ITEM 1: BUSINESS

Overview

VBI is a pharmaceutical company developing novel technologies that seek to expand vaccine protection in large, underserved markets. We have developed an eVLP vaccine platform that allows for the design of enveloped virus-like particle vaccines that closely mimic the target viruses. Using this proprietary technology platform, we have undertaken specific projects related to human cytomegalovirus (“CMV”) and other antigens. In 2015, the Company prepared several batches of vaccine for a toxicology trial, in compliance with the Good Manufacturing Practices (“GMP”) enforced by the US Food and Drug Administration (“FDA”), for a Phase I clinical trial and for other regulatory purposes. In April 2015, we began the toxicology trial for our human CMV vaccine. The toxicology trial lasted approximately 6 months and provided data that will be used in regulatory submissions, along with other information, in order to obtain regulatory approval to proceed with the Phase I clinical trial in humans. The Company expects to advance its first product candidate into Phase I clinical trials during the first half of 2016.

In 2015, VBI raised $6,285,700 in equity financing to support its CMV vaccine program, to continue the advancement of its research programs and for other general corporate purposes. Since inception VBI, together with its wholly-owned subsidiary, Variation Biotechnologies (US), Inc. (“VBI US”) has raised approximately $74.8 million in total equity and debt financing for those purposes.

Corporate History

The Company was originally established in 1970 as Paulson Capital Corp., an Oregon corporation (“Paulson Oregon”), which began as a holding company whose operating subsidiary, Paulson Investment Company, Inc. ("PIC"), was a full service brokerage firm.  As reported on the Company’s Current Report on Form 8-K filed on March 26, 2014, effective March 20, 2014, the Company changed its state of incorporation from the State of Oregon to the State of Delaware (the “Reincorporation”) pursuant to an Agreement and Plan of Merger dated March 20, 2014 by and between the Company’s predecessor entity, Paulson Oregon, and Paulson Oregon’s wholly owned subsidiary, Paulson Capital (Delaware) Corp., a Delaware corporation (“Paulson Delaware”). As a result of the Reincorporation, the Company became Paulson Delaware, its name became “Paulson Capital (Delaware) Corp.” and Paulson Oregon ceased to exist. The Company’s shareholders approved the Reincorporation pursuant to the Agreement and Plan of Merger at the Company’s 2013 Annual Meeting of Shareholders held on November 8, 2013 (the “2013 Shareholder Meeting”).

Merger with Variation Biotechnologies (US), Inc.

On July 25, 2014, VBI US completed its merger (the “PLCC Merger”) with VBI Acquisition Corp. (“Merger Sub”), a Delaware corporation and wholly-owned subsidiary of the Company, whereby Merger Sub merged with and into VBI US, with VBI US continuing as the surviving corporation. As a result of the PLCC Merger, VBI US was acquired by, and became a wholly owned subsidiary of the Company and the Company changed its name to VBI Vaccines Inc.

The PLCC Merger was consummated pursuant to an Agreement and Plan of Merger, dated May 8, 2014 (the “PLCC Merger Agreement”), by and among VBI US, the Company and Merger Sub. The PLCC Merger Agreement and the transactions contemplated thereby were approved by the Company’s Board of Directors (the “Board”) on May 1, 2014 and by the Company’s shareholders at a special meeting of shareholders held on July 14, 2014 (the “Special Meeting”).

At the effective time of the PLCC Merger, and as a result of the PLCC Merger:

At the effective time of the PLCC Merger, the shareholders of VBI US received shares of common stock of the Company which, together with options to purchase shares of VBI US common stock that were converted into options to purchase shares of common stock of the Company represented approximately 41.5% of the shares of the Company’s common stock on a fully diluted basis after the PLCC Merger. 

Immediately following the effective time of the PLCC Merger, the Company issued 480,000 shares of its common stock to Evolution Venture Partners, LLC as compensation for advisory services rendered to VBI US; 120,000 shares of its common stock to Middlebury Securities, LLC as compensation for placement agency services rendered to VBI US; 341,731 shares of its common stock to Palladium Capital Advisors, LLC as compensation for placement agency services rendered to VBI US; and 1,068,502 shares of its common stock to Bezalel Partners, LLC as compensation for consulting services rendered to VBI US.

Proposed Merger with SciVac Therapeutics Inc.

On October 26, 2015, the Company, SciVac Therapeutics Inc., a corporation organized under the laws of British Columbia, Canada (“SciVac”), and Seniccav Acquisition Corporation, a Delaware corporation and wholly owned subsidiary of SciVac (the “Sub”), entered into an Agreement and Plan of Merger (the “SciVac Merger Agreement”), pursuant to which, subject to the satisfaction or waiver of certain conditions, the Sub will merge with and into the Company, with the Company surviving as a wholly owned subsidiary of SciVac (the “Proposed Merger”). The SciVac Merger Agreement initially contemplated the closing of public or private equity financing with aggregate gross proceeds of at least $25 million (the “Capital Raising Transaction”) contemporaneously with the SciVac Merger and includes various closing conditions standard to transactions of this nature. The transaction is expected to close during the first quarter of 2016, or as soon as possible thereafter, and is not expected to have a significant impact on the current research operations of the Company.

On December 17, 2015, the Company entered into a First Amendment to the SciVac Merger Agreement (the “SciVac Amendment”), which (i) removes the Capital Raising Transaction as a condition to the closing of the Proposed Merger, and (ii) provides that Scott Requadt will become a director of SciVac (renamed VBI Vaccines Inc.) upon the closing of the Proposed Merger, instead of Michael Steinmetz.

Subsidiaries

VBI US was incorporated in 2006 in the State of Delaware. Variation Biotechnologies Inc. (“VBI Cda”), located in Ottawa, Ontario, Canada, is a wholly owned subsidiary of VBI US, was incorporated on August 24, 2001 under the Canada Business Corporations Act and is the primary research facility of VBI US.

VBI Cda was founded in 2001 as a spin-out company from an ongoing research collaboration between researchers at the University of California, Davis and the Children’s Hospital of Eastern Ontario. VBI Cda was involved in the early stage development of vaccine discovery platforms and adjuvant technologies. From 2001 until 2006, VBI Cda’s major stockholders included its founders and several individual “angel” investors. On December 28, 2006, VBI US closed a financing of its Series A Preferred Stock, which resulted in the opening of VBI US’s U.S. headquarters and the establishment of the pre-PLCC Merger corporate structure of a Delaware corporation with a Canadian research-focused subsidiary.

In September 2009, VBI US hired Jeff R. Baxter as CEO. At that time VBI US undertook a strategic review that ultimately identified the thermostable Lipid Particle Vaccine (“LPV”) technology platform as an ideal candidate for partnering with other vaccine manufacturers. VBI US also identified the need for a vaccine antigen discovery and design platform and in early 2010 began discussions with ePixis SA, a French company (“ePixis”). In June 2010, VBI US entered into a VBI Cda-funded research collaboration agreement with ePixis to design a CMV vaccine. Under the terms of the agreement, VBI Cda received an option to acquire ePixis at the end of the collaboration. On August 12, 2011, VBI Cda acquired 100% of the outstanding shares of ePixis, in order to obtain access to a proprietary technology platform and began a technology transfer of the intellectual property (“IP”) and know-how of ePixis to VBI Cda. Subsequent to the acquisition of ePixis, all technology development has been performed by VBI Cda. Effective March 1, 2014, ePixis was legally dissolved and residual assets and liabilities transferred to VBI Cda. VBI, VBI US and VBI Cda currently operate on a consolidated basis.

Contractual Arrangements

Paragon Bioservices

VBI, through its wholly-owned subsidiaries, depends on subcontractor arrangements to facilitate the completion of its research programs. In the past year the predominant subcontractor has been Paragon Bioservices, Inc. (“Paragon”), an experienced manufacturing organization with expertise in the areas of vaccines and VLP technologies. Paragon will be manufacturing VBI’s clinical batches of its lead CMV vaccine candidate. On March 27, 2014, VBI Cda signed a letter of intent (“Paragon LOI”) with Paragon, which enabled VBI to begin the transfer of its eVLP based CMV vaccine technology for eventual GMP manufacturing by Paragon. Under the terms of the Paragon LOI, VBI retains ownership of all intellectual property directly related to its eVLP technology and its CMV vaccine candidate. On September 26, 2014, VBI and Paragon executed a GMP-Manufacturing Services Agreement, referred to as the Services Agreement. Pursuant to the Services Agreement, Paragon agreed to provide, as requested by VBI, process development and manufacturing services in connection with the supply of research or clinical quantities of VBI’s drug substances, master cell banks, working cell banks and/or virus banks. Upon execution of the Services Agreement, VBI paid Paragon $180,000 to reserve specific suite availability at Paragon’s facility for one or more production runs. Pursuant to the Services Agreement, VBI will pay Paragon for all technology transfer, process development, engineering and manufacturing services as well as engineering runs, process development runs and production runs conducted in accordance with any agreed-to project plan, and in accordance with the applicable payment schedule for the project plan. VBI also agreed to pay for the acquisition, installation and validation of equipment required for the project plan, in accordance with agreed-upon project rates. The term of the Services Agreement is indefinite, although either party may terminate the Services Agreement upon written notice to the other party, upon (i) the dissolution, termination of existence, liquidation or business failure of the other party, (ii) the appointment of a custodian or receiver for the other party who has not been terminated or dismissed within 90 days of such appointment; (iii) the institution by the other party of any proceeding under national, federal or state bankruptcy, reorganization, receivership or other similar laws affecting the rights of creditors generally or the making by such party of a composition or any assignment for the benefit of creditors under any national, federal or state bankruptcy, reorganization, receivership or other similar law affecting the rights of creditors generally, which proceeding is not dismissed within 90 days of filing; (iv) breach of the Services Agreement by the other party; or (v) as a result of an inability to perform the Services Agreement due to a force majeure event. VBI has paid Paragon $2,617,240 and $552,900 during the years ended December 31, 2015 and December 31, 2014, respectively.

ePixis

VBI is engaged in the inbound and outbound licensing of key intellectual property. VBI identified the need for a vaccine antigen discovery and design platform and, as indicated in the discussion titled “Subsidiaries”, through the Sale and Purchase Agreement entered into on July 18, 2011 among Variation Biotechnologies Inc. and ePixis SA (“ePixis”) and the shareholders of ePixis (collectively, the “Sellers”), acquired 100% of the outstanding shares of ePixis in order to obtain access to its exclusive rights to key intellectual property covering its “enveloped Virus Like Particle” or “eVLP” vaccine platform (the “Technology”), including patents (the “Acquired Patents”) covering the Technology. VBI paid a purchase price of €400,268.20 (approximately $450,000) for the ePixis shares and approximately $75,000 in related transaction costs. VBI also agreed to make certain contingent payments to the Sellers as follows:

Upon the completion of a “Successful Technology Transfer”, as defined in the Sale and Purchase Agreement, to a contract manufacturing organization, VBI paid €101,720 (approximately $110,000) to the Sellers during the second quarter of 2015.

Upon the earlier to occur of (i) first approval by the United States Food and Drug Administration of an NDA permitting VBI or any sublicensee to market and sell any pharmaceutical product or candidate pharmaceutical product that contains or can express an eVLP (a “Product”) in the U.S. or (ii) first approval by the European Medicines Agency of a Marketing Authorization Application or equivalent submission permitting VBI or its sublicensees to market and sell a Product candidate in one or more countries in the European Union, VBI must pay to the Sellers €1,000,000, or, if there are no longer any issued and valid claims of the Acquired Patents in effect at the date such event occurs, €500,000.

If a Product is commercialized, VBI will be required to pay the Sellers the following:

On the date that Cumulative Net Sales, as defined in the Sale and Purchase Agreement, of all Products equals or exceeds €25,000,000, VBI must pay to the Sellers €1,500,000, or, if there are no longer any issued and valid claims of the Acquired Patents in effect at the date such event occurs, €750,000; and

On the Date that Cumulative Net Sales of all Products equals or exceeds €50,000,000 in the aggregate, VBI must pay to the Sellers €2,000,000, or, if there are no longer any issued and valid claims of the Acquired Patents in effect at the date such event occurs, €1,000,000.

If any Product is commercialized by one or more sublicensees, VBI has agreed to make the following payments to the Sellers:

On the date that Cumulative Net Sales by VBI or any sublicensees of the Products equal or exceed €25,000,000 in the aggregate, VBI must pay to the Sellers €750,000, or, if there are no longer any issued and valid claims of the Acquired Patents in effect at the date such event occurs, €375,000;

On the date that Cumulative Net Sales made by VBI or any sublicensees of the Products equal or exceed €50,000,000 in the aggregate, VBI must pay to the Sellers €750,000, or, if there are no longer any issued and valid claims of the Acquired Patents in effect at the date such event occurs, €375,000;

On the date that Cumulative Net Sales made by VBI or any sublicensees of the Products equal or exceed €75,000,000 in the aggregate, VBI must pay to the Sellers €1,000,000, or, if there are no longer any issued and valid claims of the Acquired Patents in effect at the date such event occurs, €500,000; and

On the date that Cumulative Net Sales made by VBI or any sublicensees of the Products equal or exceed €100,000,000 in the aggregate, VBI will pay to the Sellers €1,000,000, or, if there are no longer any issued and valid claims of the Acquired Patents in effect at the date such event occurs, €500,000.

Included in the Acquired Patents were patents (the “UPMC Patents”) co-owned by L’Universite Pierre et Marie Curie, or UPMC, and the Institut National de la Santé et de la Recherche Médicale, or INSERM, both in Paris, France. In July 2006, ePixis entered into a license agreement (the “License Agreement”) with UPMC, INSERM and L’école Normale Supérieure de Lyon (collectively the “Licensor”) pursuant to which the Licensor granted to ePixis an exclusive license (with the right to sublicense with written consent from UPMC) to exploit the UPMC Patents for the purpose of developing, promoting and marketing products within the United States, Japan, Canada, and Europe until the invalidation of the last of the UPMC Patents, including any supplementary protection certificates. Pursuant to the License Agreement, ePixis was to pay certain fees to the Licensor based on net sales (as defined in the License Agreement) of products developed from the UPMC Patents, sublicensing income based on net sales (“Sublicensing Payments”) and one-time payments (“Lump Sum Payments”) for each product developed from the UPMC Patents. ePixis also agreed to reimburse UPMC for fees and costs related to filing and maintaining the patent applications.

On July 12, 2011 the parties to the License Agreement entered into the first amendment to the License Agreement (the “Amendment”). The Amendment authorized the transfer of the License Agreement to VBI and laid out new financial terms and conditions for the rights granted under the License Agreement.

The Amendment provides that the fees to be paid to the Licensor by ePixis on net sales of products based on the UPMC Patents will be 1.75% of net sales for annual sales between €0 and €50,000,000, 1% of net sales for annual sales between €50,000,001 and €100,000,000, and 0.75% of net sales for annual sales in excess of €100,000,000. Pursuant to the Amendment, Lump Sum Payments would be made as follows:

Sublicensing Payments under the Amendment were revised as follows: 25% of any amounts received by ePixis for the sublicense if the sublicense is entered into prior to the start of phase 1 clinical studies; 10% of any amounts received by ePixis if the sublicense is entered into during phase 1 clinical studies and prior to the start of phase II clinical studies; 7% of any amounts received by ePixis if the sublicense is entered into during phase II clinical studies and prior to the start of phase III clinical studies, and 5% of any amounts received by ePixis if the sublicense is entered into after the start of phase III clinical studies. There was no change to the requirement that ePixis reimburse UPMC for fees and costs related to filing and maintaining the patent applications.

The parties may terminate the License Agreement, as amended, by mutual agreement. There is also a cancellation right that may be exercised in the event of breach. UPMC may terminate the License Agreement if VBI, among other things, declares bankruptcy; does not put forth reasonable effort or is unable to develop and market the products, and, in particular, if VBI suspends the development of the products for more than six months; the inability of VBI to make the payments required by the License Agreement; lack of sales of a product, or lack of a signed sub-license agreement within one year from the date of acquiring AMM (Autorisation de mise sur le marché - Regulation of Therapeutic Goods) authorization, or the necessary equivalent authorization for the use of the products; and lack of sales of a product for more than two years after the initial marketing has taken place.

Sanofi

On April 2, 2015, VBI Cda entered into a Collaboration and Option License Agreement (the “Sanofi Agreement”) with Sanofi Vaccines Technologies S.A.S., a company organized under the laws of France (“Sanofi”). Certain provisions of the Sanofi Agreement have not been publicly disclosed in accordance with that certain Order Granting Confidential Treatment issued by the SEC on June 23, 2015. The purpose of the Sanofi Agreement is to allow Sanofi to evaluate the feasibility of using VBI Cda’s LPV technology and expertise to reformulate a Sanofi vaccine candidate (the “Sanofi Project Vaccine”) to provide improved stability (the “Sanofi Project”). The term of the Sanofi Project began on the date of receipt by VBI Cda of Sanofi materials and continues for a defined period unless otherwise agreed in writing by the parties (the “Sanofi Project Period”). The term of the Agreement began on April 15, 2015, and unless earlier terminated or mutually extended in writing, the Sanofi Agreement will expire upon the expiration or termination of the Sanofi Option (defined below) or, in the event that the Sanofi Option is timely exercised, until a license agreement is executed by the parties. VBI Cda granted to Sanofi an option (the “Sanofi Option”) to negotiate and enter into a royalty bearing license for the commercial use of VBI’s LPV technology to exploit certain vaccines (the “Sanofi Field”). The term of the Sanofi Option will continue for a period following the Sanofi Project Period (the “Sanofi Option Period”). In addition, at Sanofi’s discretion, it may extend the Sanofi Option to additional vaccine targets and negotiate and enter into a royalty bearing license for the commercial use of VBI’s LPV technology to one or more additional targets outside the Sanofi Field, so long as VBI Cda does not have a program to develop vaccines against the applicable target(s), or is restricted by licenses granted to third parties. In consideration of VBI Cda granting the Sanofi Option and in partial acknowledgment of the past research and development costs incurred by VBI Cda in its development efforts, Sanofi (A) paid cash consideration to VBI Cda upon execution of the Sanofi Agreement and (B) will reimburse VBI Cda on a monthly basis for costs associated with research and development work, including internal and external expenses and costs associated with production of the Sanofi Project Vaccine, such as biological materials (subject to pre-approval by Sanofi), up to a maximum amount. The Sanofi Agreement may be terminated (i) by either party in the event the other party has materially breached or defaulted in the performance of any of its obligations under the Sanofi Agreement, and such default has continued for 90 days after written notice thereof was provided to the breaching party by the non-breaching party, with the termination becoming effective at the end of such 90 day period unless the breaching party has cured any such breach or default prior to the expiration of the 90 day period; (ii) if involuntary proceedings against a party are instituted in bankruptcy under any insolvency law, or a receiver or custodian is appointed for such party, or proceedings are instituted against such party for corporate reorganization or the dissolution of such party, which proceedings, if involuntary, shall not have been dismissed within 60 days after the date of filing, or if such party makes an assignment for the benefit of creditors, or substantially all of the assets of such party are seized or attached and not released within 60 days thereafter, the other party may immediately terminate the Sanofi Agreement effective upon notice of such termination; (iii) by Sanofi during the Sanofi Project Period, as defined in the Sanofi Agreement, at any time with 45 days written notice to VBI Cda; and (iv) by Sanofi at any time during the Sanofi Option Period, as defined in the Sanofi Agreement. VBI Cda is nearing completion of Stage 2 of the defined research plan included in the Sanofi Agreement.

IRAP

VBI Cda has been the recipient of funding from Industry Canada’s Industrial Research Assistance Program (“IRAP”). On April 15, 2013 VBI entered into a contribution agreement which provided VBI Cda with access to $499,000 CAD to further the specific objectives of its CMV research program. The project was successfully completed at the end of the second quarter of 2014. VBI has received $0 and $273,560 in funding from this IRAP grant during the years ended December 31, 2015 and 2014, respectively.

On September 8, 2015, VBI announced that VBI Cda had been awarded up to $350,000 CAD in grant funding by the IRAP to apply VBI’s eVLP Platform in the development of a respiratory syncytial virus vaccine candidate. VBI has received $40,612 and $0 from this IRAP grant during the years ended December 31, 2015 and 2014, respectively.

NRC

The National Research Council of Canada, or NRC, has assisted VBI Cda in the completion of in-vivo research studies and in the development of manufacturing methods for its eVLP-based CMV vaccine. VBI has paid NRC $163,050 and $208,375 for R&D services during the years ended December 31, 2015 and 2014, respectively.

Columbia University’ Brain Tumor Center

On October 8, 2015, VBI announced that it has applied its eVLP Platform in the development of a novel therapeutic vaccine candidate for Glioblastoma or GBM with Columbia University’s Brain Tumor Center. VBI has not made any payments under this collaboration and the related materials transfer agreement.

GlaxoSmithKline

On February 8, 2016, VBI Cda entered into an Evaluation and Option Agreement (the “GSK Agreement”) with GlaxoSmithKline Biologicals SA, a company registered in Belgium (“GSK”). Certain provisions of the GSK Agreement have not been publicly disclosed pending the SEC’s review of a Confidential Treatment Request submitted by the Company on February 9, 2016. The purpose of the GSK Agreement is to allow GSK to evaluate the feasibility of using VBI Cda’s LPV™ technology and expertise to formulate a vaccine candidate using GSK’s technology (the “GSK Evaluation”). The term of the GSK Agreement begins on the Effective Date, which is defined as February 8, 2016, and unless earlier terminated or mutually extended in writing, the GSK Agreement will expire upon the expiration or termination of the GSK Option (defined below) or, in the event that the GSK Option is timely exercised, until a sponsored collaboration agreement or a license agreement is executed by the parties. VBI Cda granted to GSK an option (the “GSK Option”) to negotiate and enter into either (i) a collaboration and option agreement in the field (the “GSK Field”), that will include an exclusive option for GSK to be granted a worldwide exclusive license with the right to grant sublicenses to the Company’s LPV technology in the Field (a “Sponsored Collaboration and Option Agreement”); or move directly to (ii) an exclusive, worldwide license with the right to grant sublicenses to the Company’s LPV technology in the Field (a “License Agreement”). The term of the GSK Option will continue for a period following the completion of the GSK Evaluation. In the event the GSK Option is exercised, a Sponsored Collaboration and Option Agreement or License Agreement shall be executed following the date the GSK Option was exercised (the “GSK Negotiation Period”). In the event that GSK elects to exercise the GSK Option, but no agreement is executed during the GSK Negotiation Period, VBI Cda will not make an offer within the GSK Field on more favorable terms than the terms offered by GSK to any third party for a period of 6 months starting from the end of the negotiations, without first offering GSK the same terms to be offered to the third party. In consideration of VBI Cda granting the GSK Option and the GSK Evaluation to be conducted pursuant to the GSK Agreement, GSK paid to VBI Cda certain fees upon execution of the GSK Agreement. The GSK Agreement may be terminated (i) by either party, in the event the other party has breached the terms and conditions of the GSK Agreement, and such breach has continued for 30 days after written notice thereof was provided to the breaching party by the non-breaching party, by providing written notice of termination to the breaching party and (ii) by GSK at any time if it decides not to continue the GSK Evaluation, by sending a written notice of termination to VBI Cda and returning any remaining materials provided to GSK by VBI Cda in connection with the GSK Evaluation. The GSK Agreement also includes certain representations and warranties made by each party and confidentiality provisions.

Principal Products

CMV Vaccine Candidate :

VBI is currently developing an experimental CMV vaccine using its eVLP vaccine platform. The vaccine is based on the CMV glycoprotein B (“gB”) antigen and is adjuvanted with aluminum phosphate.

The CMV vaccine has shown promise in early preclinical animal models, including rabbits and mice, with the ability to generate anti-CMV antibodies and CMV neutralizing responses in both fibroblasts and epithelial cells.

The Company is currently completing technology transfer for vaccine GMP manufacturing and/or out-licensing to Paragon Bioservices Inc., a third party GMP subcontract manufacturer.

eVLP Vaccine Platform :

On August 11, 2011, VBI Cda acquired the eVLP vaccine technology through the acquisition of ePixis. The eVLP vaccine technology allows for the expression of envelope glyco-proteins within a lipid-bilayer membrane of a virus like particle (“VLP”). The technology enables the synthetic manufacture of an “enveloped” virus like particle, or “eVLP”. Many viruses are “enveloped” in that they are surrounded by a lipid bilayer membrane. Such viruses display antigenic proteins in the surface of their “envelope” which can be targets for vaccine development. The ability to synthetically manufacture an ‘enveloped’ virus like particle is different from previously developed VLP technologies, which did not include the lipid bilayer membrane, and thus these technologies were unable to express antigenic proteins within an “envelope” as they occur in nature. In addition to the $450,000 initial payment for the technology and $75,000 in related transaction costs, VBI paid approximately $110,000 and $0 in milestone payments under the licensing agreement in the years ended December 31, 2015 and 2014, respectively.

VBI expects it will develop additional vaccine targets based on this platform, either through a partnership, or internally.

LPV Vaccine Platform :

Vaccines are typically sensitive to fluctuations in temperature that can degrade, destroy or inactivate the potency of a vaccine and introduce safety risks. As a consequence, 90% of vaccines are transported through a “cold-chain” of temperature controlled environments, transportation and storage. VBI’s Lipid Particle Vaccine technology, or “LPV”, is a vaccine formulation technology that enables the thermostabilization of vaccines through a proprietary formulation and freeze-drying process. The technology is constituted by three lipids, monopalmitoylglycerol (“MPG”), dihexadecyl phosphate (“DCP”) and cholesterol mixed in a proprietary ratio with vaccine antigen using a patented method. The resulting mixture is then lyophilized (freeze dried) and can be stored for extended periods of time outside of the cold-chain.

VBI has active collaborations with a number of vaccine innovators and manufacturers, including with Sanofi and GSK, two of the leading vaccine producers in the world.  Sanofi is currently evaluating VBI’s LPV technology with one of its lead vaccine assets.  Under the terms of the Sanofi Agreement, Sanofi can acquire certain rights to extend its use of the LPV technology to additional vaccine assets.  Recently, VBI also executed the GSK Agreement, which provides GSK with the rights to negotiate an exclusive license to the LPV technology for use within a defined Field.  Both agreements are described above in the Contractual Arrangements section.  

In the normal course of our business, the Company assesses and considers potential acquisition, or collaboration opportunities to gain access to, technologies or assets that are adjacent to our core competencies of immunology and formulation development. VBI is currently exploring this technology through partnerships with other third-party collaborators.

Description of Operations

VBI is headquartered in Cambridge, MA, with its research facility in Ottawa, Ontario, Canada. The Cambridge headquarters allows VBI to leverage its location in a biotechnology hub, and provides VBI with access to experienced consultants and executive level talent. The Canadian research site benefits from its location in Canada’s National Capital Region, providing VBI with access to world-class research facilities at reasonable rates. This helps keep the unit cost of doing research lower compared to other locations in Canada or the U.S.

The two sites collaborate efficiently through the use of a unified information technology infrastructure and web-based video-conferencing services.

VBI Cda’s active research collaboration with the NRC provides its staff with on-site access to the NRC’s animal facility for greater control over the testing of VBI’s vaccine candidates. NRC staff manages the general animal husbandry and maintenance requirements for VBI Cda’s research operations.

Sales and Marketing

VBI maintains a business development function responsible for inbound and outbound licensing of its IP portfolio, but no traditional sales and marketing activities are currently conducted.

Customers

VBI does not currently have any customers. VBI’s target customer base consists of other vaccine and biologics developers who may be interested in gaining access to its proprietary technologies and/or vaccine candidates.

Competitors

VBI faces general market competition from several subsectors of the vaccine development field, including: (i) large, multinational pharmaceutical companies including Sanofi-Pasteur S.A., GlaxoSmithKline Inc. (“GSK”), Merck & Co., Inc. (“Merck”), and Pfizer, Inc., (ii) mid-size pharmaceutical companies and emerging biotechnology companies including Takeda Pharmaceutical Company Limited, Dynavax Technologies Corporation, Genocea Biosciences Inc., Mitsubishi Tanabe Pharma Corporation, Vical, Inc. and Redbiotec AG, and (iii) academic and not-for-profit vaccine researchers and developers including the National Institutes of Health, Butantan Institute and the Chemo-Sero Therapeutic Research Institute of Japan (Kaketsuken). The industry is typified by extensive collaboration, licensing and merger and acquisition activity despite the intense competition.

Within the CMV vaccine space, VBI has several key competitors, some of whom are further advanced with their CMV vaccine development, as compared to VBI. Among these, GSK, with an adjuvanted, recombinant protein, gB-based vaccine was furthest advanced but does not appear to have progressed beyond the end of Phase I since 2012. Additionally, Merck has a highly potent vaccine based on a replication of defective CMV virus with an adjuvant and is currently enrolling for a Phase I clinical trial. Despite being behind Merck and GSK in terms of development stage, VBI believes there are reasons why its CMV vaccine may have some advantages, including that: (i) VBI’s vaccine is based on the successful VLP category of vaccines, which has recently been used in the successful introduction of cervical cancer vaccines, (ii) it is currently expected to use aluminum phosphate as an adjuvant, which has a more extensive history of safety through its inclusion in several pediatric vaccines, and (iii) it has demonstrated competitive anti-CMV responses in preclinical animal models. VBI believes that these advantages merit advancement of the product candidate, but do not guarantee its success.

Suppliers, Contractors and Licenses

VBI is a development stage biotechnology company and depends on a number of key suppliers to continue its research operations. We have identified the following parties as key suppliers of reagents, technology or expertise which impact our development plans with our CMV vaccine candidate:

Employees

VBI currently has a total of 22 full-time and 2 term or part-time employees. The VBI Cda research site employs 16 full-time and 2 term or part-time employees. The remaining 6 full-time employees work out of the headquarters in Cambridge, MA.

Facilities and Offices 

VBI’s headquarters is located at 222 Third Street, Suite 2241, Cambridge, MA, 02142. VBI Cda is the primary research facility of VBI, located in Ottawa, Ontario, Canada.

Research and Development

In 2014 and 2015, VBI’s top R&D priority was the advancement of its CMV vaccine candidate into formal preclinical development and GMP manufacturing. VBI’s CMV vaccine candidate was designed internally, and its manufacturing and purification processes were designed by the NRC in collaboration with VBI staff. Such processes and internal knowledge were transferred to VBI’s selected GMP manufacturer, Paragon, and required significant project management expertise and confirmatory R&D studies throughout 2014. In 2015, VBI engaged a contract research organization, ITR Laboratories Canada Inc., to complete GLP toxicology trials to confirm the safety of the CMV vaccine candidate in animals. These animal trials were completed in the third quarter of 2015.

Following the completion of GLP toxicology trials, VBI will submit its Investigational New Drug Application (“IND”) to the appropriate regulatory agency for review and consent to begin Phase I clinical trials. Phase I clinical trials are expected to include between 100 and 125 healthy adult volunteers and are expected to be completed during 2017. VBI expects the trial to be completed as a multi-center trial at locations in North America. Volunteers are expected to be healthy CMV-negative female and male adults who will be randomized across the experimental and control groups.

The clinical trial is expected to be approximately 20 months in duration and expected to start in the first half of 2016.

The primary objectives or “endpoints” of the trial are safety and tolerability of the CMV vaccine candidate and secondary endpoints will include anti-CMV antibody binding titers and neutralizing antibody responses.

As previously described, VBI expects to make additional R&D investments in its LPV platform.

Intellectual Property   

VBI’s IP portfolio, includes 31 patent families consisting of 140 fully owned or exclusively licensed allowed patents and patent applications, which include 56 issued patents and 84 pending patent applications. The highlights of VBI’s patent portfolio include: 

Governmental Regulation and Product Approval

Vaccine development is a highly regulated field. The manufacturing and marketing of VBI’s potential products and VBI’s ongoing research and development activities are subject to extensive regulation by the FDA and comparable regulatory agencies of local, state and foreign jurisdictions, such as Health Canada in Canada. New products must go through extensive preclinical and clinical development prior to product launch. This process can take more than ten years from candidate identification to licensure/marketing approval by health authorities worldwide. Despite efforts to harmonize regulatory requirements in different jurisdictions, there exists a divergence of legal and regulatory requirements in different countries and territories. Delays in regulatory approval to move from one stage of development to another can potentially cause significant delays to VBI and can affect its market capitalization.

United States Regulation

Before any of VBI’s products can be marketed and sold in the U.S., they must receive approval from the FDA. To receive this approval, any drug or vaccine, including those VBI develops, must undergo rigorous preclinical testing and clinical trials that demonstrate the product’s safety and effectiveness for each indicated use. This extensive regulatory process controls, among other things, the development, testing, manufacture, safety, efficacy, record keeping, labeling, storage, approval, advertising, promotion, sale, and distribution of pharmaceutical products.

 In general, before any new ethical pharmaceutical product can be marketed in the United States, the process typically required by the FDA includes:

Preclinical Testing

In the United States, drug candidates are tested in animals until adequate proof of safety and efficacy is established. These preclinical studies generally evaluate the mechanism of action and pharmacology of the product and assess the potential safety and efficacy of the product. Tested compounds must be produced according to applicable current GMP requirements and preclinical safety tests must be conducted in compliance with FDA and international regulations regarding good laboratory practices. The results of the preclinical tests, together with manufacturing information and analytical data, are generally submitted to the FDA as part of an IND, which must become effective before human clinical trials may commence. The IND will automatically become effective 30 days after receipt by the FDA, unless before that time the FDA requests an extension or raises concerns about the conduct of the clinical trials as outlined in the application. If the FDA has any concerns, the sponsor of the application and the FDA must resolve those concerns before clinical trials may begin. Regulatory authorities may require additional preclinical data before allowing the clinical studies to commence or proceed from one phase to another, and could demand that the studies be discontinued or suspended at any time if there are significant safety issues. Furthermore, an independent institutional review board for each medical center proposing to participate in the conduct of the clinical trial must review and approve the clinical protocol and patient informed consent form before commencement of the study at the respective medical center.

Clinical Trials

Clinical trials for new vaccine drug candidates are typically conducted in three sequential phases that may overlap. In Phase I, the initial introduction of the vaccine drug candidate into human volunteers, the emphasis is on testing for safety or adverse effects, dosage, tolerance, metabolism, distribution, excretion, and clinical pharmacology. Phase II involves studies in a limited patient population to determine the initial efficacy of the vaccine drug candidate for specific targeted indications, to determine dosage tolerance and optimal dosage, and to identify possible adverse side effects and safety risks. Once a vaccine compound shows evidence of effectiveness and is found to have an acceptable safety profile in Phase II evaluations, pivotal Phase III trials are undertaken to more fully evaluate clinical outcomes and to establish the overall risk/benefit profile of the drug, and to provide, if appropriate, an adequate basis for product labeling. During all clinical trials, physicians will monitor patients to determine the effectiveness of the drug candidate and to observe and report any reactions or safety risks that may result from use of the vaccine drug candidate. The FDA, the trial sites internal review board and/or the sponsor may suspend a clinical trial at any time on various grounds, including a finding that the subjects are being exposed to an unacceptable health risk.

Data from the clinical trials, together with preclinical data and other supporting information that establishes a vaccine drug candidate’s safety, are submitted to the FDA in the form of a BLA NDA or BLA NDA supplement (for approval of a new indication if the product candidate is already approved for another indication). Under applicable laws and FDA regulations, each NDA submitted for FDA approval is usually given an internal administrative review within 45 to 60 days following submission of the BLA NDA. If deemed complete, FDA will “file” the NDA, thereby triggering substantive review of the application. FDA may refuse to file any BLA NDA that it deems incomplete or not properly reviewable. FDA has established internal substantive review goals of six months for priority BLA NDAs (for vaccines or drugs addressing serious or life threatening conditions for which there is an unmet medical need) and ten months for regular BLA NDAs. However, these are agency proposed time frames, and so FDA is not legally required to complete its review within these periods, and these performance goals may change over time. Moreover, the outcome of the review, even if generally favorable, is not typically an actual approval, but an “action letter” that describes additional work that must be done before the BLA NDA can be approved. FDA’s review of a BLA NDA may involve review and recommendations by an independent FDA advisory committee. FDA may deny approval of a BLA NDA or BLA NDA supplement if the applicable regulatory criteria are not satisfied, or FDA may require additional clinical data and/or an additional pivotal Phase III clinical trial. Even if such data are submitted, FDA may ultimately decide the BLA NDA or BLA NDA supplement does not satisfy its criteria for approval.

Data Review and Approval

Substantial financial resources are necessary to fund the research, clinical trials and related activities necessary to satisfy FDA requirements or similar requirements of state, local and foreign regulatory agencies. It normally takes many years to satisfy these various legal and regulatory requirements, assuming they are ever satisfied. Information generated in this process is susceptible to varying interpretations that could delay, limit, or prevent regulatory approval at any stage of the process. Accordingly, the actual time and expense required to bring a product to market may vary substantially. We cannot assure you that VBI will submit applications for required authorizations to manufacture and/or market potential products or that any such application will be reviewed and approved by the appropriate regulatory authorities in a timely manner, if at all. Success in early stage clinical trials does not ensure success in later stage clinical trials. Even if a product candidate receives regulatory approval, the approval may be significantly limited to specific disease states, patient populations and dosages, or have conditions placed on them that restrict the commercial applications, advertising, promotion or distribution of these products.

Once issued, the FDA may withdraw product approval if ongoing regulatory standards are not met or if safety problems occur after the product reaches the market. In addition, the FDA may require testing and surveillance programs to monitor the effect of approved products which have been commercialized. The FDA also has the power to prevent or limit further marketing of a product based on the results of these post-marketing programs. The FDA may also request additional clinical trials after a product is approved. These so-called Phase 4 studies may be made a condition to be satisfied after a drug receives approval. The results of Phase 4 studies can confirm the effectiveness of a product candidate and can provide important safety information via the FDA’s voluntary adverse drug reaction reporting system. Any products manufactured or distributed by VBI pursuant to any FDA approvals would be subject to continuing regulation by the FDA, including record-keeping requirements and reporting of adverse experiences with the drug. Drug manufacturers and their subcontractors are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with GMP, which impose certain procedural and documentation requirements upon VBI and its third-party manufacturers. We cannot be certain that VBI or its present or future suppliers will be able to comply with the GMP regulations and other FDA regulatory requirements. If VBI’s present or future suppliers are not able to comply with these requirements, FDA may halt VBI’s clinical trials, require VBI to recall a drug from distribution or withdraw approval of the NDA for that drug. Furthermore, even after regulatory approval is obtained, later discovery of previously unknown negative effects of a product may result in restrictions on the product or even its complete withdrawal from the market.

The FDA closely regulates the marketing and promotion of drugs. Approval is typically subject to post-marketing surveillance and other record keeping and reporting obligations, and involves ongoing requirements such as post-marketing annual reports and labeling updates. Product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur following initial marketing. A company can make only those claims relating to safety and efficacy that are approved by the FDA. Failure to comply with these requirements can result in adverse publicity, warning letters, corrective advertising and potential civil and/or criminal penalties. Physicians may prescribe legally available drugs for uses that are not described in the product’s labeling and that differ from those tested by VBI and approved by the FDA. Such off-label uses are common across medical specialties. Physicians may believe that such off-label uses are the best treatment for many patients in varied circumstances. The FDA does not regulate the behavior of physicians in their choice of treatments. The FDA does, however, restrict manufacturers’ communications on the subject of such off-label use.

Section 505(b)(2) of the Federal Food, Drug and Cosmetic Act

The traditional approval process for new drugs is set out in Section 505(b)(1) of the Federal Food, Drug, and Cosmetic Act. An alternative pathway to FDA approval, established by Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act, permits the applicant to rely on certain preclinical or clinical information generated by others for an approved product as some of the information required for approval and for which the applicant has not obtained a right of reference. FDA may also require companies to perform additional studies to support the change from the approved product. FDA may then approve the new product candidate for all or some of the indications for which the referenced product was approved, as well as for any new indications sought by the Section 505(b)(2) applicant.

To the extent a Section 505(b)(2) applicant is relying on existing information for an already approved product, the applicant is required to certify to the FDA concerning any patents listed for the approved product in the FDA’s Orange Book publication. Specifically, the applicant must certify that either: (i) the required patent information has not been filed; (ii) the listed patent has expired; (iii) the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or (iv) the listed patent is valid or will not be infringed by the new product. If the applicant does not challenge the unexpired listed patents, the Section 505(b)(2) application will not be approved until all the listed patents claiming the referenced product have expired. The Section 505(b)(2) application also will not be approved until any non-patent exclusivity, such as exclusivity for obtaining approval of a new chemical entity, listed in the Orange Book for the referenced product has expired.

Fast Track Approval

The Federal Food, Drug, and Cosmetic Act, as amended, and the related FDA regulations provide certain mechanisms for the accelerated “Fast Track” approval of potential products intended to treat serious or life-threatening illnesses which have demonstrated the potential to address unmet medical needs. These procedures permit early consultation and commitment from the FDA regarding the preclinical and clinical studies necessary to gain marketing approval. Provisions of this regulatory framework also permit, in certain cases, BLA NDAs to be approved on the basis of valid indirect measurements of benefit of product effectiveness, thus accelerating the normal approval process. In the future, certain potential products employing VBI’s technology might qualify for this accelerated regulatory procedure. Even if the FDA agrees that these potential products qualify for accelerated approval procedures, FDA may deny approval of VBI’s drugs or may require additional studies before approval. The FDA may also require VBI to perform post-approval, or Phase 4, studies as a condition of such early approval. In addition, the FDA may impose restrictions on distribution and/or promotion in connection with any accelerated approval, and may withdraw approval if post-approval studies do not confirm the intended clinical benefit or safety of the potential product.

Orphan Drug Designation

Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the United States. Orphan drug designation must be requested before submitting a BLA NDA. After FDA grants orphan drug designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan drug designation does not convey any advantage in or shorten the duration of the regulatory review and approval process. If a product that has orphan drug designation subsequently receives FDA approval for the disease for which it has such designation, the product is entitled to orphan product exclusivity, which means that FDA may not approve any other applications to market the same drug for the same disease, except in very limited circumstances, for seven years. These very limited circumstances are (i) an inability to supply the drug in sufficient quantities or (ii) a situation in which a new formulation of the drug has shown superior safety or efficacy. This exclusivity, however, also could block the approval of VBI’s product for seven years if a competitor obtains earlier approval of the same drug for the same indication.

Foreign Regulation

In addition to regulations in the United States, VBI will be subject to a variety of laws and regulations governing clinical trials and commercial sales and distribution of VBI’s products in foreign countries. Whether or not VBI obtains FDA approval for a product, VBI must separately obtain approval of a product by the comparable regulatory authorities of those foreign countries before VBI may commence clinical trials or marketing of the product in those countries. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country.

Under the applicable European Union regulatory systems, VBI may submit marketing authorization applications either under a centralized or decentralized procedure. The centralized procedure, which is available for medicines produced by biotechnology or which are highly innovative, provides for the grant of a single marketing authorization that is valid for all EU member states. This authorization is a marketing authorization application. The decentralized procedure provides for mutual recognition of national approval decisions.

Under this decentralized procedure, the holder of a national marketing authorization may submit an application to the remaining member states. Within 90 days of receiving the applications and assessment report, each member state must decide whether to recognize approval. This procedure is referred to as the mutual recognition procedure.

The policies of the FDA and foreign regulatory authorities may change and additional government regulations may be enacted which could prevent or delay regulatory approval of VBI’s products and could also increase the cost of regulatory compliance. We cannot predict the likelihood, nature or extent of adverse governmental regulation that might arise from future legislative or administrative action, either in the United States or abroad.

Other Government Regulation

VBI’s research and development activities use biological and hazardous materials that are dangerous to human health and safety or the environment. VBI is subject to a variety of federal, state and local laws and regulations governing the use, generation, manufacture, storage, handling and disposal of these materials and wastes resulting from these materials. VBI is also subject to regulation by the Occupational Safety and Health Administration and federal and state environmental protection agencies and to regulation under the Toxic Substances Control Act.

In addition, once VBI’s products are marketed commercially, VBI will have to comply with the various laws relating to the Medicare, Medicaid and other federal healthcare programs. These federal laws include, by way of example, the following:

Sanctions for violating these federal laws include criminal and civil penalties that range from punitive sanctions, damage assessments, money penalties, imprisonment, denial of Medicare and Medicaid payments, or exclusion from the Medicare and Medicaid programs, or some combination thereof. These laws also impose an affirmative duty on those receiving Medicare or Medicaid funding to ensure that they do not employ or contract with persons excluded from Medicare and other government programs.

VBI is building its government relations and regulatory capabilities by leveraging consultants who have extensive experience with the regulatory process. Consultants hired by VBI include Florian Schodel who led the clinical development of several vaccines through licensure at Merck Research Laboratories for over a decade.

VBI also uses additional regulatory consultants including several former FDA regulators with experience at the Center for Biologics Evaluation & Research (“CBER”) which is the division of FDA that regulates vaccines and other drugs.

VBI recently held pre-IND and pre-clinical trial application meetings with FDA and Health Canada, respectively, to review its plans for GLP toxicology and manufacture, and release of the clinical trial supply of its CMV vaccine candidate. Both agencies were satisfied with VBI’s proposed preclinical development plan and feedback did not impact anticipated timelines to begin Phase I clinical trials. VBI anticipates the Phase I interim readout, which is post second vaccination, will be available in the first half of 2017. Earlier forecasts had anticipated the interim readout in the second half of 2016.