GNMX Aevi Genomic Medicine Inc

ITEM 1 - Business.

Unless the context otherwise requires, all references in this Annual Report on Form 10-K to the “Company”, “Medgenics”, “we,” “us” and “our” refer to Medgenics, Inc., a Delaware corporation organized on January 27, 2000, and its wholly-owned subsidiary, Medgenics Medical (Israel) Limited, a company organized under the laws of the State of Israel.

Overview

We are a medical technology and therapeutics company developing an innovative and proprietary platform technology offering what we believe to be a novel approach for the $100+ billion protein therapeutics market. Our Biopump ^TM Platform Technology converts a sliver of the patient’s own dermal skin tissue into a protein-producing “Biopump” to continuously produce and deliver therapeutic proteins, and when implanted under the patient’s skin, has the potential to deliver several months of protein therapy from a single procedure without the need for a series of frequent injections. The proof of concept of our Biopump Platform Technology has been demonstrated using EPODURE ^TM producing erythropoietin (EPO) for anemia, which has shown elevation and stabilization of hemoglobin levels in anemic patients, many lasting for six or more months from a single administration in a phase I/II dose-ranging trial on chronic kidney disease (CKD) patients, with one patient experiencing elevation and stabilization of hemoglobin levels for over 36 months.

Our Biopump is a tissue micro-organ (MO) that acts as a biological pump created from a toothpick-size sliver of the patient’s dermal tissue to produce and secrete a particular protein. We have developed a proprietary device called the DermaVac to facilitate reliable and straightforward removal of MOs and implantation of Biopumps. With the DermaVac, dermis MOs are rapidly harvested under local anesthetic from just under the skin to provide unique tissue structures with long-term viability ex vivo . This process allows us to process one or more dermis MO’s outside the patient to become Biopump protein producing units in 10 – 15 days, each making a measured daily amount of a specific therapeutic protein to treat a specific chronic disease. Based on a patient’s particular dosage need, we can determine how many Biopumps to then insert under the patient’s skin to provide a sustained dose of protein production and delivery for several months. We believe the dosage of protein can be reduced by simple ablation or excision of inserted Biopumps or increased by the addition of more Biopumps to provide personalized dosing requirements for each patient as needs change. We believe that medical personnel will only require brief training to become proficient in using our DermaVac for harvesting and implanting, which will enable implementation of Biopump therapies by the patient’s local physician. We have demonstrated that MOs and Biopumps can be processed in individual sealed chambers which can be viably transported by land and air, and are developing devices to automate and scale up the cost-effective production of Biopumps in local or regional processing centers.

We have produced more than 15,000 Biopumps to date which have demonstrated in the laboratory the capability for sustained production of therapeutic proteins, including EPO to treat anemia, interferon-alpha (INF-α) to treat various forms of hepatitis and Factor VIII clotting protein to treat hemophilia. The in vitro stability and simplicity in handling of the Biopump is another key feature separating Biopump’s tissue therapy approach from that of therapies based on individual cells grown in culture. Biopumps use the patient’s intact tissue implanted subcutaneously where it heals in place. We believe that this facilitates location for ablation or removal if it becomes necessary to reduce dose or stop therapy. A major challenge of cell-based therapies is that protein-producing cells wander to unknown locations, making it difficult or impossible to reduce or cease therapeutic delivery. We believe that by remaining local and potentially reversible by ablation/excision, Biopumps will avoid this problem and resolve a major hurdle of gene therapy.

We believe our Biopump Platform Technology may be applied to produce an array of other therapeutic proteins from the patient’s own dermal tissue in order to treat a wide range of chronic diseases or conditions. We believe our personalized approach could replace many of the existing protein therapies, which use proteins produced in animal cells administered by frequent injections over long periods of time.

Clinical proof of concept of the Biopump Platform Technology was reported in a phase I/II study using Biopumps that produced and delivered EPO in patients with CKD to treat their anemia, with interim study results presented by leading nephrologists at major nephrology conferences in 2010 and 2011. We call such Biopumps EPODURE. A total of 19 patients were treated in our initial phase I/II study, with each patient receiving a single administration of multiple Biopumps of EPODURE at a specified low, medium or high dose. The EPODURE administered was sufficient to maintain the patient’s hemoglobin in the range of 9 to 12 g/dl without need for any injections of EPO for more than three months in 14 of the 19 patients, of whom eight remained in range for more than six months, the longest lasting more than three years. We and our advisors believe that the results in patients treated to date have demonstrated proof of concept and shown safety and efficacy of our technology so far in its first application: EPODURE for treatment of renal anemia. Based on the results of our phase I/II clinical study of the EPODURE Biopump and our other development and testing efforts for our Biopump Platform Technology, we obtained clearance from the U.S. Food & Drug Administration (FDA) of our IND (Investigational New Drug) application for a phase II study in the United States for EPODURE in treatment of anemia in patients on dialysis. We expect to commence the U.S. trial in the latter part of 2013. Meanwhile, we are engaged in a similar phase IIa study of EPODURE in treatment of anemia in patients on dialysis in Israel, where we have treated the first four patients. We presented early results from these dialysis patients at the November 2012 annual meeting of the American Society of Nephrology.

In a further proof of principle of our Biopump Platform Technology, in 2010 leading liver experts presented preclinical data showing months of sustained production by Biopumps of INF-α, the therapeutic protein widely used in the treatment of various forms of hepatitis, in vitro, at a major European liver conference. We call such Biopumps INFRADURE ^TM . Several leading experts in the field of hepatitis have indicated their belief that INFRADURE has potential as a replacement for INF-α injections and their side effects not only in treatment of hepatitis C, but also in hepatitis B, hepatitis D and other indications. In November 2012, we convened a meeting of 15 hepatitis experts from the United States, Europe, Israel and Australia, including several of the key opinion leaders in hepatitis D and B, during which these experts confirmed that unmet needs in hepatitis D and B could potentially be effectively addressed by INFRADURE Biopumps. In addition, as INF-α is used in treating other diseases such as certain forms of cancer, we believe INFRADURE may have potential in some of these as well. We have obtained all necessary approvals to initiate two proposed new clinical trials of INFRADURE in Israel: a phase I/II study of INFRADURE in treatment of naïve (previously untreated) patients with hepatitis C (genotypes 2 and 3), and another phase I/II study of INFRADURE in treatment of patients with hepatitis C (genotype 1) who have relapsed from previous treatment. We recently initiated the first of such trials in Israel, to treat patients with hepatitis C genotypes 2 and 3. We are in the process of preparing an IND application to be submitted to the FDA in late 2013/early 2014 for INFRADURE to treat hepatitis B. We are also preparing an IND application for INFRADURE to treat hepatitis D, which we would plan to submit to the FDA after receiving clearance on the hepatitis B IND. Furthermore, the FDA has granted Orphan Drug Designation for the use of INFRADURE in the treatment of patients with hepatitis D, a rare form of hepatitis, Orphan Drug Designation carries multiple benefits, including the availability of grant money, certain tax credits and seven years of market exclusivity, as well as the possibility of an expedited regulatory process.

EPODURE Biopumps for the treatment of anemia have now been processed by our contract manufacturing organization (CMO) in a good manufacturing practice (GMP)-certified facility in the United States. This marks the first Biopump processing site outside of Israel, and provides us with a significant ability to scale-up our clinical and commercial capabilities to address global therapeutic areas such as anemia and hemophilia. In a key “dry run” test of the production system, tissue micro-organs were obtained and loaded into individual closed processing chambers in Israel, and then shipped to the U.S. CMO Biopump processing center in California. There, the micro-organs were processed in their closed systems into fully functioning EPODURE Biopumps, meeting the release criteria for use in human clinical trials in the United States. This demonstrates our capability to support the treatment of patients at remote clinical sites, transporting their Biopumps to and from strategically located processing facilities, thereby allowing for multicenter clinical trials and practical commercial implementation.

Based on our growing base of clinical and pre-clinical results, we continue to seek collaboration with third parties to further develop this technology and to form strategic alliances and licensing agreements, along the lines of such deals being reached typically with pharmaceutical companies. We engage from time to time in discussions with a number of pharmaceutical, biotech and medical device companies to further develop our Biopump Platform Technology. We intend to further develop and leverage our core technology in order to seek multiple licensing agreements for many different proteins and clinical indications using the same core Biopump Platform Technology. Our current strategy is to take various applications of our Biopump Platform Technology through proof of basic safety and efficacy in patients (phase I/II), or further as appropriate, and then to negotiate out-licensing agreements with appropriate strategic partners. In this manner, we anticipate receiving revenues from milestone or other development or feasibility payments from such agreements in advance of regulatory approval and sales of our product candidates, while retaining control of our core technology. In addition to orphan drug designation for application in hepatitis D, we are investigating additional opportunities for the treatment of rare diseases using our Biopump Platform Technology. Rare diseases affect a small number of people worldwide. Due to the limited number of patients afflicted with one of these rare diseases, these niche applications may also offer a more expedited route to regulatory approval because pivotal clinical trials may require a smaller number of patients before regulatory agencies will consider product approval. Furthermore, many rare disease applications command substantial per-patient reimbursement levels, and thus represent attractive product opportunities even in limited target populations. In any case, we believe that initial commercialization of any of our product candidates by us or any future strategic partners is not likely before 2017 and could easily take five years or more.

We believe that the Biopump Platform Technology has the potential to offer a better treatment alternative and replace many current methods of protein therapy, which can often involve many months of frequent injections and significant side effects. We believe that the Biopump Platform Technology provides a wide range of advantages over existing therapies and will appeal and offer benefits to doctors, patients and third-party payers (e.g., Center for Medicare and Medicaid Services (CMS) or medical insurers) including:

The Biopump Platform Technology Process (Anticipated Automated Process)

Proof of Concept of Biopump Platform Technology

The concept of the Biopump has been demonstrated in the clinic and in the laboratory, starting with the phase I/II clinical trial for our first product, the EPODURE Biopump, which was conducted in Israel under approval of the Israeli Ministry of Health in consultation with the FDA (but not under an IND application process of the FDA). This key study demonstrated that a single administration of a few EPODURE Biopumps could maintain hemoglobin levels in the target range for months in a majority of patients without raising serum EPO levels above the normal range. This stands in contrast to the longest intra-treatment period of an approved treatment for anemia, which is one month, and which has recently been recalled by FDA. The safety and efficacy data from the phase I/II study formed a major part of our IND application for a phase IIb study using EPODURE to treat anemia in dialysis patients in the United States, which was cleared by FDA in mid-2012. We believe that the study results for our first EPODURE study in patients showed that tissue Biopumps can provide safe and sustained protein therapy in patients, successfully demonstrating the Biopump concept for the first protein – erythropoietin (EPO). As a result, we are now expanding our product candidate pipeline using the same Biopump Platform Technology with continued laboratory development of Biopumps producing different proteins. We have developed in the laboratory and demonstrated in animal models our next product candidate, the INFRADURE Biopump, which produces INF-α to treat a range of diseases including various forms of hepatitis as well as other indications. We have commenced our first clinical study using INFRADURE under approval from the Israel Ministry of Health: a phase I/II study in hepatitis C, initially focusing on genotypes 2 and 3. Top experts in hepatitis have advised us that if we can demonstrate that INFRADURE provides safe and effective sustained delivery of INF-α in hepatitis C, we will likely be able to demonstrate INFRADURE’s ability to treat hepatitis B and hepatitis D as well. Applying the same Biopump Platform Technology to a completely different protein and clinical indication, we have also developed and demonstrated HEMODURE ^TM Biopumps in the laboratory that make blood clotting Factor VIII for treating hemophilia. We believe that the EPODURE clinical results, together with the laboratory results for the INFRADURE Biopump and HEMODURE Biopump, demonstrate that our Biopump Platform Technology is capable of sustained continuous production of various therapeutic proteins.

EPODURE Biopump for the Treatment of Anemia in CKD and Renal Failure

Our EPODURE Biopump is designed to provide a safer, more reliable, and cost-effective anemia therapy which we believe can better maintain hemoglobin within a defined safe range while also reducing costs. According to a number of recent studies, there are increased risks of mortality and cardiovascular disease in connection with present EPO therapy and the FDA has recently issued a Black Box Warning imposing new limitations on the amounts of EPO used in current anemia therapy. Reflecting these concerns, the FDA has further reduced the maximum recommended hemoglobin levels in these patients from 12 g/dl to 11 g/dl, which has the effect of reducing the amount of EPO needed to elevate and maintain hemoglobin in the target range. The FDA is also concerned about the additional risks associated with the excessive peak EPO levels which typically reach up to 100 times the normal physiological range following each bolus injection of EPO in current anemia therapy. We believe all these concerns increase the safety advantage potentially offered by EPODURE to maintain hemoglobin levels within a relatively narrow therapeutic range while also keeping EPO serum levels within the normal range in the patient. We also believe EPODURE usage can improve patient compliance and quality of life, and potentially reducing the healthcare costs of treating these patients. This supports the critical need for a more steady EPO delivery method, which the EPODURE Biopump is designed to address. We received approval from the Israel Ministry of Health to commence a phase II study in Israel of EPODURE in treatment of anemia in patients on dialysis and have treated four patients to date.

INFRADURE Biopump for the Treatment of Hepatitis and Other Indications

We are developing our INFRADURE Biopump to address the need for a patient-tolerable and cost-effective form of INF-α therapy for use in treatment of various forms of hepatitis and other applications listed in the FDA label for INF-α products. We believe that the INFRADURE Biopump can reduce side effects and promote patient compliance with treatment, while the steady delivery of INF- α in the physiological range could provide a more effective and lower cost alternative to INF-α injections, whose annual per patient cost includes approximately $35,000 for the INF-α drug and the costs of 52 weekly injections, monitoring and possible treatment of side effects. Top experts in hepatitis have indicated that INFRADURE Biopump could fulfill an unmet need for reliable interferon therapy for hepatitis D, a particularly aggressive form of hepatitis for which years of interferon therapy is the only effective treatment. While a relatively rare form of hepatitis in the U.S., hepatitis D is becoming a significant cause of death in Europe, now estimated to be killing more patients in a number of European countries than HIV AIDS.

We also believe that INFRADURE holds much promise to effectively address the key unmet need in the treatment of hepatitis B, namely to eliminate the hepatitis B virus (HBV), not just contain it. To date, years of expensive oral antiviral treatments have not eliminated the HBV. Instead these oral treatments act to contain the disease as long as the patient takes them. Once a patient stops taking the oral treatments, the disease rebounds. This requires the patient to continuously take anti-HBV drugs with mounting costs estimated at $10-12,000 per year, and associated health risks. Our advisors note that the gold standard for clearing HBV from the patient is to eliminate the hepatitis B surface antigen (HBsAg) by activating the immune system to fight it, known as sero-conversion – which is attained in only a small percentage of patients using oral antiviral agents and only after long-term use. Sero-conversion against HBV and surface antigen elimination has been reported to be improved by one-to-two years of INF-α therapy. However, today this requires the patient to endure regular weekly injections of pegylated INF-α with their associated side effects, creating a significant challenge in patient compliance to achieve reliable treatment. If a weekly treatment is missed, the effectiveness of the treatment is diminished. We believe INFRADURE has the potential to provide a much more practical and patient-compliant way to attain sero-conversion or surface antigen loss in a large proportion of patients by having the patient’s own tissue produce and deliver the protein instead of using injections, whether supplemental to oral treatments, or on its own.

In addition, for the treatment of hepatitis C, we believe that INFRADURE can be part of a much lower cost alternative for treating most patients, compared to current triple therapies (INF-α, Ribavirin, and Boceprevir or Telaprevir) costing $75-85,000 per patient annually, or the newer direct acting antiviral agents now in development, which our advisors expect will cost at least as much. Weekly injections of the current longer lasting formulation of INF-α, pegylated INF-α (PEG-INF-α), used together with oral antiviral drug Ribavirin, has been shown in large clinical trials and in practical use to effectively treat most patients, particularly those with genotypes 2 or 3, but with the well-known unpleasant and often serious side effects of the injections as widely reported. We believe that INFRADURE will demonstrate that when used instead of INF-α injections, the same or better results will be obtained, but with better patient compliance and reduced side effect profile. We have produced many INFRADURE Biopumps which have demonstrated sustained production of INF-α for several months in the laboratory and have been tested in mice, which results were shown at a major European conference of hepatologists in April 2010. We recently initiated a phase I/II study in Israel of INFRADURE in treatment-naïve patients with hepatitis C of genotypes 2 and 3.

HEMODURE Biopump for the Treatment of Hemophilia

We are in early stage development of our HEMODURE Biopump producing Factor VIII to treat hemophilia. The HEMODURE Biopump represents a potential breakthrough in the treatment of hemophilia because it would be prophylactic (preventing bleeding) and thus could dramatically reduce the risk posed by bleeding in these patients. If HEMODURE Biopumps succeed in producing sufficient Factor VIII and in delivering it into these patients’ circulation, it would represent a major step towards rendering the patient’s life more normal and potentially provide significant cost savings for treatment of hemophiliacs, where the cost of Factor VIII injections in a typical hemophilia patient typically exceeds $100,000 per year according to the National Hemophilia Society. In October 2009, we entered into our first commercial collaboration agreement with Baxter Healthcare (Baxter) and worked with Baxter through September 2011 when our agreement to develop HEMODURE Biopumps expired. Our HEMODURE Biopumps produced active Factor VIII protein in vitro , as confirmed by testing using a standard assay at a major hemophilia center in Israel. We have also demonstrated initial delivery of Factor VIII into the blood circulation by implantation of HEMODURE Biopumps in SCID mice, using an approach similar to the approach we used with EPODURE and INFRADURE Biopumps. We continue to work on improving these results, and believe it will be feasible to reach sufficient sustained production rates of Factor VIII to warrant clinical testing with appropriate implantation site and method. Once target levels and a modified implantation method for Factor VIII Biopump delivery are in place, we intend to seek to commence a phase I/II clinical trial in humans.

Overall Protein Market and Current Therapeutic Treatment Platform

The worldwide market for protein therapy is forecast by RNCOS - Global Protein Therapeutic Market Analysis (Ed. 3, May 2010) to reach $132 billion in 2013. We estimate that the Biopump Platform Technology could potentially be applied to many elements of this market, starting with proteins to treat anemia (EPO) and then hepatitis (INF-α). In 2010, EPO injections to treat anemia generated revenues of $9.2 billion and INF-α injections for treatment of patients with hepatitis C and some forms of cancer generated revenues of $2.7 billion according to La Merie Business Intelligence, R&D Pipeline News, Top 30 Biologics 2010 (March 3, 2011). We have identified the anemia and various hepatitis markets as first priorities for applying the Biopump Platform Technology.

Examples of other conditions that may benefit from proteins produced and delivered by the Biopump Platform Technology are listed in the table below (although we have not currently commenced any research/clinical programs with respect to such conditions):

The current standard platform for protein production and delivery involves a highly complex and capital-intensive manufacturing process based on large-scale animal cell tissue culture and delivery in the form of frequent injections (due to the short half-life of recombinant proteins as described below). Protein manufacturing plants generally take several years and substantial capital to build, secure regulatory approvals and bring into production. Once produced, the protein is typically distributed to, and stocked in, pharmacies and physicians’ offices and administered by injection. Injections can be painful and costly, often cause unpleasant or dangerous side effects and require frequent visits either by home healthcare nurses or to the doctor’s office. A treatment based on the administration of serial injections can suffer from poor patient compliance and, therefore, inadequate treatment can result.

As recombinant proteins are typically metabolized (i.e. broken down) by the body very quickly, they have a very short therapeutic life, ranging from a few minutes to a few hours. This means that, for many proteins, injections need to be taken at least once a week and often more frequently, to maintain concentration in the blood within the therapeutic window, i.e., above the minimum level required to be effective. It is widely known in the medical community that, below certain levels, the protein has no therapeutic effect. In order to keep protein levels in the blood above the minimum therapeutic level for as long as possible in between injections, large bolus injections are typically administered. Although this can extend the time before the protein levels in the blood drop below the minimum therapeutic level (undershoot), it also causes initial levels to rise to many times above the maximum desired level (overshoot). Current therapies produce extended periods of overshoot, which can cause significant side effects, followed by undershoot, which leaves the patient under treated until the next injection. In the case of EPO for treating anemia, the overshoot can cause stimulation of the lining of the blood vessels, raising the risks of hypertension and release of emboli which can lead to stroke. In the case of INF-α for treatment of hepatitis C and other applications, the overshoot typically causes serious flu-like symptoms with each injection, and can cause loss of white blood cells (neutropenia), depression, and other serious conditions.

Competition for Protein Therapy Market

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

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

Nearly all protein therapy currently utilizes recombinant protein delivered via serial bolus injections; however, there are many alternative ways to make protein and to deliver it. New ways to produce proteins are emerging, including production in plant cells, as well as generic production of off-patent proteins using more standard recombinant protein technology. However, we believe that each of these new production methods faces the same challenges of how to deliver the protein reliably in the intended therapeutic window over the required extended periods of treatment. We believe that the personal production of therapeutic protein inside a patient’s body as provided by Biopump Platform Technology has distinct advantages over the development of these new production methods.

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

We face competition within protein therapeutics, directly from established competitors using alternative protein manufacturing and delivery methods for EPO and INF-α to treat anemia and hepatitis, respectively. Additionally, many of these competitors currently manufacture, or are developing, a wide array of proteins such as G-CSF and hGH - protein therapies that we have identified as possible targets for the Biopump Platform Technology in the future.

We face potential competition from more conventional forms of gene therapy, if and when any of these become approved and adopted in clinical use. Gene therapy aims to provide some of the same advantages of Biopump therapy, delivering the desired genes to the patient’s tissue to cause the patient to produce the desired protein in the body. Conventional direct gene therapies deliver genes directly to the circulation with the intent that they will find their way into enough cells to produce the requisite amount of protein to treat the clinical condition. Alternatively, ex-vivo cell based gene therapy removes cells from the patient, processes them to take up and become transfected by the desired gene and, then grows or amplifies the population to a large number of cells before injecting them back in the patient. Once in the patient, the cells generally tend to migrate until they find an appropriate “home” where they become attached to the surrounding tissue, or don’t survive. In either case, whether via direct or via ex-vivo cell gene therapy, the amount of protein produced by the cells with the genes is difficult to predict. We believe that this process may also pose a safety risk since no reliable method has been developed to reduce or stop the production of the protein if needed. Since the cells producing the protein are typically in unknown locations, it is very difficult to stop their production of protein, so the treatment dosing is not downward adjustable or reversible.

The Biopump, in contrast, uses intact tissue at all times, so that the cells in the tissue never leave their natural matrix. Upon reimplantation, the tissue heals in place, so the cells remain in their matrix. As a result, they do not need to wander to find a place to connect, and remain in the tissue. In this way, dosing can be reduced or stopped by ablating or removing one or more Biopumps, which are typically implanted about a millimeter below the skin surface in a marked position. In a group of Biopumps prepared from the same patient, the daily protein production rate is generally very similar between individual Biopumps, and is measured before implantation in the patient, so that the total administered daily dose is known, as is the location of each Biopump. Furthermore, since no viral vector is applied to the patient in treating with Biopumps, we believe that the patient can be treated multiple times without developing rejection, in contrast to direct gene therapies. We believe that Biopumps address the key limitations of gene therapies, in knowing the dose, in the ability to increase or reduce it, and most importantly, in being able to effectively stop it if needed.

Business Strategy

Our primary strategy is to complete development of the core elements of the Biopump Platform Technology and associated key devices, and to be able to adapt them to treat different clinical indications. While this is proceeding, we intend to seek to enter into multiple licensing agreements for many different proteins and clinical indications using the same core Biopump Platform Technology. Our preferred approach is to develop the Biopump technology for a particular indication through proof of basic safety and efficacy in patients (phase I/II) or further as appropriate, and then to negotiate out-licensing agreements for the Biopump Platform Technology with appropriate strategic partners for such indication.

We are pursuing such approach with EPODURE. Our initial phase I/II trials demonstrated several months to over 36 months of sustained anemia treatment from a single administration of EPODURE Biopumps in patients with CKD and showed that an appropriate administration of EPODURE Biopumps can provide sustained anemia therapy without any EPO injections and represents an unprecedented duration from a single treatment in patients replacing many EPO injections. In the meantime, we continue to advance our clinical testing of EPODURE. We received FDA clearance for a phase II study of EPODURE for the treatment of anemia in dialysis patients with end-stage renal disease (ESRD) in the United States and are preparing to commence such trial in the second half of 2013.

The approach of first demonstrating proof of concept in patients before partnering is not our only option. We were able to successfully enter into a development and option agreement with Baxter Healthcare, a leader in the field of hemophilia, for the development of our HEMODURE Biopump producing Factor VIII for the treatment of hemophilia. Prior to entering into such agreement, we had not begun to develop our HEMODURE Biopump and had no laboratory or clinical results for such indication. However the sustained clinical results of our EPODURE Biopump, taken together with our prior production of INF-α by INFRADURE Biopumps, supported the concept of the Biopump as a platform to potentially provide safe and sustained production and delivery of therapeutic proteins such as Factor VIII on a continuous basis. This first deal, which succeeded in producing the first HEMODURE Biopumps, provided us with approximately $3.9 million in research and development participation and standstill fees. While our agreement with Baxter Healthcare expired in September 2011 without having reached all the milestones, we continue to improve HEMODURE performance. We believe the HEMODURE Biopump deal structure could provide a model for collaboration with strategic partners in completely new applications of Biopump more generally, including a funding mechanism for proving feasibility of a new Biopump application before commencement of licensing negotiations. We are exploring opportunities utilizing this model for further interest in new applications using the Biopump platform. We may thus seek additional development deals with strategic partners for other clinical indications or proteins using Biopump Platform Technology before we have reached the phase I/II clinical trial stage for such indication or protein.

We anticipate taking a somewhat different approach with our INFRADURE Biopump to treat hepatitis. We have recently launched a phase I/II trial of the INFRADURE Biopump for the treatment of hepatitis C in naïve patients with genotypes 2 and 3. This is a safety and escalating dose study whose immediate objective is to demonstrate proof of concept of the INFRADURE Biopump as a safe implantable treatment to produce and deliver INF-α in patients and that, with appropriate dose and administration, result in weeks or months of reduction in hepatitis C virus (HCV). Assuming the objective is achieved, this study would demonstrate INFRADURE as potential treatment for hepatitis C and provide key safety and dosing data for INFRADURE for use in preparing an IND application for FDA approval of phase II studies using INFRADURE in treating patients with hepatitis B and D in the United States and in Europe. We are currently planning to conduct such studies on our own. We believe we have the internal capabilities to bring INFRADURE as a treatment for hepatitis D towards product approval and sales without requiring a partner. This approach would aim to demonstrate the complete treatment and business model for the Biopump Platform Technology, while capturing the revenue stream from sales of a proprietary treatment for tens of thousands of patients with hepatitis D in the United States and Europe alone, and the millions more patients estimated worldwide.

In addition to developing new protein applications of the Biopump, we are also working towards practical scale-up and commercial implementation of Biopump treatment technology. In collaboration with outsourced engineering firms, we have developed a closed chamber system where each Biopump resides in its own sealed chamber where it produces protein in a manner similar to the open system used to date. We have demonstrated and validated that Biopumps produced in the closed chamber are comparable to those processed in the previous open system. This key step led to the establishment of our first contract manufacturing center for the GMP production of Biopumps in the United States, located in Sacramento, California. Prior to this, all of the Biopumps were produced in Israel, which involved manually processing the MOs into Biopump in GMP quality clean rooms. This approach results in a higher cost of processing as compared to the eventual commercial method anticipated, in which processing is to be performed by semi-automated bioreactors using sealed cassettes. The limited availability of such facilities and the high levels of expertise required to manually produce Biopumps in accordance with strict GMP standards would limit the practical ability to perform clinical trials in multiple centers. GMP clean rooms are required to prevent accidental agent introduction and cross contamination and ensure accurate results are obtained. This is acceptable for purposes of proving the Biopump concept in early clinical trials, and possibly for rare disease applications, but for larger clinical trials and for commercial implementation of larger clinical indications, an automated processing system using closed cassettes is being developed.

Accordingly, we trained the personnel at the contract manufacturing center to use our proprietary processing chambers and associated devices to successfully implement the Biopump processing procedure. We demonstrated that this center could process Biopumps from remote sites: skin dermis microorgans harvested into the sealed chambers in our plant in Israel were sent to the California processing center using a small battery powered portable incubator shipped via standard courier, and were correctly processed by the center into successful Biopumps meeting our release criteria. We believe that the practical demonstration of remote processing from a harvest site 9,000 miles overseas demonstrates that such centers could service many clinical sites around the United States or elsewhere. The center in California is aimed to support manual GMP production of Biopumps for use in our proposed clinical study of EPODURE in the United States in 2013, and is capable of expansion as need grows. Additional similar centers could be established in various geographical locations as needed. We continue to make improvements to the initial design of the chamber and plan to incorporate it into a closed single use cassette for the Biopumps from the patient, to be processed by semi-automated processing stations which we anticipate to be ready for use in our proposed phase II EPODURE study in the United States . The practical implementation of the Biopump system will take advantage of the robustness and stability of the MOs and Biopumps for practical logistical transport using standard shipping means. We anticipate that this will allow a patient’s physician to harvest MOs and administer the resulting Biopumps to patients locally, without requiring the patient to travel to a separate specialized center. We do not currently plan to sell Biopump devices outside of partnering agreements. It is possible that we may produce the Biopump products internally and sell them to our future strategic partners, or we may license the technology to our future strategic partners to allow them to produce the Biopump products themselves.

As the Biopump processing centers model evolves, a potential role has emerged for a supply chain partner to support logistics between clinical sites and processing centers. There may also be a role for a manufacturing partner to set up and run Biopump processing centers, which would produce Biopumps, using scaled-up cost-effective devices and methods currently under preliminary development. A completed supply chain may facilitate appropriate agreements with pharmaceutical or other commercial partners for harvesting MOs from, and administration of Biopumps to, patients in local medical centers. This model can offer pharmaceutical partners the advantages of Biopump therapy in their market applications, building on their existing infrastructure for selling injected therapeutics, while sparing them the need to establish their own Biopump processing centers.

Regulatory Strategy

Our overall regulatory strategy is aligned with our main business strategy of partnering with pharmaceutical, biotech, or medical companies to advance clinical development, request regulatory approvals, and eventually commercialize approved products. To that end, our strategy is to perform laboratory and animal feasibility studies and early clinical proof of concept (phase I/II clinical trials) to demonstrate the potential of the Biopump application. Generally, a strategic partner is sought after sufficient phase I/II data have been gathered to show proof of concept; however for some new indications, as with hemophilia, we may reach feasibility or partnering agreements at an earlier stage, even before start of preclinical development. For some applications the completion of phase I/II clinical trials would be the earliest we would seek to continue clinical development with a partner or collaborator who provides funding for the development through the product approval stage. However, we would expect partnering deals struck at phase II stage to yield substantially greater value to our company, and thus for some indications such as anemia and hepatitis B we plan to conduct our own phase II clinical trial. For other indications such as hepatitis D or some rare diseases, we could take a product candidate to final the product approval stage without a strategic partner. The general path towards regulatory approval of a Biopump product is:

We are currently in step 7 outlined above for our first product candidate, EPODURE, having attained clearance from the FDA for a phase II trial of EPODURE in treating dialysis patients with ESRD in the United States. We believe that the shortest path through regulatory approval for the first Biopump application in the United States may be for a disease condition that has an orphan drug designation granted by the FDA, particularly a life-threatening disease. In the United States, the FDA has the authority to grant a special “orphan drug designation” to a drug or biologic product that treats a rare disease or condition, which orphan designation provides additional rights to approved products as well as requiring smaller clinical trials than for large indications. Diseases thought to affect less than 200,000 patients in the United States are typically deemed to be rare. In June 2012, we successfully obtained an orphan drug designation for our INFRADURE Biopumps in the treatment of hepatitis D. The orphan drug designation may possibly allow a quicker approval timeframe, as well as smaller clinical trial enrollments. We plan to use the safety and dosing data from the phase I/II hepatitis C trial in Israel to prepare an IND application for phase II studies (step 6) in hepatitis B and in hepatitis D in the United States and elsewhere, as the INFRADURE Biopumps are the same for hepatitis C, B, or D. We will continue to evaluate and update our plans for the regulatory and clinical pathway for the INFRADURE Biopump with a view to determine whether there would be an advantage to seek regulatory approval of one of those product candidates in the United States, or possibly first in markets outside the United States, in light of the fact that hepatitis D is a relatively rare disease in the United States, but is more widespread internationally, with an estimated 15 million patients or more worldwide with the disease. In addition, we plan to identify other rare diseases with orphan designation which affect less than 10,000 people worldwide, in which the sustained therapy potentially offered by our Biopump Platform Technology could represent a major clinical advantage. According to the National Organization of Rare Diseases, there are thousands of such diseases, and we are exploring these to identify those most promising for our Biopump technology.

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

We are currently focused on seeking FDA approval initially as the U.S. market for therapeutic proteins is the largest. We also believe that the Biopump offers unique advantages addressing key issues of urgent importance in the U.S. market, such as cost-effectiveness, preventive treatment, and patient compliance. In preparation for our initial phase I/II EPODURE clinical trial in Israel, we were guided by our regulatory advisors (which include former FDA officers), in coordination with the FDA’s preclinical department in the design of the requisite preclinical testing for approval of the trial. The study itself was approved by Israel Ministry of Health, and was performed in adherence with the International Conference on Harmonization (ICH) E6 Guidance for Clinical Practice. This is an international ethical and scientific standard for designing, conducting, recording and reporting clinical trials. The guidance defines unified standards for clinical data that will be acceptable to the European Union, Japan and the United States. We intend to conduct our future trials in such manner as well. It is anticipated that such off shore phase I/II studies will provide support for the registration process of EPODURE in the United States, which will involve additional clinical trials leading up to approval for sale.

Indeed, the FDA accepted the results of our phase I/II EPODURE study in patients with CKD in our IND application, which the FDA cleared for the phase II study in the United States in dialysis patients with ESRD disease, a more advanced renal failure than the CKD patients had in the phase I/II study. Prior to that, we presented our proposed phase II study protocol, together the scientific and clinical background, to the National Institutes of Health (NIH) Recombinant DNA Advisory Committee (RAC) for its review. RAC unanimously recommended proceeding with the proposed phase II study. We intend to submit applications for other geographical markets as well.

Our understanding from the FDA is that the Biopump Platform Technology is considered a combination product, being a combination of biological products and devices, with the primary mode of action being a biologic. This was borne out in the pre-IND meeting we held in August 2012, where the Center for Biologics Evaluation and Research (CBER) division of the FDA led the review of our EPODURE product candidate, with support from the Center for Devices and Radiological Health (CDRH) for the device aspects of the Biopump product candidate. Representatives of both CBER and CDRH subsequently reviewed the IND submission and cleared the phase II study in dialysis patients.

EPODURE Biopump Clinical Trials: Anemia in patients with CKD

During 2003 and 2004, we undertook a phase I clinical trial using a short acting version of the Biopump producing EPO. That short acting version utilized a first generation adenoviral vector to process the micro-organs into Biopumps to produce and deliver EPO in ten anemic patients. The results of that phase I clinical trial were reported in the peer reviewed publication “Blood” (the Journal of the American Society of Hematology) in October 2005:

“ The results of this study represent proof of principle that the implantation of an autologous genetically modified tissue into human dermis could significantly and safely increase the level of secreted proteins in the serum of patients. Furthermore, the secreted protein induced a physiological effect by increasing the level of the reticulocyte count. The implantation and physiologic effects were not associated with any significant side effects associated with the experimental drug .” (We note that a number of the authors of such report were employees or consultants of our company and that, at that time, no regulatory authority had reviewed or approved these statements.)

The first generation adenoviral vector used in the Biopumps tested in the phase I clinical trial contained a substantial number of viral genes in addition to the gene for EPO. Consequently, the transduced cells were capable of producing not only EPO but also viral proteins, which the report published in “Blood” concluded were probably responsible for drawing the immune response against those cells thereby curtailing EPO delivery after ten to fourteen days. Having believed we proved the principle of the Biopump in the short-action phase I clinical trial, we then developed a non-immunogenic gutless (i.e. having none of its own genes) version of the adenoviral vector to produce the Biopumps which we believed was not likely to elicit an immune response in humans, and therefore, should be able to produce the therapeutic proteins over a sustained period in human patients. Utilizing the gutless adenoviral vector, we produced sustained-action Biopumps for two different applications: one producing EPO and the other producing INF-α. Each demonstrated continued protein production in the range of thousands of nanograms per day for six months in vitro . We used the gutless adenoviral vector to produce the Biopumps used in our completed phase I/II clinical trial in Israel of the EPODURE Biopump for the treatment of chronic renal anemia.

This phase I/II clinical trial was initially conducted at Hadassah Medical Center since September 2008 under approval of the Ethics Committee of Hadassah Medical Center and the Israel Ministry of Health. In April 2010 we received further approval to add an additional site of Tel Aviv Sourasky Medical Center to the clinical trial. The study was a phase I - II, open label, dose escalation study, comprising three EPODURE sustained dosage groups of EPO (approximately 20, 40, and 60 IU/kg/day) for the treatment of anemia in CKD patients (stage III - IV), starting with the lowest dose. These dose levels were selected to roughly correspond to the FDA recommended dosing range for injected EPO is from 50 to 150 IU/kg given three times per week, corresponding to 150 - 450 IU/kg per week, or 20 - 60 IU/kg per day.

CKD patients diagnosed as having renal anemia (i.e., having insufficient hemoglobin levels associated with reduced production of EPO by the failing kidneys) were candidates for the study, whether the patient was already under treatment for the anemia by a regimen of EPO injections (EPO dependent), or had yet to commence such a treatment (EPO naïve). Each patient was treated with a group of his or her own subcutaneously implanted Biopumps that were measured before treatment to produce the requisite aggregate amount of EPO per day (20, 40, or 60 IU/kg) based on the patient’s weight. The treatment rationale was that by producing and delivering EPO continuously for a sustained period, Biopumps should help stabilize the patients’ hemoglobin levels, and if the EPODURE Biopump dose was adequate for the patient’s specific needs, the hemoglobin level will also be maintained in the target range of 10 - 12 g/dl – the range preferred by FDA at the time of the phase I/II study in 2008-12.

Under the approved protocol, ten dermis micro-organs were harvested from each patient by simple needle biopsy performed under local anesthesia using our proprietary device, the DermaVac, typically from the dermis of the abdomen. These tissues samples underwent a standardized, reproducible procedure in a GMP cell processing laboratory over the course of two weeks to convert them into EPODURE Biopumps which each secrete a measured and sustained amount of EPO per day. A group of the patient’s Biopumps which together produce the dose of EPO required by the protocol was subsequently implanted back into the patient subcutaneously, again under local anesthesia.

The mid-dose was administered after submission and approval of a safety report on the first six patients treated at the low dose. Likewise, we commenced high-dose administration following review of mid-dose data and approval by the IRB of Tel Aviv Medical Center. No related serious adverse events were reported for any of the treated patients, with the exception of minor, local subcutaneous hematoma (bleeding) seen at the harvest and implantation sites, as can be expected for any invasive procedures dealing with the skin. The hematoma was generally seen to clear up within several weeks for all patients treated. In addition, no immune response to the implanted Biopumps was reported. Because the protein secreted by the implanted Biopumps is the patient’s own naturally-produced human EPO and not a foreign substance, no adverse reaction was expected, and none has been noted. Evidence that the Biopumps were not rejected by the patients’ immune system is seen in the sustained elevation and maintenance of hemoglobin levels in most of the patients. All of the patient procedures were well tolerated and no complaints of discomfort were received.

For the patients who were treated with EPO injections prior to the study, their treating physicians discontinued EPO injections at least four weeks prior to the day of Biopump implantation, as required in the approved protocol.

In November 2012, the summary results of the completed phase I/II dose escalation study in CKD patients and initial results of our phase I/II in ESRD patients were presented at the annual meeting of the American Society of Nephrology. Data summarized from the completed CKD trial indicated that five of seven patients at the low dose level of 20 IU/kg/day, and seven of seven patients at the mid-dose level of 40 IU/kg/day and two of five patients at the high dose level of 60 IU/kg/day avoided the use of supplemental EPO for three months or longer and three of seven, five of seven, and one of five patients, respectively, avoided the use of supplemental EPO for six months or longer. In these treated patients, EPO levels were quickly elevated by 10-50 mU/ml above baseline with a generally larger net rise attained in proportion to the implanted dose and resulting in an increase in the number of new red blood cells (reticulocytes).   The FDA issued a new guidance in 2011 indicating that hemoglobin should be maintained below 11 g/dl and high enough to avoid the need for increased transfusions, but not necessarily above 10 g/dl.  In view of this new guidance, we note that the results of the completed study in 19 CKD patients showed that a single EPODURE administration elevated and maintained hemoglobin levels above 9 g/dl for at least three months in 14 of 19 patients, and for at least six months in nine of them, without need for any transfusions or EPO injections. The final study report of the CKD trial should be complete by end of the first quarter of 2013. With respect to our phase I/II study in ESRD patients, the initial early data obtained in the first three patients treated showed evidence of EPO secretion and early maintenance of hemoglobin levels.

Our proposed phase II EPODURE clinical trial will seek to reproduce similar results to the phase I/II clinical trial in multiple centers (and in more patients), and further seek to test: 

In preparation for the anticipated phase II study, we established and validated the GMP Biopumps processing facility in California, identified and taken steps to arrange for CRO and obtained the interest of an experienced nephrologist will be the lead Principal Investigator for the study. More than one major U.S. clinical site has asked to take part in the planned phase II clinical trial, with costs estimated to be in the $5-8 million range, depending on the number of patients. We currently plan to perform the phase II clinical trial on our own. However, if agreement is reached with an appropriate strategic partner, the phase II clinical trial could be conducted with such partner under that agreement. In the interim we have commenced a phase IIa study of EPODURE in dialysis patients with ESRD in Israel as our first use of EPODURE in patients with complete renal failure, and a forerunner to the U.S. phase II study. To date, four patients have been enrolled and the preliminary results look comparable to our completed CKD study.

If the proposed phase II study produces the anticipated results, we believe this would be followed by a phase III clinical trial for product candidate approval involving hundreds of patients at multiple centers which we would anticipate conducting with a commercial partner, and using a version of the automatic processor and sealed cassettes which would be similar to that intended for commercial use. Details of any phase III clinical trial will only be determined by the FDA upon review of the results of the data from our planned phase II study.

INFRADURE Biopump Clinical Trials: In Patients with Hepatitis C

Our first clinical study of INFRADURE is focused on hepatitis C study which is underway in Israel and will provide us with the initial opportunity to determine the safety and biologic activity of INFRADURE Biopumps in patients. In this study, we will be examining the ability of INFRADURE Biopumps to deliver INF- α into the patient, the levels of INF- α that are achieved in the serum and the biologic effect of the INF- α on the clearance of the hepatitis C antigen and other biologic effects .

This is a phase I/II, open label, uncontrolled, dose escalation study. The trial is being conducted in Israel at the Tel Aviv Medical Center and other sites. This study is exploratory in nature.

All eligible subjects will be implanted with autologous INFRADURE Biopump tissue intended to deliver therapeutic levels of INF-α. Subjects will be enrolled sequentially into one of three dose groups; the first dose group will include nine subjects receiving the lowest dose. We are starting with a low dose intended to deliver weekly an amount somewhat higher than the weekly injections of pegylated interferon used in standard of care. An interim safety review will be conducted in house after the first six subjects who receive the lowest dose have completed four weeks of treatment. If the safety review allows, an additional three patients may be enrolled in the low dose group.

Subsequently, four subjects will be enrolled into each of the remaining two treatment dose groups: middle dose, roughly double the low dose, and high dose at roughly three times the low dose. All subjects will be treated with dual therapy of implanted INFRADURE Biopumps delivering INF- α together with oral Ribavirin (Copegus) for up to 24 weeks following the Biopump implantation.

An additional 24-week follow-up period will be conducted to ensure each subject’s safety. Outcomes to be measured will include safety, tolerability and biologic effects on viral clearance. To date, only one patient has been enrolled in the study, but has not been implanted with any Biopumps.

If we determine that this initial exploratory hepatitis C trial provides sufficient supportive evidence of INFRADURE Biopump safety and activity, we would then have supportable data from the INFRADURE hepatitis C trial to draw on in applying for IND clearance of phase II studies for INFRADURE in patients with hepatitis B and hepatitis D. Assuming the hepatitis C trial does provide the requisite data, we plan to submit to the FDA the IND application for hepatitis B. The plans for studies in each of these indications are at a preliminary phase but a general outline of our potential approach is described below. 

INFRADURE for HEPATITIS B: Draft Clinical Development Plan

As discussed above, the current oral antiviral nucleoside therapies as stand-alone treatment do not effectively clear the patient of the hepatitis B virus (HBV). When HBV is truly cleared the surface antigen of HBV, HBsAg, is cleared, which is usually reached by attaining seroconversion against HBsAg. The oral drugs have a low HBsAg seroconversion rate of 0-5%. Accordingly, we are planning to examine whether the administration of INFRADURE in addition to nucleoside therapies can produce a higher rate of seroconversions or loss of the HBsAg from the circulation. A second potential use of INFRADURE in treating hepatitis B is as stand-alone monotherapy.

INFRADURE as Supplement to Nucleoside Therapy (Oral Drugs)

We anticipate that the hepatitis B program would begin with a phase II open label randomized study. We would enroll adults with chronic HBV infection and evidence of persistent disease despite nucleoside therapy. Using this approach, subjects will be maintained on their nucleoside therapy and INFRADURE Biopumps will be added to provide administration of INF- α. We would plan to test and administer two different doses of INFRADURE for 24 weeks of therapy and compare the results to adults who only received standard of care therapy. Current planning is to aim for a study of about 50 patients. If the phase II study provides positive information, we could then proceed to a phase IIb/III, randomized open label trial with a control of standard of care therapy in adults with chronic HBV infection and evidence of persistent disease despite nucleoside therapy. This study would use a longer duration of treatment. We would plan to examine the percent of subjects with no HBsAg detectable and seroconversion, as well as the percent of subjects with significant reduction in serum HBsAg, and the safety and tolerability of chronic INFRADURE administration. Assuming positive data, we would likely engage in a broader phase III study.

INFRADURE Monotherapy

We anticipate that the initial phase II would be a randomized open label, active control study in adults (around 50 patients) with chronic HBV infection and evidence of viral replication. INFRADURE Biopumps that would potentially be capable of secreting INF- α for 24 weeks would be implanted at two dose levels and the results compared to a control group receiving standard of care PEGASYS (peginterferon alfa-2a) 180 mcg/week injection. Assuming positive data showing a significant reduction in HBsAg, we would anticipate a larger phase IIb/III trial of around 300 subjects studied in a randomized open label, active control design. We would aim to enroll adults with chronic HBV infection and evidence of viral replication. Two different doses of INFRADURE would again be compared to standard of care.

In this study, a longer duration of treatment is contemplated and we would look to determine the percent of subjects with good suppression of the hepatitis B virus to a level which is considered as not clinically significant (the level of HBV DNA in the patient’s serum less than 100,000 copies of viral DNA/ml of serum), the percent of subjects with normalization in liver enzymes (as measured by the liver enzyme ALT), the percent of subjects with clearance of serum HBeAg, the percent of subjects with clearance of HBsAg, and would also possibly examine liver histology for reduction in inflammation and fibrosis along with safety measurements over this longer time of exposure. Assuming positive data, a broader phase III study would be conducted. We would hope to be able to demonstrate superiority to standard of care or non-inferiority.

INFRADURE for HEPATITIS D: Draft Clinical Development Plan

Somewhat in parallel with the Hepatitis B program we are planning to study INFRADURE in Hepatitis D. It should be noted that patients with hepatitis D also have hepatitis B. In this indication, the safety data base requirement might be no more than a few hundred and even as few as 100 (pending discussion with the FDA). We plan an international multicenter approach to leverage the greater availability of patients worldwide compared to the low number in the United States.

The initial objective would be to assess the safety and biologic activity of INFRADURE Biopump treatment in hepatitis Delta virus (HDV) positive patients for a period of six months. We would start with a phase II open label, randomized, dose escalation, study in adults (around 30 patients), with chronic HDV infection and chronic inflammation on liver biopsy compatible with chronic viral hepatitis, who are either naïve to treatment, or at least six months off interferon treatment including previously relapsed responders. We would plan to study the administration of INFRADURE Biopumps for 24 weeks given in two or three dose levels and all subjects will have HDV genotype determined at baseline. HDV RNA and HBV DNA levels and hepatic enzymes would be measured at baseline and intermittently throughout the study until completion of therapy and follow-up. Outcome measures could include the proportion of subjects with undetectable HDV RNA , and evaluation of safety. Assuming positive data, we anticipate proceeding with a phase III study which would provide for a larger number of patients and longer treatment duration.

Patient recruitment is often a significant challenge for many clinical trials, and we have experienced significant difficulty to date in finding and recruiting sufficient appropriate patients for our EPODURE anemia studies in Israel. We cannot determine whether this is due to particular healthcare economics and clinical management practice in Israel, or to other factors. We hope and believe this will improve in future trials that we may conduct in Israel or elsewhere, including our current Israeli phase I/II study in hepatitis C and ongoing phase II study in dialysis patients, the anticipated phase II dialysis study in the United States and the planned phase II studies in hepatitis B and D.

Intellectual Property

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

We also depend upon the skills, knowledge and experience of our scientific and technical personnel, as well as that of our advisors, consultants and other contractors, none of which is patentable. To help protect our proprietary knowledge and experience that is not patentable, and for inventions for which patents may be difficult to enforce, we rely on trade secret protection and confidentiality agreements with our employees, consultants, vendors, collaborators, advisors, customers and other third parties to protect our interests. To this end, we require all employees, consultants, advisors and other contractors to enter into confidentiality agreements, which prohibit the disclosure of confidential information and, where applicable, require disclosure and assignment to us of the ideas, developments, discoveries and inventions important to our business.

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

Our existing owned and licensed patent portfolio currently contains 42 issued and 82 pending patents. Applications for patents and other intellectual property rights capable of being registered have been, and will be, filed in certain key jurisdictions.

Our licensed and owned patent portfolio covers the key elements of the Biopump Platform Technology, ranging from tissue engineering to device implementation and systematic treatment. Our patent portfolio includes our proprietary dermal genetically modified micro-organ Biopump, which includes the EPODURE Biopump, the INFRADURE Biopump, the HEMODURE Biopump and production, processing, implantation and the tools designed for use in the Biopump procedure.

Many of the patent and patent applications pertaining to the Biopump Platform Technology are licensed under an exclusive, worldwide license from Yissum Research Development Company of the Hebrew University of Jerusalem (Yissum) and variants of Factor VIII are licensed from University of Michigan. The patent portfolio at the date of this report is comprised of the following issued and pending patents:

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

We also rely on trade secrets, technical know-how and continuing innovation to develop and maintain our competitive position. We seek to protect our proprietary information by requiring our employees, consultants, contractors, outside scientific collaborators and other advisors to execute non-disclosure and confidentiality agreements and our employees to execute assignment of invention agreements to us on commencement of their employment. Agreements with our employees also prevent them from bringing any proprietary rights of third parties to us. We also require confidentiality or material transfer agreements from third parties that receive our confidential data or materials.  We intend to continue to take all appropriate steps to protect our intellectual property, including maintaining an active program for patent protection for novel elements in the development of our products and technology.  

Licenses

Yissum license

The licensing arrangements with Yissum formally commenced in 2000 and have since been replaced by the current arrangements prescribed by the License Agreement, which was entered into on November 23, 2005. The License Agreement is for a term that expires on the later of:

The scope of the License Agreement includes the exploitation of MO and MO technologies in the development and implementation of gene therapy for use in the prevention, treatment and diagnosis (or curing) of disease and for producing recombinant proteins or nucleic acids for therapeutic applications. Under the License Agreement, we agreed to pay Yissum the following amounts:

(a) three fixed installments measured by reference to investment made in our company, as follows:

(b) royalties at a rate of 5% of net sales of the product; and

(c) sublicense fees at a rate of 9% of sublicense considerations.

The License Agreement provides that our total aggregate payment of royalties and sublicense fees to Yissum shall not exceed $10,000,000.

The License Agreement requires that we reimburse Yissum for the costs and expenses of prosecuting the pending patent applications and of maintaining all registered patents licensed to us. If, however, for reasonable commercial considerations, we decide that we do not wish to fund the registration or maintenance of a patent in a certain state or country and Yissum applies for, registers or maintains a patent covered by the License Agreement in that state or country at its own cost, the patent license with respect to that state or country will revert to Yissum and be capable of being licensed to a third party or exploited by Yissum. In addition, if the License Agreement ends or is terminated for any reason, all rights in the Yissum patents will revert to Yissum.

BCM license

We also have licensed from Baylor College of Medicine (BCM) the non-exclusive right to use technology developed by BCM in producing the HDAd (gutless adenoviral vector). Under the BCM License, we agreed to pay the following amounts:

(a) a one time, non-refundable license fee of $25,000 which was paid in 2007;

(b) an annual non-refundable maintenance fee of $20,000;

(c) a one-time milestone payment of $75,000 upon FDA clearance or equivalent of clearance for therapeutic use; and

(d) $25,000 upon our execution of any sublicenses in respect of the BCM technology.

The BCM license commenced on January 25, 2007 (and references collaboration agreements between us and BCM dated January 25, 2006 and April 6, 2006). The license expires on the first date following the tenth anniversary of our first commercial sale of products incorporating the BCM licensed technology. After the license expires, we will have a perpetual, non-exclusive, royalty free license to the licensed BCM technology. If the BCM license is terminated, the rights to the licensed technology (except our developed technology) will revert to BCM.

University of Michigan license

We have entered into a worldwide licensing agreement of certain patents relating to nucleic acid sequences encoding variants of Factor VIII for use in ex vivo introduction of genes into cells or tissue intended to be administered to subjects for therapeutic use through a license granted by University of Michigan. The University of Michigan license agreement contains an annual license fee, milestone payments, royalties and sublicense fees as follows:

The University of Michigan license agreement expires upon the expiration of the last patent licensed to expire, which is expected to be approximately June 30, 2026.

We are required to use commercially reasonable efforts to bring a product utilizing one or more of the licensed patents to market to commercial use through a commercially reasonable and diligent program and to continue active, diligent efforts during the term of the University of Michigan license agreement. The license agreement also requires that we reimburse University of Michigan for 50% of the costs and expenses of prosecuting the pending patent applications and of maintaining all registered patents licensed to us. If we fail to make the payments due or otherwise breach our obligations under the University of Michigan license agreement, University of Michigan would have the right to terminate the license agreement and our right to use the patents would end.

Trademarks

Certain names utilized for our products and tools are the subject of trademark applications in certain jurisdictions, though the final choice of name for products and tools has not yet been made and will be subject to marketing considerations and other factors. We have filed applications for BIOPUMP trademark in foreign countries. BIOPUMP is registered in Australia, China, the European Union, South Korea, Norway and Russia in the framework of an International Trademark Registration as well as in, Hong Kong and Mexico. BIOPUMP trademark applications are currently pending in Brazil, India, Israel, New Zealand, Canada, as well as in the United States. There can be no assurance that a third party will not oppose any registration, that the respective Trademark Offices will issue a registration certificate or that we will otherwise be successful in perfecting trademark rights for the marks in the United States or in foreign countries, the results of any of which would likely have a material adverse effect on our business. We do not currently have trademark applications in any jurisdiction for the names EPODURE, INFRADURE, HEMOD URE or DermaVac. We had been contacted by a third party regarding the use of that party’s Biopump trademark which we believe is inapplicable to our use and registration of the mark BIOPUMP and communicated this to the said third party. We have now received said party’s consent to the use and registration of our BIOPUMP trademark in Israel.

Government Regulation

General

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

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

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

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

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

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

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

Clinical trial programs generally follow a three-phase process. Typically, phase I studies are conducted in small numbers of healthy volunteers or, on occasion, in patients afflicted with the target disease. phase I studies are conducted primarily to determine the metabolic and pharmacological action of the product candidate in humans and the side effects associated with increasing doses, and, if possible, to gain early evidence of effectiveness. In phase II, studies are generally conducted in larger groups of patients having the target disease or condition in order to validate clinical endpoints, and to obtain preliminary data on the effectiveness of the product candidate and optimal dosing. This phase also helps determine further the safety profile of the product candidate. In phase III, large-scale clinical trials are generally conducted in patients having the target disease or condition to establish the effectiveness, and support the safety, of the product candidate.

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

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

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

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

Following the completion of the clinical trial program for the product, a Biologic License Application (BLA) must be submitted by the applicant, and approved by the FDA, before commercial marketing of the product may begin in the United States. The BLA must include a substantial amount of data and other information concerning the safety and effectiveness of the product from laboratory, animal, and clinical testing, as well as data and information on manufacturing, product quality and stability, and proposed product labeling. Also, each domestic and foreign manufacturing establishment, including any contract manufacturers, must be listed in the BLA and must be registered with the FDA. The BLA must usually be accompanied by an application fee, although certain deferral, waivers, and reductions may be available, e.g., for a small business submitting its first BLA. For fiscal year 2012, the BLA application fee is $1,841,500.

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

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

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

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

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

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

Post-Approval Requirements

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

Manufacturers and other entities involved in the manufacturing and distribution of an approved biological or medical device product are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMP and other laws. The cGMP requirements apply to all stages of the manufacturing process, including the production, processing, sterilization, packaging, labeling, storage and shipment of the product. Manufacturers must establish validated systems to ensure that products meet specifications and regulatory standards, and test each product batch or lot prior to its release. The FDA has proposed, but has not yet finalized, regulations for cGMPs for combination products. The final cGMP requirements for combination products are likely to require products comprised of a biological product and a medical device to comply with both cGMPs for biological products and cGMPs for devices.

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

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

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

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

Orphan Drugs

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

Potential Competition with “Biosimilar” Products

The Biologics Price Competition and Innovation Act (BPCIA) was enacted as part of the Patient Protection and Affordable Care Act of 2010, Pub. L. No. 111-148 (2010). The BPCIA authorizes the FDA to approve “abbreviated” BLAs for products whose sponsors demonstrate they are “biosimilar” to reference products previously approved under BLAs. The FDA may also separately determine whether “biosimilar” products are “interchangeable” with their reference products. However, the FDA may not approve an “abbreviated” BLA for a biosimilar product until at least twelve (12) years after the date on which the BLA for the reference product was approved. FDA approval could be further delayed if the reference products are subject to unexpired and otherwise valid patents.

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

U.S. Fraud and Abuse Laws

Anti-Kickback Statute and HIPAA Criminal Laws

We are subject to various federal and state laws pertaining to health care “fraud and abuse.” The federal Anti-Kickback Statute makes it illegal for any person, including a pharmaceutical, biologic, or medical device company (or a party acting on its behalf), to knowingly and willfully solicit, offer, receive or pay any remuneration, directly or indirectly, in exchange for, or to induce, the referral of business, including the purchase, order or prescription of a particular item or service, or arranging for the purchase, ordering, or prescription of a particular item or service for which payment may be made under federal healthcare programs such as Medicare and Medicaid. In 1996, under the Health Insurance Portability and Accountability Act (HIPAA), the Anti-Kickback Statute was expanded to be made applicable to most federal and state-funded health care programs. The definition of “remuneration” has been broadly interpreted to include any item or service of value, including but not limited to gifts, discounts, the furnishing of free supplies or equipment, commercially unreasonable credit arrangements, cash payments, waivers of payments or providing anything at less than its fair market value. Several courts have interpreted the Anti-Kickback Statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of business reimbursable by a federal healthcare program, the statute has been violated. The Patient Protection and Affordable Care Act of 2010, Pub. L. No. 111-148 (2010), amended the federal Anti-Kickback Statute to clarify that “a person need not have actual knowledge of this section or specific intent to commit a violation of this section.” Therefore, all courts are likely to use the “one purpose” test for evaluating intent. Penalties for violations include criminal penalties, civil sanctions and administrative actions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federally-funded healthcare programs. In addition, some kickback allegations have been held to violate the federal False Claims Act, which is discussed in more detail below.

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

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

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

False Claims Laws

Pursuant to various federal and state false claims laws, the submission of false or fraudulent claims for payment may lead to civil money penalties, criminal fines and imprisonment, and/or exclusion from participation in Medicare, Medicaid and other federally funded health care programs. These false claims statutes include the federal False Claims Act, which was significantly expanded in both the Fraud Enforcement and Recovery Act of 2009, Pub. L. No. 111-21 (2009), and in the Patient Protection and Affordable Care Act of 2010, Pub. L. No. 111-148 (2010). In addition, a number of states have enacted similar laws prohibiting the submission of false or fraudulent claims to a state government.

The federal False Claims Act allows the federal government or private individuals to bring suit alleging that an entity or person knowingly submitted (or caused another person or entity to submit or conspired to submit) a false or fraudulent claim for payment to the federal government or knowingly used (or caused to be used) a false record or statement to obtain payment from the federal government. The federal False Claims Act may also be violated if a person files a false statement in order to reduce, avoid, or conceal an obligation to pay money to the federal government, or engages in conduct that may violate the federal Anti-Kickback Statute. The Patient Protection and Affordable Care Act of 2010, Pub. L. No. 111-148 (2010) established conclusively that claims arising out of violations of the federal Anti-Kickback Statute are false claims for purposes of the federal False Claims Act. Several pharmaceutical and medical device companies have settled claims based on the federal False Claims Act for conduct involving, among other examples, providing free product to purchasers with the expectation that federally-funded health programs would be billed for the product, or instances in which a manufacturer has marketed its product for unapproved and non-reimbursable purposes. A person who files suit may be able to share in amounts recovered by the government in connection with such suits. Such suits, known as qui tam actions, have increased significantly in recent years and have increased the risk that a health care company will have to defend a false claims action, enter into settlements that may include corporate integrity agreements requiring disclosures to the federal government, pay fines or be excluded from the Medicare and/or Medicaid programs as a result of an investigation arising out of such an action. We are not aware of any false claims actions pending against us. However, no assurance can be given that such actions may not be filed against us in the future, or that any non-compliance with such laws would not have a material adverse effect on our business, results of operations and financial condition.

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

Other U.S. Regulatory Requirements

In the United States, the research, manufacturing, distribution, sale, and promotion of drug and biological products are subject to regulation by various federal, state, and local authorities in addition to the FDA, including the Centers for Medicare and Medicaid Services (formerly the Health Care Financing Administration), other divisions of the United States Department of Health and Human Services (e.g., the Office of Inspector General), the United States Department of Justice and individual United States Attorney offices within the Department of Justice, and state and local governments. Pricing and rebate programs must comply with the Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990 and the Veterans Health Care Act of 1992, each as amended. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. All of these activities are also potentially subject to federal and state consumer protection, unfair competition, and other laws. In addition, we may be subject to federal and state laws requiring the disclosure of financial arrangements with health care professionals.

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

Foreign Regulatory Requirements

We may be subject to widely varying foreign regulations, which may be quite different from those of the FDA, governing clinical trials, manufacture, product registration and approval, and pharmaceutical sales. Whether or not FDA approval has been obtained, we must obtain a separate approval for a product by the comparable regulatory authorities of foreign countries prior to the commencement of product marketing in these countries. In certain countries, regulatory authorities also establish pricing and reimbursement criteria. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval.

Reimbursement and Pricing Controls

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

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

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

Employees

We currently employ 34 full-time and two part-time employees. None of our employees is represented by a labor union and we have not experienced any strikes or work stoppages. While none of our employees is party to any collective bargaining agreements, certain provisions of the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations (including the Industrialists’ Associations) are applicable to our employees in Israel by order the Israel Ministry of Labor. Such orders are part of the employment related laws and regulations which apply to our employees in Israel and set certain mandatory terms of employment. Such mandatory terms of employment primarily concern the length of the workday, minimum daily wages, pension plan benefits for all employees, insurance for work-related accidents, procedures for dismissal of employees, severance pay and other conditions of employment. We generally provide our employees with benefits and working conditions beyond the required minimums. We believe our relations with our employees are good.

Additional Information

Our principal executive offices are located at 555 California Street, Suite 365, San Francisco, California 94104. We conduct our research and development activities primarily from our Israeli location in Misgav Business Park, Misgav. Our telephone number is (415) 568-2245 in the United States and +972-4-902-8900 in Israel.

Our website address is www.medgenics.com . The information on or accessible through our website is not part of this Annual Report on Form 10-K. Copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to such reports are available without charge on our website or upon request to us. In addition, our Code of Business Conduct and Ethics, Audit Committee Charter, Compensation Committee Charter and Nomination and Corporate Governance Committee Charter are all available without charge on our website or upon request to us. All such requests should be sent to Medgenics, Inc., Corporate Secretary, 555 California Street, Suite 365, San Francisco, California 94104, or by email request from our website at www.medgenics.com . Amendments to, or waivers from, our Code of Business Conduct and Ethics that apply to our executive officers will be posted to our website. We also post or otherwise make available on our website from time to time other information that may be of interest to our investors.