oral insulin capsule on type 1 diabetic volunteers. In September 2008, we announced the beginning of this trial. In July 2009 we reported positive results from this trial.

 

In May 2009, we commenced a non-FDA approved Phase 2B study in South Africa to evaluate the safety, tolerability and efficacy of our oral insulin capsule on type 2 diabetic volunteers. In May 2010, we reported that the capsule was found to be well tolerated and exhibited a positive safety profile. No cumulative adverse effects were reported throughout this first study of extended exposure to the capsule.

 

 

In February 2010, we entered into agreements with Vetgenerics Research G. Ziv Ltd., a clinical research organization, to conduct a toxicology trial on our oral insulin capsules. In March 2011, we reported that we successfully completed the resulting comprehensive toxicity study for our oral insulin capsule. The study was completed under conditions prescribed by the FDA Good Laboratory Practices regulations.

 

In September 2010, we reported the successful results of an exploratory clinical trial testing the effectiveness of our oral insulin capsule in type 1 diabetes patients suffering from uncontrolled diabetes.  Unstable or labile diabetes is characterized by recurrent, unpredictable and dramatic blood glucose swings often linked with irregular hyperglycemia and sometimes serious hypoglycemia affecting type 1 diabetes patients.  This completed exploratory study was a proof of concept study for defining a novel indication for ORMD0801. We believe the encouraging results justify further clinical development of ORMD0801 capsule application toward management of uncontrolled diabetes.

 

In September 2012, we entered into a Master Services Agreement with Medpace to retain Medpace as a CRO for our upcoming Phase 2 clinical trial for an oral insulin capsule that is expected to start in the first calendar quarter of 2013 in the United States, and is expected to be completed in December 2013.  As consideration for its services, we will pay Medpace a total amount of approximately $3,500,000 during the term of the engagement, based on the achievement of certain milestones.

 

In December 2012, we filed an IND application with the FDA for a Phase 2 clinical trial of our orally ingested insulin candidate, ORMD0801.  We have been communicating with the FDA regarding our IND. The FDA has reviewed the file and, while requesting modifications to the protocol, they have not issued an action letter (e.g., a clinical hold letter).  We are continuing to explore with the FDA the best and shortest route to modifying the protocol according to the FDA’s recommendations. .

 

GLP-1 Analog

 

In September 2008 we announced the launch of pre-clinical trials of ORMD0901, an analog for GLP-1, a gastrointestinal hormone.  The pre-clinical trials include animal studies which suggest that the GLP-1 analog (exenatide-4) when combined with Oramed’s absorption promoters is absorbed through the gastrointestinal tract and retains its biological activity.

 

GLP-1 is an incretin hormone - a type of gastrointestinal hormone that stimulates the secretion of insulin from the pancreas. The incretin concept was hypothesized when it was noted that glucose ingested by mouth (oral) stimulated two to three times more insulin release than the same amount of glucose administered intravenously. In addition to stimulating insulin release, GLP-1 was found to suppress glucagon release (hormone involved in regulation of glucose) from the pancreas, slow gastric emptying to reduce the rate of absorption of nutrients into the blood stream, and increase satiety. Other important beneficial attributes of GLP-1 are its effects of increasing the number of beta cells (cells that manufacture and release insulin) in the pancreas and, possibly, protection of the heart.

 

In September 2009, we received approval from the IRB to commence human clinical trials of an oral GLP-1 analog. The approval was granted after successful pre-clinical results were reported. The trials were conducted on healthy male volunteers at Hadassah University Medical Center in Jerusalem. These first-in-humans clinical trials were testing the safety and efficacy of ORMD0901, an encapsulated oral GLP-1 analog formulation.  The study monitored the responses of healthy males to a single dose delivered 60 minutes before a glucose load and was completed in December 2009.  ORMD0901 was well tolerated by all subjects and demonstrated physiological activity, as extrapolated from ensuing subject insulin levels when compared to those observed after treatment with placebo.

 

A further clinical trial for our exenatide capsule on healthy volunteers and type 2 diabetic patients began in January 2013.  We expect to receive results from such trial in the first quarter of calendar year 2013.

Combination Therapy

In June 2012, we presented an abstract, which reported on the impact of our oral insulin capsule ORMD0801 delivered in combination with our oral exenatide capsule ORMD0901.  The work that was presented assessed the safety and effectiveness of a combination of oral insulin and oral exenatide treatments delivered to pigs prior to food intake.  The drug combination resulted in significantly improved blood glucose regulation when compared to administration of each drug separately.  A clinical trial is expected to commence in the first quarter of calendar year 2013.

 

 

Raw Materials

Our oral insulin capsule is currently manufactured by Swiss Caps AG, or Swiss Caps.

In May 2010, Oramed Ltd. entered into an agreement with SAFC Pharma, or SAFC, to develop a process to produce one of our oral capsule ingredients and in June, 2011, Oramed Ltd. issued a purchase order to SAFC for producing the ingredient.

In July 2010, Oramed Ltd. entered into the Manufacturing and Supply Agreement, or MSA, with Sanofi-Aventis Deutschland GMBH, or Sanofi-Aventis. According to the MSA, Sanofi-Aventis will supply Oramed Ltd. with specified quantities of recombinant human insulin to be used for clinical trials in the United States.

We purchase, pursuant to separate agreements with third parties, the raw materials required for the manufacturing of our oral capsule.   We generally depend upon a limited number of suppliers for the raw materials.  Although alternative sources of supply for these materials are generally available, we could incur significant costs and disruptions if we would need to change suppliers.  The termination of our relationships with our suppliers or the failure of these suppliers to meet our requirements for raw materials on a timely and cost-effective basis could have a material adverse affect on our business, prospects, financial condition and results of operations.

Patents and Licenses

We maintain a proactive intellectual property strategy which includes patent filings in multiple jurisdictions, including the United States and other commercially significant markets. We hold 35 patent applications currently pending, with respect to various compositions, methods of production and oral administration of proteins and exenatide. Expiration dates for pending patents, if granted, will fall between 2026 and 2032.

In January 2012, we received the approval for a key patent by the Australian Patent Office.  The patent covers an important part of our core technology which allows for the oral delivery of peptides.

 

In January 2012, we filed a provisional patent application with the U.S. Patent and Trademark Office for a combination therapy of our lead compound, ORMD0801, in combination with our oral GLP-1 analog formulation, ORMD0901.

In February 2012, we filed a provisional patent application with the U.S. Patent and Trademark Office for the composition of a key ingredient of our oral capsules.

In May 2012, we were issued a patent by each of the Israeli Patent Office, which covers part of our technology with respect to oral delivery of peptides, and the New Zealand Patent Office, which covers part of our technology with respect to oral exenatide compositions.

In December 2012, we were issued a patent by the South African Patent Office, which covers part of our technology with respect to oral delivery of peptides.

Consistent with our strategy to seek protection in key markets worldwide, we have been and will continue to pursue the patent applications and corresponding foreign counterparts of such applications.  We believe that our success will depend on our ability to obtain patent protection for our intellectual property.

Our patent strategy is as follows:

 

●	Protect technological developments at various levels, in a complementary manner, including the base technology, as well as specific applications of the technology, and

 

●	Establish comprehensive coverage in the United States and in all relevant foreign markets in anticipation of future commercialization opportunities.

 

 

We also rely on trade secrets and unpatentable know-how that we seek to protect, in part, by confidentiality agreements. Our policy is to require our employees, consultants, contractors, manufacturers, outside scientific collaborators and sponsored researchers, our Board, technical review board and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with us. These agreements provide that all confidential information developed or made known to the individual during the course of the individual’s relationship with us is to be kept confidential and not disclosed to third parties except in specific limited circumstances. We also require signed confidentiality or material transfer agreements from any company that is to receive our confidential information. In the case of employees, consultants and contractors, the agreements provide that all inventions conceived by the individual while rendering services to us shall be assigned to us as the exclusive property of our Company. There can be no assurance, however, that all persons who we desire to sign such agreements will sign, or if they do, that these agreements will not be breached, that we would have adequate remedies for any breach, or that our trade secrets or unpatentable know-how will not otherwise become known or be independently developed by competitors.

 

Partnerships and Collaborative Arrangements

 

In July 2010, we entered into the MSA with Sanofi-Aventis. Pursuant to the MSA, Sanofi-Aventis will supply specified quantities of recombinant human insulin to be used for clinical trials in the United States.

 

In September 2011, we entered into the fourth agreement with Hadasit, Dr. Miriam Kidron and Dr. Daniel Schurr, or the Fourth Agreement, to facilitate clinical trials and provide other services. According to the Fourth Agreement, Hadasit will be entitled to total consideration of $200,000 to be paid in accordance with the actual progress of the study, none of which was recognized or paid through August 31, 2012. See “Certain Relationships and Related Transactions, and Director Independence” below for a further description of the terms and conditions of the Fourth Agreement.

 

In December 2011, we received a quotation for the supply of insulin soft gel capsules for our clinical trials according to which Swiss Caps manufactured insulin capsules for total consideration of CHF 395,000 (approximately $411,000). The manufacturing was completed during November 2012.

 

In February 2012, we entered into an advisory agreement with a third party advisor for a period of one year, pursuant to which the advisor agreed to provide investor relations services for share based compensation as follows:  25,000 shares of our common stock will be issued in six installments over the engagement period, commencing as of February 15, 2012, and a warrant to purchase 62,500 shares of our common stock. The warrant has a term of five years and an exercise price of $6.00 per share and vests in 12 monthly installments over the first year   of the agreement.  In July 2012, we and the advisor entered into an amendment to the agreement, according to which the original agreement was extended until July 3, 2013 (unless terminated earlier by one of the parties), and a new payment and vesting schedule   was determined as of such date for the remaining share based compensation and unvested warrant shares, respectively, until the end of the new term of the agreement.  As of November 30, 2012, 8,334 shares of our common stock had been issued to the advisor, and 33,334 of the warrant shares had vested.

 

In September 2012, we entered into a Master Services Agreement with Medpace to retain Medpace as a CRO for our upcoming Phase 2 clinical trial for an oral insulin capsule that is expected to start in the first calendar quarter of 2013 in the United States, and is expected to be completed in December 2013.  As consideration for its services, we will pay Medpace a total amount of approximately $3,500,000 during the term of the engagement, based on the achievement of certain milestones.

 

Out-Licensed Technology

 

In June 2010, Oramed Ltd. entered into a joint venture agreement with D.N.A for the establishment of Entera.

 

Under the terms of a license agreement that was entered into between Oramed and Entera in August 2010, we out-licensed technology to Entera, on an exclusive basis, for the development of oral delivery drugs for certain indications to be agreed upon between the parties.  The out-licensed technology differs from our main delivery technology that is used for oral insulin and GLP-1 analog and is subject to different patent applications. Entera’s initial development effort is for an oral formulation for the treatment of osteoporosis. The license was royalty-free unless our ownership interest in Entera decreased to 30% or less of its outstanding share capital, in which case royalties would have been payable with respect to revenues derived from certain indications. Under certain circumstances, Entera may have received ownership of the licensed technology, in which case we would have received a license back on the same terms.

 

D.N.A initially invested $600,000 in Entera, and Entera was initially owned in equal parts by Oramed and D.N.A.  Entera’s Chief Executive Officer, Dr. Phillip Schwartz, was granted options to purchase ordinary shares of Entera, reflecting 9.9% of Entera’s share capital, upon full exercise.

 

 

As part of the transaction with D.N.A, we entered into a patent transfer agreement (to replace the original license agreement upon closing) pursuant to which Oramed assigned to Entera all of its right, title and interest in and to the patent application that it had licensed to Entera in August 2010.  Under this agreement, Oramed Ltd. is entitled to receive from Entera royalties of 3% of Entera’s net revenues (as defined in the agreement) and a license back of that patent application for use in respect of diabetes and influenza.

 

In March 2011, Oramed Ltd., Entera and D.N.A terminated the joint venture agreement entered into in June 2010 in connection with the formation of Entera.

 

In September 2011, Entera reported successful Phase 1 clinical trial results. We believe the Phase 1 data supports the continued development of Entera’s oral osteoporosis drug. The Phase 1 clinical trial consisted of twelve healthy patients and was conducted at the Hadassah Medical Center in Jerusalem. No adverse events were reported.

 

Government Regulation

 

The Drug Development Process

 

Regulatory requirements for the approval of new drugs vary from one country to another. In order to obtain approval to market our drug portfolio, we need to go through a different regulatory process in each country in which we apply for such approval. In some cases information gathered during the approval process in one country can be used as supporting information for the approval process in another country. As a strategic decision, we decided to first explore the FDA regulatory pathway. The following is a summary of the FDA’s requirements.

 

The FDA requires that pharmaceutical and certain other therapeutic products undergo significant clinical experimentation and clinical testing prior to their marketing or introduction to the general public. Clinical testing, known as clinical trials or clinical studies, is either conducted internally by life science, pharmaceutical, or biotechnology companies or is conducted on behalf of these companies by CROs.

 

The process of conducting clinical studies is highly regulated by the FDA, as well as by other governmental and professional bodies.  Below we describe the principal framework in which clinical studies are conducted, as well as describe a number of the parties involved in these studies.

 

Protocols.  Before commencing human clinical studies, the sponsor of a new drug or therapeutic product must submit an IND application to the FDA. The application contains, among other documents, what is known in the industry as a protocol.  A protocol is the blueprint for each drug study. The protocol sets forth, among other things, the following:

 

·               Who must be recruited as qualified participants,

 

·               How often to administer the drug or product,

 

·               What tests to perform on the participants, and

 

·               What dosage of the drug or amount of the product to give to the participants.

 

 

Institutional Review Board. An institutional review board is an independent committee of professionals and lay persons which reviews clinical research studies involving human beings and is required to adhere to guidelines issued by the FDA. The institutional review board does not report to the FDA, but its records are audited by the FDA. Its members are not appointed by the FDA. All clinical studies must be approved by an institutional review board. The institutional review board’s role is to protect the rights of the participants in the clinical studies. It approves the protocols to be used, the advertisements which the company or CRO conducting the study proposes to use to recruit participants, and the form of consent which the participants will be required to sign prior to their participation in the clinical studies.

 

Clinical Trials.  Human clinical studies or testing of a potential product are generally done in three stages known as Phase 1 through Phase 3 testing.  The names of the phases are derived from the regulations of the FDA. Generally, there are multiple studies conducted in each phase.

 

Phase 1. Phase 1 studies involve testing a drug or product on a limited number of healthy participants, typically 24 to 100 people at a time. Phase 1 studies determine a product’s basic safety and how the product is absorbed by, and eliminated from, the body.  This phase lasts an average of six months to a year.

 

Phase 2. Phase 2 trials involve testing up to 200 participants at a time who may suffer from the targeted disease or condition. Phase 2 testing typically lasts an average of one to two years.  In Phase 2, the drug is tested to determine its safety and effectiveness for treating a specific illness or condition.  Phase 2 testing also involves determining acceptable dosage levels of the drug.  If Phase 2 studies show that a new drug has an acceptable range of safety risks and probable effectiveness, a company will generally continue to review the substance in Phase 3 studies.

 

Phase 3. Phase 3 studies involve testing large numbers of participants, typically several hundred to several thousand persons. The purpose is to verify effectiveness and long-term safety on a large scale. These studies generally last two to three years. Phase 3 studies are conducted at multiple locations or sites.  Like the other phases, Phase 3 requires the site to keep detailed records of data collected and procedures performed.

 

New Drug Approval.  The results of the clinical trials are submitted to the FDA as part of a new drug application, or NDA. Following the completion of Phase 3 studies, assuming the sponsor of a potential product in the United States believes it has sufficient information to support the safety and effectiveness of its product, the sponsor will generally submit an NDA to the FDA requesting that the product be approved for marketing. The application is a comprehensive, multi-volume filing that includes the results of all clinical studies, information about the drug’s composition, and the sponsor’s plans for producing, packaging and labeling the product. The FDA’s review of an application can take a few months to many years, with the average review lasting 18 months.  Once approved, drugs and other products may be marketed in the United States, subject to any conditions imposed by the FDA.

 

Phase 4.  The FDA may require that the sponsor conduct additional clinical trials following new drug approval. The purpose of these trials, known as Phase 4 studies, is to monitor long-term risks and benefits, study different dosage levels or evaluate safety and effectiveness.  In recent years, the FDA has increased its reliance on these trials. Phase 4 studies usually involve thousands of participants. Phase 4 studies also may be initiated by the company sponsoring the new drug to gain broader market value for an approved drug.

 

The drug approval process is time-consuming, involves substantial expenditures of resources, and depends upon a number of factors, including the severity of the illness in question, the availability of alternative treatments, and the risks and benefits demonstrated in the clinical trials.

 

Other Regulations

 

Various federal, state and local laws, regulations, and recommendations relating to safe working conditions, laboratory practices, the experimental use of animals, the environment and the purchase, storage, movement, import, export, use, and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with our research are applicable to our activities.  They include, among others, the U.S. Atomic Energy Act, the Clean Air Act, the Clean Water Act, the Occupational Safety and Health Act, the National Environmental Policy Act, the Toxic Substances Control Act, and Resources Conservation and Recovery Act, national restrictions on technology transfer, import, export, and customs regulations, and other present and possible future local, state, or federal regulation.  The compliance with these and other laws, regulations and recommendations can be time-consuming and involve substantial costs.  In addition, the extent of governmental regulation which might result from future legislation or administrative action cannot be accurately predicted and may have a material adverse effect on our business, financial condition, results of operations and prospects.